Allegiant Air CEO Maurice Gallagher thought returning to 2019 levels of flying would be as easy as "turning on a switch." He was wrong, and disruptions cost the airline millions during the third quarter. Still, Allegiant managed a rare pandemic-era achievement by turning a profit and increasing revenues vs. the 2019 period.
Allegiant Air pulled off a rare pandemic-era feat: It is among the only U.S. airlines to report more revenue compared with the third quarter of 2019, and it turned a profit. But it wasn’t all clear skies for the leisure-focused airline. Allegiant discovered the hard way that restoring flights after the cuts of 2020 is easier said than done.
“This industry ran like a Swiss watch in 2019,” CEO Maurice Gallagher told analysts during Allegiant’s third-quarter earnings call on Wednesday afternoon. “But it’s almost like we’ve forgotten how to handle disruptions.” During the summer peak in demand, Allegiant, like Delta Air Lines, Southwest Airlines, and American Airlines, cancelled hundreds of flights and left passengers stranded all over the country.
The main issue was labor. Many of the airports Allegiant flies to are in smaller metropolitan areas. Airports weren’t staffed up top handle 2019-levels of traffic, and nor was Allegiant. Pilots and crews often were in the wrong city or bumped up against their federal duty-time limits, with no reserve crews to relieve them. Smaller crew bases couldn’t keep up with demand. As much as 30 percent of the carrier’s staff took Covid-related or other leaves of absence when the Delta variant began to surge. “We thought it would be like turning on a switch,” Gallagher said. “We need to make sure we don’t over schedule the airline,” he added.
The snafus cost Allegiant a pretty penny. Disruptions cost Allegiant $28 million to put right, for ferry flights to put crews back in the right positions and other expenses, including $15 million in refunds to customers whose flights were cancelled. Because of this, Allegiant’s costs excluding fuel were higher than expected. “We’re learning as we go,” Gallagher said.
Allegiant is not immune to the labor shortage plaguing the country. The company is paying signing bonuses — a rarity for front-line airline employees — to attract talent. By the end of the summer, it had enough staff on hand to handle demand. In addition, Allegiant has pushed up the start dates for 300 pilots, flight attendants, and maintenance technicians to get ahead of anticipated holiday and 2022 demand.
The carrier and the International Brotherhood of Teamsters ratified the mechanics’ first collective bargaining agreement on Wednesday, bringing to a close almost more than two years of negotiations for a contract. The mechanics chose representation by the Teamsters in 2018.
These issues are not isolated to the Las Vegas-based airline. Supply-chain disruptions and labor shortages are on the level “none of us have ever seen before,” Gallagher said. “The irony is that everyone in this business is hiring, but we’re not back up to full capacity.”
Compounding Allegiant’s problems is the fact that there has been something of a land grab for leisure travelers. Airlines, like United Airlines and Delta that before the pandemic focused on business travelers are now rushing to fill their planes with vacationers. Almost half of Southwest’s flights now touch Florida every day. This is a remarkable change to Gallagher, who has led Allegiant since 2003. “We are seeing a substantial shift in the way airlines operate,” he said.
“All airlines wanted to plant the flag for leisure travelers,” Gallagher said. Leisure-focused airports, particularly in Florida, were busier than they could handle. Meanwhile, airports in major business centers saw a fraction of their 2019 passenger volume. “I like to call it ‘leisure destination overload,'” he said. TSA staffing at smaller facilities remains a concern, calling into question whether these facilities can handle anticipated demand. But Allegiant is focused on getting its operations back on track. “We’re back, and we’re getting a handle on it,” Gallagher said. “We know that we can show up every day and fly the airplanes with the people who’ll get the job done.”
Allegiant has long been known for its nimbleness in reacting to demand, quickly adding or reducing flights depending on how the market is behaving. And this summer was no different. July and the first half of August were busy, with demand in some cases exceeding the summer of 2019, as people took long-delayed vacations. And the airline reacted accordingly, with mixed results. As the Delta variant began to spread in August, Allegiant was fast in pulling down its schedule. Demand has begun to return, and advance bookings for holiday-season travel are on pace with historical norms.
The airline expects to fly 12-16 percent more scheduled capacity in the fourth quarter, compared with 2019. Part of that is because it’s a larger airline: Allegiant will end the year with eight more aircraft than it did in January, and larger, 186-seat aircraft will comprise a bigger part of its fleet. The carrier expects to grow in the low double digits next year as it adds 19 more aircraft, for a total of 127 planes by the end of 2022. The main constraint will be rising fuel costs, which Gallagher said could put a “damper” on anticipated growth. Allegiant also is preparing for another surge in Covid, and is factoring that possibility into its fourth quarter and 2022 planning. “This climbout has not been a straight climb,” Gallagher noted.
Allegiant also is pressing ahead with its Sunseeker resort in Florida. Construction halted in 2020 when the pandemic began but resumed in the second quarter. Allegiant has secured $350 million in financing for the project from Castelake. It will start taking reservations in the first quarter of next year, with the first phase of the project expected to open later in 2022. The golf course and second phase are expected to be completed in 2023. Allegiant anticipates the resort will cost $510 million, but expects the costs to rise by 10-15 percent, due to construction-labor shortages and the rising price of raw materials.
Allegiant reported a third-quarter profit of $66 million, a sharp improvement from a $33 million loss last year, but down from a $72 million profit in 2019. Revenues rose 126 percent from last year and 5.3 percent from 2019, making it one of the few airlines to both report a profit this year and larger revenues than 2019.
“We’ve run to the beat of our own drum,” Gallagher said. “We will lead this industry out of the abyss.”