MIAMI — Allegiant Travel Company, parent to ultra low-cost-carrier (ULCC) Allegiant Air, announced a $34.2 million profit in the first quarter of 2014, or $1.86 a share. The figures represent a 12.7 percent YOY increase over Q1 2013 earnings, and the company’s 45th consecutive profitable quarter.

Operating revenues reached an all-time high, according to the carrier. Overall, the figures showed a 10.8 percent year over year (YOY) increase to $302.52 million, driven by a 13.1% YOY increase in scheduled service revenue to $203.52 million, reflecting a 10.2% rise in passengers carried and a 9.1% increase in revenue passenger miles (RPMs) over 2013. Ancillary revenue, which includes items such as bag fees, meals, and seat upgrades, rose 9.8% YOY to $96.08 million.

Digging deeper into the stats, the carrier had a 1.6% uptick in passenger revenue per available seat mile, to 8.74 cents, though ancillary revenue per available seat mile dropped 1.4% to 4.13 cents. Yields rose 3.1% YOY to 9.88 cents. On a per passenger basis, average total fare grew 1.0% to $146.51, with base fares increasing 2.0% to $99.52, and ancillary fare declining 1.0% to $46.99.

Interestingly, within the ancillary fare, third party revenue continues to suffer the hardest hit, with third party revenue per passenger declining a sharp 10.5% to $5.20. During the recession, Allegiant was able to increase its revenues and volumes in this sector due to the reduction in travel demand. Hotels were less full, leaving them more willing to offer discounts to travel package consolidators like Allegiant. But now as the US economy recovers, hotels are moving much more so to direct bookings, which is having a major impact on third party revenues for Allegiant.


While not a huge nominal revenue total, third party extras provide an important incentive to book Allegiant flights as part of a broader vacation. Especially in competitive markets like Las Vegas, a shift by hoteliers to work with other, higher margin OTAs and consolidators could have spillover effects on Allegiant’s passenger revenues. Indeed, Las Vegas hotel nights declined 12.1% YOY, though less competitive non-Vegas markets. We will have to monitor the third party figures from Spirit’s results next week to get a more complete read on this market segment for ULCCs.

The increases in revenue slightly outpaced an 11.2% YOY increase in operating expenses. Every single expense line went up on a per-ASM basis, save fuel, which fell 8.8% per ASM due to a 5% decline in average cost per gallon. Labor costs rose 12.8% to $46.4 million, driven by 13.1% increase in the number of full time employees. As the carrier ingested roughly one dozen additional aircraft, mostly Airbus A319s and A320s, maintenance predictably jumped 13.6% to $20.6 million.

The configuration of its Boeing 757 fleet to incorporate crew rest seats also contributed to the uptick. Finally, aircraft leases totaled $9 million, up from $303,000 in Q1 2013. Operating expenses per seat mile (CASM) rose 1.0% to 10.30 cents over 2013, while CASM excluding fuel rose 10.4% to 5.72 cents. The increase in CASM ex. fuel is in part a function of the increased complexity of Allegiant’s business with the varied fleet and additional destinations.

During the quarter, Allegiant returned nearly $114 million to its shareholders in the form of a $42 million dividend and a $72 million share buyback. It recorded an operating profit of $52.27 million or 18.9%, down slightly from 19.2% the year prior. The major challenge was of course expenses, but these expenses are best viewed as setting the stage for future growth to come.


Looking forward into Q2, Allegiant projects that PRASM growth will be 2 – 4% for the quarter (9-10% in April due to the shift of Easter), while total RASM should be up 0.5 – 2.5. Capacity in ASMs is expected to grow 7 – 9% YOY while CASM is expected to rise 3 – 5% (5 – 7% excluding fuel). For the quarter, Allegiant recorded $11.1 million in capital expenditures.

Allegiant is in the midst of several different initiatives aimed at reshaping its business model. On the ancillary revenue side, the company has quietly been building up the architecture for a points-based loyalty program and a co-branded credit card offering, which will begin to roll out at the end of the second quarter. The carrier is set to launch services to Mexico beginning in 2015, and while the carrier views the country as an attractive opportunity, it is unable to commit the prioritization of IT resources prior to 2015 in order to serve it.

The continued growth of the A319 and A320 fleets is a positive sign (now up to 17.9% of ASMs) for managing CASM, and according to the earnings call, Allegiant is shopping around actively for deals on these newer aircraft for 2016, 2017, and 2018, when they themselves will be replaced by A320neos and 737 MAXs.

The launch of the Giant Seats on the 757 fleet provides an opportunity to boost Hawaiian revenue generation. Even prior to this initiative, the much maligned Hawaiian operation delivered the best YOY financial improvement in Allegiant’s network, though cynics will certainly point out that this was made possible in part by the utter financial depths to which the operation had sunk.

In summary, Allegiant continues to deliver solid financial results, even as it embarks on an ambitious remodeling of its business strategy. Our main concern continues to lie in the field of third party ancillary revenue generation (though Allegiant also trails Spirit in absolute ancillary revenue generation per passenger), but for a carrier as profitable and well run as Allegiant, our concerns are far from deadly.