Doug Parker, President and CEO of American Airlines (Photographer: Andrew … [+]
American Airlines made a terrible announcement this week warning 25,000 workers that they could be fired or laid off. These staggering figures represent approximately 20% of the company’s workforce. The airline’s message echoed grim news from rival United Airlines of telling some 36,000 employees that they could be fired starting Oct. 1.
Both airlines, along with their competitors, were dramatically affected by the effects of Covid-19. Governments recommended that people avoid unnecessary travel. The overwhelming fear of contracting the dreaded virus caused potential passengers to stay home. This left the airline industry facing an existential threat to its business. Income and profits were significantly affected.
American Airlines, along with other major airlines, collectively accepted about $ 25 billion from the United States government, as part of the multi-million dollar stimulus package. The terms required companies, in part, to use the funds to retain workers. The government established a specific time period that ends on September 30.
For a brief moment in time, there was some hope that the industry will recover and people start flying again, though not nearly at the level of pre-Covid-19 levels. The much-needed change has not happened, putting intense pressure on American Airlines to cut costs.
Doug Parker and Robert Isom, the respective CEO and President of American Airlines, wrote in a memo to their employees about the likelihood of upcoming layoffs. “We hate taking this step, as we know the impact it has on the members of our working team.” They had hoped that circumstances would change. “From the time the CARES Act was signed in March, we had the stated goal of avoiding permits because we believed that the demand for air travel would recover steadily by October 1 as the impact of COVID-19 dissipated. Unfortunately, that has not been the case. “Executives plan to offer employees different layoff options.” We hope to significantly reduce the actual number of licenses through improved early release and leave programs. “
The severity of the pandemic was difficult, if not impossible, to accurately predict. However, many airline critics question some of their business practices that have left them vulnerable to a big decline in business. They claim that raising and holding cash for a rainy day has never been an important part of business plans for airlines “despite their propensity to go bankrupt in difficult times.”
Corporate leadership is responsible for making difficult decisions about what to do with its cash flow. Money can be used in various ways. The executive team could think in the short or long term. One use for the funds is to provide dividends to their shareholders and another is to enact share buyback programs. These shares serve to care for their investors, as well as members of the company who receive large compensation with company shares and options to buy shares in the organization.
American Airlines has “led the industry in share buyback spending.” The company allocated around $ 11.9 billion to buy back its shares in the past five years and paid more than $ 1 billion in dividends during this same time period. This strategy works well for investors and senior levels who earn a large chunk of their stock compensation when things are fine and the stock price rises in value. When that doesn’t happen, things fall apart very quickly.
At an annual meeting in 2016, Parker predicted, “We have reached the point where, like other companies, we will have good years and bad years, but bad years will not be catastrophic. They will simply be less good than good ones.” years. “Clearly, he did not have the possibility of an event like the coronavirus pandemic. Parker further informed investors:” My personal opinion is that you will not see losses in the industry at all. ”
As president and CEO, Parker earned $ 11,571,714 in full compensation for 2019, and the company’s C-suite executives, including the president, CFO, CIO, and EVP, collectively earned around $ 20 million.
We do not expect our CEOs and executives to have crystal balls and clairvoyants about the future. However, it seems reasonable to expect that they will always be on the lookout for the worst case scenario and have a plan for when things go wrong, as bad times will always be expected. Just as they dealt with shareholders and executives through dividends and buybacks, highly-paid executives should also be responsible for caring for their own employees.
American Airlines, like many large corporations, planned only sunny skies and were caught unprepared for a black swan event. All executives received their millions of dollars and don’t have to worry too much about their future. Meanwhile, its employees will be thrown into the worst job market since the Great Depression.
