Load Factors Sky-High, But Not Revenue

Major domestic airlines reported the highest load factors of the year for July, and in the case of Continental Airlines, Southwest Airlines and US Airways, the most full planes in their histories, according to traffic data released this month.

For corporate travelers, high load factors represent an occupied middle seat, scant overhead bag storage and difficulty in reaccommodation in the case of cancellation. For airlines, full planes once signaled recovery and resurgence in pricing power, but analysts and consultants note July's high load factors point instead to the impact of capacity cuts and a rise in leisure travelers taking to the skies on cheap fares.

"It's a race between capacity cutting and falling demand," R.W. Mann & Co. president Robert Mann said. "It's a relative rates game, and so far the industry is winning on load factor, but they're doing it at such low prices that it's not sustainable."

Continental president Jeff Smisek in July said, "During the quarter, we continued to see industry fare sales designed to stimulate traffic, which they did, resulting in very high load factors. Unfortunately, the high load factors were generated by low fares and thus weak yields."

That trend continued through July, with Continental reporting its record consolidated July load factor of 87.3 percent, US Airways reporting its record at 86.4 percent and Southwest Airlines cracking 83 percent with what a spokesperson called "an all-time record."

Though AirTran CFO Arne Haak said the carrier "experienced a record second-quarter load factor of 80.7 percent," AirTran was one of only two large U.S. carriers in July to see a year-over-year decrease in loads, the other being JetBlue. Both decreases, however, were modest.

If ever there is a month for airlines to record their highest load factors, it's July, Mann said, noting that the typical air travel peak of the year usually starts the first week in July and lasts through the second week in August.

"The real questions is: What will happen in the fall? This really is our peak leisure travel season right now but, if you move ahead to October, November and December, are there any signs that business travel will be expanding?" said Management Alternatives vice president John Heilner. "Prices don't normally go down when you have high load factors," he said, but it's unlikely airlines can keep their planes as full in the approaching shoulder season.

Mann said, "It will be tough to stimulate sufficient discretionary travel after Labor Day. You can stimulate some, but it will be at such low fares that you have to question whether you're better off just cutting capacity—which is what I think the industry is planning to do: just cut further."

Even for carriers that did not break records or beat July 2008's load factors, the numbers reported by all major domestic carriers were unforeseeable one or two decades ago, Mann said, adding the realm of comfort—for airlines and passengers—typically fell between 60 percent and 70 percent.

"Load factors have continued to push up this year," said Mann, "but obviously there's a limit, and we're probably at it—but I would have said that 10 years ago when load factors were in the 70s."

For July, load factors were well above the 70s.

Continental's Smisek and other airline executives during second-quarter earnings calls said high load factors create a difficult operating environment. Mann said the same is true for the passenger experience.

"If you go back and correlate passenger complaints with load factor, what you'll find is the higher the load factor goes, the higher the complaints go," Mann said. "You ideally want to go back to the bad old days when the middle seat was always empty, which means you had a nice round 60 percent to 70 percent load factor. Then, if you're cancelled, within two flights you could reaccommodate everybody."

"Load factors are what I would call an easy data trap," Mann said, claiming that even when they hit historic highs, they're not necessarily indicative of financial health or pricing power.

For example, the Air Transport Association in its most recent traffic figures showed June passenger revenue fell 26 percent compared with the same period in 2008—"the eighth consecutive month in which passenger revenue has fallen from the prior year."

The high load factors have yet to bring about more pricing power for airlines, said Travelport CEO Jeff Clarke last month. "We have not seen any particular movement to increase prices by airlines," he said, noting that Travelport GDS sees seven fare filings a day. "In fact, we're still seeing a lot of specials out there."

That is good news for global distribution systems, Clarke said, since their air revenue comes from transactions, not yield. "We want them to have high load factors."