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What's on the Horizon for the Airline Industry in 2017

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1 2 3 4 5 6 7 8 9 10 11 12
Part 6
What's on the Horizon for the Airline Industry in 2017 PART 6 OF 12

Why Passenger Yield Could Continue to Decline

Passenger yield

Yield is the average fare per passenger, per mile. It’s calculated by dividing passenger revenue by RPM (revenue passenger miles). As an airline’s yield rises, its revenue rises and its margins widen. Air travel demand and supply play an important role in determining yield.

Why Passenger Yield Could Continue to Decline

Why Passenger Yield Could Continue to Decline

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Declining utilization, airfares, and fuel surcharges have negatively affected airline yields. Yields for all major carriers fell in 2016. In 4Q16, Southwest Airlines’ (LUV) yield fell 4% YoY (year-over-year) to $0.15. JetBlue Airways (JBLU) followed with a 3% YoY decline to $0.13. Delta Airlines’ (DAL) yield fell 2% YoY to $0.16, and United Continental’s (UAL) yield fell 1% YoY to $0.15.

Spirit Airlines (SAVE) and Alaska Airlines (ALK) have yet to report their 4Q16 results. In 3Q16, Spirit’s yield fell 7.9% YoY to $0.11, against a 14% decline in 2Q16. Despite this vast improvement, Spirit still had the fastest-falling yield. Alaska Airlines’ yield fell 5.7% YoY to $0.13 in 3Q16. Yield decline slowed down substantially in the fourth quarter of 2016.

Declining utilization

Declining utilization across airlines was one of the major factors adding pressure on yields. Major airlines, both legacy and regional players, seem to be focused on reducing capacity growth to improve utilization.

Outlook

Whereas low fuel prices have allowed airlines to keep airfares low for some time now, they have led to declining yields for more than a year. To stop this yield decline, most airlines have made various attempts to hike airfares and slow down capacity. Investors can gain exposure to the industry through the iShares Transportation Average ETF (IYT), which invests 23% of its portfolio in airlines.

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