Allegiant Travel (NASDAQ:ALGT), a leisure airline, the Fund’s strongest performer this year, and second largest contributor to the Fund's returns, is up 43% YTD.7 We initiated a position in the second quarter of 2017 on a thesis that airline profitability would improve as MD-80 aircraft were replaced entirely with A320s/319s and that long term growth prospects were still well intact. Further, we like ALGT’s low utilization, leisure-oriented strategy, which we believe supports a sustainable monopoly on the vast majority of routes.
2018 was a rough year for ALGT as profitability was pressured by transition related costs (e.g., spare aircrafts, low pilot productivity, running higher than normal number of fleet bases, etc.) while the leisure, budget focused model struggled to recoup higher fuel costs through higher fare pricing. Additionally, we believe ALGT’s multiple was negatively impacted by an unpopular extension of the business into lodging and family entertainment where the scope and capital at risk were not well understood.
ALGT’s differentiated story has recently become a shining light among peers. Since the back half of 2018, ALGT’s unit revenue and costs (ex-fuel) have both improved, whereas industry peers have seen a contraction in the unit revenue to cost (ex-fuel) spread. During their 1Q19 earnings call, ALGT reiterated EPS8 guidance of $14/share at the midpoint, up from $10/share in 2018. We believe the stock has been strong recently not only on the resurgence of airline profitability, but also due to ALGT’s insulation from competition and de minimis exposure to more economically sensitive business travel demand. Additionally, the company recently toned down the scale of their Sunseeker Resort project and de-risked the financing through partial non-recourse debt. Our view is that management is using the resort as a showcase asset to gain a foothold in more lucrative, asset light hotel management contracts in their core destination markets.
We believe there is attractive upside to ALGT’s near term earnings as well as asymmetric option value in the company’s longer term lodging strategy.
From FPA Capital Fund (Trades, Portfolio)'s seocnd quarter 2019 commentary.
