Business Context and Reporting Period
Company: Allegiant Travel Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Model: Allegiant operates as a leisure travel company focusing on residents of small, underserved U.S. cities. It provides low-cost, limited-frequency nonstop flights to major leisure destinations (e.g., Las Vegas, Orlando, Phoenix). The company distinguishes itself by selling travel directly to consumers (avoiding Global Distribution Systems), unbundling services to generate ancillary revenue (baggage, seat selection, hotel packages), and maintaining a low-cost structure through a single-class cabin and high employee productivity.
Key Financial Metrics (Year Ended Dec 31, 2010)
| Metric | 2010 Value | 2009 Value |
|---|---|---|
| Total Operating Revenue | $663.6 million | $557.9 million |
| Net Income | $65.7 million | $76.3 million |
| Diluted EPS | $3.32 | $3.76 |
| Operating Margin | 15.8% | 21.9% |
| Operating Cash Flow | $98.0 million | $131.7 million |
| Total Debt (Long-term) | $28.1 million | $45.8 million |
| Cash & Short-term Investments | $150.3 million | $231.5 million |
| Average Fuel Cost per Gallon | $2.30 | $1.76 |
| Load Factor (Scheduled Service) | 90.8% | 90.4% |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenue increased 18.9% to $663.6 million, driven by a 23.6% increase in scheduled service revenue and a 19.2% increase in ancillary revenue. Passenger volume grew 14.0%.
- Profitability Decline: Despite revenue growth, net income decreased 13.9% to $65.7 million. The primary driver was a 47.7% increase in aircraft fuel expenses ($78.7 million increase) due to rising crude oil prices and increased fuel consumption.
- Cost Pressures: Operating expenses rose 28.3% to $559.0 million. Salary and benefits increased 20.0% due to new pilot and flight attendant compensation agreements. Station operations costs rose due to higher fees at leisure destination airports.
- Ancillary Revenue: Ancillary revenue per passenger increased 4.6% to $34.58, bolstered by higher baggage fees and the implementation of an open seating policy which increased take rates for priority boarding and seat assignments.
- Fleet Expansion: The operating fleet grew from 46 to 52 aircraft. The company took delivery of Boeing 757-200 aircraft to prepare for longer-haul routes and Hawaii service.
Guidance, Outlook, and Risks
- Strategic Outlook: Management plans to continue expanding the route network to small cities and leisure destinations. A key initiative is the reconfiguration of MD-80 aircraft from 150 to 166 seats to increase capacity without adding new aircraft, expected to begin in Q3 2011.
- Capital Allocation: On March 10, 2011, the company borrowed $125.0 million under a senior secured term loan facility. Proceeds will fund capital expenditures, including the acquisition of remaining Boeing 757-200 aircraft and the seat reconfiguration program.
- Fuel Risk: Fuel remains the largest operating expense (43.6% of total operating expenses in 2010). The company does not hedge fuel prices and remains exposed to volatility in global crude oil markets.
- Regulatory Risks: New FAA regulations regarding aging aircraft (Limit of Validity) and crewmember duty/rest requirements could increase maintenance and operational costs. The company must comply with these by 2013 for MD-80s.
- Labor Relations: Flight attendants voted for representation by the Transport Workers Union (TWU) in December 2010. Negotiations are ongoing, posing a risk of increased labor costs or potential work stoppages.
Investor Verification Checklist
- Fuel Hedging Strategy: Verify the company's continued decision not to hedge fuel prices and assess sensitivity to further price increases.
- Boeing 757 Integration: Monitor the timeline for ETOPS certification and the profitability of the new Boeing 757-200 aircraft on longer-haul routes.
- Labor Agreement Terms: Review the final terms of the collective bargaining agreement with the Transport Workers Union (TWU) for flight attendants.
- Debt Covenants: Examine the restrictive covenants in the new $125 million term loan facility and their impact on future capital flexibility.
- Aging Fleet Compliance: Track progress on FAA compliance regarding aging aircraft regulations and potential costs associated with fleet replacement or modification.