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A Look At Allegiant Travel After Q3 Earnings

Img 1: An Allegiant Air aircraft

Q3 Results

Allegiant Travel Company (NASDAQ:ALGT) reported Q3 operating income of $77.1 million and revenue of $300 million, up 166.8% from $28.9 million and up 13.2% from $265 million a year ago, respectively. Earnings per share of $2.62 missed average estimates of $2.63. Pressure came from fares decreasing 17.1% year over year due to a higher proportion of flying in new markets and flying off peak, as well as weakness from Canada cross-border traffic and oil-dependent states. The airline has stated its intention to begin managing earnings as opposed to margin going forward. Q3 CASM ex fuel fell 11.3%, with CASM now in line at 8.85 cents with ultra-low-cost carrier Spirit Airlines (NASDAQ:SAVE). Salaries increased 13.2% on an 8.3% increase in aircraft, with all other expenses relatively flat. Allegiant ended the quarter with $385.6 million in cash and cash equivalents, $635.8 million in debt, and $6.67 million in interest expense.

The company is projecting Q4 RASM down 8.5-10.5% in Q4, with capacity up 22-26% versus an increase of 15.3% in Q3. In Q3 and Q4 2014, 4.5% of ASMs were in new markets; however, in 2015, 9% and 12% respectively are in new markets, putting downward pressure on RASM. Excluding the 757 write-down, Q4 2015 CASM ex fuel will be down 10-12% vs. Q4 2014.

Downward pressure on revenues expected to continue through the first half of 2016. Growing earnings and bringing margins down to 20% long term by adding flying in off-peak times is expected going forward.

Unique Business Model

Wolfe Research analyst Hunter Keay described Allegiant as the "most unique" airline out there. The airline faces no competition in 90% of the airports it serves, as in many airports, larger airlines dropped their networks after consolidation. The model has been paying off with 50 straight quarters of profits, even through the global recession of 2008. The company prides itself on being cheap, with some top executives driving Honda Civic, and employees working together in open spaces to promote collaboration on keeping fares and costs low. The airline removed aircraft seat pockets along with the seat reclining mechanism and coffee machines in order to reduce aircraft weight and maintenance...