The increase, which comes as US airlines are facing heightened scrutiny over recent conflicts with passengers, will correct a gap between American's pilots and flight attendants and those who work for rivals like Delta and United (Shenzhen: 000925.SZ - news) , officials said.
American's chief executive Doug Parker responded to Wall Street criticism, saying the move was "a very important step to rebuild trust" with employees. "It's the right thing to do for our team."
American has offered a base pay boost of five percent to flight attendants and eight percent to pilots, Parker said in a letter to employees.
He told analysts in conference call the move was "unprecedented," because it comes two years before the labor contract was due to expire.
- Wall Street frowns -
Investors are concerned because the pay increase will dent earnings, boosting costs by $230 million in 2017 and $350 million in 2018 and 2019, American said.
That sent American Airlines shares down 7.0 percent at mid-morning to $43.14.
"We're sensitive to American's desire to 'build a foundation of trust' with its labor stakeholders... but we think this latest agreement goes too far."
JPMorgan (LSE: JPIU.L - news) said the shift could usher in a new leaner era for airline earnings after the industry returned to profitability following the 2008 financial crisis and a series of large mergers.
"Establishing a precedent that labor contracts are seemingly temporary in nature, and subject to change at the request of one party, represents a potential step back," JPMorgan said. "Hopefully, this serves merely as a glance instead of a true body blow for the sector."
The move came as American reported net income of $234 million, down 66.6 percent from the first three months of 2016, due primarily to increased fuel costs.
Revenues were up two percent to $9.6 billion.
- A response to incidents? -
The decision also comes as large US airlines face questions over their customer service in the wake of public outrage over United's treatment of a passenger earlier this month.
United was roundly castigated after 69-year-old passenger David Dao was pulled from his seat and violently dragged off a full plane by airport security in Chicago to make room for airline crew. Video of the incident went viral, stoking global outage.
United has apologized repeatedly and announced further policy changes Thursday, including offering bumped passengers up to $10,000 in compensation.
American has faced questions of its own after video surfaced last weekend of a sobbing woman whose baby was almost hit with a stroller, as an employee got into a shouting match with another passenger.
American has apologized for the incident and suspended the employee.
Parker said the salary increase was under discussion for several months and was "absolutely not" a response to the two episodes.
But he expressed confidence the increase would translate to better customer service "and that's the best way to take care of shareholders."