Allegiant Finally Tackles the New York Market

Last week, Allegiant Travel (NASDAQ: ALGT  ) announced a plethora of new routes to begin this fall and winter. Among this group, two routes stand out: one from Stewart Airport in Newburgh, N.Y., to the Tampa Bay area, and one from MacArthur Airport in Islip, N.Y., to Punta Gorda, Fla. These routes represent Allegiant's first scheduled service to the New York metro area since early 2007. (Allegiant does operate charter service from Stewart Airport to Cancun on behalf of Apple Vacations.)

Allegiant already serves over 200 nonstop routes, but this new service to New York could represent the beginning of a major expansion opportunity. While New York already has plenty of low-cost-carrier service on hometown carrier JetBlue Airways (NASDAQ: JBLU  ) and -- to a lesser extent -- Southwest Airlines (NYSE: LUV  ) , Allegiant has a much lower cost structure than either of those airlines.

Allegiant therefore has an opportunity to become a price leader in the New York market. Lower airfare prices could stimulate incremental demand. As the company becomes better known in the New York area, Allegiant may be able to add a variety of other leisure destinations to its New York route map.

Price leader
Allegiant has built a highly profitable business model by avoiding congested airports, booking only nonstop itineraries, and embracing a direct sales model. These measures all help reduce the company's costs. According to a recent presentation given by Allegiant's management, it has the lowest cost structure in the airline industry excluding fuel costs. Including fuel, Allegiant's cost per available seat mile of 10.2 cents is slightly higher than that of fellow ultra-low-cost carrier Spirit Airlines (NASDAQ: SAVE  ) , but still more than 10% below any other competitor.

With such low costs, ultra-low-cost carriers like Allegiant and Spirit can offer significantly lower fares than competitors. Both companies also grab attention by offering rock-bottom base fares and then charging for "optional services" like checked and carry-on baggage, in-flight food and beverages, and seat selection. Allegiant supplements its income by selling all-inclusive travel packages, allowing it to earn commissions for hotel and rental car bookings.

Welcome to New York
Allegiant's New York service fits in well with the company's operating model. Rather than attempting to compete at the three major New York airports, Allegiant will serve two airports far out in the suburbs. Stewart Airport is roughly 50 miles north Manhattan, while MacArthur Airport is 45 miles to the east. These airports offer low operating costs and are sparsely utilized today.

Allegiant has had considerable success operating from similar airports located far from major urban centers. For example, Allegiant serves Canadian passengers from the Vancouver, Toronto, and Montreal metro areas respectively via Bellingham, Niagara Falls, and Plattsburgh (airports just on the American side of the border).

Allegiant may initially struggle to convince people from New York City proper to travel to Stewart Airport or MacArthur Airport for cheaper fares, but it will benefit from the large suburban population. Suffolk County, where MacArthur Airport is located, has a population of 1.5 million. Orange County (the location of Stewart Airport) is less populous, but still has nearly 400,000 residents.

Many suburban New Yorkers are accustomed to driving into the city whenever they want to fly. Allegiant will offer a compelling alternative for residents of New York's eastern and northern suburbs: cheap flights from nearby suburban airports to popular vacation destinations. If Allegiant's first set of New York routes prove successful, it could pave the way for additional service in the region.

Will Allegiant attack competitors head-on?
The biggest barrier to Allegiant's expansion in the New York area is that JetBlue and Southwest already offer service to Florida from Stewart Airport and MacArthur Airport, respectively. So far, Allegiant has followed its customary strategy by avoiding direct competition; neither of the two routes it announced last week is served by another carrier.

However, given the size of the New York market, Allegiant might want to consider going head-to-head with JetBlue and Southwest on other routes to Florida if its first two routes perform well. With its lower operating costs, Allegiant should be able to offer the lowest airfares in the market while maintaining a healthy profit margin.

There is some evidence that Allegiant is willing to enter a few high-traffic markets if doing so will allow it to stimulate incremental demand. For example, last month the carrier announced that it will serve the busy Los Angeles-Honolulu route starting in October. Allegiant thus may be laying the groundwork for a strategy of more direct competition with other airlines. This could make it a bigger thorn in the side of competitors in New York and elsewhere.

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