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Did American Airlines’ Capacity Growth Come at a Cost?

American Airlines Group Sees Record Results in 3Q15

(Continued from Prior Part)

Capacity continues to grow

For the third quarter of 2015, American Airlines (AAL) saw mixed operational performance. Capacity rose by ~3% in 3Q15 after falling by ~1% in 1Q15 and rising by 2% in 2Q15. Traffic growth was higher than capacity for the quarter, increasing by ~6%.

This has helped in improving the airline’s capacity utilization. Load factor increased by 2.2% to 85.6% in 3Q15 as compared to 83.4% in 3Q14. A few other airlines such as Delta Air Lines (DAL) and Southwest Airlines (LUV) also improved their load factors in 3Q15.

Delta reported a 0.4% increase in load factor to 86.8%, while Southwest’s load factor increased by 1% to 85.4%. United Airlines’ (UAL) load factor remained flat at 84%. JetBlue Airways’ (JBLU) load factor decreased by 1% to 85.3% and Alaska Air Group’s (ALK) load factor decreased by 0.4% to 85.6%.

American Airlines forms 5% of the holdings of the Dynamic Leisure & Entertainment ETF (PEJ).

Costs fall

On the costs side, the mainline CASM (cost per available seat miles) was 11.3 cents, down 14.7% year-over-year (or YoY) on a 2.6% YoY growth in capacity or ASM (available seat miles). The regional CASM stood at 15.78 cents, up 1.7% YoY on a 5% YoY increase in regional capacity. Total CASM for 3Q15 fell by 14.3% to 12.02 cents.

PRASM and yields fall

American Airlines’ unit revenues,measured by passenger revenue per ASM (or PRASM), fell by 6.8% YoY to 13.16 cents. Despite this, the airline’s PRASM-CASM spread increased to 0.91 cents in 3Q15 from -0.17 cents in 3Q14.

American Airlines’ PRASM-CASM spread turned positive only in 2Q15 after remaining negative since 2012. However, the spread is still lower than those of all other major airlines except for United Continental’s.

American Airlines’ consolidated passenger yield also fell by 9.2% YoY to 15.37 cents.

Our analysis

American Airlines seems to be in a good place for now. Capacity growth will mean future growth for the airline, provided load factors remain constant or increase. The bigger concern, however, is fear of overcapacity in the airline industry. American Airlines has already announced that it will introduce lower fares to take on its low-cost competitors.

The company’s president Scott Kirby said, “American has many frequent fliers who will pay more for premium service. But 87 percent — accounting for half of American’s revenue — fly the airline no more than once a year and they buy airline tickets based on price.”

Given that low-cost carriers such as Spirit Airlines and Frontier have low customer satisfaction ratings, demand could improve for American Airlines, but lower fares would mean lower margins.

Continue to Next Part

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