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Old 09-21-2006, 06:48 PM   #1  
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Default Allegiant In The Ny Times

September 21, 2006
Flying Where Big Airlines Aren’t
By JEFF BAILEY
Gas guzzling and noisy, the MD-80 is the aging, seemingly indestructible jalopy of the skies.

“They fly forever,” said Roger King, an aviation analyst at the research firm CreditSights. But with newer jetliners offering better fuel efficiency, a quieter ride and more comfort, the MD-80 is increasingly unloved by airlines. “Everyone wants to get rid of them,” Mr. King said.

Everyone, that is, but Allegiant Air, an upstart low-cost carrier based in Las Vegas that has built a quirky but profitable strategy around the MD-80.

Allegiant’s fleet of 21 planes would have cost about $1 billion if it had bought new Boeing 737-700’s, the plane favored by Southwest Airlines, with a list price around $54 million each. But with used MD-80’s selling for about $4 million each, the Allegiant fleet, averaging 16 years old, costs less than a tenth that.

Allegiant’s success is the latest sign that traditional hub-and-spoke carriers like American Airlines and United Airlines remain highly vulnerable to small and nimble competitors willing to take a different approach to the business.

Allegiant is preparing for a public offering of shares, hoping to raise at least $100 million, in what could be the most prominent initial stock offering by a domestic airline since a flurry of industry offerings that began with JetBlue Airways in 2002.

Even with its huge fuel bills, Allegiant’s costs are about 15 percent lower than Southwest’s. Allegiant flies nonstop from about 40 small cities like Duluth, Minn.; Allentown, Pa.; and Idaho Falls, Idaho, to the country’s two most popular vacation destinations, Las Vegas and Orlando, Fla. Bigger carriers, typically serving such cities with smaller regional jets instead of full-size planes like the MD-80, require connections through hub airports to reach Las Vegas or Orlando.

Allegiant’s one-way fares, some as low as $69 and with the top fare on a route $239, average about $94.

Cheap planes and a route network that largely avoids head-to-head competition against bigger airlines have made Allegiant steadily profitable since 2003, a rarity in the business. For the first six months of 2006, Allegiant reported a profit of $11.5 million on revenue of $119.3 million.

It attracted an early investment of $7.5 million, as part of a $34.5 million private equity placement, from the Ryan family of Ireland, which founded Ryanair, Europe’s leading low-cost airline.

Much of the management team once worked at ValuJet, a low-cost airline that was grounded in 1996 after a crash in the Florida Everglades that killed all 110 aboard. ValuJet restarted operations, merged with AirTran Airways and adopted the then smaller carrier’s name, which helped ease the taint of the crash.

Maurice J. Gallagher Jr., Allegiant’s chief executive, was a founder of ValuJet and an officer and director until its merger with AirTran in 1997. M. Ponder Harrison, managing director for marketing and sales at Allegiant, held a similar post at ValuJet. And Robert L. Priddy, chief executive of ValuJet until 1997, is an Allegiant board member.

Allegiant would use the proceeds from the share offering to buy more MD-80’s and link as many as 60 additional small cities to Las Vegas or Orlando — bad news for established carriers. It has also begun connecting about a dozen small cities to Tampa, Fla.

The market share of low-cost carriers has doubled since 1998, to about 35 percent, and will keep growing as Southwest, JetBlue and others add planes. Allegiant, founded in 1997, adopted its current strategy as it emerged from bankruptcy protection in 2002. Previously, Allegiant operated routes in the West and tried to attract business travelers.

As big airlines sell off their older planes, there will be plenty of MD-80’s available to support the growth of Allegiant, which shoehorns 150 seats into a plane, and possibly other niche carriers. American alone has more than 300 MD-80’s; Delta Air Lines more than 100.

Allegiant is a popular choice in out-of-the-way locales. “It’s a lot more convenient,” said Kate Coppock, 22, who flew with her parents on Allegiant from Colorado Springs this month for her Las Vegas wedding at a casino hotel.

In the past, said Ms. Coppock, a lifeguard at a Y.M.C.A., she had to drive to Denver, more than an hour away, to catch a direct flight to Las Vegas.

Price is important in such leisure markets. Connie Houx, 61, of Pueblo, Colo., works 10 to 14 hours a day providing home care for the elderly. She paid $144.60 round trip recently by booking weeks in advance to fly from Colorado Springs. She planned to stay with her sister, who lives in Las Vegas, because “it doesn’t cost anything.”

So far, bigger airlines have mostly left Allegiant alone. “We believe our market strategy has had the benefit of not appearing hostile” to big carriers, Allegiant said in a Securities and Exchange Commission filing in connection with the proposed share offering.

Of course, its rapid growth is likely to invite competition. Northwest Airlines, which operates in some of the same smaller Midwest cities as Allegiant, began nonstop flights in 2005 to Las Vegas from Des Moines; Sioux Falls, S.D.; and Fargo, N.D., going head-to-head with Allegiant.

Northwest, though, plans to discontinue those flights next month, a spokesman said, because the routes were not financially successful.

Joe Leonard, chairman and chief executive of AirTran, which battles Delta in Atlanta, said Allegiant had “a very workable strategy; I think they’ll do well.”

Allegiant’s executives, including Mr. Gallagher, the chief executive, declined to be interviewed for this article because of the quiet period imposed before a stock offering.

The airline is also known for charging extra for just about everything besides the seat and the seat belt, a practice widely adopted in Europe by Ryanair. Allegiant gets fees for booking passengers’ hotels and car rental. Food, soft drinks and reserved-seat assignments cost extra — bringing in, during the first six months of 2006, an average of $13.58 a passenger.

“That’s world class,” said Andrew Watterson, a director focusing on airlines at Mercer Management Consulting. Ryanair collected a little more than $10 a passenger last year in ancillary fees, Mr. Watterson estimated, and United, close to $13 a passenger, in large part by selling frequent-flier miles to other companies that use them as rewards. But the mileage business is growing more slowly now, he said, and the unbundling of services once included in the ticket price seems more attractive.

Mr. Watterson said airlines needed new sources of revenue, with spontaneous purchases considered best. With the Internet, passengers hunt for the cheapest fare. But once aboard, they are not so penny-pinching, he said, and are willing to pay for conveniences. “Just as people who buy a two-liter bottle of soda at a discount retailer for 99 cents will pay the same price for a 0.35-liter can at a vending machine,” Mr. Watterson wrote in a recent report.

Costly new planes require Southwest, JetBlue and others to fly an aircraft as many hours a day as possible. JetBlue flies its planes about 13 hours a day. Operating costs are low. Maintenance is light the first few years. And a 737-700, for instance, needs just about 75 cents of fuel for every $1 poured into an MD-80.

But paying so little for MD-80’s, Allegiant lets other factors dictate its schedule, flying its aircraft about seven hours a day. To keep labor costs down, it typically flies a plane to and from a city that is no more than four hours from Orlando or Las Vegas. That way, only a single shift of workers is required. It tries to have all the planes back each night in Las Vegas and Orlando, where maintenance is centralized.

Allegiant workers are not members of unions, which is unusual among airlines. But pilots there recently formed an association and asked for better pay, Allegiant said in the S.E.C. filing. The company and the pilots have been holding talks.

Smaller airports — which suffered a loss of traffic after Sept. 11, 2001 — like Allegiant. Springfield-Branson National Airport in Springfield, Mo., helped attract Allegiant by allowing it to pay to use airport employees as needed, rather than hire its own full-time employees to run the ticket counter and to load bags, a spokesman for the airport, Kent Boyd, said.

With Allegiant’s nonstop flights to Las Vegas, the Branson airport employees have the added enjoyment of seeing celebrities who split their time between Branson and Las Vegas pass through the terminal, Mr. Boyd said, adding, “Tony Orlando — I’ve seen him fly Allegiant to Las Vegas.”

Greater Peoria Regional Airport in Illinois said that 242 people from the area fly to Las Vegas every day. With Allegiant there since March 2004, the airport captures about half those fliers, more than before, while some people still drive three hours to Chicago for a nonstop flight.

Tim Davis, president of Suzi Davis Travel in nearby Bloomington, Ill., canceled the twice-a-year charter flights to Las Vegas he once organized after Allegiant arrived in Peoria, but books a lot of people on the airline.

“The convenience will make people go who wouldn’t go,” Mr. Davis said. Also, as an owner of the airport’s restaurant and bar, he added, Allegiant’s morning flight “has been really good for our bloody mary sales.”
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Old 09-21-2006, 06:54 PM   #2  
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It does kinda help profits to pay a 10 year Captain $105/hr, and a 10 year Fo $49. With crappy work rules, and min days off.

Last edited by Short Bus Drive; 09-21-2006 at 06:56 PM.
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Old 09-22-2006, 04:37 AM   #3  
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Quote:
Originally Posted by Short Bus Drive View Post
It does kinda help profits to pay a 10 year Captain $105/hr, and a 10 year Fo $49. With crappy work rules, and min days off.

They don't even have 10 year Captains or FOs. The company was founded in 1997.
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Old 09-22-2006, 05:16 AM   #4  
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Wow, that pay sucks. At least they fly "old" MD-80's, NWA is still flying the DC-9's.
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Old 09-22-2006, 06:08 AM   #5  
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This strategy was used by TransMeridan and we know what happened to them.
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Old 09-22-2006, 07:24 AM   #6  
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But in Allegiant's case, they do NOT fly at below cost. They do have a small profit for their routes, unlike TransMeridian.
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Old 09-22-2006, 07:51 AM   #7  
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I wonder if Alaska's MD-80s are going there? You would think that Alaska would chop up the MD's they own and make a deal with the leasing company to keep those from Allegiant. No need to help the competition.
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Old 09-22-2006, 08:07 AM   #8  
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Yeah, Mike....but AS doesn't fly to Sanford, Allentown, Moline, Wichita, Des Moines, Grand Rapids or Flint. No real problem of competing if AS MD-80s go there.
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Old 09-22-2006, 08:18 AM   #9  
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Does anyone know the fuel burn per hour of either the 737-700 or MD-80???

I would like to take those numbers, do some math, and see how much MORE MONEY $$$ per day Allegient spends in fuel compared to if they were flying the 737. Then I could see how many years it takes to add up to $40 million dollars per aircraft. If it does that in 10-20 years, their business plan sucks long term. If it takes 30,40,50 years, then Allegient is making a smart decision. But with the price of fuel today, I HIGHLY DOUBT IT!
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Old 09-22-2006, 09:27 AM   #10  
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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)
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