Why it’s important for airlines to improve load factor

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Load factor

Load factor measures capacity utilization. It indicates the percentage of total capacity that an airline utilizes. Airlines are capital intensive. They have high fixed costs. Airlines’ efficiency in utilizing their assets is important for them to generate adequate return on investment.

Higher load factor is positive because it increases revenue and profitability. Available seat miles (or ASM) and load factor increase revenue passenger miles (or RPM). This contributes to revenue growth. With higher load factor, profitability increases. The fixed costs are spread across more passengers. Load factor can be calculated by dividing RPM by ASM.

Part 6_Load factor_Sept

Load factor changes

Growth in capacity and capacity utilization depend on air travel demand. Excess capacity can result in higher fixed costs per unit. As a result, an increase in ASM is only positive if demand rises.

An increase in load factor is always positive whether demand is high or low. Load factor improves operations’ efficiency without adding to fixed cost. However, the airline will have to bear a small amount of variable cost per additional passenger.

Airlines have been utilizing their capacity more efficiently in 2014. There was a year-over-year (or YoY) increase in monthly load factor in most of the months from January to September. In March and June, the load factor declined by 0.8% and 0.5%, respectively.

The decline in load factor to 82.1% in September—compared to 86.9% in August—can be attributed to the seasonality of demand. The trend in the data for the past three years is presented in the above graph. It shows a decline in load factor in September each year.

In 3Q14, the load factor for American (AAL), United (UAL), and Alaska (or ALK) decreased by less than 1%. Delta’s load factor increased by 0.4% to 86.4%. JetBlue’s (or JBLU) load factor increased by 1.2% to 86.2%. Southwest’s (LUV) load factor increased by 3.6% to 84.4%.

Transportation exchange-traded funds (or ETFs)—like the iShares Transportation Average ETF (IYT)—hold airline companies’ shares.

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