Allegiant Travel Boosts Planes And Places For Profit

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W ith the announced rollout of more than 20 new nonstop routes and the purchase of eight used planes, Allegiant Travel Co. seems to be on a spending spree.

But the low-cost air carrier isn't prone to splurging. Its unique strategy has led some analysts to call it "the best business model in the industry," venturing that it will be "the most profitable airline in the world" in 2015.

As other major airlines have cut back on flights to smaller and midsized airports,Allegiant ( ALGT ) has seized on the opportunity, taking the route less traveled by competitors -- but not by its target market, vacation-goers.

"The core of the business is to offer leisure customers travel when they want to travel," Allegiant Senior Vice President of Planning Jude Bricker told IBD.

Its most recently announced nonstop route, Hagerstown Regional Airport in Maryland to St. Pete-Clearwater International Airport in Florida's Tampa Bay area is a good example. A quick search onExpedia ( EXPE ) for an HGR-PIE flight around the July 4th weekend turns up zero results from the more-than-400 airlines that make tickets available on the website.

"Certainly in the airline industry, where one worries about competition a lot, this is an airline that has very little competition," CRT Capital Group analyst Michael Derchin told IBD. He has a buy rating on Allegiant stock, and says the airline is on track to be the industry's most profitable this year.

Flying Under The Radar

The company has no competition on 221 of its 251 routes, said Derchin in a Feb. 5 research note. Other seasonal nonstop routes announced last week include Little Rock, Ark., to Los Angeles; Cincinnati to Savannah (Ga.)/Hilton Head and Indianapolis to Myrtle Beach, S.C.

Unlike other carriers that offer round-the-clock trips, Allegiant opts for low-frequency flights that it can fill.

"(With other airlines) it's all about high utilization, lots of capacity, low fares, stimulating traffic," said Bricker. "We use a lot of the same aspects, but we fly low utilization so we can schedule around demand instead of scheduling where we think demand's going to be."

The company has the "highest load factor because they put capacity out when they feel like they can fill the airplane," said Derchin.

On the 30 Allegiant routes that are serviced by rivals too, Allegiant generally does not offer daily flights. Derchin noted that during off-peak periods, over 80% of the airline's routes offer "only two flights a week and 95% less than daily service."

Yet another unusual strategic move? Buying used jets.

Last week, the company said it had agreed to purchase two used 177-seat A320 aircraft and six used 156-seat A319 aircraft. The A320s, currently operated by Philippine Airlines, will become part of the Allegiant fleet toward the end of the year, the company said. Two of the A319s will be bought this year, with the rest to be purchased in 2016.

Fleet Provides Flexibility

The airline owns 70 planes, said Bricker, which include 53 MD80s and six 757s, the latter of which are used for flights to Hawaii. Allegiant exclusively buys planes, rather than leasing them, but it does own 12 aircraft that it leases to others. There are no plans to expand on the leasing side. The company is in the midst of a multiyear transition from MD80 aircraft to A320s.

As oil prices change, Allegiant's lack of fuel hedges gives it more flexibility.

"We scheduled the airline to optimize margins, and when things change, with fuel falling over the last 8 months as it has, we take that as direct benefit to operating earnings," said Bricker, who noted that the airline consumes 120 million gallons annually. "Every flight profile has a different earnings potential. As fuel prices change, we can cancel flights that aren't going to earn acceptable returns."

Oil Prices And Airplanes

Stifel Nicolaus analyst Joseph DeNardi said in a research note on Jan. 28 that Allegiant has "the best business model in the industry" and is in the best position to benefit from falling oil prices, in part because of a lack of competitive capacity growth in key markets and its ability to increase aircraft utilization to boost available seat miles ( ASM ) growth. DeNardi also noted the company's lack of fuel hedges and expected fuel savings from a relatively less fuel-efficient fleet.

Notably, less-traveled routes don't translate to less profitability.

Allegiant's fourth-quarter earnings, reported on Jan. 28, nearly doubled to $1.83 a share from 94 cents a year earlier and topped views for $1.72. Revenue grew 17% to $279 million, ahead of expectations for $276 million, in what CEO Maurice Gallagher said was Allegiant's 48th straight profitable quarter.

East Coast total revenue per available seat mile (TRASM) rose 1.3% as market capacity in the region climbed 24.9%. The company said that East Coast flights made up 48% of its network, up from 42% the year before.

After consolidating in October, Allegiant stock has continued to climb steadily.

In IBD's Transportation-Airline industry group, Allegiant tops the list at a 99 Composite Rating, meaning it has outperformed 99% of stocks, based on technical and fundamental factors such as earnings and revenue growth.

Southwest Airlines ( LUV ),Alaska Air Group ( ALK ),JetBlue Airways (JBLU) andSpirit Airlines (SAVE) round out the top five.

For January, Allegiant's scheduled service revenue passenger miles (RPM) grew 5.1% from a year earlier, as ASMs increased 3.2%. Load factor rose 1.5 points to 86.5%. Departures increased 7.1%. For Q1 2015, the company sees departures up 6%-10% and ASMs up 2%-6%.

Higher-ups at the airline have good reason to want the company to be profitable -- management owns 20% of its stock.

Says Bricker of CEO Gallagher: "He's bullish. He thinks that the stock has room to run and he can't find anything better to do with his money, so he's putting it here."

Analysts polled by Thomson Reuters expect Q1 EPS growth of 81% from a year ago to $3.36 on a 5% revenue rise to about $317 million.

Stifel's DeNardi expects 2015 PRASM to decline 10% and TRASM to fall 4% to account for higher ASM growth past Q1. He says the figures will likely include increased utilization and off-peak flying that is "particularly dilutive to PRASM (but accretive to margins)."

CRT's Derchin notes that 10%-15% capacity growth a year is "manageable," as the company adds about eight aircraft to its fleet annually. The company expects to have 80 aircraft in its fleet in 2015.

Does he see any major roadblocks to Allegiant's success?

"Not really," he said. "This is a company that has more control over its own destiny."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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