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Allegiant Gets No Respect

Every so often when an airline goes out of business (or nowadays, roughly every 20 minutes) the airline message boards fill up with people trying to predict the next airline to shutter.  Without fail, Allegiant is mentioned.  Those people are idiots.

Allegiant announced their results late Monday night and they don’t resemble any other airline in the US.   Last quarter they earned 47 cents a share.  Even those who don’t follow the industry will note that they didn’t lose 6 billion dollars.  They earned more than $25 a passenger from ancillary (non-ticket) revenues, a 35% increase over Q1 last year.  Their cost per available seat mile jumped 25% because of fuel, yet they managed to increase revenue per available seat mile by 16%.  Sure their fuel costs went up (they don’t hedge), but they focused on those ancillary revenues, and it paid off.

Articles about Allegiant typically note their fuel-thirsty old MD-80s that they fly, but they’ve made the (correct, apparently) decision that the extremely low aircraft costs outweigh the increased fuel consumption.  That move is completely against the conventional wisdom of buying new planes to save on fuel.  And it was the right decision for them.

But their smartest decision has to do with their route map, which takes passengers a couple of times a week from tertiary cities to Vegas, Phoenix, Fort Lauderdale, Orlando and Tampa (primarily) .  They used to rely on Vegas more heavily, but they’ve diversified a bit to alleviate some risk.  Great call.  They are also very willing to drop cities that aren’t working, much to the chagrin of the small airports losing service.  But most importantly, on something like 90% of their routes they have no nonstop competition.  They are basically a monopoly carrier on every route they fly, allowing them to charge, perhaps, more than they would have with competition (though their fares are certainly low) and earn more on top of that with ancillary sales.

Perhaps the problem, then, with the airline industry is not fuel, it’s pricing.  Allegiant needs fuel — and uses more than similarly sized airlines because of their old planes, yet they’re very profitable because they have focused on the revenue part of the equation (and their route structure) far more than any other airline out there.   They get roughly zero credit for this, but that’s just fine as long as they stay the hell out of everyone’s way.  Well done.

(For full disclosure, as a mention every time I write about Allegiant, I own a small number of shares in the company.  I obviously can’t affect the share price, but I think it’s only fair that I disclose that…)

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  1. I wonder how much of the “pricing” problem for the network carriers is actually a drop in business travel. Last ten years have seen a structural shift in business travel (more business people buying discount fares), but perhaps with this must talked-about “slowdown” were are seeing a larger decline in all sorts of business travel (and in particular full-fare tickets)

  2. The lowered business travel fares haven’t helped, but the planes are full. Transcon biz fares have dropped significantly over the past couple of years, so that hasn’t helped. But there are simply more lowfare carriers flying more routes that overlap with the network carriers. Because of that, there’s little power to raise fares where they need to be (although fares are up this year).

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