Allegiant Flying High

A New Age airline is showing there's money to be made despite high energy prices.

Tom Taulli
Tom Taulli
Dec 11, 2006 at 12:00AM
Other

Back in 2001, Allegiant Air (NASDAQ:ALGT) was in bankruptcy, with little hope of recovery. Since then, the company has staged an amazing comeback; in fact, last week, it had its IPO, in which the stock price surged 39.44% to $25.10. Given the company's innovative business model, it looks like the momentum will continue.

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 (NASDAQ:EXPE), or of global distribution systems, such as Sabre Holdings (NYSE:TSG). In fact, roughly 85% of bookings come from Allegiant's website.

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 (NYSE:AAI). As for Allegiant, Gallagher personally financed the company over the past few years and has yet to take a salary. In other words, his interests are clearly aligned with those of shareholders.

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.

Fly high with further Foolishness:

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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 327 out of 16,362 in CAPS. The Fool's disclosure policy operates nonstop to your chair.