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Allegiant revenue soars despite fuel costs

31 January 2008

By Benjamin Spillman

LAS VEAGS, Nevada -- High oil prices didn't stop rural America from flocking to Florida's beaches or the bright lights of Las Vegas, if a 48 percent revenue increase for Allegiant Travel Co. is any guide.

Executives at Las Vegas-based Allegiant Air said Wednesday that a 39 percent increase in fuel costs cut into fourth-quarter profits but the niche carrier still posted a double-digit margin for the year.

The low-cost vacation airline hauled in nearly $361 million in revenue for the year and made $44 million in profit, a margin of more than 12 percent.

Allegiant stock rose 12 percent Wednesday, closing the day at $26.61 on the Nasdaq National Market. The stock, however, is still 18 percent lower than it was one year ago. Allegiant also announced a $25 million stock repurchase plan.

Allegiant managed to keep profits up while other airlines struggled, in part by squeezing customers harder with extra charges for preferred seating, checked bags and sales of trinkets coordinated with its Nevada, Arizona and Florida destinations.

So-called ancillary revenue jumped 34 percent in 2007 to $21.53 per passenger for a haul of nearly $65 million, about 18 percent of overall revenue.

Allegiant's niche of ferrying passengers from small-town airports in places such as Duluth, Minn., and Peoria, Ill., to vacations in Las Vegas, Florida and Arizona remains untapped by competitors.

That makes it possible for the airline to keep posting profits while much of the industry is losing money, cutting service and contemplating consolidation.

"They are this hidden airline," said Jay Sorenson, president of IdeaWorks, an airline consulting firm in Shorewood, Wis. "They lurk below the surface in these secondary markets."

Allegiant executives are already implementing plans to keep the company in black ink in 2008 despite there being no relief in sight from high fuel costs.

During a conference call to discuss the 2007 earnings, they said the soft economy will keep the cost of Las Vegas hotel rooms in check, which could prompt more Allegiant flights as well as hotel bookings through the company's Web site.

Allegiant's nimble operation also makes it easy for the airline to cut unprofitable routes and shift resources to more lucrative flights.

The lack of competition in Allegiant's small-town markets also helps. In the past year, the airline increased its charges for checked bags and assigned seats and still managed to increase its load factor, the amount of seats filled on a given flight, to more than 81 percent, one of the highest rates in the industry.

"If this is a recession, we can't wait for the good times," said Ponder Harrison, Allegiant's executive director for marketing and sales.

But the skies aren't entirely friendly, even for the highly profitable Allegiant.

In 2007, the price it paid for a gallon of jet fuel increased almost 39 percent to $2.90. The first quarter of 2008 will bring a tough comparison to 2007, when Allegiant posted a 17 percent profit margin.

In the fourth quarter of 2007, revenue was up almost 60 percent to $101 million. But the profit margin of 6 percent was only about half of the fourth-quarter margin in 2006, due largely to rising fuel costs. Fourth-quarter operating income of $6 million was a decrease of almost 18 percent from 2006.

"It will be difficult for us to match first-quarter market performance if fuel prices stay at existing levels," said Andrew Levy, Allegiant's chief financial officer.

That could prompt the airline to cut more long-haul routes from its schedule in an effort to preserve the profit margin by saving fuel.

"If we determine we need to slow our growth ... then we will do so," Levy said.