Updated 

Allegiant passenger numbers up, but revenues spook market


Allegiant Travel Co. posted typically strong passenger growth in June, but Wall Street seized on a different number to sharply drive down the stock Tuesday.

The Las Vegas-based company’s Allegiant Air unit carried 710,000 passengers during the month, 15.1 percent more than in June 2012, as the growth in scheduled service more than offset a shrinking charter business.

At the same time, the number of miles each seat flew with a paying passenger in it jumped 25.5 percent, to 694.9 million, a result not only of more customers but longer flights.

However, the estimate for how much revenue Allegiant would collect from each mile a seat flies dropped from May and spooked investors. The stock sank $7.61 a share, or 7.2 percent, to close at $98.48. On Friday, the stock hit its all-time high of $109.72.

The revenue benchmark, which includes not only ticket prices but extras such as luggage and seat selection fees, will drop from 6.3 percent to 5.9 percent in June. By contrast, the decline in May was only 2.7 percent.

In both months, the income from ticket sales fell at a steeper rate but was partially offset by Allegiant’s extra charges. This led analyst James Parker of Raymond James & Associates to downgrade his Allegiant rating from “strong buy” to “market perform,” the equivalent of neutral.

“There was softness in business travel commencing in March 2013, which was attributed largely to the (federal budget) sequester,” Parker wrote in a note to investors. “It appears that the weakness has spread to the leisure sector as indicated by Allegiant’s softer than expected unit revenue in June.”

That is important because almost all of Allegiant’s customers are bargain-hunting tourists.

“Moreover, Allegiant’s (revenue) weakness is not more heavily weighted toward new Hawaii service (started June of last year), but is widespread throughout the system,” Parker added.

Allegiant spokesman Brian Davis declined to elaborate on the June report.

In an unrelated move, Allegiant announced it would launch twice-a-week nonstop flights between Los Angeles and Honolulu.

In doing so, the airline will stray from its long-standing strategy of connecting vacation areas with small or midsized cities lacking head-to-head competition.

Although Allegiant has made some exceptions to this rule, such as the Las Vegas to Honolulu route, the Los Angeles flight will pit it against six rivals. This is by far the most crowded market Allegiant has entered.

“We don’t believe this is a change in philosophy,” Davis said. “We believe there is a larger underserved community (in Los Angeles) that can’t afford to pay what everyone else is charging.”

According to an Allegiant survey, the average roundtrip costs $570. Allegiant will start with a promotional $198 roundtrip, excluding extras; the Las Vegas to Honolulu flights have generally stayed below $400.

When Allegiant started cheap flights between Las Vegas and Long Beach, Calif., in late 2010, established carriers such as Southwest and JetBlue fought back with a fare war. Allegiant dropped the route.

Davis said the company’s relatively low cost structure would help it operate profitably even in the face of entrenched competition.

However, rivals such as Hawaiian Airlines have complained that the new flights between the West and the islands have diluted revenues in recent quarters.

Contact reporter Tim O’Reiley at toreiley@reviewjournal.com or 702-387-5290.

 

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