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Will Passenger Yield Continue to Fall?

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Passenger yield

Passenger yield is the average fare per passenger per mile. It’s calculated by dividing passenger revenue by revenue passenger miles (or RPM).

The higher the yield, the higher the revenues and margins for airlines. Air travel demand and supply play important roles in determining yields.

Falling utilization, airfares, and fuel surcharges negatively affected airline yields in 2015. Yields for all major carriers except JetBlue Airways (JBLU) fell throughout 2015. This was probably an important factor leading to JBLU’s performing so well in 2015.

Spirit Airlines (SAVE) was the only airline to witness a double-digit fall in yields in 2015. American Airlines witnessed the second-highest fall.

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Falling utilization

Falling utilization across airlines was one of the major factors adding pressure to yields. Major airlines, both legacy and regional players, now seem to be focused on reducing capacity growth to improve utilization.

Falling fuel surcharges and the strengthening US dollar

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

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

Outlook for 2016

As we saw earlier, most airlines’ utilizations continue to fall. These airlines may see further falls in yields.

LUV and SAVE are the only two airlines that currently expect their yields to improve in 2016. This is reflected in their improving utilizations. JBLU, which was earlier expecting flat to positive unit revenues, now expects them to fall for at least the first half of 2016.

Investors can gain exposure to airlines by investing in the PowerShares Dynamic Leisure & Entertainment ETF (PEJ), which invests ~30% in airline stocks.

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