This tiny, cut-rate, no-frills airline ferries small-town vacationers to Vegas and other resorts—and stays out of big rivals' hair
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.
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.
Aside from the ancillary revenues, Allegiant has built its network on assiduously avoiding large airports and deeper-pocketed airlines, giving it a buffer from competitors that the CEO jokingly refers to as "a bit of a porcupine model."
Filling In Where There's a Gap
"No one's interested in us, and we just kind of stay away from everyone," says Gallagher, who helped found the airline and is the largest shareholder, with a 20% stake. Its service to towns such as Bangor, Me.; Shreveport, La.; Laredo, Tex.; Belleville, Ill.; and Allentown, Pa., is usually the only commercial service that doesn't involve a small-plane connection to a hub airport. That offers Allegiant two big advantages: Its markets tend to be underserved relative to their population sizes, and the airline avoids incurring the wrath of a major, which could easily stomp it.
Moreover, Allegiant has no qualms about seasonal or intermittent service or ditching a town entirely if sales are weak. "It may be twice a week in the winter, and in the summer you may not fly there at all," McAdoo says. "You're there when the business is good. You're there when you can make money."
Allegiant has been able to do that, despite the record surge in crude oil. The company turned a $9.7 million profit in the first quarter, with revenues rising 58%, to $133 million. Operating profit margin was 10.8%, which Allegiant says was the highest for a U.S. airline in that period, although it was down from 17% a year earlier. Southwest, by comparison, had a first-quarter profit margin of 3.9%, while the biggest player, American parent AMR (AMR), was around 2% for all of 2007, its most recent period of income.
Allegiant wields an extreme distaste for costs. Its MD-80 planes are older (average age: 18 years) and relative fuel hogs, but that model can be bought for essentially the cost of scrap metal, since few airlines want them. The company recently acquired six MD-80s from Europe, and could be a customer in coming years for some of the hundreds of MD-80s that American plans to shed. Allegiant budgets $5 million to $6 million to acquire a plane, a pittance next to the cost of new models. Allegiant also tries to control costs by keeping its booking window tighter than most airlines. It sells tickets for only six months before departure, nearly half the 333-day advance that is common in the industry. When fuel is pricey, the extra months can give revenue managers time to adjust routes and fares accordingly. (Southwest recently dropped its booking window to less than 100 days.)
Intensely Focused on Costs
Allegiant also keeps a close eye on all capital spending, including the airports where it flies. One example: The company recently expressed concerns about planned terminal renovations at South Dakota's Sioux Falls Regional Airport, even though tenants were not being asked to fund any part of the work, says Michael Marnach, executive director of the airport. Allegiant was worried that some of those costs could potentially get passed along to airlines. "Allegiant is intensely focused on costs—intensely," Marnach says.
Allegiant has boosted parking revenues for the airport by 20% in the four years it has been flying out of Sioux Falls. (Parking costs $4.50 per day.) Its average one-way fare from Sioux Falls is $101, less than half the $212 one-way average for other carriers serving the airport. Allegiant is the No. 3 airline from the city: Only Northwest (NWA) and United (UAUA) carry more traffic. For Marnach, the Allegiant nonstops to Las Vegas, Orlando, and Phoenix have been critical in his battle against traffic losses and keeping his airport viable. Southwest flies out of Omaha, 180 miles south, and lots of people who fly from Sioux Falls might otherwise drive down there, he says. "Thank God we got Allegiant," Marnach says.
The largest threat to Allegiant's business model is additional swift spikes in energy prices. A slow rise can be factored into the business, but rapid increases siphon cash quickly and leave few options. So far, though, Allegiant has kept its focus on fine-tuning a business model that has thus far proved resilient, and managers "don't let themselves get distracted by illusions of grandeur," says Harteveldt, the Forrester analyst.
"Everybody wants to have the broad international networks and the big, shiny wide-body jets," Harteveldt says. But Allegiant, he says, aims to show that "bigger is not always better."