A:

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.

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. ASM 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. Airlines typically have thin profit margins and must have relatively high load factors to stay profitable. In 2014, Southwest Airlines had a break-even load factor of 74.4%. This was lower than most other U.S. major airlines. JetBlue and Delta also had positive load factors, while American and United had non-beneficial load factors. If a high load factor is necessary, the airline is less efficient and may not be as profitable for investors.

Around 75% of airline revenue is generated from passengers, with approximately 15% of the remaining revenue from air freight delivery and the remainder from other transport. Passenger earnings are largely generated from domestic travel, so load factor is perhaps particularly relevant on domestic flights. Almost a 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 75% of an airline's controllable expense.

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.

RELATED FAQS
  1. Is the airline industry an oligopoly?

    Has the air line industry become an oligopoly? Lean about the changing regulations, the history of the airline industry and ... Read Answer >>
  2. Which major expenses affect airline companies?

    Discover the major expenses that airlines must pay. The two largest are labor costs and fuel costs, with fuel costs being ... Read Answer >>
  3. How does government regulation impact the aerospace sector?

    Learn more about how government regulation impacts airlines and aerospace manufacturers. Find out how American deregulation ... Read Answer >>
  4. Why are most airplane tickets nonrefundable?

    Discover why most airline tickets are nonrefundable. Learn how this practice is a big revenue generator for major airlines. Read Answer >>
Related Articles
  1. Investing

    5 Reasons Airline ETFs Are Doing Well Despite Oil Bounce (JETS, AAL)

    Learn why airline stocks and exchange-traded funds are increasing their profits consistently as oil prices are also on the rise.
  2. Investing

    Who Are American Airlines’ Main Competitors? (DE, JBLU)

    Understand what makes American Airlines a good company and what sets it apart in the industry. Learn about the top four competitors to American Airlines.
  3. Insights

    American Airlines Updates Q4 Guidance, Announces November Traffic (AAL)

    American Airlines issued a press release detailing its November 2016 traffic performance. The airline also revised its Q4 guidance.
  4. Investing

    Watch Airline Stocks For Takeoff Potential (AAL, DAL)

    Airline stocks have taken a hit but they show potential for takeoff as a result of low fuel prices, reduced competition and an improving economy.
  5. Insights

    Airline Stocks Rally (DAL, AAL)

    Airline stocks are up today thanks to reports that the industry is doing "OK."
  6. Financial Advisor

    The Incredible Shrinking U.S. Airline Industry

    The U.S. hasn’t had a new scheduled passenger airline since 2007. Some blame a lack of financing while others say government approval has gotten too tough.
  7. Insights

    Falling Prices, Revenue Hit Airlines

    2016 has been a tough year for U.S. airlines with overcapacity and falling prices.
  8. Personal Finance

    Will Airlines Keep Flying High in 2016?

    Learn why the airline industry has such a unique set of variable and fixed costs that makes it very difficult to forecast its performance each year.
  9. Personal Finance

    Top New Trends In Airline Travel

    Learn more about the newest policies and procedures of America's airlines, and find out how these changes are affecting profit margins.
  10. Personal Finance

    Ever-Higher Airline Fees: Will Congress Save Us?

    Democratic senators want to crack down on high fees the airlines charge for things like changing flights. The airlines say this would end cheap airfares.
RELATED TERMS
  1. Revenue Passenger Mile - RPM

    A Revenue Passenger Mile is a transportation industry metric ...
  2. Airline Industry ETF

    A sector exchange-traded fund (ETF) that invests in stocks of ...
  3. Revenue Per Available Seat Mile - RASM

    Revenue Per Available Seat Mile is a unit of measurement used ...
  4. Cost Per Available Seat Mile - CASM

    Cost per available seat mile (CASM) is a common unit of measurement ...
  5. Transportation Sector

    The transportation sector consists of companies that provide ...
  6. Richard H. Anderson

    Richard H. Anderson became the CEO of Delta Airlines in 2007. ...
Hot Definitions
  1. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  4. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  5. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert ...
Trading Center