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Known for its cutthroat competition and barely legal margins, the airline industry has a bad rap in the investing community. Like any other ultracompetitive market, though, there are opportunities for differentiated, low-cost providers to not just succeed, but fly. Southwest Airlines (NYSE: LUV) is a poster child of this phenomenon, with its stock price up an astounding 34 times over the past 30 years.

But that story's done and done. In December 2006, a new prince of the skies had an initial public offering at $18, and is now soaring at $43. That company is my "11 O'Clock Stock" pick: Allegiant Travel (Nasdaq: ALGT).

Allegiant fast facts

Market Capitalization

$850 million

Industry

Airlines

Revenue (TTM)

$605.8 million

Earnings (TTM)

$64.5 million

Cash / Debt

$249.2 million / $39.4 million 

Key Competitors

Southwest Airlines, UAL (Nasdaq: UAUA), Delta Air Lines (NYSE: DAL), JetBlue (Nasdaq: JBLU), US Airways (NYSE: LCC)

Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months.

Allegiant: The best airline in the world
That's a bold statement for an airline that most people probably haven't even heard of, but for its category -- low-cost carriers -- that's exactly what trade publication Aviation Week found in its cross-industry study. So how did Allegiant do it? How did Allegiant find a way to differentiate itself from the rest of the pack, carve out a nice little niche, own that niche, and then earn industry-leading margins and returns on capital? It did it because nobody else competed with it.


Source: Company presentations.

See that map? That's not your typical airline's route map. Allegiant targets and focuses on leisure travelers, a completely underrepresented population with different needs and wants compared to the business travelers that most airlines target. For instance, say you've planned a vacation in Tampa Bay, Fla. -- you don't care that your flight leaves in the afternoon, and you don't care that you have to leave on a Wednesday. What you do care about is that you get to fly straight out of your local airport in Peoria, Ill., instead of driving three hours on the interstate to Chicago, and that you get a direct flight to two weeks of sand and beaches. And that it's going to cost you less than anything else you could get.

A wizard disguised as an airline
And there's the magic: Allegiant operates 143 routes but only faces direct competition on 10 of them. That means it's a monopoly operator on 93% of its flight routes. Less competition means less cost for Allegiant, which means lower prices and higher volumes. And yet, the company's revenue per available seat mile (an industry metric that measures how efficiently an airline utilizes its seat capacity) hasn't suffered. By "unbundling the traditional airline product" -- in other words, you, the customer, only pay for exactly the amenities you actively desire: checked bags, seat selection, priority boarding, and so on -- Allegiant is able to advertise a lower headline price while still being able to extract enough ancillary revenues to generate the highest revenue per available seat mile vs. cost per available seat mile spreads in the industry.

 Airline

RASM

CASM

Difference

Allegiant

10.24

8.00

+2.24

Southwest Airlines

10.56

10.29

+0.27

JetBlue 

10.09

9.24

+0.85

UAL

11.61

11.43

+0.18

Delta Air Lines

10.34

12.32

(1.98)

US Airways

12.29

12.08

+0.21

Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months.

And as one would expect, the RASM-CASM spread is reflected in outperformance on every other metric, too.

Company

Market Cap

(Millions)

3-Year Revenue Growth %

FCF %

ROIC %

Cash-to-Debt Ratio

EV/EBITDA

Allegiant Travel

$850

26.8

15.4

19.9

6.3

4.5

Southwest Airlines

$9,004

4.7

0.6

3.1

0.8

7.2

JetBlue

$1,870

10.4

(7.6)

3.5

0.3

7.8

UAL

$3,906

(2.3)

2.3

8.8

0.5

4.9

Delta Air Lines

$9,355

17.2

(1.0)

5.3

0.3

7.1

US Airways

$1,720

(1.4)

(4.8)

6.3

0.4

6.1

Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months. EMITDA is earnings before interest, taxes, depreciation, and amortization.

Bottom line and risks
It is important to note that Allegiant's fleet is old. The average age of its aircraft is 20, which in plane years is probably up there in the 60s or 70s. As the company continues to grow and find new routes appropriate for its strategy, it will hit a major capex cycle where it needs to upgrade, replace, and augment its fleet. I believe its ample cash flow and balance sheet will be enough to let it get through these growing pains smoothly, and I'm not alone -- management recently announced that it was doubling its stock repurchase authority.

Against this background, though, it's also clear that the company is growing faster, earning higher margins, delivering better returns on capital, sporting a better balance sheet, and trading at a lower multiple than all of its peers. If you missed the Southwest rocket, this might be a second chance to get some air.

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Motley Fool Rule Breakers analyst Sean Sun does not own shares in any of the companies mentioned. Southwest Airlines is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.