Fate of Allegiant's 757s rest on success of Hawaii experiment

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Allegiant Air remains hopeful that its fledgling Hawaii flights will be successful, but an executive says the airline may have to get rid of its fleet of six Boeing 757 aircraft if it cannot ultimately fly all of them profitably on Hawaiian routes.

When asked during an earnings call today if the airline has too many 757s, Allegiant president Andrew Levy responds: "We don't know yet."

"If we can't have somewhere around six airplanes running to Hawaii year round at acceptable margins, the answer is probably to go to zero," he says.

The statement comes a few weeks after Allegiant announced it would begin service between Honolulu and Los Angeles from 30 October, a change from the airline's earlier strategy of serving Hawaii primarily from secondary markets.

In addition, Allegiant seeks another "market or two" that would support year round service to the islands, Levy says today.

Las Vegas-based Allegiant has taken delivery of six 757s since 2011 for what an executive called the "express purpose" of serving Hawaii. Levy said in 2010 that the airline expected the Hawaii flights to generate extensive revenue from ancillary sales of hotel rooms and car rentals.

Between 2012 and early 2013, the airline begin service on about 10 Hawaii routes, including flights to the islands from Las Vegas, Boise in Idaho, Eugene in Oregon, Phoenix-Mesa in Arizona, Spokane and Bellingham in Washington and the California cities of Stockton, Santa Maria, Fresno.

But in April, Allegiant announced the majority of those flights, with the exception of routes from Bellingham and Las Vegas, would be placed on "seasonal temporary hiatus" due to insufficient demand and lower-than-expected ancillary revenue.

"[In] some of the smaller markets we serve there are not enough bodies there to service [Hawaii] year round ... at prices that make sense," Levy tells investors today.

Allegiant has redeployed some 757s on high-demand routes within the US mainland, such as those between Las Vegas and McAllen in Texas, and it announced on 2 July that it will resume the Spokane and Boise flights in December.

Then on 9 July it announced the new Los Angeles-Honolulu flights, which Levy calls "a bit of an experiment."

That is because Allegiant's business model primarily rests on connecting leisure markets like Hawaii to smaller destinations where there are few, if any, competitors.

Hawaiian Airlines, American Airlines, Delta Air Lines and United Airlines all fly between Los Angeles and Honolulu, according to FlightMaps Analytics.

But Levy expressed confidence, noting that Allegiant has "far and away" the lowest costs on the route and a "decent-sized database" of customers in Los Angeles to which it can market Hawaii flights.

In addition, Allegiant is improving its pricing system to allow customers to book hotels with one-way flights and packages that include stays at more than one hotel during the same trip.

Currently, Allegiant's system allows customers to book only hotel reservations that coincide with roundtrip air purchases.

"We are learning a lot about seasonal trends [to Hawaii]," Levy says. "We are optimistic that a market like [Los Angeles] can help us drive the returns we anticipated when we decided to go to Hawaii."

Allegiant reported an operating profit of $42.9 million for the second quarter of 2013 today, up 2.4% from the same period last year.

It was Allegiant's forty-second consecutive profitable quarter.