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Las Vegas-based Allegiant Air is an American LCC, operating a highly successful and unique business model linking mostly regional cities and tourist destinations with low-frequency MD-80 service across the US. In addition to Las Vegas, Allegiant operates scheduled service to its hubs in Orlando, Tampa, Fort Lauderdale, Phoenix, Bellingham and Los Angeles. The carrier has annouced plans to acquire Boeing 757 aircraft to begin service to Hawaii.
Location of Allegiant Air main hub (Las Vegas McCarran International Airport)
Allegiant Air share price
LCCs will continue to evolve into hybrids of the original core model. CAPA and OAG consider Allegiant Air fits the LCC profile and it is included in our reporting on this basis. Please note: when reporting for an airline is changed from or to LCC the historical data is not affected and it can lead to a distortion in the current reported data. Contact us if you have any queries.
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Profit growth of nearly 98% by Spirit Airlines in 3Q2013 was dampened by the carrier’s revelation that it will encounter some cost headwinds at YE2013 and into 2014. These are driven by possible expenses related to an engine failure incident that occurred in Oct-2013, increasing costs due to new flight duty and rest time regulations for pilots and a 22% average growth rate during the next couple of years.
As those warnings cause some uncertainty around the carrier’s unit cost containment, Spirit’s rapid expansion into the continental US during the past few years is resulting in a typical pattern of perhaps strong 1Q and 3Q profits, and 2Q and 4Q performances that do not quite reach the levels recorded in the peak periods. The airline has stated that its 4Q2013 results should be similar to 1Q2013 – when top-line revenue grew 23% and net income increased 31% year-on-year.
After experiencing challenges in deploying its business model from the US mainland to Hawaii, conservative is the key word underpinning Allegiant Air’s strategy to expand into the Mexican market, which will appear in the carrier’s route map in Jun-2014 when it deploys flights to Mexico from its largest base and headquarters of Las Vegas.
Mexico has been on Allegiant’s radar even before the carrier first tabled plans to introduce service to Hawaii in 2010 and finally launched its Boeing 757-operated flights from the US mainland to Hawaii in 2012. As far back as 2008 Allegiant mentioned Cabo San Lucas/Los Cabos, Puerto Vallarta and Cancun as potential destinations that would fit its model of introducing service from smaller US markets to large leisure markets.
Allegiant also launched its Hawaii platform from Las Vegas and still operates two weekly flights on the pairing even as it is adjusting capacity in some of the smaller markets it serves from Hawaii as filling the 217-seat aircraft (check this) has proven to be a challenge.
The timing of Frontier Airlines’ parent Republic Airways Holdings disclosing that it had reached a non-binding deal in its long-awaited sale of Frontier followed by an announcement by Spirit Airlines that Indigo Partners was divesting its stake in the carrier, fuelled intense speculation that Indigo’s head Bill Franke was circling around Frontier. Mr Franke also resigned as chairman of Spirit’s board of directors.
It would seem logical for Mr Franke to make a move to purchase Frontier given Indigo’s ties to low-cost carriers Volaris, Wizz Air, Avianova and Tiger Airways. But the unfolding events pose an interesting question as to whether the mature US market really needs another ultra low-cost carrier (ULCC), and if Frontier can successfully transform itself into a true no-frills carrier based in Denver. Mr Franke, a shrewd operator, may think so.
Behind solid financial performances recorded by US carriers Allegiant Air and Hawaiian during 2Q2013 were challenges each carrier continues to face in their respective expansion strategies – Allegiant from the mainland to Hawaii, and Hawaiian on its rapid long-haul expansion into Asia and Australasia.
Allegiant is introducing a slight shift in its Hawaii strategy by launching service from Los Angeles to Honolulu, which runs somewhat counter to its long-standing model of offering service from small US markets to large leisure destinations. Hawaiian, meanwhile, assures its long-haul expansion will slow in the near future as it works to improve its performance in some of those markets, which have been challenging for a number of reasons.
As each carrier works to improve its fortunes in new areas of expansion, Allegiant and Hawaiian did post respectable results during 2Q2013 as Allegiant’s top-line revenues increased nearly 11% to USD256 million while year-on-year profits grew 2% to USD26 million. Hawaiian grew top-line revenues by 10% to USD533 million, and recorded a healthy increase in profits from roughly USD4 million to USD11 million. (See background information.)
Consolidation - and route reductions and higher fares - in the US market place are creating opportunities for the new breed of ultra low-cost carriers (ULCCs) led by Spirit Airlines, which set out on a path in 2006 to achieve unit costs among the lowest in the market. As Southwest’s costs are beginning to mirror those posted by legacy carriers, Spirit is leading the charge to capture traffic the soon-to-be three big full service network carriers no longer find attractive.
Capacity reductions that have resulted from both consolidation and a revamping of the airline business in North America have also created three distinct business models in the region – full service network carriers, hybrids and ultra low-cost airlines. Strong contenders have emerged in each category. The remaining carriers either need to carve out a new niche or adapt to the new maturity taking hold in the market place.
Recently Southwest CEO Gary Kelly declared the carrier has been, “a disruptive force for five decades”. But while the company has taken great care to preserve its pioneering low-cost and low-fare image (neither of which still neatly applies), full service carriers have fundamentally changed their businesses - at the same time as ultra low-cost airlines and hybrid carriers have structurally evolved the business model on which Southwest has built its legend.
As the strict adherence to Southwest’s simple low-cost carrier playbook has been abandoned by the new breed of hybrid carriers that began making their marks during the early to mid-2000s, Southwest has undergone its own subtle transformation, albeit on its own terms. The downside of maintaining a pioneering image is the constraints it sometimes creates in attempting to alter outdated elements of a business.
Southwest’s influence in the respective evolving airline business models – revamped full service carriers, hybrid airlines and ultra low-cost operators – has arguably been diminished as its conservative approach has resulted in the carrier moving slowly to embrace new approaches to its business. Southwest as a consequence will be less disruptive in the coming decades as it works to determine where it falls in a US market place which may be about to reach a new level of maturity as the mergers creating three large network carriers take full effect.
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