Load factor is an indicator that measures the percentage of available seating capacity that is filled with passengers. It is released monthly by the Air Transport Association (ATA).
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. 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 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 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. If a high load factor is necessary, the airline is less efficient and may not be as profitable for investors.
Around 75 percent of airline revenue is generated from passengers – approximately 15 percent of the remaining revenue is from air freight delivery and the rest comes from other types of transport. Since passenger earnings are largely generated from domestic travel, load factor is particularly relevant on domestic flights.
Load Factor and Costs
Almost a third of airline fixed costs are associated with flying operations. Another 13 percent of costs are due to aircraft maintenance, 13 percent is spent on advertising, 16 percent on services at the airport gates, nine percent on in-flight services, and the rest on other expenses.
Significant labor costs are common and account for about 75 percent of an airline's controllable expenses.
Break-Even Load Factor
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.