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July 25, 2014

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Allegiant profits, Southwest swoons in first quarter earnings

Las Vegas-based Allegiant Travel Co., parent company of Allegiant Air, has defied the gravity of the slumping economy by being among the few U.S. airlines to post first-quarter profits.

Allegiant and Dallas-based Southwest Airlines — two air carriers with considerable influence over Las Vegas tourism — reported earnings in the past week with Southwest showing its third straight quarterly loss. It was the first quarter in which a fuel-hedge loss wasn’t responsible for the negative result.

Allegiant, a discount airline specializing in flying small-town tourists to leisure destinations, reported unexpected high earnings. The seventh-leading passenger generator at McCarran International Airport reported earnings of $28.2 million, $1.37 a share, on revenue of $142.1 million for the quarter that ended March 31. That compared with earnings of $9.7 million, 47 cents a share, on revenue of $133.1 million for the same quarter a year earlier.

The results easily outpaced analysts’ expectations with an average forecast of $1.26.

Results could get even better in the second quarter.

“Looking forward, we expect second-quarter costs to be substantially lower than the prior year, both because of significantly lower fuel costs and increased utilization,” Allegiant CEO Maurice Gallagher said. “Fuel cost per passenger for the first half of April was slightly more than $26, substantially below the $62.48 we paid in the second quarter of 2008.”

But Gallagher remained conservative and offered no revenue guidance for investors because travelers continue to book much closer to the time of travel, making projections difficult.

Growth is in the forecast for the airline, which has 39 routes to Las Vegas; 30 to Orlando, Fla.; 20 to Tampa Bay, Fla.; and 15 to suburban Phoenix. Allegiant expects second-quarter year-over-year departure growth of 20 percent and third-quarter growth of 35 percent. The airline expects to operate 43 MD-80 twin-engine jets by the end of the second quarter and 45 by the end of the year, up from the current 41.

The airline, which added four routes in the first quarter to Punta Gorda, Fla., near Fort Myers, will add 18 more this quarter, including 13 to its newest leisure destination at Los Angeles International Airport beginning May 1.

Allegiant entered into a fixed-fee flying contract with several companies to provide charter service between Miami and four Cuban cities in support of a Cuban family charter program. Allegiant is committing one aircraft to the program, scheduled to begin in June, and expansion is possible.

Although Allegiant’s total operating revenue increased 6.7 percent in the quarter, its scheduled service revenue fell 1.7 percent and its fixed-fee contract revenue was off 29 percent, a reflection of the economy. But it more than made up the difference with a 52.2 percent increase in ancillary revenue.

Allegiant — one of the first to embrace an a la carte list of add-on fees — has an aggressive ancillary revenue program that generated $41.3 million in the first quarter.

With much larger Southwest Airlines reporting consecutive losses in recent quarters, Allegiant becomes one of the rarest of the rare — an airline that turns a profit. Southwest has been set back by losing money on fuel hedges recently with the plunge in oil costs.

Allegiant has no fuel hedge program.

Southwest, meanwhile, which saw its historic string of profitability end in 2008’s fourth quarter, reported a loss of $91 million, 12 cents a share, on revenue of $2.36 billion. The company had earnings of $34 million, 5 cents a share, on revenue of $2.53 billion in the same quarter a year earlier.

Airline officials said the company would freeze hiring and offer more employee buyouts. There was no indication how that would affect operations at McCarran, where the company has a pilot and flight attendant crew base and 2,300 employees. Employees were given a June 19 deadline to consider buyout options.

Pay was frozen for senior management and top officers.

“We face the toughest revenue environment in our history,” CEO Gary Kelly said in a statement. “A rapid weakening in passenger demand during first quarter, particularly among business travelers, led to our first-quarter net loss. Although competitively strong and financially resilient, we are not immune to the challenges the worldwide recession is having on air travel.”

The loss occurred despite a record first-quarter load factor of 69.9 percent. The higher percentage of paying customers on flights was a result of the airline’s capacity cuts systemwide, which included a 4 percent reduction of flights in Las Vegas.

Its fuel-hedge program, which has benefited the airline for years, worked against it in the first quarter, just as it did in the fourth quarter of 2008. The company reported $57 million in unrealized losses associated with the program because oil prices are well below costs projected when the hedges were made.

Without the fuel hedges, Southwest still would have lost $20 million, or 3 cents a share. Analysts expected a 1 cent loss.

Southwest has curtailed its growth plans for 2009, but promised expansion next year in contract negotiations with pilots. This year, the airline has trimmed flights in several cities, but expanded its Denver market and began service to Minneapolis-St. Paul in March. The airline will begin offering flights to New York’s LaGuardia International Airport on June 28 and to Boston’s Logan International Airport on Aug. 16.

Las Vegas continues to be Southwest’s largest station with an average of 230 flights a day by McCarran’s count.

In another cost-cutting measure, the airline deferred deliveries of jets from Boeing in 2009 and 2010, but still plans to accept 13 Boeing 737-700 jets, while retiring 15 aircraft by the end of 2009.

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