Flying high: Springs a growing market for Allegiant Air

Longing for the beach?

Discount leisure carrier Allegiant Air, which is adding two resort cities to its Colorado Springs schedule next month, has bigger plans for the Springs that may include nonstop flights to Hawaii and Mexico in a few years, airline officials say.

The Las Vegas-based airline is adding twice-weekly flights to Phoenix-Mesa Gateway Airport and Long Beach, Calif., with introductory one-way fares starting at $29.99 and regular one-way fares at $49.99. The carrier also may consider service to Oakland, Palm Springs and San Diego, all in California, said Andrew Levy, Allegiant’s president, in a recent interview. Allegiant considered flights from the Springs to Orlando, Fla., before determining the route was beyond the range of its MD-80 aircraft, Levy said.

Allegiant said last week it will also begin twice-weekly flights in October between Pueblo and Las Vegas. Pueblo’s other air service includes three daily flights to Denver and charter flights to Wendover, Nev. Allegiant also serves Fort Collins and Grand Junction.

Allegiant began serving Colorado Springs with nonstop flights to Las Vegas in 2002 as the first demonstration that it could profitably operate flights between small cities with little air service and resorts by offering vacation packages that included hotels, rental cars and entertainment. The airline has grown rapidly since then and now offers flights and vacation packages from 57 other small cities and 11 resort destinations.

“In 2001, we had one plane and we thought Colorado Springs was an attractive market that we could reach with a short flight. The route had a history of a lot of capacity. Reno Air was successful” on the route before ending the service in 1999, Levy said. “It worked extremely well, although it was better before Southwest came to Denver (in 2007) because we could charge more. That is part of the reason we didn’t add more cities (from the Springs) earlier.”

The Colorado Springs Airport had begun discussions with Allegiant about service to Orlando when US Airways announced plans last fall to pull out of Colorado Springs because it couldn’t make money flying from here to its Phoenix hub, said Mark Earle, Colorado Springs aviation director. The discussions quickly shifted to Phoenix-Mesa to restore nonstop service to one the most popular nonstop destinations from the Springs, he said.

“It is specialized service for leisure travelers, but it filled a hole in our service. We hope they will continue to grow in this market,” Earle said.

The airport has discussed flights to Mexico with Allegiant, he said, but hadn’t considered seeking Hawaii service until Allegiant announced earlier this year that it was acquiring longer-range aircraft so it could offer such service. Hawaii is not among the most popular destinations for local travelers, he added.

Allegiant was started in 1997 as a charter airline based in Fresno, Calif. It began scheduled service between Fresno and Las Vegas two years later and had expanded to five other cities before soaring fuel prices pushed the carrier into bankruptcy in December 2000. Six months later, ValuJet Airlines co-founder Maurice Gallagher took control of Allegiant and restructured the airline as a low-cost leisure carrier connecting small cities to resort destinations.

The airline was able to expand quickly because it was able to acquire a fleet of used MD-80 aircraft for about one-tenth of what it would have paid for new versions of Boeing’s workhorse 737, which is used by low-fare giant Southwest Airlines. While other airlines were getting rid of MD-80s and replacing them with more fuel-efficient aircraft, Allegiant kept its other costs low enough that it had a cost advantage over its larger competitors.

By 2004, Allegiant had grown to serve 13 cities from Las Vegas; it was serving 45 cities by the time it raised $90 million to buy more aircraft by going public in 2006. The carrier said at that time it had identified more than 50 U.S. and Canadian cities as candidates for service, many with little or no air service. By 2008, fuel prices soared again and Allegiant delayed some of its growth plans and cut some of its long-haul routes to remain profitable.

The carrier served just three resort destinations before late 2007 — Las Vegas, a secondary airport in the Orlando, Fla., area and St. Petersburg-Clearwater International Airport near Tampa, Fla. Since then, it has added Phoenix-Mesa, Fort Lauderdale, Fla., Charlotte County Airport in Punta Gorda, Fla., Myrtle Beach, S.C.,, Los Angeles International Airport and, just this year, Orlando International Airport and Long Beach. In several cases, Allegiant is the only carrier or one of only a handful of airlines using the airport.

Allegiant’s unusual business model has proved consistently profitable — a claim few other airlines can make. It has made money every quarter for more than seven years by avoiding competitive routes, keeping its costs at rock bottom and generating about a third of its revenue from booking vacation packages that include hotel, rental cars and entertainment, and collecting extra charges for checked baggage, seat assignment and early boarding.

“We are Expedia with wings; we want to be your leisure-travel provider,” Levy said. “There is a lot more money to be made on selling hotels and cars, and not a lot to be made on airlines. Our business is a wholesale company. Everything we did to build the business from day one was built around that strategy. We get very attractive rates from our travel providers because we bring a lot of customers and extend their brand to a whole new base of customers.”

Allegiant is “taking discretionary spending and putting it for this purpose. Seventy percent of their passengers would not have taken another flight. They’re creating travel (demand) that wasn’t there before,” said Mike Boyd, an Evergreen-based aviation-industry consultant. “They have a bulletproof model; I can’t find anything wrong with it. The only problem for airports is, it does not create enough capacity to draw thousands of passengers.”

The carrier negotiates the right to sell blocks of rooms in up to 200 hotels in the 11 resort destinations it serves — including the Bellagio in Las Vegas, the Arizona Biltmore in Phoenix and the Walt Disney World Swan & Dolphin in Orlando — and it has an exclusive agreement with Alamo Rent A Car and its Enterprise and National affiliates. The packages are offered at a discount that still allows Allegiant to make a profit, Levy said.

Allegiant’s latest expansion plan is its most ambitious — it will spend up to $90 million to buy six used Boeing 757 aircraft from a European carrier to allow the airline to start service to Hawaii by mid-2011. Although Allegiant hasn’t said which cities will get Hawaii flights, Levy said Colorado Springs most likely would be in the second wave of cities the carrier would add after 2011 because it is “at the edge of the range of our aircraft.”

Flights between Colorado Springs and Hawaii “are definitely on the radar for (Allegiant). Vegas has worked well for us. If we see similar success in Phoenix and Long Beach, it would make us that much more confident about flying to Hawaii and making a profit,” Levy said.
“I definitely think Colorado is a perfect kind of market to serve Hawaii — we have a large base of customers and the ingredients are there to give it a go at some point.”

By expanding to Hawaii, Allegiant is moving into a market that contributed to the bankruptcy of two other low-fare carriers — America West Airlines, which later recovered and merged with US Airways, and ATA Airlines, which was acquired by Southwest Airlines.

Levy said Allegiant will succeed where the others failed because it will serve markets with little competition and benefit from additional revenue from vacation packages.

“Hawaii is a market that has felt very attractive for a very long time,” Levy said. “While it is not without risk, it will be a very small part of the company and even if it lays a complete egg, it doesn’t put the rest of the company in jeopardy.

“The difference between us, America West and ATA is that we are a travel company that is selling more than airline seats. We sell you your hotel, car the other things that you want to do while you are vacationing.”

Allegiant still has plenty of cities left where its business model will work — Levy estimates about 100 small cities fit its criteria and it serves only 58 — and the airline could “connect the dots” between its destinations “for years,” Levy said. The carrier also is considering additional resort destinations that could include New Orleans, the Florida panhandle and Savannah, Ga., as well as resorts in the Caribbean and Mexico such as Puerto Vallarta and Cancún.

“We are a leisure-service provider to small-town USA. We stimulate travel because we make it convenient at an exceptionally low price that stimulates a lot of ridership,” Levy said.
“Our customers don’t have convenient access to the air-travel system and have been driving two or three hours to the airport. We compete with the couch for discretionary income. Instead of spending money at Home Depot, our customers are flying with us.”
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Contact the writer at 636-0234.

ALLEGIANT AIR AT A GLANCE

Headquarters: Las Vegas
Founded: 1997 in Fresno, Calif.
Fleet: 47 MD-80 aircraft
Employees: 1,800
Destinations served: 69
Chairman and CEO: Maurice Gallagher
Stock: ALGT on the Nasdaq Stock Market, traded between $34.88 and $59.04 in the past year
Revenue: $338 million in first half of 2010, up 16.5 percent from 2009
Profit: $40.2 million in first half of 2010, down 20.9 percent from 2009
Reservations: www.allegiantair.com or 1-702-505-8888