Allegiant Travel Company's Softness Looks Cyclical

Allegiant Travel (NASDAQ: ALGT  ) is a hybrid airline stock, which should be a good thing for the company considering the eternal difficulty of operating a pure airline profitably. Allegiant derives significant income from its travel booking business and focuses on dirt cheap vacation packaging. The company, along with other upstart airlines, has done well over a multi-year period as the legacy carriers and other big names suffered, entered bankruptcy protection, and consolidated -- but now that trend appears to have turned upside down. Allegiant is feeling the pinch of what it means to be a discount airline -- increased expenses are very difficult to absorb. While the industry rises, can Allegiant keep up?

Core problems
Allegiant's web-based travel booking service has been a strong point for the company in the past, helping even out the sometimes lumpy earnings schedule inherent with airlines. At the moment, however, it looks like the asset-light, cash-generating component isn't enough to compensate for rising costs on the tarmac.

For one thing, Allegiant's fleet is old -- like 1980s' old. Dozens of its MD-80s are in line for major maintenance in the coming year. Last September, the company had to ground most of them to address an emergency slide issue. With such thin margins to begin with, Allegiant's bumped up maintenance costs may keep pressure on the bottom line for some time.

A better expense in the long run, but nonetheless limiting in the short term, are the company's new fleet additions, mainly Airbus jets. This is a necessary expense and will ultimately increase sales as passengers will much prefer a new Airbus over a 30-year-old MD-80. The new planes are more fuel efficient, safer, and all-around accretive to the company's operations. In 2013, the company added eight Airbus', and it tacked on two more this past month.

The company's non-airline assets are also in need of repair. In Allegiant's recent conference call, management cited two projects that are unrelated to the airline itself, but should be adding to the company's long-term sales. The company also noted that its technology and sales platform require upgrades and fixes. Again, these are necessary costs, and while it may make the Street angry in the short term, it's good to see management that isn't obsessed with the bottom line.

When it works, it really works
The stock sank 9% on the forward-looking warnings, but investors should also keep in mind how this company looks when it isn't burdened with expenses.

In its recently ended fiscal fourth quarter, Allegiant achieved its 44th consecutive quarter of profitability. It grew sales by 7%, operating income by just under 20%, EBITDA by 13.5%, and on the bottom line, an EPS gain of 23.7% to $0.94 per share.

These results reflect the strength in the industry at large, but they also demonstrate the fact that when the going is good for Allegiant -- it's really good.

Similar to how PRASM -- passenger revenue per available seat mile -- is a great metric for unit-level profitability, CASM -- cost per available seat mile -- is a go-to metric for measuring the cost of flying people around. Looking ahead, investors can expect between $100,000 and $110,000 maintenance expense per plane, leading to full year CASM (minus fuel) growth of 4%-7%. For the current period, CASM is expected to grow a disheartening 13%-15%, due to the above reasons as well as pilot training for the new Airbus planes. Investors should always double check whether CASM includes fuel costs, as it can quickly increase the numbers. 

The market may have disliked the direction Allegiant is flying, but it's better for the long run. Consider the weakness a cyclical point for the company. With the long-term prospects intact, Allegiant is no weaker today.

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