Defying Gravity: Why Allegiant, despite its share of problems, remains a profit champion

Why Allegiant, despite its share of problems, remains a profit championIts boldest experiment ever—flying to Hawaii—was a failure. Now it’s stuck with a half dozen B757s it wouldn’t have bought if not for that venture. So it now has three fleet families, representing a lot of complexity for an ultra-low-cost carrier—most have just one.

Meanwhile, local economies in places where it long tallied big profits—its core U.S. heartland markets, many of which boomed thanks to high oil and agriculture prices—are now suffering. It faces nonstop competition in more of its markets than ever before. It doesn’t have enough trained pilots for all the flying it wants to do, and the pilots who are on the job unionized three years ago, still don’t have a contract and just tried to strike. A recent U.S. security tax increase hits it (like its low-fare competitors) particularly hard. Its longtime president resigned suddenly. And the Canadians who stream across the border and pack some of its most profitable flights have far less spending power now that the loonie has plummeted in value against the U.S. dollar.

So someone who hasn’t looked at a recent airline profitability ranking (see last week’s issue, page six) could be forgiven for being surprised that Allegiant, for all its problems, has the third highest operating profit margin in the entire world (of 71 airlines ranked), nestled in good company between two other ultra-LCC superstars, No. 2 Spirit and No. 4 Ryanair. The difference: no such litany of apparent problems exists for those two.

How in the world does Allegiant continue to defy gravity? And can it continue doing so?

The answer—and the reason its Q1 earnings release Wednesday will surely be another good one—starts with a business model that has long prospered in all kinds of operating environments. Allegiant, in fact, had joined Ryanair as one of the world’s consistent profit high-fliers long before Spirit made its mark. Allegiant’s network, as it happens, actually has a lot more in common with Ryanair than either of the two have in common with Spirit. In Europe, there’s enough demand from major population centers to the continent’s many charming towns—people living in big cities like to visit charming towns—to fill a few low-fare, nonstop flights each week from, say, Manchester to Bologna. So Ryanair flies a few times each week from the big cities to the small towns. In America, there’s enough demand from towns everywhere, where people live, to the giant vacation destinations they want to visit, so Allegiant flips the Ryanair map and collects people from their towns and flies them, a few times each week, to places like Las Vegas and…

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Once the route to salvation for U.S. carriers, international markets are now a minefield, as Delta made perfectly clear in its first quarter earnings presentation last week. No worries though: Delta is still producing massive profits and cash flows, underpinned by highly favorable domestic market conditions as well as lower unit costs. True, bad hedges prevented what would have been a fuel savings bonanza. But Delta still paid less for fuel this Q1 than last, and even on the international front, hedges of another sort—antitrust-immune joint ventures—prevented what would have been more severe revenue degradation.

Don’t get too excited about the turnarounds underway at LOT Polish and Philippine Airlines. Both remain strategically vulnerable to stronger global carriers on the one hand, and leaner low-cost carriers on the other. But 2014 was a recovery year for the two airlines, which each posted profits after a string of annual losses.

For TAP Portugal, by contrast, 2014 was a lossmaking year after a string of annual profits. And 2015? It’s already off to a bad start with vital Brazilian markets sharply weakening. And now pilots are threatening a devastating 10-day strike in the midst of TAP’s privatization process.

As economists debate the future of China’s economy, the nation’s airlines will report strong Q1 profits later this month thanks to cheaper fuel (unblemished by hedges) and bullish Chinese New Year travel.

This week: a heavy lineup of U.S. airline earnings, with American, United and Southwest among those stepping to the plate.


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