What is the load factor?
Airline capacity utilization is measured using the passenger load factor, which is calculated by dividing the traffic numbers by capacity numbers.
Analyzing airline load factors
The aggressive capacity growth has had an adverse effect on utilization, which has resulted in declining utilizations for most players. For the first half of 2016, global industry load factors have fallen by 0.2 percent points to 79.2%. Domestic US market load factors have also fallen by 0.2 percent points to 84.4% in the same period.
The trend for July 2016 is mixed. Legacy air carrier United Airlines (UAL), Spirit Airlines (SAVE), and JetBlue (JBLU) have improved their utilization while American Airlines (AAL), Delta Airlines (DAL), Alaska Air (ALK), Southwest Airlines (LUV), and Allegiant Travel (ALGT) have seen a decline in utilization.
UAL’s load factor rose by 0.5 percent points year-over-year (or YoY) to 88%, SAVE’s LF rose by one percent point to 89.8%, and JBLU’s rose by 0.8 percent points to 88%.
American Airline and Allegiant Travel saw the highest decline in the load factor for the month. Both carriers’ load factors fell by 2.1 percent points to 85% and 88%, respectively.
Southwest Airlines’ (LUV) load factor fell for a second consecutive month by 0.8 percent points to 87%, while ALK’s load factor fell by 1.4 percent points to 87%.
What can we expect?
With the low oil price environment expected to stay at least for the next few months, airlines will likely continue to take advantage by restructuring their fleets. This means that the load factor, or utilization, will remain under pressure until capacity growth falls below the airlines’ demand growth.
Investors can gain exposure to airline stocks by investing in the iShares Transportation Average ETF (IYT), which invests ~20% in airline stocks.