Allegiant Keeps Flying for Shareholders

Allegiant Travel (NASDAQ: ALGT  ) has been perhaps the most consistent performer in the airline industry over the past decade, delivering substantial profit to shareholders in the process. Last week, the company reported Q4 earnings that beat analyst expectations once again. Full-year 2012 EPS of $4.06 was a new record for the company. Moreover, Allegiant is well-positioned to generate another year of strong profit growth in 2013.

Fuel efficiency gains
Allegiant has historically saved money and increased its flexibility by minimizing aircraft-related capital expenditures. While Delta Air Lines (NYSE: DAL  ) has followed a similar strategy of utilizing older aircraft than peers, Allegiant has taken this policy to the extreme. Allegiant only buys used aircraft, and until last year, exclusively flew the MD-80. However, this reliance upon cheap MD-80s carried a cost: poor fuel efficiency.

As fuel prices have risen, Allegiant has moved to improve its fuel efficiency. Last year, the company added Boeing 757 aircraft, which are larger than the MD-80s and consume less fuel per seat. This year, Allegiant is adding Airbus A319 and A320 aircraft to its fleet, which use much less fuel than the MD-80. Lastly, Allegiant is about to finish a project to add 16 seats to each of its MD-80s, spreading fuel costs among more passengers.

Thus far, these actions have boosted Allegiant's fuel efficiency by 11% in the past five quarters (from 59.1 available seat miles, or ASMs, per gallon of fuel in Q311 to 65.6 ASMs per gallon in Q412). The savings will have a significant impact on Allegiant's bottom line. In 2012, Allegiant spent $378 million on jet fuel, representing 48.7% of total operating expenses of $776 million. As Allegiant's fuel efficiency continues to improve over the next year or two, the reduction in fuel expense will boost the company's operating margin.

New market opportunities
Allegiant entered the West Coast-Hawaii market in mid-2012 with two routes, Las Vegas-Honolulu and Fresno-Honolulu. The company added a number of additional routes to Hawaii in November, and this week it is adding service from three more cities (Phoenix, Spokane, and Boise). These routes were made possible by Allegiant's acquisition of Boeing 757s, because the MD-80 does not have the necessary range for Hawaii flights. Hawaii flights fit in perfectly with Allegiant's business model of bringing leisure travelers from smaller markets to seasonal warm weather destinations. Moreover, Allegiant will have competition on less than half of its Hawaii routes, because market leaders Hawaiian Airlines (NASDAQ: HA  ) and Alaska Airlines (NYSE: ALK  ) are not equipped to serve smaller cities.

Allegiant's recent decision to acquire Airbus aircraft will also open new market opportunities. Not only are the Airbus planes more fuel-efficient than the MD-80, they also have superior capabilities: longer range and shorter takeoff/landing distances. As a result, adding A319 and A320 aircraft will generate a number of new route opportunities that were not feasible with the MD-80.

Conclusion
Allegiant's management team has delivered consistent profitability for shareholders over the past 10 years. Moreover, the company has clear strategies for growing the bottom line. Most notably, Allegiant is taking advantage of favorable pricing in the marketplace to buy and lease more fuel-efficient and more capable Boeing 757 and Airbus A319/320 aircraft. These acquisitions will open new route opportunities while boosting Allegiant's profitability.

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