uploads/2016/08/Load-Factor-1.png

Can Delta Prove Investors Wrong by Improving Its Yields in 3Q16?

By

Updated

Declining utilizations

The load factor is the most commonly used measure of an airline’s capacity utilization and is calculated by multiplying the capacity by its traffic. A higher load factor indicates better utilization of aircraft capacity.

As discussed in the previous articles, for July 2016, Delta Air Lines’s (DAL) capacity grew at a higher rate than its traffic growth. This resulted in its utilization declining slightly by 0.8% in July 2016.

However, since its capacity growth in the past seven months has matched its traffic growth, its utilization has remained flat. YTD July 2016, DAL’s utilizations have declined by 0.1%.

DAL’s legacy peers American Airlines (AAL), United Continental (UAL), and Alaska Air Group (ALK)—as well as regional players such as Southwest Airlines (LUV) and JetBlue Airways (JBLU)—have been plagued with declining utilization numbers.

Article continues below advertisement

Declining yields

Yield is the revenue earned per seat mile. In particular, domestic yields remained weak. This has been adversely affected by increasing competition and seating oversupply in the industry, which has led to reduced airfares.

As a result, Delta Air Lines’s (DAL) passenger unit revenue per available seat mile (or PRASM) decreased by 7% in July 2016. An increase in PRASM validates the airline’s ability to generate higher revenue per seat. This is essential to increase margins.

Outlook

DAL has been unsuccessful in its attempt to improve its yields since 2015. For 3Q16, DAL forecasted a decline of 4%–6%. However, given the 7% decline in July, achieving this forecast would mean a steep comeback in the next two months, which most investors think is a difficult task.

Although airlines have increased their airfares in 2016, which should help improve their yields to some extent, analysts do not feel the increase is enough to fuel a turnaround.

Delta Air Lines forms ~1% of the Large Cap Growth AlphaDEX ETF (FTC).

Advertisement

More From Market Realist