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Will Airline Passenger Yields Continue to Decline?

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Airline passenger yield

Airline passenger yield is the average airfare per passenger per mile. It is calculated by dividing the passenger revenue by revenue passenger miles (or RPM). The higher the yield, higher the revenue and margins for an airline. Air travel supply and demand play an important role in determining yield.

Declining utilization, airfares, and fuel surcharges have negatively affected airline yields in 2015.

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The yields for all major carriers except JetBlue (JBLU) declined throughout 2015. This is one of the main reasons that JBLU stock performed so well in 2015. Spirit Airlines (SAVE) was the only airline to witness a double-digit decline in yields. American Airlines (AAL) witnessed the second-highest decline.

Falling fuel surcharges and the strengthening dollar

The strengthening US dollar and falling fuel surcharges have added to the pressure on yields. Declining fuel prices means lower fuel surcharges for airlines on international routes, thus reducing revenues.

The strengthening dollar has led to huge foreign currency losses, especially for legacy carriers Delta Air Lines (DAL), American Airlines (AAL), and United Continental (UAL).

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Declining utilization

Declining utilization for these airlines was one of the major factors that added pressure on yields. Capacity growth in excess of demand should continue to add pressure on utilization.

Outlook for 2016

LUV and SAVE are the only two airlines that currently expect yields to improve in 2016. JBLU, which earlier expected flat to positive unit revenues, now expects them to decline at least for the first half of 2016.

AAL has projected passenger revenue per available seat mile (or PRASM) to decline by 6%–8% in 1Q16. ALGT’s unit revenues are expected to decline by 11%–13% in the first quarter of 2016. For 1Q16, UAL also expects unit revenues to decline by 6%–8% as compared to 1Q15.

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

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