Allegiant, AirTran competition increasing. Faceoff time?

Each has expanded aggressively over the past two years. Allegiant, coming off a much smaller base, has shown explosive growth.

Allegiant fleet trend (in-service fleet):

Source: Centre for Asia Pacific Aviation & Ascend
*2009 data to 06-Dec-2009

With its much larger profile, AirTran has been more cautious in its recent expansion, eschewing growth in size for profit growth.

AirTran fleet trend (in-service fleet):

Source: Centre for Asia Pacific Aviation & Ascend
*2009 data to06-Dec-2009

AirTran’s operating margins as a consequence have continued to rise in recent quarters, while Allegiant retains industry-leading margins, peaking in 1Q2009 at above 30%.

Low-Cost System* Quarterly Operating Profit/Loss Margin

Low-Cost Airlines	2Q08 (%)	3Q08 (%)	4Q08 (%)	1Q09 (%)	2Q09 (%)
Allegiant	0.2	5.0	21.6	30.1	23.8
Spirit	13.5	-19.4	12.0	17.1	17.3
AirTran	-6.6	-6.9	9.3	8.8	11.0
Frontier	-12.2	-2.6	0.0	8.4	9.5
JetBlue	1.1	1.6	5.3	9.1	7.9
Southwest	7.2	3.0	2.6	-2.1	4.7
Virgin America	-67.1	-47.5	-24.0	-36.7	-8.4

Source: Centre for Asia Pacific Aviation & BTS

Allegiant, a very different airline

While other low cost carriers pursue a larger portion of the business travel market, Allegiant Air stubbornly sticks to its mission serving leisure travellers from underserved points to major leisure destinations. Its pure leisure profile means that Allegiant has been able to expand beneath the radar of most of its competitors, serving smaller ports (and, of course, Las Vegas). With its aggressive approach to online sales, this profile enhances the carrier’s ability to sell hotels and car rentals; Allegiant has the highest proportion of ancillary revenue of any airline in the world at around one third of total.

The carrier differs most from the conventional modern low cost airline in that, although high density configuration is a feature, it operates older, fuel thirsty aircraft, planning to continue to add MD-80 aircraft to its fleet at “attractive prices” without the need for external financing, as it opportunistically acquires aircraft, engines and parts. Allegiant has previously stated that it can purchase and refurbish its MD-80 aircraft for as little as USD4 million. The carrier recently bought six aircraft from Finnair, apparently to use for parts, and could be a potential customer for American Airlines’ large MD-80 fleet that will be progressively be retired.

While the aircraft are less fuel-efficient than newer types, Allegiant is able to purchase them outright for one-tenth the cost of a new B737 aircraft, and because of the low cost of ownership, operate at much lower utilisation (seven hours per day versus 13 hours per day at JetBlue), which helps keep costs lower. 

(For more analysis, please see The Centre’s landmark Global LCC Outlook Report)

Orlando; tourists want Disney

This strategy has, not coincidentally, tended to keep it apart from direct competition with the bigger low cost airlines. But expansion means Allegiant is now increasing competition with AirTran Airways. Allegiant has served AirTran’s Orlando headquarters from Orlando Sanford Airport, where it dominates the facility. But Allegiant is now moving over to Orlando International Airport (MCO), citing passenger preference, last week announcing ten new cities from the main Orlando airport.

New destinations announced by Allegiant from MCO include Allentown, PA; Knoxville and Lexington, & Tri-Cities, TN; Des Moines, IA, Greenville, NC; Grand Rapids, MI; Springfield, MO; Huntington, WV and Youngstown, OH.

Thus Allegiant will either directly or closely compete – within an easy drive – of AirTran’s service.

AirTran is not about to take a backward step

Still, AirTran has proven its mettle by standing firm against Delta at Atlanta and many others at Orlando International. The airport is a competitive place, with no-one dominating:

Orlando International Airport passenger numbers market share for Sep-08 to Aug-09

Source: Centre for Asia Pacific Aviation & BTS

But Orlando is a key market for AirTran. After Atlanta, it is its busiest airport.

AirTran top domestic markets and market share at airport for Sep-08 to Aug-09

Market	Volume (thousands)	share*
Atlanta, GA	7,644	19.99%
Orlando, FL	2,039	13.69%
Baltimore, MD	1,545	15.68%
Milwaukee, WI	697	19.93%
Tampa, FL	687	8.49%
Others	10,960	2.02%

*The table shows the carrier's share in each of the markets

Orlando (Sanford) is also very important for Allegiant. After its home base, Orlando is its most important operation.

Allegiant top domestic markets and market share at airport for Sep-08 to Aug-09

Market	Volume (thousands)	share*
Las Vegas, NV	917.42	5.0%
Sanford, FL	570.26	99.7%
St. Petersburg, FL	315.42	94.3%
Phoenix, AZ	253.35	1.4%
Bellingham, WA	203.91	67.9%
Others	2,377.51	0.4%

AirTran is also well capable of holding its own while expanding to other hubs such as Milwaukee, where it now competes not only with ailing home-town carrier Midwest Airlines, but also, again, Southwest.

It is putting six out of seven new routes of its 7% capacity expansion into Milwaukee. In addition, it has managed to stare down Northwest at Minneapolis, Detroit and Memphis.

So Allegiant will not wreak terror in AirTran management’s hearts. It will however be probably only the first of many future crossings of the way for the two airlines.