How Does Load Factor Impact Airline Profitability?

Airlines have notoriously been known to have difficulty remaining profitable given their high fixed costs, the desire of passengers to find the cheapest tickets, and seasonality factors. Determining if a specific airline company is a good investment can be tricky, but there are many metrics that provide useful insights; the load factor is one of them.

The load factor is an indicator that measures the percentage of available seating capacity that is filled with passengers. It is released monthly by the International Air Transport Association (IATA).

Key Takeaways

• The load factor is a metric used in the airline industry that measures the percentage of available seating capacity that has been filled with passengers.
• A high load factor indicates that an airline has sold most of its available seats and is preferred over a low load factor.
• The higher the load factor, the more an airline can spread its fixed costs amongst passengers.
• The load factor helps investors and management determine how well an airline generates sales, covers its expenses, and remains profitable.
• Airlines have thin profit margins with many costs so having a high load factor is essential to an airline’s success.
• Available seat miles (ASM) is another useful metric that measures an airline’s carrying capacity to generate revenues.

What Does a High Load Factor Indicate?

A high load factor indicates that an airline has full planes with most seats occupied by passengers. Airlines have high fixed costs associated with each flight. Every flight must have a full flight crew and support staff, a well-maintained aircraft with enough fuel, and services that entertain and comfort customers.

If only half of the seats on a flight are occupied, the airline is not generating as much revenue as it could by flying a full plane. The load factor may help investors understand how the airline covers expenses and generates a profit. A low load factor may be a cause for concern and may indicate an unprofitable airline.

Using Available Seat Miles With Load Factor

Available seat miles (ASM) may make the load factor more understandable. The ASM of an airline measures how many passenger travel miles are available at a given time. This statistic expresses the capacity of the airline. Higher load factor values make the airline more profitable by spreading fixed-cost expenses across more passengers.

Using the ASM and the load factor, investors may determine the revenue gained when planes are filled at a particular level. At a certain amount of revenue per passenger, airlines are able to cover fixed costs and begin generating profits. Investors may use this break-even point when evaluating how profitable an airline is.

Load Factor and Revenue

Airlines typically have thin profit margins and must have relatively high load factors to stay profitable.

Note

For the majority of the last decade, the domestic and international load factor for U.S. airlines has remained above 80%. 

Around 75% of airline revenue is generated from passengers while the remaining 15% of revenue is approximately from air freight delivery, with some revenue coming from other types of transport. Since passenger earnings are largely generated from domestic travel, the load factor is particularly relevant on domestic flights.

Load Factor and Costs

Almost one-third of airline fixed costs are associated with flying operations. Another 13% of costs are due to aircraft maintenance, 13% is spent on advertising, 16% on services at the airport gates, 9% on in-flight services, and the rest on other expenses.

Significant labor costs are common and account for about 75% of an airline’s controllable expenses.

Break-Even Load Factor

The break-even load factor is often used by airlines in strategic planning. An airline wishing to attract low-budget customers with cheap tickets will likely need a higher load factor to stay profitable and may need aircraft designed to carry more passengers. Pursuing service and a quality customer experience, the airline may decide to charge more per ticket and offer fewer seats while providing a higher level of comfort.

The Bottom Line

There are numerous metrics to determine how profitable an airline company is, with the load factor being one of the most simple and informative. Knowing how many seats an airline fills helps provide insight to investors and management on how well the airline is doing in marketing, periods of seasonality, efficiency, revenues, and profit. The load factor shows the ability of an airline to drum up business and spread fixed costs across more passengers.

Read the original article on Investopedia.