Scripps Howard News Service
FRESNO, Calif.
May 13, 2008 06:04 pm
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Soaring fuel prices caused most airlines to lose money last quarter, but Allegiant Travel’s unusual business model helped it earn almost $10 million.
Allegiant Air strays from the industry norm in that it targets small to midsize cities without much air service and flies people to tourist hot spots such as Las Vegas and Orlando.
And then, because its corporate parent is a travel company, employees also book hotel rooms, arrange car rentals and sell tickets to them for parks and shows –– for a price, of course.
Other airlines offer similar services, but often they contract with an outside company. Allegiant representatives wouldn’t disclose their financial arrangements with Harrah’s Entertainment and others, but in 2007 the company generated revenue from companies with thousands of hotel rooms.
Such “ancillary revenue” added $27.1 million to Las Vegas-based Allegiant’s coffers last quarter, up from $12.7 million a year earlier. Put another way, the company got an extra $25.75 from every passenger, according to public filings.
“We are a one-stop shop,” said M. Ponder Harrison, director of marketing and sales.
That helped alleviate the impact of soaring fuel costs, which doubled year over year. Those costs have led to a torrent of red ink for many carriers. Merrill Lynch projects that the nation’s eight largest carriers will lose $1.9 billion this year.
Allegiant flies from 59 cities, including Billings, Mont., and Fargo, N.D., to Las Vegas, Orlando, Tampa Bay, Fort Lauderdale and Phoenix. The planes averaged 87 percent full last quarter, and the airline has been adding communities. All that helped expand revenue by $58 million from the first quarter of 2007 to the first quarter of 2008.
Allegiant also is adding destinations to spread risk.
“We diversified our operations considerably in the past year,” said Maurice J. Gallagher, Allegiant’s chief executive.
“New destinations Phoenix-Mesa and Fort Lauderdale combined for 17 percent of our scheduled departures in the first quarter, while Las Vegas accounted for 41 percent, a reduction from 57 percent a year earlier,” he said.
The overwhelming majority of flights are to resort cities, but Allegiant isn’t afraid to try something different. In June, it will start offering flights from Bellingham, Wash., to San Francisco and San Diego.
“This is an example of our first nonleisure destination city,” Harrison said.
If those combinations don’t work, Allegiant can adjust. It isn’t locked into multiple flights a day like a typical carrier that serves business travelers.
In some cities, it offers flights only on certain days.
“They haven’t built themselves up as a carrier that will be there every day. It’s easier to tailor capacity to the market,” said Bob McAdoo, an airline analyst for Avondale Partners. “If they can only afford to fly to a city twice a week, they’ll do that.”
Allegiant also reduces risk with charter service. About 30 percent of its business is charters, including work for casinos, flying to Reno, Laughlin, Nev., and Tunica, Miss.
Allegiant was started in 1998 in Fresno, Calif., by businessman Mitch Allee, who designs software applications for airlines. Rising fuel prices in 2000 caused the company to file for bankruptcy protection in 2001 and shed all but the Fresno-to-Las Vegas route and its charter business.
In 2001, Gallagher acquired much of the stock, moved the business to Las Vegas and built upon Allee’s vision. “Our success today in great part has been delivered by his ability to get us here,” Ponder said of Allee, who is no longer involved in the daily operation, but remains a stockholder in Allegiant Travel, the parent company that went public in 2007.
Company officials say still-rising fuel prices and the vagaries of a souring economy could affect the airline through the remainder of the year.
The high fuel costs did cut the operating margin from 17 percent to 10.8 percent in the last quarter.
“Should record fuel prices persist, our performance in the second quarter of this year will not match our performance in the second quarter of last year,” said Andrew C. Levy, chief financial officer.
Still, Allee said the diversification has helped shelter the business.
“We have a certain amount of immunity,” Allee said. “We’re a niche carrier.”
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