Allegiant Travel (NASDAQ:ALGT) was one of the names that provided a lift to the airline names during this week's trading. The airline made an interesting pivot earlier this year as it ordered Boeing 737 MAX aircraft while it currently is an all-Airbus operator. The low-cost carrier seems to be making some rather bold moves to drive down costs for the longer term. However, on the shorter term, there are significant challenges as discussed in this report.
Allegiant's revenues increased by nearly 80% year-over-year. However, what can be seen is that revenues increased by approximately $221 million, and operating costs rose by $238.4 million. That's what we have seen at other airlines as well. The top-line growth has not been translated to the bottom line as the costs rose more or less the same. That cost increase is driven by higher flight activity and a surge in fuel prices. What should be noted is that last year, Allegiant Air had a $91.8 million tailwind on costs due to the Payroll Support Program. Correcting for this, operating income went from negative $67.2 million to positive $7.2 million which is an improvement of roughly $75 million.
On an earnings per share basis, profit declined from $0.42 to -$0.44 driven by higher operating expenses of which 27% was driven by higher fuel prices, higher interest costs and the absence of Payroll Support.
Results were affected by 1,800 cancellations during the quarter. Allegiant did not provide a detailed breakdown of the numbers but did say that 600 cancellations were weather-related. Other reasons for cancellations were shortages at ATC centers, crew shortages due to Omicron and pilot attrition.
Compared to 2019, revenues were up 10.7% while fares per passenger went up 2.7% and capacity increased by 18.7%. So, capacity growth is ahead of revenue growth. At this point, that's not much of a problem, since demand for air travel is extremely strong. However, going forward as the market enters a more sustained and recovered phase, the capacity expansion and topline being in or out of line is going to become a watch item.
It shouldn't come as a surprise that Allegiant Travel Company is upbeat about the second quarter. That's a sentiment that echoes throughout the industry and that is not odd. Pent-up demand is significant and big enough to see record-breaking toplines. The airline is aiming for $600 million in revenues that would indicate 28%-32% revenue growth and 9% to 14% capacity growth, which means there will be a significant increase in average fares leading to margins north of 12%.
The assumed average jet fuel price is $4 per gallon. April figures showed that passenger numbers were up 20% and average fuel prices were sitting at $4.15 for the month. So, it's going to be interesting to see whether average fuel prices will indeed be $4 per gallon or higher than that.
Right now airlines are seeing extremely strong demand. Demand is so high that airfares are rising, partially because of capacity constraints. So, right now the question is not so much whether demand is there but whether Allegiant Air has the pilots to fly the aircraft. Allegiant Air saw 8 members leaving for legacy carriers. The airline has hired 250 pilots, slightly short of the 270 that were targeted. So, Allegiant did not manage to reach its hiring target, and going forward, that could be an issue. In February, Allegiant Air decided to drop 10% of its capacity in the second quarter due to staffing challenges and rising fuel costs. So, Allegiant is one of the companies that's also seeing pilot shortage pressures. DoT data from March showed that Allegiant already cut 5.4% of their scheduled flights. So, Allegiant is hoping to see that 10% reduction for the second quarter results in lower cancellations. A review of cancellations rates showed 1% of the flights being cancelled at Allegiant yesterday and 2% today. With an n=2 set, we can't really draw any conclusions but if this is the cancellation rate seen throughout the quarter then cutting the capacity has indeed improved operational reliability.
Just like many airlines, Allegiant Travel Company saw a significant jump in revenues during the quarter but this topline growth fully absorbed by increased operating costs including the impact of higher jet fuel prices.
For the second quarter, Allegiant Travel Company is extremely bullish and if they can execute on their plans that will be reason to buy shares. The airline is indeed facing pilot shortages as legacy carriers are attracting pilots from low-cost carriers, but the airline has taken required steps such as a 10% capacity cut for the second quarter. This means that on unit cost level there will be some headwinds but operational reliability should improve. Overall, I think Allegiant Air has been able to perform quite well with capacity significantly higher than pre-pandemic levels. The airline had to cut a bit, but overall, I believe that Allegiant Air is one step ahead. What will be interesting to see is whether the 10% cut in capacity was enough. Right now I'm assuming it indeed was enough to execute a reliable schedule.
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His reports have been cited by CNBC, the Puget Sound Business Journal, the Wichita Business Journal and National Public Radio. His expertise is also leveraged in Luchtvaartnieuws Magazine, the biggest aviation magazine in the Benelux.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.