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Best of Benjamin Spillman

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Benjamin Spillman
 

Airline industry: Allegiant flies clear of fiscal woes

14 April 2008

LAS VEGAS, Nevada -- With most airlines about as appealing to investors as an in-flight movie, Las Vegas-based Allegiant Air continues to defy the industry's downward economic spiral.

Although high fuel prices will almost certainly drag on Allegiant's first-quarter earnings, the discount leisure carrier recently added six MD-80 aircraft to its fleet and is one of just two domestic airlines with more cash on hand than debt -- Southwest is the other.

Allegiant's market capitalization of about $500 million is small compared to Southwest's valuation of more than $9 billion. But, like Southwest, Allegiant employs a different business model that puts it in an advantageous position compared to other domestic airlines.

"Allegiant is one of the few airlines I have seen that has a long-term, viable business plan," said Darryl Jenkins, an airline researcher who is studying the profitability of domestic routes. "They kind of have their cost structure in line with what people will pay."

Allegiant is scheduled to report first-quarter earnings by the end of the month.

According to a recent forecast from Merrill Lynch, Allegiant and Southwest are the only two, free-standing domestic airlines expected to turn a profit in the quarter.

"Ultimately, airlines could be much smaller," the report said in regards to the industry as a whole. "And air travel presently could be peaking as a form of mass transportation."

Allegiant, which takes passengers from small cities around the country to Las Vegas, Florida and Arizona, has already reported a first-quarter traffic increase of nearly 57 percent with an 88 percent load factor, that's the percentage of full seats on a given flight.

"Not a lot of airlines can make that claim," said Robert Ashcroft, Allegiant's vice president of planning.

At the end of 2007, Allegiant had about $72 million in debt and $171 million in cash on hand. The surplus gave the company the ability to pay cash for six used MD-80s at a cost of about $5 million to $6 million each, including the costs to repaint, configure, inspect and perform maintenance to have the aircraft ready to fly in 2009 and 2010. Allegiant has 36 aircraft.

Despite the rosy numbers, the airline's stock continues to hover around $25 per share. That's much closer to the 52-week low of $19.97 than the 52-week high of $38.74.

There are a number reasons why investors would steer clear of airlines, including Allegiant.

For starters, fuel prices are up about 60 percent during the past 12 months. The price significantly raises the cost of doing business for airlines. But a national recession also has Americans feeling poorer, which makes fare increases difficult to swallow.

Allegiant is sensitive to rising fuel costs because it flies comparatively inefficient MD-80 aircraft, which use 25 to 35 percent more fuel than the stingiest midsize jets.

Late last year, company officials decided to cut long-haul routes between Las Vegas and Gulfport-Biloxi, Miss.; Huntsville, Ala.; Springfield and Champaign, Ill.; and Lansing, Mich.

The decision helped the airline trim the average length of flights during the first quarter more than 2 percent compared with last year. Shorter routes help airlines offset the cost of fuel in the same way the owner of a gasoline-guzzling sport utility vehicle benefits from a short commute to work.

In addition to coping with high fuel costs, Allegiant operates an entire fleet of MD-80 aircraft, the type of jet American Airlines recently grounded to comply with a directive from the Federal Aviation Administration to reinspect ties that secure wiring.

Officials are wary of talking about the grounding because tensions are high between airlines and regulators. Both groups have been criticized by Congress.

There's talk that the FAA is cracking down rigidly on airlines after revelations of inspection lapses at Southwest raised questions in Congress about how well regulators are overseeing the airline industry.

But officials at Allegiant, and other carriers, are reluctant to discuss the relationship between regulators and airlines for fear of exacerbating the situation.

"We have to be very careful," Ashcroft said.

So far Allegiant hasn't had to ground any of its flights.

Allegiant's leisure focus, however, means its aircraft are in the air less than others, which would give it flexibility to comply with requests from the FAA without disrupting flights.

A typical Allegiant aircraft flies six to seven hours per day compared to other airlines that may be in the air 11 to 13 hours per day.