Must-know: Why airlines should improve their load factor

Load factor

Load factor is a measure of capacity utilization. It indicates the percentage of total capacity that is utilized by an airline. Since airlines are capital intensive and have high fixed costs, the efficiency with which they utilize their assets is key to generate adequate return on investment.

Higher load factor is positive, as it increases revenue and profitability. Available seat miles (or ASM) and load factor together drive increases in revenue passenger miles (or RPM), contributing to revenue growth. With higher load factor, profitability increases, as the fixed costs are spread across more passengers. Load factor can be calculated by dividing RPM with ASM. 

Load factor changes

Growth in capacity and capacity utilization are dependent on demand for air travel. As mentioned in the previous article, excess capacity can result in higher fixed costs per unit. So an increase in ASM is positive only if demand rises.

But increase in load factor is always positive, whether demand is high or low. This is because load factor improves operational efficiencies without adding to fixed costs. But the airline will have to bear a small amount of variable cost per additional passenger.

There was a year-over-year increase in monthly load factor in all months from January to July, except in March 2014 and June 2014 when it declined by 0.8% and 0.5%, respectively.

Breakeven load factor

The breakeven load factor (or BELF) is a useful indicator that measures the percentage of seats to be sold to cover airline costs. It’s calculated by dividing cost per available seat miles (or CASM) by yield (the average fare per passenger per mile).

In 2Q14 (or the second quarter of 2014), Southwest (LUV) had the lowest breakeven load factor of 74.7%, with the highest spread between actual load factor and BELF among the top U.S. airlines, reflecting its high efficiency standards. Delta (DAL) and JetBlue (JBLU) also had positive spreads, but American (AAL) and United (UAL) had negative spreads in 2Q14.

For more details on breakeven load factor refer to Must know: Comparison of Southwest’s load factor with its peers and How yield and cost structure contributed to Southwest’s low break-even load factor.