Allegiant Air Soars Above the Competition

Company Background:

Allegiant Air (NASDAQ: ALGT) is a low cost American airline with 1,800 employees headquartered in Las Vegas, NV providing service from numerous small cities to Fort Lauderdale, Las Vegas, Los Angeles, Orlando, and other vacation destinations.

Effectiveness on display:

Allegiant Air is a great example of effective alignment between a company’s operating and business models. They were the #1 ranked air carrier by 2015 operating margin percent as reported in Airline Weekly’s annual rankings. Allegiant has consistently been in near the top of Airline Weekly’s rankings since their current business and operating models were put into effect in the mid-200s. Their 22% margin in 2015 far exceeds that of much better known airlines like Southwest 15% and American 14% and their consistency in profitability is a rarity in the volatile airline industry with traditionally low margins that are largely driven by jet fuel contracting strategy.

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Business model:

Allegiant provides low cost US air travel to common generally southern tourist destinations from smaller northern cities with colder climates and limited flight availability.

Operating Model:

Allegiant operates in smaller markets with few direct flights to vacation destinations, including departures from many US cities on the Canadian border to cater to Canadian tourists looking to save money by flying from the US rather than Canada which traditionally has higher fares. It offers no frills service, few amenities, and limited flight selection on its given routes. It staffs crew on full day round trips so as to avoid costs of crew room and board on overnight stays. In larger cities, Allegiant flies into smaller airports when possible to minimize landing fees and rents counters hourly in terminals rather than have permanent staff and kiosks. For example, Allegiant lands in Orlando-Sanford Airport (SFB) and Phoenix-Mesa Gateway (AZA) rather than their much larger and expensive counterparts Orlando International (MCO) and Phoenix Sky Harbor International (PHX).

Why these models are unique:

The most profitable customer segment for most airlines is the perk and amenity hungry, high fare paying business travelers. Allegiant’s business model ignores this potentially lucrative segment and focuses on the cost conscious leisure traveler instead. While other airlines operating models focus strongly on turnaround time and high aircraft utilization, Allegiant flies their planes about half as much as the industry average and only operates each route on a few days a week. While large airlines use the hub and spoke model to ferry passengers around from location to location on new large fuel efficient planes, Allegiant only offers direct flights on smaller, older, and less fuel efficient planes.

Alignment and Support:

Allegiant’s operating model of only flying direct flights favored by tourists instead of business travelers from the north to warm vacation destinations creates a competitive advantage compared to larger airlines who try to service a wider variety of locations and customers. This model means that major airlines are more convenient for most routes and most travelers, but also require much larger investments in airplanes and ground equipment. A major component of Allegiant’s operating model is choosing to not operate on the large majority of popular air routes. Since they have fewer flights and locations to service, Allegiant requires fewer planes and much less overhead giving them a lower cost basis for their operations. Therefore, on the routes they do chose to operate, they can be the low cost and hassle free airline. The business model targets leisure travelers will accept less flight selection and flexibility for lower price and convenient direct flights into warm vacation destinations as they are less time and location sensitive than business travelers.

Performance Implications:

The end result of the effective alignment of Allegiant’s business and operating models is a small airline that performs much more consistently and profitably than the industry as a whole. The company is however, limited in growth opportunities, as the target market exists in critical mass in only so many locations such such that expanding aviation operations for leisure travelers can be attractively profitable.