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Alaska Air Group’s Utilization Steals the Show

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Improving utilizations

Load factor is the most commonly used measure of an airline’s capacity utilization. It’s calculated as revenue passenger miles divided by available seat miles. A higher load factor indicates better utilization of aircraft capacity.

If traffic growth lags behind capacity growth, utilizations will fall, which has been the case with Alaska Air Group (ALK) since January 2015 (except March 2016, April 2016, and May 2016 when utilizations improved). For the last three months, Alaska has seen a continuous improvement in utilization.

For November 2016, Alaska Air Group’s utilization improved by 3.4 percentage points YoY (year-over-year) to 85.1%—the strongest improvement in 2016. Year-to-date in November 2016, the utilization improved by 0.1 percentage points to 84.3%.

If utilizations continue to fall, it will have a negative impact on Alaska Air Group’s unit revenues.

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Declining unit revenues

Unit revenue is a measure of passenger revenue earned by the airline per available seat mile, also known as “PRASM.” Like other airlines in the industry, Alaska Air Group’s unit revenues also fell. It’s PRASM fell 7.7% to 10.84 cents for 1Q16, 7.7% to 11.42 cents in 2Q16, and 5.8% to 11.79 cents in 3Q16.

Foreign currency fluctuations and lower fuel surcharges in the international market will continue to have a negative impact on Alaska Air Group’s unit revenues.

Outlook

Alaska Air Group doesn’t give any future unit revenue guidance. Although PRASM might continue to fall in 4Q16, the pace will definitely be lower than the pace in 3Q16.

Alaska Air Group’s legacy peers—Delta Air Lines (DAL), American Airlines (AAL), and United Continental Holdings (UAL)—expect their unit revenues to fall in 4Q16.

Alaska Air Group forms 1.7% of the Guggenheim S&P 500 Equal Weight Industrials ETF’s (RGI) holdings.

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