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Benjamin Spillman

Allegiant revenue up as fuel costs eat at profit

24 July 2008

LAS VEGAS, Nevada -- Las Vegas-based Allegiant Air can't escape sky-high fuel costs but the airline did boost revenue 48 percent to $132 million in the second quarter, in part by scooping up passengers more troubled carriers left behind.

The gain was enough to help Allegiant outrun a 40 percent increase in fuel prices during the past six months, but not by much. The company's profit, or operating margin, slipped below 4 percent in the quarter, a decrease from a 16 percent margin during the second quarter last year.

Earnings per share were down almost 75 percent for the quarter to 13 cents. That was 1 cent less than Wall Street analysts expected, according to one survey.

Investors apparently paid greater heed to the profit decline than the revenue increase. Shares of Allegiant Travel Co., parent of Allegiant Air and Allegiant Vacations, fell $2.67, or 10.65 percent, to close at $22.39 on the Nasdaq National Market. The shares recovered slightly in after-hours trading, rising 67 cents to reach $23.06 by 6:30 p.m. PDT.

Allegiant officials say that they made more than they spent while the rest of the domestic airline industry is in shambles, thereby showing the durability of their business model.

"We can produce strong profit margins at any fuel price," Allegiant Chief Financial Officer Andrew Levy said. "We have the unique ability to be very nimble."

The airline made money by squeezing more people onto each flight, extracting more cash from customers in-flight, flying shorter routes to save fuel and taking advantage of the Las Vegas tourism slump by offering cut-rate deals on hotel and airfare packages.

Allegiant officials also believe their business model of flying from small towns to tourist destinations such as Las Vegas, Phoenix and Florida has another advantage. Their customers live in communities that haven't been hit as hard as big cities during the real estate and credit market crashes.

They cited a recent survey that identified the 10 most creditworthy cities in America and pointed out that six of those communities are in the Allegiant network.

As a result, they have a customer base with money to spend and a connection to destinations desperate to attract business, even if it means selling hotel rooms at rock-bottom prices.

The airline sells about 30,000 room-nights monthly at its destinations, officials said during a conference call. Although that number remains consistent, they said customers are using their increased spending power to get nicer rooms, especially in Las Vegas.

"We regret the tough times for them, but it is frankly working to our advantage," Ponder Harrison, Allegiant's managing director of marketing and sales, said of the recession-time bargains available through hotels and rental car companies.

During a conference call Wednesday, Allegiant officials also discussed the state of the company in the first half of 2008.

So far this year, Allegiant revenue is up 53 percent to $265 million. Net income, or the amount of money left after paying bills, was down almost 38 percent to $12.3 million.

The decline was attributable to the price of fuel jumping from $2.64 to $3.70 per gallon during the period.

To try to outrun fuel costs, Allegiant cut long-haul routes from Illinois and Indiana to Fort Lauderdale, Fla., and added routes from California to Las Vegas. The changes helped lower average stage length, the distance of any given flight, from 924 to 894 miles. As a result, the airline was able to increase departures by 36 percent and fuel costs by 29 percent.

It also increased load factor, the percentage of full seats on a flight, to 94 percent in June, which helped reduce the gallons of fuel per passenger from 20 to 18.

Ancillary revenue, money from charges in addition to airfare such as assigned seats or checked bags, increased 34 percent to $26.75 per passenger.

The airline also benefited from the woes of other airlines. High fuel costs are forcing major carriers such as US Airways, Delta, United and others to drastically cut flights. Small communities such as the ones Allegiant serves are bearing a disproportionate portion of the cuts.

Allegiant officials say they've lost competitors in Eugene, Ore.; Toledo, Ohio; and Lansing, Mich.

Fewer competitors will make it easier for Allegiant to raise fares without losing customers, a necessity if the airline intends to stay in the black with jet fuel costs at an all-time high.

"Increasing revenue is the only possible recourse," Harrison said.