ALGT

Business Context and Reporting Period

Company: Allegiant Travel Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Model: A leisure travel company operating a low-cost passenger airline focused on residents of small U.S. cities. The company provides limited-frequency, nonstop scheduled service to major leisure destinations (e.g., Las Vegas, Orlando, Phoenix) and generates diversified revenue through airfare, fixed-fee contracts (primarily with Harrah's Entertainment), and ancillary services (baggage fees, seat assignments, hotel/rental car packages).

Key Financial Metrics (Year Ended Dec 31, 2009)

Operational Statistics:

• Passengers: 5.33 million (up 24.0% from 2008)
• Load Factor: 87.4% (System); 90.4% (Scheduled Service)
• Average Fuel Cost: $1.76 per gallon (down from $2.98 in 2008)
• Operating Expense per Passenger: $81.77 (down from $104.25 in 2008)
• Ancillary Revenue per Passenger: $33.07 (up 12.4% from 2008)

Material Changes vs. Prior Period

• Profitability Surge: Net income more than doubled to $76.3 million, driven by a record 21.9% operating margin. This was primarily due to a 40.9% reduction in average fuel costs per gallon and a 26.3% increase in passenger volume.
• Revenue Mix Shift: While scheduled service base fares decreased by 17.2% to stimulate demand, total revenue grew 10.7% due to a 49.8% increase in ancillary revenue (air-related charges) and passenger growth. Ancillary revenue now represents 29.2% of total operating revenue.
• Cost Management: Operating expenses decreased 2.8% year-over-year despite a 22.2% increase in departures, largely because the drop in fuel expense ($64.6 million reduction) offset increases in salaries, maintenance, and station operations.
• Network Expansion: The company added Los Angeles as a major leisure destination and expanded service to 58 small cities across 136 routes. Fleet size grew to 46 aircraft.
• Fixed Fee Revenue Decline: Fixed fee contract revenue decreased 17.8% to $43.2 million due to a reduction in block hours flown under the Harrah's agreement and a new contract structure where Harrah's reimburses fuel costs directly.

Guidance, Outlook, and Risks

Management Outlook:

• 2010 Expectations: Management expects "moderate growth" for 2010 due to rising jet fuel prices and a weak revenue environment. Capacity growth will focus on new routes and seasonal flying.
• Strategic Initiatives: The company is emphasizing revenue growth from third-party products (hotels, cars) and has begun an initiative to enhance software capabilities for web-based offerings.
• Fleet Strategy: In Q4 2009, the company contracted for 20 MD-80 aircraft. In March 2010, it contracted for six Boeing 757 aircraft to enable longer-haul markets, including potential service to Hawaii.

Key Risks and Contingencies:

• Fuel Volatility: Fuel is the largest operating expense (38% in 2009). The company does not currently hedge fuel prices. A 10% increase in fuel prices would increase fuel expense by approximately $16.4 million.
• Economic Conditions: Leisure travel is discretionary; high unemployment and economic downturns could reduce demand from small city markets.
• Aircraft Age: The fleet has an average age of 20.4 years. Aging aircraft may lead to increased maintenance costs and potential regulatory restrictions.
• Competition: While currently the only carrier on most routes, legacy and low-cost carriers could enter these markets, potentially driving down fares.

Investor Verification Checklist

• Fuel Price Sensitivity: Verify current jet fuel prices against the $1.76/gallon average in 2009 to assess margin pressure for 2010.
• Ancillary Revenue Sustainability: Confirm if the high ancillary revenue per passenger ($33.07) is sustainable as competitors potentially adopt similar unbundling strategies.
• Boeing 757 Integration: Monitor the delivery and induction costs of the six Boeing 757s contracted in March 2010 and the associated regulatory approval for over-water operations.
• Debt Maturities: Review the $23.3 million in debt maturities due in 2010 against the $231.5 million cash balance to confirm liquidity coverage.
• Harrah's Contract Terms: Understand the long-term impact of the new Harrah's contract structure (fuel reimbursement) on fixed fee revenue stability.