ANALYSIS: Allegiant’s Hawaii retreat demonstrates flexibility

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Allegiant Airlines' decision to slash Hawaii flying just months after launching the routes has irked one of the airline's unions, but generated praise from some airline analysts who say the move demonstrated the airline's ability to quickly adapt to market conditions.

"The reason Allegiant is still around is [because] they are very flexible," says Michael Boyd, chairman of aviation consulting firm BoydGroup International, based in Evergreen, Colorado. "These kind of moves speak to the strength of Allegiant. If it doesn't work, they are out."

But Thom McDaniel, international vice president of Transportation Workers Union, says Allegiant's Hawaii experiment indicates hasty, poorly-planned route decisions.

"They seem to jump into markets, and jump out, and there doesn't seem to be any analysis of the market," says McDaniel on Allegiant's management. "We would like to see a little bit more foresight."

TWU represents Allegiant's flight attendants.

Ultra-low-cost carrier Allegiant, based in Las Vegas, announced on 5 April that the majority of its roughly two dozen weekly flights to and from Hawaii would be placed on "seasonal temporary hiatus" starting 14 August.

Allegiant says the flights will return next holiday season, but some analysts question whether that will happen.

The flights to be cut include those from Honolulu to Boise, Eugene, Fresno, Phoenix-Mesa, Santa Maria, Spokane and Stockton.

The airline said that it would not cut flying between Honolulu and Las Vegas and Bellingham, and between Maui and Bellingham.

Allegiant launched Hawaii service in late June 2012 with flights from Honolulu to Las Vegas and Fresno. The Bellingham, Eugene, Santa Maria and Stockton flights started that November and the Phoenix-Mesa, Boise and Spokane flights began in February.

The routes operate with six Boeing 757-200 aircraft, which chief executive Maurice Gallagher said in 2010 were acquired for the "express purpose of serving Hawaii".

Allegiant president Andrew Levy said in 2010 that the airline was confident Hawaii would generate strong financial returns and that the market was a "tremendous" opportunity to sell ancillary services like hotel rooms and rental cars.

The airline earned ancillary revenue of $210 million, roughly one-quarter of its total yearly revenue, which was $779 million, in 2011, the last full year that is available. The airline earned a profit of $49 million that year.

Analysts are not surprised that Allegiant suspended the Hawaii routes, noting that the airline has a long history of seasonal flying and of exiting markets that underperform.

"You can't look at an Allegiant route decision in the same light as JetBlue or Spirit [Airlines]. Allegiant runs seasonal," says David Fintzen, an airline analyst in New York City with Barclays Capital.

Allegiant did not return a call requesting comment, but the airline told Flightglobal earlier this month that it knew ahead of time that the Hawaii flights could become seasonal if demand was not sufficient.

The airline said that its business model, which caters to leisure travelers, allows it to shuffle resources in response to seasonal changes in demand.

Fintzen notes that Allegiant's first Hawaii routes - the Fresno and Las Vegas flights that launched in June 2012 - showed early promise.

Using capacity and fare data from the US Department of Transportation (DOT), Barclays estimates that Allegiant's revenue per available seat mile (RASM) on the Honululu-Fresno route during the third quarter of 2012 was 120% of the carrier's system-wide RASM, excluding ancillary revenue. RASM on the Honolulu-Las Vegas route was 100% of the average, Fintzen says.

"Both [markets] were very successful" in the third quarter, especially considering they were new to Allegiant and operated during an off-peak Hawaii travel period, Fintzen says.

The peak Hawaii travel period is during the summer months, he adds.

Barclays does not have subsequent RASM data, but Fintzen notes that load factors, while a poor indicator of route performance, also started strong, then declined.

DOT data shows that load factors on the Honolulu-Fresno route were higher than 90% in July and August 2012, but hovered around 60% during the last four months of the year.

Load factors on the Honolulu-Las Vegas route, which was not cut to seasonal-status, were above 90% in June, July and August 2012, but 67% in September and 70% in October. Loads on the route climbed to near 90% by December.

"I think the off-peak [period] was worse than they expected. But I don't think I'm ready to say Hawaii was a bad move," Finzten says.

US DOT

He adds that Allegiant's business model allows it to adapt better to seasonal demand than competitors like Hawaiian Airlines and Alaska Airlines. That's because Allegiant flies less-expensive, second-hand aircraft, which it can ground in response to seasonal fluctuations.

"This is an airline that buys old airplanes for a reason - so they don't have to fly when there is no demand," he says. "It would be great if [Hawaii] worked off peak, but the real opportunity is the peak."

Boyd speculated that the Hawaii service might not have generated as much revenue from sales of hotel rooms, car rentals and other ancillary services as Allegiant expected.

"If the ancillaries don't come up, goodbye," Boyd says.

The Hawaii cuts have stirred internal strife at the airline.

McDaniel at TWU says Allegiant lets down customers, communities and its employees when it enters and exits markets quickly. He notes that many of the airline's flight attendants moved to Honolulu to work the routes, and now face the prospect of needing to move back to the mainland.

On 11 April, TWU apologised publicly for Allegiant's Hawaii cuts in an advertisement in the Honolulu Star-Advertiser.

"We're sorry," the ad sats. "Aloha can mean 'Hello' or 'Goodbye.'"

TWU has been in contract talks with Allegiant for two years, and butted heads with management over the airline's initial decision to staff many of the Hawaii flights with part-time Honolulu-based flights attendants who were not given health benefits. Allegiant later reversed course and made the positions full-time with benefits.

The Teamsters' Airline Professionals Association, which represents Allegiant's pilots, declines to comment.