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View Full Version : Allegiant In The Ny Times

09-21-2006, 07:48 PM
September 21, 2006
Flying Where Big Airlines Aren’t
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.”

Short Bus Drive
09-21-2006, 07:54 PM
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.:(

09-22-2006, 05:37 AM
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.

09-22-2006, 06:16 AM
Wow, that pay sucks. At least they fly "old" MD-80's, NWA is still flying the DC-9's.

09-22-2006, 07:08 AM
This strategy was used by TransMeridan and we know what happened to them.

09-22-2006, 08:24 AM
But in Allegiant's case, they do NOT fly at below cost. They do have a small profit for their routes, unlike TransMeridian.

09-22-2006, 08:51 AM
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.

09-22-2006, 09:07 AM
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.

09-22-2006, 09:18 AM
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!

09-22-2006, 10:27 AM
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)

09-22-2006, 10:46 AM
But in Allegiant's case, they do NOT fly at below cost. They do have a small profit for their routes, unlike TransMeridian.

I would think the market you fly in dictates the numbers on the airplane and they are in the same type of market as TransMeridan.

09-22-2006, 11:55 AM
They are probably paying ten times less in lease payments per month than if they were to lease new 737s. That is very significant. They are paying more for fuel. That is not nearly as significant.

However they must pay a lot more in maintenance. That is really a significant cost that has to be balanced with the lower lease payments to figure out if it is cost effective.

I suspect their model involves little plane utilization, which in turn makes the lower lease payments work to their advantage despite the higher maintenance cost and fuel cost.

In any case their 160 pilots must be lynched for accepting regional wages and below regional work conditions to fly mainline aircraft. :mad:

09-22-2006, 06:35 PM
I would think the market you fly in dictates the numbers on the airplane and they are in the same type of market as TransMeridan.

TransMeridian has been out of business since last fall. They shut down and liquidated because they bid on contracts at lower rates than it cost them to fly them, hence the phrase "Flying Below Cost". They didn't make enough revenue to pay for their expenses, and suddenly they were out of money. They in no way carved a successful niche as Allegiant has. That's why Allegiant is still in business.

09-23-2006, 02:30 AM
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.
Well if they are adding numerous aircraft it is only a matter of time before they do start to compete. Of course, there are bigger more pressing issues right now I know.

09-23-2006, 08:22 AM
I think they have 20 MD-80s now, mostly 1st generation round-dial jets. If they get more, and expand slowly, I still don't see them flying in AS markets. They'll go to secondary airports, and try to feed Las Vegas, not fly LAX/SFO/SEA/PDX-Mexico or Alaska.

How many MD-80s does AS have left?

09-23-2006, 09:16 AM
Actually it's 21 jets: 19 -83s and 2 -87s. All but 2 of our planes have the full EFIS and digital engine parameter representation with the electronic overhead annunciator panel. I believe we are getting another 3 by the end of this year. One more -87 and two -83s. But I'm not sure yet as to their cockpit layout.

09-23-2006, 09:20 AM
The sad thing is.....they will probably get 1000's of resumes for those 70-80 positions they say will be hired next year. Terrible pay compared to the LLC's and Legacies, but better than regionals

09-23-2006, 03:58 PM
In any case their 160 pilots must be lynched for accepting regional wages and below regional work conditions to fly mainline aircraft.

Might want to get your facts right first...:cool:

Allegiant Travel Pilots Form Association, Ask For Raises
Wednesday August 23rd, 2006 / 17h00

WASHINGTON -(Dow Jones)- Allegiant Travel Co., which is planning to go public, disclosed Wednesday that its pilots have formed an in-house association and recently requested pay raises from the company.

The Las Vegas-based low-cost airline, in a document updating the risk factors for investing in the company, said "costs will be affected by the results of discussions with our pilot group and any other employee groups in the future."

In an amended registration for its initial public offering, filed with the Securities and Exchange Commission, the company said it intends to negotiate a mutually satisfactory arrangement with the pilots association.

In its original IPO registration in May, the company said that, unlike many airlines, it has a non-union work force. The company said that if its employees unionize, the move could result in demands that may increase the company's operating expenses and adversely affect profitability.
The company cited its highly productive work force as one of its competitive strengths and attributed its productivity in part to "fewer unproductive labor work rules."

Allegiant said it isn't aware of any campaigns among its employee work groups to establish union representation, but it said the employees could unionize at any time.

Each separate unionized work group would require a collective bargaining agreement, and work slowdowns and stoppages could result if favorable agreements aren't reached, the filing said.

-By Yogita Patel, Dow Jones Newswires; 202-862-1343; [email protected]

09-24-2006, 06:46 AM
hubs in las vegas, and or orlando are graveyards for airlines=national,air florida, delta express, song,primaris,all star. etc. reason= leasiure markets, people only fly there if the fares are cheap, cheap fares dont cover expenses. the casinos know ther will always be a new start-up to take over.

09-25-2006, 02:34 PM

based on info in Boeing's website, 737s burn an roughly 900 gal/hour. Assuming the MD burns one third more fuel than the 737, then the MD burns roughly 1200 gal/hour.

At 7 flight hours/day and 350 days flown, each plane would fly 2450 hours/yr. Transient retail price for Jet A at SFB is $4.40. My guess is Allegiant is paying at least a dollar less. Sooo....

2450 hours/yr X (1200-900)gal/hr difference X $3.40/gal = $2.5 million/yr

That means 20 years to equal the extra $50 million to by a new airplane.

That is a quick and dirty estimate

09-25-2006, 05:01 PM
More quick and dirty. The MD-83 burns about 6200 lbs/hr in cruise Vs. 4200 for the 737-700. These are based on observations at moderate to heavy weights.

09-25-2006, 08:29 PM
thanks for the better numbers. they still yield a difference of about 300 gal/hour (I am using gallons since prices are given in gallons), so 20 years is about right.