Is it prudent to travel for leisure? Perhaps not. But is that stopping people from traveling? No, it is not. So Allegiant Air and its CEO Maury Gallagher figure it might as well benefit.
On recent earnings calls, Allegiant Air CEO Maury Gallagher almost seemed bored. Over more than two decades, he built one of the world’s most successful ultra-low-cost carriers, but by 2019, Allegiant had nearly run out of obvious markets to make the profit margins investors had come to expect.
Between August 2015, and January 2020, Allegiant’s stock fell 21 percent, as analysts questioned whether the company had hit its ceiling. Having built a profitable franchise flying travelers from small U.S. cities to popular vacation destinations, Allegiant expanded to larger markets, where there was more competition and, in some cases, smaller margins. It also made some forays into non-airline businesses — investments that generally did not go well.
But speaking Tuesday on Allegiant’s first quarter earnings call, Gallagher seemed more animated. The U.S. airline industry is in crisis, and historically that’s when Gallagher racks up his biggest victories.
To be sure, Allegiant is in some trouble itself. Its stock price is less than half what it was in January, and it lost $33 million in the first quarter, ending its streak of 68 consecutive profitable quarters. And while demand is improving, the airline’s revenue is far from where it should be heading into the busiest time of the year. Often, it is canceling flights last minute because they’re so empty.
“Clearly, none of us have seen an environment in which booked revenues, as well as future revenues, disappeared in less than a month,” Gallagher told analysts on Tuesday. “During the last three weeks of March, each week’s falloff was so much worse than we thought it might be.”
However, Gallagher, who turns 71 later this month, has spent a lifetime in the airline industry, and told analysts has a good idea what happens next. After ensuring them Allegiant has enough liquidity to withstand the crisis, he told them that in any downturn, domestic leisure travelers typically return before business customers. And while vacationers could choose any airline, they may be feeling frugal, so they prefer the lowest fare option over a more comfortable experience.
“Historically, coming out of downturns, leisure customers have been the first to return,” Gallagher said. “We believe that will be the case with respect to this downturn, that leisure traffic will respond faster than business and international.”
If Allegiant gets it right, Gallagher stands to make a lot of money. As he reminded investors on Tuesday, he still owns nearly 20 percent of the company.
“I like our prospects, because we are niche-y and we can play in places where other people can’t or aren’t comfortable,” Gallagher said.
There’s another place Allegiant stands to benefit in an downturn — the aircraft market.
In its first 20 years, Allegiant developed a thrifty reputation, as Gallagher liked to buy used aircraft and fly them until the end of their lives. For most of Allegiant’s history, its workhorse was the MD-80, though more recently it switched to an all-Airbus fleet.
The strategy worked well until about four years ago. But during boom times for global airlines, more carriers wanted more jets. The cost of used aircraft ballooned, making them less attractive to Allegiant.
Gallagher, always the opportunist, switched to a different approach. He started taking new airplanes from Airbus, direct from the factory with older technology, akin to buying a new car from the previous model year. Allegiant got deals, but nothing compared to buying a gently-used aircraft at a fire-sale price.
Now, Allegiant can revert to its old ways. On the call, Gallagher spoke excitedly about airline bankruptcies, including Avianca, the South American carrier, while filed last weekend. Its A320s have the CFM engines Allegiant prefers, Gallagher said.
“In the past of 30-60 days, what was once a robust sellers’ market for airplanes and equipment has been turned on its head,” Gallagher said. Allegiant has few aircraft on order, so it can capitalize on these airline failures when demand returns.
Gallagher is planning to shuffle aircraft in other ways. Allegiant is planing to retire 10-15 Airbus jets, rather than pay for expensive maintenance work they require. It will be able to use parts from those jets on other aircraft, including engines.
And if it needs more engines, Gallagher said, it’ll buy used ones at more reasonable prices than it would have a few months ago.
“We will be one of the few players in the market with the wherewithal to purchase these assets,” he said.
This is Not a Hotel Company
As business stagnated, Allegiant tried to branch out, beginning construction on a resort community in Southwest Florida, called Sunseeker. The airline spent considerable time trying to sway equity analysts of synergies between the community and the airline’s burgeoning focus city in Punta Gorda.
Several analysts never liked the program, and company President John Redmond occasionally spared with them on earnings calls. Now, Sunseeker is on hold, with the airline pledging not to spend any money on it for at least 18 months.
“One of these difficult but required decisions was to shut down the Sunseeker resort development,” Redmond said. “We have said from the outset, the most important component of our model is the airline. We have to do everything we can to preserve the cash register.”
With construction paused indefinitely, the company took an impairment charge of $137 million.
Uptick in Business
Like many airlines, Allegiant has seen an uptick in business in the past couple of weeks, as some states have opened up. But “bookings are not there yet,” said Drew Wells, vice president for revenue and planning.
On the worst day in this crisis, Allegiant was taking in only $250,000 in daily bookings, executives said. By mid-April, revenue from bookings had increased to $750,000, but that was still less than the $5.5 million it was making a year earlier.
Much of the improvement comes from predictable places. For example, Allegiant said it saw improve bookings on Florida’s West Coast and Panhandle after beaches reopened. But Las Vegas and Orlando are the airline’s two biggest summer markets, executives said, and they are not expected to begin recovery until after casinos and theme parks reopen.
“It’s coming,” Gallagher said. “I would be absolutely astonished if these hotels here in Vegas aren’t open in the next 30-45 days.”
Regardless, Allegiant is betting nationwide demand will come back, relatively soon, citing pent-up interest for leisure travel. Nearly two-thirds of customers surveyed by the airline plan to travel before year-end, Chief Marketing Officer Scott DeAngelo said.
“As of Sunday, our customers are telling us they overwhelmingly think things are getting better,” he said.
Photo credit: An Allegiant Air Airbus jet in Las Vegas. The market is one of the most important for the discount airline. Tomas Del Coro / Flickr