When nobody expects much from a company, it's usually pretty
easy to please the audience. And there aren't many sectors that
have such low expectations as commercial airlines.
In this bleak industry, it's often a struggle just to avoid
bankruptcy -- let alone generate any real profits for shareholders.
So when you find a company that's able to do so, you know you can't
And I know a small airline that does just that. In fact, I think
it's poised to buck the trend of this "hated" group of stocks and
post significant gains for shareholders.
If you live in a small city, then you've probably heard of
Allegiant (Nasdaq: ALGT)
. But what you may not know is that Allegiant has been able to
deliver profits for 36 consecutive quarters. Considering the fact
that we're talking about the airline sector, that's quite a streak.
What makes Allegiant different from the competition is its focus on
small to mid-size cities. While the big boys battle in major hubs
such as Atlanta and Chicago, Allegiant has made inroads into 65
less-penetrated markets, including Bangor, Maine; Fayetteville,
Arkansas; and Eugene, Oregon. In each case, the company flies only
to major resort destinations such as Tampa, Orlando and Los
In the interest of full disclosure, I recently booked a direct
flight departing from Shreveport, Louisiana, to Las Vegas for about
$220. Booking through one of the majors would have cost at least
$100 more per person. And it would likely involve the hassle of
connecting in a large airport such as Houston or Dallas.
It's easy to see why leisure travelers like Allegiant. But how is
the airline making any money for investors?
For starters, this is a no-frills outfit. You're not going to get
gourmet-quality food and all the latest technology at your
fingertips when flying on this airline. Second, having fewer routes
reduces expenses. The company also schedules just a few flights per
week and can adjust capacity to meet seasonal demands, so there are
few empty seats. Finally, most of its fleet comprised of Boeing
MD-80s, a low-cost, fuel-efficient aircraft.
The company does spend a bit more on aircraft maintenance than its
peer group (which, as a passenger, I don't mind so much). But it's
able to counteract this with lower expenses from labor, fuel and
other miscellaneous costs.
That's not to say Allegiant is cutting to the bone to attract
passengers. It doesn't have to. The company runs 178 regular routes
and only has competition on 12 of them. And if you've ever flown
with Allegiant (or any other budget airline), then you know the
company is also very good at extracting money after you get to the
airport -- baggage fees, seat reservation fees, snacks, etc.
All of this helps explain why Allegiant sports an operating cost of
just $0.109 per available seat mile. This compares favorably even
with other low-cost carriers such as
JetBlue (Nasdaq: JBLU)
at $0.112 and
The company also coaxes many of its passengers into bundling their
vacation packages. Last year, Allegiant fliers booked more than
570,000 rental car days and 650,000 hotel nights. Ancillary revenue
from these third-party operations jumped 19% to $106 million, $30
million of which was gross income. That's a lofty
of nearly 30%.
Allegiant has grown by leaps and bounds in the past few years. In
2008, the company had 36 planes that flew 4.4 billion miles. Last
year, the fleet expanded to 57 planes, flying 6.4 billion miles.
During the same time frame, averages fares and ancillary add-ons
ticked up 10% to $125.
and stronger pricing,
leapt by nearly 50%, rising from $1.73 to $2.57 per share. And in
all four quarters of 2011, the firm's bottom-line total either
matched or beat consensus targets.
There should be more of the same in 2012. In the past few months,
analysts have already raised their
earnings per share (
forecast from $3.88 to $4.01. Some have also lifted their outlook
for the stock. Deutsche Bank has raised its share
from $65 to $75. (The stock currently trades around $58.50.)
All signs point to a banner year. Traffic to the firm's website is
up sharply. Allegiant's footprint is also expanding into new
markets, and the company is adding eight new routes, including
Hawaii. At the same time, Southwest Airlines is abandoning 10 to 12
markets where Allegiant operates.
As for departures, management is expecting a 13% to 17% increase
this quarter, followed by an even stronger 16% to 20% bounce next
When times are good, Allegiant generates about $3.5 million in
from each of its planes. And we've just seen 11 new jets enter
service, the biggest expansion in company history. This couldmean
an additional $35 million to $40 million on the
this year, a potential increase of more than 20%.
Risks to Consider:
Rising fuel costs, slower leisure travel and air safety
concerns all represent potential hazards.
Action to Take -->
Those who are afraid of airline stocks can take some solace from
the fact that Allegiant has delivered net profits every quarter
since 2003. The company routinely posts superior returns on capital
in the upper-teens to lower-20s.
The stock is an attractive play on a gradually rebounding labor
and stronger discretionary consumer spending. (Vacation travel
tends to spring back before business travel.)
Allegiant Travel started off strong in 2012, with January passenger
traffic rising 7% to 417,656 fliers. The
are already near a
, but I think they'll continue to climb, potentially reaching as
high as $70.
-- Nathan Slaughter
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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