MIAMI — Allegiant Travel Co, parent company of ultra-low cost carrier (ULCC) Allegiant Air, announced a fourth quarter 2013 net profit of $17.5 million, or 94 cents per diluted share on Wednesday. The Las Vegas based carrier also announced a 2013 annual net profit of $91.8 million, or $4.82 per diluted share. An increase in fares combined with decreases in fuel and maintenance costs were largely responsible for the 17% year-over-year (YOY) increase in profits over 2012.
It was a good year, by and large, for Allegiant. The ultra-low-cost carrier saw a 9.6% YOY increase in operating revenue, led by an 11.1% YOY increase in scheduled service revenue to $651 million. The increase was also bolstered by a huge 19.6% uptick over 2012 in ancillary fees—which include items such as bags, tickets, service, etc—to $324.8 million. On a per passenger basis, ancillary fees totaled $44.99, actually down 0.2% YOY due to a 16.0% decrease in ancillary revenue from third party products thanks to a 9.3% decrease in hotel nights sold, and a 5.0% decrease in rental car days sold.
The reduction in third party revenues speaks to the overall strength of the travel and tourism industry in the US. In Allegiant’s core markets such as Fort Lauderdale, Las Vegas, Orlando, and Vegas, travel demand is once again booming as the economic fortunes of the affluent have reversed in the United States. As a result, hotels and rental car agencies have to rely less on consolidators like Allegiant (who offer lower margins) to fill rooms and rent out cars. Allegiant has tried to counter this by bulking up in secondary markets such as Punta Gorda, which is a smart diversification strategy, but these smaller markets tend to have less excess capacity and pay less of a premium to consolidators.
Operationally, scheduled passenger revenue per available seat mile (PRASM) finished the year at 8.25 cents, down 2.1% from 8.43 cents in 2012. Yield decreased in tandem to 9.28 cents, down 1.5% YOYLoad factor came in at an impressive 87.5%, despite an increase in capacity as measured by available seat miles (ASMs) of 8.8% YOY.
On the expenses side of the ledger, the carrier saw a mixed bag that resulted in a total 8.4% YOY increase to $841.4 million. Fuel increased a relatively minor 1.9% YOY to $385.5 million, despite a 0.9% YOY decrease in gallon price to $3.17. Employee driven costs, such as salaries and benefits, drove up 19% from 2012 to $158.62 million, while the carrier invested $21.67 million in marketing (12.8% higher than 2012).
On the marketing note, Allegiant has diversified away from its localized and internet-driven strategy utilized in the past. In 2013, the carrier ran its first nationwide television advertising campaign, and appears to be taking marketing more seriously as the ULCC competition in the US heats up thanks to Spirit’s rapid growth and Frontier’s transition to a ULCC business model under the wing of Indigo partners. Depreciation costs also rose heavily, 20% YOY, to $69.26 million. Maintenance costs, meanwhile, decreased 1.5% YOY to $72.81 million, even after the carrier’s MD80 fleet grounding disaster in the fourth quarter, reflecting the improvement in fleet mix with the addition of younger Airbus A319 and A320 aircraft.
Thanks to this cost discipline, the carrier’s cost per available seat mile decreased 0.4% to 10.33 cents, while excluding fuel the figure rose 5.3% YOY to 5.6 cents. The reduction in CASM was also driven by the carrier’s reconfiguration of its McDonnell Douglas MD-80 fleet to seat 166 passengers versus 150 passengers. This 10.7% increase in seating capacity drove down CASM by 5-6% on the fleet (because of the added fuel costs of more weight and the addition of another flight attendant).
Allegiant ended the year with $387.1 million in unrestricted cash, up 9.8% from $352.7. Total debt jumped a steep 55.3% to $234.3 million, though the carrier still has a negative net debt and a healthy debt to equity ratio of 62.4%. Over the course of the year, Allegiant returned $125 million to its shareholders through the combination of $42 million in dividends and $83 million (with a further $40 million authority outstanding) in repurchasing 913,806 shares of common stock. Operating margin for the fourth quarter was an excellent 12.7%, reflecting Allegiant’s strength in winter-seasonal sun markets.
For the full year, operating margin came in at 15.5%, a level that stands as the best or second best amongst US carriers depending on the figures reported by rival Spirit Airlines in mid-February. Capital expenditures rose 69.0% YOY to $177.6 million due to additions to the Airbus fleet, while 2014 capex is expected to come in much lower at $60-80 million. This space will be updated with free cash flow figures when those numbers become available. Return on invested capital (ROIC) came it as an excellent 16.4% while pretax return on equity (ROE) was an excellent 39.1%.
Allegiant Air has been consistently profitable for almost its entire existence but over the past couple of years, its business model has come under increased pressure. On one hand, Spirit Airlines has proven that there is plenty of money to be made in major markets with low fare stimulation thanks to legacy carrier consolidation and the upmarket shift by JetBlue and Southwest. Simultaneously, Frontier has generated strong results in its Philadelphia-area secondary airport “test tubes” of Wilmington (DE) and Trenton (NJ), which could pose a threat to Allegiant’s strength at secondary airports nationwide.
Allegiant of course has not sat still, and has started to make tentative additions to major markets (such as Las Vegas – Austin) and of course entered Hawaii with a fleet of Boeing 757s. But the Hawaii operation has certainly underperformed (forcing them to abandon smaller West Coast markets in favor of Vegas – Honolulu). The MD-80 fleet presents its own set of challenges with regards to operations, and there are rumblings about safety issues (though this could just be disgruntled employees).
Still, the long term prospects are bright. Continued fare increases by network carriers should offer Allegiant plenty of space to grow. And the surfeit of A320 family aircraft that will enter the market after the 737 MAX and A320neo come on the market later this decade will allow Allegiant to turn over its fleet at a reasonable pace. Moreover, relative to Spirit and Frontier (who have large A320neo order books), Allegiant’s fleet strategy coupled with the projected moderation in fuel prices thanks to the explosion of North American oil production from secondary sources such as shale and oil sands has positioned it to consistently deliver better free cash flow and return more cash to shareholders in coming years. Looking forward into 2014, Allegiant should continue to deliver strong results, though third party pressures will likely take a bite out of PRASM and earnings.