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How Allegiant Air turned a profit for 39 consecutive quarters

Nov 04, 2012 8:33 am

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Controversial and fee-happy, Allegiant undoubtedly does things differently, is nimble and successful.

— Dennis Schaal

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When Allegiant Air started flying to Eugene in May 2007, its share of the market was infinitesimal — 2.6 percent of arriving and departing passengers.

Today, one out of every five passengers that flies in or out of Eugene flies on Allegiant.

The airport lost almost 25 percent of its capacity in 2008 when fuel costs skyrocketed, airport Manager Tim Doll said. “We were able to make it through the recession when Allegiant came in and added capacity into the market — we were getting low-fare service, additional routes throughout the downturn. It helped us attract new passengers, helped us keep passengers who were driving up to Portland and, once a year, they added a route.”

This month, Allegiant will add two new routes, with direct flights to Palm Springs, Calif., starting Nov. 15 and direct flights to Honolulu starting Nov. 17.

“Never in my wildest dreams did I think we would get nonstop Hawaii service out of Eugene — we’re just not that type of market,” Doll said.

But Allegiant has created a different model than the major national airlines.

The Las Vegas-based airline has a short but dramatic history. It was founded in California in 1997, got into financial trouble a couple of years later and filed for bankruptcy in 2000. It emerged from bankruptcy in 2002 under a new owner, who reinvented it as a low-cost carrier focusing on leisure travelers and moved its hub to Las Vegas. Since then, it has recorded a profit for 39 quarters in a row.

Allegiant has earned those profits using a seemingly simple model: Fly direct from smaller cities with limited air service to popular vacation destinations. Cut costs to the bone and offer customers an a la carte selection of services for a fee. Priority boarding, for example, costs $5; checking a bag from Eugene to Las Vegas costs $19.99 prepaid, $35 at the gate.

If demand is strong, add flights. If a particular route, or city, doesn’t produce the passengers you were expecting, ax them. “If we see a drop in demand for a route we will not think twice about cutting it,” Allegiant Marketing Director Brian Davis said.

“If you Google us, we used to serve Redmond (Ore.). We don’t anymore,” he said.

This part of Allegiant’s formula creates a certain amount of stress for airport managers.

“That’s their style, that’s what’s made them successful,” Doll said. “We do have a strong market here, we feel comfortable with that. But we do understand if ridership goes down they will make a decision (to cut service). That’s nerve-wracking. It’s very hard to sleep at night as an airport manager.”

Behind Allegiant’s seemingly simple model is a complex system of decision-making that determines everything from routes to a choice of planes to the pitch of a seat.

For starters, there is the automation system that runs the business, from the public website used to book flights to the website that Allegiant’s maintenance people use to track planes.

“Many airlines use large outsourced computer systems,” Davis said. Those systems are powerful, he said, but have limitations, primarily not allowing an airline to make changes quickly.

“We can make changes quickly,” Davis said, which, among other things, allows Allegiant to offer different fees for different services, with prices that vary for different routes.

“Our (model) is fluid by design,” Davis said. “From the very beginning that was important to us.”

Allegiant’s bread, butter and jam is the leisure traveler. And, Davis said, vacation demand isn’t something that stays the same year after year.

“That’s why we fly the MD-80s,” he said. Some of the national carriers are moving away from those planes because of their high operating and fuel costs, Davis said. But the upfront cost of buying one is very low, and that suits Allegiant’s model, he said.

Allegiant flies only direct routes, no connecting flights, with the vast majority of its airplanes leaving from their base and then returning the same day, which keeps both labor and maintenance costs lower than if the airline were having to maintain the planes all over the country and leave crews in hotels overnight.

And, because the upfront cost of buying the plane is so low, Allegiant can afford to park its planes when demand is low, Davis said, or when the airline wants to reduce frequency of service to one or more destinations because of escalating fuel costs.

“For instance, Tuesday is a day that people don’t like to begin or end their vacations,” Davis said. “If you go to Las Vegas on a Tuesday, we’ll have 18 aircraft parked, not scheduled to go anywhere. Other airlines, their cost structure is so high, they can’t afford to park planes.”

Allegiant’s flights schedules vary much more widely than national carriers over the course of a year, in reaction to fluctuating demand from leisure travelers. That same demand governs the addition of new routes, Davis said.

“When we launch a new market, one of the things we measure is, for example, the number of people who fly from Eugene to Hawaii on other carriers to get some indication of the level of interest and what they are paying on average,” Davis said. “We know that if we come in and reduce (prices) directly, that demand will increase.”

By and large, Allegiant isn’t taking passengers from other airlines, Davis said, but attracting new passengers who either wouldn’t have been flying or wouldn’t have been flying as often — a conclusion that Doll said Eugene Airport’s data supports.

“We’ve built a business in a way that’s structurally different,” Davis said. Literally, in some cases. “Our seats do not recline.”

They are specially built for Allegiant, he said, permanently locked halfway between what would be the upright and fully reclined positions on most airplanes. Reclining seats, Davis said, “add weight, burn fuel and they’re a maintenance nightmare.”

That kind of attention to detail helps keep the airline’s costs low and gives it flexibility, he said.

“We’re not afraid to take risks and try new things no one has done,” Davis said. The majority of those risks have paid off, he said. “We have well north of 200 unique routes within our network (and) the overwhelming majority are hugely successful.”

Allegiant’s parent company, Allegiant Travel Co., also offers room and rental car bookings, but it is the flights that have fueled the company’s growth so far.

“On average, we collect $124.94 per passenger,” Davis said, “$82.30 was airfare, $37.05 was ancillary revenues — people who pay to board early, to check a bag — and $5.59 is third party products (such as hotel rooms). That’s the area of business we’re focusing on growing.

Allegiant saw its stock fall below $18 a share in 2008 when the economy plunged and fuel prices soared, but it soon rebounded. Allegiant’s stock (Nasdaq: ALGT ) currently is trading above $70 a share.

Allegiant’s model isn’t for everyone — its Facebook page is divided between people begging the airline to continue service to their community, or add service, and those who are angry about fees or canceled or delayed flights. Like most discount carriers, Allegiant does not have agreements with other airlines to take its passengers if they are stranded. But Allegiant officials say it gets back to the airline’s mantra, customer choice: If a customer can find a better deal elsewhere, they have the freedom to choose it.

About Allegiant

Nasdaq: ALGT

Headquarters: Las Vegas

Full-time employees: 1,775

Air service to Eugene: Began March 2007 with flights to Las Vegas

August 2007: Added Mesa, Ariz.

June 2009: Added Oakland, Calif.

June 2010: Added Los Angeles

November 2012: Adding Palm Springs, Calif., and Honolulu

(c)2012 The Register-Guard (Eugene, Ore.). Distributed by MCT Information Services.

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