The airline industry is a cyclical one, which means business depends on the economic growth of the country. During periods of economic prosperity, disposable income is on the rise, which means people have more money to spend on discretionary items like air travel. Thus, airline revenues are higher during times of economic growth and lower during times of economic contraction.
Currently, macro indicators are sending out confusing signals about the economy. While business investments are slowing down, consumer spending has ramped up. The US economy grew by 1.1% in the second quarter of 2016, higher than the 0.8% growth recorded in the first quarter. However, this is still lower than the growth seen throughout 2015.
Jobs growth, however, paints a booming picture. Jobs have risen at a rate of 200,000 per month in 2016. This is, however, a lagging indicator. Though corporate profits have climbed slightly in 2Q16, fixed investments continue to decline.
Despite the confusing signs, the stock market has continued to trend upwards. The S&P 500 SPDR ETF (SPY), which closely tracks the index, rose 5.9% year-to-date (or YTD) as of August 30, 2016.
Stocks of both legacy and regional carriers have fallen in 2016. Among legacy carriers, Delta Air Lines (DAL) recorded the highest decline of 27%. United Continental (UAL) and American Airlines (AAL) fell by 11.3% and 13.4%, respectively. Alaska Air Group (ALK) fell by 17%.
Other factors that impact the airline industry include travel demand, capacity, utilization, and yield. Next, we’ll analyze the airline industry demand.