Before diving into the industry-specific metrics used by professionals and the airlines themselves to evaluate financial performance, let’s take a step back and ask ourselves about the main factors driving an airline’s profitability. First, how much capacity does it have in terms of flights per year? Second, how much of that capacity is being utilized in terms of seats filled? Third, and most importantly of all, how much revenue is the airline generating per passenger – and how does that compare to the cost of operating its flights?

A commonly used measure of airline capacity is available seat miles (ASM), which is calculated by multiplying the number of seats available on a flight by the number of miles traveled, regardless of whether the seat was occupied or not. So a plane with 100 seats that flies 300 miles generates 100 x 300 = 30,000 ASM. Adding that up across all of an airline’s flights in a particular time period – say a quarter or a year – gives you a total ASM figure. Delta Air Lines’ 2019 ASM, for instance, was 275 billion. Changes over time can be illuminating: a growing ASM indicates that the airline is making either more or longer flights – or both.

But an airline’s passenger volume is probably more important for investors than capacity. To measure this, you can work out revenue passenger miles (RPM), which is calculated by multiplying number of paying passengers by distance traveled. 80 paying passengers on board a 200-mile flight would therefore generate 80 x 200 = 16,000 RPM. Once again, you can aggregate that for all of an airline’s flights in a particular time period: in 2019, Delta notched 238 billion total RPM.

Dividing RPM by ASM gives you something called load factor, which measures an airline’s capacity utilization: the percentage of available seating capacity that’s being filled by passengers. Dividing Delta’s 2019 RPM of 238 billion by its annual ASM of 275 billion works out at a (238 / 275) x 100 = 87% load factor. In other words, the average Delta flight was 87% full in 2019.

In general, a high load factor is clearly better than a low one. There are lots of fixed costs involved in operating a flight: airport fees, pilot salaries, fuel costs, and so on. So a flight that’s filled with few paying passengers is a poor use of airline resources, and will likely be loss-making – even more so if it’s a long-haul trip. Load factor, of course, already takes distance traveled into account.

If load factor tells you how full an airline is packing its planes, then the obvious next question is how much revenue it’s generating per passenger. But in order to make accurate comparisons, it’s even better to look at revenue per passenger per mile: after all, a flight’s fare is often proportional to its length.

You can use passenger yield to easily assess an airline’s average fare per passenger per mile. It’s calculated by dividing total passenger revenue by revenue passenger miles (RPM). So if Delta Air Lines generated $42 billion in passenger revenue in 2019 and flew 238 billion RPM in 2019, its passenger yield was 42 / 238 = $0.176. Put simply, Delta took in 18 cents on average for each mile it flew each passenger. The higher an airline’s passenger yield, the better – with the caveat that you’d naturally expect highfalutin full-service carriers to have greater yields than low-cost carriers.

But while passenger yield helps you assess an airline’s revenue-generating potential, you still need to factor in the airline’s costs to paint a picture of its profitability. Enter our last metric (promise): cost per available seat mile (CASM), which is calculated by dividing total operating costs by available seat miles (ASM). That makes sense when you think about it: the cost of operating a flight is largely determined by the size of the plane and the distance flown, both of which ASM captures.

Returning to our Delta Air Lines example, the firm had $40 billion of operating costs and 275 billion ASM in 2019. 40 / 275 = $0.145: so in 2019, Delta spent around 15 cents on average flying each seat each mile.

What comprises an airline’s operating costs? The three main things are labor, maintenance, and fuel. All three are variable costs in the sense that an airline’s total spending on them is largely determined by the number of flights it operates in any given year. But fuel costs are also heavily influenced by oil prices: largely beyond an airline’s control, outside of its fuel hedging policy. For that reason, you’ll sometimes see airlines report an additional CASM figure excluding the cost of fuel and allowing investors to better isolate and directly compare operating costs across companies.

How to pick airline stocks

Now for the juicy part. You can find the metrics discussed above in airline companies’ financial statements and investor presentations, so you’ll never have to worry about calculating them yourself. But now that you know what they are and how to interpret them, you can start using these metrics to analyze airline stocks. Obviously comparisons are key here, over time and between companies – so check out the MIT Airline Data Project to get past and present figures for all the major US airlines in one place.

As an investor, what do you want to see in an airline company? Capacity growth, as seen in available seat miles (ASM) expansion, is a good place to start. But you don’t want an airline to be opening up half-empty routes. That’s where load factor comes in: capacity utilization that’s increasing and/or is higher than peers’ is always preferred. A high load factor indicates that an airline is using its available capacity efficiently and isn’t leaving any money on the table – or rather, on an empty seat.

The next thing to assess is passenger yield. If an airline can steadily increase average per-mile fares over time without losing customers – that is, while maintaining a stable or growing number of revenue passenger miles (RPM) – then that’s a very good sign. Passenger yield can be negatively affected by cut-throat competition with regional rivals, especially among low-cost carriers – but strong reputations and loyalty programs can help shore yields up. It’s therefore worth looking into these less intangible aspects of the airline, and even talking to friends who’ve flown with it about their own experience.

Finally, you can use cost per available seat mile (CASM) to suss how well an airline is managing its outgoings. A decreasing CASM indicates that the airline is becoming more cost-efficient, while a figure lower than others indicates that it’s already got a well-kept fleet. Still, you’d expect low-cost airlines to have lower CASMs than their full-service peers, so be sure you’re comparing apples to apples. An ideal scenario is one where an airline’s increasing its passenger yield over time while lowering its CASM. The widening gap between the two translates to higher profit margins: something you always want to see as an investor.