21-Apr-2009 4:32 PM

Allegiant Air – Another stellar financial performance in 1Q09

Analysis

Allegiant Air reported a 6.7% year-on-year revenue increase to USD142.1 million in the three months ended 31-Mar-09 (1Q09), on the back of year-on-year improvements in load factors, ancillary revenues and average passengers per departure. A substantial reduction in costs, driven by a nearly 50% reduction in the per gallon cost of fuel, resulting in a near-tripling of the carrier's operating margins and a record EPS for the company.

1Q09 also marked a return to capacity growth for the LCC, after a pullback at the end of 2009.

Allegiant financial highlights for three months ended 31-Mar-09

Currency: USD		% Change
Revenue (mill)	142.1	+6.7%
Operating costs (mill)	97.6	-17.8%
Operating profit (mill)	44.5	+209.6%
Operating margin	31.3%	+20.5 ppts
Net profit (loss) (mill)	28.2	+191.2%
Operating revenue per ASM^	10.67	+1.8%
Operating costs per ASM (cents^)	7.33	-21.6%
Operating cost per ASM (exc fuel) (cents)^	4.82	+10.8%
Traffic pax (mill)^	1.3	+12.1%
Traffic RPMs (bill)^	1.2	+9.8%
Capacity ASMs (bill)^	1.3	+4.9%
Load factor (%)^	87.6%	+4.0 ppts

According to CFO and Managing Director Planning, Andrew C Levy, "we are very pleased with our first quarter financial performance. We held our own in a challenging revenue environment, more than offsetting fare weakness with increased load factors". He added, "at the right price we continue to find strong demand for our product. Should fuel prices remain at current levels, earnings and free cash flow will once again be exceptional".

Allegiant was the only US mainline carrier to have posted net profits in every quarter of 2008, with the consistently profitable LCC likely to be one of the best performing carriers in the current quarter and 2009 in general. These positive prospects for 2009, supported by the carrier's string of industry-leading financial and operating performances, contributed to the carrier's share price performance this year.

Allegiant share price: Jan-2009 to Apr-2009

Record operating margin of 31%; net profit improves considerably

The sharp reduction in oil prices in the quarter has been particularly beneficial for Allegiant, which operates a fleet of older aircraft with an average age of 18 years. During the quarter, the carrier's operating expenses fell 17.8% year-on-year to USD97.6 million.

Meanwhile, operating profit improved, by a notable 209.6% year-on-year, resulting in a 20.5 ppt improvement in the carrier's operating margin to a record 31.3%, making it one of the world's most profitable carriers alongside Sharjah's AirArabia. Net profit was also up considerably, by 191.2% to USD28.2 million.

Allegiant operating margin: 1Q06 to 1Q09

Ancillary revenues star performer again in 1Q09, helps offset sharp yield deterioration

Ancillary revenues were, once again, a fantastic performer in 1Q09, surging 52.2% year-on-year, to represent 29.1% of total operating revenue (compared to 20.4% of total revenues in 1Q08). According to the LCC, prices for ancillary revenue items, such as hotels and rental cars, have remained "somewhat more resilient" than the base-selling airfare. These revenues are a key factor in the LCC's ability to maintain reasonable margins, even during last year's high-cost environment.

Allegiant ancillary revenue as a portion of total revenue:
1Q06 to 1Q09

Average scheduled service fares fell 14.3% year-on-year in the quarter to USD74.52, partially offset by a 32.6% year-on-year increase in average ancillary revenue per fare. This resulted in an overall fare reduction of 3.6% in the quarter, to USD108.66, which slightly exceeded the carrier's expectations.

Meanwhile, scheduled passengers per flight increased 3.9%, from 127 to 132, resulting in the carrier's industry-leading load factor of 90.8%, a 3.9 ppt year-on-year improvement (or 87.6% for total system operations, a 4.0 ppt improvement).

Scheduled service revenue per ASM, however, fell 9.4% year-on-year in the quarter (although total system unit revenue increased 1.8% year-on-year to USD 10.67 cents), with scheduled service yield also down, by 13.3% year-on-year to USD 8.18 cents.

Average total system sector length, meanwhile, fell 1.3% year-on-year to 843 miles, while average daily aircraft departures was down 6.0% to 3.00.

Seeing the benefits of a reduction in fuel costs

On the cost side, Allegiant's total system unit costs per ASM fell 21.6% year-on-year to USD 7.33 cents in 1Q09, while non-fuel unit costs increased 10.8%, to USD 4.82 cents.

On a per passenger basis, operating expense was down, by an impressive 26.7% to USD75.42, as fuel expense per passenger fell 53.1% to USD25.80. However, excluding fuel, operating expense per passenger was up by 3.7% to USD49.62.

Allegiant's aircraft fuel expenses, meanwhile, fell 47.4% year-on-year in 1Q09, with an average fuel cost per gallon of USD1.47, a 49.0% year-on-year reduction. Allegiant, which remains unhedged, reported that fuel costs represented 34.2% of total expenses in 1Q09, the lowest proportion in over three years, compared to 53.5% in 1Q08.

Allegiant fuel cost as a portion of total operating expense: 1Q06 to 1Q09

Still growing faster than rivals; growth trend to continue

During the quarter, Allegiant transported 1.3 million scheduled passengers (or 1.2 million scheduled passengers, +14.8% year-on-year), representing a 12.1% increase. Total system traffic (RPMs) increased 9.8% year-on-year, on a 4.9% capacity (ASMs) increase, resulting in a 4.0 ppts load factor improvement to an industry-leading 87.6%.

Scheduled system traffic (RPMs), meanwhile, increased 13.3% year-on-year, on an 8.5% capacity (ASMs) reduction, resulting in a load factor improvement of 3.9 ppts to 90.8%.

Allegiant schedule service capacity (ASMs) growth: Mar-2007 to Mar-2009

Allegiant's capacity (ASM) growth in the quarter was the strongest among the US carriers (although off a small base). Comparatively, the majority of LCCs, except Canada's WestJet, have slowed capacity growth to the 0-10% range, while all major US network carriers have been reducing capacity by around 10% or more.

Year-on-year North American carrier's domestic passenger capacity growth (% change year-on-year): 1Q09

Allegiant plans to continue to its growth trend in 2Q09, with a capacity (ASM) increase of approximately 22% and a 20% rise in departures. For 3Q09, Allegiant plans to increase capacity (ASM), by a notable 35% year-on-year, with an 40% increase in departure growth.

Allegiant Capacity and Departure Growth: 2Q09 and 3Q09

	2Q09 Growth (year-on-year)	3Q09 Growth (year-on-year)
ASM Growth	+22%	+35%
Departure Growth	+20%	+40%

Balance sheet and liquidity remain strong

Allegiant's balance sheet and liquidity remains strong, with the LCC ending the quarter with USD236.4 million in unrestricted cash and short-term investments, a 61.6% year-on-year increase, and a 5.2% improvement from 4Q08 levels.

To continue to be "opportunistic" in purchasing aircraft for future growth

During 1Q09, Allegiant had USD11.5 million in capital expenditures for three aircraft (one already in service with the other two to enter service in the current quarter), three aircraft for part-out and miscellaneous other purchases.

Allegiant stated it expects to continue to be "opportunistic" in purchasing aircraft for future network growth and part-outs to support its spare engine and rotable parts inventory. The airline expects FY2009 capital expenditure of approximately USD25-30 million, an increase from the previously anticipated USD20-25 million (as at Dec-2008), for improvements to aircraft owned but not yet operated, purchase of additional spare engines and rotatable parts, and other miscellaneous capital expenditure.

Since the carrier's previous earnings announcements, Allegiant invested USD7.1 million in open market transactions to acquire 210,175 shares of its own common stock at an average of USD33.59/share under the share re-purchase programme, as approved in Jan-2009. Including open market transactions in both 2008 and 2009, Allegiant has repurchased a total of 763,875 shares at an average price of USD29.94.

Diversifying operations to improve risk profile

Allegiant is continuing to diversify its operations, to improve the airline's risk profile.

During 1Q09, Allegiant launched service on four new scheduled routes, and announced service to a further 18 routes, to commence during 2Q09, including 13 routes to the carrier's new major leisure destination of Los Angeles, with services to commence on 01-Mar-09.

In other network highlights, the LCC commenced service to Punta Gorda (just North of Ft Myers) in the quarter and announced seasonal service starting at the end of Apr-2009 to Myrtle Beach. Subsequent to the end of the quarter, the LCC also announced new service from Eugene to the San Francisco Bay Area to start in Jun-2009 (for more route changes information, see separate Allegiant profile in this week's edition of Peanuts! Weekly).

Allegiant Network summary^

Destination	Dec-07	Mar-08	Jun-08	Sep-08	Dec-08	Mar-09
Total cities served	58	58	60	63	61	70
Routes to Las Vegas	37	34	38	38	39	39
Routes to Orlando	27	28	26	26	29	30
Routes to Tampa Bay/St Petersburg	14	15	15	15	20	20
Routes to Phoenix Mesa	13	13	9	9	15	15
Routes to Fort Lauderdale	12	11	8	6	6	6
Other routes	2	2	4	4	4	6
Total routes	105	103	100	98	113	116

Allegiant has also recently entered into fixed fee flying contracts with several different parties to provide charter service between Miami and four Cuban cities, in support of the Cuban family charter programme, with service to commence in Jun-2009. Allegiant will initially commit one aircraft to this programme, although it believes further expansion is possible. As with all fixed fee flying, Allegiant is not exposed to fuel risk under this programme.

The carrier also operated its first ad-hoc charters for the US Department of Defence (DoD) earlier this month, with the carrier stating the available DoD opportunities to date have "exceeded our expectations".

Fleet continues on growth path

During 1Q09, Allegiant placed three owned aircraft back in service, two of which were previously leased to a third party. In addition, the carrier entered into operating leases for two MD-80 aircraft in the quarter, which the carrier expects to place in service by the end of 2Q09.

By the end of the 2009, Allegiant expects to place into service two additional owned aircraft, currently on lease to a third party. In addition, the LCC owns one other aircraft on lease to a third party, which is expected to be placed in service early in 2010. According to Allegiant, "the MD-80 market continues to favor us", allowing the carrier to "easily" purchase MD-80s without the need for financing, if needed.

By the end of 2Q09, Allegiant expects to operate 43 MD-80 aircraft, with this to increase to at least 45 aircraft by the end of 2009, which is two more than prior guidance.

Allegiant fleet summary^

MD-80 aircraft in service^	Dec-07	Mar-08	Sep-08	Dec-08	Mar-09
Owned (including capital leases)	28	39	35	36	39
Leased	4	2	2	2	2
Total	32	41	37	38	41

Acquires key assets from IT provider, CMS Solutions

Another key develop in 2009, and what Allegiant describes as perhaps the "most important event of the first quarter", was Allegiant's acquisition of key assets from its long-time IT provider, CMS Solutions.

CMS has provided the software that runs much of Allegiant's operations, including the carrier's reservation system. This is an important move for the LCC, which has recognised that the flexibility of its reservation system has been critical to the carrier's successful ancillary revenue strategy.

Allegiant now has a permanent exclusive license for all CMS airline applications and has brought in-house all related development and programming, under the leadership of the carrier's new VP Information Systems, Rob Wilson, formerly of CMS.

Outlook solid in light of recent fuel reductions

Allegiant will benefit handsomely from the recent fuel reductions and expects 2Q09 costs to be substantially lower than the prior year, due to significantly lower fuel costs and increased utilisation. Fuel cost per passenger for the first half of Apr-2009 was slightly more than USD26, substantially below the USD62.48 in 2Q08. Increased utilisation is expected to drive non-fuel cost per passenger below the prior year's USD47.52 per passenger.

On the revenue side, the LCC stated it is seeing travelers continuing to book much closer to the time of travel, making projections difficult. However, given current "soft fare conditions", the carrier expects total scheduled RASM to decline year-on-year in the second quarter. The carrier also stated it expects it to be difficult to improve materially its 90.5% scheduled load factor in 2Q08.

Overall, Allegiant remains "confident" unit cost savings will "thoroughly overwhelm any unit revenue softness", resulting in another strong quarter in 2Q09 and beyond.

Unlike all its rivals, Allegiant appears to have found the right strategic mix to make money amid a harsh economic environment, characterised by extreme pressure on yield. Allegiant could replace Southwest as the standard bearer for an industry searching for answers.

Background Information:

Based in Las Vegas;
Subsidiary of Allegiant Travel Company;
Operates services to US domestic leisure destinations, from its bases in Fort Lauderdale, Las Vegas, Orlando, Phoenix/Mesa and Tampa/St Petersburg;
Has authority to operate charter services to Canada and Mexico;
Plans to expand FY2008 capacity (ASM) by at least 30%, with capacity growth of at least 25% in 2Q08. This goes against a general trend of capacity reductions among other US carriers;
Has been profitable for five consecutive profitable years, between 2002 and 2007.