Ryane, you can't just look at fuel cost. Allegiant lease MD-80s for $30-70k per month, depending on how old they are. The 737-700s are much newer and cost $225-330k per month to lease, and you can see not only the difference in leasing costs, but in the purchase outright from a post above. Their business plan seems to be working okay. You could ask ATA how their experiment with brand-new, fuel-efficient 757-300s and 737-800s worked out; it nearly killed the company, and they were forced to return almost all the new jets. And ATA had 64 jets at the time; they now have 28.
I can give you an example of the cost savings dillemma. If you buy a Jeep Grand Cherokee for $25,000, and it only gets 22 MPG on the highway, instead of a Toyota Hybrid SUV that costs $45,000, that gets 35-40 MPG on the highway, you spent an extra $20,000 for fuel savings. But, will you SPEND $20,000 on fuel during the time you own/lease the car? Probably not. Leasing jets is a similar endeavour, although the fuel usage is much higher.
(Source of Lease rates: "Airline Fleet & Asset Management" August 31,2006)