Why yield is another key driver for airline revenue

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Passenger yield

Yield is the average fare per passenger per mile. Passenger revenue is calculated by multiplying revenue passenger miles (or RPM) by the yield. Yield varies based on demand and supply factors. Air travel demand is seasonal. As a result, yield is higher during peak seasons.

Yield also varies for different market segments and different classes of seats—First class, Business class, or Economy seats. Airlines adopt price discrimination and product differentiation strategies to charge different fares. The fares are based on passenger’s requirements and willingness to pay. For example, business travelers are willing to pay higher fares in return for better services and convenience—compared to the price conscious leisure travel segment.

Average domestic air fare in U.S. _1995_2014_Sept

Yield management

Yield management involves determining the number of seats available to each fare class. This is done by setting booking limits on advanced booking when fares are low. Seats are saved for last minute booking when higher fares can be charged.

Yield trend

According to the International Air Transport Association (or IATA), the U.S. passenger yield improved in the second quarter. There was lower yield during first quarter because of weather-related challenges. Yields are 2% higher compared to the previous year. The trend is expected to continue.

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Higher yields translate into higher revenue and improved margins. According to the Airlines Reporting Corporation (or ARC), the dollar value of airline tickets sold by U.S.-based travel agencies increased 4.78% year-over-year (or YoY) in the first nine months of 2014. However, the global yield is still weak due to weakness in Asia.

In 3Q14, passenger yield—fares paid per passenger per mile—increased for all major airlines, except Alaska. Delta’s yield was $17.16 in 3Q14. It was the highest among its peers. However, its YoY growth in yield, at 1.8%, was lower than United’s (UAL) ~4% and American’s (AAL) 3.5%.

Yield for low-cost carriers—including Southwest (LUV) and JetBlue (JBLU)—hasn’t varied much. Higher yield results in higher unit revenue. This leads to higher profitability if costs don’t increase. Increased airline profitability improves returns from exchange-traded funds (or ETFs)—like the iShares Transportation Average ETF (IYT)—that hold airline companies’ shares.

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