ALGT

Business Context and Reporting Period

Company: Allegiant Travel Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Model: Allegiant operates as a low-cost leisure airline connecting small cities to major leisure destinations (Las Vegas, Phoenix, Ft. Lauderdale, Orlando, Tampa/St. Petersburg). The company differentiates itself by selling directly to consumers (avoiding Global Distribution Systems), offering a single-class cabin, unbundling amenities (charging for seat assignments, food, and bags), and maintaining a low-cost fleet of used MD-80 aircraft.

Key Financial Metrics (Year Ended Dec 31, 2007)

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenue increased 48.2% to $360.6 million, driven by a 39.5% increase in revenue passenger miles (RPMs) and a 10.0% increase in revenue per available seat mile (RASM).
• Ancillary Revenue Surge: Ancillary revenue (hotels, rental cars, seat assignments, in-flight products) more than doubled, rising 107.9% to $65.0 million. Ancillary revenue per passenger increased to $21.53 from $16.11.
• Profitability Expansion: Net income increased 260% to $31.5 million. Operating margin improved from 9.3% to 12.2%.
• Fleet Expansion: The fleet grew from 24 aircraft in service (2006) to 32 aircraft in service (2007), with a total fleet of 35. Available seat miles (ASMs) increased 34.6%.
• Fuel Costs: Aircraft fuel expense increased 49.8% to $152.1 million due to a 37.6% increase in gallons consumed and an 8.5% increase in average fuel cost per gallon ($2.30 vs. $2.12).
• Fixed Fee Contracts: Revenue from fixed fee contracts with Harrah's Entertainment Inc. affiliates increased 4.8% to $35.4 million, representing 6.5% of total revenue (down from 8.2% in 2006).

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Growth Strategy: Management plans to continue expanding into small cities and adding frequency to existing routes. They aim to grow ancillary revenues by unbundling services and expanding partnerships with leisure companies.
• Cost Control: The company intends to maintain low operating costs by utilizing a single fleet type (MD-80), optimizing crew bases, and avoiding traditional airline overheads like frequent flyer programs.
• Seasonality: The business is seasonal, with traffic historically lowest in the third quarter and highest in the first quarter.

Risks and Contingencies

• Fuel Price Volatility: Fuel is the largest operating expense (48.1% of total operating expenses in 2007). The company does not currently pursue fuel hedging programs. A 10% increase in fuel price would increase fuel expense by approximately $14.9 million.
• Fleet Age and Maintenance: The fleet consists of used MD-80 aircraft with an average age of 18 years. Maintenance costs are expected to increase as the fleet ages. The aircraft and engines are no longer manufactured, creating potential long-term supply risks.
• Customer Concentration: Approximately 66.2% of fixed fee contract revenue in 2007 was derived from Harrah's Entertainment Inc. and affiliates.
• Accident Risk: In March 2007, a nose landing gear failure occurred on a flight to Orlando. The aircraft was out of service for two months, and the company paid a $250,000 deductible. The NTSB investigation was ongoing at the time of filing.
• Unionization: The company currently has a non-union workforce. Risks include potential unionization efforts which could increase labor costs.

Investor Verification Checklist

• Fleet Replacement Strategy: Verify the company's long-term plan for replacing the aging MD-80 fleet, given that the aircraft are no longer manufactured and FAA regulations on aircraft age may tighten.
• Fuel Hedging Policy: Confirm the company's stance on fuel hedging, as they currently do not hedge, leaving them fully exposed to jet fuel price volatility.
• Ancillary Revenue Sustainability: Assess whether the rapid growth in ancillary revenue (hotels, seat assignments) is sustainable or if it faces regulatory or competitive pushback.
• Harrah's Contract Renewal: Monitor the status of fixed fee contracts with Harrah's Entertainment, which represent a significant portion of predictable revenue.
• Gate Capacity at Hubs: Verify the company's ability to secure sufficient gate space and overnight parking at key leisure destinations (Las Vegas, Ft. Lauderdale) to support growth plans.