Airlines Continue to Reduce Capacity Growth

Industry average

Capacity growth for the seven major airlines grew just 3.2% YoY (year-over-year), lower than the 4.5% YoY growth recorded in April. Year-to-date, in April 2017, the average industry growth for the seven players was 4.0% YoY, and in 2016, it was ~7.1%.

Airlines Continue to Reduce Capacity Growth

Capacity growth slowing down

At the start of 2016, regional carriers Southwest Airlines (LUV), JetBlue Airways (JBLU), and Spirit Airlines (SAVE), and niche legacy player Alaska Airlines (ALK) were growing their capacity by double digits. Southwest was the first to realize the importance of capacity discipline and curtailed its capacity growth to single digits from 2Q16. JetBlue followed in its footsteps in 3Q16, and Alaska Airlines joined in 4Q16.

However, Spirit Airlines continued to grow its capacity by low double digits until last month. Its capacity growth reduced to single digits (9% YoY) in May, though this growth is still higher than all other carriers’. Alaska Airlines increased its capacity by 5.9% YoY, Southwest grew its capacity by 4% YoY, and JetBlue increased its capacity by 3.7% YoY.

Legacy carriers have maintained their low-single-digit capacity growth. United Continental (UAL) increased its capacity by 3.7% YoY in May, followed by American Airlines (AAL), which increased its capacity by 2.3% YoY. Delta Air Lines’ (DAL) capacity for the month was flat.

Outlook for 2017

Airlines’ capacity trends show that they have realized the importance of capacity discipline. Overcapacity has been detrimental to airline profitability in the past, as airlines tend to reduce fares so that they can fill up extra seats, thereby reducing yields. Investors can continue to expect low capacity growth for the rest of 2017. Investors can gain exposure to airlines by investing in the SPDR S&P Transportation ETF (XTN), which invests ~21.7% of its holdings in airlines.