Whew, has 2009 been a tough one for airlines. Globally, carriers are expected to lose $11 billion this year, with US airlines contributing about $2.5 billion worth of those losses. Mainline carriers saw 10-15% drops in year-over-year Revenue per Available Seat Mile, and back in June US Airways reported a nearly 30% drop in year-over-year yields (roughly – the average fare paid). Add the that a 5-7% decrease in capacity, and it would look like 2009 was the year that airlines tried to shrink themselves into a $2.5 billion loss.
Except Allegiant. The Las Vegas-based low fare carrier continued its tradition of posting ridiculously good numbers, even as every analyst out there assumed that people would stop flying to Las Vegas altogether. Wrong. Allegiant diversified, flying to Phoenix and several cities in Florida, generally avoiding any competition by flying a few days a week to cities with little air service. For $69 or so people in third-tier cities could go to a sun destination without having to change planes. There is a lot to be said for that, even in a down economy.
During the first 3 quarters of 2009, Allegiant posted a $65 million profit on $423 million in revenue. Their operating margin was more than 24%. While their average fares dropped from the first quarter ($74 in Q1 vs $67 in Q3), ancillary revenues only dropped from $34 to $32 per ticket. Yes, they derive about 1/3 of their ticket revenue from ancillary charges. They decreased operating expenses nearly 30% year-over-year in an operation that was already lean, allowing them to post strong profits even when average fares were dropping.
Their decision to purchase MD-80s on the used market for several million dollars each, rather than investing billions in new planes is brilliant, allowing them to keep utilization pretty low and still print money. Sure, when fuel costs increase they get hit because of their less efficient aircraft, but it is offset by their ability to manage their cashflows by buying planes outright.
Their strategy seems obvious: do what you do well and avoid doing anything else. I was concerned when they moved away from their Vegas strategy to diversify a bit, but it turns out to be a great move in light of decreasing travel to Vegas during the recession. They were able to translate their strategy to a handful of new markets, offering service to small cities and selling hotel rooms, attractions, and onboard services to keep revenues at a profitable level, even as fares decreased.
Bravo to yet another year well done at Allegiant.