ALGT

Business Context and Reporting Period

Company: Allegiant Travel Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Model: Allegiant operates as a low-cost leisure airline connecting small cities to major leisure destinations (Las Vegas, Phoenix, Orlando, Tampa/St. Petersburg, Ft. Lauderdale). The company differentiates itself through a diversified revenue model comprising scheduled air service, fixed-fee charter contracts (primarily with Harrah's Entertainment), and significant ancillary revenue (hotels, rental cars, baggage fees). The company maintains a non-union workforce and utilizes a fleet of MD-80 series aircraft.

Key Financial Metrics (Year Ended Dec 31, 2008)

Operational Statistics:

• Passengers: 4.3 million (up 31.7% from 2007)
• Load Factor: 87.0% (up from 81.3%)
• Average Fuel Cost: $2.98 per gallon (up from $2.30)
• CASM (Cost per Available Seat Mile): 10.09 cents (excluding fuel: 4.92 cents)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 39.8% driven by a 27.8% rise in scheduled service revenue and a 76.4% surge in ancillary revenue. Ancillary revenue per passenger grew 36.7% to $29.43.
• Expense Increases: Total operating expenses rose 41.6%. Aircraft fuel expense increased 50.9% to $229.6 million due to higher fuel prices and increased consumption. Maintenance and repairs expense jumped 60.9% due to increased heavy maintenance checks and engine events.
• Profitability: Despite higher fuel costs and expenses, operating income grew 26.7% and net income increased 12.4%. The company maintained profitability in all four quarters of 2008.
• Capacity Management: The company reduced capacity in late 2007 and 2008 (eliminating long-haul flights) to manage fuel costs, resulting in a 7.8% decline in average stage length but a significant increase in load factors.

Guidance, Outlook, and Risks

Outlook and Strategy:

• Expansion: Allegiant plans to launch service to Los Angeles in the second quarter of 2009 from a dozen small city markets.
• Capacity Restoration: Management intends to restore some capacity reduced in 2008 and expand the route network, contingent on economic conditions.
• Cost Control: Continued focus on low operating costs, high employee productivity, and minimizing fixed costs to maintain strategic flexibility.

Risks and Contingencies:

• Fuel Volatility: Fuel costs represented over 50% of operating expenses in 2008. Significant price increases or supply shortages could materially harm results. The company is not currently hedging fuel prices.
• Economic Downturn: The financial crisis and rising unemployment may reduce leisure travel demand from small cities.
• Fleet Age: The average fleet age is 19.4 years. Maintenance costs are expected to rise as the fleet ages, and future FAA regulations on aircraft age could necessitate earlier fleet replacement.
• Unionization: The company currently has a non-union workforce. Potential unionization 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 the cessation of manufacturing and potential FAA age restrictions.
• Fuel Hedging Policy: Confirm the rationale for not hedging fuel prices in a volatile market and the sensitivity of earnings to fuel price fluctuations.
• Ancillary Revenue Sustainability: Assess whether the rapid growth in ancillary revenue (baggage fees, seat assignments) can be sustained as competitors adopt similar unbundling strategies.
• Fixed Fee Contract Concentration: Review the terms and renewal status of fixed-fee contracts with Harrah's Entertainment, which accounted for 7.4% of total revenue.
• Los Angeles Expansion: Monitor the execution and profitability of the new Los Angeles routes scheduled for Q2 2009.