Heard of Allegiant Air? Why It’s the Nation’s Most Profitable Airline

You’ve probably never heard of the most successful airline in America. That’s because Allegiant Air is not for you. It eschews business travelers, daily flights, even service between major cities. Allegiant is the anti-airline, or as CEO Maurice Gallagher calls it, the “accidental airline.”

But it’s no accident that Allegiant’s planes are full, profits soared 200% in the first quarter to $28.2 million, and the number of passengers is up 18% through May during the worst recession in recent memory. While competitors furiously cut back, Allegiant has boosted capacity 30%. The more intriguing question, though, is whether its rock-bottom fares, bootstrap approach, and focus on the places abandoned by the hubs and spokes are the new blueprint for building an airline in tough times.

Gallagher thought he had survived those already. When he took over Allegiant in July 2001, two months before 9/11 terrified passengers and froze credit markets, the JetBlue model—tons of cash, a single hub, and brand-new planes—was the way to go. The onetime ValuJet cofounder (who left the airline after its horrific Everglades crash in 1996 and subsequent merger with AirTran) moved his single plane to Las Vegas and set out to reinvent the business. Certified to fly MD-80s, aging warhorses of the skies, Allegiant could acquire used ones for as little as $4 million, one-tenth of what it costs Southwest to buy a new 737. With no access to capital, Gallagher didn’t have much choice. But the plane is a gas-guzzler—fuel costs can be as much as half of expenses—so Allegiant couldn’t afford an empty seat; keeping the planes full spread the cost across more passengers. “We needed a strategy that was low cost and could make money from day one,” Gallagher says. “Slowly, we figured it out: Go where they ain’t.”

That meant connecting Vegas—and later other tourist destinations such as L.A., Orlando, and Phoenix—to dozens of otherwise empty airports in third-string cities such as Peoria, Fresno, and Toledo. Allegiant faces competition on only 6 of its 134 routes. It doesn’t try to steal other carriers’ passengers; it stimulates new ones with cheap fares. “There’s little the airlines can do [to compete] without cannibalizing their route structures,” says Helane Becker, an aviation analyst at Jesup & Lamont Securities.

Because, except for the fuel, the MD-80 is cheap to operate, Allegiant doesn’t need to fly its aircraft every minute of the day, unlike its competitors with new, rapidly depreciating planes. It can afford to serve smaller airports infrequently—as few as three or four flights a week—making more efficient use of its fleet. It serves 40 destinations from Las Vegas with just 14 planes. Its average flight is 90% full.

While major carriers have turned to charging for amenities out of desperation, Allegiant has always seen flying as an à la carte experience and has raised billing to an art form. Allegiant charges $13.50 just to book (like Ticketmaster); $15 for the first checked bag; between $5 and $25 for a seat assignment. (No surprise, then, that the Ryan family behind Ireland’s discount carrier Ryanair feels a kinship with Allegiant and invested in an early financing round.)

And although it’s usually possible to buy a vacation package from your airline’s Web site, Allegiant actually woos its customers to do so, enabling it to position itself as a vertically integrated travel company. It sold 400,000 hotel rooms last year, along with extras such as beach towels and suntan oil for the trip. Financial catastrophe has been a boon, as oil’s drop from its summer 2008 highs translated to lower fuel costs, and deserted hotels meant more discounted inventory to sell to passengers lured onboard by $9 teaser fares.

At that price, or even at Allegiant’s average one-way fare in 2008 of $84.97, Americans are still willing to fly. Meanwhile, ancillary revenue per passenger rose 52% in the first quarter, to $34, comprising nearly a third of the company’s business.

The advantage of this pricing structure is psychological. “We collect $110 from you at the end of your trip,” Gallagher says. “If I tried to charge you $110 up front, you wouldn’t pay it. But if I sell you a $75 ticket and you self-select the rest, you will.”

Allegiant has room to grow. “There’s still a lot of small markets it could tap into,” says Forrester Research analyst Henry Harteveldt. “It just started flights into Los Angeles, and a third of its passengers are buying tickets in L.A.” Gallagher presumes those travelers are commuting to second homes outside Billings, Montana, and the like. In Europe, this phenomenon is known as the “Ryanair effect.”

Gallagher concedes there’s not much more to squeeze from passengers in flight, but suggests Allegiant’s destiny may be digital. Having built an integrated travel company, he can see a day when Allegiant is as much a portal as it is an airline. “We think there will be 100 million people who will have flown us, and they could eventually turn to us to put them on a plane” flown by a nominal competitor, “and put them in a Hyatt,” he says. “We joke we’re an Expedia with wings.”