Why American Airlines’ CEO Wants To Make Less Money Than His Peers And Interesting Southwest Numbers

It isn’t often that one article yields nuggets about multiple airlines.  And yet, we learned some interesting things about Doug Parker (American Airlines’ CEO), Gary Kelly (Southwest’s head honcho) and their employees.

This Dallas News article starts out with the juicy details that draw you in:

American Airlines CEO Doug Parker made $12.2 million in 2017, but it’s still expected to be millions less than his peers at United Airlines and Delta Air Lines.

That’s just the way Parker wants it, it turns out, with the 56-year-old executive continuing to request he be paid 15 to 20 percent less than other large airline CEOs.

I knew this about Doug Parker from previous stories about him.  He volunteered not to take a base salary, instead agreeing to be compensated completely through stock grants.  That makes him very beholden to the stock price and to shareholders.  Heck, he even preached to analysts and media at a media day last year that he thought the big airlines would never lose money again.

We could have a very long discussion about why this isn’t the best thing in the world.  What’s good for the short-term growth of a stock price isn’t necessarily good for long-term growth of a company.  Ideally, I’d want an airline executive (or any executive) be paid on the long-term growth of the company.  If the price of oil goes down, it doesn’t mean an airline executive did a better job running the company.  The same holds true in the opposite situation, when the price of oil goes up.  You could argue that the airline’s hedging strategy might play a role.  But, there are occurrences in the industry that have nothing to do with the executive’s performance that have a profound effect on the stock performance.

How About Their Employees?

The article goes on to compare the executive compensation of Doug Parker and Gary Kelly, and how it relates to the median income of their employees:

At American, Parker’s compensation was 195 times higher than the $62,394 median annual compensation for the company’s other employees.

At Southwest, Kelly’s compensation was 93.1 times as much as the median worker, who earned $81,177 in 2017.

The median income of the employees at the two airlines probably shouldn’t be as big a shock to me as they are.  American (along with Delta and United) have a profoundly different approach to how they employ people.

The Big 3 US carriers contract out a decent portion of their flying to regional carriers.  These planes bear the logos of American, Delta and United.  But, for the most part the employees work for these subsidiaries or 3rd party carriers, at much lower rates.  American’s subsidiary, American Eagle pays their employees much less than mainline employees.  United contracts out their regional jet flying.

You would think that the significant reduction in labor cost would lead to higher profits.  That’s not always the case.  Where American made almost $4 billion last year, United made just about $2 billion, or the same Southwest made while paying all employees who operate their airplanes a much higher median salary.

Yet, Gary Kelly makes less than half what United Airlines’ CEO Oscar Munoz earns.  Oscar tops the scale at over $18MM in compensation in 2016.

The Final Two Pennies

The airline industry is insanely interesting to me.  As a businessman, I’m always curious how businesses make money.  Seeing the different ways that these behemoth airlines pay employees and executives is eye-opening.  The light shone on them by shareholders and stock analysts isn’t always a positive influence.  Airline CEOs are making large paychecks while the airlines they run pull in cash measured in billions.  The next big test for these men and their airlines will be when the economy takes a turn for the worse.

The post Why American Airlines’ CEO Wants To Make Less Money Than His Peers And Interesting Southwest Numbers was published first on Pizza in Motion

5 Comments

  1. One clarification Edward; Doug’s stock vests over three years so that is longer term than one quarter. Doug’s view on his comp was exactly was you state above; it should be tied to long-term performance not short-term quarterly results or stock price. We include our wholly owned regionals because I believe the exercise requires their inclusion. It’s nearly 25k team members so that impacts the calculation. For the sake of disclosure, I work for American.

Leave a Reply