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How Airlines Are Dealing with Declining Passenger Yields

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Passenger yield

Yield is the average airfare per passenger per mile. It is calculated by dividing the passenger revenue by revenue passenger miles (or RPM). The higher the yield, the higher is the revenue and margin for an airline. Air travel demand and supply play an important role in determining yield.

Declining utilization, airfares, and fuel surcharges have negatively affected airline yields. Yields for all major carriers have declined so far in 2016. Spirit Airlines (SAVE) is the only airline to witness a double-digit decline in yields. For 2Q16, SAVE’s yield has fallen 14% year-over-year to 10.5%. American Airlines witnessed the second-highest decline of 9% YoY to 15.4 cents.

The yields of United Airlines (UAL), Allegiant Travel (ALGT), and Southwest Airlines (LUV) fell 7% YoY each to 15 cents, 12.6 cents, and 15 cents, respectively.

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Declining utilization

Declining utilization across airlines was one of the major factors adding pressure to yields. Major airlines, both legacy and regional players, now seem to be focused on reducing capacity growth to improve utilization.

Outlook 2016

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 declined from April 2015–April 2016.

The various attempts to hike airfares is an effort to stop this yield decline, which may continue through the rest of the year. Most airlines also seem to be working toward improving yields. In fact, J.P. Morgan thinks we are near the turnaround point for unit revenues.

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

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