Why are revenue passenger miles important?

Revenue passenger miles

Revenue passenger miles (or RPM) measures demand for air transport. It’s calculated as the number of revenue passengers multiplied by the total distance traveled. It’s also called airline “traffic.”

An increase in RPM is positive for an airline company. It means that more passengers are using their service. This results in topline growth—assuming the yield also increases. Yield is another airline indicator. We’ll discuss it in Part 7.

How can companies improve their RPM?

To support RPM improvement, companies should add more seats or increase capacity. Another way to do this without adding capacity is to improve efficiency by utilizing existing capacity. Available seat mile (or ASM) is the measure of airline capacity. Load factor is the measure of capacity utilization. We’ll discuss these indicators in Part 5 and Part 6.

Air passenger traffic growth and RPM

According to the International Air Transport Association (or IATA), growth in worldwide air transport during the first half of 2014 was 5.9%—compared to an overall growth of 5.2% for 2013. Although air traffic volumes slowed down in the first quarter, they increased in the second quarter. They were supported by trade and business activity improvements. Air volumes continued to increase by 5.4% year-over-year (or YoY) in July and 5.9% in August.

In the U.S., mainline RPMs increased by 2.5% YoY in September. They were supported by a 2% increase in capacity. Although there was a YoY increase in traffic, the growth rate was slower in September—compared to a 3.5% and 3.9% increase in the previous two months.

Among the six major U.S. airlines that account for ~78% of U.S. domestic market share by RPM, Alaska (or ALK) had the highest mainline domestic RPM YoY growth of 8.3% in September 2014. It was followed by Delta’s (DAL) 7.5%, JetBlue’s (or JBLU) 7.1%, Southwest’s (LUV) 5.1%, American’s (AAL) 1.4%, and United’s (UAL) -0.5%.

For more details on the overall traffic growth, including domestic and international traffic in September for all these airlines, refer to “Performance Highlights: Top 6 Airlines in September.”

Also, investing in transportation exchange-traded funds (or ETFs) like the iShares Transportation Average ETF (IYT), provides investors with exposure to some of the top airline companies.