13 responses to “3 Links I Love: Allegiant’s Advantage, Frontier’s CEO Talks, A New Site You Need”

1. 

   Kilroy

   Jun 26, 2020

   Thanks for highlighting the Allegiant letter to shareholders. Very interesting and insightful letter. A few thoughts…

   * Liquidity is king, is king, is king. Just as in 2008 and in previous crises, not being overly burdened by debt payments (and not having to worry about the liquidity of one’s suppliers and customers, or their ability to meet their obligations) is huge, as is minimizing fixed costs.

   * As has been noted on this blog, in recent weeks Allegiant has generally cancelled flights closer to departure than many other airlines, and the letter explicitly states that Allegiant waits until 10-14 days from departure, before cancelling flights that do not cover its marginal fuel + airport costs.

   * Mr. Gallagher rightly points out that this crisis is a huge opportunity for those airlines who are liquid enough, both in terms of gaining new customers and (especially) in terms of opportunistic buying of planes and engines on the cheap, which fits right into Allegiant’s model of buying planes cheap and flying them a bit less. I’m not sure that Delta will recover fast enough and in time (or have enough need for new aircraft capacity) to do its usual opportunistic aircraft buying, but this glut of inexpensive aircraft could open some opportunities for new, more creative airline business models or ULCCs.

   * The death of business travel has been predicted many times. I don’t think that business travel will take an extreme long-term hit from this crisis, as nothing replaces face-to-face visits and communications, but the evolution of cheap video conference services (e.g., Zoom, Teams) will certainly affect business travel at the margin after the world recovers from COVID-19, and will force companies to question how truly necessary each trip is.

   * All of the 5 strong airports highlighted in Mr. Gallagher’s letter are in sunny destinations with relatively high numbers of seniors / retirees, and 4 of those 5 airports are in Florida. Allegiant is doing well by capturing both the “cheap trip to a beach / warm weather” traffic and the “visit grandma / grandkids” traffic.

   Reply
2. 

   Tim Dunn

   Jun 26, 2020

   The focus on ultra low cost carriers shows a common theme: they expect the legacy carriers to be monolithic, unable to adapt while Allegiant and Frontier (and Spirit not mentioned) can fly wherever they want and carry whatever passengers they want.

   Either the virus crisis is depressing travel for all or it is a big hoax that only a few are buying into; it cannot be both things.

   If there is some reasonable demand, every carrier will figure out how to compete for it. If premium business travel is dead, the other carriers will figure out how to evolve. Delta, like Southwest, has accessed the private capital market to raise over $10 billion in cash, including on an unsecured basis. Delta and Southwest both have very strong track records for cost control.

   And if the virus crisis is real, there is a very real possibility that it will be taken seriously by seniors that travel to/from ULCC strength markets.

   It is also worth noting that American just announced that it is ditching its load factor caps, the only one of the big 4 to do so. Doing so frees up a bunch more seats they can sell. Given that AA has more hubs in states with huge increases in virus case loads, either the public won’t care about blocked seats or AA will just fill up seats with lower yielding passengers while DL UA and WN will focus on higher yielding passengers – and the revenue difference won’t be that big, esp. after costs are cut.

   Either DL UA and WN are keeping load factor caps because they know it translates into higher yield or they are making a huge mistake – along w/ the ULCCs that do not also have load factor caps because their business model doesn’t work if they can’t fill planes. If ULCCs think they serve a client base that doesn’t care about the virus while 3 of the big 4 do, then there is far more at stake than airline business models.

   Business travel won’t totally disappear – but if it is dramatically reduced, the weaker legacy players and those that can’t get their costs down will go first.

   The industry is not defined by previous business models that existed before the virus crisis started; companies will evolve and they will compete for whatever traffic they think they can retain.

   Reply
   1. 

      Kilroy

      Jun 26, 2020

      Tim,

      I agree that the legacy carriers will evolve their business models and route structures to better compete for what demand there is. I wouldn’t be surprised if we start to see some additional Allegiant-style “unbundling” or a la carte options from the legacy carriers, especially on basic economy fares and heavy leisure routes. However, the timing of this will be challenging from an optics and PR perspective, and we may not see it until demand picks up more.

      > Either the virus crisis is depressing travel for all or it is a big hoax that only a few are buying into; it cannot be both things.

      I disagree and consider this a false dichotomy. Yes, many (if not most) people have cut their air travel back, but some have done so much more than others, and that’s what’s important here. I don’t think one can argue that many of those who are traveling by air these days consider the virus a “hoax”, or think they can’t/won’t get it. Many people simply consider COVID-19 as a risk to be managed, just as one manages the risk of catching other diseases or being injured/killed in a car accident, and for them the risk of catching the virus by flying (or by going grocery shopping, or any other activity in public) is one that they are willing to take.

      Different people value things differently in terms of risk/reward, and just as I don’t judge people who do things that I consider “too risky” to do myself (like climb tall ladders), I don’t think we should be judging those who are flying these days. Provided one takes reasonable steps to protect oneself and others, flying on commercial flights in and of itself is not irresponsible (from a social or virus standpoint), nor are most other public activities (like riding the subway). I’m sure we’ll eventually have a situation where virus cases are traced back to a plane or airport, and that such a situation will receive a great deal of press and social media attention, but at this point it’s fair to say that the airlines have done almost as much as they reasonably can (both from a practical and an economic standpoint) to make flying much safer.

      Similar to flying post-9/11, many people aren’t ready to abandon their previous habits and ways of life merely out of fear, but rather will find ways to adapt the process and mitigate the risks so that they can eventually return to relatively normal lives. Life will go on, it will just be a little different than it was in the past.

      Reply
      1. 

         Tim Dunn

         Jun 26, 2020

         I don’t disagree – but you either have airlines that say that social distancing doesn’t matter and are carrying as many passengers as their planes always held or it does matter and some segment of the population will only fly if they believe there is some sort of protection. It can’t be both for now. No airline is doing social distancing for one flight but not another.

         And if it truly comes down to price competitiveness, airlines that do social distance have an added benefit – more space – that they can tout. Airlines do compete for price-conscious passengers; that was true before the virus crisis.

         FC (below),
         the big 3 airlines are using their widebody aircraft for cargo and military charters on top of their few scheduled routes. As long as international passenger flights are depressed, cargo flights will be more profitable.

         and the big 3 have very valuable loyalty programs that will help with revenues.

         Let’s see how the actual revenue and profit numbers compare not just for the 2nd quarter – which is just about ready to end and will be reported in a couple weeks – but for the 3rd quarter and beyond.

         If DL and UA see other carriers doing better financially, they will adapt their plans – but since airlines share and see enormous amounts of competitive data, I fully expect that DAL and UAL already know what traffic they are passing on right now .

         Reply
   2. 

      enplaned

      Jun 26, 2020

      > Either the virus crisis is depressing travel for all or it is a big hoax that only a few are buying into; it cannot be both things.

      Right now, and since shortly after the crisis began, corporate business traffic has nearly completely ceased. I would guess a lot of smaller businesses are also minimizing travel – perhaps not all smaller businesses, but a very good fraction.

      The nascent recovery in traffic since April has been overwhelmingly leisure/personal driven.

      Further, think of long-haul international – overwhelmingly gone, because it’s really hard for most Americans to travel to far away places without there being a quarantine involved.

      So I think your statement above is clearly wrong. To date, this crisis very much has hit some kinds of traffic far worse than others.

      Reply
3. 

   FC

   Jun 26, 2020

   Really interesting letter for G4. Great stuff.

   Up to this point, it seems like AA has been very actively in chase low yielding leisure customers which has also allowed it to operate more fuller schedule and picked up some more ff. DL and UA have been more conservative about cash preservation and not going after price sensitive customers to the same degree.

   I do think this letter would look different in a couple of weeks given the recent surge in COVID cases in leisure markets. I think ULCCs will be hit very hard and same with AA. Regardless, G4 does a very good model and have always done well. They will do great coming out of this crisis.

   The legacy carriers really depends on getting premium clients from its business routes and also LH international markets. With all those widebodie sitting around doing nothing, it’s going to be tough going for them until these market comes back. For the next 2 to 3 years, it will be very hard for legacies to do what they did prior to COVID.

   Reply
4. 

   eric

   Jun 26, 2020

   MG makes compelling points but I’m not buying the ‘end of business travel’ trope.
   Zoom, GoToMeeting, et. al. work because they have to work right now. After 3 months of total reliance of the technology, I have to say it does the job but dosent replace F2F.

   There is a reason why successful salespeople, project managers, consultants, journalists, attorneys, etc. have the behavior analytics skills of an FBI profiler. Video technology will never replace nuance.

   Reply
   1. 

      enplaned

      Jun 26, 2020

      It’s a rare person who says that Teams/Zoom/whatever will completely replace F2F. The real question is whether it replaces a meaningful proportion of F2F.

      There are a lot of companies which have been forced to create remote alternatives for what were previously in-person processes. Not all of these were “meetings” per se. Some were inspections of one kind of another, personal acceptance of high-value parts, in-person implementation of software, the list goes on and on.

      Once this is over, not everything is going to revert to the status quo ante. Some of those remote alternatives will be deemed to be good enough, especially in light of productivity gains and T&E savings.

      If there were, for instance (this is not a prediction) to be a 20% reduction in business travel, that 20% reduction would have pretty material impact on the airline business, on business hotels, etc. Not to mention, say, loyalty programs and everything that falls out of those.

      Covid has forced us into the future relative to remote working and many other things – a lot of people started using Instacart, Amazon Fresh, etc, who had never tried it before. Again, not everyone will go back when this is over – and in fact the longer this lasts (and the recent flare-up means it’s going to last longer than we thought even just a week ago), the less likely people are to go back.

      For sure there will be some reversion to the old ways of doing business. What we don’t know is what the split will be. It won’t be 100% replacement, it won’t be 100% reversion to pre-Covid.

      Reply
   2. 

      SEAN

      Jun 26, 2020

      Well said Eric. A few weeks ago the NYT had an article that explained in great detail that as great as Zoom is, it fails to capture important social nuances that we depend on in face to face communication.

      Two examples that were pointed out…

      1. slight delays between users causing unstable images & 2. moving ones head to the side to make constant adjustments to cameras or mikes. Both give the impression of disinterest to other parties even though that is NOT the intention. Our brains don’t process this type of lack of signaling well, but of course it’s what we need to do for the time being.

      “Either the virus crisis is depressing travel for all or it is a big hoax that only a few are buying into; it cannot be both things.”

      Tim Dunn is correct. It was first believed that the virus was only in dense urban areas such as NYC, Boston, SF, LA, Chicago, Portland & Seattle, however a few things were wrong about that conclusion. First of all the first two clusters were in Teaneck (Bergen County) NJ & New Rochelle (Westchester County) NY. In both cases the outbreaks were in religious communities & I know exactly where the NR outbreak occurred. Secondly NYC’s worst outbreak took place in Staten Island witch is as suburban as anyplace else in the country, but just happens to be part of the five boroughs.

      And now it’s suburban & middle America’s turn to go through the first wave of this mythical pandemic. By the looks of things, they are less prepared than the coastal cities. Case example Phoenix & they are just the first to be hit& we’ll see what happens next.

      Reply
5. 

   Oliver

   Jun 26, 2020

   I wonder how much Allegiant customers like it when their vacation flight (after a few months of lockdown) is cancelled ten days before departure because of low demand.

   Reply
   1. 

      CF

      Jun 26, 2020

      Oliver – I was just looking at that today. Allegiant has stopped canceling much now, so that’s good news.

      Reply
      1. 

         Kilroy

         Jun 29, 2020

         At some point (and it may still be too soon) a post analyzing the cancellation rates and reasons (if different from the usual lack of demand) by airline since February would be very interesting to see.

         Reply
         1. 

            Kilroy

            Jun 29, 2020

            Looks like you were ahead of me, as I posted that previous comment an hour or two before today’s post was published. Never mind, what I suggested above, then.

            Reply

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