Low crude oil, demand growth drives global airline profitability (Part 2 of 10)
Traffic and capacity growth in global airline industry
The positive trend in air travel volume continued at a higher rate in October 2014 compared to September. According to the IATA (or International Air Transport Association), passenger traffic growth increased to 5.7% in October from 5.3% in September. Capacity increased by 5.5%, higher than in September.
Strong growth in the international market drove this increase in capacity. However, demand growth and load factor increased in the domestic market. On a year-to-date basis, traffic and capacity increased by 5.8% and 5.6%, respectively. Details on regional international and domestic passenger traffic growth in October are provided in Part 3, Part 4, and Part 5 of this series.
Slightly better utilization
In October 2014, load factor was 79.1%, only 0.1% higher than a year ago. Load factor has been higher in the domestic market (81.1%) compared to international markets (78%). The overall growth in demand was higher than supply during the month and for the year to date.
A higher rate of growth in demand compared to supply is positive for the industry, as it results in better utilization of existing seats. This leads to a higher load factor, which improves cost efficiency and leads to increased profitability.
Yield remains weak
Apart from traffic, airline revenue is also impacted by the rise or fall in yield (or average fare paid per passenger per mile). Although global yield continues to remain soft due to weakness in Asia and exchange rate fluctuations, the US passenger yield continues to improve with a 2% year-over-year growth in October.
Yield and load factor also determine an airline’s profitability. The US region has the best load factor compared to all other regions, and even yields have improved over the past few months. This could be the reason for the higher profitability of North American airlines (see Part 9 of this series).
US airlines, including Delta (DAL), American (AAL), United (UAL), Southwest (LUV), and JetBlue (JBLU), recorded higher profitability and margins in 2014. Investors can gain exposure to these stocks through ETFs such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN).
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