Rising Breakeven Load Factors Threaten Airline Finances

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Breakeven Load Factor (BLF) is the average percent of
seats that must be filled on an average flight at current average fares for
the airline’s passenger revenue to break even with the
airline’s operating expenses.

Since 2000, most large passenger airlines suffered a
sharp increase in their Breakeven Load Factor. Some carriers could not
cover operating expenses even if they sold 100% of their seats at average
airfares.

This study focuses on three groups of major passenger
­airlines:

• The “recently
  bankrupt” – airlines that have filed for bankruptcy within the
  last two years. This group consists of United Airlines and US Airways. (US
  Airways has recently emerged from bankruptcy.)
• The “at
  risk” – airlines that have not filed for bank­ruptcy, but
  they have not achieved yearly profits over the last two years. This group
  consists of American Airlines, Alaska Airlines, Continental Airlines, Delta
  Air Lines, America West Airlines, and Northwest Airlines.
• The
  “profitable” – the only major passenger airline to show a
  yearly profit over the last two years is Southwest Airlines,

The BLFs for the three groups are shown in Figure
1¹.

BLFs for the recently bankrupt and at-risk groups began to deteriorate even
before September 11th. In Figure 1, the obvious
third-quarter 2001 spikes in the BLF reflect the impact of September 11th on
the industry.

The most pronounced jump is for the recently bankrupt
airlines as that group’s BLF increased from 77.7% in the first
quarter of 2000 to 114.0% in the first quarter of 2003. For these recently bankrupt airlines, even if they had managed to
fill every seat, selling tickets at prices that would have allowed them to
remain competitive with other airlines would not have allowed them to
generate enough revenue to offset operating expenses.

By contrast, the BLF of the profitable group has stayed
below 70%, while the BLF for the at-risk group approached 100%.

Passenger Yield

Passenger yield, which partly determines Breakeven Load Factor, has fallen
most sharply for recently bankrupt carriers, although it has also declined steeply
for most large carriers.

A drop in passenger yield for all three groups took place between the first
quarter of 2000 and the first quarter of 2003²
(Figure 2). The drop is particularly steep for the recently bankrupt group, the
group with the highest passenger yield in the first quarter of 2000 and the
lowest passenger yield in the first quarter of 2003.

The BLF is determined by two variables: 1) unit costs
– operating expenses per available seat-mile (ASM), and 2) passenger
yield – passenger revenue per revenue passenger-mile (RPM). The BLF
is equal to the ratio of these two variables:

Unit Cost

Unit costs – another factor in Breakeven Load
Factor – have been rising for many large passenger airlines. Large
airlines at most financial risk had higher unit costs than other airlines
even prior to September 11, 2001, and those costs have remained high and
have even increased for some.

Unit costs of the recently bankrupt group and the at-risk group exceed the
unit costs of the profitable group (Figure 3).
Unit costs of the former two groups have been rising (on average) over time,
while those for the profitable group have not.

Airlines in the recently bankrupt group and the at-risk
group have recently made major cost-cutting decisions. However, the effect
of these decisions is not yet reflected in the unit costs because there is
a lag between the initiation of cost-cutting initiatives and their effects
on operations. Most large carriers cannot implement rapid cost reductions
because of contractual obligations and other business constraints.

Because the BLF is the ratio of unit cost to passenger
yield, its value can be increased by an increase in unit cost, or a
decrease in passenger yield, or both—which is the case for the
recently bankrupt group. For this group, the rate of decrease in passenger yield is higher
than the rate of increase of its unit cost. It is primarily this steep decline in
passenger yield that caused the BLF of this group to soar well above 100%.

For More Information:

U.S. Department of Transportation

Bureau of Transportation Statistics

Office of Airline Information

400 7th Street SW, Room 4125

Washington, DC 20590

Phone: 202-366-4105

Fax: 202-366-3383

Jason.Goodfriend@bts.gov

¹ These airlines comprise
all the major airlines except for American Trans Air, which flies a large number
of charter flights, and American Eagle, which is a code-sharing partner with
American Airlines. The costs and revenues of these two carriers would not be
readily comparable with those of other major airlines.

² Passenger yield is determined
by dividing the passenger revenue by the number of revenue passenger-miles.
The passenger revenue is the amount paid by flying customers. A revenue passenger-mile
is one revenue passenger transported one mile.