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Allegiant posts 27% drop in earnings in 35th consecutive profitable quarter

31-Oct-2011

Following everyone else in the industry, Allegiant reported falling profits on rising revenues as it posted a 27.9% decline in profits to USD9.5 million on a 17% increase in operating revenues to USD191.5 million. Net as a percent of total operating revenue dropped three points to 5%.

Its EBITDA margin, still healthy at 14.4%, was down 2.9 points while its operating margin was down 3.2 points to 8.7%. 

CEO Maurice Gallagher reported revenues continuing to perform well on most metrics in the quarter, which were up 15% or more year on year.

Allegiant will be one of the bidders for the slots being made available from the US Airways-Delta slot swap but has not expressed interest at this stage in the Washington National slots.

Guidance

Allegiant expects October passenger revenue per available seat mile (PRASM) to rise 16-18% while fourth quarter will be up 11-13%. It estimates that fixed-fee revenue and other revenue will be up USD11-13 million in the fourth quarter.

Unlike 2008, when the airline focussed on raising ancillaries 35% to counter the rise in fuel, the demand environment this year has allowed the company to raise fares 25% in the third quarter and 21% in the second quarter, letting ancillaries rise more slowly than in 2008. However, ancillaries are also growing at double-digit rates.

Mr Gallagher also reported that now that fuel has stablised, the company has sufficient unit revenue to operate profitability and has re-instituted growth plans.

By operating one of its four B757s on two routes out of Las Vegas, the airline determined that more seats could be sold in some markets on peak days – Thursday/Friday and Sunday/Monday – and thus is expecting to continue that strategy. Mr Gallagher said it found that it was able to stimulate additional demand by offering the additional 67 seats on the B757s, which surpass the 150-seat MD-80 capacity. The cost per passenger for the B757 was 20% below its MD-80 aircraft. It is also increasing seating density on the MD-80s by 16 seats, which is expected to be completed by the end of 2012, if not sooner.

President Andrew Levy indicated one of the options being considered in its plan to upgrade its fleet is adding more B757s for its mainland domestic operation.

Hawaii is expected to come on line in time for the northern summer 2012, once it gets the okay from the Federal Aviation Administration (FAA) to perform B757 ETOPS operations. It is only now in the initial stages of that application.

System available seat miles are set to grow 6-10% in the fourth quarter but only 0-4% for the full year. Guidance for the 1Q2012 has ASMs increasing 12-17%. Scheduled ASMs will grow 5-9% in the fourth quarter, 0-4% for the full year and 14-19% in the first quarter 2012.

The revenue picture impressed analysts as its guidance was higher than expected but costs did go up on higher engine overhauls set for the quarter. Fourth quarter cost per available seat mile (CASM) ex fuel will rise 7-9% in the fourth quarter and 12-14% for the year. Analysts are expecting cost growth to moderate in 2012.

Major projects under way

The current strategy is to complete its two major projects, increase seat density on its MD-80s and launch Hawaii service with its new B757s. It launched B757 operations in July. The operation is going well profitably since it only takes a moderate increase in fuel burn to generate the additional 67 seat aboard the aircraft.

Its final project is revamping its automation platform, now set to be available when the new Department of Transportation (DoT) consumer fare rule requiring fares to reflect all government taxes and fees as well as any non-government fees imposed by airports and airlines comes into play. This reverses decades of past government policy, with the new rule scheduled to take effect on 24-Jan-2012.

Allegiant joined Spirit in fighting the move as did Southwest, who reported that compliance was taking valuable resources away from its major projects. The three carriers lost a bid to gain a court-ordered stay to several provisions in the new rule including the requirement to hold a reservation for free for 24 hours if it is not within seven days. In addition to requiring an all-in fare on web sites and in advertising, the rule also prohibits airlines from raising prices once a ticket is purchased, a practice being received by some as transformational. This rule will inhibit airlines from increasing the rates on ancillaries between the purchase and travel periods.

Currently, the case is ongoing and Mr Gallagher indicated that all arguments and submissions will be made to the court by March with a ruling expected in the following quarter.

As for the automation work, Mr Gallagher explained that it enables the airlines to offer other products without the fare including hotel, car rentals, ground transport and destination activities. Currently, the only way to book a hotel is to also book an air fare on Allegiant. The change will also mean the ability to book on other airlines as well. The aim is to significantly increase revenues by increasing the flexibility of the system.

“This will be the first enhancement of many to come,” said Mr Gallagher, indicating it hopes to become an online travel agent (OTA). “The ultimate objective is creating an OTA-style system that will enhance our efforts to sell additional hotel and associated packages.” The percentage of sales through its website rose in 3Q2010 to 88.2%.

Allegiant’s web booking has received criticism lately because it pre-checks ancillary services, requiring the passenger to consciously take action to opt out of these service. Critics call it anti-consumer and the government has agreed in the past. This is one of the issues on the mind of the DoT for the next round of consumer rules, with a prohibition against pre-checking ancillary services likely to be part of the next action.

Its hotel bookings outside Las Vegas are growing substantially, including Orlando, where it consolidated operations back to Sanford after a short-lived experiment of also servicing Orlando International Airport. However, it is still unable to reach a deal to sell Disney accommodations but continues to work on it.

Explaining network changes

Allegiant's abandonment of the Long Beach market has caused much comment since it was assumed that it would be where service to Hawaii was launched from. However, Mr Levy explained the company discovered that Long Beach was not a market by itself but rather part of the larger Los Angeles area, and namely the larger Los Angeles International Airport (LAX). Due to this fact, it decided to consolidate its operations at Los Angeles International Airport even though there is already a lot of capacity to Hawaii. He indicated it was a matter of not having great returns out of Long Beach and redeploying to an airport that would.

“LAX is really just one big market, although we thought Long Beach would be its own market especially for Hawaii,” he said. “But we didn’t find that to be the case so we concluded that, if we were going to serve Hawaii, it should be from LAX. We tried to hold on to find ways to use the slots until we started Hawaii but after our experience, it just didn’t make sense to be at Long Beach.

Mr Levy also reported that all the deals necessary to sell hotels and other products in Hawaii were in place, with the airline merely awaiting the launch of the operation.

Mr Levy explained its move to launch Phoenix-Las Vegas service from the Mesa airport gateway in Phoenix, saying that it enjoyed a great deal of origin-and-destination (O&D) traffic, as does Las Vegas. He pointed to the company’s large databases of local passengers at both points to which it can market to.

In addition, available seat miles (ASMs) would jump 17% in the first quarter, half of which will be to new markets and the other half increasing frequency to current markets. It is folding in several new routes in response to the cancellation of service at those points by AirTran. It is doing something similar in the fourth quarter which will contribute a 6% increase in ASMs with service to Orlando from Asheville, NC, Williamsburg/Newport News, VA and Moline/Quad Cities. AirTran is also abandoning Atlantic City in the wake of its merger with Southwest but Allegiant is not interested in that market at this time.

Results

Scheduled service revenue in the third quarter rose 20.5% to USD125.5 million, with air-related ancillaries rising at a slower rate than third-party ancillaries at 3.5% and 16.5%, respectively, to USD44.9 million and USD7.8 million, respectively. Total ancillaries rose 5.3% to USD52.7 million.

Fixed-fee, contract revenue rose 7.8% to USD9.6 million while other revenue in its charter operations rose to USD3.5 million.

Total system ASMs dropped 3.2% to USD1.5 billion while load factor rose 2.7 points to 89.4%. Revenue per ASM jumped 20.9% to USD 12.02 cents as CASM increase 25.4% to USD 10.97 cents.

Scheduled ASMs dropped 3.3% to 1.4 billion while load factor rose 2.6% to 92.2%. Schedule passenger yield jumped 21.2% to USD 9.31 cents while PRASM increased at a 24.5% rate to USD 8.58 cents. Total ancillary revenue per ASM was up 9.1% to USD 3.61 cents. Scheduled TRASM rose 19.5% to USD 12.19 cents.

Mr Levy reported the airline has been able to offset its fuel prices with higher fares resulting in a record high fare during the third quarter at USD120.63. The average fare for the scheduled service rose 21.4% to USD84.94 while the average ancillary air-related charges rose 4.3% to USD30.36. Its third-party ancillary produces rose 17.5% to USD5.31, bringing its total ancillaries per passenger to about USD36.

“Gains in the base air fare, air-related ancillary, third-party ancillary and load factor all contributed to a 19.5% increase in TRASM,” said Mr Levy adding October should be another strong month. “The projected year-over-year gain in PRASM will be between 16-19% despite 5% capacity growth. We expect fourth quarter PRASM to increase between 11-13% on a year-over-year basis, despite capacity growth of between 5% an 9%.”

Net third-party ancillary revenue on its passenger service rose 17.5% to USD5.31 on a 19.9% increase in hotel room nights to 163,000 and a 9% increase in car rental days to 146,000. Ancillary third-party revenues as a percent of gross dropped 0.9 points to 28.7% while as a percent of income before taxes, they rose 17.6 points to 52.6%. Ancillaries per passenger jumped 17.5% in the quarter.

Scheduled passenger revenue per ASM (PRASM) rose 24.5% to USD 8.58 cents while total scheduled services RASM jumped 19.5% to USD 12.19 cents. Load factor rose 2.6 points to 92.2%

Total operating expenses rose 21.1% to USD174.7 million. Total system operating expense per passenger rose at a faster rate than revenues at 19.8% to USD110.71 while the ex fuel expense per passenger increased 9.7% to USD 57.42. CASM ex fuel jumped 14.7% to USD 5.69, besting Spirit’s CASM ex fuel which came in at USD 5.74 cents.

Chief financial officer Scott Sheldon cited a 6.5% reduction in aircraft utilisation and a 2.3% decline in average stage length to 845 while schedule stage length increased 0.1% to 892 miles. Average system stage length dropped 2.3% to 845. As it had in the second quarter, it restricted capacity in the third quarter to offset higher fuel costs and, as with Spirit, it put additional pressure on unit costs.

Mr Sheldon, too, cited rising maintenance costs as well as credit card processing fees related to its increase in scheduled revenue and depreciation and amortisation related to its four B757s, three of which are leased to other carriers. However, maintenance cost growth is expected to peak in 2011 and moderate in 2012.

Finally, he reported unrestricted cash declined during the quarter to USD303 million, down USD14 million from the second quarter. However, he also noted the company raised USD7 million of debt on one of its B757s purchased during the quarter.


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