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Will Alaska Air Group’s Traffic Keep Trailing Capacity Growth?

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Alaska Air Group’s traffic growth

In June 2016, Alaska Air Group’s (ALK) traffic grew by 10.9% YoY (year-over-year). This is slightly slower than the 11.7% YoY capacity growth seen during the month. Alaska Air Group’s traffic also grew by 11% for both the first and second quarters of 2016.

From January through June 2016, Alaska Air Group’s traffic grew by 11% YoY, which is slightly slower than the 12% YoY growth seen in capacity.

Regional traffic grew by 19% YoY in June 2016. From January through June 2016, regional traffic grew by 18.4% YoY. ALK’s mainline traffic grew by 10% YoY in June 2016. From January through June 2016, mainline traffic grew by 11.1%.

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Slowing passenger travel

Research by the International Air Transport Association has found that passenger travel demand closely tracks global economic growth. This year has gotten off to a great start with 6% growth in global passenger demand from January through June on a YoY basis. However, the pace is slowing down. With the Brussels terrorist attacks in May 2016, traffic growth came in at 4.6%, the slowest growth rate since January 2015.

Global economic uncertainties will also weigh on passenger travel. On the other hand, airfares have been dropping since January 2016 and may help growth in travel demand.

Outlook

Past trends suggest that growing GDP, along with lower airfares, should provide ALK with the boost it needs in traffic. Its lower costs as compared to those of legacy players American Airlines (AAL), Delta Air Lines (DAL), and United Continental Holdings (UAL) will help it see higher traffic growth than these peers.

However, increasing competition from ultra-low-cost carriers Spirit Airlines (SAVE) and Allegiant Travel (ALGT), especially in its main hubs such as Seattle, will be detrimental to demand. ALK expects its network’s competitive capacity (capacity growth by ALK’s competitors) will grow by 14% YoY in both 3Q16 and 4Q16.

Alaska Air Group (ALK) comprises 3.2% of the First Trust Industrials/Producer Durables AlphaDEX Fund’s (FXR) holdings.

In the final part of this series, we’ll discuss Alaska Air Group’s unit revenues.

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