Allegiant Travel Takes Flight

You either have to be clinically insane or just have too much cash lying around if you've considered investing in the airline sector recently. High oil prices are wreaking havoc on the bottom lines of many of the nation's largest airlines, including United Continental Holdings (NYSE: UAL  ) , AMR (NYSE: AMR  ) , and Alaska Air (NYSE: ALK  ) to name a few. There's definitely reasoning behind Warren Buffett's rationale for being very leery of the airline sector in general.

Despite these struggles, one gem continues to stand out quarter after quarter in the sector -- and it's one of the smallest companies of the bunch: Allegiant Travel (Nasdaq: ALGT  ) .

The company may sound familiar because I highlighted it as one of my 10 small caps to rule them all a few months back. Back then, I noted that Allegiant is unique in that, rather than hedging fuel costs, it instead cuts back on the amount of flights it undertakes. No other airline company out there does this, or does this on the scale that Allegiant does. So needless to say, I wasn't surprised in the least when Allegiant last night reported its 34th consecutive quarterly profit.

For the quarter, Allegiant reported a 19% jump in revenue on earnings of $0.62 per share, both of which easily surpassed analyst expectations. The key to Allegiant's quarterly strength continued to be reducing capacity to a level more in-line with consumer demand. Capacity for the quarter fell 2.6%, but the company was able to pass along an average total fare increase of 19.2% while also increasing its load factor another 20 basis-points to 92%. Even with a 37% increase in fuel costs (equivalent to $15 per passenger), the company was able to pass along a price increase of $19 per passenger.

But not everything can go Allegiant's way. One of my favorite figures, which clearly allows Allegiant to stand out among its peers, is its operating margin. While still in the double digits, Allegiant saw a hefty 640 basis-point drop in its operating margin to 10.3%. Compare this with other regional airlines like SkyWest (Nasdaq: SKYW  ) and Republic Airways (Nasdaq: RJET  ) , and you'll continue to see a considerable outperformance from Allegiant.

Continued capacity regulation and a planned Hawaii route, which the company expects to be operating by next summer, look like solid catalysts for this company to fly higher. Scheduled service passenger revenue grew by 27.5% in the second quarter and is projected to climb by 19%-21% in the third quarter. In short, Allegiant continues to be a princess surrounded by a sea of beasts. It remains the one and only airline on my personal buy watchlist.

What's your take on Allegiant Travel? Do these results merit an investment or would you park your money elsewhere? Share your thoughts in the comments section below and consider adding Allegiant Travel to your watchlist if you haven't done so already.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Allegiant Travel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that always has two feet on the ground.


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  • Report this Comment On August 02, 2011, at 3:14 PM, BeatofHawaii wrote:

    As for Hawaii, we'll believe Allegiant is here when we see the plane. Here's why:

    1. Allegiant was dead serious about HI before their problems with ETOPS and flag carrier status. A great deal has changed since then.

    2. Southwest has made their intention to begin service to Hawaii clear. We expect to see them flying trans-Pacific and perhaps inter-island as soon as next year.

    3. Alaska Airlines continues aggressive expansion into the Hawaii market. Between them and Southwest, it leaves little maneuvering room for Allegiant in HI.

    4. Virgin America may well take up a slot or two to HI, especially since AA pulled their SFO-HNL route last week.

    I've written widely about Allegiant and the entire Hawaii transport market on our website at http://beatofhawaii.com

    Aloha,

    Jeff

    Beat of Hawaii

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