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Short-term Airline Industry Demand Volatile, Long-term Story Intact

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Passenger demand

The demand growth for the top seven airline players averaged at 4.1% YoY (year-over-year) in May 2017, a significant decline from the 7% YoY growth seen in April 2017. It was also slower than the 6.9% YoY growth seen in 2016.

However, April also marked a high point in passenger travel demand. According to the IATA (International Air Transport Association), global passenger travel demand in April 2017 grew 10.7% YoY, the fastest growth seen since April 2011. In April 2017, year-to-date, global passenger demand rose 7.9% YoY.

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Regional carriers’ growth slows down

All three major regional carriers saw a slowdown in their traffic growth in May, a result of slowing capacity growth. Ultra-low-cost carrier Spirit Airlines (SAVE) continued to see the highest growth among the three carriers, of 6.6% YoY. However, the growth was significantly lower than Spirit’s average 2017 growth of 11.2% and 2016 growth of 19.9%.

Traffic demand at JetBlue Airways (JBLU) grew 3.8% YoY, lower than its 2017 average growth of 4.9% and also lower than its 2016 growth of 6.2%. Southwest Airlines’ (LUV) traffic demand grew 3.4% YoY in May. The carrier has seen an average 2017 growth of 4.5% YoY, and grew 9.4% in 2016.

Legacy carriers slow down as well

Alaska Airlines (ALK) recorded a higher demand growth than regional players. In May 2017, its traffic grew 7.6% YoY. Traffic demand at both United Continental (UAL) and American Airlines (AAL) grew 2.6% YoY. Delta Air Lines (DAL) saw the slowest traffic growth of 1.7% YoY. Its performance is still better than peers’, considering that this growth in traffic was achieved at no capacity growth.

Demand to continue growing

Terrorist attacks, winter storms, and airline scandals seem to have impacted travel demand, but only temporarily. In the long term, more people are expected to travel. Demand from emerging markets such as China and India is set to keep growing. Global economic growth will be the major driving factor for air travel demand. Investors can gain exposure to the industry through the iShares Transportation Average ETF (IYT), which invests 24% of its portfolio in airlines. Next, we’ll look at airlines’ capacity growth plan for 2017.

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