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Will the Airline Industry’s Demand Continue to Grow in 2016?

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

Passenger demand

A study by the International Air Transport Association (or IATA) found that growth in disposable income, which closely follows GDP growth, is the key demand driver of airline travel. Improved economic conditions lead to higher disposable incomes for consumers, which leads to improved travel demand.

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Regional carriers’ demand soared

Regional airlines saw stronger demand, especially due to low airfares and route expansions. As shown in the graph above, regional carriers such as Southwest Airlines (LUV) and JetBlue Airways Corporation (JBLU) saw 8.8% and 10.3% year-over-year growth, respectively, in their traffic demand. Traffic demand is measured in revenue passenger miles (or RPM).

Ultra-low-cost carriers Allegiant Travel (ALGT) and Spirit Airlines (SAVE) saw tremendous growth of 14% and 27%, respectively, led by aggressive capacity expansion.

Slow growth for legacy carriers

Traffic for legacy carriers also grew throughout 2015, although this growth rate was slower than that experienced by their regional peers. Respectively, legacy carriers American Airlines (AAL), United Continental Holdings (UAL), and Delta Air Lines (DAL) witnessed 2.4%, 1.5%, and 3.3% year-over-year growth in traffic during the year. Alaska Air Group (ALK) was the only exception, with 9.3% growth during the same timeframe.

The PowerShares Dynamic Leisure & Entertainment Portfolio ETF (PEJ) invests 5% of its holdings in each of UAL, DAL, and AAL. PEJ invests 2.7% in Alaska Air Group (ALK).

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2016 outlook

For 2016, the International Money Fund (or IMF) forecasts the inflation-adjusted world GDP to grow by 3.6%, higher than the 3.1% growth estimated for 2015. IATA expects another good year for passenger travel, with demand expected to grow by 6.9%, as compared to the 6.7% growth projected for 2015.

As a mature market, the US economy is expected to grow at a slower rate of 3%–4%. The Eurozone’s faster-than-expected recovery could help outweigh the overall impact of slower growth in the US and the downturn in the Brazilian economy.

Also, China’s shift to a consumer-based economy is good for service providers like airlines. Other markets that are expected to remain the key growth drivers are India, the Middle East, Latin America, and South America. Demand should also improve as more direct flights replace long-distance car travel.

Past trends suggest that US airlines should continue to witness strong traffic during 2016, helping them record good revenue growth.

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