Traffic growth helps
Capacity growth for airlines is useless if it’s not put to use. Regional carriers’ high capacity expansion has, in fact, been met with equally high traffic growth.
Airline traffic is measured by revenue passenger miles (or RPM). RPM is the number of revenue passengers multiplied by the total distance traveled.
Spirit Airlines leads the pack
Spirit Airlines’ (SAVE) low airfares seem to be working in its favor, with more and more customers continuing to flock to the airline. For 3Q16, its traffic rose 17.0% YoY (year over year), which was 1.0 percentage point higher than its capacity growth of 16.0% YoY.
Traffic for both Alaska Air Group (ALK) and JetBlue Airways (JBLU) rose 8.0% YoY, and traffic for Southwest Airlines (LUV) rose 4.0% YoY. In the same period, United Continental’s traffic rose 2.0% YoY, and Delta Air Lines’ (DAL) traffic was flat. American Airlines (AAL) was the only airline that saw its traffic fall. It fell 2.0% YoY.
Why are regional players growing faster?
One reason regional players are growing faster is because their low base helps them grow at a significant rate. For example, Spirit Airlines flew ~6,000 RPMs in 3Q16, the lowest among the players we’re comparing. That compares to ~60,000 RPMs for American Airlines (AAL), the highest among our players.
Another reason is lower airfares. Regional carriers can afford to charge less because of their low-cost structures. Air travel, like any other commodity, is highly price-sensitive. Consumers naturally flock to airlines with the lowest airfares whenever possible.
But legacy players are quickly catching up. Most of them have introduced basic economy class fares that match the prices of regional players.
You can get exposure to travel stocks by investing in the iShares Transportation Average ETF (IYT), which invests 22.0% of its portfolio in airlines.
In the next part, we’ll see how a traffic and capacity mismatch is weighing on airlines’ capacity utilizations.