ANALYSIS: Allegiant moves away from single aircraft type strategy

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Las Vegas-based Allegiant Air will gradually usher in new aircraft types to its fleet from this year onwards, beginning a departure from its single aircraft type strategy that it has long employed with a fleet of significantly older Boeing MD-80s.

The low-cost carrier will add two Airbus A319s and seven A320s to its fleet in 2013, ending the year with 67 aircraft. Allegiant operates mostly MD-80s and also has six Boeing 757-200s.

Allegiant has started the retirement of seven MD-80s, comprising two MD-87s, two MD-82s and three MD-83s. Five of these seven aircraft will be retired this year. Allegiant retired one aircraft in 2012 and will retire the last MD-80 in the first quarter of 2014.

The airline's chief executive Maury Gallagher has said Allegiant does not plan further MD-80 retirements in the near term after the departure of the seven aircraft, adding that the type is a "solid performer" and that it will be a key part of Allegiant's fleet for the foreseeable future.

Allegiant's new A319s and A320s, however, will help to reduce the average age of its fleet. Its MD-82s and MD-83s, the two MD-80 variants that Allegiant will operate after the retirements, have an average age of about 23 years, according to Allegiant's annual report filed with the Securities and Exchange Commission.

The airline's incoming A319s and A320s will be about eight to 10 years old, and about 12 years old, respectively, at the time of delivery. Allegiant is acquiring nine A320s from Iberia with cash and nine A319s on a lease agreement with GE Capital Aviation Services.

Allegiant's fleet plan

    Number of aircraft at end of year

 2013

 2014

 2015

MD-80

 52

 51

 51

757-200

 6

 6

 6

A319

 2

 4

 9

A320*

 7

 7

 7

Total

 67

 68

 73

Source: Allegiant Air

* Excludes two A320s that Allegiant plans to purchase from the owner of the other A320s, but which are not under contract yet.

 

While Allegiant's Gallagher has said the MD-80 will remain a key part of its fleet in years to come, the airline's executives are aware they cannot operate the type for significantly longer. Gallagher himself has said the airline plans to retire the MD-80 fleet in a decade.

"We have to bite this bullet at some point... the MD-80 is a great airplane but it has 30-year-old technology," Gallagher has said.

Besides obviously higher maintenance expenses necessitated by operating the ageing MD-80s, Allegiant would also have to adhere to ageing aircraft regulations adopted by the US Federal Aviation Administration (FAA) in 2011. Allegiant says that it must incorporate mandatory maintenance actions resulting from these regulations in its MD-80 maintenance programme by July 2013.

These regulations require that aircraft manufacturers set a limit of validity, or LOV, of the engineering data that supports the aircraft's structural maintenance programme for that aircraft type and show that fatigue damage will not occur in the type before reaching the LOV.

Maintenance actions related to the LOV must be incorporated into the airline's maintenance programme, and operation of the aircraft beyond the LOV is prohibited unless an extended LOV is obtained for the aircraft.

The LOV established by Boeing for the MD-80 is 110,000 cycles or 150,000 flight hours, whichever is reached first.

Allegiant says that it does not believe the LOV will limit their MD-80 operations because the average number of cycles on their MD-80 fleet is about 35,000 cycles per aircraft as of 1 February, with the highest at 49,500 cycles. The carrier says it historically operates only about 1,000 cycles per aircraft per year.

However, it adds that while it has started the process of incorporating the mandatory maintenance actions, it is not able to predict the future cost of complying with these new requirements.

Going by the carrier's indications, it is extremely likely for Allegiant to conclude more orders of used current generation A320 family aircraft. The carrier's executives have cited the appeal of prices of the aircraft type, depressed by the new generation of re-engined narrowbodies of the A320 family and Boeing 737 types.

The view was seconded by lessor Air Lease Corporation that sees A320 values below where they "need to be", said John Plueger, president and chief operating officer of the lessor, during an earnings call on 28 February.

A used A319 is projected to cost Allegiant $96 per passenger compared with $106 on a 166-seat MD-80 with the assumption of an aircraft utilisation of 8.9 hours a day, Allegiant has said.

Aside from the cost advantage, the A320 family aircraft will also help to open up new markets for Allegiant. These include short field markets like Trenton, New Jersey, and Charlottesville, Virginia, and high and hot airfields such as those in Mexico which would fall outside Allegiant's existing domestic network. The aircraft could also be operated on transcontinental flights with its long-haul range.

Industry observers have questioned Allegiant's decision to add A320 family aircraft, since low-cost carriers have repeatedly touted the cost benefits of operating a single aircraft type.

The airline's executives, however, have tried to allay these concerns by emphasising that the carrier has thought through the move thoroughly.

"We have a pretty good understanding of what this airplane does and how it makes sense to bring it on board. We've done a lot of intelligence, and we are going into this with our eyes wide open and a grin on our faces," Allegiant's president Andrew Levy has said.

Gallagher has pointed to Allegiant's decision to scrap a deal to lease 10 A319s from Cebu Pacific as evidence of this prudence. "We work hard to achieve the appropriate economics, if not we move on," he said during the airline's earnings call on 30 January.