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Will American Airlines’s Unit Revenues Continue to Decline?

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Load factor

As we discussed earlier in this series, American Airlines’s (AAL) traffic growth has lagged capacity growth most of 2016. With the exception of January, its load factor has declined throughout 2016.

In August 2016, American Airlines’s load factor fell 3.6% to 82.9%. Its year-to-date 2016 load factor fell 1.2% to 81.9%, which is expected to increase the pressure on the airline’s unit revenues.

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

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Declining yields

American Airlines’s (AAL) domestic yields (revenue per seat) have declined due to the airline’s aggressive capacity growth and increased competitive pressure.

International yields have also declined due to a strong dollar, resulting in foreign currency devaluation. Because AAL earns its international revenues in local currencies, the airlines realizes lower revenues when translated to the dollar. Other factors impacting AAL’s yield include low fuel surcharges and economic slowdowns in Brazil and Venezuela.

Outlook

American Airlines (AAL) expects the above-discussed factors to adversely impact its unit revenues. AAL projected its passenger revenue per available seat mile (or PRASM) to fall 3%–5% in 3Q16.

This is better than peers United Continental (UAL) and Delta Air Lines (DAL), which expect the yield to fall 7.5%–5.5% and 4.5%–6.5%, respectively. Alaska Air Group (ALK) does not give any future unit revenue guidance.

Investors can gain exposure to AAL by investing in the PowerShares Dynamic Market Portfolio ETF (PWC), which invests ~2.7% of its portfolio in the airline’s stock.

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