Why economic factors support airline industry growth

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Sep. 4 2014, Updated 5:00 p.m. ET

Economic factors support industry growth

Like most industries, the airline industry is impacted by the economic cycle’s peaks and troughs. The current growth in developed economies—like U.S. that’s driven by the loosening monetary policy—has resulted in a rise in business confidence, industrial production, and international trade. All of these results act as catalysts for airline industry.

According to the Bureau of Economic Analysis (or BEA), the real gross domestic product (or GDP) increased 4% annually in 2Q14 after decreasing 2.1% in 1Q14. With economic and industrial growth, employment rates have increased. This has led to higher real disposable income.

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In 2014, the U.S. real disposable personal income increased by 3.5% in the first quarter. It increased by 3.8% in the second quarter. The changes in real disposable income have strong relationship with the level of consumer spending on goods and services. Higher income consumers will likely spend more on leisure travel. Business and industry growth will have a positive impact on the demand for business travel and freight transportation.

Airline industry growth and economic growth

Airline performance is related to economic growth. Economic indicator trends can be matched with airline passenger and freight volumes. Revenue passenger kilometers (or RPK) measure the volume of passengers carried by an airline. It’s calculated by multiplying the number of revenue passengers by the distance traveled. Freight Tonne Kilometers (or FTK) measure freight traffic. One FTK is one metric tonne of revenue load carried one kilometer. The FTK is closely related to business confidence that’s driven by strong demand for goods. During periods of weak demand, businesses choose cheaper means of transport. The transport is substituted to reduce costs and maintain margins. This leads to reduced volumes. As a result, it bring down the FTKs and RPKs.

In 2013, a healthy U.S. economy supported the growth in revenue of all major U.S. airlines including Delta (DAL), United (UAL), American (AAL), Southwest (LUV) and JetBlue (JBLU).

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