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How Might Spirit Airlines’ Declining Utilization Impact Yields?

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Utilizations decline

Spirit Airlines’ (SAVE) capacity growth outpaced industry traffic growth through most of 2016, and the trend has continued in 2017, but this has meant declining utilizations or load factors. In fact, SAVE saw one of the fastest-declining utilizations in 2015 among all major players, except Allegiant Travel (ALGT), which saw a similar decline.

However, 2016 was a mixed year, with Sprint’s utilization declining for exactly six months and improving in the other six. Spirit’s utilization has continued to decline in 2017. It fell 3.5% in January and 3.1% in February to 78.2% and 80.7%, respectively.

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For February 2017, peers Delta Air Lines (DAL) and American Airlines (AAL) have reported improvements in utilizations. United Continental (UAL) is the only other carrier that has reported a decline in utilization. Alaska Air (ALK), JetBlue Airways (JBLU), and Southwest Airlines (LUV) have yet to report their February performances.

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

Yields decline, unit revenues follow

SAVE has mainly increased its capacity on routes served by other legacy players. This has resulted in severe pricing wars, leading to declines in average yields.

In 2016, the company’s TRASM (total operating revenue per available seat mile) fell 9.6% to 9.11 cents. Spirit’s heavily falling unit revenues have been a cause of worry for many investors. Declines became more moderate in the fourth quarter of 2016. For 4Q16, TRASM fell 3.6% YoY to 8.78 cents.

Outlook

Spirit Airlines expects unit revenues to continue to decline in the first half of 2017. Airfare stabilization could help to offset some of this decline. For the first quarter of 2017, TRASM is expected to fall 2.5% YoY.

Investors can gain exposure to Spirit Airlines through the First Trust Industrials/Producer Durables AlphaDEX Fund (FXR), which has 1.2% of its portfolio in SAVE.

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