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What Does Rising Capacity Mean for Airline Capacity Utilization?

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Nov. 21 2016, Updated 11:04 a.m. ET

What is the load factor?

Airline capacity utilization is measured using the passenger load factor, which is calculated by dividing the traffic numbers by capacity numbers.

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Analyzing airline load factors

For the first eight months of 2016, global industry load factors have fallen 0.3 percent points to 81.1%. Domestic US market load factors too have fallen 0.4 percent points to 84.9% in the same period. Though low capacity growth has helped in improving utilization, higher growth in demand drove the improvement in load factor, according to International Air Transport Association (or IATA).

The trend for October 2016 is mixed as it has been throughout the year. Alaska Air (ALK) and JetBlue Airways (JBLU) have improved their utilization while American Airlines (AAL), Delta Air Lines (DAL), United Continental (UAL), Spirit Airlines (SAVE), Allegiant Travel (ALGT), and Southwest Airlines (LUV) have seen a decline in utilization.

ALK’s load factor has increased by 1.9 percent points to 84% and JBLU’s increased by 0.8 percent points to 84.8%. American Airline and Delta Air Lines saw the highest decline in the load factor for the month. Both carriers’ load factor fell 2.6% and 1.8% percent points to 82.6% and 85.1%, respectively.

Southwest Airlines’ load factor fell by 0.2 percent points to 85.7%, while SAVE’s LF fell by 0.6 percent points to 82.9%. United Continental’s load factor fell by one percent point to 82.4%.

What can we expect?

In October 2016 year-to-date, United Continental, Spirit Airlines, and Southwest Airlines have all seen positive improvements in utilization. This is much better than the last month when only Spirit Airlines showed unit revenue improvement.

With the low oil price environment expected to stay at least for the next few months, airlines will likely continue to take advantage by restructuring their fleets. This would mean that the load factor or utilization will likely remain under pressure until capacity growth falls below the airline demand growth.

Investors can gain exposure to airlines by investing in the SPDR S&P Transportation ETF (XTN), which invests 30.1% of its portfolio in airlines.

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