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Low Cost Airlines

PART 2 of 2 – A Look at the Business Models of the 2 established US based ULCC (Ultra Low Cost Carriers) Spirit Airlines and Allegiant Air as well as newcomer Frontier Airlines

In this part of my discussion of LCC, I will examine the business models and strategies of the 3 ULCC in the US market today (Spirit Airlines, Allegiant Air and new comer to the ULCC club Frontier Airlines), as well examining and bench marking their financial performance against each other. This topic can become a book and I will try and keep things as simple as possible and yet very revealing on whose model/strategy is or is not working, and what the future may hold for the LCC.

Before I start with the existing ULCC, it noteworthy that the nostalgia for past airlines never dies, as I write this blog we have 4 new airlines in the USA working on their Part 121 AOC that take their names from the great airlines of the past:

1. PEOPLExpress out of Newport News, plans to start operating a wet leased B737-400 from Vision Air this summer from Washington National to Myrtle Beach and then later to West Palm Beach, for those old enough, PEOPLExpress was a BIG airline low cost airline out of Newark between 1981-1987, even launched trans-Atlantic B747 services at rock bottom prices.

2. Pan American Airways out of Atlanta, will start with B737-800’s but not much information available, but everyone should know PAN AM, she was the de facto US flag carrier from 1927 till her demise in 1991, and airline that spanned the world and led by a brilliant aviation pioneer Mr. Juan Trippe., it would be nice to see the old PAN AM fly but its tough out there.

3. Eastern Air Lines out of Miami, led by airline veteran Mr. Edward J. Wegel plans to launch with B737-800’s and the first will be appropriately named “The Spirit of Eddie Rickenbaker” (1890-1971) the long time CEO of EAL, a World War I Ace with 26 kills,  a Medal of Honor and an aviation pioneer that sold America on flying, well good luck, there is good management team in place and they just have to figure out where, what and how in a tough market, best wishes.

4. America West Jets out of Las Vegas, a group bought the remains of bankrupt Ryan International Airlines and its operating certificate, and plans to operate B747, L1011 and MD-80’s from San Bernadion, CA to Sanford, Las Vegas then Central America ? My senses tell me this not a good business plan or strategy, sorry.

Good luck to everyone, below you will read about what you are up against with ULCC and the more hybrid LCC’s in PART 3.

*** NOTE***  I have attached a LCC Comparison Table based on 2013 results, below:

LCC Comparison Table

PART 3 will look at the business models and economic performance of the other 3 US based LCC’s  JetBlue Airways, Virgin America and Southwest Airlines, and there evolving hybrid business models, who has it right ?


Allegiant Air’s 25 year old MD-80 (166 seats), bought for around $US 3.5 million each and still doing a great job making making money for the airline by keeping fixed costs very low and therefore can make money even with a low utilization rate. In 2013, EBITDA per aircraft at Allegiant was $3.6 million, the price of each MD-80 !


In academic circles there is some differences in what a Business Model and Strategy is, but for me and this article I am assuming a Business Model deals with core logic and value creation for the firm and Strategy is more about competitive positioning of the firm, it is the process of competing to be unique rather than competing to be the best, defining a unique value proposition through which the organization will achieve and maintain competitive advantage . It involves a different and tailored value chain or activities that support and help to differentiate the organization’s strategy, its about deciding what NOT to do as mush as what TO do.

A Business Model needs to answer the following 6 decision component questions:

1. HOW do we create value ? these are factors related to the offering.

2. WHO do we create value for ? these are market factors.

3. WHAT is our source of competence ? these are internal capabilities of the firm.

4. HOW do we competitively position our firm ? this is competitive strategy factors.

5. HOW do we make money ? these are crucial economic factors that many airlines DO NOT get right.

6. WHAT are our time, scope and size ambitions ? these are growth plans and exit factors.

The LCC business model has brought enormous changes over the past 20 years to the global airline market. The understanding of low cost cost business model varies and is perceived I believe by many uninformed to be a ‘negative’ and four important key points that need to be persistently pointed out to prevent misconceptions (Kachner 2011) are:

1. Low cost is NOT low margin. It can be HIGHLY profitable, when you get it right.

2. Low cost is NOT low quality. It usually entails a narrower range of offerings.

3. Low cost is NOT cheap imitations. It is true innovation at work, when it you get it right.

4. Low cost is NOT unbranded, It is frequently supported by potent brands.

All business models start with the VALUE PROPOSITION, which are the benefits offered to customers, without benefits, you have no business. Here one needs to look at:

1. Target Segments – WHAT matters ? what channels, what end users ?

2. Product and Service Offering – WHICH needs ? which products, which features ?, which services ?

3. Revenue Model – WHAT relative price ?

Then you need an OPERATING MODEL, which outlines how you will produce/deliver what you are offering to your customers. Here one needs to look at:

1. The Value Chain    2. Cost Model     3. Organization

Spirit A321

Spirit Airlines Airbus A321 has 218 seats while US Airways has only 183 seats, those 35 seats (16% less seats) make a huge difference when it comes to unit costs


A side note on the air travel value chain, an economically sustainable industry has to cover its cost of operation and provide a reasonable return on investment, sadly weakest link in the ai travel value chain are the airlines. Between 2004 and 2011 the return on capital for airlines was around 4%, while the other chains were higher (ie. CRS 20%, Travel Agents 44%, Lessors 9%, OEM’s 7%, Airports 6% and all service providers 11%), showing that airlines do not have the bargaining power they would like, airports are monopolies, only 2 OEM’s (Boeing and Airbus), Lessors are many but current demand is outstripping supply on some aircraft models, and few service providers at many airports. That all has to change for airline’s to be more profitable, without profitable airlines, than suppliers will pay the price on day as well.

The good news is that in the past 18+ months, 13 million passenger seats have been taken out by US airlines, mostly FSC, which has reversed the red ink caused by the foolish race for market share at any cost pursued by most airlines.  This has created some stability in the market and has caused load factors to go as high as 87.1% in 2Q 2013 and a profit of $4.7 billion for all of 2013 for the US airline industry.

Now we can look at the 5 business design areas of differentiating the LCC against the FSC (full service carrier):

1. Customer Selection – travel purpose, customer origin, price sensitivity and product quality.

2. Value Capture – products offered, market breath, network type, in flight offering, loyalty program or alliances.

3. Scope of Activities – distribution, MRO, operations.

4. Strategic control – regulatory, cost structure and brand.

5. Organization Structure – organizational system, management focus and non core actvities.

The Business Plan will then incorporate the above into 8 LCC Activities that will differentiate the airlines from each other, this where I am looking for competitive advantages from all airlines, it all comes down to how they handle and structure their 8 business activities.


A key feature of LCC’s is their ability in un-bundling the various services on offer in order to offer the lowest possible price to its customers. Things like no meals on board simplifies many operational issues and reduces costs, from ordering food, loading on aircraft, serving it, disposing of garbage, the extra weight, which equals extra fuel, so a big cost savings. The airlines checked baggage fee are now common for all carriers and it started with the LCC, and is now spreading to seat selections and priority boarding. The ULCC will use high seating plans for its aircraft to get as many seats as possible (Spirit Airlines has 29% more seats in its 178 seat Airbus A320’s than United Airlines A320’s with 138 seats).


Large airports are natural monopolies and price their services accordingly, while secondary airports are eager to attract new business and lowering landing fees is one tool they use. As well secondary airports are not slot constrained or congested, making quick 25 minute turnarounds possible, where that is not doable at large airports like ATL or JFK. Quicker turnarounds allow more flights in a given day schedule, more flights, means more flight hours and passengers, all lead to lower unit costs.


LCC do not over much in the way of connectivity, delays can play have with schedules and the complexity just adds costs. Also LCC will operate more P2P services, very limited hub networks which keep utilization low and are dependent on passenger connectivity at the hub, so again point to point schedule is less complex and costly. The frequency of weekly services is also usually lower for LCC vs FSC as the LCC try to have many P2P markets but with lower frequencies as the leisure/price sensitive market is not in need of frequency but in need of low fares. There was a time when LCC operated shorter stage length flights, but now they are looking for new markets and several flying transcontinental routes, raising average stage lengths beyond 1,000sm or 2 hours, which allows fewer flights per day than doing say 1:20 flights (on a 12 hour daily utilization that is 9 flights per day versus only 6 flights).

The entry of JetBlue and Virgin America into the transcontinental flights where flights are 5 hours has changed the short haul model, and changed the competitiveness of the LCC as its harder on long flights to compete, as for longer flights customers want more frills like more leg room, reclining seats, meals, lounges,, upgrades, etc. and for that JetBlue has had to put only 150 seats into its Airbus A320 and Virgin America 149 when they can have 180, this lowers their unit costs by 17%+.


Many LCC are using the web exclusively for reservations and avoiding GDS (global distribution) fees which FSC use a great deal. As well LCC have not use FFP (frequent flyer programs) though that is now changing as well as LCC Southwest Airlines has started its own FFP. It costs money, gives away free seats and requires people to manage it, again complexity adds cost. Usually no code sharing, interlining or alliances are entered into, though that is changing too, JetBlue has several partnerships/code shares and there is talk from SkyTeam that they are receptive to the idea of including LCC under certain circumstances, limited cooperation as P2P is not interesting for Alliances but flows beyond gateways, especially transcontinental is very interesting, that could mean JetBlue, Virgin America and especially WestJet in Canada which has embrased many code sharing partners, and soon going long-haul (more on that in a soon to released article).


LCC must get higher productivity from their assets, be it aircraft or employees to drive down unit costs. As unions have come into play at most LCC this is becoming a major challenge for management, Allegiant Air gas some labor issues now and Frontier Airlines has had to deal with its unions after the buyout by Indigo Partners and the move to ULCC. For now the LCC pay less and get more productivity from their employees.  As an example let’s look at employee productivity numbers between Spirit Airlines and Delta Air Lines:

1. ASM’s per employee (Spirit 4.29m vs Delta 2.62m)

2. Employees per aircraft (Spirit 60 vs Delta 107)

3. Employee average salary (Spirit $59.8k vs Delta $72.9k)

4. Passengers per employee (Spirit 3,753 vs Delta 1,553)

Evidently, LCC pay less but get more productivity from their employees than do FSC like Delta. But we know as the LCC matures, the labor costs start to creep up, like at Southwest Airlines the last few years.


Efficient operations are the core of the LCC business model, as maximum flight hours, shortest turnarounds and maximum flights per day are a must with new expensive aircraft to spread unit costs out (Allegiant Air is a little different here, will discuss soon), new aircraft also have higher reliability and one of the main factors why CASM are 40% higher at Delta Air Lines ($0.140) than at Spirit Airlines ($0.099), as Delta’s fleet is 17+ years old versus only 5 years old at Spirit Airlines. Generally you want aircraft utilization above 10 hours per day, ideally 12 hours per day with new aircraft, though Allegiant Air does very well with older aircraft at 5.5 hours per day, so again its back to the business model that each LCC choose that will dictate utilization, sector lengths, seating capacity and age of aircraft used.


LCC unbudnle their services to exclude no frills from the basic price, for each additional service that is desired and extra fee is charged. In fact globally in 2013 is is estimated that $42.6 billion was generated in ancillary revenue from all global airlines (LCC and FSC), or 6% of total global airline revenue and growing. US FSC had $14.3 billion in ancillary revenues and LCC globally had $13.7 billion. A few LCC carriers are doing very well with ancillary revenue (or non-ticket revenue), Spirit in 2013 had 40.4% of its revenue from ancillary sales, while Allegiant had 33.3% and Rynair in Europe had 24.3%. This “ancillary subsidy” allows airline’s like Spirit to offer very low base fares, in fact in 2013 Spirit’s average fare per passenger flight segment was $56.07 while Delta was $167.38 (+199% above Spirit’s), and even LCC Southwest was 85%  higher than Spirit’s base fare.


The LCC business model is now based on ancillary sales, In 2013 Spirit Airlines average ticket price was $79.43 and then non-ticket revenue per passenger (ancillary sales) was another $53.84 per passenger for a total average revenue per passenger segment of $133.27, notice the fact that ancillary was 67.7% of the base price or 40.4% of the average revenue per passenger is ancillary sales. The LCC aim to educate their customers on the fact they pay for the seat and flight, the rest is extra, and here Spirit has not done a good job at this, it has the most consumer complaints of any US airline.

Just this past week, The DOT (Department of Transport) in Washington proposed that passengers be provided detailed information on fees for a 1st checked bag, 2nd checked bag, advance seat assignment and carry on bags, its about transparency and to prevent consumers from being lured by low advertised air fares only to be hit by higher fees for things once considered part of the ticket price.The rules will nto cover fees for early boarding, curbside check-in and other services, but the standard stuff that was once included in the air fare.The government also pushing a bill for taxes and government fees to be included in any advertised price.

Here in Canada, we have full transparency, the advertised price MUST include all fees, no surprises, and when booking on line the booking engine asks for number of bags, seat selection, food, etc, and you just tick off what you want and then when submitted you have the the final price before you confirm the booking, a great system and one that I think the US airlines should embrace and not fight, it will improve the image of the LCC a great deal when all is transparent.

In the US airline market we have 6 LCC’s each following their own business models that produce different economic results and you can see the difference in their respective yields, average load factors and CASM (cost per ASM), remember that operating profit is in simple terms (Yield x load factor) will give us RASM which needs to be greater than CASM. The Table below (LCC Comparison Table) compares the financial and operational numbers side by side for all 6 LCC. I should mention that 4 of the 6 are public companies, and financial and operational information is readily available on them (JetBlue-JBLU, Southwest-LUV, Spirit-SAVE and Allegiant-ALGT), while Frontier was just bought by Indigo partners and in the middle of a transformation into a ULCC so an IPO is years away and Virgin America is looking forward to an IPO, but given it just had its first annual net profit in its 7 year history, it is not likely to go down well or not at all.

In short, the lowest CASM is $0.0990/RPM (Spirit Airlines), the lowest yield is $0.0957 (Spirit Airlines), highest load factor is 90.7% (Frontier Airlines), lowest operating revenue per ASM is $0.1237 of Allegiant Air, highest operating margin is 17.05% (Spirit Airlines) and highest return on equity is at Allegiant Airlines (24.40%), so why the differences between carriers ?


Frontier Airlines Airbus A319 has 138 seats as a ULCC it needs at least 7 more seats, its ALL about unit costs, 7 seats equals 5% reduction in CASM, every little bit helps when airline margins are so low.


SPIRIT AIRLINES:    (2013 Revenue $1.654 billion, 54 aircraft, 12.1 million passengers, 3,224 employees, LF 86.6%, RASM $0.1319, CASM $0.099, CEO Mr. Ben Baldanza)

I will my examination with the two ULCC (Spirit and Allegiant) and I will start with Spirit Airlines is ULCC based in Miramar, Florida and offers rock bottom fares for price conscious customers with a fleet of 54 Airbus aircraft (29 x A319 with 145 seats, 23 x A320 with 178 seats and 2 x A321 with 218 seats), in high density seating, and is planning to add 11 aircraft in 2014, 14 aircraft in 2015 and 14 aircraft in 2016 and plans to have 111 aircraft by the end of 2018, a very ambitious growth plan is in place. Though it has only 1.5% of the capacity in the US domestic market it is becoming a game changer in the industry.

Capacity increased 22% in in 2013, 25 new routes which generally take 6 months to break even or become profitable, and breaks down its routes into 4 categories :

1. Core Mature – fully allocated costs – in 2013 this was 19% of the routes.

2. Core New – fully allocated costs – 10% of routes

3. Utilization Mature – variable allocated cost basis, majority of these flights operate during off peak hours “red eye” or short haul flights that fit into the schedule gaps, 32% of routes.

4. Utilization New – variable allocated cost basis, majority of these flights operate during off peak hours “red eye” or short haul flights that fit into the schedule gaps, 36% of routes.

The above Utilization Mature/New routes would be routes down to South America for instance from Ft. Lauderdale (FLL) where a flight will leave late evening for say Lima, Peru and be back early morning in FLL to start flying US domestic routes, here consumers get very low flights to South America as long as they do not mind arriving somewhere at 2am and Spirit keeps some of its aircraft flying day and night a few days a week, that is how it flies its aircraft 12.7 hours a day, driving unit costs down. IF a route fails to reach break even in 12 months, Spirit eliminates the pairing and redeploys the aircraft elsewhere, their motto “make mistakes quickly”.

The airline as of Dec 31, 2013 serves 130 markets served by 56 airports in North America, Central America South America and the Caribbean. From as far north as Platsburg to as south as Lima, Peru the airline keeps costs down through:

high aircraft utilization – high density seating – simple operations – no hub and spoke – productive workforce – opportunistic outsourcing – modern fleet – single type fleet – minimum ground time – reduced sales/marketing and distribution costs through direct to consumer marketing 


Spirit Airlines Airbus A319 with 145 seats (Direct CASM of $0.079), while US Airways have only 124 seats (Direct CASM $0.1060) which is 34% higher !


The business model at Spirit Airlines is very similar to Europe’s ULCC Ryanair, keep costs as low as possible and then you can offer very low base fares with a range of optional services, allowing customers the freedom through ‘a la carte’ options to choose the extras they want. The whole premise of the business model is to deliver the #1 criteria for airline selection, PRICE and the price sensitive customers have shown that by using aggressively low fares, you stimulate air travel demand to increase passenger traffic, load factors and non-ticket revenues (ancillary sales) to new highs. The higher the passenger traffic and load factor the higher are the ancillary sales. In 2013, Spirit had a daily aircraft utilization of 12.7 hours, which is 31% more than even LCC Southwest utilization of only 9.7 hours per day and one of the reasons Southwest’s CASM is 8% higher than Spirit’s. The seating capacity of its fleet gives Spirit a much lower unit cost, look how it compares with the competition in seating capacity, remember more seats means lower CASM:

Spirit Airbus A319 (145 seats) vs 114 to 128 seats at United, 128 at American, 124 at US Airways, roughly 13% more seats.

Spirit Airbus A320 (178 seats) vs 138 to 150 seats at United, 150 at JetBlue, 150 at US Airwats, roughly 19% more seats.

Spirit Airbus A321 (218 seats) vs 183 to 187 at US Airways and 159 seats (Transcontinetal MINT seating) to 190 seats at JetBlue, roughly 17% more seats.

In 2013 Spirit had an average sector distance of 958 sm (1,537 km), and yet average revenue per passenger segment was only $133.27, or $0.139 per mile. That average revenue per passenger was broken down to $79.43 for the base fare (59.6% of the total fare) and $53.84 for non-ticket items (40.4% of the total revenue per passenger). Here Spirit is showing that you can get to very low basic fares by keeping ancillary sales up, imagine flying somewhere a distance of 958 sm for $79.43 ($0.0829 per mile), yes you will not be able to check in baggage without paying extra, but it is many times cheaper than any bus or train service, even with the added ancillary fees.

Its all about elasticity of demand, lower prices by 50% and you can get a 120% increase in demand (Ed >1), when elasticity of demand coefficient is 2.40 (short haul leisure flights), this demand stimulus in each of its markets, allows Spirit to have the lowest costs in the industry(CASM $0.0990), while FSC Delta Air Lines has a CSAM of $14.06 or 42% higher, so the FSC cannot compete on price with Spirit and Spirit cannot compete on the product side for those who want to fly businesss class or have many extra perks like live TV, extra leg room, food on board, movies on demand, that is a different market segment, which is the bread and butter of FSC and some LCC now, but its not Spirit’s market and that is fine with its shareholders, as the airline had a ROIC (return on invested capital) of 30.8% and a ROE (return on equity) of 23% in 2013 with an operating margin of 17.95% and a net margin of 10.7%, that would make any CEO in any business very happy.


Spirit Airlines Airbus A319 with 145 seats has 33% higher Direct CASM than the Spirit Airlines A320, with 179 seats (23% more seating capacity) ($0.0790/ASM vs ($0.0590/ASM) ? All A320 fleet better ?


With costs low, the airline is innovative in un-bundled pricing strategy that generated an extra $53.84 per passenger in 2013 through :

charging for checked and carry on baggage – passing on all distribution costs – charging for the very few premium seats it has ( 4 on A320, 4 on A321 and 10 on A319) – advance seat selection – FREE SPIRIT credit card – offering 3rd party hotels, ground transportation and attractions – selling 3rd part travel insurance – selling in flight products – selling on board advertising – subscription to $9 Fare Club

The core principal at Spirt is “run the airline as a business”, where every decision is driven by its impact on the bottom line, I have seen too many airlines run by people who love airplanes and prestige of running an AIRLINE, wow, but in the end it is a business, the aircraft are just assets that move people to where they want to go, and in the end you need to make money doing it, and for that you need targets, ROIC, ROA (return on asset), Operating Margins, etc. cannot improve that which you cannot quantify !

For those of you that looked at the LCC Comparison Table (attached above) will notice I have done a quick financial analysis of the 4 public LCC, and the DuPont Analysis shows the profit margins and the asset turnover ratio (ATO), which for some is revealing, we see Spirit with a 1.40 ATO ratio which shows how well Spirit is using its assets to produce sales and it is by far the best of the 4 LCC analysed, while JetBlue’s ATO (0.74) is almost half of Spirit’s, which is a red flag as far as either excessive assets or insufficient revenue, mor eon that when I get to JetBlue. Now the next number in the LCC Comparison table is the RoA (return on assets) which combines profit margin and ATO, and here Spirit blows the other 3 away with 14.99%, again a confirmation that Spirit is very efficient in utilizing its assets to generate net income, while JetBlue is 2.29% not good, and warning signal about some underlying issues with its business plan and its move to go premium in a big way on the very competitive transcontinental flights between New York, Los Angeles  and San Francisco.

The financial results of Spirit show that the ULCC model is a very good one, it is unique and not easily copied. The airline competes very heavily with FSC and other LCC, in fact the overlap in the Spirit network is significant, 30% with Southwest, 17% with JetBlue (mostly in Ft. Lauderdale-FLL), American 61%, Delta 21% and United 31%, clearly Spirit competes with the FSC but on its own  terms and conditions and does very well as the low cost leader and knows its customers well, though the airline does get the most complaints by consumers, that is due to a poor communication strategy of explaining what un-bundling or a la carte pricing is and how their business and pricing model is different. Now the DOT (Department of Transport) wants to make all of this much more transparent to consumers, the heat is on for transparency, like in Canada, where any advertised price must have ALL included (taxes, security fees, add on’s, etc.).

The top 5 domestic routes for Spirit Airlines are Fort Lauderdale (FLL) to NY-LaGuarda (LGA) with 11,088 seats per week, FLL-Atlantic City (ACY) 7,014 seats per week, FLL-Atlanta (ATL) 7014 seats per week, DTW (Detroit) to Las Vegas (LAS) 6552 seats per week and DTW-FLL 5,372 seats per week. Obviously Fort Lauderdale (FLL) is a big market for Spirit, it has high margins, but now JetBlue Airways has moved in and plans to really ramp up its operation there to the Caribbean and Latin America, and just announced 2 new routes to Cartagena (Colombia) and to Las Vegas  and these will begin in October the same day it launches FLL to Pittsburg. Last year JetBlue launched 6 new routes from FLL to San Jose (Costa Rica), Lima (Peru), Port-au-Prince (Haiti), Port of Spain (Trinidad & Tobago), Montego Bay (Jamaica) and Punta Cana (Dominican Republic), so lots of competition in Southern Florida for Spirit, but opportunities as well.

In short, Spirit Airlines is a success, it is doing well, it is keeping its costs down and it is not venturing into the Transcontinental market like JetBlue and Virgin America (more on that in PART 3), though it does serve Las Vegas from Fort Lauderdale, Philadelphia, Baltimore (BWI) and to Los Angeles (LAX) from FLL, but it does not fly high frequency something that business travelers expect, but not leisure travelers. As long as Spirit stays true to its business model it will keep growing, it has identified over 500 large, un-flown high fare markets between 400 and 1,400 miles, that is a big future. Needs to keep costs down, larger A321 aircraft will help keep unit costs down, but labor cost could start creeping up, labor costs are 19.1% of its costs and 59% of employees belong to some union and they have 3 different collective bargaining agreements, keeping costs down is always the hard challenge as LCC mature over time.

The airline began charter ops in 1990 and became Spirit Airlines in 1992, and its business model has changed several times since, but this one is a keeper, just keep doing what you do best. On that note, Ryanair the ULCC in Europe is changing its model, more frills, more customer service, less secondary airports and more frequencies for business travelers, in aviation never say never !


ALLEGIANT AIR:    (2013 Revenue $994 MILLION, 66 aircraft, 7.2 million passengers, 2,065 employees, LF 88.9%, RASM $0.1237, CASM $0.1033, CEO Mr. Maurice Gallagher)

A very different LCC Allegiant Air is, being Las Vegas based they view their business as “selling a vacation”, their strategy is keep costs very low and connect large leisure destinations to small cities. Built differently and is highly profitable, by focusing on the price sensitive leisure market, small cities to large leisure destinations, low frequencies, variable capacity, low cost aircraft (older) and little competition, NOT your normal airline that is in the air transport business chasing business travelers, flying between large cities at high frequencies, with high costs, fixed capacity and lots of competition and until 2013 a money looser. This airline does things differently, and you know they do it with 33 employees per aircraft ! while Delta Air Lines has 107, need I say more.

Allegiant B757

One of 6 Allegiant Air’s Boeing 757 for the Hawaiian operation that has not been as successful as planned, and now the entry into Mexico is delayed till 2015 BUT maybe Canada is next ?


Now Allegiant Air may be a ULCC but its customers are your middle class, mean income $104,000+, mean age 49, 73% married, 84% own a home and 53% are professional, the loyalty is there, recent survey showed that 41% of its customers took 4 or more trips with Allegiant Air in the past 2 years, in fact 21% took 6 trips in the past 2 years, and this confirms the survey’s finding that 97%  of Allegiant customers view in favorably.

The secret ? the starting point is  that Allegiant Air targest leisure passengers in small cities and that gives it a monopoly on a majority of its routes in fact out of 227 routes in 2013, only on 22 was there any competition (12 were against Southwest, 3 against Hawaiian, 3 against Alaska and 3 against US Airways),  Allegiant avoids it at all cost if possible, 90% of its routes there was NO competition at all. It operates 53, 161 seat MD-80s (average age is 25) which cost it around $3.5 million they still have lots of life in them and great for low utilization operations, which Allegiant is, at around 54. hours per day (165 hours per month), which would be very uneconomical if you had a brand new Airbus A320 at around the current market lease rate of $350,000 per month, that would equate to around $2,212 per hour in lease cost alone or $0.025/ASM.

The company made an EBITDA (earnings before interest tax depreciation and amortization) of $225 million in 2013, which comes to $3.6 million per aircraft, not bad when that is what the MD-80 cost in the first place. The fact that fuel and maintenance costs are higher for the MD-80 than new aircraft is not an issue as they are variable costs and are only incurred when the aircraft is flying (yes, some maintenance is fixed. The airline strategy is to offer capacity only when needed to fill the plane, for instance at Las Vegas, 23% of weekly capacity is offered on Thursdays, 22% on Fridays, 4% on Sunday, 24% on Mondays and 21% on Tuesdays and only 15 on Wednesdays to match the incoming and outgoing flights for usually long weekend trips to Las Vegas.

One thing about Allegiant Air is that their business model has taken note and incorporated bits and pieces of the best in their class :

1. Leisure travel focus from Southwest, Carnival, Royal Caribbean.

2. Ancillary revenue focus from Ryanair.

3. Direct distribution from Expedia, Orbitz, Travelocity.

4. Low Cost structure from Ryanair and Southwest.

5. Direct customer relationship United Milegage Plus, Delta SKYmiles

Allegiant has started services to Hawaii but so far results are not as expected, 6 Boeing 757’s were purchased for that operation, and recently plans to enter the Mexican were pushed back to 2015 as the economy struggles in Mexico hurting local airlines Aeromexico, Volaris, Aerobus and Interjet there with ever decreasing yields. But Canada is on its radar, Allegiant was talking to Fort McMurray, Alberta but that was shot down when WestJet announced its 2 weekly non-stop flights to Las Vegas starting this summer. So not everything goes as planned, so you make new plans, that is aviation.

The airline targets leisure customers in small cities because they are looking to travel to a big leisure destination, more motivated by price that schedule, they like weekend breaks to leisure destination towards the end of the week and back home at the beginning of the week, they form a series of small markets that would not support a high frequency schedule and they are seasonal, so lots of ups and downs. The busy months are March and July where daily utilization can be 7.5 hours and the low months are May and September when utilization can be as low as 3.5 hours, so Allegiant must be flexible, and be able to park its aircraft during low seasonal demand, not something for a FSC.

In fact, Allegiant has to be very flexible with scheduling, it needs to adapt to demand by day, by week, by season so that it is flying when demand can drive high load factors (+85%), the cost structure needs to be more variable than loaded with fixed costs, and you need to be profitable with low frequency and low utilization ! that requires very low fixed costs to be profitable, and it is working. It is why they buy older used aircraft and once they are fully deprecited and have no depreciation charge and their use incurs variable costs only.

In 20013, Allegiant Air MD-80s flew an average sector of around 900 sm (1,444 Km) and had a direct CASM of $0.0675/ASM while the B757 had an average sector distance of 1,700 sm (2,720 km) and direct costs of $0.0530 (21% less than MD-80), and yet the MD-80 DIRECT cost at AllegiantAir  is much better than at American (140 seats) at $0.093/ASM on 800 sm sector (1,280 km) and Delta (149 seats) at $0.102/ASM at average sector distance of 550 sm (880 km) which is 92% higher than Allegiant Air’s direct cost !

The airline has done everything against the current airline management thinking, it mainly operates ‘cheap’  and old fuel inefficient aircraft, with low utilization, high seasonality operation, low frequency BUT ha sbeen profitable for a long time and generates a lot of FCF (free cash flow). Going back to my LCC Comparison Table, we see that it is just shy of $1 billion in revenue ($986 million), an operating margin of 17.05% and a net margin of  9.26% are very good, one of the top airlines in North America. The ATO (asset turnover ratio) of 1.07 is healthy and with a better equity multiplier (leverage) it has managed a better ROE (return on equity) than Spirit 24.4% vs 23.0%.

The future looks good for Allegiant Air, Airbus A319/320’s will slowly in time replace the MD-80’s, and that will lower fuel and maintenance cost which will lower CASM and by 2015 we will see Allegiant Air enter the Mexican and Canadian market and hopefully soon get its Hawaiian operation sorted out, hats off to Mr. Maurice Gallagher and his team for another excellent airline (he was CEO at Valuejet as well).


FRONTIER AIRLINES:    (2013 Revenue $1.356 billion, 53 aircraft, 10.67 million passengers, 3,494 employees, LF 90.7%, RASM $0.1247, CASM $01202, CEO Mr. David Siegel)

Frontier Airlines is not new to the LCC market, but since its $140 million sale by Republic Airways Holdings last year to Indigo Partners led by industry veteran Mr. Bill Franke. Indigo already owns Wizz Air (Hungary), Volaris (Mexico) and Tigerair Airways (Singapore), and until last year Bill Franke was a shareholder and Chairman in Spirit Airlines but sold the shares and now is looking to turn Frontier Airlines into a ULCC. Frontier Airlines is now expanding outside its traditional Denver hub, and has set up a Trenton, NJ hub where airport costs are low and strategically located near Philadelphia (58 km) and Newark (78 km) with little competition, and going after the cost conscious low yield leisure customers with its current fleet of Airbus A319 (138 seats) and A320 (162 seats).


A B737-200 of Frontier Airlines in 1982, a long history for this airline, lots of different business plans, now a new owner, Indigo Partners and a new ULCC (ultra low cost carrier) in the making.


Timing could be on Frontier’s side as consolidation will lead to yield increases as competition has and will decrease and LCC JetBlue very focused on moving up scale with the MINT seating on the Transcontinental services and focus on FLL (Fort Lauderdale) and the Caribbean and Latin America, and Virgin America having to defend the Transcontinental business it has which 68% of its ASM’s, so while everyone is busy, Frontier can map out and feel out its strategy while it works to reduce its CASM’s by 20%.

A side note on the Transcontinental services of JetBlue and Virgin America, the 5 hour flights cannot carry a large passenger payload and therefore the seating capacity on the A320/A321’s on those routes is reduced, driving CASM up significantly, and then you have aircraft flying the network with less than optimal seats on short flights, so its bad situation for both LCC as they fend of each other and the FSC that have upgraded their own product.

Well, the first thing they have to do is get high density seating into their aircraft cannot get CASM down otherwise, and being a ULCC is ALL about cost. In 2013 CASM was 0.1202 that is 21.4% higher than Spirit Airlines CASM of $0.0990(also a A319/A320 operator) and this where CEO Mr. David Siegel will have to sharpen his pencil because they need to cut $0.0212/ASM, that is around $800 per block hour, that is a big cost reduction challenge for Frontier. I expect Frontier to copy the Spirit Airlines model, but 2013 yields were $01148/RPM or 20% higher than Spirit Airlines yield in 2013, which will come down as Frontier starts to cut fares. It is harder to get info on Frontier Airlines as it is not a public company, so it is difficult to know where the airline is now 5 months into 2013. Not sure what Frontier Airlines was doing flying Q400’s under the Lynx brand and even EJ-190’s from Republic, it was ill conceived business model, and then merging Midwest Express with Frontier ? Midwest was a good quality brand and it was said to see it disappear.

I am always baffled by what some companies come up with in terms of strategy, what was Republic Airways thinking in buying Frontier Airlines and Midwest ? and then ordered 40 Bombardier CS 300’s ? such airlines should never order a new unproven airliner, leave that to the big boys like Lufthansa, Air France. Anyway good to read this week that Republic Airways CEO Mr. Bryan Bedford acknowledged that his “waning interest in the 40 CSeries jets he has on order, he might wind up selling or leasing them to another airline”, he expects first delivery 3Q 2016, hmm  good luck on that.  With 40 on order, Republic holds 20% of current orders, the aircraft is too big for regional airlines, as they are currently capped at 76 seats by most pilot scope clauses, and the industry is changing, 37-50 seaters are on their way out fast and now majors/mainline carriers are buying the aircraft and makes the regionals bid on their operation with shorter terms, tougher conditions and a lot of competition, not a time to be investing in regional airlines, sorry Mr. Bedford, but the industry is not  a good place to invest right now, as majors/mainline carriers drive costs down by squeezing all suppliers.

The numbers for Frontier Airlines were ok last year as a LCC, 10.67 million passengers, revenue of $1.356 billion which resulte din operating margin of 3.61%the lowest of all LCC, while its CASM of $0.12o2 was 5th highest of the 6 LCC’s, only Southwest’s was higher at $0.1260/ASM, and it did have the longest average stage length of all 6 at 1,117 sm (1,792 km). The longer the the stage length, the more ‘frills’ customers want which for a ULCC is not good, as many will pick the more premium carrier.

Frontier A319-11

Frontier A320’s with 162 seats, Airbus is now increasing A320’s maximum seating from 180 to 186 (+3.3%) with new exit door and re-arranged galley, Frontier should at least match Spirit Airlines 178 seats in its A320’s, that alone gives Spirit a 9.8% seat mile cost advantage if else was equal, if you want to be a ULCC then everything is about LOW unit costs, because there can only be one true low cost operator, in Europe its Ryanair with Wizz Air very close.


I do know that in July 2013, Frontier started to charge for soft drinks and that in August they started to charge $100 luggage fee to those who booked outside the webpage, and by October Frontier had a 92% load factor, so any worries about customer loyalty in Denver have subsided. The big opportunity for Frontier will be to capitalize on service reductions by the FSC, as the last few mergers (United & Continental, Delta & Northwest, American & US Airways and Southwest and Air Tran) have created a consolidation drive that the US market has never seen before, 8 airlines became 4 and many routes and cities were dropped, including hubs like Cincinnati, and this has created many opportunities for the LCC and Frontier has moved east very nicely.

Now as United Airlines is downsizing its hubs, it is withdrawing heavily from Cleveland which was a former Continental Airlines hub and only 315 sm from United’s O’hare hub, and now United is reducing departures there from 199 per day to 72 by June, 2014. An opportunity for Frontier to step in and launch its planned 6 new routes to Atlanta, Fort Lauderdale, Fort Myers, Tampa, Raleigh-Durham and Phoenix this June, with 3 weekly flights to each destination, typical frequency pattern from Frontier.

At Trenton, new services are being launched Atlanta, Charlotte, Chicago-Midway and Cincinnati and the hub has been doing well, with lots of promise which is something Frontier can take to other under utilized airports.

The jury is out on Frontier, the ownership and management knows what it is doing and what it has to do, now the execution is crucial, and 2014 will be a big year, as Frontier has to settle its labor issues, lower unit cost 20% and figure out how and where it will compete. Frontier was not very successful as a hybrid LCC under Republic Airways Holdings, and this transformation into a ULCC is a very smart bold move, it will require some serious cost cutting and implementation of those cost cutting moves, its going to challenge management and Indigo’s capabilities to the max.

Till PART 3, thank you for reading my Blog.











About Aviation Doctor - Helping aviation companies to transform the present into a more profitable tomorrow

I am a Canadian and EU national with an MBA and 33+ years experience in aviation business development with 20 years overseas and work in 30+ countries. A former investment/merchant banker (mergers and acquisitions to corporate turnarounds). airline and OEM senior executive and past owner of 6 successful aviation companies in 3 countries (executive jet charter/management companies, aircraft sales, aircraft broker, airline/aerospace consulting to aircraft insurance). I have a very diverse aviation background with 75+ aviation companies (50+ airlines of all sizes, OEM's, airports, lessors, MRO to service providers) as consultant, executive management, business analyst and business development adviser. Excellent success track record in International Business Development. Most work with airlines is with new start-ups and restructuring of troubled carriers. I sold new business jets, turboprops and helicopters for Cessna, Raytheon, Gulfstream to Eurocopter as an ASR as well as undertaking sales and marketing of commercial aircraft for Boeing, de Havilland, Dornier, Saab and Beechcraft. Brokered everything from LET-410's to B747's and from piston PA31 to G550 business jets. I look beyond the headlines of the aviation news and analyze what the meaning and consequences of the new information really means. There is a story behind each headline that few go beyond. Picked the name Aviation Doctor, as much of my work has been with troubled companies or those that want and need to grow profitably. I fix problems in the business for a better tomorrow. You can reach me with comments or suggestions at: Tomas.Aviation@gmail.com I write a lot of Articles and Posts on LinkedIN: https://www.linkedin.com/in/tomas-chlumecky-3200a021/


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