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- [00:03]
A
I'm Jon Ostrower, editor in chief of the Air Current.
- [00:05]
B
I'm Brett Snyder, author of Cranky Flyer.
- [00:07]
C
I'm Brian Summers. I write the Airline Observer. You're listening to the Air show, the podcast where we talk about what goes on in the business of the sky. We were a little torn on this week's topic because there's a lot of M and A excitement going on this week. We did learn, Brett, that Lufthansa Group will acquire an additional 49% stage stake of ITA for 325 million euros. That'll give it 90% of Italy's number one airline. Brett, you must be so excited about this, right? I mean, how do you feel? You've been a long time supporter of Alitalia and its successor companies.
- [00:48]
B
I love that airline dearly. I feel like a late night comic who relied on Spirit for half of their jokes right now, and it's. It's just gone. So now we just have that cold German efficiency. But I actually, I think there will be plenty to make fun of here. Lufthansa Group will find a way to screw this up. Probably like recreating Alitalia, then ITA City. ITA City Line, Air Dolo. I don't know. Euro, ita. It. It could be anything. And then they'll shut them all down six months later. It'll be awesome. The opportunities here are endless.
- [01:20]
C
Well, maybe for a future podcast. We do very much respect your love of this number one Italian airline, but right now, we're gonna put you right in your comfort zone. Brett. I know nobody likes a show about a random US Airline more than you. We are on the cusp this week, right as we record the show on Wednesday morning of losing another US Airline, though it's not related to a fuel crisis. And we've known this has been in the works for a while. Sun country, it's about to lose its independence. It's being gobbled up by that US ULCC that, you know, Scott actually respects. It turns out having a moat for an airline is kind of a big important deal. Allegiant actually has one. Its entire business model is predicated on flying to places that I do not want to go. A spill carrier. It is not.
- [02:17]
B
No, sir. It is not a spill carrier. This is why it has done so well. But isn't it kind of strange that it has just about bought an airline that is entirely dependent upon the spill of Mother Delta?
- [02:30]
C
You make a good point, Brett, but let's not dwell on that just yet. I think allegiant has earned the benefit of the doubt from us both from its long term history, outside of a blip that I'm going to talk about in a moment and its recent earnings record. First, the blip. We know that that period between 2017 and 2024, not so great. Some of us may remember former Allegiant CEO John Redman tried to convince everyone that he could achieve major synergy by building a resort near that big Allegiant station in southwest Florida, the Punta Gorda Airport. I loved hearing him spar with analyst Hunter Key back in the day about how many swimming pools the property did or did not have. As Key could have told us at the time, the thing was going to be a disaster. And it was. And it really didn't have a lot to do with COVID But Allegiant told us last year it was going to go back to basics and give us those nice juicy margins again. The hotel called Sunseeker. It's now a Hilton. Allegiant doesn't really have anything to do with it anymore. And since then the results have been pretty good.
- [03:43]
A
Okay, so let's dig into some numbers. As part of their first quarter earnings, Allegiant reported adjusted operating income of 108.9 million. An adjusted operating margin a very envious one of 14.9%. That was a more than 5 percentage point improvement over the prior year and the highest first quarter level since COVID They had an adjusted pre tax income of 93.8 million, an adjusted pre tax margin of 12.8%. First quarter adjusted diluted earnings per share of $3.77 and more than a 16% year over year increase in trasm. That's total revenue per available seat mile with total yields up over 20% year over year. Man oh man, that is an envious haul given the state of US Aviation right now.
- [04:38]
C
Indeed it was. And Brett, I know you were impressed with Allegiant's results. You wrote about it in Cranky Flyer this week. You mentioned that Allegiant had the second highest year over year gain in adjusted unit revenue in the first quarter, up 15.4% on a stage length adjusted basis. Brett, I trust you. You're a savant with numbers. But John and I have probably said the word adjusted like 14 times in the last 90 seconds. And I remember in my accounting classes that we were supposed to be skeptical anytime an airline or any company used the word adjusted that many times. Are we sure that things are as good as they say? Or should we wonder what happened here.
- [05:23]
B
No, they're as good as they say. So look, all the adjustments there are special charges that they did. There's nothing on the revenue side. So you mentioned the 15.4% increase in TRASM. That was my adjustment for stage length. Otherwise it would have been a 16.4% increase. It's just that stage length came down a little bit. But on the special charges side, they had about $11 million in sped up depreciation and amortization on planes and tech. There's another $10 million that was spent on the Sun country integration, $7 million on a credit loss which isn't even worth going into. It's like someone went out of business and I fell asleep reading that. Anyway, I think those are fair to exclude if we're trying to look at the airline and kind of normal course of business. And that's how we get to allegiance. 14.9% operating margin. But even if we that Allegiant would still have posted an 11.1% operating margin. You can't make this quarter look bad. Try, I dare you.
- [06:25]
C
I won't. I give Allegiant a lot of credit for turning things around pretty quickly. After getting rid of that ridiculous hotel, Allegiant is now doing what it had has always done. Connecting smaller cities with popular destinations with a lot of flying during peak periods and then doing it with cheaper to own airplanes. I think what has been nice for Allegiant is that its moat was so deep that this multi year excursion through the harbors, not beaches, remember the hotel was not on the beach of southwest Florida didn't actually cost it so much in the long term. We know that Lucas Johnson of Breeze made some dabbles into Allegiant markets which made sense because Johnson used to work at Allegiant. But it turned out Allegiant really didn't give up that much ground in those secondary or tertiary markets when it had other things to do.
- [07:18]
A
Don't forget all those fourth tier markets.
- [07:20]
C
Oh yes, John, how could I? The people of Minot, North Dakota, I mean they have to go to Phoenix, Mesa and Vegas. This is still an airline like sun country that knows what it does well and doesn't fly when there isn't money to be made. Can you gentlemen guess the average block hours per day per aircraft for Allegiant in the first quarter?
- [07:43]
A
We've done this set up before where you like ask us a question that we already know the answer to. So I'm just going to say I Is it 37 hours per day?
- [07:51]
C
Yeah, yeah John. Okay, it's.
- [07:53]
A
What is it?
- [07:54]
C
It's 7.2 hours per day down 4% year over year. This is also interestingly about 4 hours less per day than Frontier's long term target.
- [08:06]
B
Fun fact, this varies greatly. I pulled last September's numbers and utilization using cerium data. During that very off peak period in September, especially in Florida, their utilization was under 4 and a half hours a day then. But this past March it was over 8. So they use those planes when they need to.
- [08:27]
A
Well this is exactly the special sauce of their model. Like there is a discipline in how they fly that honestly is lost on most airlines in the world who just try to fly the wings off their airplanes. But I think it's worth unpacking the strategy that goes in here. Way back when, when Allegiant first ordered the 737 Max from Boeing, it was January 2022. It was a big surprise, right? Like this was an airline that was built on flying secondhand used or last generation new aircraft, in this case Airbus single aisles all of a sudden picks a new fleet based on the latest generation of metal and the engines to come along with it. The timing of that deal of course was late pandemic but pre mask mandate coming down and Boeing was barely a year out of the max grounding, let's just be honest, like there was commercial ground to rebuild here for Boeing and delivery slots in the near term were plentiful and Allegiant absolutely got a killer deal. And a lot of that deal was based on the near term availability of airplanes, which now you have to wait 4, 5, 6, 7 years before your airplanes arrive. But how did new airplanes actually fit into allegiance model? They relied on the all Airbus fleet which we just talked about, formerly an all MD 80 fleet. Well, Courtney Miller, a good friend of the show and now managing director of Visual Approach analytics, showed me and the readers of the Air Current when he was managing director of analysis for the Air Current exactly what the airline was
- [10:02]
B
thinking at the time.
- [10:04]
A
Allegiant, he concluded, was very, very, very good at knowing when not to fly. Look, a fully owned asset, that is their Airbus fleet lets you control what you spend and when. In this case, ultra low fixed costs for owning an airplane allows you to accept higher variable costs in greater maintenance, fuel, etc, only when you get paid back for that flying new aircraft are really expensive. Yes, they do inherently come with higher capital costs, but also lower in theory maintenance costs. But Allegiant ultimately gets to enjoy the benefit of the latest generation of engines, in this case the CFM Leap 1B. But I think when you step back from Allegiant, this is the tale of two fleets operating at two very different tempos for very different reasons. Right. So Allegiant took its 17th 737 Max 8200, each with 190 seats in February. That's a the Max 8 with an extra mid exit door to allow for the added seating, which in this case
- [11:12]
C
is actually only one seat because they've gone for extra legroom.
- [11:15]
A
Exactly. This is an airplane that ryanair flies, pushing 200 just for comparison sake. So we're going to look at March flying, but if my math is right, and I concede that it may very well not be, look at Do Data and take the 316,037 block minutes scheduled for that month, divide by 60 to get block hours, then divide by 31 days in the month and then divide by 17 airplanes in the fleet and you get a smidge shy of 10 hours per day of scheduled utilization. But if you run the same math over the 110 airplane Airbus fleet, you get a scheduled utilization of, of 7.8 hours per day. Allegiant has built itself into an airline that selectively can sustain higher utilization flying. Putting a 320 CEO on those routes pushed old metal hard and burns lots of fuel. So selectively applying the 737 Max on routes where they do actually have more consistent flying that they don't have to stand down on Tuesdays, for example, lets you optimize one fleet for high tempo and another fleet for low.
- [12:21]
B
Yeah, and you know, it's interesting because we look at the utilization in March, which is obviously going to be higher, I assume the maxes are going to be more consistent. But in Q1, low utilization still seems to be leading the way because capacity actually dropped pretty significantly. ASMs were down 5.9%, which that's a lot and certainly helps boost fares and unit revenue and all that. It's, it's a tailwind that no other airline got even close to having. I think JetBlue had the next biggest drop with ASM down 1.7%. But look, Allegiant, they're in markets where there isn't much competition. You can really flex it. It's more pure. There's not as much of a strategic need to do this kind of stuff and they're making a ton of money. So who's going to complain about it?
- [13:08]
C
Clearly it was a great idea in the first quarter to reduce ASMs by 5.9%. Maybe they got a little lucky. Maybe they didn't know the cost of fuel was going to spike so much. But over the long term we know that no airline, allegiant, whatever it is, is going to be able to shrink forever. You do have to grow. Maybe not so much. But Brett, you are our network and revenue savant. And I think there's always a concern for airlines, whether warranted or not, that maybe a carrier is going to run out of room to grow. You know, we have to wonder, we always wonder how many routes and city pairs remain ripe for this sort of thing. Spirit learned the hard way that it kind of run out of ideas. Is there any worry that that will happen here? We've kind of run out of small cities to link to Vegas, Phoenix and Florida at this point, right?
- [14:00]
B
Well, it's a great question. I don't know that we have an exact answer yet. To me, the most appealing low hanging fruit for where you add capacity is actually on the sun country side of the business. Want to guess where that is? Brian?
- [14:12]
C
If you say Detroit, Brett, I am walking out of the room.
- [14:16]
B
Detroit. No, look, we don't need a Spirit sun country merger anymore. Allegiant can just roll in and take over Detroit as the number two. The market dynamics are pretty similar to Minneapolis. There's going to be a second airline in Detroit. Allegiant should be that airline. And Frontier might disagree, but whatever. But see beyond this, this is where it can get more interesting. Forgetting about Detroit, I've talked to multiple people who say I don't appreciate the value that allegiance Southern bases will bring to the sun country model and there is opportunity there for growth.
- [14:53]
C
What are these people telling you? What do they mean by that?
- [14:56]
B
Think about today or near now. I actually I went back, I looked in cerium at the schedule data. I looked at Saturday March 28, which is a very important day in Minnesota because that was the first day of Minneapolis public school spring break this year year. So that day sun country had 25 departures from MSP before 8:30am it then only had five between 8:30 and noon. And why? Because it sent its fleet out that morning from msp, which is its sole crew base. The planes are there, the crews are there. All that. Then it needs to wait for those airplanes to come back before it can fly again. Now next year Allegiant can send morning airplanes from Sanford, St Pete, wherever and now have a second wave in the late morning where demand will still be really Strong. They just couldn't make it work operationally before. And so that actually is part of the reason why Allegiant has bases in places like Allentown and Cincinnati today, because it can play the north and south bases off of each other. And now it has a brand new huge north base added to the system where it can do things.
- [16:05]
A
Or maybe two if they add Detroit.
- [16:06]
B
Yes, thank you. This is what I'm talking about. So that's growth, but how much can they do beyond that? They haven't run out of ideas yet, but I imagine the incremental options get tougher in their core plan. So now it's going to be more sun country esque stuff like charter or operationally challenging routing. Sun country is very good at doing stuff that other airlines would probably balk at. It's. It's very proud to be complicated.
- [16:35]
C
Yeah, all this network stuff is super interesting and it will be fascinating to watch how it develops. I do think, guys, one of the keys to Allegiant success over the past two decades is that it often has something else cooking besides the network. A Sunseeker, of course, was a bad idea.
- [16:53]
B
What about the Family Fun Centers?
- [16:55]
C
Oh, the Family Fun Centers and the golf course management system. But I think we're past that now. Let's talk about a good thing, though. Remember how much money the airline used to make by selling vacation packages?
- [17:06]
A
Ah, yeah, but Allegiant isn't done with that package idea, or at least not investing in it as much as they did.
- [17:12]
C
No, you can certainly buy a vacation package with Allegiant and in fact it would be happy to sell you one. But people may remember back in the day, 15 years ago, every earnings call, every earnings release talked about revenue and packages. We just don't hear that much anymore. The folks in Las Vegas have moved on to a new thing. At least now they're really trying to grow the frequent flyer program, or we should probably say the credit card program because that's what it is. They've been pretty successful at it. I think we know the rule of thumb of loyalty at this point. If you're number one in a market, you tend to get an outsized share of credit card revenues. Allegiant, number one in a lot of markets. One of them is my not. These are teeny tiny markets, but in the aggregate it works pretty well. You may wonder why Allegiant is just discovering this. Well, Allegiant only had its first credit card deal negotiated in 2016, and those times were a lot simpler. So I spoke recently to Chief Commercial Officer Drew Wells, and he told me, you know, at the time they were just looking for a credit card program, any credit card program. And they got a pretty simple one at that. Things started to change last year, and Wells told me that he's very excited. And in the first quarter of this year, Allegiant reported about a little less than 40 million in total CO brand revenue. And that was up about 9% year over year. This year, Allegiant expects its credit card to provide it with about 5% of its total annual revenue. And that's from about 600,000 cardholders.
- [18:48]
A
So that doesn't actually sound particularly impressive. I mean, the gold standard here is Delta, right? Which reported 8.2 billion in AmEx revenue last year, up 11% year over year. If the back of the napkin math is right, Delta can actually buy those 3787 dash tens from Boeing paid for by American Express just last year and still have several billion left over. That's just to give you a sense of magnitude for what these numbers really mean.
- [19:21]
C
Yeah, Delta is in a league of its own, and I don't think too many people in the industry expect that will change. But Allegiant has told analysts that it thinks it can get close to Delta levels as a percentage of total revenue, which is pretty impressive. It's far from that now. SkyMiles accounted last year for about 13% of Delta's revenue. Wells has been telling analysts on the earnings call that he actually thinks 10% is possible. Things have been going very well recently. According to the airline, new accounts and card spending each went up more than 15% year over year in the first three months of this year. Another thing is coming. All these airlines, of course, like to negotiate new deals with banks that pay them more. Allegiant has been teasing that it is expecting a new deal with bank of America. And Wells told analysts recently that once that deal is done, he expects that 10% is, quote, more achievable than it is now. One analyst did ask if sun country will help spur loyalty signups. Well, it's kind of punted that one. I think sun country is still a
- [20:30]
B
pretty small airline, so I certainly see the genius of this. Here's the thing, though. I think it's actually a little bit different here. I'm not sure how many markets Allegiant is truly number one in. If we look at Minot, I'm willing to bet Delta is number one there. The thing is, Allegiant flies to the right places and is going to be the most attractive for that vacation for people. And so if you're allegiant, you may not be number one, but you're the most attractive. So, you know, if I'm planning my big annual trip to Vegas or Phoenix or Florida or wherever it may be, sure, I could have a Delta credit card and pay to 12 million sky miles to go, you know, to Vegas with a connection, and it's a real pain. Or I could have the Allegiant credit card and I could go for pretty cheap. Not a lot of miles is my guess in the end. And then I love it. And so it's a pretty compelling offer if you're trying to actually save up for that big trip from these small cities.
- [21:32]
A
Okay, so I want to move on and talk about Sun Country. They're now one company, soon to be called Allegiant. Is this really the deal of the century?
- [21:41]
C
It certainly is for Jude Bricker, the ex CEO of Sun Country. John. I'm sure he's walking away with quite a bit of money. For the rest of us, though, I don't know how much it moves the needle. I guess it's nice for competitors to know that there is one fewer US Airline. Everybody likes it when capacity is. What's the word they like to use? Rationalize, constrained, disciplined.
- [22:06]
B
Any of those will do. But no, this is not the deal of the century. It's a fine deal. I don't really get it. I don't think Allegiant needs it, But I also don't hate it. It's just meh.
- [22:17]
C
Yeah. You know, after the airlines announced the deal a few months ago and this thing closed really fast, we spent some time on this program kind of guessing what Allegiant would do with Minneapolis. We know that there is a lot of potential issues. A big one, I think centers around brand people in the Minneapol area. They actually kind of like Sun Country. They don't treat it like a regular ulcc. They're really into that Sunny the Bear mascot. Super cute. My kids like their stuffy. But anyways, you know, people there, they trust the airline. They've flown it for 50 years. It's their hometown carrier. And we know that Allegiant doesn't come with those warm and fuzzy. So we kind of wondered, like, how many of those customers would stick with Allegiant. But I wondered, guys, recently if we were overthinking it because I followed the Allegiant first quarter earnings call pretty closely. And do you know how many times they said Minnesota or msp? I'm not going to open it to you guys because, John, you're just going to give me a hard time. So I'm just going to tell you it was none. Zero. Those words did not come up on the call.
- [23:24]
A
Did they talk about the deal at all?
- [23:25]
C
Yeah, John, they did. First, I know that Brett lives and dies on synergy estimates. I think that's his favorite word. Good news, Brett. The company quote, maintains a high conviction in achieving its 140 million in run rate. Synergies, that's by next year. You happy about that, Brett? Yeah.
- [23:48]
B
Why don't you try and say sun country synergy three times fast.
- [23:53]
A
Sun country synergy. Sun country synergy.
- [23:54]
C
I'm not going to do that. But I will tell you is that if Minneapolis isn't really part of these synergies, you may be interested in what CEO Greg Anderson said is really the value of the sun country deal, at least now. So he said he's very excited about the charter and cargo business. He said that those account for about 35 to 40% of Sun Country's standalone revenue. And for the combined company, it's going to be about 10% of total revenue. I think the key here is that in both cases another entity is paying for the operating costs.
- [24:29]
B
Interesting. I didn't realize that fuel was a pass through for charters, but either way, I still like the charter business. I think that's the most attractive piece, the cargo side. Nobody seems to love the Amazon cargo deals they have. They're always trying to renegotiate, but stable revenue, not terrible. Okay, not amazing. But the charter business, that's good business.
- [24:50]
C
Yeah, it is. It is good business. What was interesting also on the call is that nobody really talked about the sun country passenger network at all. Most of the discussion was just on the nuts and bolts of running what is going to be a bigger airline. And one thing that Greg Anderson said was that he was really excited that both airlines own their own aircraft and this fleet strategies complement each other and that the combined airline is going to have a lot of flexibility over where it puts its aircraft. Here's one fun stat that they shared on the call. This combined airline is going to own 163 of 166. And John, I want to ask you what could be a dumb question and I hope that you can give us another four minute lecture on the history of aviation or airline economics. But at what point in history did it become unusual for airlines to not own their aircraft? I just find it Remarkable that merely owning airplanes can give allegiant a competitive advantage.
- [25:58]
A
So I don't lecture.
- [26:00]
C
Do I lecture?
- [26:00]
B
I don't, I don't know.
- [26:01]
A
I try not to lecture. I try not to lecture. I try to in a good way.
- [26:05]
C
Like your favorite professor, right? The one that you're just like you're sitting there in the front row and you're paying attention.
- [26:11]
A
Oh, as long as people are paying attention. Okay, there are a few ways to break this down. You know, I think crucially you probably may have to segment this versus like developed versus developing aviation markets. Like, I'd actually love some listener feedback on kind of like how this all works because I can go a lot of different ways. Like in 2025 and 2026, so far, yes, I looked it up. Direct to lessor airplane deliveries made up about 25 to 30% of shipments from Boeing and Airbus. The number of actual leased airplanes in the world is far higher when you factor in obviously everything that was delivered in the past. Sale leasebacks, all different types of business models. Okay, but the sale leaseback side of it is actually really, really interesting. I think that actually takes a big part of the balance here. That's extremely lucrative for airlines like Indigo Porter, Frontier looking to make each airplane a cash positive event. So what that means is Frontier will take delivery of the airplane for $35 million, making up numbers here and. But they will sell it to a lessor for 40 million, making it a 5 million dollar cash positive event. And when you're in high growth mode, that kind of arm's length relationship where you kind of switch from like buying an airplane outright to actually paying monthly for it can be really valuable. But that really only works if the growth is sustained. And oh, by the way, interest rates are low and they were for a better part of a decade coming out of the global financial crisis, right up to the pandemic. Look, I think, you know, allegiant, when they place the 737 order in 2022, had about 110 airplanes. Right now they've got 123. This is not a super high growth carrier over the last four years since they purchased them. But look, I think in many ways ownership of airplanes, it comes down to not having to deal with other people's money and other people's problems. Like an airplane that has a monthly lease rate is an airplane that has to keep flying to pay its bills. Alex Wilcox at JSX was openly annoyed at having to roll with lessors and all their requirements on the ATR fleet because of all the different hoops that he felt like he had to jump through. Bey just renting the airplane. But look, not everyone can afford to buy airplanes. This is like an uptown strategy. Like, the ultimate flex in this business is paying cash. And Delta did that for a while on the strength of their balance sheet. And there's a lot of virtue in that. If you can own your own airplanes, it gives you a lot of flexibility.
- [28:35]
C
Thank you, John. That was fascinating. As I suspected it would be. Final question for all of us here. What happens next? We've kind of established that we think this particular merger is kind of a nothing burger. The industry is still in trouble. Allegiant is in good shape compared to other carriers. Do we think that Allegiant could participate in yet another round of consolidation, maybe with Breeze? I know that Breeze's cfo, its CCO as well, worked at Allegiant for a long time. I know everybody at Breeze wants that nice IPO money, as does David Nealman. But Jude Bricker found out that acquisitions bring good money, too.
- [29:24]
A
So I feel like Breeze is looking up at the majors for M and A, not across to the other value players. I mean, from a fleet perspective, Avelo may make sense after sun country for Allegiant, but those are. They still exist that airlines, they absolutely
- [29:40]
B
do not every day.
- [29:41]
A
But those aren't like owned assets. Those 737s are all on operating leases. Big picture. I think what I'm really curious about, I think this is going to drive a lot of the discussion is what do the cost per implant expenses look like for Allegiant and the other value carriers that want to fly to these smaller markets? You know, that may actually really end up having a profound impact on their trajectory as. As spending rises.
- [30:03]
C
That's.
- [30:03]
B
That's a.
- [30:03]
A
Probably a. An entirely separate discussion, but I think it kind of fills in the question about who needs to do M and A and why.
- [30:11]
B
Yeah, I would think Allegiant will be digesting this one for a little while at least. I mean, look, you can say the industry is still in trouble. Perhaps they need to seek the sun. Brian. See what I did there? But. But allegiance. Part of the industry. It's all sunshine right now, Brett.
- [30:32]
C
I'm gonna let that one go. You've been listening to the Air Show. If you have suggestions or questions for us, or if you're interested in sponsoring the podcast, go to our website, theairshowpodcast.com to get in touch.
- [30:49]
B
Leo Duran produced and edited this episode Our theme music is by Joshua Mosher. Thanks for listening and we'll be back soon.
- [31:07]
C
Did I say that right or is it Mino? Is it?
- [31:09]
B
Why not?
- [31:10]
C
How do you say.
- [31:12]
A
Where have you left my. Have you left Los Angeles County?