This Is Your Captain Speaking: Buy Allegiant

Airlines make terrible investments -- at least, that's the conventional wisdom. There's evidence in the returns, too: Delta (NYSE: DAL  ) is down 42% over the past five years, and Southwest (NYSE: LUV  ) , once a reliable market-beater, is down 43% over the same period.

Not only is the airline business among the world's most capital-intensive, but air travel is heavily regulated, the industry's workforce is often unionized, mistakes are extremely costly, and airline companies' already narrow margins experience pressure from volatile fuel prices. There's room neither for management error nor, on the part of investors, a romantic view of flight and its attendant wonders. Just ask Warren Buffett. One of Berkshire Hathaway's (NYSE: BRK-B  ) most turbulent investments was USAir.

The Oracle has spoken: Stay away from the airline industry. But there are exceptions to every rule. Flying in the face of Buffett's advice is Allegiant Travel (Nasdaq: ALGT  ) , a little-known airline that has been profitable for nine straight years.

Before you run screaming for the emergency door ("AIRLINE STOCK! EJECT!"), cast your eye upon Allegiant's unique strategy, firm cost controls, and attractive cash flows. This small-cap gem is worth your consideration.

Diamond in a rough industry
Most airlines focus on business travel and major hubs like New York, Atlanta, Chicago, Charlotte, and Los Angeles. Allegiant does neither of those things. Instead, it aims to serve the leisure traveler in 64 small, regional airports like Salisbury, Md., and Minot, N.D., ferrying passengers nonstop to vacation destinations like Las Vegas, San Diego, Orlando, and Myrtle Beach.

To reduce costs, Allegiant uses older planes and only flies when those planes are booked to near-capacity. Its fares are very cheap, helping to attract customers, but the company generates significant revenue from charging for extras like checked bags and onboard snacks. This revenue center has grown significantly -- from $5.87 per passenger in 2004 to $36.36 per passenger in 2011.

The airline also keeps its marketing costs at rock bottom. According to its latest 10-K: "Our nontraditional marketing approach results in very low distribution costs. We do not sell our product through outside sales channels and, as such, avoid the fees charged by travel web sites (such as Expedia, Orbitz or Travelocity)."

It goes on to say: "We believe our percentage of website sales is among the highest in the U.S. airline industry. Further, we are 100% ticketless, which saves printing, postage, and back-office processing expenses."

Not like those other guys
It's easy to lump Allegiant in with Spirit Airlines (Nasdaq: SAVE  ) , another low-cost provider that focuses on leisure destinations. However, when you compare the two airlines' route maps (see Spirit's here and Allegiant's here), you can see that they don't cross paths much. Allegiant's management isn't publicly wrangling with any terminally ill veterans, either.

Combine that good stewardship with underserved markets, a low-cost model, solid ancillary revenue, and a healthy balance sheet that includes $350 million in cash versus $144 million in debt. In 2011, the company booked revenue of $779 million, an increase of 17% over 2010. Five-year revenue compound annual growth rate looks healthy at 25%.

As the economy improves, we can reasonably expect more people to travel, and in the second half of 2012, Allegiant plans to begin offering service to Hawaii, a move that should entice even more small-city folk to climb aboard.

Should you, too, airline-phobic investor? Share your fear of flying in the comments section below.

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Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. She recently flew Delta and it wasn't that bad. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Southwest Airlines and Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (7)

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  • Report this Comment On May 12, 2012, at 7:37 PM, sharkflyt wrote:

    Actually, I would have to disagree with your thoughts on buying Allegiant. I think Spirit Airlines route structure is more profitable and makes sense. True Allegiant has leisure travelers but they are capped at that. Those cities aren't in the growth spurt in which they pick up from. Spirit has the newest aircraft in the nation and have a system that keeps them on time such as bag fees at the gate.

    It appears that Allegiant and Spirit will be the dominating airlines in Las Vegas and that is good for the customer who flies in and out of those cities that both airlines serve. Southwest is bleeding cash rapidly and yes they say bags fly free, as a matter of fact it is written on the sides of some of their planes but the customer pays out the yahoo for those flights with SWA. I think Southwest is being kicked out of Vegas and this is good news for the customers.

    My bet is on Spirit Airlines as a stock and future growth. We are already seeing Vegas grow because of that airline. Allegiant still has time to grow but the aircraft they are flying has high maintenance and are much older which amounts to future costs for Allegiant. Maybe Spirit and Allegiant should come together and take the west and east right about now!

  • Report this Comment On May 14, 2012, at 9:32 PM, TMFCatB wrote:

    Sharkflyt, thanks for your substantive input. I'm not necessarily bearish on SAVE. I'm drawn to Allegiant's more unique route structure, which I don't feel is tied to population growth but with more people in ALGT-served markets choosing to travel as the economy improves. The company is keeping its plane maintenance costs under control, and there's a clear catalyst with the opening of the Hawaii routes. That's my take.

  • Report this Comment On May 21, 2012, at 2:39 PM, sharkflyt wrote:

    I think Hawaii market is great news for Vegas but still the route structure with Allegiant is capped! This doesn't mean they can't continue to do good business through it but it does mean growth to be low and non expanding.

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