Budget airline Allegiant Travel Company (ALGT 0.83%) posted strong first quarter earnings results on Wednesday afternoon. Revenue rose 8.8% year over year to $329.2 million.
Meanwhile, EPS more than doubled, rising from $1.86 in Q1 2014 to $3.74 last quarter. This comfortably beat the average analyst EPS estimate of $3.53. This stellar performance shows that Allegiant has recovered from the crew training issues that were plaguing it a year ago.
A record quarter
Allegiant's EPS of $3.74 easily set a new quarterly record for the company. Allegiant's 32.8% operating margin for the quarter also represented a new record.
Allegiant was able to add more capacity than originally planned toward the end of the quarter, during the busy spring break travel season. This extra capacity helped to reduce Allegiant's unit costs by spreading fixed expenses over more passengers. Allegiant also benefited on the cost side last quarter from favorable timing of some maintenance expenses.
Fuel was a big tailwind
However, cheap oil was by far the biggest driver of Allegiant's record profit in Q1. All airlines have benefited to some extent from the sharp drop in oil prices since last summer, but Allegiant was one of the biggest winners due to its unique strategy.
Whereas Spirit Airlines -- the other top U.S. ultra-low cost carrier -- maintains a very young aircraft fleet in order to maximize its fuel efficiency, Allegiant mainly flies older jets. (It has been adding some newer Airbus A320-series planes to its fleet recently, though.) This strategy allows Allegiant to keep its capital spending and fixed costs down, but the trade-off is that its planes use more fuel.
In fact, 2 years ago, fuel accounted for 49% of Allegiant's operating expenses. In Q1 2013, its average fuel cost per gallon for scheduled service was $3.41/gallon. By contrast, it paid just $1.96/gallon last quarter!
As a result, whereas Allegiant spent $108.5 million on fuel in Q1 2013, it only spent $69.6 million on fuel in Q1 2015 -- despite offering significantly more capacity last quarter.
Looking ahead
Allegiant barely averted a damaging pilot strike over Easter weekend by getting a court order compelling the pilots to stay on the job. Labor strife continues to be a risk for Allegiant, where unions have only recently come to power and management has traditionally held an anti-union stance.
However, if Allegiant can maintain labor peace, its profit should continue to rise thanks to the low oil price environment. Allegiant announced in its earnings release that pilots will receive a 5%-7% pay increase at the beginning of May due to Allegiant's increase in profitability -- which could help quell some of the labor unrest.
Allegiant is currently projecting that total revenue per available seat mile will decline by 8%-10% in Q2. Still, with non-fuel unit costs only expected to rise 0%-2% and fuel prices still far below last year's levels, analysts are expecting another quarter of rapid earnings growth in Q2.
Lastly, investors can also look forward to regular dividends going forward. While Allegiant has frequently bought back stock in the past and has even paid special dividends on occasion, it just began paying a quarterly dividend last month. This gives investors a little more clarity on what to expect in terms of capital return in the future.
