Allegiant Air has reported profitable earnings and operational milestones as it transitions to an all Airbus fleet, but the company is shifting some focus from the airline's growth to other non-airline business ventures.

"The past 18 to 24 months have been challenging as we pushed through a successful onetime changeover to an all Airbus fleet," Maurice Gallagher, chief executive and chairman, says in a statement.

Allegiant earned a 2018 operating profit of $244 million, up 5.6% year-on-year, and a net profit of $162 million, down 18%.

The Las Vegas-based carrier completed its fleet transition from Boeing MD-80s to an all A320-family fleet at the end of 2018, one year ahead of an original schedule.

President John Redmond points out that moving to a single fleet type will "drive efficiencies" and improve revenue, which is expected to increase with a higher number of seats. Drew Wells, vice president of revenue and planning, says the company can achieve the same profit margin operating an A320 at jet fuel $1 per gallon higher than an MD-80.

"In terms of earnings potential, there's a difference of about $1 per gallon between the MD and the Airbus to secure the same earnings and margin," Wells said on the call.

Cost per available seat mile (CASM), excluding fuel and some other expenses, was down 1.8% to 6.44 cents year-over-year with airline revenue up 10% to $1.7 billion.

"As good as the performance has been in 2018 as we completed the [fleet] transition, our best years are ahead of us," Redmond told investors on 30 January during the company's full-year earnings call.

The airline, which had 76 aircraft at the end of 2018, will take delivery of 17 aircraft – six A319s and 11 A320s – this year, with capital expenditures estimated to be about $425-432 million.

The airline is guiding available seat miles (ASMs) to increase 4-6% in 2019, with the first quarter estimated to be the slowest and the second quarter the fastest due to the late Easter holidays.

Earlier in January, Allegiant put out a tender on its maturing $450 million 5.5% high-yield bond which it expects to refinance with a five-year $450 million term loan. The deal, which is slated to close in early February, will include a maintenance covenant requiring $300 million minimum liquidity, says the company's treasury and principal accounting officer Greg Anderson.


In addition to aircraft purchases and heavy maintenance checks expected to cost between $520-550 million, Allegiant expects to spend $250-300 million on its Sunseeker Resorts and an additional $15-20 million for other non-airline projects, including family entertainment centers and golf course management software, in 2019.

"In our view, the company's continued investment in the non-core airline businesses (Dave & Busters like concept, TeeSnap, Sunseeker) overshadows the opportunities they have to grow the airline," writes Cowen senior research analyst Helane Becker.

Allegiant's chief executive Gallagher counters that while filling up an aircraft is important, the carrier wants to have deeper relationships with customers and understand how they spend their money, hence spending on non-airline products.

Noting "Allegiant’s innovative and maverick industry history", Evercore ISI's lead airline equity analyst Duane Pfennigwerth says "revenue trends remain resilient" but questions Allegiant's capital expenditures into other segments.

"Allegiant is a very interesting situation in that the core business is at a positive inflection and historical mid-teens earnings multiple argues for substantial upside, yet significant capital allocation into new, potentially unrelated and lower-return ventures is actively compressing ALGT valuation," Pfennigwerth writes.

"Other ventures (golf course management software and, though very small, family entertainment centers) distract from the inflection/improvement in the core business and likely present resource allocation challenges," he adds. For instance, Pfennigwerth questions whether the airline might compete against the golf software division for information technology resources needed to upgrade reservations software.

At its peak Allegiant's stock rose by 10% to 136.89 on 31 January after results were announced late yesterday.

Source: Cirium Dashboard