Allegiant Air Proves Worth of Its Model as It Bucks Trend of Falling U.S. Airfares

Allegiant Air may have just provided the answer to the questions about U.S. domestic travel demand that have nagged many during the latest quarterly earnings cycle. Leisure demand is good but — and there’s always a but — mostly on the specific days and to the popular destinations that Allegiant excels at flying.

Revenues, yields, and capacity were all up at the Las Vegas-based discounter in the second quarter and, while it does not provide guidance for the third quarter, executives see the trend continuing.

“In as much as demand is slightly below last year’s historic high levels, we believe this simply represents a continued return to normalized pre-pandemic peak and non-peak seasonal travel patterns,” Allegiant Chief Marketing Officer Scott DeAngelo said during Allegiant’s second-quarter earnings call Wednesday. “We continue to view domestic leisure travel in the cities and among the customers we serve as strong.”

The airline reported a $133 million operating profit and 18.6% operating margin excluding special items in the June quarter. Revenues increased nearly 9% year-over-year to $684 million. Total unit revenues, or TRASM, for Allegiant’s scheduled airline business was up 7.5%, and unit costs, CASM, excluding fuel jumped nearly 13%. Capacity was up 0.7%.

Looking ahead at the full year, Allegiant left its guidance largely unchanged at capacity flat to up 3%. It honed its earnings per share target, a rough proxy for profitability, to the upper end of expectations at $10.50-13. And executives said total unit revenues for the nine months ending in December would come in on “the lower side of the [up] mid-single-digit range.”

The performance comes as nearly every other mostly-domestic U.S. airline is looking at an odd summer. After the soaring peaks of demand last year, yields in the U.S. are softening this year. Alaska Airlines, Frontier Airlines, JetBlue Airways, and Southwest Airlines are all seeing it. However, executives uniformly maintain that the underlying demand remains robust albeit more on peak days than others.

This is where Allegiant zigs while the others zag. The carrier is unique in the U.S. in that it typically only flies on peak days and lets its planes sit on others. Its mantra has long been if an aircraft is not flying, it’s not generating expenses. This has enabled it to profitably serve many smaller and medium-sized cities across the country that other carriers have shrunk or pulled out of. And Allegiant is an entirely domestic operator with no international scheduled exposure; it does operate select charter flights outside the country.

Allegiant’s success is what its competitors are talking about emulating. Southwest last week outlined plans to further reduce flying on off-peak Tuesdays and Wednesdays next year to better reflect new travel trends. Frontier will implement similar changes beginning in September. JetBlue is also planning similar adjustments to its schedules.

“I don’t anticipate competitive dynamics to change meaningfully,” Allegiant Chief Revenue Officer Drew Wells said. “The peaks are a peak for a reason. And so in general, I believe it’s a good thing, but the demand patterns fit the Allegiant model just exceedingly well.”

And, asked if Allegiant saw any significant shift in its customers to international trips this year as other airlines have cited for their weaker yields, CEO John Redmond said: “For us, it’s not a displacement argument at all. These percentages are consistent year in and year out.”

With demand good and capacity seemingly in line, Allegiant is looking to other strategic initiatives to boost its results. Its delayed foray into the hotel business, the Sunseeker Resort in Florida, will open this fall with initial returns positive. Investments in new technology are coming online: SAP for internal financial analytics came online in July, and Navitaire for digital and ancillary sales switches on later in August. And demand for its premium-lite Allegiant Extra product is robust with plans to offer the product on all of its new Boeing 737 Maxes that begin entering service next year.

One initiative that has hit a roadblock is Allegiant’s planned transborder joint venture with Mexican discounter Viva Aerobus. On Monday, the U.S. Department of Transportation notified its Mexican counterpart that it was suspending its review of the pact over questions regarding the latter’s implementation of the U.S.-Mexico air service agreement. The DOT cited “recent actions” by Mexico that were affecting U.S. airline operations at the main Mexico City airport, Benito Juarez.

“This does not affect the merits of our application,” Allegiant CEO John Redmond said. “It’s also worth noting that we have readied the areas within our control to be able to launch once [antitrust] is approved.”

Neither the DOT in its letter to Mexican authorities, nor Allegiant management, mentioned the fact that the Federal Aviation Administration still has yet to upgrade Mexico’s aviation safety rating to Category 1 from Category 2, a prerequisite to approving and implementing the Allegiant-Viva Aerobus partnership.