ust about anyone in the commercial aviation space knows the term Passenger Load Factor (PLF), most commonly referred to as “load factor.” For those of you catching up, PLF is, at its most basic level, a means of understanding the occupancy rate of an aircraft. It’s a metric used to gauge how effectively an airline fills seats and generates base fare revenue.
How is PLF Calculated?
As a simple example, let’s say you’re flying on an A220-300 with a configuration that fits 150 seats in the aircraft. Your revenue management team by all accounts has done a good job and sold 140 of those seats. This would give you a rounded occupancy figure of 93 percent.
Now if we take it a step further, we must also add an additional variable. The load factor of an aircraft doesn’t only measure seating occupancy. Airlines also consider distance traveled, creating the following equation.
Taking another look at our example, let’s imagine that our A220 is flying from Amsterdam (AMS) to London Heathrow (LHR), which is approximately a flying distance of 372Km. By plugging in these numbers, we arrive at the same numerical value of 93 percent (seeing that the distance variable remains constant), but it does give us an opportunity to introduce two more metrics.
The number of carried passengers (140) multiplied by the distance (372) gives us revenue passenger kilometers (RPK), while the total available seats (150) is multiplied by the distance (372) to give us the available seat kilometers (ASK). We then divide the RPK by the ASK and multiple by 100 to get the load factor percentage.
It may seem trivial adding these extra variables to our basic example, but they become significant when examining the performance of a multi-leg flight with varying distances.
What’s the Industry Benchmark?
Any way you slice it, our example would be a great result considering that the worldwide average in 2018 was 81.9 percent . This broke the previous all-time high from 2017, which hit 81.5 percent. As you can see from the graph below, there has been a fairly steady uptick in load factor as air travel demand has increased.
But this is a very generalized number. Different markets, routes and carriers, for instance, each have their own unique sets of challenges and goals. If you look at PLF by market, you get very different pictures. Africa which only account for about 2 percent of air travel traffic, has an average load factor of 72.4 percent, while North America’s more established market tops out at 82.5 percent.
And while in total PLF increased, in the Middle East it dropped to 73.6 percent (from 74.3 percent), even though total capacity climbed by 5.2 percent in the region.
And when looking at domestic markets, we again see a slightly different picture. Domestic air travel climbed 7 percent between 2017 and 2018. Domestic PLF reached 83.0 percent in 2018, increasing slightly from 82.8 percent the previous year. We can also see how different markets performance. For instance, look at the discrepancy between India (84.5 percent) and Japan (68.8 percent).
How Much Focus is Given to PLF?
Load factor is a crucial metric when determining operational efficiency. Simply put, an airline wants to maximize its yield by filling as many seats as it can. If an airline is unable to sell seats, it faces spoilage. Think of those airline seats as a carton of milk from a supermarket. It must be sold and consumed before its expiration date or else it’s no good.
PLF metrics can play a significant role in determining pricing, capacity and frequency of a route. For instance, if seats are being priced too low, an airline might face spillage, which opposite to spoilage means seats are being sold too quickly, too far from the departure date. Or, as another example, PLF could determine that a route is being overserved if the metric is too low.
However, PLF also has its shortcomings.
It does not factor in pricing and costs against revenue in order to calculate profit. This is something very important to consider as profit margins are razor thin for airlines. The net profit per departing passenger of commercial airlines worldwide is estimated to be just $7.70. Perhaps that route from Barcelona to Oslo sold out in the dead of winter because your marketing team pumped tens of thousands of ad dollars into it.
In comparing PLF’s importance across various levels throughout the aviation sector, an apples-to-apples view can be weighed by examining a respective airline’s business model. Low-cost carriers, such as Spirit Airlines and Ryanair, attract low-budget customers with cheaper base fares and then makes additional money through ancillaries such as luggage allowance, seat selection and ground transportation.
Given the lower cost of tickets and their reliance on ancillary revenue, PLF is significant. Ryanair boasted a 96.0 percent load factor in 2017, while Spirit Airlines generated 46.6 percent of its revenue from ancillaries. Ryanair chief executive Michael O’Leary has even forecasted giving out tickers for free in the future.
Conversely, you have full-service carriers selling higher-priced fares with an added focus on customer-service, comfort, and the overall travel experience such as Emirates. The airline that’s known for its luxury offerings posted a 77.2 percent load factor in 2017 but reported $1.1 billion in profits.
Nevertheless, airlines should tread cautiously, as a low PLF typically signals trouble. Etihad Airlines, Flybe, and Austrian Airlines all posted low percentages and have weathered economic difficulties.
However, please be aware that, like most things in the commercial aviation space, all of this comes with a caveat. A bare-bones base fare does not necessarily equate to more ancillary sales, just as selling more higher-priced fares does not directly equate to revenue maximization. In fact, the best application likely lies somewhere in the middle, blending together multiple approaches with consideration to load factor, fare price, costs and ancillary revenue.
This is, and likely always will be, an industry riddled with inconsistencies and outliers. The application of revenue management and pricing is a complex science, which we’ll continue to explore in more granularity here at Kambr Media.
While one may be able to debate its significance, Passenger Load Factor will remain a large part of the vernacular on the performance of commercial aviation. Keep your eyes peeled on this space as we’ll explore additional metrics through our Airline ABCs series.