Ancillary revenue key to Allegiant's profits

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With increases in average ancillary passenger revenue and better yield from hotel and car bookings, Allegiant Air reported another profitable quarter today with $52.4 million in operating income.

The Las Vegas-based airline also reported a 9% jump in total average passenger fare to $145, the highest in the company's history.

"The single-biggest driver was bag-related income," Andrew Levy, Allegiant's president says, noting that the airline charges passengers for both carry-on and checked bags.

Levy adds: "We are optimising our pricing better. We are capturing more yield on the average hotel sale and the average car sale."

The $52.4 million in operating income is a 44% increase from the same period last quarter.

The carrier reports operating revenue of $273 million. That includes $87.5 million in ancillary revenue, which was up 36%. The airline's net income was $31.9 million, up 47%.

"We are very bullish in terms of where we sit right now," says Allegiant's chairman and chief executive Maurice Gallagher.

The results mark 41 consecutive profitable quarters for the company.

The Allegiant's average fare for scheduled flights during the period was $97.54, up nearly 3%, and average ancillary revenue was $41.64, up 29%.

Operating cost per available seat mile, excluding fuel, increased 0.2% to 5.18 cents.

The average load factor for the period was near 90%.

The results come shortly after Allegiant added two Airbus A319 aircraft to its fleet, part of an order for 18 A320-family aircraft that runs through 2015.

Executives say the aircraft, which are more fuel-efficient than the Boeing MD-80s that make up the bulk of Allegiant's fleet, will improve the airline's cost advantage over competitors.

Levy says Allegiant is seeking additional Airbus aircraft and will place orders if prices are attractive. He says the bulk of the airline's Airbus fleet will likely consist of the A320, but adds that the smaller A319 is also attractive on some routes.

"We are actively in the market and we hope to add [orders] in 2014 and 2015," Levy says.

The first five Airbus aircraft will be "replacement units" for retiring MD-80s, but Levy stresses that the MD-80 will "make up the core of the fleet for many years to come".

Allegiant is also reshuffling its fleet to make room for a handful of Boeing 757s that are being repositioned from Hawaii flying to domestic routes.

Allegiant announced in recent weeks that it will end the majority of its flying to Hawaii, just months after the airline launched many of the routes with six newly acquired 757s.

Allegiant serves Hawaii from nine cities; all but its flights to Bellingham, Washington and Las Vegas will cease 14 August.

Levy downplays the Hawaii cuts, noting the airline has a long history of serving markets seasonally.

"This is business as usual for us," he says, adding that Allegiant's ultimate position in Hawaii will be determined in the long-term, after it learns the market.

He did not specify where the 757s will fly, but says there are some markets where the aircraft is more suitable than the MD-80.

Levy adds that the Airbus aircraft joining Allegiant's fleet are more suited for domestic flying than the 757s.

"[On] any route that an Airbus can operate, it will probably be the right airplane, as opposed to the 757," he says.

Executives also discussed airline industry trends.

Levy says consolidation will likely benefit Allegiant, noting that airline tie-ups typically result in higher fares and capacity cuts, which could leave smaller markets without air service.

The result could be new opportunities for Allegiant, assuming the carrier can maintain its cost advantage, Levy says.

Gallagher adds that a merger of US Airways and American Airlines would create integration challenges that could benefit Allegiant.

"Anytime you do something that big it has to be distractive to their efforts," Gallagher says. "We think we are in the catbird seat in the long term."

During the first quarter, Allegiant began new service to Provo, Utah and Reno, Nevada, added eight new routes and announced it will begin service on five new routes in the second quarter.