Rise in premium travel supported by growth in long-haul markets

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How seat class impacts airline revenue

Growth in passenger traffic results in higher revenue for airlines. Another factor that determines the growth in airline revenue, other than volume, is the yield (or average price paid per passenger per mile). Fares charged by the airline vary, and one of the many factors that determine the price of the ticket is the seat class.

Premium seats are priced higher compared to economy seats, yielding higher revenue. The seat choice depends on the purpose of travel and price sensitivity of the traveler. Business travelers generally opt for premium class, while passengers traveling for leisure choose economy class.

Part6_Nov_Premium passenger

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Growth in long-haul markets

According to the International Air Transport Association (or IATA), both premium and economy passenger numbers increased by 2.3%. The share of premium travel increased faster than economy class. However, growth in both classes has been lower compared to 3.7% and 3.5% growth recorded for premium and economy travel, respectively, in the first three quarters of the year. The rise in the share of premium seats was supported by strong growth in long-haul markets.

International airline traffic is growing at a much faster rate than passenger numbers because of the strong performance in long-haul markets. However, the growth in international passengers slowed to 2.3% in September compared to 4.5% in August. Long-haul markets drive the largest share of premium markets, according to IATA. Other factors that drive demand for premium travel include world trade growth, global financial market performance, and rising business confidence.

US legacy carriers

In the US, legacy carriers such as Delta (DAL), American (AAL), United (UAL), and Alaska (ALK) are able to provide long-haul routes. This capability allows them to derive more premium revenue compared to low-cost airlines, which offer mostly short-haul routes. Southwest (LUV) has only recently launched routes to international markets.

ETFs such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN) hold 35% to 40% of their holdings in US airline stocks.

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