LAS VEGAS – Allegiant Air is entering the hotel business. Earlier this week, the ultra-low-cost carrier’s (ULCC’s) parent company announced a new 22-acre, $600 million resort and condominium (condo) development in Port Charlotte, Florida under the new sub-brand “Sunseeker Resorts.” The development will include a resort hotel property, nine condo towers, and a shopping and dining center. It is targeted for completion in late 2019, and once built will be the largest waterfront resort of its type in the state of Florida.
Allegiant Air, like many ULCCs around the world, relies on the bundled sale of ancillary products like hotel rooms and cars alongside its core flight operations to boost revenue per customer. Traditionally only a small percentage of Allegiant’s customers buy a full package from the company, but when they do, it can represent several hundred additional dollars of revenue beyond the flight.
Allegiant has been mulling a move into the direct hotel space for more than a year now, as it faces the dual whammy of an increasingly competitive US air travel market and concerns around operational quality at the airline level. Moreover, its long stretch as one of the two or three most profitable US airlines may well be at an end due to financial improvement at rival carriers.
All of this is to say that Allegiant needs to grow its revenues and profits. And there are only a couple of ways to achieve that. The first is to win new customers by expanding your current product offering into more markets (i.e., to sell your stuff to new customers). The second is to extract more revenue from your existing customers by expanding your product offering (i.e., to sell your existing customers more stuff).
While Allegiant could try to grow within the US air travel market, it historically hasn’t succeeded when going head to head with full-service carriers and national LCCs like Southwest and JetBlue, which it would need to do to add new markets to its fold. Current market conditions are simply not very favorable to ULCCs with low fuel prices and “ULCC-killer” economy class fare classes like Basic Economy at American. So Allegiant needs to sell more ancillary products like hotel rooms and rental cars to grow revenues.
The problem is that hotel rooms and rental cars are commodities in today’s world – it’s not clear why a traveler would book a hotel room with Allegiant instead of using Expedia, Hotels.com, or one of the other numerous online travel agencies (OTAs). But in a resort owned by Allegiant, the opportunities to profit from each consumer are more numerous. Allegiant can extract high profits from captive ancillary sales within the hotel like poolside drinks and room service, as well as from the dining and shopping complex on the property. At the same time, it can sell the hotel room as a loss leader (with pricing no longer bounded by a third party hotel brand) to create attractive package pricing to get more passengers to buy their whole package through Allegiant.
The move into the hotel business may seem like an odd lateral move, but for Allegiant it makes perfect sense. Vertical integration may well be the best path forward for Allegiant Travel Company, even if it is tangential to the world and business of Allegiant Air (the airline) itself.