Back in 2001, Allegiant Air
Allegiant focuses on small cities, which are often neglected. The value proposition for customers is certainly enticing: rock-bottom fares and nonstop flights to major leisure destinations, such as Las Vegas and Orlando.
"By focusing on small markets with no competing nonstop service providers, Allegiant is shielding itself from profit-eroding price wars," Rafi Mohammed, an expert on airline pricing who operates Pricingforprofit.com, told me in an interview.
What's more, Allegiant is relentless on having a low cost structure. For example, the company keeps most of its planes in leisure locations, which means more efficient use of airport facilities, personnel, and spare parts inventories.
There are other strategies as well. The fleet has only one type of aircraft (MD80 series planes), which has a low ownership cost. The simple product offering means no overbooking, no frequent flyer programs, and no selling of connections. And there is no use of middleman services, such as travel sites like Expedia
Moreover, the company uses innovative approaches to generate ancillary revenues, which are now about $15 per scheduled service passenger. These revenues include add-ons like vacation packages (hotels, rental cars, attractions and so on); the sale of beverages and snacks; and even the sale of advance seat assignments. By far, the biggest source of ancillary revenue is hotel rooms -- the company booked more than 283,000 hotel nights for 2006.
Something else: Allegiant's CEO, Maurice J. Gallagher Jr., has extensive industry experience, having co-founded ValuJet, now AirTran Holdings
And the financial results have been strong. For the first nine months of 2006, revenues increased 94.9% to $180.2 million and net income increased 33.7% to $10.3 million.
However, as is often the case with a hot IPO, the valuation is not cheap, with a price-to-earnings ratio of 39 (assuming the company generates about $12 million in net income). So, while the company has a solid business and good growth prospects, it's probably a good idea to wait until the quick trading subsides.
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