Allegiant Air parent posts higher earnings, lower fuel expenses

A dramatic decline in fuel prices helped Las Vegas-based Allegiant Air reap a double-digit profit margin and to project growth in 2009, despite a lousy economy that's dragging down tourism.

Allegiant Air parent Allegiant Travel Co. on Tuesday reported fourth-quarter earnings of $18.2 million, or 88 cents per share, an increase from $4.8 million, or 23 cents per share, a year earlier.

Revenue rose 21.2 percent to $122.4 million from $101 million.

Allegiant officials think growth will continue in 2009, even as the recession has lots of folks cutting back on trips to Las Vegas and other Sun Belt destinations Allegiant sells.

"The world has not ended," Allegiant President and CEO Maurice Gallagher told investment analysts during a conference call to discuss the airline's results. "It is hard to get that message across."

Allegiant's fuel expenses fell 23.7 percent in the fourth quarter. The decline, when coupled with efficiency measures taken to adjust to record-high fuel costs in summer, boosted margins dramatically.

Allegiant also benefitted from its continued emphasis on driving ancillary revenue, such as charges for seat assignments, travel insurance and other add-ons.

Ancillary revenue was up 50.6 percent to nearly $30.8 million.

In addition to the lucrative fourth quarter, Allegiant officials also discussed a $25 million stock buyback plan.

Although the company has cash to spare, independent investment researcher Reggie Middleton said the airline should avoid the stock buyback.

With $110.1 million on hand, Allegiant officials say theirs is the only domestic airline with more cash than debt.

But Middleton, who has criticized media companies' stock buyback programs, says investing in stocks could be a poor use of the money.

"They should be shopping for strategic and valuable assets that are underpriced in order to grow their business instead of playing money manager," Middleton said.

Allegiant's core airline business had a successful 2008 in many categories, despite high fuel prices in the first half of the year and a national economic malaise in the final months.

The number of passengers flown increased 31.7 percent from 3.3 to 4.3 million. Load factor, the percentage of full seats on a given flight, increased from 81.3 to 87 percent, which is among the highest in the industry.

The average stage length, a measure of distance flown, declined 4.3 percent. Shorter flights mean the airline uses less fuel which helps keep costs down.

Although per-passenger fuel costs for the year were up 14.6 percent to $53.42 from $46.61 in 2007, that figure was dropping fast by the end of the year. And it looks to continue moving down in 2009.

In the fourth quarter of 2008 the fuel cost per passenger had fallen to $36.70.

Gallagher said Allegiant eschewed opportunities to buy fuel in bulk, a practice referred to as hedging, when the price was high and is reaping the benefit as the price falls.

"In hindsight this has proved to be a wise decision," he said.

Still, there are potential challenges to Allegiant in 2009.

The airline expects fares to decrease 4 percent to 6 percent in the first quarter, a reflection of the bad economy.

He thinks the company will make up for the decrease, however, through savings on fuel and continued increases in ancillary revenue.

Also, airline officials are noticing stronger demand for departures away from their Sun Belt destinations to source markets in the Midwest, Mountain West and Great Plains.

They believe the demand comes from folks in Florida, Phoenix and Las Vegas using Allegiant to visit friends and relatives in their hometowns.

"This type of traffic is much more resilient in an economic downturn," said Ponder Harrison, managing director-marketing and sales, for Allegiant. "We serve points in small markets that, really, there is just no other way to get to."

Harrison also said contraction in the Las Vegas market could be offset if hotels continue deep discounting of room rates.

He said the airline has airfare-hotel package deals that can put two people in Las Vegas for multiple days for less than $500.

Allegiant Travel Co. shares fell $2.01, or 5.3 percent, Tuesday to close at $35.90 on the Nasdaq National Market.

Contact reporter Benjamin Spillman at bspillman@reviewjournal.com or 702-477-3861.