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From The Survey: Allegiant Travel Company
Allegiant Travel Company (ALGT) is a low-cost passenger airliner that serves travelers in small cities to leisure destinations, including, (but not limited) to, Las Vegas, NV, Phoenix, AZ, Orlando, FL, Tampa/St. Petersburg, FL, and Ft. Lauderdale, FL. The company’s headquarters are located in Las Vegas, Nevada. Founded in January, 1997 by Mitch Allee, Jim Patterson and Captain Dave Beadle, the airline was initially named WestJet Express. Soon, after a trademark dispute with another corporation under the name of West Jet Air Center, the company adopted the Allegiant Air name. In 1998, Allegiant received an operating certificate for scheduled and chartered domestic flights, as well as flights to Canada and Mexico. After going bankrupt in 2000, the company restructured its business model to a more low-cost platform, focusing on smaller markets that larger airliners were not servicing as well. The company exited bankruptcy in 2002.
Allegiant started off with contracts to some local casino partners, including Harrah’s Casino, which it offered charter services between casinos. The company saw an opportunity for bundled packages from various cities to Las Vegas which included airfare and hotels. Allegiant began flying from 13 small cities to Las Vegas in 2004. After going public in November 2006, Allegiant started expanding its services throughout the country, as well as opening new service bases or “focus cities” which included Phoenix, Fort Lauderdale and Washington. The company used these focus cities as service points from smaller cities. The Phoenix-Mesa Gateway Airport expanded in 2008, adding more gates for Allegiant to triple the number of flights from Phoenix.
With a fleet of 56 MD80 jet aircraft servicing about 62 cities, at present, Allegiant has been able to attract customers interested in cheaper airfares from smaller locations, particularly vacationers, with destinations to major and popular tourist cities. Its strategy has helped it remain profitable despite industry challenges, including the 2007-2009 recession and fluctuating fuel prices. Other airliners like Southwest Airlines (LUV) and Spirit Air (SAVE) have adopted similar models which are based on low costs, including lower landing fees due to the use of secondary airports, a reduced schedule, and fewer operating routes and crews required. In addition, ancillary items, which includes baggage fees and on-board food and beverage service, generate a large amount of revenue for the company (approximately 30% as of last year). Other sources of income included fixed-contract revenue which takes in strategic partnerships with resorts, hotels, cruise liners and other product partners.
While the company’s low-cost model seems to be successful, competitive forces from major airliners, such as Delta (DAL), United (UAL), and Jet Blue (JBLU), can be a threat, as companies look to expand to more destinations. Additionally, a high unemployment rate and rising commodity prices will likely pressure demand for leisurely travel. The recent government shutdown will not help either, as it delayed additional aircraft deployments for the company including a number of Airbus A320 aircraft that were initially scheduled to be operational by 2013. Management has looked to offset these particular factors with continued route expansion, particularly in Mexico, where it sees a growing opportunity for additional flight destinations.
A recent event related to an evacuation slide issue has warranted an inspection on the company’s safety measures. Costs associated with this event have hampered results in the recent quarter. That said, the stock has been on an upward track, climbing over 15% in the past three months. Continued share repurchases have helped the company reward its investors, and the possibility of special dividends in 2014 should please them as well. Strong capital management has enabled the company to maintain leverage and flexibility when it comes to fleet expansion. Allegiant has done a solid job maintaining operating leverage and has been able to produce better year-over-year earnings results over the past few years.
While macroeconomic factors will always be key when considering investing in airline stocks, Allegiant has been able to maintain steady margins and a strong capital position. With its attractive low-cost strategy and continued fleet and base expansion, the company seems to have solid footing within the market and should be a viewed as a sound investment if investors are willing to make the commitment. For more information in regard to Allegiant Travel Company’s prospects, as well as the particular investment merits of the stock, subscribers are encouraged to check out our full-page report in The Value Line Investment Survey.
At the time of this article, the author did not have positions in any of the companies mentioned.