A View from the Top is a Q&A series available exclusively at CNBC ProCNBC reporters regularly speak to business leaders about decision-making, investments, and industry news.
The Covid-19 pandemic hasn’t been easy for any airline, but Allegiant Travel has a moment. The parent company of low-cost carrier Allegiant Air won analysts earlier this month and posted nearly $ 46 million in profit before costs in the fourth quarter, despite a net loss of $ 184 million annually. The company expressed optimism about future bookings while keeping costs under pressure.
The Las Vegas-based airline is well equipped to deal with the turmoil, analysts say: the airline is lean, focused on domestic US travel with nonstop routes to the beach and other outdoor destinations from medium-sized cities that are relatively powerful stayed in the pandemic.
Their major network competitors, who relied heavily on international and business travel before the virus spread, have suffered greater losses.
“We expect Allegiant’s financial outperformance to continue into 2021, driven by an improved cost outlook, a modest CAPEX program and supported by a robust liquidity position,” Deutsche Bank said in a Feb. 4 note, setting its 12-month price target. increased to $ 250 from $ 180.
“While we’ve built in a revenue recovery for the year, it’s a modest one at best,” the note continued. “As such, we are raising our earnings forecasts for Allegiant, making the stock unique in our industry: it is the only name in our coverage universe with higher estimates following the December Q earnings call.”
Deutsche Bank expects Allegiant to generate full year earnings of $ 5.50, up from a previous estimate of $ 4 per share.
Shares of Allegiant are up 30% in the past 12 months, more than any other publicly traded US passenger carrier.
Vaccines are now on the way and there is a greater demand for travel on the horizon. Allegiant unveiled 34 new routes last week, including Austin, Texas to Bozeman, Montana and St. Cloud, and Minnesota to Destin, Florida.
CFO Greg Anderson spoke to CNBC about how the airline is preparing for a recovery from the trip:
Here’s the Q&A:
(This interview has been edited slightly for length and clarity.)
You know how 2020 went. How are you approaching this year? Are you alone in expand mode?
If we could use one word to describe it would be flexibility. There are some leading indicators to suggest that there is pent-up leisure demand in the mid-half of ’21 that we should be able to support and fly.
Part of that is the vaccinations and the timing thereof. We track by region: mobility index, Google searches starting to suggest that people are looking for bookings in busy leisure travel periods. We also do customer surveys and just under 70% of our customers are consistently saying a few things: they see Covid’s situation getting better or much better and they plan to leave and fly in six months.
How do you choose destinations?
I would describe it as four main pillars that we look at: one is simply disadvantaged leisure markets. Looking at each market, who flies in that market, what the population looks like and what kind of leisure activities there are in that market. Another is the proliferation of the population. What we see in this work-from-anywhere environment where people go or want to go. Google searches are useful data. Another is to fill the empty spaces of some of the larger carriers. Since you see direct flights from certain areas cut back or withdrawn, that’s an indicator for us to see if that makes sense for Allegiant to supplement that with a direct non-stop flight. And another is just hyperseason routes. For a week or two, all year round, it will be in high demand, so look at it from that perspective.
We built our model to fly when it makes sense to fly and to park when there is no demand. For example, on Tuesdays we do not fly into Vegas because there is no need for that. But Thursdays and Fridays or Sundays and Mondays we go up and we fly a lot. In September we will actually park our fleet and fly less. The entire airline is built on that. I think what’s really helpful in understanding the dynamics is that we see areas of demand in certain periods and we put our resources in during those periods, and if not, we will park. That’s why the routes you see are twice a week, three times a week.
When we think of Covid, it was just an intensified version of our model. You bend your capacity when you find a question.
Do you expect summer holidays to be longer this year, as so many Americans have postponed their vacations during the pandemic?
We were pleasantly surprised in September [2020] demand. We can certainly see that again in 2021. If we start to see that September can be a more than normal flying month, we can meet that demand fairly quickly.
When is the peak season for you?
Historically, our peak was March and mid-June through August.
Are there normally busy airports where you have had an opportunity to enter?
We are not too focused on that. There are many airports that have come to us and they want us to become their airports too, especially since we are one of the few airlines that talk about growth. We can reach all the airports we planned.
Boston, or [Chicago] We could probably have gotten in half way through, but it is [a] taller [opportunity] today than a year ago.
What are your expectations for spring break?
It will not be as good as we would have seen in 2019, but compared to last year or other periods in 2020 it will be considered a peak period and we will do just fine. I wouldn’t be surprised if it gets closer to normal in 2022.
Are you still burning money?
Daily bookings of nearly $ 3.5 million a day break even for the first quarter, but … $ 4 million a day, you’re nearly break even on your debt and your capex.
Our data suggests we should see improvements. I think there is a likely scenario where we will be EPS positive in 2021.
What is the behavior of airline customers during the pandemic?
It’s quite interesting what we saw in 2020. One we could probably call a reverse flow, meaning that from some of the bigger cities like Las Vegas you saw traffic coming from Las Vegas, which is typically a destination city for us, heading north to more of the open, wide open air: Montana, Idaho, to northern California, which we called ‘non-stop after nature’.
We also saw some positive signs about working, staying, playing. The remote working atmosphere. In Las Vegas, for example, market for customers who could come to Vegas and spend a lot of time … team up with hoteliers to say you can work here, play here. Things like that were unique.
Also close-in bookings. Pre-pandemic, our booking curve would average 40-45 days. During the pandemic, in the middle of it, you were seven to ten days [ahead of the flight], and we’re still a little under 20 days, so it’s still a relatively short booking curve. So what we tried to do for our customers is we provided a lot of flexibility so that they could change their flights for free.
Do you expect the trend of last-minute bookings to continue?
I think that will still happen, especially given the smooth situation with Covid. As more time goes by and more vaccinations, you will automatically return to that elongated booking curve.
Do you know everywhere you will be flying in 2021?
I think for the most part. The announcement will be a good indicator. As things evolve and emerge, I would certainly think we would deploy capacity if the demand environment justifies it. For the most part, the takeaway we have a good idea and that is already available for purchase, but it doesn’t mean we don’t add more year round or turn here and there to make sure it’s the right size for whatever the demand environment is.
Do you have plans to expand the fleet?
We ended ’20 with 95 aircraft and we now expect 108 aircraft by the end of 2021. We are expanding our fleet, but I just want to emphasize that we have 20 aircraft that we have found that if the demand environment does not come back as we think or expect in the second half of 2021 and beyond, we have a safety valve that allows us to withdraw aircraft and set it right on whatever that may be. I mention that because of one of the others [ultra-low cost carriers], your Spirits and your Frontiers, they have plane orders where to take those planes. We don’t have a big order for planes there. They are used (Airbus) A320s.
Are there many bargains on airplanes?
I would say the plane we’re focusing on, the Airbus A320ceo, from before Covid is about 25-30% lower than after Covid. There is a lot of interest from others in working with Allegiant. Flooded might be a strong word, but we get a lot of inbounds from people who own those assets.
Competitor Sun Country Airlines has formed a team with Amazon to fly cargo. Are you interested in that business side?
We think the more low-hanging fruit in our model is on the shipping side for us. I think that’s what we’ll continue to focus on. Never say never [cargo’s] not a strategic goal for us. Charter has always been a nice addition to Allegiant. A good example: certain days of the week when we don’t use our aircraft, we can use those resources for charter.
Are you planning to grow the workforce?
Just like the [payroll support protection] launched in October ended up losing about 130 pilots, but since the announcement of PSP2 we announced that we would recall all those pilots and no matter what happens we don’t plan on renewing pilots after the restrictions on PSP2 (on March 31). In fact, we are trying to position ourselves to hire pilots in the second half of 2021 for 2022. And we are hiring flight attendants to support our potential growth that we want to do in 2021 and beyond.
Some airlines support a third round of government aid, which was led by a parliamentary committee last week. Do you support that?
We absolutely appreciate all the support the government has provided. It has been a real game changer. I don’t think we need it at Allegiant. We’ll be fine without it. For many carriers, this will be useful to maintain jobs. This pandemic was nobody’s fault. It was not the airlines’ fault. I don’t think they managed things wrong. We are super grateful for everything we have received so far and we don’t necessarily think we will need it in the future, but we will appreciate it when it does.
So if they make it, would you sign up?
I think so, it would probably make sense for us to do this, especially with all other airlines.