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What’s the Demand Outlook for the Airline Industry?

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Passenger demand

According to IATA (or International Airline Transport Association), for September 2016, global passenger travel demand grew 7% year-over-year (or YoY), the fastest pace seen in the past seven months. International travel grew across all regions. Domestic growth was, however, mixed. The Asia-Pacific and the Middle East regions saw the fastest traffic growth (in double digits) for the fourth consecutive period.

For the first seven months, industry demand rose 3.3% YoY, while the US domestic region traffic rose 4.6% YoY. Passenger travel demand is measured by revenue passenger miles (or RPM).

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Regional carrier demand soars

Regional airlines continued to see higher demand than their legacy peers in September 2016. However, this is significantly lower than the demand seen in the past seven months, mainly on account of slow capacity expansions. Ultra-low-cost carrier Spirit Airlines (SAVE) saw the highest growth of 14.4%, led by high capacity expansion.

JetBlue Airways (JBLU) saw the next highest growth of 12.3% YoY in its traffic demand. Allegiant Travel (ALGT) saw a growth of just 5.1%, despite the highest capacity growth. Traffic demand at Southwest Airlines (LUV), however, was at just 4.9% YoY.

Legacy carriers follow behind

Legacy carriers’ traffic demand growth was poor in September with Alaska being the only airline posting growth. American Airlines (AAL) witnessed a 2.6% YoY decline in September traffic, similar to what it saw in the past four months. Delta Air Lines’ (DAL) traffic also fell slightly by 0.3% YoY.

On the other hand, United Continental Holding’s (UAL) traffic was flat for the month. Alaska Air Group (ALK), which is a niche legacy player, was the only exception to the industry trend with a 5.5% YoY growth during the same timeframe.

Outlook

Economic uncertainty and frequent terrorist attacks seem to be weighing on the airline industry. Despite this, traffic demand has been on the rise. However, according to IATA, the uptrend has eased off recently.

Also, the Trump win is expected to discourage travelers from visiting the US, especially those from the UK. On the other hand, analysts are expecting a short-term boost to economic growth in the region due to proposed tax cuts, which should be positive for domestic travel. Also, lower oil prices and lower airfares continue to provide upward support.

Investors can gain exposure to airlines by investing in the Dynamic Leisure & Entertainment ETF (PEJ), which invests ~36.6% of its portfolio in airlines.

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