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Spirit Airlines Outpaced Its Peers in Traffic Growth in 4Q16

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Traffic growth helps

During 4Q16, the regional air carriers’ high capacity expansion was met by equally high traffic growth. Airline traffic is measured by revenue passenger miles (or RPM), which is the number of revenue passengers multiplied by the total distance traveled.

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Spirit Airlines led the pack

Spirit Airlines’s (SAVE) low airfares seem to be working in its favor, as it continues to attract more passengers. In 4Q16, Spirit Airlines’s traffic grew 13.4% year-over-year (or YoY), which is 2% lower than its year-over-year capacity growth of 15.4%.

Alaska Air Group (ALK) followed closely with traffic growth of 13.1% YoY compared to 10.3% capacity growth. JetBlue Airways’s (JBLU) traffic grew 6% YoY, and Southwest Airlines’s (LUV) traffic grew 5.5% YoY.

During the same period, United Continental’s traffic growth was 1.6% YoY and Delta Air Lines’s (DAL) traffic growth was 0.8% YoY. American Airlines (AAL) was the only airline to witness a traffic decline of 1.3% YoY.

Why are regional players growing more quickly?

The small base of regional carriers helps each carrier grow at a significant rate. For example, Spirit Airlines flew ~5,363 revenue passenger miles in 4Q16, which was the lowest among the carriers compared in this series. In contrast, American Airlines (AAL) had the highest RPMs flown in 4Q16, about 53,452 revenue passenger miles.

Lower airfares provide another important advantage for regional players, which can afford to charge less given their low-cost structures. Like any another commodity, air travel is highly sensitive to price. Budget-conscious passengers naturally seek airlines that offer the lowest airfares wherever possible.

However, legacy players have been catching up to the regional carriers. Most legacy carriers have introduced basic economy airfares that compete with the airfares offered by regional airlines.

Investors can gain exposure to the industry through the iShares Transportation Average ETF (IYT), which invests 23% of its portfolio in airlines.

In the next article, we’ll see how this traffic and capacity growth mismatch has weighed on airlines’ capacity utilization.

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