Allegiant Travel is more than a low cost airline, it's also a travel agent. But it's a very specialized one. Unlike most airlines, it doesn't emphasize selling high priced tickets to high paying business travelers. They specialize on leisure travelers looking for the best deal while heading toward fun locations. And they have a lot of processes in place that are stealing that market from the big guys.
Allegiant Travel Company, a leisure travel company, focuses on the provision of travel services and products to residents of under-served cities in the United States. The company offers scheduled air transportation on limited frequency nonstop flights between under-served cities and leisure destinations. As of February 2, 2015, it operated a fleet of 53 MD-80 aircraft, 4 Airbus A319 aircraft, 9 Airbus 320 aircraft and 6 Boeing 757-200 aircraft provided services on 229 routes to 94 cities. The company also provides air-related services and products in conjunction with air transportation, including use of its call center for purchases, baggage fees, advance seat assignments, travel protection products, change fees, priority boarding, food and beverage purchases on board, and other air-related services. In addition, it offers third party travel products, such as hotel rooms, ground transportation, and attractions; and air transportation services through fixed fee agreements and charter service on a seasonal and ad-hoc basis. The company was founded in 1997 and is headquartered in Las Vegas, Nevada.
(Summary) (Company) (Chart)
| 24 January 2016 Price $160.51 1yr Target $203.33 Analysts 12 Dividend $1.20 Payout Ratio 12.10% 1yr Cap Gain 26.67% Yield 0.62% 1yr Tot Return 27.29% | EPS (ttm) $9.91 EPS next yr $13.52 EPS next 5yr 35.18% 1yr Price Support $475.63 P/E 16.20 PEG 0.46 Beta -0.06 Market Cap $2.70 Bil Revenues $1.23 Bil Earnings $168.00 Mil Profit Margin 13.65% | 1yr EarnGR 161.72% 3yr EarnGR 45.76% 5yr EarnGR 30.81% 1yr DivGR 20.00% 3yr DivGR --- 5yr DivGR --- Quick Ratio 1.10 Current Ratio 1.10 Debt/Equity 1.90 ROA 18.00% ROE 74.10% |
The Business of Allegiant Travel
Allegiant is a leisure travel company focused on providing travel services and associated products to travelers located in under-served cities in the US. The company was founded in 1997 and, in conjunction with our initial public offering in 2006, the company incorporated in the state of Nevada. Allegiant's unique business model delivers diversified revenue streams from various travel service and product offerings which which is somewhat unique to other travel companies. In addition to operating a low-fair passenger airline marketed to price sensitive leisure travelers on a standalone basis, the company sells bundled travel packages which can include the sale of air-related and third party services and products. Allegiant's developed route network, pricing philosophy, advertising, and product offerings focused on sending customers to premier leisure destinations are all intended to appeal to leisure travelers and make it attractive for them to purchase both travel services and additional products from the company.
Travel related services and products:
Scheduled service air transportation. As of February 2015, Allegiant's operating fleet consisted of 53 MD-80 aircraft, 11 A320 series aircraft, and six Boeing 757-200 aircraft providing service on 229 routes to 94 cities. Based on Allegiant's recent announcements and expectations, its expected that service will have expand to 271 routes and 105 cities by the end of 2015.
Air-related ancillary products and services. Allegiant keeps airfares low by providing unbundled air-related services and products in conjunction with air transportation for an additional cost to customers thus allowing the customer to choose which services they deem of value. These optional air-related services and products include baggage fees, advance seat assignments, Allegiant's own travel protection product, change fees, use of the Allegiant call center for purchases, priority boarding, food and beverage purchases on board, and other air-related services.
Third party ancillary products and services. Allegiant offers third party travel products such as hotel rooms, ground transportation (rental cars and hotel shuttle products) and locality based attractions (show tickets) for sale to their passengers.
Fixed fee contract air transportation. Allegiant provides air transportation through fixed fee agreements and charter service on a year-round and ad-hoc basis.
Other revenue. This segment consists principally of lease payments on aircraft or engines that the company owns and currently being leased to third parties. Allegiant may choose to temporarily act as a lessor for that equipment when they have opportunistically acquired aircraft or engines while on lease to a third party. Upon the expiration of the lease the company usually operates the assets themselves.
Allegiant Travel's Unique Business Model
| Traditional Airline Approach
| Allegiant Approach
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Allegiant has established a route network with a national footprint, providing service on 229 routes between 81 under-served cities and 13 leisure destinations. In most of these cities, the company provides service to more than one leisure destination. The company currently provides service to the popular leisure destinations of Las Vegas, Nevada; Orlando, Florida; Phoenix, Arizona; Tampa/St. Petersburg, Florida; Los Angeles, California; Ft. Lauderdale, Florida; Punta Gorda, Florida; the San Francisco Bay Area, California; Honolulu, Hawaii; Palm Springs, California; and West Palm Beach, Florida. They also provide service on a seasonal basis to San Diego, California, and Myrtle Beach, South Carolina, and have recently commenced service to New Orleans, Louisiana and Jacksonville, Florida.
The geographic diversity of their route network protects them from regional variations in the economy and helps to insulate the company from competitive actions, as it would be difficult for a competitor to materially impact the company's business by targeting one city or region. Allegiant's widespread route network also contributes to the continued growth of their customer base.
In developing this unique business model, the company's ancillary offerings, including the sale of third party products and services, have been a significant source of total operating revenue growth. Allegiant has increased ancillary revenue per passenger from $5.87 in 2004 to $45.93 in 2014.
Allegiant owns and manages their own air reservation system giving them the ability to modify their system to enhance product offerings based on specific needs of their customers without being dependent on non-customized product upgrades from outside suppliers. That also believe that the control of their automation systems has allowed them to be innovators in the industry by providing their customers with a variety of different travel services and products.
Strengths of this Unique Business Model
Allegiant believes that small and medium sized cities represent a large, under-served, market, especially for leisure travel. Prior to the initiation of their service, leisure travelers from these markets had limited desirable options to reach leisure destinations because existing carriers generally focused on connecting business customers through their hub-and-spoke networks. Allegiant has recently begun to serve many of these medium sized cities which those major carriers have reduced service and Allegiant is now filling that void with limited or direct nonstop competition.
These factors provide the company with significant growth opportunities in both small and medium-sized markets. The company believes that their nonstop service, along with low prices and leisure company relationships, make it attractive for leisure travelers to purchase travel services and products from Allegiant. The size of these markets, and Allegiant's focus on the leisure customer, allows the company to adequately serve our markets with less frequency and to target and vary their air transportation capacity to match seasonal and day of the week demand patterns.
By focusing on under-served cities the company avoids the intense competition in high traffic domestic air corridors. In most of their typical small and medium-sized markets, travelers previously faced high airfares and cumbersome connections or long drives to major airports in order to reach their leisure destinations. Based on published data from the U.S. Department of Transportation (‘‘DOT’’), Allegiant believes that the initiation of their service stimulates demand. There's typically a substantial increase in traffic subsequent to initiating new service.
Capacity Management
The aggressive management of seat capacity includes increased utilization of the company's aircraft during periods of high leisure demand and decreased utilization in low leisure demand periods. Management of seat capacity also includes changes in weekly frequency of certain markets based on identified peak and off-peak travel demand throughout the year. Unlike other carriers which provide a fairly consistent number of flights every day of the week, we concentrate our flights on high demand leisure travel days and fly only a very small portion of our schedule on low demand days such as Tuesdays and Wednesdays.
The company's strong ancillary revenue production, coupled with the ability to spread costs over a larger number of passengers, has allowed Allegiant to operate profitably throughout periods of high fuel prices and economic recession. The company prices their fares and actively manages their capacity to target a 90 percent load factor. In addition, their low aircraft ownership costs facilitate their ability to adjust service levels quickly, and maintain profitability during difficult economic times.
Low Cost Structure
Allegiant believes a low cost structure is essential to competitive success in the airline industry. Their operating expense per available seat mile or operating CASM was 10.95¢ and 10.33¢ in 2014 and 2013, respectively. They continue to focus on maintaining low operating costs through the following tactics and strategies:
Cost-driven schedule. Allegiant designs their flight schedule to concentrate their aircraft each night at crew bases which allows them to better utilize personnel, airport facilities, aircraft, spare parts inventory, and other assets. They believe leisure travelers are generally less concerned about departure and arrival times than business travelers so they are able to schedule flights at times that enable the company to reduce costs while remaining desirable.
Low aircraft ownership costs. Allegiant believes properly balances low aircraft ownership costs and operating costs to minimize their total costs. As of February 2015, the company's operating fleet consisted of 53 MD-80 series aircraft, 11 Airbus A320 series aircraft, and six Boeing 757-200 aircraft and their fleet has been substantially less expensive to acquire than newer narrow body aircraft.
Simple product. Allegiant believes that offering a simple product is critical to achieving low operating costs. As such, they sell only nonstop flights. They do not code-share or interline with other carriers, they have a single class cabin, they do not provide any free catered items, they do not overbook our flights, they do not provide cargo or mail services, and they do not offer other perks such as airport lounges.
Low distribution costs. Their nontraditional marketing approach results in very low distribution costs. They do not sell their product through outside sales channels thus avoiding the fees charged by travel web sites (such as Expedia, Orbitz or Travelocity) and traditional global distribution systems (‘‘GDS’’) (such as Sabre or Worldspan). Allegiant's customers purchase their travel only at the company's airport ticket counters, on their website or through their telephone reservation center.
Small and medium-sized city market airports. Allegiant's business model focuses on residents of small and medium-sized cities in the US where the airports have lower operating costs driven by less expensive passenger facilities, landing, and ground service charges. In addition, many of those airports provide marketing support which results in lower marketing costs.
Ancillary product offerings
Allegiant believes that most leisure travelers are concerned primarily with purchasing air travel for the least expensive price so they have unbundled the air transportation product by charging fees for services that many U.S. airlines historically bundled in their ticket price . Allegiant offers instead a simple base product at an attractive low fare which enables the company to stimulate demand and generate incremental revenue as customers pay additional amounts for conveniences they value. Allegiant does not offer complimentary advance seat assignments but for customers who value this product they can purchase advance seat assignments for a small incremental cost. In addition, snacks and beverages are sold individually on the aircraft, allowing passengers to purchase only items they value.
Allegiant's third party product offerings give customers the opportunity to purchase hotel rooms, rental cars, airport shuttle service, show tickets, and other attractions at the time they book their tickets. Third party offerings are available to customers based on agreements with various travel and leisure companies. Allegiant has direct contracts with more than 540 hotel and casino resort properties throughout the country, which allow the company to provide hotel rooms as part of a travel package for their customers. In addition, the company has an exclusive agreement with Enterprise Holdings Inc. for rental cars packaged with air travel. And the pricing and margin of each product can be adjusted based on customer demand because our customers purchase travel through Allegiant's booking engine without intermediaries.
Strong Financial Position
As of December 31, 2014, Allegiant had $416.8 million of unrestricted cash, cash equivalents and investment securities, and total debt of $593.1 million. The company also prepaid their $125.0 million senior secured term loan facility (‘‘Term Loan’’), scheduled to mature in 2017. Their ability to generate operating cash flows with their capital structure has allowed them to grow profitably for 12 consecutive years.
Routes and Schedules
Allegiant's current scheduled air service (including seasonal service) consists of limited frequency, nonstop flights into Las Vegas, Orlando, Phoenix and other Florida, and California destinations from under-served cities across the continental US. Scheduled service route network as of February 2015 were:
50 - Routes to Orlando
44 - Routes to Las Vegas
34 - Routes to Phoenix
35 - Routes to Tampa Bay/St. Petersburg
22 - Routes to Punta Gorda
19 - Routes to Los Angeles
25 - Other routes
229 - Total routes
Marketing and Distribution
Allegiant's website is their primary distribution method but they also sell through their call center and at our airport ticket counters. This distribution mix creates significant cost savings and enables them to continue to build loyalty with their customers through increased interaction with them. Allegiant is also able to utilize customer email addresses in their databases which also provides multiple cost effective opportunities to market products and services. In addition, Allegiant markets products and services to their customers during the flight. Allegiant believes that the breadth of options they offer allows them to provide a ‘‘one-stop’’ shopping solution to enhance the customer’s travel experience.
Their low cost distribution strategy results in reduced expenses by avoiding the fees associated with the use of GDS distribution points. This distribution strategy also permits the company to closely manage ancillary product offerings and pricing while developing and maintaining a direct relationship with their customers. This continuous communication results in substantial benefits over time. And using there own automation system, they have the ability to continually change product offerings and pricing points, which allows them to find the optimal pricing levels for various product offerings.
My Perspective
While I've never been a big fan of the major airlines I've always been favorable toward those smaller airlines that have found a niche in the travel industry. I'm an owner of Southwest Airlines stock and accumulating shares of Alaska Airlines has always intrigued me, but Allegiant Travel is really a unique situation with the potential to be a big winner. Allegiant seems to be doing everything right and it shows in its fundamentals.
Allegiant has identified a specific segment of the travel industry, designed a service to meet the needs of that segment, and then expands into every aspect of that specific business. They've also gotten close to their customers and designed their business around their needs rather than following the precedents set by the majors.
With an extremely high estimated five year earnings growth rate over 35%, a P/E ratio of only 16 and a PEG of only 0.46, this stock may be poised to move significantly higher over the next few years. Add in a payout ratio and the company's small dividend yield may be in for improvements similar to the expected increases in earnings. And that's music to any dividend growth investors ears!
While I've never been a big fan of the major airlines I've always been favorable toward those smaller airlines that have found a niche in the travel industry. I'm an owner of Southwest Airlines stock and accumulating shares of Alaska Airlines has always intrigued me, but Allegiant Travel is really a unique situation with the potential to be a big winner. Allegiant seems to be doing everything right and it shows in its fundamentals.
Allegiant has identified a specific segment of the travel industry, designed a service to meet the needs of that segment, and then expands into every aspect of that specific business. They've also gotten close to their customers and designed their business around their needs rather than following the precedents set by the majors.
With an extremely high estimated five year earnings growth rate over 35%, a P/E ratio of only 16 and a PEG of only 0.46, this stock may be poised to move significantly higher over the next few years. Add in a payout ratio and the company's small dividend yield may be in for improvements similar to the expected increases in earnings. And that's music to any dividend growth investors ears!
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