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Dillon MacDonald is a current undergraduate student at Vanderbilt University, where he studies financial economics and political science.
  • Allegiant Airlines: Flying High in a Troubled Sector 0 comments
    Nov 9, 2009 01:24 AM | about stocks: ALGT
    "If there had been a capitalist down there at Kitty Hawk, he should have shot Orville and saved us a lot of money." --Warren Buffet discussing airline stocks

    Airline stocks are notoriously poor investments. Their operating costs are tied to the cost of oil; they are controlled by powerful labor unions; and they are straddled with expensive pension plans and other "legacy" costs.

    The airline industry is also fiercely competitive, and customers generally book their flights based on price alone. Regardless of an airline's superior service or brand image, customers will often defect to another carrier if the fare is just five dollars lower.

    This means that the most successful airlines are not the companies with excellent service or a superior product, but the ones that can maintain the lowest costs. Low cost airlines such as AirTran, Southwest, and JetBlue are among the most successful airline stocks, but even they have begun to struggle with rising costs.

    In this writer's opinion, the most attractive airline stock is the Allegiant Travel Group (NASDAQ:ALGT). Allegiant Travel Group operates Allegiant Air, which connects small to medium sized towns around the country to leisure destinations. They sell tickets both on a stand alone basis and bundled with hotel rooms, rental cars, and other travel related products.

    Allegiant Air is a no-frills operator that offers rock-bottom fares and charges for all amenities--including checked baggage and advance seat assignments. In fact, Allegiant generates an average of $33.25 in ancillary revenue per passenger. Allegiant operates strictly on a "point to point" basis; any customers who want to connect to another flight must purchase two separate itineraries.

    Allegiant currently operates 46 McDonnell Douglas MD-80 aircraft. The aircraft have an average age of 19.4 years and and can be purchased for less than one tenth the cost of a new Boeing 737 airliner.

    The airline has been successful in avoiding competition and dangerous price wars by targeting small communities with no non-stop competition. 

    Allegiant has amassed 27 consecutive quarters of profitability and enjoys double-digit margins. The company has low levels of debt and has shown consistent earnings growth. .

    Even with this stellar performance, the stock trades at less than ten times earnings. It seems as if the standard aversion to airline stocks has led investors to disregard even the strongest performers. Like all airlines, Allegiant is vulnerable to a spike in oil prices, but Allegiant remained profitable even with the high prices of last summer.

    The airline industry is certainly a troubled sector, but Allegiant is one of the few shining stars.

    Disclosure: No positions
    Themes: airlines Stocks: ALGT
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