In 2014, airlines utilized their capacity more efficiently than in 2013. Load factor measures capacity utilization, or the percentage of total capacity that is utilized by an airline. There was a year-over-year increase in monthly load factor in all months from January to November, except in March and June, when it declined by 0.8% and 0.5%, respectively. In November, however, load factor decreased to 79.7% from 82.7% in October 2013, but it was higher than the 79.2% recorded in November 2013.
Capacity growth and utilization depends on the demand for air travel. In November, traffic and capacity grew at a slower rate. The decline in load factor could be due to slower demand growth. Because airlines are capital intensive and have high fixed costs, the efficiency of their asset utilization is key to generating adequate returns on investment.
US airlines’ load factors
In November, Alaska Air Group (ALK) reported the highest load factor of 82.3% among the six major US airlines. JetBlue Airways (JBLU) reported the highest growth in load factor, increasing by 3.1% to 81.4% from 78.3% in the previous year. Delta Air Lines’s (DAL) and Southwest Airlines’s (LUV) load factors were 80.6% and 80.1%, respectively. Only United Continental’s (UAL) and American Airlines’s load factors were less than 80%.
All airlines except American Airlines showed improvements in their utilization rates. 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.
Effect of load factors on profits
A lower load factor impacts revenue and profitability. Available seat miles (or ASM) and load factor together drive increases in revenue passenger miles (or RPM), contributing to revenue growth. With a higher load factor, profitability increases as the fixed costs are spread across a larger number of passengers.
Load factor can be calculated by dividing RPM by ASM. Although the increase in available seat miles is positive only if demand rises, an increase in load factor is always positive whether demand is high or low. This is because the load factor improves the efficiency of operations without adding to fixed costs. However, the airline will have to bear a small amount of variable cost per additional passenger.