Are Airlines Slowing Down Capacity Growth?
The global airline industry capacity has continued to increase in 2016. September 2016 capacity rose 6.6% year-over-year (or YoY), which is 0.4% lower than traffic growth in the same period last year. The domestic US market capacity has risen 4.2% YoY, which is also 0.4% higher than traffic growth in the same period. This is the first time in 2016 that traffic growth has exceeded capacity growth in both global and domestic US regions.
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Capacity growth across industry
For September 2016, capacity addition as measured by available seat miles (or ASM) rose over 5.8% year-over-year on average (of the eight major airlines) as compared to a 5.1% year-over-year growth in average traffic.
Alaska Air Group (ALK), the niche legacy carrier, saw a capacity growth of 3.2% during September 2016, higher than its legacy peers but lower than all regional peers. This is in contrast to two months ago when Alaska was increasing capacity by double digits.
Southwest Airlines (LUV) and JetBlue Airways (JBLU) grew capacity by 5.4% and 5.5%, respectively, for September, in line with their capacity addition for the past five months. Ultra-low-cost carriers Spirit Airlines (SAVE) and Allegiant Travel (ALGT) continued to outdo all peers, growing their August capacity by 13.1% and 15.3%, respectively. However, even these players have drastically reduced capacity growth as compared to a couple of months ago when these players were growing capacity at almost 20%.
History shows that in times of profit boom, airlines have added capacity aggressively leading to an overcapacity situation. Overcapacity can lead to declining utilization and declining airfares, which put pressure on yields, ultimately resulting in losses. Industry analysts have thus been calling for a slowdown in capacity this time.
Airlines seem to have taken heed too and slowed down capacity growth. Airline investors hope 2017 will be a year of cautious capacity growth.
Investors can gain exposure to travel stocks by investing in the iShares Transportation Average ETF (IYT), which invests 22% of its portfolio in airlines.