Tiny Allegiant Air thrives on low costs, high fees

AP Airlines WriterJune 29, 2013 

LAS VEGAS -- There are no sure things in this city -- with one exception: Allegiant Air.

While other U.S. airlines have struggled over the past decade from the ups and downs of the economy and the price of jet fuel, Allegiant has been profitable for 10 straight years.

The tiny airline focuses on a niche ignored by other airlines: It only flies from small cities to sunny vacation spots.

Allegiant entices people who otherwise wouldn't fly with low fares and nonstop flights. Then it aggressively pitches them hotels, rental cars, show tickets and other entertainment, earning millions in commissions.

Passengers face fees for almost every service and amenity imaginable. At Allegiant, fees for checked baggage and changing an itinerary -- which are common on many airlines -- are just the beginning.

The Las Vegas-based airline charges extra to book flights online, or to use a credit card. Selecting a seat in advance costs $5 to $75 each way, depending on the length of a flight. Even a bottle of water costs $2.

Flying Allegiant isn't glamorous. While other airlines tout new aircraft with Wi-Fi

and TVs in every seat, Allegiant buys old planes to avoid hefty aircraft loans. And to pack in as many passengers as possible, its seats don't recline. But for small-town Americans with limited flight options, these inconveniences are worth it for a few days of sunshine.

Allegiant offers nonstop service from places like Owensboro, Ky., Casper, Wyo., and Appleton, Wis., to popular destinations in Nevada, Florida, Hawaii and Arizona. These may not be the most coveted routes in the airline business, but that is precisely why Allegiant likes them.

Only 17 of Allegiant's 203 routes are flown nonstop by another airline.

Allegiant finds ways to profit on routes other airlines couldn't make work, often swooping in after they pull out. This month, it started flying between Asheville, N.C., and Tampa, a route abandoned by AirTran after Southwest Airlines acquired it.

Like other discount carriers, Allegiant prefers small airports that charge airlines lower rents, even if they aren't the most convenient. In Orlando, that means flying into Sanford, 30 minutes further from Walt Disney World than Orlando International Airport.

Frugal decisions like that helped Allegiant post a net profit of $78 million last year on revenue of $909 million. Its 8.6 percent profit margin was the highest of any U.S. airline, making it a darling of Wall Street.

"Typically, the best way to make money is not to compete with somebody," says Andrew C. Levy, president of Allegiant Travel Co., who sits in a cubicle next to the rest of his staff.

Rather than battle major carriers for customers on routes between major cities, Allegiant uses its marketing muscles to convince people in small towns to fly away for a vacation.

Last year, 7 million passengers took a flight on Allegiant. That is a sliver of the 642 million people who took a domestic flight last year.

But Allegiant earned a whopping $11.22 each way from those passengers. On average, the airline industry earned 37 cents each way, per passenger, according to Airlines for America, the industry's lobbying group. Southwest Airlines, one of the industry's most profitable carriers, made $3.85 per passenger last year.

Allegiant is ruthless about keeping its costs down. Its employees are some of the lowest-paid in the industry, in some cases making $20 an hour less than colleagues at other airlines.

Like some other budget airlines, Allegiant advertises extremely low base fares and then tacks on numerous fees. A roundtrip ticket with Allegiant costs $195, on average. But passengers pay an additional $83 in fees -- or 30 percent of the total cost of flying.

To book a trip by phone, Allegiant charges $50 for each roundtrip ticket. To book online costs $20 for each roundtrip ticket. The only way to avoid the fees is to purchase tickets at the airport, something fewer than 3 percent of its customers did last year.

But whether you book by phone, Internet or in person, paying with a credit card costs an extra $8.

Placing a suitcase in an overhead bin is $10 to $25. Boarding passes signify who has paid the fee. If passengers show up at the airport with a large carry-on bag and haven't prepaid the fee, the airline penalizes them an additional $25 to $50, depending on the route.

But what really makes Allegiant different are the commissions it earns from selling hotel rooms, rental cars and other extras including Everglades boat tours and theme-park tickets. It even gets people to attend timeshare sales presentations. Before a passenger can finalize a ticket purchase online, they must click through page after page offering them these add-ons.

Last year, revenue from commissions totaled $36 million, or nearly $12 per roundtrip passenger.

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