Every Airline Is Watching This Metric Like a Hawk. You Should Be, Too.

Thinning profits per passenger make it even more important for carriers to fly at capacity as often as possible.

Jun 9, 2014 at 11:25PM

Images

Delta's aircraft were more than 86% full in May. Credit: Benjamin Beyers for The Motley Fool.

According to new data from the International Air Transport Association, or IATA, via CNN, the world's airlines average just $5.42 in profit per ticket, for a net profit margin of only 2.4%.

Think that sounds bad? You don't know the half of it. Cut-rate retailer Wal-Mart still earns 3.3% on the bottom line -- nearly a percentage point better than the average airline. No wonder some carriers are struggling.

What to do, especially now that overall capacity is shrinking the wake of big mergers? Fill more seats on every flight. As an investor, you can track this via a widely reported metric known as "load factor."

Busier skies mean more potential profit
To be fair, there's no perfect correlation between high load factor and high profits. Even a carrier that packs its aircraft sardine-tight could still fall victim to unexpected fuel, maintenance, or labor expenses. Or weather delays could cancel flights and cut overall capacity, crimping profits. Airlines suffer from unknowns like no other industry.

Yet this same randomness is what makes load factor such an important metric. Filling seats via smart marketing and affordable fares can reduce the sudden impact of bad luck. That's why some of the industry's best-performing carriers are also flying with very full planes right now.

Among the majors, Delta Air Lines (NYSE:DAL) flew its aircraft 86.5% full in May, up 1.9 percentage points year over year. Passenger revenue miles improved 7% over the same period. United Continental ranked second with an 85.3% load factor, up 0.9 points. Passenger revenue increased 1.2%. Finally, American Airlines parent AAR Corp. suffered a 0.3-point decline to 84%.

We don't yet have full data on the discounters, but JetBlue endured a year-over-year decline in April. In May, Southwest Airlines (NYSE:LUV) enjoyed an almost Delta-like gain of 1.8 percentage points to end with an 83.7% load factor. Passenger revenue miles improved 0.6% as a result, and that's despite a 5.6% decline in trips flown.

Foolish final thoughts
So far, 2014 is shaping up to be an interesting year for the global airline industry. The IATA estimates we'll see passengers spend an estimated $746 billion this year and take a record 3.3 trips. Both figures represent a huge opportunity for the carriers capable of filling their aircraft with premium fliers. Right now, to me, that looks like Delta. Do you agree? Which airline stock most interests you right now? Leave a comment below to let us know your take.

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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's Web home and portfolio holdings, or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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