Allegiant continues Extra expansion, predicts competitive collapse

Allegiant is ready to tap into the growing demand for a more premium travel experience. Through its Allegiant Extra offering, the company expects to deliver that increased space and other benefits on board to ever more customers, and with an upside to revenue.

Speaking on the company’s Q2 earnings call this week, Chief Revenue Officer Drew Wells noted that the program continues to expand across the fleet. Since its launch with a handful of planes in 2019, the carrier has steadily expanded the offering. Another 11 aircraft were retrofitted earlier this year, and the company plans for 26 more to see the shift before 2025. Additionally, the new 737 MAX fleet will be delivered with the Allegiant Extra cabin on board.

All told, Allegiant expects nearly half the fleet to be flying with the extra legroom (and free snack) option by the end of the year.

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Driving (less??) incremental revenue

While keeping passengers comfortable is part of the value proposition, the incremental Extra revenue is also compelling for the airline. Wells admitted the company “believed it would work on paper, given the mix of itineraries from [Allegiant] customers, but there was no certainty it would work in practice.”

Two years ago Chief Marketing Officer Scott DeAngelo shared that the Extra seats on board delivered an average revenue boost of $800-1000 per departure. In this week’s earnings call Wells claimed $3 in incremental revenue per passenger on equipped planes. That translates into ~$450-500 per departure based on 180 seats and an 85% average load factor in the system. The company did not offer any direct explanation of the decrease, though Wells did acknowledge that higher overall fares compared to the prior test period do create higher opportunity cost, especially as the configuration removes one row from the A320s as they are reconfigured.

Even if it is only $500 per departure in incremental revenue, that’s still a boost to the bottom line, well worth pursuing. Especially given the de minimus cost to implement the changes.

MAX on the horizon

Allegiant’s first 737 MAX is now expected to be delivered prior to the end of Q3, though the specific date remains in flux. The carrier is waiting for the FAA to complete the final pre-delivery inspection (it did not delegate that to Boeing for this frame), and management currently anticipates an early September timeframe for taking ownership.

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Ultimately, Allegiant continues to expect it will have four of the planes in its fleet by the end of the year. That number is well below the contracted commitment from Boeing.

Outgoing CEO Maury Gallagher did not try to hide his frustration with the certification progress, noting that the type is already flying and has been for years. Moreover, the 190 seat, single-class interior does not present any truly new innovations in the cabin. As a result, he suggested Allegiant would “try to push Boeing and the FAA to get together and have a nice little pow wow and get [the certification] done.” He continued, “They’ve been doing this for a year now and it’s just taken too long.”

Predicting a competitive collapse

The MAX certification was not the only topic on which Gallagher had strong words for current regulatory environment. He also expressed frustration with the current approach to mergers and other industry regulation.

It is no secret that LCCs in the US are struggling right now. Gallagher sees Allegiant as operating in its “own, private swim lane while the rest of the world is playing water polo…and that’s a nasty game.” As a result, he expects losses to continue for those airlines:

The recent undoing of this low fare industry that we are part of does not portend well for a number of the incumbent Low Fare carriers. [A] combination of weakening revenues, substantial cost increases. poor reputation and brand has condemned a number of the industry’s Low Fare players to a loss situation that will be hard to turn around. This environment has driven certain players to make massive schedule changes in search of a viable business plan. The magnitude of these changes almost certainly suggest losses will increase near term.

The undoing referenced appears to be tied to the recent pivots from both Spirit Airlines and Frontier to look more like legacy carriers, with proper premium products on board and new a new distribution strategy that remove many fees and drip pricing in favor of product bundles.

Related to that, he also suggests that could result in those companies going out of business, since the DOJ continues to oppose mergers, such as with Spirit and JetBlue:

On the regulatory front, I worry about the efforts that the federal government is working to fix something that is not broken. Since Allegiant began in the early 2000s, there has been a constant drumbeat by the government on a path to reregulate the industry. The current administration has made it known that they do not want any additional mergers that mergers they believe have been bad for the industry. But when a current carriers business does not work, there’s only one of two options: You go out of business or you merge.

Since mergers are no longer on the table, the implication is an expectation of one or more airlines folding as a result. With the Hawaiian/Alaska merger review DOJ deadline just extended, presumably to facilitate additional negotiations, it is hard to ignore that potential outcome.