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Why Capacity Growth in the Airline Industry Is Slowing Down

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Snapshot

Lower fuel prices have provided airlines with a chance to use cash to restructure their fleets. Airlines have been busy buying new planes or adding capacity to their older ones in order to meet up with their growing demand. However, lately, airlines have been facing industry-wide fears of overcapacity. The growth in capacity is measured using available seat miles (or ASM).

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Legacy carriers

Legacy carriers such as United Continental Holdings (UAL) and American Airlines (AAL) saw limited year-over-year capacity growth of 1.4% and 2.1%, respectively, each due to capacity overgrowth concerns. On the other hand, Delta (DAL) cut down its capacity by 0.2%. Most of Delta’s cuts came from its Pacific region. Alaska Air Group (ALK) continued to grow its capacity at a strong 12.9% year-over-year to meet its route expansion and fleet expansion plans. Most of the company’s growth came in its Alaska Airline segment.

Budget carriers

Similar to demand growth, capacity growth for low-cost carriers also remained above that of their larger peers. The low-cost carriers such as Spirit Airlines (SAVE) and JetBlue (JBLU) saw 33% and 11% year-over-year capacity growth, respectively, while Southwest slowed down its capacity growth to 7.2% year-over-year in October.

Expectations

Most airlines have trimmed their future capacity growth or expansion plans due to industry-wide overcapacity fears. Airlines have already been suffering due to lower fares, and oil prices are expected to rise in the second half of next year. Amid such conditions, the fear of overcapacity is expected to slow down capacity growth in coming months.

Investors can gain exposure to these airlines by investing in the SPDR S&P Transportation ETF (XTN), which invests ~29% of its holdings in airline stocks.

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