American Airlines reported a first-quarter 2017 net profit of $234 million, down 66.6% from net income of $700 million in the 2016 March quarter, as fuel prices rose sharply.

American’s first-quarter revenue increased 2% year-over-year (YOY) to $9.6 billion while expenses increased 11.4% to $9 billion, producing an operating profit of $600 million, down 55% from operating income of $1.4 billion in the 2016 March quarter. Mainline aircraft fuel expenses rose 36.2%, or $373 million, YOY and regional fuel expenses rose 45.2%, or $99 million, YOY.

Given rising costs, including a 6.5% YOY first-quarter increase in labor expenses, Wall Street analysts questioned American chairman and CEO Doug Parker during an April 27 conference call about management’s decision to offer pilots and flight attendants a mid-contract pay raise to bring salaries on par with rivals. “This is about us getting our team to the levels that are currently in place at our competitor airlines,” Parker said. “It just got to the point where the gap was too big and was going to be in place for too long.” He said it is critical to have an “engaged and excited team” and that the ability to generate revenue long-term correlates with employee compensation levels.

“Look, we’re comfortable with the commitment,” Parker said. “We’re indeed not leading this charge. We’re just making sure we’re catching up … I don’t think it’s that different than if you saw another airline make a dramatic change in their inflight product and we matched that.”

American’s first-quarter consolidated traffic decreased 1.5% YOY to 51 billion RPMs on a 1.1% drop in capacity to 64.3 billion ASMs, producing a load factor of 79.2%, down 0.4 point. Yield increased 2.4% to 16 cents.

Aaron Karp