Allegiant: The Other Profitable U.S. Airline

This tiny, cut-rate, no-frills airline ferries small-town vacationers to Vegas and other resorts—and stays out of big rivals' hair

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by Justin Bachman

Allegiant Travel CEO Maury Gallagher Jr.

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Southwest Airlines' financial success is the stuff of business legend: a 65-quarter span of profitability dating from 1991. But even Southwest, which now flies more passengers annually than any of its Big Six U.S. rivals, has begun showing strains in the face of unrelenting price increases for crude oil, which neared $128 a barrel on May 16. If not for long-term jet fuel contracts that locked in lower prices (BusinessWeek.com, 5/6/08), Southwest would have slipped into red ink in nine quarters this decade.

Yet a tiny, no-frills carrier born six years ago in the Nevada desert is reaping unlikely success in the face of soaring fuel prices. It's winning with a mix of older, fuel-guzzling jets, paltry fares, and not a single fuel-hedge contract. The company, Allegiant Travel (ALGT), focuses on wringing revenues out of middle-class travelers from the hinterlands who want to spend a long weekend in Las Vegas, Arizona, or Florida. Most fares are dirt cheap—$79 from Billings, Mont., to Vegas, for example. And Allegiant Air counts virtually zero business travelers on its flights—unless your business is blackjack, sunbathing, or golf. Indeed, in June the airline will fly only two flights per week on more than half its 103 routes.

As with many of its rivals, Allegiant's operating costs are low. But to a degree that most big airlines can only dream of, Allegiant has devised a revenue system that delivers far more dollars per customer than just the sale of a flight.

No Middleman

Ticketing, for example, is possible only through Allegiant. The company does not participate in any of the large airline distribution systems through which most tickets are sold, such as Sabre and Galileo. Those same systems also power sites such as Orbitz (OWW), Priceline (PCLN), and Expedia (EXPE). Whatever Allegiant may sacrifice in volume it reclaims in share of ticket receipts: No one else collects a cut of an Allegiant transaction. And forget about a toll-free call to book a flight: Allegiant ditched its 800-number in 2006. Too expensive.

On board, an Allegiant flight makes a trip on one of the discounters, like Southwest (LUV) or JetBlue (JBLU), seem downright luxurious. If you'd like anything—a slurp of water, coffee, or soda—expect to pay. You'll also be offered an array of souvenirs to buy. "We are very sensitive to all the needs you may have, but we're also able to mine all the profit," says CEO Maurice Gallagher Jr., who was a co-founder of ValuJet Airlines, which later became AirTran (AAI). He also helped found WestAir Commuter Airlines, which flew among smaller California cities and was sold to Mesa Air Group in 1992.

Allegiant's highest one-way fare is $334, and the average one-way fare is $87, but the airline collects almost $26 extra from each passenger from in-flight sales. "That's a number you just don't see anywhere else," says Bob McAdoo, an analyst at Avondale Partners and a former airline executive.

Car, Hotel, and Golf Tie-Ins

The revenues hardly stop there. Allegiant has become a big promoter of Alamo rental cars and Sin City hotels, selling 395,000 rooms last year. (The airline does not break out hotel or car revenues, but gets a percentage.) On its Web site it also sells tickets to performances of Blue Man Group—whose logos adorn Allegiant cups, napkins, overhead bins, and crew uniforms—and tee times at dozens of golf courses. You can book tickets for other Las Vegas shows, helicopter tours, kayak trips, and tours of the Grand Canyon on Allegiant's site.

This strategy, dubbed "unbundling" in the airline industry, has been mined most audaciously by Ryan­air Holdings (RYAAY), the 23-year-old Irish airline that features fares as low as 5 euros ($7.73) and a seemingly endless array of revenue streams. Home or auto insurance? Foreign currency? Villa rentals? Credit cards? Ryanair pitches it—and has become one of the largest intra-European airlines in the process.

Unbundling has crept into the mainstream lately, as carriers such as United, US Airways, and JetBlue seek to pry profit from a bevy of new fees in such areas as checking additional luggage, having more space on board, or choosing a particular seat. Allegiant's model speaks to an integrated travel approach based on convenience and perceived value. "They're a retail service that just happens to be certified by the FAA," says Henry Harteveldt, a travel analyst with Forrester Research.