Spirit Airlines’ (SAVE) capacity growth has outpaced traffic growth through most of 2015, and this trend has meant that the company’s utilization, or load factor, has declined. In fact, SAVE saw one of the fastest declining utilizations in 2015 among all major players except Allegiant Travel (ALGT), saw a similar decline. But the tables seem to have turned in 2016. SAVE has been able to improve utilization in four out of the seven months of 2016. It improved by one percentage point in July 2016 to 89.8%.
Remember, load factor is the most commonly used measurement of an airline’s capacity utilization. It is calculated as revenue passenger miles divided by available seat miles. A high load factor indicates better utilization of aircraft capacity.
In July 2016, peers JetBlue Airways (JBLU) and United Continental Holdings (UAL) also reported an improvement in utilization, whereas Delta Air Lines’ (DAL), American Airlines’ (AAL), and Southwest Airlines’ (LUV) utilizations have declined.
Yields decline and unit revenues follow
As we discussed previously in this series, in the past, SAVE mainly increased capacity on routes served by other legacy players, which resulted in severe pricing wars, leading to declines in average yields. For 1H16, the company’s TRASM (total operating revenue per available seat mile) declined by 14%. SAVE’s heavily falling unit revenues have been a source of worry for many investors.
However, according to SAVE Chief Financial Officer Ted Christie, the pricing environment has stabilized in the past few months, and the company expects its unit revenues to rise sequentially throughout 2016. This would make SAVE the only airline to do so, and it could mean higher revenue growth for the rest of 2016.
Meanwhile, SAVE plans to continue to follow its high capacity growth strategy, focusing now on untapped markets, which should help reduce pressure on unit revenues. Coupled with SAVE’s low-cost strategy, this new focus will likely bode well for the airline’s future.
Notably, investors looking for exposure to airlines can check out ETFs like the iShares Morningstar Small-Cap ETF (JKJ), which has 0.65% of its total holdings in SAVE.