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Best of Benjamin Spillman

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Benjamin Spillman
 

A break in the clouds

30 April 2008

LAS VEGAS, Nevada -- Las Vegas-based Allegiant Travel Co. overcame woes facing much of the airline industry by raking in more than $133 million in revenue during the first quarter, an increase of 58 percent.

The low-cost airline and vacation-seller successfully raised airfares, squeezed an extra $7 in nonfare revenue from each passenger and increased the percentage of full seats on each flight, called load factor, to 87 percent, the highest in the airline industry.

"We had a terrific quarter," said Maurice Gallagher, Allegiant's chairman, chief executive officer and president. "These are the types of increases I thoroughly enjoy."

Yet even high-flying Allegiant couldn't escape fuel costs that rose nearly 104 percent since the first quarter of 2007. Fuel expenses pushed Allegiant's profit margin down to 11 percent for the quarter, down from 17 percent during the same period last year.

"If fuel prices continue at this level, we will fall short of matching last year in second-quarter results," said Andrew Levy, the company's chief financial officer and managing director of planning.

Still, the airline's stock managed to jump $7.01, or 33.7 percent, Tuesday to close at $27.81 on the Nasdaq National Market, making it one of the market's largest small cap gainers, according to SmallCapInvestor.com.

Allegiant's net income was flat at $9.7 million for the quarter. Diluted earnings were down 1 cent to 47 cents per share, but still beat analyst expectations by 13 cents, according to Briefing.com.

For the first time since 2002, when Allegiant emerged from bankruptcy in its current form, the majority of the airline's traffic isn't heading to Las Vegas.

Through expansion in Arizona and Florida, Allegiant diluted the percentage of network flights to Las Vegas to 44 percent, down from about 60 percent last year, Gallagher said.

"We have truly become a national company," he said.

Meanwhile, the financial future of much of the domestic air transportation industry is cloudy thanks to rising fuel costs, sinking consumer confidence and ill-conceived airline business models.

In recent weeks, several carriers have filed for bankruptcy protection and some have already stopped flying. Major carriers such as Delta, Northwest, United Airlines, Continental and, according to some reports, US Airways, are considering mergers.

The turmoil is being felt in Las Vegas, where traffic at McCarran International Airport has been in decline since November. The most recent figures for McCarran showed a 1.7 percent decrease in passengers during March, even though Las Vegas hosted one of its biggest-ever conventions during the month.

"If high fuel prices persist, the industry is going to reduce capacity," Gallagher said. "It has no other choice."

But rather than be caught in the turbulence of problems shaking the industry, Allegiant manages to skirt around dark clouds and find opportunity.

Since the first quarter of 2007, Allegiant has grown from 71 to 103 routes to destinations in Nevada, Arizona and Florida. The network of source cities increased from 46 to 53.

During the same span, the company has managed to cut the average length of its scheduled flights 2 percent to 907 miles, a move it says saves fuel and lowers costs.

During that same period the airline increased ancillary revenue per passenger -- the amount of money it gets on everything from hotel and rental car kickbacks to charges for checked bags and assigned seats -- nearly 36 percent to $25.75 per passenger.

Company officials expect the airline to scoop up new passengers as struggling airlines abandon small-town airports that are Allegiant's core markets.

Allegiant is also benefiting from broader economic woes in Las Vegas and around the globe.

The tourism slump in Las Vegas is making hotel rooms cheaper, which makes travel more attractive to Allegiant customers who can get better rooms without spending more money.

Gallagher said room prices at Allegiant's hotel partners in Las Vegas are down as much as 25 percent, an indication that demand is down.

And global economic forces, like a plunging dollar and soaring commodity prices, are benefiting farm communities in America's agricultural belt, the source of many Allegiant customers.

The weak dollar may also be contributing to demand for Allegiant flights from Bellingham, Wash. The airline flies from Bellingham to Palm Springs, Calif., Reno, Las Vegas and Phoenix. It plans to add San Francisco and San Diego beginning in June.

Bellingham's proximity to Vancouver, British Columbia, is attracting Canadian customers who prefer the convenience of a small airport and want to take advantage of the relative strength of the Canadian dollar.

Demand from Bellingham prompted Allegiant to add a crew base there in March and include the California cities that aren't part of its major leisure destination structure.

It could prompt company officials, however, to make San Francisco and San Diego available to more Allegiant markets.

"We also like to experiment, so we will play with it and see how the results come in," Gallagher said.