Allegiant Travel: The sky's the limit
Over the past several years, civil aviation has seen more than its fair share of turbulence. In the wake of the 9/11 attacks, terrorism fears crippled the industry, leaving domestic air travel virtually grounded and sending most airlines into a tailspin. An economic downturn, coupled with Iraq uncertainties that caused a surge in oil prices, didn't help matters.
Quickly losing altitude, the nation's largest carriers scrambled to gain stability: United Airlines (Nasdaq: UAUA), Delta Air Lines (NYSE: DAL), Northwest Airlines (NYSE: NWA) and US Airways (NYSE: LCC) sought bankruptcy protection. Continental Airlines (NYSE: CAL) and American Airlines (NYSE: AMR) avoided Chapter 11 reorganization but raised fares, eliminated jobs and cut employee wages and benefits.
With the fear of flying having receded and the economy rebounding, the big boys are in their best shape in years. But now there is a new challenge to contend with: low-cost competition. Discount carriers like Southwest Airlines (NYSE: LUV), JetBlue (Nasdaq: JBLU) and Midwest Express (AMEX: MEH) have siphoned away passengers from full-service airlines.
One high-growth small cap, Las Vegas-based Allegiant Travel Company (Nasdaq: ALGT), is flying high, while carving out a cut-rate niche at underserved airports. Allegiant Air flies budget-conscious travelers from about 50 small U.S. cities to world-class leisure destinations such as Las Vegas, Nev., Phoenix, Ariz., Orlando, Fla., Fort Lauderdale, Fla. and Tampa/St. Petersburg, Fla.
Allegiant is a low-fare outfit which has a fleet of MD-80 series jets (with comfortable seating and spacious overhead luggage bins), offers ticketless "open seating" and prides itself on providing superior customer service. The company also sells bundled hotel rooms, rental cars and other travel-related services through Allegiant's other subsidiary, Allegiant Vacations, to drive ancillary revenues.
Since its IPO in December 2006, Allegiant has had a smooth take off, with its shares soaring almost 70% so far. Allegiant reported second-quarter 2007 results on Aug. 6, posting operating revenue growth that was up 49.1% to $88.94 million, from $59.67 million in the year-earlier period. Net income more than doubled to $9.98 million or $0.49 per share, compared to $4.70 million or $0.28 per share in the prior year period. And capacity is growing. The airline's load factor—the percentage of seats filled—jumped 55.8%, from 78.4% to 86.8%, in August 2007, compared to the corresponding month last year.
Citing Allegiant's initial success, Avondale Partners issued a bullish outlook on Sept. 10, rating the stock a new "market outperform." Senior Research Analyst Robert McAdoo, who has 20 years of airline industry experience, set the one-year price target at a whopping $50 per share.
Matrix Research initiated coverage and rated Allegiant a "strong buy." In a Sept. 14 research note, analyst Daniel Scalzi mentioned that the company's sales rose 60% in the quarter, while a 40% decline in capital during the period substantially improved the company's return on capital, the analyst said. Scalzi commented on robust financial performance, noting that the stock exhibits "very strong EVA performance and very low risk that more than compensates for an elevated valuation."
On Sept. 17, Allegiant announced the resignation of Chief Financial Officer Linda Marvin, effective on Sept. 30 (no successor has been named and she will stay onboard until Dec. 31 in a transitional capacity).
"As an early member of Allegiant's management team, the opportunity to contribute towards and witness the company's growth and progress over the past six years has been a tremendous professional experience," Marvin said in a statement. "In my opinion, Allegiant is positioned for continued success and I will sincerely miss being part of the core team that has been assembled at the company. The decision to resign my position as CFO is driven by a desire to spend more time with my family and to focus on other personal interests."
The good news: Marvin is leaving the company with a clean bill of financial health. Looking ahead, Allegiant Air anticipates third and fourth quarter year-over-year ASM growth to be in the 30% to 40% range, and 2008 year-over-year growth of at least 30% with departure growth of at least 25%. The company, which is continually adding new routes and growing its fleet, has committed to purchasing eight MD-80 aircraft for delivery through the first quarter of 2008.
While the airline sector is currently benefiting from record passenger demand, which has helped lift profitability and overcome rising fuel prices, the industry's good fortunes usually fall as petroluem prices rise. In fact, the International Air Transport Association, a trade organization which represents over 260 airlines, warned that the sector's profits will fall by 19% next year. "The continuing high price of oil combined with turmoil in credit markets is a cause for concern in 2008," IATA Director General Giovanni Bisignani said in a Sept. 17 press conference at their Montreal headquarters.
Though fuel costs and credit woes are always issues of concern and larger carrier consolidation is likely, a coherent strategy, strong growth potential and the fact that frequent fliers and travel professionals give the airline high marks probably means friendly skies ahead for Allegiant.
During midday trading on Tuesday, Allegiant shares were up $0.75, or 2.69%, at $28.63. The stock hit a 52-week high of $36.51 on Feb. 22. Analysts’ consensus one-year target estimate is $44.50.
