In an unassuming part of southwest Las Vegas, the headquarters of Allegiant Travel Company, parent company of Allegiant Air, sits as blandly and unobtrusively as the flat, sun-bleached terrain of the surrounding valley.
The squat, dust-coloured building rises only a few stories from the desert rock in a nondescript office park along Durango Drive, seven miles from the casinos and hotels that line the glitzy Las Vegas Strip. There’s not even an Allegiant sign on the door.
Austerity aside, business is booming at Allegiant, a 16-year-old niche US carrier that reports impressive financial returns.
Andrew Levy, Allegiant’s president, attributes that success to a strategy that largely turns the traditional low-cost-carrier model on its head. A former ValuJet Airlines executive, Levy, 44, views Allegiant more like a travel service provider than just an airline.
That’s because much of Allegiant’s revenue comes from the sale of bundled vacation packages that include air tickets, hotel nights, car rentals and other products like sightseeing tours, surfing lessons and dinner cruises. And while other airline executives place large orders for the newest Airbus and Boeings, Allegiant makes do with older, used aircraft. It buys them cheaply on the secondary market and dispatches them on infrequent routes between US leisure destinations and small secondary cities in the USA.
Allegiant flies some 200 routes, most of them obscure city pairings without competing service: like Bangor in Maine to Punta Gorda in Florida, Odgen in Utah to Phoenix, or Rapid City in South Dakota to Las Vegas.
“Most airlines, if you asked them what their business is, would say it's the transportation of passengers from one place to another. We don’t view it that way. We view [our business] as selling a vacation.”
Levy, who largely oversees the day-to-day running of the business, says the company eschews the conventional wisdom that successful low-cost carriers must follow Southwest Airlines’ playbook.
“We have gone about building an airline differently than the other LCCs,” he says, dressed casually in a short-sleeve shirt, his airline badge dangling from a lanyard around his neck.
Speaking from a conference room that employees wryly call “the corner office”, a wink to the fact that Allegiant has no private offices. Its staff, Levy included, work in cubicles. “If you are the traditional LCC model, you are going after leisure [visiting friends and relatives] and small-business traffic. As a result, you have to have some level of frequency to be successful,” he says. “We love business travellers, but there is nothing in our business to be appealing to [them].”
That model has resulted in 10 consecutive years of profit, but Levy says the party is not over. Airline mergers mean more small-town opportunities for the company.
Allegiant was founded in Fresno, California in 1997 and began scheduled flights between Fresno and Las Vegas using a McDonnell Douglas DC-9 in 1999.
After a 2000 bankruptcy filing, Maurice Gallagher, another ValuJet alumni and major Allegiant creditor, gained control of the company.
MAKING SAFE BETS
Under Gallagher, now Allegiant’s chief executive, the airline signed a charter contract with casino operator Harrah’s and launched scheduled flights from Las Vegas.
Allegiant emerged from bankruptcy in 2002 and by 2004 served 13 small cities from Las Vegas and earned a full year operating profit of $6.1 million, according to securities filings.
That year, 51% of the company’s revenue came from scheduled flights, 45% came from charter operations, and the rest from hotel rooms, car rentals and other ancillaries
Going public in December 2006, the low-cost carrier has since grown into one of the industry’s most consistently-profitable airlines, with more than 1,900 employees and a fleet of nearly 70 aircraft.
Now the budget carrier connects roughly a dozen leisure hot spots - places like Orlando, Las Vegas and Los Angeles - with more than 70 relatively small cities, facing competition on just 18 of its 200 routes in 2012, according to filings.
Ninety percent of the airline’s bookings are through its website, and Allegiant does not sell tickets through online travel agencies or global distribution systems.
Operating margin in 2012 was 14.6% on operating income of $132.3 million, up 55% from the previous year. Net income was $78.4 million, up 59%.
Allegiant’s scheduled service now accounts for the vast majority of its $908.7 million in operating revenue in 2012, with charter flights accounting for less than 5%. Allegiant’s average fare in 2012 was $88.90, but it also earned an average of $35.72 in “ancillary air-related charges,” which include baggage fees.
Policy is to charge for everything that can be. This includes fees of up to $75 for an advanced seat selection, $2 for soft drinks and if purchased in advance up to $75 for carry-on bags or hold luggage. Tickets booked online cost $10 extra each way - to avoid the fee, customers must buy at the airport.
Allegiant also earned about $5.50 per passenger in 2012 from the sale of third–party products like hotel rooms and car rentals.
While other US low-cost airlines like Southwest and JetBlue cater increasingly to business travellers and typically buy new, Allegiant buys used aircraft, which Levy calls “out-of-favour assets”. To cover their costs, those other airlines must fly their new aircraft as much as possible - nearly 12 hours daily at JetBlue in 2012.
Allegiant’s fleet in mid-2013 contained 58 Boeing MD-80s with an average age of nearly 24 years and six Boeing 757s with an average age of 20 years, according to Flightglobal’s Ascend Online database.
Allegiant purchased many of the MD-80s on the used market for $5-6 million to each. Recently it has been acquiring used A320 family aircraft, eventually to replace the MD-80s.
The first to arrive were a few A319s, part of an August 2012 agreement to lease nine former EasyJet aircraft from GE Capital Aviation Services. Allegiant expects to have three of those aircraft flying by the end of 2013, with the remainder being delivered through the second quarter of 2015.
It also plans to take delivery of seven A320s purchased from Iberia by the end of 2013, and expects to acquire two more in 2014.
Though Allegiant expects to retire five MD-80s this year, Levy says the type will remain at the “core” of the fleet for up to 10 years.
The low purchase prices of the aircraft allows them to be economically parked during off-peak periods and for most routes to be flown just a few times weekly.
In 2012, the carrier’s aircraft averaged just 5.7h of operation daily. “Having a low-cost asset allows you not to focus on utilisation. It no longer becomes a relevant issue,” Levy explains. In that respect, he compares Allegiant to European carrier Ryanair, which parks many of its aircraft during slower winter months. However when airborne the aircraft are normally packed with passengers. The airline says that it averaged loads factors of 87% during 2012.
When it went public in 2006, Allegiant estimated its low-cost, low-frequency model would work in some 100 markets in the USA, Canada and Mexico.
“That number has grown,” Levy says. “We have discovered our service works in more markets than we anticipated originally.”
He also sees opportunities in markets where other carriers, fresh from mergers and straddled with rising costs, have retrenched, like Southwest in Las Vegas. Fifteen to 20 years ago, Southwest grew rapidly nationwide and drove off competitors in many of its Las Vegas markets. However that cost advantage has eroded as Southwest has matured. In 2012, the Dallas-based carrier’s cost per available seat mile (CASM) was 12.8 cents, higher than other low-cost carriers, but still slightly below US legacy airlines.
These days Allegiant has the cost advantage. In 2012 the carrier’s CASM was 10.4 cents. Only Miramar, Florida-based Spirit Airlines had a lower CASM at 10.1 cents.
“We think we can come in some of these markets [and be the] dominant competitor,” Levy says of the Las Vegas market. “We can come in underneath in certain select opportunities and be able to provide that fare that Southwest could have provided ... 15 years ago.”
Examples include routes from Las Vegas to cities like Phoenix and Reno in Nevada, Boise in Idaho and Oakland in California.
The uniqueness of Allegiant’s business model enables it to compete without directly stepping on others’ toes, he says. “We are offering a totally different price point, which enables us to stimulate the market.”
NOT STRAYING FRP0M THE PATH
Levy says Allegiant won’t stray from its strategy of connecting larger leisure destinations to small cities.
In July, Allegiant announced it will launch flights from Los Angeles to Honolulu on 30 October, a route also served by heavyweights like Delta, American Airlines and United. Levy has confidence the route will succeed, since Allegiant can significantly undercut competitors and has a “decent-sized database” of customers in Los Angeles to which it can market the flight. Allegiant also has international ambitions. In July it filed papers with US regulators requesting permission to begin flights in June 2014 from Las Vegas to the Mexican cities of Hermosillo and San Jose del Cabo.
Cancun is also in Allegiant’s sights as well as destinations in Central America, northern South America, Jamaica, the Bahamas and the Dominican Republic. Levy thinks Allegiant can also increase ancillary revenue by further unbundling its product. One way to do this would be to follow Ryanair’s lead and charge customers for ticket counter check-in.
“We want to get to the point where we have given the customer sufficient options so they can deal with their check-in process on their own,” Levy says.
Also in the works is a customer loyalty programme and affinity credit card, which Allegiant hopes to launch by the end of the year.
Details of the programme are still being developed, but Levy says it will be aimed at customers in small cities and may offer members points for purchasing services at local merchants, such as grocery stores.
A page may also be taken from Spirit Airlines’ book in charging a monthly subscription fee that would give customers access to the best fares. Members of Spirit’s $9 Fare Club program pay roughly $60 a year to access the carrier’s most-discounted tickets.
Eventually, the goal is to construct a company that customers view as a travel service provider, Levy says. He foresees a time when Allegiant sells hotel rooms in cities that it does not even serve, like New York. One day, Allegiant may even consider selling air tickets on other carriers, Levy says.
Success means maintaining low costs - no easy task for a company with seniority pay scales, which Levy calls a “ticking time bomb”.
“If you are successful in the long run, you tend to give your people more and more money, and then you get to the point where Southwest is,” he says.
In 2012, salaries and benefits accounted for 17% of Allegiant’s total operating expenses. In comparison, wages and benefits accounted for 29% of operating expenses at Southwest in 2012 and 23% at JetBlue, according to regulatory filings.
Levy also does not hide his disappointment that three key employee groups - flight attendants, pilots and dispatchers - voted to join unions in recent years.
“We don’t like that there is a third party. We don’t think that’s in our employees’ best interests,” Levy says, adding that all Allegiant employees participate in a profit-sharing plan. The airline is currently in contract negotiations with unions. Though Levy expects the parties will find common ground, Allegiant will not sign a contract similar to those at other carriers. “We are here today because we have tossed out the rulebook,” he says.
The carrier has also at times been at odds with the Transport Workers Union of America (TWU), which represents its 500 or so flight attendants, who have been seeking a contract for two years.
The union is urging the airline to improve its market planning. It maintains a website - www.WillAllegiantBeThere.org - that tracks dozens of routes and cities from which Allegiant has retreated, in many cases shortly after launching services.
TWU says such pullbacks indicate poor foresight and negatively affect employees, communities and airport authorities, which often initially subsidise service. Examples include the company’s announcement in April to place the majority of its new Hawaii routes on “temporary seasonal hiatus”, -beginning in August.
The decision came shortly after the carrier launched about a dozen routes to the islands. Levy concedes Allegiant’s projections on the routes were off. “It’s even more seasonal than we anticipated,” he says. Levy also defends his staff’s forecasting as many of the airline’s routes have never been served by other carriers, meaning there is no historic traffic data.
“I happen to think that the planning side of our business is pretty darn good...I think the financial results tend to confirm that.