Economic Insights

Economics | September 28 2015

Leading indicator: More people flying, airfares up

Tracking the economy
More people on planes: Could figures on domestic airline activity provide key insights on the economy?
Data released late last week showed that the proportion of occupied seats on domestic airlines in July was
at a 9-month high with the smoothed measure at a 17-month high. The cost of the cheaper airfares (best
discount, as opposed to business and full economy fares) is also rising.

Airline activity as a leading economic indicator

Investors are always on the lookout for timely and less traditional indicators on the economy. And one such
source of information is the monthly data on airline activity produced by the governments transport statistician.

If more business people are flying inter and intrastate it

suggests companies are keen to chase new opportunities
and prepared to spend money. And if more people are
flying to holiday destinations it could signify either lower
fares, higher incomes, increased confidence or more
costlier international travel.

One key indicator of airline performance is the proportion

of occupied aircraft seats (or load factor). If more seats are
occupied it could suggest that airlines are becoming more
efficient in aligning planes and flight numbers to the
number of travellers. But airlines are never going to
always get it right they respond to demand with a lag,
adjusting capacity and airfares. And filling up planes is not
an end in itself it gets down to profitability.

Over time there has been a close relationship between

economic growth and changes in airline load factors. And
that relationship has steadily improved over the past 20
years. In fact in the 1999/2000 economic downturn,
airline load factors started weakening in late 1999 before
the slowdown hit in 2000. And load factors began lifting in
November 2000 before the pick-up in economic growth in
early 2001.

And in fact in the last economic slowdown in 2008/09,

airline load factors started weakening in early 2008
before the slowdown hit in late 2008. And load factors
began lifting in early 2009, broadly around the time the
economy was picking up, confirming the improvement in
overall economic conditions.

What does it all mean?

As measured by rolling annual totals, there has been little

Craig James Chief Economist (Author)

Twitter: @CommSec

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Economic Insights. Leading indicator: More people flying, airfares up

change in passenger numbers on domestic flights over the

past year. But there has been a gradual lift in the
proportion of occupied seats (or load factor). The
increased load factor is consistent with a gradual
improvement in business conditions.

At the same time, passenger numbers on the key SydneyMelbourne route have been rising while at the same time
airlines have been able to lift airfares.

The fact that passenger numbers have held up despite

higher airfares suggests that business and consumer
conditions remain favourable.

What do the figures show?

Load factor: In July the Bureau of Infrastructure,

Transport and Regional Economics (BITRE) reported that
the load factor on planes operated by domestic and
regional airlines was 79.4 per cent, the highest level in
nine months and the highest July result in four years. The
moving annual average load factor in July was 76.5 per
cent the highest result in 17 months.

Sydney-Melbourne route: The Sydney-Melbourne route

is the third busiest air route in the world. The SydneyMelbourne route is also a key measure of business
activity. In the year to July, there were a record 58,807
flights between Sydney and Melbourne, up 6.4 per cent on
a year ago and the strongest growth in 26 months (May
2013).

The lift in the number of flights between Sydney and

Melbourne has led to an easing in the moving annual
load factor to 81.7 per cent a 21-month low. But the
number of passengers was up by 3.1 per cent on a year
ago a 21 month high.

The number of passengers carried between Sydney and Melbourne in July was 752,993 a record for any July
month and up 7.5 per cent over the year.

BITRE also report: It was followed by Brisbane Sydney with 406,136 passengers (up 3.4 per cent) and
Brisbane Melbourne with 307,903 passengers (up 4.2 per cent).

Further BITRE note: There were 5.38 million passengers carried on Australian domestic commercial aviation
(including charter operations) in July 2015, an increase of 1.8 per cent on July 2014. For the month of July 2015
there were 60,246 aircraft trips, a decrease of 0.2 per cent compared with July 2014.
Airfares

BITRE report that smoothed (13-month moving average) business class airfares were up 3.4 per cent on a year
ago in September. Best discount fares were up by 11.7 per cent with restricted economy fares up 7.2 per cent.

September 28 2015

Economic Insights. Leading indicator: More people flying, airfares up

In real terms, airfares are still relatively low with discount fares around 30-35 per cent cheaper than the base
level of the index set 12 years ago. And all airfares are cheaper in nominal terms than seven years ago.

What is the importance of the economic data?

The Bureau of Infrastructure, Transport and Regional Economics (BITRE) releases regular aviation data. The
BITRE releases the Australian Domestic Airline Activity publication each month as well as the Domestic Air
Fares publication. The data provides insights on airline activity as well as trends in the broader Australian
economy. If more people are flying, then it suggests businesses are more active and/or consumers are more
confident.

What are the implications for investors?

No single indicator can define how the economy is doing. Investors need to track a raft of traditional and less
mainstream indicators. Over time there has been a good link between changes in aircraft load factors and
economic activity. Load factors are improving despite higher airfares, suggesting a modest improvement in the
tone of the economy.

Passenger numbers on the key Sydney-Melbourne route continue to hit record highs. The key airline activity
indicators for this route need to be watched carefully given its importance to overall business activity.

Airlines seem to be well in touch with conditions, lifting airfares without a significant degradation in passenger
numbers and able to lift load factors on planes (operational efficiency).

Craig James, Chief Economist, CommSec

Twitter: @CommSec

September 28 2015