A Plummeting Profit Problem?: For Allegiant, not really
There’s a modestly-sized airline—87 planes—whose nonfuel costs are expected to swell some 9% to 12% this year, even as its unit revenues decline. For the first quarter of this year compared to the same period last year, its operating margin declined more steeply than almost any other airline worldwide. It’s losing several top executives, including its well-regarded chief operating officer. Its latest chief marketing officer was on the job for about two months. An expensive new pilot contract will add $30m to $35m in additional costs this year. Occasional stories about its safety record, coming not just from unions but from mainstream journalists too, certainly don’t help its image. Operational woes, especially last summer, didn’t win it any praise either. And the commodity bust hurt many of its best markets.
Who is this troubled mystery airline? Actually, it was the world’s most profitable airline last quarter. And all of last year. And the year before that. The airline is Allegiant. By its standards, Allegiant is indeed going through a rough patch. But it’s falling from extraordinary heights. An outlandish 29% operating margin in 2015 gave way to a still extraordinary 27% in 2016, although the decline was far sharper in the first quarter of 2017, when its operating margin fell to 19% from a freakish 35% the year before—this in what for most U.S. airlines is the worst quarter of the year. The decline stemmed chiefly from reasons afflicting the entire U.S. airline sector last quarter: rising fuel and labor costs, combined with falling yields.
To fall so far yet retain its global profit leadership is a testament to Allegiant’s ultra-durable business model. But in some key respects, the model isn’t the same as it was in years past. Sure, many of the core tenets remain in place: the heavy reliance on ancillary revenues, the predominance of leisure travelers, the exclusive use of internal distribution channels, highly variable scheduling and so on. But in some key areas, Allegiant has changed.
One such area is its network. Critically, the Las Vegas-based airline is becoming less Las Vegas-centric. This quarter, its seat counts from Sin City are down 2% y/y, according to Diio Mi schedule data, and growth for the full year will be only about 3% (for an airline growing by about 13% overall). Back in 2010, Las Vegas was more than twice as busy as any other Allegiant air…
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