Southwest, American to give workers $1K bonuses to mark tax law

Southwest Airlines Boeing 737-700 (AP Photo/Chris O'Meara)

Only a small slice of corporate America has shared tax savings with workers so far
American and Southwest Airlines are giving their workers $1,000 bonuses because of the corporate tax cut that just became law.

American, the world's largest airline, is making the payments to each of 130,000 employees, a total cost of about $130 million.

The law, passed by Republicans in Congress and signed into law by President Trump last month, cuts the corporate tax rate from 35 percent to 21 percent.

American wasn't paying federal income tax anyway because it was sheltered by past losses that resulted in bankruptcies. But CEO Douglas Parker told employees in a letter that the new tax rules will help the airline later.

"We will be able to invest even more in aircraft and facilities, and we will be able to do so with even greater confidence about the future," he wrote.

Southwest is paying $1,000 to every full-time and part-time employee. The airline did not say how many workers would be covered, but a filing a year ago listed 53,500 full-time employees.

Unlike American, Southwest has never filed for bankruptcy and is paying federal tax, so it will save money almost immediately because of the new law.

In addition to the bonuses, Southwest says it will give an additional $5 million to charities and will buy more aircraft from Boeing, which builds all its planes.

Southwest said it is exercising options for 40 of Boeing's 737 MAX 8 jets over the next two years, while deferring existing orders for 23 of its smaller 737 MAX 7 jets.

"We are excited about the savings and additional capital, which we intend to put to work in several forms," Southwest CEO Gary Kelly said.

Airlines have been highly profitable in recent years, and have given large pay raises -- often more than 10% -- in the most recent round of union labor contracts.

American even instituted a profit-sharing plan for both union and non-union employees in 2016 without asking the unions for anything in return. In April 2017, it raised pay for pilots and flight attendants, beyond what was called for in the contracts, to match pay at other carriers.

Republicans who pushed for the tax bill predicted that companies would pass the savings to their employees. President Trump said on Twitter on Tuesday that the "big bonuses" were "Really great!"

But the overwhelming majority of S&P 500 companies have not announced plans to give bonuses or raise pay because of the tax cuts.

Only a small slice of corporate America has shared tax savings with workers so far

President Trump has cheered corporations "showering their workers with bonuses" thanks to the tax overhaul he just signed into law.

Trump tweeted on Tuesday that "companies are giving big bonuses to their workers because of the Tax Cut Bill." He added, "Really great!"

The president is right: Companies poised to cash in on the tax cuts, such as AT&T, Bank of America, Comcast and Wells Fargo, have announced one-time bonuses and pay raises. It's terrific news for employees, especially those struggling with years of disappointing wage increases.

American Airlines, Southwest Airlines, U.S. Bancorp, Zions Bancorp and Regions Financial on Tuesday became the latest big companies to unveil $1,000 special bonuses or pay raises.

But despite the political rhetoric, only a small fraction of corporate America has decided to share the tax bonanza directly with workers, at least so far.

According to the White House's own compilation and more recent announcements, only 18 companies in the S&P 500 have responded to the tax overhaul by raising wages, handing out bonuses or improving employee benefits. If smaller companies such as GoDaddy and Sinclair Broadcasting are included, the list expands to about four dozen.

"It's good marketing, but you don't have a trend yet. It's premature at this point," said William Klepper, a management professor at Columbia Business School.

The employee rewards that have been announced are often a small percentage of what companies are saving from the tax overhaul.

For instance, Wells Fargo decided to boost its minimum wage to $15 per hour and increase its charitable giving by 40%. Yet the scandal-ridden bank is one of the biggest beneficiaries of the new corporate tax rate -- 21%, down from the previous 35%. Wells Fargo's effective tax rate was 31% in 2016, according to S&P Dow Jones Indices.

The wage hike and additional charitable giving will cost Wells Fargo about $215 million in 2018, according to investment bank KBW. That represents just 5% of Wells Fargo's total estimated earnings benefit from the tax overhaul, KBW estimates.

"It's a token compared with what companies are actually saving. Where is the rest of the money going?" said Jeffrey Sonnenfeld, senior associate dean at the Yale School of Management.

Sonnenfeld argued that the wage hike and bonus announcements "were heavily from employers under the gun from government scrutiny."

For instance, AT&T's proposed takeover of CNN owner Time Warner has been blocked by the Justice Department. Trump recently vowed to punish Wells Fargo for "bad acts against their customers." And Sinclair, the largest owner of local television stations in the U.S., has a $3.9 billion acquisition that is being reviewed by the FCC.

To be sure, it's early, and some companies are still trying to understand the impact of the most sweeping tax overhaul in three decades. More bonus announcements may be coming.

Other companies may use their tax savings for different purposes. Wall Street anticipates a big chunk of the tax windfall will get returned to shareholders in the form of bigger share buybacks and fatter dividends. In 2004, when Congress provided tax breaks for companies to bring foreign profits back home, businesses used much of their money on share buybacks.

Investors love when companies use excess cash to repurchase their own stock. These moves make stocks more attractive by limiting the supply of shares, thereby improving a key measure of profitability known as earnings per share.

Corporations are also likely to use the money to pay down debt or make acquisitions.

How companies use their tax savings will be decided by longer-term decisions than one-time bonuses. It will help determine whether the massive corporate tax cut will trickle down to workers and consumers, as the White House has promised, or tilt more toward shareholders.

Wage hikes are needed because nearly half of Americans (49%) feel their wages haven't kept up with the cost of living, according to Pew Research Center. Average hourly earnings increased by 2.5% over the past 12 months, trailing the Federal Reserve's target of 3.5%.

If wage growth remains lackluster, it could worsen America's record wealth inequality gap. The richest 1% of families controlled nearly twice as much wealth in 2016 as the bottom 90%, according to the Federal Reserve.

HSBC said that because the "bulk of the direct gains" from the tax overhaul will go to the rich and corporations, "it is hard to see it supporting more inclusive growth."

If the government fails to reverse the "worsening income inequality," HSBC predicted "anger over this issue will persist and support for populist parties will continue to rise."

(The-CNN-Wire & 2017 Cable News Network, Inc., a Time Warner Company. All rights reserved.)
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