MENU

3 Metrics to Know Before You Invest in Airline Companies

The airline industry is a notoriously difficult sector to invest in. There are many challenges that airline companies face and are often plagued by risks that are beyond their control. I have covered some of these risks in a previous article, which you can find here.

Having said that, there are also times that set the stage for airline companies to prosper. It is perhaps the reason why Warren Buffett himself has bet big on the industry by investing billions into four major airlines in the United States.

In Singapore, we also have the option to invest in our flag carrier, which is perhaps one of the most recognised airline brands in the world. However, before you decide to invest, either in our local carrier or a foreign company, it is important for you to understand three simple metrics that can help you determine the profitability of an airline company.

Available seat miles (ASM)

The available number of seat miles is the total capacity of the airline company. It is calculated by multiplying the available seats with the miles that the plane is flying. The greater the ASM of an airline company, the greater is its potential revenue.

This metric is a simple measure of assessing a company’s capacity to generate revenue. A company that can maximise its seats miles will be able to utilise its assets better and generate more revenue in the long-term.

Revenue passenger miles (RPM)

The revenue passenger miles or RPM is the number of miles travelled by paying customers. It is calculated by multiplying the number of passengers by the distance travelled.

For example, a flight carrying 200 passengers that travels 100 miles clocks up 20,000 RPM. A company that operates with an RPM close to its ASM is approaching its full capacity.

Revenue per available seat mile

This metric measures the revenue generated per available seat. It is calculated by dividing a company’s revenue by its available seat miles. The revenue per available seat mile is a more specific measure of the efficiency of an airline to generate revenue with its assets.

It is dependent on the price the airline sells each seat and the percentage of available seats that it can fill up. As with any business, how well it can utilise its assets is vital and ultimately determines the profitability of a company. An airline company that is consistently weak in this department may be a yellow flag for investors.

The Foolish bottom line

Investors need to know the basics of assessing an airline company before they can make a decision. These three metrics are good first steps to evaluating and comparing the numerous airline companies available in the stock market and can help you make a better long-term investing decisions.

Worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore's new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge--Simply click here now to claim your copy

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.