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Continued: Allegiant Air thrives on routes other airlines ignore: small cities to sunny vacation spots

  • Article by: SCOTT MAYEROWITZ , AP Airlines Writer
  • Last update: June 28, 2013 - 10:45 AM

Frugal decisions like that helped Allegiant post a net profit of $78 million last year on revenue of $909 million. Its 8.6 percent profit margin was the highest of any U.S. airline, making it a darling of Wall Street.

The last five years have been good for airline investors. After a major spike in fuel prices in 2008 and a drop in business travelers, airlines tweaked their business models, adding baggage fees and cutting unprofitable flights. They started to make money and their stock prices climbed. While the S&P 500 climbed 26 percent in the past five years, an index of all U.S. airline stocks has tripled. Allegiant's stock has done even better, increasing more than fivefold to $105.40

Allegiant has 64 planes and flies to 87 cities, but it's tiny compared with an airline like United, which carried 20 times as many people last year, often on much longer flights.

The airline got its start in 1998 as a charter operation with one airplane. By February the following year, it had started scheduled flights between Fresno, Calif. and Las Vegas.

But its business struggled and less than two years later, it filed for bankruptcy protection. Maurice J. Gallagher, Jr., the airline's major creditor and a founder of ValuJet Airlines, gained control during the reorganization and became CEO. ValuJet was a low-cost carrier that changed its name to AirTran after a 1996 fatal crash in Florida.

Gallagher moved the airline from Fresno to Las Vegas; secured a lucrative contract with Harrah's to provide charter services to its casinos in Laughlin, Nev., and Reno, Nev.; and started to transform Allegiant into a low-cost carrier.

"The model evolved out of survival," says Gallagher, who is still CEO.

By 2003, the airline started turning profits, and it hasn't stopped. Gallagher's nearly 20 percent stake in the airline is now worth more than $380 million.

Allegiant benefits from paying lower salaries and having work rules that are more favorable to management than at most airlines. Flight attendants with 15 years of experience are paid $34 for each hour their plane is in the air — $10 to $20 less than colleagues at larger carriers. Planes and crews typically end up at their home cities overnight, avoiding hotel rooms.

Wages could eventually shoot up. Pilots, flight attendants and dispatchers have all voted in the past two and a half years to join unions. The company has yet to sign a contract with any of them.

"We've been told several times at the (negotiating) table: If you don't like this job, there's the door," says Debra Petersen-Barber, who has been an Allegiant flight attendant for eight years and is the lead negotiator for the Transport Workers Union of America. "We have no value. We're easily replaced."

Thanks to its choice of aircraft, Allegiant has more flexibility than other airlines in deciding when and where to fly.

Instead of buying the newest, most expensive planes, the airline buys used, inexpensive jets. Its planes are 23 years old, on average, compared with the industry average of 14 years.

Each used MD-80 costs $3 million, compared with $40 million for a new Boeing 737 or Airbus A320 of similar size.

"When you have such little investment in an aircraft, you only fly it when it's going to be full of passengers," says Peter B. Barlow, an aircraft finance lawyer at Smith, Gambrell & Russell. "Other airlines don't have that luxury. They need to keep their aircraft in the air in order to make the economics work."

So on Tuesdays, when most of Allegiant's customers are stuck in the office, the airline keeps nearly all its planes on the ground.

Flying older planes has drawbacks, though. They burn more fuel, something Allegiant combats by squeezing 166 passengers onto planes — 26 more than American Airlines has on comparable jets. They also have more mechanical problems, resulting in more delays.

One of every four Allegiant flights last year was at least 15 minutes late, the worst record in the industry, according to flight tracker FlightAware.

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