Allegiant faces pivotal year as it seizes on AirTran cuts and works toward Hawaii launch

Allegiant's low frequency strategy could prove more successful in the markets AirTran is abandoning since Allegiant eschews flowing passengers over its bases to build out a complex network for revenue optimisation. Allegiant has a traditional low-cost carrier point-to-point structure, and fleshes out its revenue by billing itself as a comprehensive travel company, selling air travel as part of larger vacation packages to the destinations it serves. The packages, coupled with ancillary products it offers passengers, make Allegiant a leader in non-ticket revenues. The company's ancillary revenue per passenger in 4Q2011 was USD 36.39 cents.

AirTran markets Allegiant is already backfilling

Source: Allegiant

Allegiant has already swept into four markets that Southwest has opted to shed from AirTran's network: Asheville, North Carolina; Newport News, Virginia; Bloomington, Indiana; and Moline, Illinois.

In Nov-2011 Allegiant commenced service from Asheville to Orlando ahead of AirTran's Jan-2012 exit from Asheville, which AirTran served from Orlando and Tampa. Allegiant could easily add Asheville-Tampa at some point as it already has a base at Tampa.

The carrier serves both Orlando and Tampa from numerous small cities on its route map including Allentown, Pennsylvania (another market being abandoned by AirTran); Youngstown, Ohio; Fort Wayne, Indiana; Des Moines, Iowa; Springfield, Illinois; and Roanoke, Virginia.

Allegiant also serves all four of its Florida bases - Orlando Sanford, Tampa, Punta Gorda and Fort Lauderdale - from Huntington, West Virginia; Knoxville, Tennessee; Lexington, Kentucky; and Greenville-Spartanburg, South Carolina. AirTran is pulling out of Lexington in August when its flights to Orlando are scheduled to end. Allegiant has been serving Orlando from Lexington since Feb-2010, indicating that that market remains viable for the carrier's low frequency service.

Allegiant's service launched from Newport News in Nov-2011 at four frequencies per week - higher than average for the carrier. During peak times of the year, roughly 20% of Allegiant's frequencies from its market reach the four per week level, falling to just 10% during off-peak times.

Allegiant peak vs off peak average weekly frequencies

Source: Allegiant

The carrier obviously sees enough demand from Newport News to support the current level of service. It is not likely that Allegiant would backfill the other markets losing service from Newport News since Atlanta, Boston and New York typically have a larger business traveller mix.

New twice-weekly Allegiant flights to Orlando from Moline debuted last month after AirTran's exit in January. Allegiant introduced flights from Moline in 2010 and in addition to Orlando now offers low-frequency weekly service to Tampa, Phoenix-Mesa and Las Vegas.

Bloomington will become a new market for Allegiant once its twice weekly service to Orlando begins in May ahead of AirTran's exit in June. If Bloomington's demand patterns mirror that of nearby Peoria (63km away), Allegiant could expand service from Bloomington quickly to other leisure destinations. The carrier offers flights to Tampa, Las Vegas and Phoenix from Peoria. Allegiant probably has no interest in filling the Bloomington-Atlanta service AirTran is cutting, which means Bloomington passengers will no longer have direct access to one of the busiest airports in the US.

Six potential AirTran markets for Allegiant

Allegiant could be examining six other markets being exited by AirTran. The leisure carrier would have no interest in backfilling AirTran's flights from Miami, Washington Dulles or Dallas, and already offers flights in the Knoxville-Orlando market AirTran is exiting. That leaves Sarasota, Florida; Harrisburg, Pennsylvania; Huntsville, Alabama; White Plains, New York; Atlantic City, New Jersey; and Charleston, West Virginia as potential new Allegiant markets.

Harrisburg could fit Allegiant's passenger profile, although Frontier is already moving into the Orlando-Harrisburg market. But that is not necessarily a deterrent to Allegiant, which is introducing flights from Bloomington to Orlando alongside Frontier in May. Frontier is also introducing Orlando-Allentown service at that time.

Huntsville could also be a prospective market for Allegiant. Once AirTran ends service at the airport in August, Huntsville will only be served by network carriers (American, Delta, US Airways and United), which could give Allegiant an opportunity to practice its strategy of using low fares to stimulate demand from small cities to leisure destinations.

Both AirTran and JetBlue serve Orlando from Westchester County Airport in White Plains, New York, which is 53km north of Manhattan. White Plains might not be as attractive to Allegiant because the carrier touts its low level of competition from the majority of its markets. White Plains is also slot controlled and the airport in particular limts the number of flights in aircraft with over 100 seats due to the small size of its terminal. There would also likely be weight restrictions on Allegiant's MD-80s given the relatively short runway at White Plains.

Allegiant estimates it only has competition in 12 of the 174 markets it will serve by 20-Apr-2012. But the carrier seems comfortable competing directly with Frontier on flights from Allentown, Harrisburg and Bloomington from Orlando.

AirTran's departure from Atlantic City in January leaves Spirit as the airport's main carrier. Spirit offers flights from Atlantic City to Myrtle Beach, Orlando, Tampa, Fort Lauderdale and Fort Myers. So far, Allegiant has not expressed interest in serving Atlantic City, which subsidised AirTran's service to Atlanta.

Allegiant faces increasing competition from Spirit

Allegiant may also want to avoid competition with fellow ultra low-cost carrier Spirit Airlines, but that is becoming increasingly difficult as Spirit recently launched flights between Allegiant's two bases of Phoenix Mesa and Las Vegas. Last year, Spirit began serving another Allegiant market, Plattsburgh, New York, and now offers flights from Plattsburgh to Fort Lauderdale. Allegiant operates from Plattsburgh to Orlando, Tampa and Fort Lauderdale.

Allegiant will also join Spirit if it opts to backfill AirTran's service from Charleston, West Virginia to Orlando, Florida. Spirit currently offers three times weekly flights to Fort Lauderdale. Allegiant already serves Huntington, West Virginia, which is 82km from Charleston. But serving two cities in close proximity has not been a deterrent for Allegiant. It saw opportunities in filling AirTran's Bloomington-Orlando service, even though it offers service from nearby Peoria.

Sarasota Bradenton International Airport will feel the brunt of AirTran's cuts when the carrier ends flights to Baltimore-Washington, Atlanta, Milwaukee, Chicago and Indianapolis in August of this year. The airport moved quickly after to court carriers after Southwest's decision for AirTran to pull out of the market, offering airlines incentives to replace the service. United Airlines is replacing some of AirTran's Chicago Midway service, launching a single daily flight from Sarasota to Chicago O'Hare in November. JetBlue is also launching flights from New York LaGuardia to Sarasota in June.

Allegiant markets Punta Gorda Airport in Southwest Florida as midway between Sarasota and Fort Myers, so it is not clear if it would have any interest in launching flights from Sarasota. It appears the preference of airport officials is to replace the larger markets served by AirTran, so Allegiant might not see much benefit in attempting to serve Sarasota. But the carrier's footprint in Punta Gorda is small in comparison with the other destinations it serves in Florida. Allegiant only offers flights from Punta Gorda to a handful of cities - Greensboro, North Carolina; Greenville-Spartanburg, South Carolina; Knoxville, Tennessee; and Lexington, Kentucky.

Hopeful of Hawaii launch in June

Almost two years after initially announcing its plans to operate Boeing 757s to Hawaii, Allegiant it still waiting to introduce the flights pending approval from the FAA for extended twin engine operation (ETOPs) on the aircraft.

Allegiant's management recently remarked the company sees light at the end of the tunnel for ETOPs certification on the 757s, which has been a 15 to 18 month process, and is hopeful of a June debut for new Hawaii flights. However, company executives also admit there is a tight window to begin selling flights once Allegiant gains ETOPs certification.

Commenting on Hawaii prospects in early February of this year, Allegiant executives said the carrier would have reasonable time to sell tickets for a 01-Jun-2012 launch date. But they did admit a 60-75 day window to sell tickets was less than ideal and obviously a 90-120 day selling period is preferable. At that time, they indicated Allegiant would have a better idea of how the Hawaii launch is shaping up in the next month to six weeks.

Uncertainty around Allegiant's exact date of approval for ETOPs certification has also slowed its progress in securing deals with hotels, car rental agencies and other travel firms in creating travel packages, which is key to Allegiant's strategy of keeping its ancillary revenue per passenger at industry leading levels. The anticipated short-selling window coupled with its inability to close travel package deals could make launching flights to Hawaii before it is fully prepared to deliver its typical product offerings to passengers unattractive to Allegiant.

Allegiant is confident it can find domestic mainland US markets for its fleet of 216-seat 757s if the company's expansion plans to Hawaii fail to materialise this year. One of the aircraft is already operating scheduled flights on the US mainland from Allegiant's Las Vegas base to Rockford, Illinois; McAllen, Texas; Lexington, Kentucky; and Knoxville, Tennessee.

Executives at Allegiant stressed they would not hesitate to to put all four 757s it expects to have in its fleet by the end of 2Q2012 into mainland domestic service. They explained the single 757 currently in service is accretive on the routes where it is operating, and stressed the aircraft validates their belief that a larger aircraft on peak days is advantageous since additional seats produce more revenue and have lower unit costs.

Management has remarked there are many routes in Allegiant's system that could handle the extra capacity. Allegiant executives have also alluded to the 757 as an extremely attractive asset for some of its other long-term plans.

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Source: Allegiant

Allegiant's current 757 fleet plan for 2012

Allegiant now has three of its 757s leased out to European carriers but these are scheduled for a return sometime in the second or third quarter of this year. The company also has committed to acquire two more aircraft that will likely come online later in 2012 or possibly in early 2013.

In the short term, the company could see a greater return on operating the 757s within the mainland. Allegiant would likely introduce its flights to Hawaii from the US West Coast, and capacity from that region to the Hawaiian islands has been growing steadily since ATA and Aloha Airlines went out of business in 2008.

Allegiant Alaska Hawaii expansion: 2007 to 2012

Source: Allegiant

Alaska was quick to move and fill the service gap created by the demise of those carriers, and now during its winter peak operates 24 daily flights from Hawaii with 157-seat 737-800s. Alaska is quick to point out the Boeing narrowbodies work well from secondary US cities to Hawaii, stressing the carrier does not operate its flights to Hawaii from Los Angeles and San Francisco, where most of the US-Hawaii service originates. Alaska estimates service to Hawaii will account for 20% of its total capacity this year.

Alaska has already firmly positioned itself from Bellingham, Washington, where Allegiant has a base, offering flights to Honolulu, and also serves Hawaii from Allegiant's new Oakland base. Alaska has said it has no non-stop competition in 60% of its Hawaii markets, which Allegiant could view as an opportunity to introduce its low-fare, low frequency service.

While Hawaiian's focus during the last couple of years has been on introducing new flights to Asia, it also has expanded its Hawaii-West Coast flying, introducing new flights from Maui to Oakland (where Allegiant is setting up a base) and Las Vegas in 2011.

Other bases where Allegiant might consider launching flights to Hawaii - Phoenix and Las Vegas - are dominated by US Airways and Hawaiian in the Hawaii market. Potential launching points from the US to Hawaii for Allegiant where it does not have bases, San Diego for example, are also served by Alaska.

Medford and Eugene, Oregon could possibly work for the launch of Allegiant's Hawaii flights. These smaller Oregon cities are already served by Allegiant as they fit Allegiant's mold of markets that require fewer frequencies. The carrier's passengers in these market would likely welcome a couple of direct flights per week to Hawaii. Alaska now has feed from Medford and Eugene to Portland, Oregon, where it offers daily flights to Kahului on Maui and Honolulu.

Allegiant no doubt has firm markets in mind for Hawaii, but its planned launch is now less than three months away, creating significant challenges in the spool up of the service.

Early results of MD-80 seat expansion are positive

At the same time, Allegiant it attempting to launch its long-awaited service to Hawaii it is the midst of a project reconfiguring its 50-plus MD-80s with 16 extra seats for a total seat configuration of 166.

Allegiant undertook the project in 2010 and has often cited the complexity of reconfiguring the older aircraft. But as of 01-Feb-2012 reconfigurations were complete on 10 aircraft, and the carrier has set a year-end target to retrofit is MD-80 fleet with the extra seats.

During the month of January, Allegiant operated four 166-seat MD-80s from its Bellingham base. The company said the load factor on the additional 16 seats was 75%, and the incremental costs of the seats hit previously forecast levels of roughly USD41. Allegiant also said it was pleased with the estimated operating margin of the increased seats in excess of 60%.

Allegiant management refers to 2011 as a transition year, one in which it worked to refine its business model to operate profitably in the high fuel cost environment. But 2012 could prove to be pivotal for the carrier as its second fleet type comes online and it works under a tight deadline to launch its first new flights outside the continental US.

Projections for performance on higher capacity MD-80s

Source: Allegiant