Allegiant CEO Maury Gallagher has always done things his way. By doing so, he has built one of the most profitable airlines in the world. But is it a good idea to get into the hotel business?
Allegiant Air executives could have spent Wednesday’s earnings call bragging about their remarkable 22 percent profit margin. Instead, they took considerable time to criticize and mock investment analysts who have questioned their model as the company’s focus moves away from aviation and into hotels.
It was, at times, a bizarre call. After analyst Duane Pfennigwerth of Evercore asked a simple question about non-aircraft spending and the future of the company’s dividend, Allegiant President John Redmond nearly didn’t answer.
“I wasn’t going to take the question from you just because of how unprofessional and disrespectful you’ve been in the past,” Redmond said. “But I’ll go ahead and rise up to the occasion.”
Redmond didn’t say what had made him so angry, but an airline spokeswoman said he was referring to an exchange with Pfennigwerth on January’s fourth quarter earnings call. On that call, Pfennigwerth asked several pointed questions about Redmond’s top priority — a resort hotel called Sunseeker near Punta Gorda Airport in Southwest Florida. In the transcript, Pfennigwerth appeared to be polite, if skeptical.
This hotel project is a big point of contention between the company’s top two executives — Redmond and CEO Maury Gallagher — and a handful of analysts.
Redmond, a former hotel company executive, argues Allegiant can use its customer data to cross-sell rooms, experiences, and rounds of golf. He said this is a logical business shift for Allegiant, which for years has made hefty margins bundling airfare with hotel rooms owned by others. Executives said Wednesday the company has generated more than $1.3 billion from sales of third-party products since 2005, including hotels, worth almost $400 million in operating income.
Analysts have long loved this revenue stream. But not all of them have been persuaded Allegiant needs to get into the hotel business.
Some note Allegiant’s current operating margin is among the world’s best, far outpacing first-quarter results from Delta (10 percent), Hawaiian (7 percent), United (5 percent), and JetBlue (5 percent), according to calculations by Jay Shabat, senior analyst at Skift Airline Weekly. The investment analysts wonder whether it makes sense to worry about operating a hotel when the core airline performs so well.
Regardless, it’s happening.
The project broke ground in March. Phase one should be done in about two years and will have roughly 500 hotel rooms and 180 extended-stay suites. The resort will also have meeting and conference space, restaurants, bars, and retail outlets.
Management and some analysts have had a contentious back-and-forth for several months, and some have been watching for signs the project has not been as successful as the company expected.
In March, analyst Hunter Keay of Wolf Research wrote a long report questioning whether Allegiant had rolled back one of the project’s key facets — a gigantic swimming pool. He suggested to subscribers the company might be reducing the scope of the project.
“This week Allegiant changed an FAQ about the pool from ‘the resort swimming pool… will be over 1,000 feet long, covering nearly two acres’ to a new answer of ‘Sunseeker Resorts Charlotte Harbor will feature a rooftop swimming pool and jacuzzis as well as an accompanying rooftop bar,’” Keay wrote on March 22. “This felt like a significant change. Turns out it is.”
Keay asked about it on Wednesday, and Redmond gave a long response about why Keay was wrong, saying the pool had not been scheduled for phase one. Redmond seemed to suggest Keay did not understand construction.
“For us to build that as part of phase one, we wouldn’t have been able to access the rest of the site without a tremendous amount of cost — like in the tens of millions of dollars,” Redmond said. “In some cases, we would have built from the water on the barge. It’s not a change in plans. It’s still there.”
Redmond’s response to Keay’s follow-up was more critical. Keay said he noticed Allegiant had begun marketing the hotel as more of a business destination for company meetings and retreats. Keay said she was skeptical that would work, since Allegiant has customer data on leisure travelers, not business customers.
“I know it’s not as intuitive for you, but this is not being designed as a corporate hotel,” Redmond told Keay. “We are leisure company, leisure airline focused on leisure guests. Having said that, we also know that there is some seasonality in this market so we also want a venue that can accommodate the groups that all the hotel companies focus on to be able to drive rates and yield and to fill slower periods of time.”
Redmond’s boss, CEO Maury Gallagher, also joined to criticize analysts.
“As difficult an audience as you can all can be,” he said, speaking to analysts, “our management group and team are tougher. They know the business intimately and are appropriately critical of our ideas. They have bought into the diversification of the company from ‘the airline is the company’ to ‘we are a leisure travel company that operates an airline.’”
In the future, Gallagher said, Allegiant may even become more active in the hotel business. He said the company could look for other resorts to manage.
Photo credit: Allegiant Air is building a resort hotel complex called Sunseeker. Allegiant Air