Thursday, April 26, 2018

Allegiant Air 1Q net profit up 31% on revenue tools, MD-80 retirements

Las Vegas-based Allegiant Travel Co., parent of ultra-LCC Allegiant Air, reported 2018 first-quarter net income of $55.2 million, up 31% from $42.2 million in the 2017 first quarter. Operating revenue was $425.4 million, up 12% from the year-ago quarter.

Allegiant’s ambitious plan to fast-track the retirement of its MD-80 fleet remains on track, and the associated efficiency gains along with expanded use of revenue management tools has executives bullish on the company’s revenue-generation potential.

Allegiant ended the first quarter with 32 MD-80s in its 88-aircraft fleet. It plans to park five this quarter, eight in the third quarter, and the last 19 in the final quarter. It will add 26 Airbus narrow-bodies—20 A320s and six A319s—as part of its transition to a single fleet type.

“Our second-quarter activity, which has 16 Airbus inductions from six different operators and five MD-80 retirements, is more than we would typically take on and accomplish in an entire year,” CFO Scott Sheldon said on an April 25 earnings call.

Allegiant’s original plan was to retain some MD-80s through 2019. But mounting reliability problems with the aircraft led management to revise its plan in mid-2017. Issues with the MD-80s were spotlighted in a recent CBS “60 Minutes” report that called the carrier’s safety culture into question. Allegiant executives acknowledged “reliability challenges” in 2015 in 2016, but said changes made to address them—including phasing out the MD-80s and personnel changes—have put those issues in the past.

“We have the proud distinction of having the best controllable completion at 99.9% of all US airlines since August 2017,” Allegiant president John Redmond said. “We’re doing significantly better than prior year on all reliability metrics, we and other airlines track.”

Redmond said bookings dropped and cancellations rose immediately following the April 14 “60 Minutes” story, but the long-term effect will be negligible. “The degree of these cancellations and bookings have reduced each day to a point we were starting to reach normalcy,” he said, adding that full-year guidance will not change as a result.

Meanwhile, the company is testing its new revenue management system on about 80% of its capacity as measured by available seat miles (ASMs). Early returns show the system boosts total revenue per available seat mile (TRASM) 1-2 points compared to markets where it is not used, SVP-commercial Lukas Johnson said. “The reason we haven’t gone to 100% [of ASMs] is because we're still seeing enough opportunity to improve the bulk of the 80%,” he said. “We think there’s still plenty more that the system can do.”

Replacing the MD-80s with more flexible, fuel-efficient Airbus narrowbodies adds another dimension, Johnson said. “The Airbus, because it is so much more efficient, you’re seeing us being able to make markets, seasons, [and] days a week work that the MD-80 simply wasn’t able to.”

For the first quarter, TRASM was 11.30 cents, up 1.4%, factoring in the company’s new revenue-recognition standards. Excluding the standards, TRASM was up 2.5% on a like-for-like basis. Cost per available seat mile last quarter was 9.27 cents, up 2.2%, and 6.43 cents ex-fuel, down 2%.

Looking ahead, second-quarter TRASM is expected to be down 2% year-over-year (YOY) because of the earlier Easter holiday. For the year, Allegiant remains on track to increase ASMs 11%-15%. Fuel costs are now projected at $2.20/gallon, up 3 cents over earlier guidance.

(Sean Broderick - Aviationweek / ATWOnline News)

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