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Will Airfares Continue to Decline in 2016?

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2015 fares fell by 5%

2015 was the year of aggressive capacity expansions and falling utilizations. Such a situation usually results in price wars, which was the case in 2015. According to a study by Expedia with help from Airlines Reporting, industry-wide airfares fell by about 5% in 2015.

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Airfares in 2016

According to the latest data from the U.S. Department of Transportation, average domestic airfares fell by 7.8% to $361 in 1Q16 as compared to $392 in 1Q15. This is the lowest inflation-adjusted average fare since 2010.

However, airlines have had higher success rates in hiking air ticket prices this year. Airlines successfully hiked airfares 50% of the times this year as compared to the 18% success rate between 2013 and 2015.

The first successful hike was by Delta Airlines (DAL), which led to a $6 increase in airfare on a round trip. The second successful hike was by JetBlue Airways (JBLU), which again led to a $6 increase in airfare on a round trip. The third successful hike was by Southwest Airlines (LUV), which led to a $10 increase in airfare on a round trip. Some hikes were unsuccessful, like the one by American Airlines (AAL). The latest hike by JetBlue (JBLU) of $3 one way (excluding premium Mint service) in the beginning of June 2016 was also successful.

What can we expect in the upcoming year?

Low fuel prices have allowed airlines to keep airfares low for some time now. However, this has led to declining yields for more than a year. According to the latest data available from Airlines for America, domestic yields have fallen between April 2015 and April 2016. The various attempts to hike airfares is an effort to stop this yield decline.

Investors can gain exposure to airline stocks by investing in the SPDR S&P Transportation ETF (XTN).

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