Allegiant’s Condo Project Could Mean Trouble for the Airline

I really enjoyed this year’s Boyd Conference, but I’ll admit I wish it had all happened one day later. Why? Well, I was able to speak with Lukas Johnson, SVP of Commercial for Allegiant, one day before the airline made its long-anticipated announcement that it would begin building condos in Florida.

When we spoke, Lukas wasn’t able to talk about that side of the business. Instead, he focused on the fact that despite what some (*cough* Scott Kirby *cough*) are saying, the Ultra Low Cost Carrier model isn’t dead. In his estimation, “most of the consumers are buying based on fare… in an industry where it’s mostly a commodity, the highest cost producer can’t produce more than the lowest cost producer.” And while the legacies can match while margins are high, if fuel rises or demand tanks, the legacy airlines won’t be able to continue to match such low fares with their costs being so much higher than ULCCs.

For Lukas, it’s business as usual. He continues to look for new routes. The original small city-to-big destination model may have a little more growth opportunity, but it’s not going to be a real driver. Instead, the growth will be largely be in markets where the origin city gets bigger (think Cincinnati, already with flights to 20 destinations) and the destination gets smaller (something like Destin, Florida). There will be more growth in existing cities, but there may be new cities as well. Allegiant will continue to enter markets with less than daily service and do its best to avoid being seen as a threat by other airlines. The MD-80s will be gone within 2 years, and Allegiant will be all-Airbus. At that point, it may even have its operational act together. In theory.

You’d think that an airline that generated a ton of cash and has growth opportunities would get the full attention of the senior management team, right? After all, you want to keep that gravy train in top form, but nay, that’s not what’s happening. Instead, founder Maury Gallagher decided to bring in John Redmond as President, a guy with no airline background but a whole lot of hospitality experience. So it should be no surprise that his focus seems to be on anything but the airline.

As mentioned, his first big project was announced the day after the the Boyd Conference. The airline is rolling out a company called Sunseeker Resorts which will have its first gigantic development on 20 acres on the water near Punta Gorda in Southwest Florida.

This development will have up to 9 condo towers along with a 75 room hotel, and owners can put their units into a resort pool so that rooms can be rented out. In other words, it’s just another big condo project.

What does this have to do with the airline? Well, I assume this map (thank you, Great Circle Mapper) of Allegiant’s flights into Punta Gorda Airport tells the tale.

Allegiant already has a substantial operation at Punta Gorda with flights from more than 30 cities arriving a couple times a week. Allegiant has always focused on trying to sell people ancillary services, including hotels and more. In my conversation with Lukas, he explained that Vegas was the best hotel market in the country. But he said in Florida, it’s not as good. Instead, they do really well selling car rentals. Now, the plan must be to try to bundle the flight and the hotel together (probably with a car too) and aggressively try to get people to stay there. Then the company makes more money, right? That’s the idea, but there are some red flags.

Let’s not forget that since these are condo towers, the big push won’t be just on bundling a flight with a hotel stay. There is undoubtedly going to involve a push to sell those condo units. (Fly Allegiant for cheap, then stay at your condo!) Maybe people in, say, Peoria buy in droves. But, uh, what if that Peoria starts performing horribly? Will Allegiant drop it, leaving condo owners livid that they can’t get to the Allegiant-built condo they bought? Or will the needs of the condo project override the airline’s profit needs, and the airline will be forced to keep flying? Allegiant (the airline) has never had loyalty to a specific route. If it does well, it stays. If not, it goes. If that strategy stays the same, then condo owners might want to think twice about buying. If that strategy changes, then that’s not good news for the airline and its profitability.

Take that a step further. Will Allegiant be forced to make new route planning decisions that support the hotel instead of what’s best for the airline? Lukas assured me that the airline will be kept separate, but if the resort is empty or the the condos aren’t selling, do you really think there won’t be internal pressure on which routes need to be flown to support the project? Maybe there will be some big buyers in Youngstown, Ohio who really need that flight to be convinced to buy. Allegiant just left Youngstown thanks to poor performance. Could it be forced back in by its own leadership?

I can understand the draw of wanting to vertically-integrate, but history shows us it hasn’t worked well with the airline industry. I’d much rather see Allegiant’s senior management team focus on running a great and highly-profitable airline. Instead, I fear Lukas and the rest of the airline folks are going to find themselves in some uncomfortable situations down the road.

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30 Responses to Allegiant’s Condo Project Could Mean Trouble for the Airline

  1. Dave says:

    Ummmm… Allegis anyone???

    • Davey says:

      My thought exactly. Sounds like what Richard Ferris tried to do with United back in the 1980s. All Allegiant needs is a rental car company.!

      Conglomerates have a mixed history going back to the 1960s. Question has to be what happens when the airline needs capital and so does the hotel/condo project. Capital is a scarce commodity and both businesses are high-capital businesses.

      Add that to the boom and bust cycle of Florida real estate and one wonders where Mr. Johnson’s sanity is. The bigger question isn’t the airline leaving Youngstown or Peoria, it’s what happens to the airline when Florida real estate goes through its inevitable downturn.

    • Tom Martin says:

      Dave…LOL! I think their name will eventually be “Allegis Air” instead of Allengiant Air! You and I maybe the only two old enough to remember that disaster!

  2. Kilroy says:

    I wouldn’t be as worried about Allegiant dropping routes to Punta Gorda. Both Fort Myers and SRQ (Sarasota/Bradenton) are 45-55 minutes from Punta Gorda, and TPA is 90 minutes away. Sure, those options are much less convenient than a 10-15 minute drive from the Punta Gorda airport, and they would likely require connections from places like Peoria, but they are not unreasonable in terms of driving distances.

  3. A hurricane going through that area this week should really get people wanting to buy condos there.

  4. DesertGhost says:

    I have to wonder how much Hurricane Irma is going to affect Allegiant’s plans.

  5. Southeastern says:

    Sounds like they are becoming EasyGroup. Hopefully they won’t make the same mistake of getting into cruise ships, music, phones, movie theaters, internet cafes, and all the other businesses that have failed.

  6. Oliver says:

    Alaska FAs were pitching a credit card on my recent flight, are Allegiant FAs going to pitch condos and timeshares?

    Seriously, what is the overlap of people having spare money to buy a condo in Florida with those flying Allegiant?

    Bizzare…

    • This is probably the best point on the whole thing.. What is the overlap between people who will fly Allegiant and those who will have enough money to buy a condo?

      If you’ve got enough money to buy a condo, you’ll probably fly enough that you’ll have a frequent flier account on one of the majors and be a bit brand loyal to them..

      • grichard says:

        I don’t think the idea is especially to fly the owners. Condos like this, with “resort pools,” are often mostly bought as investments. The large majority of traffic would come from non-owners who were booking the condo units as if they were hotel rooms.

    • CF says:

      Oliver – I think that’s a misconception about Allegiant. It may be cheap, but that doesn’t mean it only appeals to people who don’t have money.
      Remember, Allegiant’s model is different. If you live in Sioux Falls, you can either connect on a big airline and waste the day along with money or you can fly Allegiant nonstop. So there are people with money who fly Allegiant because it’s easily the most convenient.

      • Oliver says:

        … and if you fly Allegiant, you can fly on Tuesdays, Thursdays and Saturdays, unless it’s full moon? And if their plane breaks, come back next week? ;)

        Another way to look at it: if Allegiant is interested in targeting “people who have money”, why aren’t they offering them some of the services of a big airline (at least a big seat upfront; I guess they have a few on the 757s) and less excessive nickel-and-diming *combined* with the convenience of a non-stop route from middle-of-nowhere to sunny-beach-Florida?

        I should become an airline CEO :)

      • Oliver says:

        Another thing I would be concerned about: the name Allegiant doesn’t really rhyme with quality and luxury. There are plenty of condos and timeshares and hotels in Florida (or, well, until last week at least). Why buy from the company that flies ancient MD-80s without coffee makers ;)

        Then again, looking at the Sunseeker website, they don’t seem to mention Allegiant anywhere.

      • TB says:

        Bingo. The cost model is designed to allow Allegiant to fly into small cities in the first place and be that only option for people. It’s not intended to necessarily fill the plane up with cheapskates like on Spirit. That strategy is evolving into the “reverse” small city model Cranky alluded to, e.g. CVG-PGD — but a lot of these routes are still without competition (as long as you ignore that on some level, demand on IND-PGD and IND-TPA is interrelated). If people love Punta Gorda for whatever reason and nothing else will do, G4 can still be their go-to airline.

        Not sure I’m buying into the allure of flying Allegiant every time I want to go to my Allegiant-owned condo, however.

  7. David A says:

    Given the damage to Punta Gordy and other southwest Florida communities, I have a feeling this project will be slow to take off.

    Pun intended.

  8. It’s impressive that Florida has so much demand. I never get why it’s so popular. It’s flat, hot, humid, and loaded with nasty bugs.

  9. haolenate says:

    Well, why not? Sunwing owns the Royalton All-inclusive brands all over the caribbean. Maybe Allegiant is just slow to the punch?

  10. dkarp says:

    Truly dumb

  11. Bill in ATL says:

    I wonder if they’d be interested in Delta’s refinery?

  12. Yo says:

    If Allegiant would actually have some new planes and invest in MX and not strand pax for several days, I’d fly them. Wait…no, I wouldn’t because they are a PITA airline to fly and I like my AA frequent flier miles,and they fly to places I actually want to go to. Yeah, I’m a snob, and am willing to pay not to have to ever experience Allegiant (or Spirit, or Frontier, or Avatar).

  13. Yo says:

    Wait…buy a timeshare? What could possibly go wrong with that purchase? LOL

  14. Jim@CVG says:

    TWA execs, back in 1967, formed Trans World Corp., taking ownership of Hilton International Hotels, and later Century 21 real estate. They turned their attention away from running the airline. “Those who do not learn history are doomed to repeat it.” — George Santayna

  15. Last airline to make money in the hotel business was PanAm, which created Intercontinental Hotels to support its Latin American routes. According the 1981 NY Times article announcing the sale to Grand Metropolitan Hotels, the hotels were profitable, but the airline wasn’t and needed to cash out to pay its losses.

    If this link works, there’s a wonderful vintage brochure on the other end:
    http://www.panam.org/images/Community/DixieClipperReunion/panam_intercontinental.pdf

Do NOT follow this link or you will be banned from the site!