Allegiant Air Misses Targets Due to Comping Flyers for Cancelled Flights

During a choppy fourth quarter, Allegiant Air reported a net profit of $10.7 million, a small haul by the company’s historical standards, but not shabby for a period in which travel companies struggled with fallout from Omicron, the newest Covid-19 variant.

Still, on one metric, Allegiant lagged its goals, and analysts spent much of Wednesday’s fourth-quarter earnings call asking executives about the miss. For the fourth quarter, Allegiant’s CASM ex-fuel was 7.52 cents, or 11.6 percent higher than during the same period two years earlier. That’s a sharp increase for a company that prides itself on near-fanatical devotion to controllable costs.

Some of it is a function of capacity. The more seats Allegiant flies, the lower its unit costs tend to look in comparison. But executives admitted Wednesday they’ve been facing some stubborn cost increases from irregular operations. The biggest chunk of those costs, executives said, come from compensation to customers booked on delayed or cancelled flights.

In just the fourth quarter, the company spent about $23 million on customer compensation. In 2019, the company spent $4-5 million on irregular operations-related compensation for the entire year, Chief Financial Officer Greg Anderson said. Without the extra compensation, Anderson said, Allegiant’s CASM-ex fuel would have been roughly equal to 2019. “Omicron ripped through and that put some pressure on us on the IROPs side,” Anderson said. “And that customer compensation program, that stings for us, to be candid.”

Executives blamed much of the operational trouble on the virus, saying the airline cancelled flights amid an unusually high number of employee sick calls. Drew Wells, senior vice president for revenue, said the airline had about 1,100 controllable cancellations in the fourth quarter, with about 450 coming in the period’s last 11 days.
“Weather was obviously impacted, but the majority of that,” came from Covid,” he said. “Our crew sick calls were north of 30 percent over a five-day period. it was just such a shock to the system.”

Not Just a December Issue

December may have been the worst of it, but Allegiant struggled with higher costs from irregular operations in other periods last year, as well. Last summer, the airline cancelled almost 1,600 flights, compared with only 146 in 2019. Then, the airline blamed a confluence of factors, including staff shortages, issues sourcing jet fuel, and wildfires in the Western United States.

Why is a company known for its frugality being so generous with customers? Executives claimed it is a competitive advantage and suggested they had had no plans to curb the program to reduce costs. “This is compensation we provide in excess of the ticket amount” Anderson said. “We are not aware of any program in the industry nearly as generous.”

Anderson called it an important tool for customer retention. “Importantly,” he said, “our customers impacted by summer IROPs have returned to book at the same rate that those who were not impacted,” he said.

Getting Better?

With Omicron receding, Allegiant told investors to expect first quarter CASM ex-fuel of roughly 6.85 cents, which would be about 3 percent higher than the same period in 2019. While compensation has been an issue, Anderson noted that other costs have risen considerably over the past two years. Ground handling, he said, has become considerably more expensive, while airport charges are expected to increase 7 percent from 2021 to 2022.
Anderson also called out catering, saying costs have increased 10 percent, though he said Allegiant is able to recoup those costs because it charges customers for everything.

To combat the increases, Allegiant has become more efficient. Executives said the company will have 42-to-43 full-time employees per aircraft this year, down from 48 before the pandemic.

What About Revenue?

On revenue, Allegiant was far closer to its 2019 numbers, with total revenue per seat mile decreasing only 3.4 percent. Executives said they were bullish about spring and summer revenue, especially the upcoming spring break period.

“The peak spring break week will be reflective of pre-pandemic revenue in terms of load and the amount of revenue carried by flight,” Wells said. “It probably should be above and beyond, but it’s really hard to tell,” he said.
Wells added that, while it is early, summer bookings are “showing great promise.”

Note: This story was updated to say Allegiant’s CASM-ex was higher in the fourth quarter.