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Is There Room for Capacity Utilization Improvement in 2016?

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Jan. 25 2016, Updated 4:35 p.m. ET

Analyzing airline load factors

The utilization of an airline’s capacity is measured using the passenger load factor, which is calculated by dividing the traffic numbers by capacity numbers.

Airlines across the industry saw mixed changes in their utilization during 2015. Legacy carriers United Airlines (UAL) and Delta Air Lines (DAL) saw flat utilization. American Airlines’ (AAL) utilization improved by 1% while Alaska Air Group’s (ALK) utilization declined by 1%.

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Regional carriers JetBlue Airways Corporation (JBLU) and Southwest Airlines (LUV) improved their load factors by 1% for the year despite growing capacities more aggressively than their legacy competitors. During 2015, Spirit Airlines’ (SAVE) and Allegiant Travel’s (ALGT) utilization declined by 2% and 2.5%, respectively, as a result of aggressive capacity expansions and their inability to grow traffic as quickly.

What to expect?

Most airlines have taken notice of their falling utilization, which is adding pressure on yields. Players like AAL, UAL, and DAL expect to maintain their capacity or even selectively cut capacity. They also expect to see better utilization in 2016.

On the other hand, SAVE, ALGT, and ALK should continue to add capacity aggressively in 2016, which can pressure their utilization.

Investors can gain exposure to airlines through the iShares Transportation Average ETF (IYT), which invests ~24% of its portfolio in airline stocks.

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