Allegiant Air's immunity from soft prices in the US market challenged as public expectations change

Some cracks are beginning to emerge in the immunity from the soft pricing environment that Allegiant Air has enjoyed in the US market. The company is feeling pressure from increased ULCC competition and large network airline discounting on connecting traffic in some of its markets. That added pressure, along with Allegiant's decision to boost off peak flying in response to lower oil prices, is driving down total unit revenues for the company in 1Q2016.

In mid-2015 Allegiant began making a push into off-peak flying, reasoning that the added capacity could lower margins and unit revenues, but could in fact lift overall profits. The company's top-line profitability did jump 154%; Allegiant has also concluded that the added flights, while still profitable, underperformed relative to the company's expectations. However, Allegiant expects to sustain its increases in off peak flying as long as fuel remains at current levels.

Similarly to the situation at other airlines, falling unit revenues and increasing capacity seem to be pressuring Allegiant's stock valuation, as concern grows among investors over its ability to withstand the pricing pressure in the US market place. But despite the pressure on Allegiant's valuation, it will, together with most other US airlines continue to grow profits and returns as fuel prices lift performance. The combination of these measures is driving a different type of behaviour in the market place.