Allegiant Air had a good end of the year. The budget carrier known for its low frequency, point-to-point routes to vacation destinations beat analysts’ expectations with an $89 million operating result and 16 percent operating margin in the fourth quarter, a turnaround after losses earlier in the year.
But while solid operations — buoyed by stumbles at competitors like Southwest Airlines — and strong travel demand contributed to its success, Las Vegas-based Allegiant made a windfall from what other carriers have been profiting on for years: Ancillary revenues. The airline brought in an average of $72.94 in additional revenues per passenger — think seat assignments and checked bag fees — in the fourth quarter, up nearly 26 percent from before the pandemic. The annual increase was slightly less dramatic for the full year at up 19.5 percent to an average of $67.74 per passenger. Ancillary revenues grew faster than ticket revenues at Allegiant over both periods, though their share of total per passenger revenues remained slightly less than half.
These extra revenues have long been a boon to budget airlines. Some, like Wizz Air in Europe, bring in more on the ancillary side of the ledger than they do in actual airfares. The revenue source has proven so valuable that even legacy carriers have moved quickly to expand their extras-for-a-fee offerings over the past decade. Today, travelers — no matter which carrier they book — can look forward to at least one webpage asking if they want to buy this or that extra before they can confirm their booking.
The growth at Allegiant was driven by several initiatives underway. One is the upgrade of Allegiant’s distribution and other technology systems. Drew Wells, senior vice president of revenue, highlighted during a fourth-quarter earnings call Thursday the adoption of Navitaire for sales distribution as driving additional revenue growth on the ancillary side of the ledger. The system, provided by Amadeus, is scheduled to come online in the second quarter.
Another ancillary revenue driver is Allegiant’s new premium-esque product, Allegiant Extra. The offering includes extra-legroom seats, a free drink, designated overhead bin space, and priority boarding, all for an extra fee. The airline only had the product on six of its 121 aircraft at the end of 2022, and plans to expand it to 14 by the end of this year, senior vice president of corporate treasury and finance Robert Neal said. However, he cautioned that the full financial benefit of the offering will be more of a “2024 story.”
“The rollout of our Navitaire commercial platform and the expansion of our Allegiant Extra program, both providing air ancillary tailwinds weighted more heavily to the second half of the year,” Wells said.
And Allegiant has other alternative revenue streams that are beginning to pay off. More than 150,000 people signed up for its co-branded credit card with Bank of America last year that pushed total active users to 400,000 — a 60 percent year-over-year jump. Allegiant Chief Marketing Officer Scott DeAngelo said the airline brought in $100 million from the deal in 2022.
To put that $100 million in perspective, it represents just over 4 percent of Allegiant’s total revenue of $2.3 billion in 2022. Delta Air Lines, a leader in co-branded credit card revenue, generated $5.5 billion from its deal with American Express, or nearly 11 percent of its total revenues.
Allegiant, like much of the industry, still had its struggles last year. Aircraft utilization was 6.1 hours a day in the fourth quarter. That’s a significant drop from the average 7.3 hours a day that its aircraft flew three years earlier. And unit costs, measured by costs per seat mile flown, excluding fuel and special items jumped 15 percent from 2019 during the December quarter; total unit revenues, measured by revenue per seat mile flown, increased 21 percent over the same period.
Increasing aircraft utilization and containing costs will be a central focus for Allegiant in 2023, even as the revenue outlook remains strong. Executives warned that expected new labor agreements with its flight attendants and pilots in the second half of the year; continued under-utilization of its aircraft; and slower-than-normal capacity growth would push unit costs up further. Allegiant, known for growing by double-digit percentages annually, only plans to increase capacity by 2-6 percent year-over-year this year. The airline did not provide specific cost growth guidance.
The outlook for revenues is bright this year. In addition to the ancillary growth, executives touted robust demand and booking trends through at least the first half of the year. And, in the event of a U.S. recession, they emphasized the fact that most travelers would likely trade down from more expensive airlines to a budget carrier like Allegiant.
“We have a core base of loyal frequent flyers who drive a majority of our revenue, while at the same time, we continue to add new customers that are defecting from other airlines, namely Southwest and Legacy Carriers to our customer base and record numbers,” DeAngelo said.
Allegiant also expects approval of its proposed international joint venture with Viva Aerobus in the first half of the year. While implementation will take additional time due to needed technology upgrades, the airline claims the pact will allow it to grow significantly with its partner on U.S.-Mexico routes. Allegiant does not currently operate scheduled international flights.
Allegiant turned a nearly $92 million operating profit in 2022. Total unit revenues increased 11 percent compared to 2019 while unit costs excluding fuel and special items rose 14.2 percent. The airline flew nearly 17 percent more passenger traffic on 15 percent more capacity.