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Maury Gallagher's Moment of Truth
Allegiant's long-time CEO is back, and he wants you to know his model is more durable than Bill Franke's.
When the time comes, the first line of Maury Gallagher's obituary almost certainly will feature the word “Valujet,” the airline he founded that effectively disappeared1 after a 1996 crash that the NTSB partially blamed on airline managers who failed to oversee a contractor's work. But with Gallagher leaving retirement as of September for another stint as Allegiant's CEO, I sense he wants to push another legacy: that he’s a visionary executive who created the most durable model for a leisure-focused airline.
The timing is favorable, because Indigo Partners chairman Bill Franke (who tends to get far more credit than Gallagher for bringing a different cost-focused model to the United States) is seeing his airlines struggle as consumer preferences change. It may only be temporary but my good friend Jay Shabat, the excellent analyst for Skift Airline Weekly, this week referred to the issues at Frontier and Volaris as the "Franke Funk,” coining a term that could describe the troubles at many ULCCs with Franke’s imprint.
Gallagher — who one insider told me once was probably worth nearly $1 billion, give or take, based on the value of his Allegiant stock — long has had a lower profile than Franke. But on Nov. 2, in the first earnings call since he ended his 18-month retirement to return as CEO, Gallagher took a slight swipe at Franke, saying the Allegiant model, which focuses on low utilization and only flying when and where people want to go, is more sustainable and built better for the current climate.
"There has been and still are differences between our business model and the Franke-centric model," Gallagher said. "You judge us on our profitability. Costs are a part of the equation, but having the lowest cost does not guarantee success. We at Allegiant have a flexible model focused on flying when the customers want to fly. Or, said differently, we minimize our flying in off-peak periods and peak up for the peak periods. That has been our model for 20 years."
Well, yes — on the airline side. If you follow Allegiant, you know the airline’s model has been incredibly durable. But the company, whose official name is Allegiant Travel Company, has sometimes lost its way when chasing ideas to diversify revenue, including buying a golf course management company, and a chain of family fun parks. Most recently, it has developed a sprawling (and expensive and delayed) hotel resort complex in Florida that opens on Dec. 15.
Because of these forays into other businesses, Allegiant’s earnings can be misleading. Allegiant Travel Company lost $25.1 million in the third quarter. But excluding special charges, the airline itself eked out a profit of $5.9 million, according to the press release.2
That’s a lot better than both Frontier and Spirit fared this summer, and Gallagher made a compelling case for why, telling analysts the issues facing traditional U.S. ULCCs (soft demand and too much competitive capacity among them) will not spill over to Allegiant.
Gallagher said he knew JP Morgan’s Jamie Baker had coined a new acronym for the two airlines — low-margin airline, or LMA — to replace the ultra-low-cost moniker, but he said it’s not appropriate for Allegiant.
"I'm proposing a new label for us — no more ULCC and certainly no LMA," Gallagher said. "Our new label is PLFC, [for] ‘profitable leisure-focused carrier.’ That's what we are to be called from now on. We are in a class of our own."
What's a PLFC? And why might it be more successful in this demand and competitive climate than a ULCC?
Let's take a look at the attributes of PLFCs, according to Gallagher.
1. Fly where the competition does not
On Frontier's third quarter earnings call, CEO Barry Biffle bemoaned the competitive capacity in Las Vegas, saying airlines have added far too many seats than consumers can buy.
For proof, on a Thursday in December, Frontier is offering $49 fares to Las Vegas from Denver, $45 fares from Portland, and $59 fares from Dallas/Fort Worth. But Allegiant is judicious with where it flies, and its markets are holding up OK, judging by pricing. On that same day, it is charging $143 from Bismarck, $120 from Rapid City, and $166 from Des Moines.
Where it does have competition, such as Bozeman to Las Vegas, a new Southwest market, fares are under some pressure. But those routes are the exception. Gallagher said 75 percent of Allegiant's routes have no direct non-stop competition, reminding analysts that traditional ULCCs have far more overlap with Southwest, United, Delta, JetBlue, Alaska and Southwest.
"We've been able to own the majority of our markets," Gallagher said. "When you look at the ULCC market, they've got over 90 percent overlap in their marketplaces. That's tough competition to go up against if you've got a comparable product that's sitting there with a well-known brand that has a credit card [and] has all the attributes."
Gallagher said the airline has identified 1,400 possible new domestic routes,3 as well as new routes to Mexico that will be possible if regulators approve Allegiant's proposed joint venture with Viva Aerobus.
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2. Only fly when there's money to be made
Allegiant flew its 127 Airbus A319s and A320s an average of seven hours per day in the summer quarter. That's lower than the airline would like, as executives said they were constrained by pilot issues and concerns over air traffic delays. Gallagher said he'd like to ramp up utilization to pre-pandemic levels of at least eight hours per day. Had it done so, summer quarter earnings would have risen by $50 million, company president Greg Anderson said.
But eight hours is still about four hours short of how much a typical ULCC wants to fly its airplanes.
To be sure, average is a bit of a misnomer. When demand is strong, Allegiant flies its airplanes hard. When it's not, the airline parks them. Nearly 45 percent of the airline's total capacity in the summer quarter, measured by available seat miles, came in July. In September, chief revenue officer Drew Wells said the airline flew half as much.
Allegiant uses this approach because the revenue is much better in July than September. On the four September Saturdays after Labor Day, Wells said, unit revenue was approximately 30 percent worse than on comparable Saturdays in July.
Next year Allegiant will take the first of up to 130 new Boeing 737 Max airplanes, but even then, it does not expect to shift strategies. However, the new aircraft should allow it to add more flying in the most peak periods. "Our low utilization model sets us up nicely to expertly deploy capacity to meet seasonal demand trends, and we will enhance this with the introduction of more efficient aircraft next year," CFO Robert Neal said.
3. Don't grow for growth's sake
The knock on Franke-style airlines is that they must always grow capacity to maintain unit costs. That was fine for many years, but in today's environment, it might be too aggressive, Gallagher told analysts. "You can't see capacity growth with the way fuel is," he said. "And there's a good argument to suggest it's been permanently changed, given the environmental issues and what's going on in the world. Capacity can't grow that much if people are going to make money. It just doesn't work. Capacity has got to come out to raise fares to offset the fuel increases."
Next year, executives said, Allegiant will have little growth. The plan is to have flat year-over-year capacity for the first half of 2024, with a full-year target of mid-single digits, Wells said.
That's probably prudent given today's market dynamics, but executives reminded analysts that Allegiant long has grown slowly. In its 22-year history, Allegiant has grown at an average of 5.7 aircraft per year, Gallagher said.
"Others in this space have grown at a much faster pace to date, adding aircraft almost three times faster per year than we have," Gallagher said, before addressing the analysts directly. "Fast growth, while attractive to the audience on the phone here, creates potential operational problems, including a concentrated fleet of the same aircraft type, which has historically been desired but today has become a burden, with Pratt motor problems, and operational size and complexity that most likely outpaces management experience."
Another problem, according to Gallagher, is that Spirit and Frontier have run out of obvious places to place airplanes, because their growth has spurred "a pronounced competitive response given the network overlap with the larger incumbent carriers.”
One more thing about Gallagher ... he doesn’t look back
I have been covering Gallagher for a decade now, as Allegiant was the big airline on my beat when I got my start at Aviation Week. I can tell you that Gallagher doesn't spend much time dwelling on either past mistakes or personnel issues.
I have received a few emails asking about what happened to former CEO John Redmond, who resigned under mysterious circumstances. Gallagher didn't address it on the call, which didn't surprise me, since he rarely said much about the resignations of Andrew Levy, Jude Bricker, Lukas Johnson, Scott Sheldon or Steve Harfst.
Likewise, we didn't get much clarity on Sunseeker, the hotel project. When Allegiant announced the idea in 2017, some analysts (and Allegiant executives, according to my sources) expressed skepticism. But Redmond, who had a hotel background, was committed to it, telling analysts the airline could cross-sell hotel rooms to airline customers. Gallagher firmly supported him.
Allegiant might keep the hotel forever, or it might sell it. But either way, I sense a shift in Allegiant's messaging. Management seems to be refocused on the core airline.
That’s all for today. I want to flag a couple of things. Next week is Thanksgiving in the United States, and I suspect I’ll have limited content. The following week — that’s the week of Nov. 27 — I’m planning to go to Abu Dhabi for the CAPA World Aviation Summit, and you may also hear less from me. But when I return, I’ll have fresh reporting about a part of the world I don’t cover often. I’m looking forward to it.
It became AirTran.
The special items include non-cash charges related to ”accelerated depreciation …related to our revised fleet plan,” according to a footnote, which seems reasonable.
I’m more wary of these big numbers than when I started on the beat. A few years ago, I remember Southwest executives talking about all new routes that they potentially could start. But when the pandemic happen, and Southwest had to shift its network — and presumably start some of those routes that had been in the hopper — we learned not all of these markets were winners.