Monday, March 7, 2011 | 3 a.m.
It’s pretty easy to pick the standouts in the volatile airline industry.
Southwest Airlines is consistently profitable. JetBlue and Virgin America have won accolades for their innovative approaches.
And then there’s Las Vegas-based Allegiant Air, a division of publicly traded Allegiant Travel Co., which has been consistently profitable — for 32 consecutive quarters — and prides itself in its unconventional approach to low-fare travel and value for its customers.
The seventh-busiest carrier at McCarran International Airport serves 73 cities nationwide and has 45 routes to and from Las Vegas, primarily to small cities with no competition. Although the big airlines fly passengers to Las Vegas from New York, Chicago and Los Angeles, Allegiant goes after customers in places such as Fort Collins, Colo.; Fargo, N.D.; and Billings, Mont., running flights only a few times a week.
Allegiant has quietly become one of Las Vegas’ largest employers, with 934 workers — 606 at the airport and 328 at its headquarters in southwest Las Vegas. That’s before last week’s announcement that it will be laying off 168 airport employees in May when it will begin contracting ground operations. The company hired 64 people in January and is working to fill 38 openings.
One of Allegiant’s corporate leaders is President Andrew Levy, who has been with the company since 2001 and has been president since October 2009. Levy is responsible for market and fleet planning, scheduling, pricing, sales and marketing and corporate development.
He held management positions at Mpower Communications and was a vice president at Savoy Capital, an investment company focused on aviation. Levy was part of Allegiant founder Maurice Gallagher’s management team at Valujet Airlines from 1994 to 1996.
Levy talked with In Business Las Vegas about the airline’s plans to expand to Hawaii, the recent union vote by flight attendants and the prospect of instituting a carry-on baggage fee:
IBLV: Allegiant continues to grow rapidly and you now have 73 cities and 45 Las Vegas routes. What other route expansion do you expect in 2011?
Levy: I think in 2011 we’re going to grow slower than we have in the past couple of years. At least for the first half of the year, I can say that with certainty. That’s really driven by the high energy prices we’ve seen. It’s gone up dramatically in the past two months. From the first week of December to the first week of February, just to pay for increases in fuel cost alone takes about 6 1/2 passengers per segment length, based on the average fare that we can charge. So fuel is very much on our minds, and as a result, we’re slowing down our growth rate until we have a little better clarity as to where fuel settles. Once it settles somewhere, we can live with it. When it rises very quickly, it makes it very difficult to plan. We’ll see what happens in the back half, but I think this will be a slower growth year. We will add some new routes, though. We’ll add some small cities, both into Las Vegas as well as to our East Coast destinations. We’ll continue to connect the dots, as we put it, where we have existing small cities that might be served to other destinations. For instance, we have 45 routes, as you mentioned, to Las Vegas. We have about 12 to Southern California. Not all 45 are going to be cities we want to serve to L.A. But there are several that we will. So we’ll connect the dots to places where we have a presence. I don’t expect us to serve any new destination markets that we don’t already serve this year. Certainly next year, Hawaii. Hopefully, we’ll be in there in the summer of ’12. At some point, we’ll go into Mexico.
As far as fuel costs are concerned, I know some airlines have a strategy involving fuel hedging, but Allegiant doesn’t do that. Why not?
We used to hedge for about 5 1/2 years. We got to a point where we concluded that it just wasn’t the best use of our time and that we’d be better off spending our focus on making sure that no matter what happens with the fuel prices that we could manage the business in a way that we could be profitable. We have the luxury of being able to do that because we have a really strong balance sheet. If you don’t have a really strong balance sheet, then in some cases you may have to hedge just to protect yourself from having to run out of cash. Because of the strength of our balance sheet, we’re not in that position. So we’ve decided to go about it in a different way. Hedges are expensive to enter into and they’re not long lasting. They’re temporary so they give you temporary price protection if there’s a lot of volatility. But that’s all it does. Our strategy on this is a little different from most airlines. US Airways is another one that has realized the same thing that we have: that it probably doesn’t make a lot of sense to hedge. In other industries, companies that have really strong balance sheets, like Carnival Cruise Lines, it doesn’t do hedging either. We’re not along, but we are in the minority.
How badly were you hurt by cancellations in your December and January flying?
Well … to me, it’s winter. It happens every year. There’s always winter, and there’s always bad weather, and there are always cancellations. This year, perhaps, the weather was a little worse than it’s been before. It’s really hard to say. Whatever you want to call normal versus this year … what does that really mean in terms of profit and loss? We don’t even bother trying to calculate that. It’ll have an effect, but nothing out of the ordinary in my opinion. When you cancel flights due to weather, obviously you don’t fly the airplanes so you don’t burn the fuel. You don’t collect the revenue either, but it’s not as though it’s a complete loss. It’s a big disruption to the airline and the customer, so it’s disappointing.
What does your crystal ball tell you about fuel costs in 2011?
I think fuel prices are going to continue to go higher. I think as the economy continues to improve, I believe that that’s the trade right now. Unfortunately, commodity prices are controlled by what I call “hot money.” It’s speculators, but it’s the worst kind of speculators. They’ve made commodity prices almost like a casino game. So the control of prices is not in the hands of suppliers and consumers, which is the way it used to be. Now, it’s really controlled by people sitting in front of computer screens in financial offices around the world. I just don’t see how that trade stops. As long as the economy keeps getting better and people can absorb that cost, then I think it will continue to go higher. I don’t want to see it affect the consumer, but I think ultimately that’s what’s going to happen, which will drive a slowdown in the economy when we least want to see that. And that, then, will right-size prices again, in my opinion. That’s my prediction.
The introduction of service to Long Beach, Calif., was a bold step for Allegiant because you decided to go head-to-head with JetBlue on the route. Why did the company decide to mix it up with such a tough competitor?
Our view was a little bit different from your observation. For us, we have (takeoff and landing) slots in Long Beach that we think are valuable. Longer term, we’re not certain what we’re going to do with those slots, but in the meantime, we’re trying different ideas, trying to find the best use of those slots. One of the markets we served, Stockton (Calif.) to Long Beach, was a bit of a disappointment. We thought that we would have a better chance to have improved economics by flying to Las Vegas, which obviously is a place where we have the ability to sell a lot of hotel products and things of that nature, which helps our economics. We’ve also developed a pretty large customer base in the L.A. Basin just for having served that area for almost two years. With two slots a day, the most we could ever fly was two flights a day. JetBlue has the vast majority of the slots in Long Beach, so we could never be in a dominant position in Long Beach, no matter what. So really, this was a bit of an experiment. JetBlue reacted extremely aggressively, which was a little bit surprising.
And that was my next question. Was the response a surprise?
In one respect, it’s not a surprise because it’s right out of the Airline 101 playbook. But at the same time, I thought with these circumstances with the fact of our limited ability to grow there, it’d probably simply ignore us. But it didn’t, so it dropped fares to match us and then, of course, Southwest dropped fares in other airports in L.A. to match them, so we’ve really made travel to the L.A. Basin a bargain for everybody. For us, the route is performing very well. It’s hard to get the word out in L.A. It’s such a huge market for us. But we’re pleased with the results, and we intend to continue to operate those flights.
How are the Long Beach routes doing?
They’re doing fine. We never thought this would be one of our most profitable routes, but it was a little bit of an experiment. We think over time, there may be some more opportunities to fly into some of the shorter-haul routes out of Las Vegas where there’s essentially a monopoly in the form of Southwest Airlines. So we do think over time that those could present some opportunities for us.
Is there any duplication with the Los Angeles International routes?
No. We fly from LAX from Bellingham (Wash.) and Long Beach from Bellingham. That’s the one route that we fly to both markets. The reason we did that was to try to get a gauge as to customer preference between those two airports because Long Beach is certainly a less expensive airport to operate out of. Much less expensive. At some point, we’ll have enough data to be able to make an assessment about that. That being said, at the end of the day, the real limiting factor in Long Beach is the slot constraints that we have there. So unless somebody gives back slots, we have our two and that’s what we have until maybe one day we’ll be able to pick up some more.
Last year, Allegiant announced plans to add capacity by putting more seats on your MD-80 jets. How will you accomplish that?
It’s not as simple as putting more seats in and everybody having a little less space, although the pitch — the distance between the seats — will in fact be a little bit smaller than it is today. Today, it’s actually very generous relative to many other airlines. Primarily, the complexity of that project is that we have to remove galleys and we have to move lavatories. We’re not going to remove any lavatories, but we are going to relocate them in some cases. We’re removing closets, replacing galleys in some cases, maybe taking a very large galley and putting in a smaller one. Because we have a fleet that comes from so many parts of the world and so many other airlines, many of these airplanes are different from one another. It’s very complex to develop the work that has to be done on each specific airplane. So we’re going to open up the floor space, essentially, and that’s going to enable us to put another 16 seats on the airplane and we’re very excited about that project. It enables us to lower our cost per passenger which enables us to continue to offer exceptionally low prices to our customers and bring more visitors to our destinations.
What kind of revenue payoff are you expecting?
We think the additional cost of those passengers at current fuel prices is about $40 a passenger. In our most recent quarter, we generated about $115 a passenger. We don’t expect we’ll generate the same revenue on these last 16 seats, but we certainly think we can exceed our $40 cost.
There’s lots of buzz — and rumors — about Allegiant’s Hawaii plans. Any new details you can share about the Hawaii service?
Not really. We’re hoping that we’ll be flying there in 2012 and hopefully that will be in the first part or no later than the summer of ’12. That’s what we’re shooting for. Once we have a lot more clarity as to the timing that we would start service, then we’ll start to identify routes and things of that nature. The industry is so fluid and dynamic that routes that we would think would work well now we may not feel about the same way a year from now. I don’t know if we’ll do anything out of Las Vegas, at least early on. Hawaiian (Airlines) has a lot of service in and out of Las Vegas, both in Honolulu and Maui — that’s a flight they recently started. My guess is that it was started as a pre-emptive move for us. Perhaps, perhaps not. But we are going to target some of our small cities on the West Coast into Hawaii as well as some cities that today we don’t serve at all, but we think service to Hawaii would be very valuable.
Based on the number of Boeing 757s you’re picking up and the amount of flight time there is on that trip, realistically how many flights could you have?
It’s going to depend. I think initially we’re not going to try to run a really intense schedule. At certain times of the year when it’s really popular, we may try to squeeze a few more flights in there. For the most part, we’re going to guess that we’re going to run about a round trip a day from the mainland to Hawaii. Once we have all six airplanes flying, we’ll probably have one of them as a spare to support the operation. So you might be looking at five airplanes, one flight a day on each of those. That being said, we think that the opportunity for Hawaii is bigger than six airplanes. We also think that this airplane has great application elsewhere so for both those reasons, we think we’ll have more than six 757s over time. Some things that airplane enables us to do which would be of interest certainly to Las Vegas would be longer-haul flights to the East Coast, which there are a few markets we think would be successful. In general, I don’t think long-haul works very well because the revenue starts to fall off as you fly farther, but the fuel costs continue like the first hour of the flight. But there are a few markets that we’d like to try. And then, additionally, we think longer term that there are opportunities to go internationally out of Las Vegas and this airplane can go about seven hours so it can get you into the northern parts of South America. So we do think there are opportunities to expand our Vegas service by bringing in international customers inbound into Las Vegas. That’s down the road, but we’re excited about what we think of as an opportunity that may represent.
Allegiant Chairman Maurice Gallagher has said that one of the reasons for the slow startup on Hawaii has to do with the certification process taking longer than anticipated. Why is that taking longer?
I think there are a few things going on. There are a couple of ways to gain the authority from the Federal Aviation Administration and what we tried to do was a very, very difficult thing to do. I think, in retrospect, we’ve acknowledged that was a strategic mistake. Instead of trying to get all approvals at one point in time so that on Day One we could fly to Hawaii, it probably would have been more prudent for us to get experience with the airplane and then go to the FAA. So first, get the airplane on the certificate and then go to the FAA to get permission to go to Hawaii after we’ve operated the airplane for a while. I think part of that shift in strategy was due simply to new management overseeing that area. We hired a senior vice president of operations in May last year, and as he has gotten his arms around the operation I think he is better able to assess what’s the best course going forward for Allegiant. So we’ve delayed it. We’ve been looking at Hawaii for about five years so our view is that Hawaii’s not going anywhere and the routes that we target are highly unlikely that anybody else is going to target. So we’re patient. We’ll get there when we’re ready.
In December, Allegiant flight attendants voted to be represented by the Transport Workers Union. Was management surprised with the outcome of the election?
I don’t know if we’d say we’re surprised about the outcome. I think we thought the vote would be far closer than it ultimately was, so on that, we were surprised and, obviously, very disappointed. But we’re going to move forward and sit down with the collective bargaining agent that work group has vote in. And we’ll look to have a good relationship with them and negotiate a fair contract.
On a scale of 1 to 10, how significant is this for the airline and for your customers?
I think for the airline, culturally, it’s significant, just in terms of bringing a third party into what we think is a unique culture. That’s probably the thing that troubles us the most. From an economic standpoint, I don’t think it’s very significant at all. For there to be a contract, there has to be agreement by both parties, and nobody is going to make us agree to something we don’t think will be in the company’s best interests. And the same, I’m sure, would be said about the Transport Workers Union. You have to find common ground. So I don’t think there’s necessarily going to be any economic impact. But we’re definitely disappointed that we have a third party that is coming in. We have a unique business and the reason that we’re successful is because we have a unique business. So the idea that a third-party collective bargaining agent that represents other airline workers at other companies is going to come in here and attempt to try to have us agree to provisions that are industry standard isn’t consistent to where we’ve gotten. We’ve gotten where we are because we don’t do anything that’s industry-standard in any aspect of our business. You can’t have the results and the growth that comes with it and the job creation that comes with it and the increase in salaries that come with it with changing the business so that it looks like everybody else. I think that will really be the challenge we have to try to manage in our discussions with this new collective bargaining agent.
The folks I talk to at (the union) bristle over the “third-party” label. They say that the negotiating will be done by Allegiant employees. Are we really talking about a third party here?
I guess we’ll see. There’s no question (the union is) a third party. We’ll see how it operates. We’ll learn that over time. There’s no question that they are people who don’t work for Allegiant. While I’m certain that there will be Allegiant employees in the negotiating committee, I’m certain there will be other people that are not Allegiant employees. I think it’s kind of silly to pretend that it’s not a third party.
What do you anticipate to be the big issues in contract negotiations? They’ve said it’s more about schedule and not so much about money. What have you heard?
It remains to be seen. That’s my belief as well. The issues that led people to believe that they would be better off with union representation were not really as much about compensation and more about other issues. It’s a workforce of 400 people and I think if you asked 400 individuals about what they think the priorities are, you’d probably get 400 different answers. I don’t think there’s any one issue. If there was a single issue, then I hope we could have addressed it, so I think it’s more complicated than that. It comes down to people’s expectations as well. During the election process, the labor laws permit the union to make a lot of promises and, of course, as management, we’re not able to engage in that kind of discussion at all. I don’t know if they’ve set the expectations too high. I guess we’ll find out over time.
Have you selected a contract negotiating team?
I think we have a pretty good idea who is going to be involved in the effort, but as far as I know, I don’t even think we even have a first meeting scheduled yet, so I think this will play itself out over time. These first contracts, typically, take quite a bit of time. This is something that’s going to play out over the next two to three years in my opinion. Maybe it’ll go faster. We’ll just have to wait and see.
What do you think will be the biggest differences at Allegiant post-union?
Well, I hope that there would be no changes. We’ll leave it at that. That’s my hope.
Do you expect other employee groups at Allegiant to consider union votes?
This industry has a high propensity to unionize, so I think there probably has been and probably will continue to be a certain group of people in the different work groups that think having a union is a benefit to them. So I don’t know if this vote is any watershed moment. With our flight attendants, I think we had one vote four years earlier, which we defeated handily. This is only the second time we’ve had a vote to organize one of our labor groups. This time, our labor group voted for union representation. We had a third vote of our dispatchers. We ended up succeeding in that. We will certainly do what we can to prevent unions from coming on our property. We do not think it’s in the company’s best interest, we do not think it is in our employees’ best interests, and we’ll do our best to try to communicate why it is we believe that to be the case over time. I’m certain that as we get larger, unions are businesses. They are in the business of generating dues. So as you get more and more employees, you become a larger and larger target. That’s not to say that there aren’t employees who believe that’s in their best interest. There certainly are. But I expect to continue to see this over time, and we’ll do our best to persuade everybody as to why we don’t think it’s in their best interest.
Allegiant has been one of the aviation industry leaders in developing ancillary revenue sources. Will the company continue to look at new ways to generate revenue?
Yeah, we don’t really like to sit still. We’re always looking at different ideas and different things we can do and doing what we do better and tweaking things, adding new products. We’re always searching for ways to generate more revenue. So that’s certain to be the case.
I’ve perceived a growing number of air passengers who are getting fed up with airline fee structures. What do you say to customers who ask you to just raise fares instead of nickel-and-diming them with fees?
I guess that our experience hasn’t been that. Our experience is that from our customers we don’t hear that. I know that’s conventional wisdom, but we don’t hear that. But you know, you pay for what you use. That’s a fair approach. If you don’t check a bag, you don’t pay to check a bag. Personally, I usually travel with just a carry-on so I don’t incur those charges. It costs money to handle bags. If it’s in the fare, why should I pay for a service I’m not using? I think that’s the beauty of the differentiated approach. You can tailor a product to a customer’s needs. With us, they don’t pay for something they don’t use so it’s a fair approach. I actually think most people like that, despite the conventional wisdom out there. I think the unbundled pricing approach is here to stay. One of the interesting things you see is how companies are marketing themselves in different ways now. It’s leading to a less commoditized product. Southwest Airlines has gone one direction, JetBlue has gone a different direction, we have gone another direction. You have different choices that you can make and at the end of the day, that’s obviously pro-consumer.
Isn’t there also a tax advantage by charging fees instead of putting it in the fare?
Yeah, that’s an advantage, theoretically that’s true. You pay an excise tax on the passenger fare and you do not pay that on the other items sold. That’s relatively insignificant with the amounts of money in my judgment. But I’d be lying if I didn’t tell you there was a small advantage there. The excise tax rules are written so they apply only to the air service and these other products and services are not covered under those laws. If they were to change that, obviously we and the rest of the industry would have to try to pass that on to our customers.
Have you reviewed Spirit Airlines’ consideration of charging customers for carry-on bags? Is Allegiant considering that?
We definitely think that has a lot of merit. We’re studying it. I expect us to move in that direction. It’s interesting because a lot of our customers are asking us for that. The reality is that because we charge for checked bags there are fewer checked bags and more people are bringing things into the cabin. That typically ends up delaying flights and inconveniencing a lot of our customers. I think a lot of our customers would love to see us put a nominal fee out there so that there are fewer bags brought into the cabin, which can hopefully speed up the process of getting in and out. We think that idea makes a lot of sense. We’ll see how that develops, but we’re looking at it hard.
Do you have a timetable under consideration?
No, we’re studying it hard. If we decide to go forward with it, we will look to do something with it certainly in the first half of this year.
Has Allegiant considered developing a loyalty card program to keep your customers?
We’re interested in loyalty programs. We think they can be very lucrative and they also can help in customer loyalty and the defensibility of the business so that it’s a little harder for somebody to go another direction as a consumer. But that’s something that’s dependent on automation enhancements, which we’re hard at work on. Hopefully in the back half of this year, we’ll be in a position to gain some traction and do something about our interest level there.
Possibly a tie-in with a credit card company?
A credit card is probably the easiest thing to get going. We are discussing a credit card program with a number of banks. That’s very likely the first step. I think there are other things we can do in this area that make a lot of sense so we’re exploring that issue, but because it depends on automation enhancements, it’s just not the top priority at the moment.
Although many people see Allegiant Air, they’re not as familiar with another piece of Allegiant Travel Co., that being the third-party business you generate with hotel packages. How is that business doing?
We believe we’re one of the largest distributors of inventory in Las Vegas. We’re told that by our hotel partners. We work with most of the hotels that are on the Strip and a few that are off the Strip. That’s a business we’ve been in since early 2002, and we’ve grown that dramatically. We do expect to continue to grow that business, not only in Las Vegas but in our other destination locations. What we want to try to do is not only sell our customers a seat to come on our airplane, but we really want to sell them other products and services that are provided by other third parties, whether they be hotels, rental cars, transportation by shuttle, helicopter rides and shows. We sell a lot of shows. We have a big tie-in with the Blue Man Group. That’s part of our business that’s really interesting, and we’re able to extend discounted rates that we receive because we are such a large distributor to our customers. Obviously, we make a couple of bucks along the way, but we can offer our customers not only exceptionally low-priced air travel, but also saving them money when they buy more things from us. That’s an area where we’re really focused on continuing to grow.
And because you have the strategy down, it’s probably pretty easy to duplicate it in other markets. I imagine Hawaii offers a lot of opportunities.
First of all, there’s only one Las Vegas so I don’t think we have any expectations that we can necessarily duplicate what we do in Las Vegas. It’s a unique market. We do have (relationships with) hotels in other destinations and we’re very focused on driving those numbers higher. I think there have been a couple of things that we have done in the last year that have helped us. We have a low-price guarantee where if you find a bundled hotel priced at less than what we have, then we will give you a free round trip on the airline. What we’ve also told our customers is that we’re giving them a discount. Every time they’re bundling air with hotel, they’re automatically getting a discount on the air. They don’t see that in how we price it. That’s all done in the computer system. But we’re trying to encourage people to buy the bundled package providing even more value. That business is the key reason why we think Hawaii makes a lot of sense. If it was just about flying people on airplanes to Hawaii, it’s a business that’s fine, but it wouldn’t be enough to make an investment in bringing in another aircraft type. It’s really the opportunity to be a meaningful distributor of hotel rooms for people going on vacation in Hawaii as well as rental car, as well as other products and services. That’s what makes Hawaii really interesting. Vegas is a great hotel market, not a big car market. Florida is a big car market, not as big a hotel market. But Hawaii is a little bit of both. It’s a great hotel market and a great car market. And, it’s a great market to sell other products. As you know, when people go to Hawaii, they tend to do a lot of stuff — a lot of activities such as whale-watching, snorkeling, scuba. Whatever it may be, we think we’ll have a great opportunity to sell those products to our customers.