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Allegiant succeeds at keeping labor costs low and ancillary costs high resulting in a strong operating margin, a strategy that more carriers are trying to adopt with increasing bag and foot room fees.
Allegiant‘s business model seems to fly in the face of conventional wisdom. A fleet of old, fuel-inefficient aircraft, flying with low frequencies and at low daily utilisation rates in markets with a high degree of seasonality. Yet the ultra-LCC is consistently profitable and generates free cash flow (operating cash flow in excess of capital expenditure), unlike most of the airline industry.
…Its return on capital employed is consistently the envy of most carriers. How does Allegiant achieve its strong financial results and what can the rest of the airline industry learn from its approach?
Allegiant’s network encompasses 86 small cities and 13 leisure destinations across the US and ranges from coast to coast and from north to south. Its origination cities are small: 86% of them had a population of less than 900,000 in 2013 and more than one third had a population of less than 300,000.
This is an important starting point in understanding Allegiant’s business model: its target market is leisure passengers in small cities across theUSA. Much of the rest of the Allegiant approach flows from this. At the same time, this is, almost by definition, a niche market and therefore one on which the industry as a whole could not build a sustainable strategy.
This story originally appeared on CAPA – Centre for Aviation, a Skift content partner.
Additional links from CAPA: