ALGT

Business Context and Reporting Period

Company: Allegiant Travel Company (Allegiant)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Allegiant is a leisure travel company operating a low-cost passenger airline focused on small cities connecting to major leisure destinations (Las Vegas, Orlando, Tampa/St. Petersburg). The company also provides fixed-fee charter services. As of September 30, 2007, the fleet consisted of 29 aircraft (25 owned, 4 leased).

Key Financial Metrics

Unit Metrics (Three Months Ended Sep 30, 2007):
- Load Factor: 84.2%
- Revenue per Available Seat Mile (RASM): 9.46 cents
- Cost per Available Seat Mile (CASM): 8.41 cents
- CASM excluding fuel: 4.40 cents

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 41.7% ($25.4 million) for the quarter and 44.1% ($79.4 million) for the nine-month period compared to 2006. This was driven by a 41.2% increase in Revenue Passenger Miles (RPMs) and an 8.1% increase in RASM for the quarter.
• Profitability: The company reported a net income of $7.0 million for the quarter, a significant turnaround from a net loss of $1.2 million in the same period in 2006. Operating margins improved as total operating expenses as a percentage of revenue dropped from 95.3% in Q3 2006 to 88.9% in Q3 2007.
• Ancillary Revenue: Ancillary revenue surged 85.5% to $16.0 million in the quarter, driven by a 56.6% increase in passengers and a higher yield per passenger ($21.31 vs $17.99).
• Fleet Expansion: The fleet grew from 21 aircraft in September 2006 to 29 aircraft in September 2007, enabling a 31.0% increase in Available Seat Miles (ASMs).
• Fuel Costs: Aircraft fuel expense increased 36.8% to $36.6 million for the quarter due to a 35.1% increase in gallons consumed, though the average cost per gallon remained relatively stable ($2.32 vs $2.29).

Guidance, Outlook, and Risks

Management Commentary & Outlook:
- Management attributes growth to fleet expansion and the addition of new routes (four new routes to Las Vegas in Q3 2007).
- New service to Phoenix-Mesa began in October 2007, with Ft. Lauderdale service commencing in November 2007.
- A new two-year charter agreement with a subsidiary of Harrah's Entertainment was signed in October 2007, guaranteeing minimum flying for two aircraft starting January 2008.

Risks and Contingencies:
- Fuel Price Sensitivity: Fuel represents approximately 47% of operating expenses. A hypothetical 10% increase in fuel prices would increase fuel expense by approximately $3.7 million for the quarter. The company had hedged only 9% of projected 2007 fuel requirements as of September 30, 2007.
- Legal Proceedings: The National Transportation Safety Board (NTSB) has not yet released its report on a nose landing gear failure at Orlando Sanford International Airport in March 2007. While no claims have been made, the company anticipates potential future claims, which it believes are covered by insurance.
- New Market Risk: Success in newly announced destinations (Phoenix-Mesa, Ft. Lauderdale) is not guaranteed, particularly regarding the use of the Phoenix-Mesa Gateway Airport versus the primary Sky Harbor airport.

Investor Verification Checklist

• Fleet Utilization: Verify the load factor sustainability (84.2%) as the company expands into new, unproven markets like Phoenix-Mesa.
• Fuel Hedging Strategy: Assess the risk exposure given that only 9% of fuel requirements were hedged as of period end, leaving the company vulnerable to price spikes.
• Maintenance Costs: Monitor maintenance expenses, which decreased in Q3 2007 due to the absence of unplanned engine overhauls; verify if this trend is sustainable or if timing variations will impact future quarters.
• Debt Obligations: Review the $69.1 million in total debt and the schedule of contractual obligations, noting $7.7 million due within one year.
• Legal Contingency: Track the NTSB report regarding the March 2007 landing gear incident for potential insurance claim impacts.