Why Airline Industry Demand Could Grow in the Long Term



Passenger demand

Demand growth for the top seven airline players averaged at 6.1% year-over-year or YoY for July 2017—a significant improvement compared to the 4.4% YoY growth in June 2017 and 4.1% YoY growth in May 2017. It was, however, slower than the 6.9% YoY demand growth in 2016.

The slowdown in passenger travel demand is an industry-wide phenomenon. According to the International Air Transport Association or IATA, global passenger travel demand was growing at a rate of 12% at the beginning of 2017. This growth has, however, slowed to 7% YoY since February 2017. Year-to-date as of June 2017, global passenger demand had grown by 7.9% YoY.

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Regional carriers’ growth slowdown

All three major regional airline carriers have seen growth in their traffic for the month, a result of increasing capacity growth. Ultra–low-cost carrier Spirit Airlines (SAVE) continued to see the highest growth of 17.8% YoY among the three carriers. The growth is also significantly higher than its own average 2017 growth of 10% in the first half of 2017. Spirit Airlines’ 2016 traffic growth averaged 19.9% YoY.

Traffic demand at JetBlue Airways (JBLU) grew 5.1% YoY—higher than its first-half 2017 average growth of 4.5% but lower than the 2016 growth of 6.2%. Southwest Airlines’ (LUV) traffic demand grew 6.0% YoY in July. The carrier has seen average first-half-2017 growth of 4.2% YoY and 2016 growth of 9.4%.

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Legacy carriers almost constant

Alaska Air (ALK) recorded traffic growth of 6.6% YoY for July 2017—higher than LUV and JBLU but similar to its 1H17 average of 6.3% YoY. Traffic demand at United Continental (UAL) grew 3.9% YoY, matching 1H17 average growth of 3.3% YoY. Delta Air Lines’ (DAL) grew 2.7% YoY, higher than the 1H17 average growth of 1.2% YoY. American Airlines (AAL) saw the slowest traffic growth of 0.8% YoY for the month—slightly higher than the 1H17 average growth of 0.3% YoY.

Demand to continue growing

Passenger travel demand is expected to continue growing as more people are expected to take to travel. Emerging markets like China and India are expected to contribute to a greater extent to this growth. A growing middle-class population, rising disposable income, and more aspiring travelers support this outlook. Global economic growth should be another major driving factor for air travel demand.

Investors can gain exposure to the industry by investing in the SPDR S&P Transportation ETF (XTN), which invests ~22.1% of its holdings in airlines. Next, we’ll look at airlines’ capacity growth plans for 2017.


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