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Monday, October 20, 2014         

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Allegiant makes its unusual business plan work

By Scott Mayerowitz

Associated Press

POSTED:


LAS VEGAS » There are no sure things in this city — with one exception: Allegiant Air.

While other U.S. airlines have struggled over the past decade from the ups and downs of the economy and the price of jet fuel, Allegiant has been profitable for 10 straight years.

The tiny airline focuses on a niche ignored by other airlines: It only flies from small cities to sunny vacation spots, such as Hawaii.

Allegiant entices people who otherwise wouldn't fly with low fares and nonstop flights. Then it aggressively pitches them hotels, rental cars, show tickets and other entertainment, earning millions in commissions.

Passengers face fees for almost every service and amenity imaginable. At Allegiant, fees for checked baggage and changing an itinerary — which are common on many airlines — are just the beginning.

The Las Vegas-based airline charges extra to book flights online, or to use a credit card. Selecting a seat in advance costs $5 to $75 each way, depending on the length of a flight. Even a bottle of water costs $2.

Flying Allegiant isn't glamorous. While other airlines tout new aircraft with Wi-Fi and TVs in every seat, Allegiant buys old planes to avoid hefty aircraft loans. And to pack in as many passengers as possible, its seats don't recline. But for small-town Americans with limited flight options, these inconveniences are worth it for a few days of sunshine.

"They could be the worst airline in the world and we'd fly them because we want to go to Vegas," says Tom Mayo of Cedar Rapids, Iowa, who recently flew there with his family. "It's our only option."

Allegiant offers nonstop service from places like Boise, Idaho; Owensboro, Ky., Casper, Wyo. and Appleton, Wis., to popular destinations in Nevada, Florida, Arizona, as well as to Hono­lulu and Maui. These may not be the most coveted routes, but that's precisely why Allegiant likes them.

Only 17 of Allegiant's 203 routes are flown nonstop by another airline.

"Typically, the best way to make money is not to compete with somebody," says Andrew C. Levy, president of Allegiant Travel Co., who sits in a cubicle next to the rest of his staff.

Rather than battle major carriers for customers on routes between major cities, Allegiant uses its marketing muscles to persuade people in small towns to fly away for a vacation.

"Allegiant tends to bring people into the airport who wouldn't normally fly," says Tim Bradshaw, director of the Eastern Iowa Airport in Cedar Rapids. "It brings people off the couch."

Last year, 7 million passengers took a flight on Allegiant. That is a sliver of the 642 million people who took a domestic flight last year. But Allegiant earned a whopping $11.22 each way from those passengers. On average, the airline industry earned 37 cents each way, per passenger, according to Airlines for America, the industry's lobbying group. Southwest Airlines, one of the industry's most profitable carriers, made $3.85 per passenger last year.

Allegiant is ruthless about keeping costs down. Its workers are some of the lowest paid in the industry, in some cases making $20 an hour less than colleagues at other airlines. It pays cash for planes nearly twice as old as everyone else. It only sells directly to vacationers, refusing to pay Expedia, Orbitz or other sites to list its flights.

And if you have a question, it will cost you: the airline doesn't have a toll-free number.

Like some other budget airlines, Allegiant advertises extremely low base fares and then tacks on numerous fees. A round-trip ticket with Allegiant costs $195, on average. But passengers pay an additional $83 in fees — or 30 percent of the total cost of flying.

To book a trip by phone, Allegiant charges $50 for each round-trip ticket; online is $20 per round-trip ticket. The only way to avoid the fees is to buy tickets at the airport, something fewer than 3 percent of its customers did last year.

But whether you book by phone, Internet or in person, paying with a credit card costs an extra $8.

Placing a suitcase in an overhead bin is $10 to $25. Boarding passes signify who has paid the fee. If passengers show up at the airport with a large carry-on bag and haven't prepaid the fee, the airline penalizes them an additional $25 to $50, depending on the route.

But what really makes Allegiant different are the commissions it earns from selling hotel rooms, rental cars and other extras including Everglades boat tours and theme-park tickets. It even gets people to attend time-share sales presentations. Before passengers can finalize a ticket purchase online, they must click through page after page offering these add-ons.

Last year, revenue from commissions totaled $36 million, or nearly $12 per round-trip passenger.

"I don't think of them as an airline. I think of them as a travel company," says Helane Becker, an airline analyst at Cowen Securities.

Once onboard, Allegiant passengers are again bombarded with sales pitches. On a recent flight from Cedar Rapids to Las Vegas, flight attendants came over the loudspeaker and hawked show tickets and airport shuttles. The in-flight magazine is filled with ads for shows and attractions instead of stories. One ad offers $30 off a Las Vegas helicopter tour if purchased from flight attendants, who are paid extra for each item sold.

Most airlines promote their new first-class seats or individual TV screens. Allegiant — which only offers coach seats — promotes its destinations: Las Vegas gamblers smiling after winning at roulette, a hot-air balloon floating over the Arizona desert or a woman in a bikini sipping a frozen drink on a Hawaiian beach.

Like other discount carriers, Allegiant prefers small airports that charge airlines lower rents, even if they aren't the most convenient. In Florida that means flying into Sanford, 30 minutes farther from Walt Disney World than Orlando International Airport.

Frugal decisions like that helped Allegiant post a net profit of $78 million last year on revenue of $909 million. Its 8.6 percent profit margin was the highest of any U.S. airline, making it a darling of Wall Street.

The past five years have been good for airline investors. After a major spike in fuel prices in 2008 and a drop in business travelers, airlines tweaked their business models, adding baggage fees and cutting unprofitable flights. They started to make money and their stock prices climbed. While the S&P 500 climbed 26 percent in the past five years, an index of all U.S. airline stocks has tripled. Allegiant's stock has done even better, increasing more than fivefold to $105.86.

Allegiant has 64 planes and flies to 87 cities, but it's tiny compared with an airline like United, which carried 20 times as many people last year, often on much longer flights.

The airline got its start in 1998 as a charter operation with one airplane. By February the following year, it had started scheduled flights between Fresno, Calif., and Las Vegas.

But its business struggled and less than two years later, it filed for bankruptcy protection. Maurice J. Gallagher Jr., the airline's major creditor and a founder of ValuJet Airlines, gained control during the reorganization and became CEO. ValuJet was a low-cost carrier that changed its name to AirTran after a 1996 fatal crash in Florida.

Gallagher moved the airline from Fresno to Las Vegas; secured a lucrative contract with Harrah's to provide charter services to its casinos in Laughlin, Nev., and Reno, Nev.; and started to transform Allegiant into a low-cost carrier.

"The model evolved out of survival," says Gallagher, who is still CEO.

By 2003, the airline started turning profits, and it hasn't stopped. Gallagher's nearly 20 percent stake in the airline is now worth more than $380 million.

Allegiant benefits from paying lower salaries and having work rules that are more favorable to management than at most airlines. Flight attendants with 15 years of experience are paid $34 for each hour their plane is in the air — $10 to $20 less than colleagues at larger carriers. Planes and crews typically end up at their home cities overnight, avoiding hotel rooms.

Wages could eventually shoot up. Pilots, flight attendants and dispatchers have all voted in the past 2 1/2 years to join unions. The company has yet to sign a contract with any of them.

Thanks to its choice of aircraft, Allegiant has more flexibility than other airlines in deciding when and where to fly.

Instead of buying the newest, most expensive planes, the airline buys used, inexpensive jets. Its planes are 23 years old, on average, compared with the industry average of 14 years.

Each used MD-80 costs $3 million, compared with $40 million for a new Boeing 737 or Airbus A320 of similar size.

"When you have such little investment in an aircraft, you only fly it when it's going to be full of passengers," says Peter B. Barlow, an aircraft finance lawyer at Smith, Gambrell & Russell. "Other airlines don't have that luxury. They need to keep their aircraft in the air in order to make the economics work."

Flying older planes has drawbacks, though. They burn more fuel, something Allegiant combats by squeezing 166 passengers onto planes — 26 more than American Airlines has on comparable jets. They also have more mechanical problems, resulting in more delays.

One of every four Allegiant flights last year was at least 15 minutes late, the worst record in the industry, according to flight tracker FlightAware.

The bigger problem is if a mechanical issue forces a plane to be grounded. Given its limited schedule and packed planes, there usually isn't another flight to book passengers on. Instead, they are left waiting six hours while a new plane is flown in.

Sometimes flights are postponed to the next day. In one extreme situation in March, more than 1,700 passengers flying to and from Hawaii saw multi-day delays, including one flight that was 52 hours late.

That's a lot of time to kill at an airport bar.






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