I Pledge Allegiance to Allegiant

Like Warren Buffett, I do my best to avoid the airline sector. One of the main reasons Buffett prefers to stay away from investing in airlines has to do with the large capital costs that go into the business and the small margins (if anything) that the business and subsequently shareholders get in return.

Buffett is completely right. These high costs are exactly what have caused more than 100 airline bankruptcies since 1990 and are the primary reason that all national airlines have declared bankruptcy within the past decade.

But even in the worst sectors, a gem will shine through now and then. Allegiant Travel (Nasdaq: ALGT  ) is one such gem.

As I've surmised on multiple occasions, Allegiant's older fleet significantly reduced its upfront costs, allowing it greater flexibility to undercut national carriers on price and attract consumers. Unlike national carriers, it also has the flexibility to discontinue flying certain routes if they become unprofitable. It has the perfect formula for success in the airline sector and that's the main reason why Allegiant was chosen as one of my "small caps to rule them all" last year.

Last night, Allegiant added one more chapter to its superiority when it reported fourth-quarter and full-year results. Shockingly, Allegiant only met Wall Street's EPS estimates ($0.56) but did slightly surpass revenue forecasts ($193.9 million vs. $192.4 million). But don't let the fact that Allegiant didn't crush EPS estimates fool you; this was another strong quarter.

Allegiant was able to pass along a $10-per-passenger increase in fares that helped it grow revenue by 20% with just a 9.3% increase in capacity. Passenger revenue per available seat mile (PRASM), probably the most important bottom-line metric to determining an airline's health, jumped by 11.7% over the year-ago period and 19.2% for the entirety of 2011. Just look at Allegiant compared to some of the national airlines -- mercifully, I'll leave American Airlines off this list:

Company

PRASM Q4 Increase

Allegiant Travel 11.7%
Delta Air Lines (NYSE: DAL  ) 8.0%
US Airways (NYSE: LCC  ) 9.9%
United Continental (NYSE: UAL  ) 8.2%

Source: Individual earnings reports. PRASM = passenger revenue per available seat mile.

Allegiant not only surpassed these national carriers, it did so while increasing capacity as many of the national carriers, like Delta and US Airways, reduced capacity. This should have made PRASM comparisons even better for the national carriers, but just went to show just how superior Allegiant is compared to everyone else in the sector.

Rising fuel and maintenance costs on Allegiant's older fleet are the only two concerns that persist, though all airlines will share these concerns. For the fourth quarter, fuel costs rose $9 per passenger and engine maintenance costs jumped 45%. Thankfully, third-party revenue jumped 23% and non-fuel-related costs dropped 2%, which kept these higher expenses well under control.

Allegiant has plans in 2012 of adding capacity and new routes, and likely adding to its rapidly growing third-party revenue stream. It continues to grow shareholder equity and more than doubled its ending cash balance over the year-ago period. With the company forecasting PRASM growth of 9%-11% in January and 1%-3% in the first quarter of 2012, I am more than willing to once again pledge my allegiance to Allegiant as the best airline of the bunch -- period!

What's your take on Allegiant? Is it worth the gamble in an otherwise terrible sector or would you avoid airlines no matter what? Share your thoughts in the comments section below.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has also been known to pledge allegiance to the Detroit Lions. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Allegiant Travel. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 flies above its peers.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2012, at 11:57 PM, Melaschasm wrote:

    As a customer, I love Allegiant Travel. As an investor I do not like their P/E ratio of 17. That is high for a company with somewhat flat EPS over the past couple years.

  • Report this Comment On February 03, 2012, at 6:32 PM, kesehc wrote:

    Does anyone remember Valujet? Sure this airline "wins" the current Wall Street investor race to the bottom by outsourcing EVERYTHING. Customers love it because it's the cheapest.

    I have nothing against the fine people who are just trying to make a living working there. But when you fly this airline or buy it's stock, you support this kind of broken, dysfunctional model of a "company."

    Of course, only after the Valujet crash, and the 20/10 hindsight that comes with it, everyone realized this kind of a company was dangerous and couldn't maintain a safe level of operations.

    The cheapest, lowest cost model in this industry isn't worth the price.

  • Report this Comment On February 03, 2012, at 6:42 PM, diggerdan28 wrote:

    Allegiant has been a great addition to my portfolio. The one thing I don't like as a traveler is the use service providers instead of Allegiant employees at most of their stations. Service providers have no "allegiance" (pun intended) and it shows, especially at the counter.

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