Airlines utilized their capacity more efficiently in 2014. Load factor is a measure of capacity utilization, indicating the percentage of an airline’s total capacity. There was a year-over-year increase in monthly load factor in all months from January to October except in March and June, when it declined by 0.8% and 0.5%, respectively. In October 2014, the load factor increased to 82.6%, compared to 82% in August 2014 and 82.1% in October 2013.
Growth in capacity and capacity utilization is dependent on the demand for air travel. Because airlines are capital intensive and have high fixed costs, the efficiency with which they utilize their assets is key in generating an adequate return on investment.
Load factors and returns
In 3Q14, Delta’s load factor increased by 0.4% to 86.4%, JetBlue’s increased by 1.2% to 86.2%, and Southwest’s (LUV) increased by 3.6% to 84.4%. The load factors for American (AAL), United (UAL), and Alaska (ALK) decreased by less than 1%. US airlines have been able to improve their return on invested capital, and a higher load factor is one of the main contributors for generating higher returns. Transportation ETFs such as the iShares Transportation Average ETF (IYT) hold shares of airline companies.
A higher load factor is positive, as it increases revenue and profitability. Available seat miles (or ASMs) and load factor together drive increases in revenue passenger miles (or RPM), contributing to revenue growth. With higher load factors, profitability increases as the fixed costs are spread across higher numbers of passengers. The load factor can be calculated by dividing RPM with ASM.
Although the increase in available seat miles is positive only if demand rises, the increase in load factor is always positive whether demand is high or low. This is because load factor improves efficiency of operations without adding to fixed costs. However, the airline will have to bear a small amount of variable cost per additional passenger.