MIAMI — Allegiant Travel Company, the parent company of Allegiant Air, announced a $33.49 million second quarter profit on Wednesday, or $1.87 per diluted share. The figure represents a 29.9% year-over-year increase year-over-year (YOY) versus the same period of 2013, and marks Allegiant’s 46th consecutive quarter of profitability.

Operating revenues for the Las Vegas based carrier rose 13.6% YOY to $290.54 million. Scheduled passenger revenues grew 14.4% to $189 million as yields rose 6.5% to 9.45 cents, and passenger revenue per available seat mile (PRASM) rose 6.4% to 8.45 cents. Load factors and average per-passenger remained stable, reflecting a 7.5% YOY growth in capacity as measured in available seat miles (ASMs), and a 12.4% increase in traffic to 2.11 million passengers.

Ancillary revenues, which are critical to Allegiant’s a-la-carte business model, grew 9.8% YOY to $95.44 million. Air-related ancillary revenues, which include items ranging from bag fees to on-board food purchases, rose 12.1% to $85.78 million. Conversely, third party product revenue declined 6.9% to $9.66 million, or $4.58 per person. The increase translates to roughly $45.23 in fees and third party revenue per passenger, down 2.2% YOY. However, Allegiant’s average stage length is down about 3.0%, which means that on a per-ASM basis (PRASM contribution), average ancillary and third party revenue rose slightly.

We’ve been warning on Allegiant’s third party revenue figures for some time, and this quarter’s figures did nothing to dispel that worry. In nominal terms, these revenue figures represent just about 3% of Allegiant’s top-line numbers, but third party services are a critical portion of Allegiant’s overall value proposition. Many of Allegiant’s sales are driven by package customers (perhaps up to 10%) and a decline in third party sales thanks to less hotel room discounting (hotel room nights purchased decreased 19.8%) could close off a market that had been a strong growth driver for Allegiant over the past couple of years. On the airline’s quarterly earnings call, President Andrew Levy admitted that the third party revenue figures were a challenge.

“[We] see the primary reasons for the decline particularly in the Last Vegas hotel market, which is the still the dominant portion of the hotel revenue. So I think you have the combination of declines here associated with just a less favorable contract than what we entered in to back in the really bad times when the hotels were had a little less leverage…. And in addition to that, [there is the] continued shifting of the network, so that a greater percentage of our capacity is away from Las Vegas, which is helpful on the car side. [T]here [are] no new updates as far as how we plan to reverse the trend obviously, the lasting effect of this will certainly help as far as the year-over-year comps. But more important are some of the IT tools that are coming; some of which we have at our disposal now.”

Operating expenses for the airline grew 9.9% YOY in the second quarter to $234 million. Labor expenses rose fastest, reflecting Allegiant’s aging workforce, with a 19.3% rise to $47.30 million. Fuel costs rose 7.6% to $104 million, reflecting both a 5.1% increase in consumption, as well as a 2.6% increase in per-gallon price to $3.20, though overall fuel costs were essentially flat on a per-ASM basis. While Delta continues to see reductions in fuel price, the benefit to the rest of the industry from Trainer has begun to recede. Operating cost per ASM (CASM) grew 2.5% YOY to 10.23 cents, though it rose a more alarming 4.2% excluding fuel.

For the trailing 12-month period, Allegiant delivered a 17.5% return on capital employed, though that figure is sure to decline as Allegiant continues to refleet with A319s (including a recent purchase of 12 airframes) and A320s. Capital expenditures for the quarter totaled $257.0 million, nearly three times as much as they did during the same period in 2013.

Allegiant ended the quarter with $548.2 million in unrestricted cash versus $619.4 million in total debt, positioning Allegiant with a net debt of $71.2 million after it ended 2013 with no net debt. The rise in debt primarily occurred due to the uptake of 12 A319s from a European operator, which added $142 million in debt to the balance sheet. For the quarter, Allegiant recorded an operating profit of $56.4 million and an operating margin of 19.4%, up from 16.8% in the second quarter of 2013. Allegiant, along with fellow ULCC Spirit Airlines, continues to lead the US airline industry in terms of operating margin, though Delta (and potentially American) are quickly catching up.

Allegiant Air finds itself in an interesting position strategically. Years of consolidation and fare increases by legacy and network carriers have created a massive growth opportunity for ULCCs in the United States. Passengers around the country are starved for low fares, and pent up, organic demand at the fare levels Allegiant provides is perhaps upwards of 40 million passengers per year (extrapolating from previous years with similar economic conditions). But what aircraft can Allegiant use to fly these passengers?

The McDonnell Douglas MD-80s that form the backbone of Allegiant’s fleet are rapidly approaching the end of their life, not so much due to a lack of virtue on the part of the airframe but rather due to the heightening scarcity of parts. Allegiant’s current fleet plan calls for 53 MD-80s, 6 757s, 10 A319s, and 10 A320s in its fleet by the end of 2016, though a recent transaction could push the number of A319s up to 22.

Even with those aircraft, Allegiant is only pushing a 32% increase in fleet size, much smaller than the near-doubling that Spirit and Frontier are likely to pursue over the same period. But as mentioned before, the MD-80 fleet is on its last legs and A319/A320 secondhand demand around the world is still robust (driving up acquisition costs). The 757 could be an interesting add in limited markets, but it’s nearly as old as the MD-80 (admittedly with more cannibalization potential) and likely too big for most of Allegiant’s markets.

That places Allegiant is in the awkward position of having to replace at least 50% of its present-day fleet while simultaneously growing overall fleet count by upwards of 50%. Surveying the state of the secondhand aircraft market today, that doesn’t seem possible without so much capital expenditure that investors become extremely antsy. And if refleeting is as hard as projected, it won’t necessarily affect Allegiants profitability figures, but it will represent a massive opportunity lost.