August 20, 2008

Flying One for Mr. Average

By Benjamin Spillman



Compared with the high rollers who crowd Wynn Las Vegas each weekend, Middle America tourists in fanny packs aren't nearly as glamorous.

But for companies who know how to reach them, the T-shirt-and- Budweiser crowd can be just as lucrative as beautiful people in high- limit salons.

Just ask the folks at Allegiant Travel Co.

The Las Vegas-based company sold small-town tourists enough airline tickets, hotel rooms and novelty Elvis-style sunglasses to generate $132 million in the second quarter. That's about $12 million more than Steve Wynn made from gamblers at his $2.5 billion casino on the Strip.

More surprising is that Allegiant makes most of its money from an airline, part of perhaps the most volatile major industry in the country.

Surprising, that is, to anyone who hasn't been paying attention.

To customers from Pasco, Wash., to Knoxville, Tenn., the Allegiant brand is synonymous with cheap, easy getaways from remote airports to vacations in Las Vegas, Florida and Arizona.

"It is the first time in our lifetime we have flown nonstop from Iowa to Las Vegas," said John Donovan, 65, of Cascade, Iowa.

Donovan and his wife, Sharon, 61, recently finished a weeklong stay at New York-New York on the Strip. They have been taking Las Vegas vacations together for 40 years.

But until recently that meant flying from Iowa to catch a connection in Dallas or elsewhere before reaching Nevada.

After Allegiant inaugurated a route from Cedar Rapids, Iowa, to Las Vegas in June 2004, they started using the service and haven't looked back.

"It is a nonstop flight for us," Sharon said. "It is fantastic."

Since then Allegiant has increased the frequency of Iowa-to-Las Vegas flights to six days per week and added Florida and Arizona routes.

Enthusiasm from customers such as the Donovans has helped Allegiant rise from an upstart hauling folks from Fresno, Calif., and Colorado Springs, Colo., in 2001 to become the sixth-biggest carrier into Las Vegas.

In the first half of this year, Allegiant filled nearly 870,000 seats to and from Las Vegas. Fifth-place Continental filled a little more than 1 million but is dropping.

The ability to fill seats and make a profit at perhaps the most difficult fiscal times ever for airlines in the United States is attracting attention to Allegiant from inside the industry.

US Airways President Scott Kirby, whose company by the end of the year will have cut nearly half of its flights to Las Vegas, recently said he told executives to study Allegiant's financial reports and listen to the company's conference calls with airline stock analysts.

Rick Seaney of the popular airline Web site, called Allegiant "the model for the future" in an April blog posting.

"I just think they are offering a service no one else is offering," Seaney said. "I think it is very clever."

There are two entities under the Allegiant Travel flag. Allegiant Air, an airline that flies MD-80 aircraft exclusively, and a hotel and leisure booking operation called Allegiant Vacations.

The airline saves money by purchasing used aircraft and flying routes ignored by other carriers. The aircraft are notorious fuel guzzlers, but the cost of fuel, even today, is outweighed by the relatively low purchase price.

The airline purchased six aircraft for $5 million to $6 million each this year in an all-cash, no-debt deal, to add to its fleet of 36 planes.

Seaney noticed that Allegiant, which offers some of the cheapest fares in the industry, managed to turn a profit in the first half of the year despite fuel costs increasing 60 percent.

It did so by doing what it always does, flying only from cities where competition is sparse, offering flights only when they will make money, aggressively pushing add-ons like hotel stays, rental cars and show tickets and charging customers for everything from assigned seats to sodas to checking a bag.

US Airways and a few other major airlines are now following Allegiant and charging for checked bags and in-flight sodas.

Allegiant, however, has an advantage because its small-town customers can't choose another airline. If they don't like the extra fees on Allegiant, their only option for direct, nonstop service is often to make a long drive to a major airport.

That other airlines are following Allegiant's lead isn't necessarily a good trend for the flying public, Seaney said.

"I think passengers hate it," he said. "They hate pulling out their wallets every step of the process."

If Seaney is right, it isn't showing in Allegiant's earnings reports.

The amount of money it squeezes from passengers for nonairfare charges, called ancillary revenue, has steadily increased since Allegiant went public in December 2006.

Ancillary revenue was up 34 percent in the first half of the year to nearly $27 per passenger, per flight.

On a $99 flight from Cedar Rapids to Las Vegas, an airfare Allegiant was offering for the upcoming weekend, that's a significant share of revenue.

"As long as they have no competition, they could pretty much do whatever they want," Seaney said.

That's fine by Allegiant officials. They don't apologize for making money.

Since the airline was reconstituted from an earlier version based in Fresno that went bankrupt, Allegiant's priority has been profits over market share.

"We will sacrifice any amount of growth to maintain profitability," said Robert Ashcroft, Allegiant's vice president of planning. "We have said that in the past, and we really mean it."

The stance has helped keep Allegiant in the black, but it doesn't always win friends.

In recent months Allegiant has cut long-haul routes from Illinois and Indiana to Florida and added shorter flights from California to Las Vegas to reduce fuel costs.

"If it doesn't work, we back up," Allegiant Chief Executive Officer, President and Chairman Maurice Gallagher said. "We have to make sure we can get a return on our money."

Those types of decisions have generated criticism from people who say it shows a lack of commitment to communities where Allegiant does business.

Opponents of Allegiant's effort to launch service from Everett, Wash., to Las Vegas have cited the company's withdrawals from other communities in their campaign against commercial airline service at Paine Field.

In a letter to the community, the airline criticized opponents' characterizations as being "neither careful nor respectful" and "wrong on a material number of facts."

Gallagher says saving money and remaining profitable is at the core of the company's philosophy, which was set in place well before it went public.

"We are a little more focused on profitable growth," Gallagher said. "We didn't have a lot of money, which I think was good for us. It caused us to be very cautious with what we did and go slowly."

He contrasted Allegiant, which has 36 aircraft serving about 55 cities, with Southwest, which has more than 500 aircraft serving just 64 cities.

"The world doesn't need more service to San Francisco and Los Angeles," Gallagher said.

Allegiant also took heat recently in Knoxville after launching service to Fort Lauderdale, Fla.

Due to the timing of the flight schedule and problems at the Fort Lauderdale airport, the flights from Knoxville were almost always late.

Customers there complained about delays, some lasting hours, and the problems made the local news.

But for the most part, Allegiant is a welcome arrival wherever it launches service.

Tony and Sally Charles of McAllen, Texas, won tickets for an Allegiant flight to Las Vegas through a drawing at a grocery store Tony manages.

The couple, who spent four days in Las Vegas, said the convenience of the direct service outweighed whatever charges customers incur during flights.

"They are fair, reasonable," said Tony. "More than likely, we'll use this airline when we come back."

Wall Street Doubters

Although it is one of just a few airlines in the country to be turning a profit, stock in Allegiant Air isn't flying as high as one might think.

In recent weeks, it has been trading closer to the 52-week low of $15.89 than the 52-week high of $38.74.

Airline analyst Bob McAdoo says it might be because the airline isn't well-known in the industry and investors are skeptical that anyone can make money with fuel costing about 100 percent more than it did a year ago.

"The concern most people have is they are going to run out of small cities that they could feed into Las Vegas or Orlando (Fla.). I would guess they could at least double in size and not have to change the model much," McAdoo said. "I have it on our buy list."

Allegiant Travel Co., Allegiant Air's parent, trades under the symbol ALGT on the Nasdaq National Market.

The Un-ValuJet

Allegiant Travel Co. isn't the first airline Allegiant executives built from the ground up.

Three of the company's four executive officers were officials at ValuJet, a discount carrier that grew fast during the 1990s until one of its planes crashed in the Florida Everglades in 1996, killing all 110 people on board.

The airline was later reconstituted as AirTran, a discount airline that last month recorded an all-time high passenger count of 2.5 million.

Allegiant boss Maurice Gallagher was a founder and served as CFO. Gallagher had long since left day-to-day work at ValuJet by 1996. Allegiant officers Ponder Harrison and Andrew Levy also worked for ValuJet.

But don't think of Allegiant as a re-creation of ValuJet. Allegiant saves by flying infrequently while ValuJet sought to saturate markets it was in with low fares and frequent service.

"ValuJet was trying to be very much like the Southwest Airlines of Atlanta. That is just not this story at all," said airline analyst Bob McAdoo of Avondale Partners.

Cash for Planes

Allegiant Air isn't the first Las Vegas airline to make headlines.

For 41 months from 1999 to 2002 National Airlines grew from obscurity to become the fourth-largest carrier into McCarran International Airport.

Although it generated lots of traffic, the airline couldn't keep ahead of its debts. In November 2002 a creditor backed out of a pledge to contribute $2 million to a bankruptcy reorganization the airline was conducting.

The decision collapsed the entire reorganization plan and National shut down, leaving about 1,500 employees in the lurch.

Allegiant has avoided accumulating debt like National. It is one of the few carriers with more cash on hand than debt, which allows it to make aircraft purchases with cash, a rarity in the industry.


Contact reporter Benjamin Spillman at [email protected] or 702-477-3861.

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