Tiny Allegiant Air thrives on low costs, high fees

 

Associated Press

While other U.S. airlines have struggled over the past decade from the ups and downs of the economy and the price of jet fuel, Allegiant Air has been profitable for 10 straight years.

The tiny airline focuses on a niche ignored by other airlines: It only flies from small cities to sunny vacation spots, including Fort Lauderdale.

Allegiant entices people who otherwise wouldn’t fly with low fares and non-stop flights. Then it aggressively pitches them hotels, rental cars, show tickets and other entertainment, earning millions in commissions.

Passengers face fees for almost every service and amenity imaginable. At Allegiant, fees for checked baggage and changing an itinerary – which are common on many airlines – are just the beginning.

The Las Vegas-based airline charges extra to book flights online, or to use a credit card. Selecting a seat in advance costs $5 to $75 each way, depending on the length of a flight. Even a bottle of water costs $2.

Flying Allegiant isn’t glamorous. While other airlines tout new aircraft with Wi-Fi and TVs in every seat, Allegiant buys old planes to avoid hefty aircraft loans. And to pack in as many passengers as possible, its seats don’t recline. But for small-town Americans with limited flight options, these inconveniences are worth it for a few days of sunshine.

“They could be the worst airline in the world and we’d fly them because we want to go to Vegas,” says Tom Mayo of Cedar Rapids, Iowa, who recently flew there with his family. “It’s our only option.”

Allegiant offers non-stop service from places like Owensboro, Ky., Casper, Wyo. and Appleton, Wis., to popular destinations in Nevada, Florida, Hawaii and Arizona. (The airline flies between Fort Lauderdale and eight cities: Asheville, N.C.; Grand Rapids, Mich.; Greensboro, N.C.; Greenville, S.C.; Huntington, W. Va.; Knoxville, Tenn.; Lexington, Ky.; and Plattsburgh, N.Y.) These may not be the most coveted routes in the airline business, but that is precisely why Allegiant likes them.

Only 17 of Allegiant’s 203 routes are flown non-stop by another airline.

“Typically, the best way to make money is not to compete with somebody,” says Andrew C. Levy, president of Allegiant Travel Co., who sits in a cubicle next to the rest of his staff.

Rather than battle major carriers for customers on routes between major cities, Allegiant uses its marketing muscles to convince people in small towns to fly away for a vacation.

“Allegiant tends to bring people into the airport who wouldn’t normally fly,” says Tim Bradshaw, director of the Eastern Iowa Airport in Cedar Rapids. “It brings people off the couch.”

Last year, 7 million passengers took a flight on Allegiant. That is a sliver of the 642 million people who took a domestic flight last year. But Allegiant earned a whopping $11.22 each way from those passengers. On average, the airline industry earned 37 cents each way, per passenger, according to Airlines for America, the industry’s lobbying group. Southwest Airlines, one of the industry’s most profitable carriers, made $3.85 per passenger last year.

Allegiant is ruthless about keeping its costs down. Its employees are some of the lowest paid in the industry, in some cases making $20 an hour less than colleagues at other airlines. It pays cash for airplanes nearly twice as old as everyone else. It only sells directly to vacationers, refusing to pay Expedia, Orbitz or other sites to list its flights.

And if you have a question, it will cost you: the airline doesn’t have a toll-free number.

Like some other budget airlines, Allegiant advertises extremely low base fares and then tacks on numerous fees. A roundtrip ticket with Allegiant costs $195, on average. But passengers pay an additional $83 in fees – or 30 percent of the total cost of flying.

To book a trip by phone, Allegiant charges $50 for each roundtrip ticket. To book online costs $20 for each roundtrip ticket. The only way to avoid the fees is to purchase tickets at the airport, something fewer than 3 percent of its customers did last year. But that’s not an easy alternative — ticket counter hours are extremely limited.

But whether you book by phone, Internet or in person, paying with a credit card costs an extra $8.

Placing a suitcase in an overhead bin is $10 to $25. Boarding passes signify who has paid the fee. If passengers show up at the airport with a large carry-on bag and haven’t prepaid the fee, the airline penalizes them an additional $25 to $50, depending on the route.

But what really makes Allegiant different are the commissions it earns from selling hotel rooms, rental cars and other extras including Everglades boat tours and theme-park tickets. It even gets people to attend timeshare sales presentations. Before a passenger can finalize a ticket purchase online, they must click through page after page offering them these add-ons.

Last year, revenue from commissions totaled $36 million, or nearly $12 per roundtrip passenger.

“I don’t think of them as an airline. I think of them as a travel company,” says Helane Becker, an airline analyst at Cowen Securities.

Once onboard, Allegiant passengers are again bombarded with sales pitches. On a recent flight from Cedar Rapids to Las Vegas, flight attendants came over the loudspeaker and hawked show tickets and airport shuttles. The in-flight magazine is filled with ads for shows and attractions instead of stories. One ad offers $30 off a Las Vegas helicopter tour if purchased from flight attendants, who are paid extra for each item sold.

“They do a fantastic job packaging,” says JetBlue CEO David Barger. “I think we can learn a lot from what Allegiant does.”

Ben Baldanza, CEO of Spirit Airlines – the only other U.S. carrier to charge for overhead bin space or for booking over the Internet – also respects Allegiant’s ability to sell extras, such as a round of golf in Myrtle Beach, S.C.

“They developed that expertise earlier than we did,” Baldanza says.

Spirit focuses on getting passengers between big cities cheaply; Allegiant taps into people’s desire to escape small-town life for a few days.

Most airlines promote their new first-class seats or individual TV screens. Allegiant – which only offers coach seats – promotes its destinations: Las Vegas gamblers smiling after winning at roulette, a hot-air balloon floating over the Arizona desert or a woman in a bikini sipping a frozen drink on a Hawaiian beach.

Allegiant’s passengers aren’t sold on the airline but on the escape.

An hour and a half before a recent flight from Cedar Rapids to Las Vegas, a spare seat couldn’t be found in the airport bar. It was only 11 a.m., but travelers like Bridget Estrada and her four friends were too excited for their trip to wait.

It was only Estrada’s second trip on a plane and her first in 13 years. She was nervous and gave a quick thought to her husband and three kids at home. But she and her friends quickly got back to drinking hard lemonade, mapping out their weekend away from Iowa.

A few feet away, other passengers shared tips on attractions, buffets and the cheapest blackjack tables.

“You must see the pirate show,” one insisted.

Allegiant finds ways to profit on routes other airlines couldn’t make work, often swooping in after they pull out. This month, it started flying between Asheville, N.C., and Tampa, a route abandoned by AirTran after Southwest Airlines acquired it.

Like other discount carriers, Allegiant prefers small airports that charge airlines lower rents, even if they aren’t the most convenient. In Orlando, that means flying into Sanford, Fla., 30 minutes further from Walt Disney World than Orlando International Airport.

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.

The bigger problem is if a mechanical issue forces a plane to be grounded. Given its limited schedule and packed planes, there usually isn’t another flight to book passengers on. Instead, they are left waiting six hours while a new plane is flown in.

Sometimes flights are postponed to the next day. In one extreme situation in March, more than 1,700 passengers flying to and from Hawaii saw multi-day delays, including one flight that was 52 hours late.

That’s a lot of time to kill at an airport bar.

Read more Travel stories from the Miami Herald

  •  
This mural is a collaboration between New Zealand artist Tanja Jade and Australia artist Dabs Myla, on the wall and alleyway of a car dealership in Kakaako, in Honolulu.

    Hawaii

    Street art is the draw in Honolulu’s Kakaako

    Honolulu is famous for gold-sand beaches and big waves. But the city’s warehouse district, called Kakaako, is famous for a different sort of attraction. You won’t find kitschy Hawaiian souvenir shops or hordes of tourists here, but you will find a thriving urban arts scene, with colorful street murals so big they stretch across walls and sometimes entire sides of buildings.

  • The travel troubleshooter

    What happened to the repair records for my damaged rental car?

    Q: I recently rented a car from Europcar in Brussels. I declined the collision damage waiver (CDW) provided by Europcar in favor of the CDW on my Capital One World MasterCard.

  •  
The number of smartphone and tablet apps that allow a user to search for and bid on the lowest prices for upscale hotel rooms has dramatically increased in recent years. Using them, along with third-party booking sites like Kayak.com and the hotel's own app or website, can net travelers some surprising savings.

    Travelwise

    Battle of the apps: last-minute deals on upscale hotels

    If last-minute hotel booking apps make you think of impetuous travelers on a budget, think again. The market for such apps and websites is becoming increasingly crowded, making it easier for those looking for upscale hotels to find eleventh-hour discounts.

Miami Herald

Join the
Discussion

The Miami Herald is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere on the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

The Miami Herald uses Facebook's commenting system. You need to log in with a Facebook account in order to comment. If you have questions about commenting with your Facebook account, click here.

Have a news tip? You can send it anonymously. Click here to send us your tip - or - consider joining the Public Insight Network and become a source for The Miami Herald and el Nuevo Herald.

Hide Comments

This affects comments on all stories.

Cancel OK



  • Marketplace

Today's Circulars

  • Quick Job Search

Enter Keyword(s) Enter City Select a State Select a Category