Allegiant Air's Remedy to High Fuel Prices: Buy More Efficient Jets
Skift Take
Good riddance. The MD-80 had its moment in the 1980s and 1990s, but manufacturers are producing much more efficient (and quieter) airplanes now.
Every airline is feeling the pinch of higher fuel prices, but U.S. discount carrier Allegiant Air has a not-so-secret advantage. It is retiring its old jets and adding a bunch of newer, more fuel efficient aircraft at an opportune time.
Allegiant executives said Wednesday on their third-quarter earnings call that they'll retire their last MD-80 on Nov. 28, just after Thanksgiving travel rush. The final flight will mimic Allegiant's first-ever routing a couple of decades ago — Las Vegas to Fresno to Las Vegas.
The aircraft, which have an average age of about 28 years, according to Flight Global, have been the backbone of Allegiant's fleet since the early 2000s, but in recent years, they've become problematic as they're inefficient and less reliable than newer airplanes. Partly as a result, Allegiant has had more than its share of unscheduled landings, according to reports.
At times, Allegiant executives have complained they have had trouble finding parts for the jets, which have not been built since 1999. American Airlines and Delta Air Lines still fly them, but both plan to retire them within a couple of years.
What's interesting is that Allegiant's replacements are far from the most efficient. While many low-cost carriers are adding ultra-fuel efficient Boeing 737Maxs and Airbus 320neos, with the newest engine technology, Allegiant is going with a mix of used Airbus A319s and Airbus A320s, both with previous-generation engines.
Allegiant's Airbus jets burn more fuel than the neo aircraft preferred by Frontier Airlines and Spirit Airlines, two other U.S discount carriers, but they're cheaper to acquire.
And even with the older engines, switching to an all-Airbus fleet gives Allegiant a major bump on costs, said Drew Wells, vice president for revenue and planning.
"By our analysis, we have somewhere between 85 cents and a dollar per gallon more efficient right now as we have shifted to the airbus aircraft," he said.
In a two-month period, Allegiant will retire all 19 of its remaining MD-80s, according to its most recent fleet plan.
Most won't be replaced right away with Airbus aircraft — the fleet will drop from 93 airplanes at the end of September to 76 at year-end — but Allegiant can still increase capacity if it wants. Since the new jets are more efficient and more reliable, Allegiant can fly them more often each day.
Managing higher fuel costs
Allegiant's executives said they're managing higher fuel costs fine, though Wells acknowledged the airline isn't recovering 100 percent of its higher expenses. The airline told investors it paid 33 percent more per gallon for fuel in the third quarter, year-over-year.
If the airline wants to improve, it'll need to cut some less profitable flights to better align supply with demand, Wells said.
"We're not going to be recapture 100 percent of fuel simply through pricing," Wells said. "That's not how our customer reacts, and it's not core to our business model. You will see us make some capacity trims, particularly on the fringes with off-peak days ... to really recapture in earnest."
But Wells added that the airline will still look to add routes, both from new markets, and between existing cities.
"Even in a rising fuel environment, we're constantly looking at new cities to grow the network," he said, adding that might change if fuel prices increase further.
Making Money
Allegiant remains profitable, having reported its 63rd consecutive profitable quarter.
The airline said it had net income of $15.15 million, off 35.2 percent, year-over-year, on total operating revenues of $393 million. Its total passenger revenue per available seat mile, or TRASM, a metric that gauges industry profitability, was roughly flat compared to last year.
Executives said they expect they will produce their best year-over-year TRASM increase of 2018 in the fourth quarter.
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