uploads/2016/08/AAL-LF-1.png

Will American Airlines’ Unit Revenues Continue to Fall?

By

Updated

Load factor

As we discussed earlier, American Airlines’ traffic (AAL) growth has lagged capacity growth in most of 2016. As a result, the load factor fell throughout 2016—except in January 2016. For July 2016, the load factor fell by 2.1 percentage points. The load factor has declined by 0.9 percentage points year-to-date in 2016. This will increase the pressure on unit revenues.

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

Article continues below advertisement

Declining yields

Domestic yields (revenue per seat) have declined due to American Airlines’ aggressive capacity growth and increased competitive pressure.

International yields also fell due to a strong dollar—this resulted in foreign currency devaluation. Since American Airlines earns its international revenues in local currencies, it means lower revenues when translated to the dollar.

Other factors impacting the yield include low fuel surcharges and an economic slowdown in certain Latin American markets—Brazil and Venezuela.

Outlook

American Airlines expects the above factors to continue to have a negative impact on its unit revenues. It expects the passenger revenue per available seat mile to fall by 3%–5% in 3Q16.

This is better than its peers such as United Continental (UAL) and Delta Air Lines (DAL). They expect the yield to fall by 7.5%–5.5% and 4%–6%, respectively. Alaska Air Group (ALK) doesn’t give any future unit revenue guidance.

Investors can gain exposure to American Airlines by investing in the PowerShares Dynamic Large Cap Value Portfolio (PWV). PWV invests 1.6% of its portfolio in American Airlines.

Advertisement

More From Market Realist