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Allegiant Travel - Rarely Do You See Such an Excellent Airline
Posted by: Jae Jun (IP Logged)
Date: February 20, 2012 07:34AM
Allegiant Travel Company (ALGT) is a very interesting company. It is an airline company so when I first heard the name in 2009 or so, I immediately dismissed it as I don’t bother with airlines.
ALGT came up again in the 2011 Forbes Best Small Company list so it was time to give it a chance. After all, I can’t always spoil myself by studying companies that always meet my criteria. That would only limit my investment view and learning curve. As I wrote previously, studying bad companies is good for you.
Upon reading ALGT’s company reports, I found it very educational and highly entertaining.
I definitely recommend you to read the annual report to get a bigger picture of the airline industry and especially ALGT.
Allegiant Travel Company (ALGT) Analysis
ALGT Business Description
From the 10-K:
Strategic Advantage/MoatThe airline industry is highly competitive yet ALGT has many advantages over its bigger and smaller competitors. In most businesses, efficiency comes from scaling operations, but not in the airline industry.
ALGT proves this in the way it does business.
They have less planes, less flights and less routes, yet are better off than most of their competitors who continue to lose money year after year.
Here is how they do it.
- Premium seat selection: $9.99 – you get an assigned seat near the front or at the exit rows.
- Standard seat assignment: $6.99 – gives you an assigned seat towards the back of the aircraft.
- Online checked bag fee: $39.98 – might be more than the industry average, but you want to pay it online, since it will cost you $70.00 per bag at the airport.
GrowthThe main growth driver comes from ALGT’s ability to expand into more smaller cities. There are hundreds of smaller cities located hours away from international airports, and people living in these areas also have to fly somehow.
Since ALGT purchases used MD-80 airplanes on the cheap, it will be able to penetrate these locations as their cost to open a new route is much cheaper than a bigger airline.
Growth also comes from ancillary revenue. By making better deals with resorts, hotels and casinos, ALGT is able to generate more commission from its package sales.
ALGT is working on a direct flight to Hawaii which should add growth.
ConclusionWhile learning about the company, I couldn’t help but be impressed by the business strategy and business savvy. Maybe it is because the CEO is an entrepreneur at heart.
Previously, I had never thought about airlines as a potential investment opportunity but ALGT completely shatters that assumption.
At the current price, it is clearly at a premium, but if it comes down to a reasonable range, ALGT is definitely one to watch out for. As the spider graph shows at the top, ALGT is a well rounded company.
Stocks Discussed: ALGT,
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