Allegiant Travel Company (NASDAQ:ALGT) has become one of the most successful airlines in the U.S. (albeit not a very well-known one) by attacking a distinct niche: leisure travelers going from small cities to warm weather destinations. Focusing on markets where it does not face any competition has helped Allegiant Travel Company (NASDAQ:ALGT) generate margin performance near the top of the airline industry for the last several years.
Allegiant has also benefited from maintaining a very low cost structure. The company buys used, older-model airplanes that other airlines are replacing, which are often available at bargain prices. This allows Allegiant Travel Company (NASDAQ:ALGT) to concentrate its flying on days of the week and in months with the highest demand. Allegiant’s strategy of flying its routes less than daily works because leisure travelers tend to be more flexible in their scheduling than business travelers.
Earlier this month, Allegiant Travel Company (NASDAQ:ALGT) announced a new route that marks a significant shift in the company’s philosophy. Beginning in late October, Allegiant will serve the busy Los Angeles-Honolulu route twice a week. This route is already served by all three major network carriers, as well as Hawaiian Holdings, Inc. (NASDAQ:HA), with each carrier offering multiple daily flights. What is Allegiant up to? More importantly, will it work?
Rethinking the market
A few years ago, Allegiant purchased The Boeing Company (NYSE:BA) 757 aircraft, which are larger and have a longer range than the MD-80s that are the mainstay of Allegiant’s fleet. The primary reason for buying the 757s was that they would enable Allegiant to begin flying to Hawaii, a market that fits with Allegiant’s overall leisure-oriented strategy.
Allegiant finally entered the Hawaii market in mid-2012, and the company expanded its flight schedule later in the year and then again in early 2013. However, Allegiant Travel Company (NASDAQ:ALGT) has discovered that Hawaii demand is more seasonal than it expected, and some of its markets cannot profitably support even one or two weekly flights during the off-season. As a result, Allegiant is seasonally cutting service on most of its mainland-Hawaii routes in mid-August. It’s unclear whether all of those routes will be restarted during the 2014 peak season.
However, this move left Allegiant with a lot of extra 757 capacity. While the company has some ability to use those planes on other routes, the additional capacity cannot be absorbed in many of Allegiant’s markets. (The 757s contain nearly 35% more seats than Allegiant Travel Company (NASDAQ:ALGT)’s MD-80s.) Entering a busy market like Los Angeles-Honolulu could make sense insofar as there are enough travelers to keep planes full outside of the peak travel season.