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Capacity Utilization Remains Volatile for Most Carriers

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Declining utilizations

The load factor is the most commonly used measure of an airline’s capacity utilization. To calculate the load factor, divide the airline traffic (or revenue passenger miles) by airline capacity (or available seat miles). A higher load factor indicates better utilization of aircraft capacity.

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Legacy carriers except Alaska Air see a drop in utilization

When the growth in capacity exceeds the growth in demand for airline services, the capacity utilization falls. This has been the case for most airlines since 2015. In 4Q16, most airlines saw falling utilization levels.

In 4Q16, Delta Air Lines (DAL), United Continental (UAL), American Airlines (AAL), and Spirit Airlines (SAVE) saw growing capacity in excess of demand. As a result, these four carriers saw falling utilization.

In 4Q16, Delta Air Lines’s utilization fell 0.1% to 85.1%, and United Continental’s utilization fell 0.4% to 82.4%. American Airlines’s utilization fell 1.6% to 81.4%, and Spirit Airlines’s utilization fell 1.8% to 81.4%.

Traffic growth

Traffic growth for Alaska Air Group (ALK), JetBlue Airways (JBLU), and Southwest Airlines (LUV) rose higher than their respective capacity growth levels during 4Q16, leading to improved load factors.

Alaska Air Group’s utilization rose 2.4% to 84.5%, and JetBlue’s load factor rose 1.3% to 84.7%. Southwest Airlines’s utilization rose 0.4% to 84.4%.

Trend analysis

Airlines have been known to go overboard on capacity growth during good economic times. When the economy tightens, airlines find it more difficult to fill these seats. This could result in price wars, which can cut or wipe out airlines’ profits.

Because crude oil prices have been on a downtrend since 2014, the major expense for airlines—jet fuel—declined considerably, leaving airlines with comfortable profits. Airlines used this opportunity to build capacity, often in excess of demand. As a result, these airlines saw declining utilizations.

As we discussed in Part 2, most airlines are seeing reduced capacity growth, which could ease the pressure on utilization. If demand remains robust, utilization could improve.

Investors can gain exposure to the airline industry by investing in the PowerShares Dynamic Leisure & Entertainment ETF (PEJ), which holds ~23% of its portfolio in airlines.

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