Allegiant Air faces formidable short term cost pain from pilot pay reset and Airbus transition

The niche ultra-low cost airline Allegiant Air will undergo significant changes during the next couple of years - a fleet replacement programme and the adoption of a new pilot contract that are driving cost pressure for the airline during 2017. Its anticipated 5% to 9% year-on-year rise in unit costs excluding fuel for the year places Allegiant over the USD6 cent benchmark for ultra-low cost airlines.

The company's new pilot agreement and the costs associated with the transition to an all-Airbus fleet are necessary changes in order for Allegiant to remain cost competitive over the long term. A single fleet will create operational efficiencies, and the pilot agreement should stabilise Allegiant's attrition levels. The challenge for Allegiant is ensuring its revenue generation outpaces the jump in its unit costs.

Allegiant's cost challenges, particularly its labour expense, reflect challenges that airlines operating a variety of different business models - low cost, ultra-low cost and full service - are currently facing in the US. But as the country's airlines enter into new labour agreements, Allegiant believes its pilot labour costs will settle back into a rational differential between it and other US airlines.