Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: MrB on April 15, 2018, 01:54:30 PM

Title: ALGT - Allegiant Travel Company
Post by: MrB on April 15, 2018, 01:54:30 PM
Not a bad time to start a thread

Airing today

60 Minutes Preview: Is Allegiant Airlines Safe to Fly?
https://www.cbsnews.com/video/60-minutes-allegiant-air-flying-under-the-radar/
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 18, 2018, 04:54:17 AM
LUV accident
https://www.swamedia.com/releases/release-de080387b716f7f68a21d1f864938d7a-southwest-airlines-confirms-accident-our-hearts-are-with-those-affected
Title: Re: ALGT - Allegiant Travel Company
Post by: BeerBBQ on April 18, 2018, 05:33:48 PM
Do you have an opinion on the company and/or stock?
Title: Re: ALGT - Allegiant Travel Company
Post by: Gamecock-YT on April 18, 2018, 08:08:15 PM
Do you have an opinion on the company and/or stock?

https://en.wikipedia.org/wiki/ValuJet_Airlines

https://en.wikipedia.org/wiki/ValuJet_Flight_592
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 19, 2018, 09:54:44 AM
Do you have an opinion on the company and/or stock?

https://en.wikipedia.org/wiki/ValuJet_Airlines

https://en.wikipedia.org/wiki/ValuJet_Flight_592
Gamecock-YT do you care to elaborate on the connection you're making between ValuJet & ALGT?
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 19, 2018, 10:10:23 AM
Do you have an opinion on the company and/or stock?
BeerBBQ I should be more diligent and put a short synopsis in the first post. Been meaning to do it, but a bit swamped right now.

Generally speaking the space interests me, because I view the ULCC (Ultra Low Cost Carriers) market as distinct from the LCC (Low Cost Carriers) market with a significant runway for growth if you compare US penetration v the rest of the world. From memory the US is at something like 6% and Europe for example at 31%. You also have a major consolidation story that's played out by the main price setters over recent years in the US.

Specifically, I think all three companies (Frontier, SAVE & ALGT) in that space are interesting, but I prefer ALGT over SAVE (Frontier is not listed, but their S1 of last year is an excellent read), because Gallagher has a big stake, runs it very conservatively, focus on a different market (leisure with 80% of routes without any competition) and runs a low frequency, low capex model (most LCCs have high capex, high frequency models). For valuation I refer you to recent presentations where you will note the company is going through a major fleet change, which management pegs at 110 planes by 2020 x $5m EBIT/plane, throw in the Trump tax rate and you're getting to a sensible multiple considering the $2.4Bn market cap.

Major risks
- Gallagher related party transactions (not material)
- Airline (plane goes down)
- New property venture
- Getting too big?
- Does switch to A320 imply they're changing the model?
- Fuel (oil goes up; they don't hedge, which I like, but it means you take any increase on the nose)
- Labor (not a worry for the foreseeable future

Thanks for the nudge-got to run
Title: Re: ALGT - Allegiant Travel Company
Post by: bizaro86 on April 19, 2018, 10:26:01 AM
Do you have an opinion on the company and/or stock?

https://en.wikipedia.org/wiki/ValuJet_Airlines

https://en.wikipedia.org/wiki/ValuJet_Flight_592
Gamecock-YT do you care to elaborate on the connection you're making between ValuJet & ALGT?

Not Gamecock, but the CEO of Allegiant was a director of Valujet at the time of their fatal crash.
Title: Re: ALGT - Allegiant Travel Company
Post by: Gamecock-YT on April 19, 2018, 10:44:17 AM
Do you have an opinion on the company and/or stock?

https://en.wikipedia.org/wiki/ValuJet_Airlines

https://en.wikipedia.org/wiki/ValuJet_Flight_592
Gamecock-YT do you care to elaborate on the connection you're making between ValuJet & ALGT?

Same CEO taking a wreckless track towards safety eventually will get burned (no pun intended). Just copy over the ValuJet wiki and that'll be the story of Allegiant. If they are already cutting corners when oil is as cheap as it has been, imagine what they'll do if we get a permanent spike. Sure getting rid of the MD80s to a younger fleet will help, but only a matter of time. I would never recommend my family travel on G4.
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 19, 2018, 11:37:44 AM
Do you have an opinion on the company and/or stock?

https://en.wikipedia.org/wiki/ValuJet_Airlines

https://en.wikipedia.org/wiki/ValuJet_Flight_592
Gamecock-YT do you care to elaborate on the connection you're making between ValuJet & ALGT?

Same CEO taking a wreckless track towards safety eventually will get burned (no pun intended). Just copy over the ValuJet wiki and that'll be the story of Allegiant. If they are already cutting corners when oil is as cheap as it has been, imagine what they'll do if we get a permanent spike. Sure getting rid of the MD80s to a younger fleet will help, but only a matter of time. I would never recommend my family travel on G4.

"same CEO" Gallagher was an investor, lender to and in that sense one of the founders of ValuJet; as a result he was also a board member, but Robert Priddy was the CEO.
http://getfilings.com/o0000950109-97-002648.html

Even so,

"wreckless track towards safety" - contractor SabreTech was ultimately singled out for the ValuJet accident; improperly preparing cargo (old oxygen generators) that was loaded, caught and set the plane on fire. SabreTech was criminally charged with a 24 count federal indictment in 1996 and by 2002 only one survived the appeals process, (the failure to train their [SabreTech] employees on hazmat procedures).

Even the initial NTSB investigation did not apportion the blame to ValuJet's approach towards safety.
https://www.ntsb.gov/investigations/AccidentReports/Pages/AAR9706.aspx

Ultimately, I think defence lawyer for two SabreTech defendants, Jane Moscowitz, put it best, "The crash of the plane was not a criminal act, it was an accident and a tragedy."

Best piece by far on the accident
https://www.theatlantic.com/magazine/archive/1998/03/the-lessons-of-valujet-592/306534/


Title: Re: ALGT - Allegiant Travel Company
Post by: siddharth18 on April 19, 2018, 11:41:33 AM
No dog in this fight. But I did watch the 60 Minutes segment. They mentioned that pilots are disincentivized from reporting mechanical problems. The attitude and incentives from the top seem to favor flight utilization rate over safety. What would Munger think about that?
Title: Re: ALGT - Allegiant Travel Company
Post by: Jurgis on April 19, 2018, 12:33:02 PM
Best piece by far on the accident
https://www.theatlantic.com/magazine/archive/1998/03/the-lessons-of-valujet-592/306534/

The author makes good points about system failures and their unavoidability. However, he is also consciously pursuing this line of reasoning and overemphasizing it.
He himself admits that there were issues with ValuJet and contractor safety procedures (as well as numerous FAA complaints regarding ValuJet) that are not just "complex system" issues. Apportioning all the blame to "complex system" and saying "it is unavoidable" is IMO rather misleading and unintentionally providing justification to bad practices.

No dog in this fight, but I read the article.  8)
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 19, 2018, 12:40:14 PM
No dog in this fight. But I did watch the 60 Minutes segment. They mentioned that pilots are disincentivized from reporting mechanical problems. The attitude and incentives from the top seem to favor flight utilization rate over safety. What would Munger think about that?
I'll take the 60 Minutes opinion for what it's worth, but it is generally true that ULCC/LCC pilots are incentivised to keep the rigs rolling, especially the high frequency operators. Yet, it is highly unlikely any pilot is going to take to the skies with knowledge of a serious mechanical issue; the incentive is obvious.
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 19, 2018, 12:47:19 PM
Best piece by far on the accident
https://www.theatlantic.com/magazine/archive/1998/03/the-lessons-of-valujet-592/306534/

The author makes good points about system failures and their unavoidability. However, he is also consciously pursuing this line of reasoning and overemphasizing it.
He himself admits that there were issues with ValuJet and contractor safety procedures (as well as numerous FAA complaints regarding ValuJet) that are not just "complex system" issues. Apportioning all the blame to "complex system" and saying "it is unavoidable" is IMO rather misleading and unintentionally providing justification to bad practices.

No dog in this fight, but I read the article.  8)

I cannot recall if it was in that article, but at the time there was a report floating around the FAA that had significant questions about ValuJet, but it was mainly to do with the fact that they were growing so fast and for one the FAA could not keep up with checking the planes ValuJet was bringing into its fleet. Either at the time of the crash or at the end of '96 the FAA had checked less than half ValuJet's planes, something like that.

However, that is a very different issue and to draw a straight line between that and the ValuJet Flight 592 crash and/or Gallagher is not supported by the facts. It is a pretty mainstream opinion, but simply not true.
Title: Re: ALGT - Allegiant Travel Company
Post by: bizaro86 on April 19, 2018, 12:59:36 PM
It seems to me that allegiant would have some of the lowest incentive to keep utilization high by flying planes that aren't fixed yet.

They fly a low number of flights per plane, which is economically efficient because they fly mostly older, cheaper planes.

By comparison, Southwest flies newer more expensive planes, but turns them fast to get lots of use out of them.

Looking only at the incentive to get the plane turned fast, Allegiant seems like a better choice in some ways.
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 19, 2018, 01:34:34 PM
It seems to me that allegiant would have some of the lowest incentive to keep utilization high by flying planes that aren't fixed yet.

They fly a low number of flights per plane, which is economically efficient because they fly mostly older, cheaper planes.

By comparison, Southwest flies newer more expensive planes, but turns them fast to get lots of use out of them.

Looking only at the incentive to get the plane turned fast, Allegiant seems like a better choice in some ways.

Yes that is correct. In some ways ALGT's "low capex approach" means they can afford to NOT fly. That is why you see them fly only two days out of the week on a lot of their routes. I'm not sure which model is the best, but ALGT does sport a 30% ROE over 10 years versus LUV's 14%, SAVE's 20% (7 yrs), RYAA's 18%, etc . Maybe what is more important in this case is that you must choose one, but you cannot be both. Currently I'm concerned that the change in the fleet and size of the network, might be an indication that they're trying to shift to a higher frequency model. In fact their last 2017 ID presentation mentions utilization is expected to increase from 5 block hours/aircraft/day to 7 as they migrate from the MD80s to the A320s, which would support my concern. Having said that, it still puts it significantly shy of Southwest's 10.5, so it will have to increase utilization of the A320s by another 50% before it fits the Southwest/high frequency model. 
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 20, 2018, 12:32:07 AM
Rather late than never. Poor response when compared to the way Southwest management handled its crisis.

https://www.usatoday.com/story/opinion/2018/04/19/allegiant-air-proud-safety-record-editorials-debates/34001143/
Title: Re: ALGT - Allegiant Travel Company
Post by: BeerBBQ on April 20, 2018, 12:38:49 PM
Do you have an opinion on the company and/or stock?
BeerBBQ I should be more diligent and put a short synopsis in the first post. Been meaning to do it, but a bit swamped right now.

Generally speaking the space interests me, because I view the ULCC (Ultra Low Cost Carriers) market as distinct from the LCC (Low Cost Carriers) market with a significant runway for growth if you compare US penetration v the rest of the world. From memory the US is at something like 6% and Europe for example at 31%. You also have a major consolidation story that's played out by the main price setters over recent years in the US.

Specifically, I think all three companies (Frontier, SAVE & ALGT) in that space are interesting, but I prefer ALGT over SAVE (Frontier is not listed, but their S1 of last year is an excellent read), because Gallagher has a big stake, runs it very conservatively, focus on a different market (leisure with 80% of routes without any competition) and runs a low frequency, low capex model (most LCCs have high capex, high frequency models). For valuation I refer you to recent presentations where you will note the company is going through a major fleet change, which management pegs at 110 planes by 2020 x $5m EBIT/plane, throw in the Trump tax rate and you're getting to a sensible multiple considering the $2.4Bn market cap.

Major risks
- Gallagher related party transactions (not material)
- Airline (plane goes down)
- New property venture
- Getting too big?
- Does switch to A320 imply they're changing the model?
- Fuel (oil goes up; they don't hedge, which I like, but it means you take any increase on the nose)
- Labor (not a worry for the foreseeable future

Thanks for the nudge-got to run

Thanks for the insights.  The strategy seems to be very different from rest of industry.

Curious what you think the competitive advantage is here (if there is one).  Seems like historically anyone with capital could enter the airline business. 

What keeps existing competition from replicating their strategy? Is it the infrastructure already in place and devoted to corp travelers?

Would gate access be a hindrance to new competition from replicating strategy?

What else will prevent others from encroaching on their profit pool?   

 

 

Title: Re: ALGT - Allegiant Travel Company
Post by: Spekulatius on April 21, 2018, 08:24:03 AM
Gate access hardly would seem a hurdle, if the frequency on a route is only 2 flights / week. I think with these low frequency routes, it would just be hard for a new operator to make only returns against an entrenched competitor, unless he is willing to eat losses on that route for a while.
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 21, 2018, 09:16:02 AM

Thanks for the insights.  The strategy seems to be very different from rest of industry.

Curious what you think the competitive advantage is here (if there is one).  Seems like historically anyone with capital could enter the airline business. 

What keeps existing competition from replicating their strategy? Is it the infrastructure already in place and devoted to corp travelers?

Would gate access be a hindrance to new competition from replicating strategy?

What else will prevent others from encroaching on their profit pool?   
 
In the LCC/ULCC industry you don't have natural barriers to entry, so you have to create and maintain them yourselves, which also means yes that anyone can come in and duplicate it with the basic deterrents being what Spekulatius spoke to. Execution is key and might seem easier than it is. Good LCC and ULCCs demand to be well run (daily operation & strategy).
Most differentiators between the industry and NLCs (network legacy carriers) e.g. no frills, max seating density, secondary airports, etc is essentially designed to be the lowest cost operator (strategy).
You have to buy planes competitively and you have to stay disciplined on route ROIs. This can bee seen in significantly higher entry/exit rates for routes, which ULCC/LCCs fly compared to NLCs (operation).

In ALGT's case a lot of their advantage lies in their capital discipline. They can only pay so much for planes and have to make their numbers on a route otherwise it gets closed down fast. They fly from small airports, focus on leisure and generally stay out of the way of competition.

So no surprise that it is a commodity industry, where lowest cost operator wins.
Having said that the 10 year ROEs for LCC/ULCC globally are clearly above average and does not point to commodity type returns.

The following MIT study is a good read on the industry
U.S. Airline Business Models 2006-2015: Trends and Key Impacts

https://www.google.co.uk/search?q=U.S.+Airline+Business+Models+2006-2015%3A+Trends+and+Key+Impacts&oq=U.S.+Airline+Business+Models+2006-2015%3A+Trends+and+Key+Impacts&aqs=chrome..69i57.244j0j4&sourceid=chrome&ie=UTF-8
Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on April 23, 2018, 07:00:54 AM

Thanks for the insights.  The strategy seems to be very different from rest of industry.

Curious what you think the competitive advantage is here (if there is one).  Seems like historically anyone with capital could enter the airline business. 

What keeps existing competition from replicating their strategy? Is it the infrastructure already in place and devoted to corp travelers?

Would gate access be a hindrance to new competition from replicating strategy?

What else will prevent others from encroaching on their profit pool?   
 
In the LCC/ULCC industry you don't have natural barriers to entry, so you have to create and maintain them yourselves, which also means yes that anyone can come in and duplicate it with the basic deterrents being what Spekulatius spoke to. Execution is key and might seem easier than it is. Good LCC and ULCCs demand to be well run (daily operation & strategy).
Most differentiators between the industry and NLCs (network legacy carriers) e.g. no frills, max seating density, secondary airports, etc is essentially designed to be the lowest cost operator (strategy).
You have to buy planes competitively and you have to stay disciplined on route ROIs. This can bee seen in significantly higher entry/exit rates for routes, which ULCC/LCCs fly compared to NLCs (operation).

In ALGT's case a lot of their advantage lies in their capital discipline. They can only pay so much for planes and have to make their numbers on a route otherwise it gets closed down fast. They fly from small airports, focus on leisure and generally stay out of the way of competition.

So no surprise that it is a commodity industry, where lowest cost operator wins.
Having said that the 10 year ROEs for LCC/ULCC globally are clearly above average and does not point to commodity type returns.

The following MIT study is a good read on the industry
U.S. Airline Business Models 2006-2015: Trends and Key Impacts

https://www.google.co.uk/search?q=U.S.+Airline+Business+Models+2006-2015%3A+Trends+and+Key+Impacts&oq=U.S.+Airline+Business+Models+2006-2015%3A+Trends+and+Key+Impacts&aqs=chrome..69i57.244j0j4&sourceid=chrome&ie=UTF-8

Thoughts on ALGT's interest in real estate dev?
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 23, 2018, 08:46:28 AM
Thoughts on ALGT's interest in real estate dev?
What's to like? Diworsification, overly bullish sounding Sunseeker President, too much talk of synergies, etc.

Maybe I'm too cynical, because John Redmond (President) does have the relevant experience, having spent many years at Vail Resorts, Ceasers World, MGM, etc. He also pulled a few people from his MGM days e.g. Ben Mammina (VP Design & Construction), John Cunningham (VP Project Development and Operations), etc. We've double checked a lot of what they're saying and building a resort in the Punta Gorda area seems to make sense from the data that we can see. When you combine Allegiant's proprietary data (flying all these folks into resort areas, Allegiant credit cards, etc) and the project team, which includes people like Paul Steelman who understands the resort concept business well then it does possibly translate into some kind of an edge.
They also claim to have a lot of flexibility with their commitment, which means they will not blow much beyond the sunk cost of $35m for the land. Essentially they're depending on two things a) funding via condo deposits and short term funding (not sure about the recourse) and b)phased project (only start the next of the 10 phases if the last one looks certain to be successful). The 2017 ID  suggests the board will only make a final decision in June 2018 to go ahead with breaking ground, depending what all the data they have at that point tells them.

Big question for me though is whether this is an indication of the basic ALGT model having reached its limits. Of course if the idea works then this could become very interesting over the long run.

Bottom line is I don't like it, but at this stage I'm giving management the benefit of the doubt.




Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 23, 2018, 11:09:51 PM
Thoughts on ALGT's interest in real estate dev?
What's to like? Diworsification, overly bullish sounding Sunseeker President, too much talk of synergies, etc.

Maybe I'm too cynical, because John Redmond (President) does have the relevant experience, having spent many years at Vail Resorts, Ceasers World, MGM, etc. He also pulled a few people from his MGM days e.g. Ben Mammina (VP Design & Construction), John Cunningham (VP Project Development and Operations), etc. We've double checked a lot of what they're saying and building a resort in the Punta Gorda area seems to make sense from the data that we can see. When you combine Allegiant's proprietary data (flying all these folks into resort areas, Allegiant credit cards, etc) and the project team, which includes people like Paul Steelman who understands the resort concept business well then it does possibly translate into some kind of an edge.
They also claim to have a lot of flexibility with their commitment, which means they will not blow much beyond the sunk cost of $35m for the land. Essentially they're depending on two things a) funding via condo deposits and short term funding (not sure about the recourse) and b)phased project (only start the next of the 10 phases if the last one looks certain to be successful). The 2017 ID  suggests the board will only make a final decision in June 2018 to go ahead with breaking ground, depending what all the data they have at that point tells them.

Big question for me though is whether this is an indication of the basic ALGT model having reached its limits. Of course if the idea works then this could become very interesting over the long run.

Bottom line is I don't like it, but at this stage I'm giving management the benefit of the doubt.
https://www.sunseekerresorts.com/
Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on April 24, 2018, 11:06:27 AM
Thoughts on ALGT's interest in real estate dev?
What's to like? Diworsification, overly bullish sounding Sunseeker President, too much talk of synergies, etc.

Maybe I'm too cynical, because John Redmond (President) does have the relevant experience, having spent many years at Vail Resorts, Ceasers World, MGM, etc. He also pulled a few people from his MGM days e.g. Ben Mammina (VP Design & Construction), John Cunningham (VP Project Development and Operations), etc. We've double checked a lot of what they're saying and building a resort in the Punta Gorda area seems to make sense from the data that we can see. When you combine Allegiant's proprietary data (flying all these folks into resort areas, Allegiant credit cards, etc) and the project team, which includes people like Paul Steelman who understands the resort concept business well then it does possibly translate into some kind of an edge.
They also claim to have a lot of flexibility with their commitment, which means they will not blow much beyond the sunk cost of $35m for the land. Essentially they're depending on two things a) funding via condo deposits and short term funding (not sure about the recourse) and b)phased project (only start the next of the 10 phases if the last one looks certain to be successful). The 2017 ID  suggests the board will only make a final decision in June 2018 to go ahead with breaking ground, depending what all the data they have at that point tells them.

Big question for me though is whether this is an indication of the basic ALGT model having reached its limits. Of course if the idea works then this could become very interesting over the long run.

Bottom line is I don't like it, but at this stage I'm giving management the benefit of the doubt.

https://www.sunseekerresorts.com/

I read your post in full, but I get the feeling your a little conflicted? 

What's funny is that Buffett coined the term "diworsification," yet the breadth of Berkshire's diversification is stunning!
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 24, 2018, 11:13:24 AM
Thoughts on ALGT's interest in real estate dev?
What's to like? Diworsification, overly bullish sounding Sunseeker President, too much talk of synergies, etc.

Maybe I'm too cynical, because John Redmond (President) does have the relevant experience, having spent many years at Vail Resorts, Ceasers World, MGM, etc. He also pulled a few people from his MGM days e.g. Ben Mammina (VP Design & Construction), John Cunningham (VP Project Development and Operations), etc. We've double checked a lot of what they're saying and building a resort in the Punta Gorda area seems to make sense from the data that we can see. When you combine Allegiant's proprietary data (flying all these folks into resort areas, Allegiant credit cards, etc) and the project team, which includes people like Paul Steelman who understands the resort concept business well then it does possibly translate into some kind of an edge.
They also claim to have a lot of flexibility with their commitment, which means they will not blow much beyond the sunk cost of $35m for the land. Essentially they're depending on two things a) funding via condo deposits and short term funding (not sure about the recourse) and b)phased project (only start the next of the 10 phases if the last one looks certain to be successful). The 2017 ID  suggests the board will only make a final decision in June 2018 to go ahead with breaking ground, depending what all the data they have at that point tells them.

Big question for me though is whether this is an indication of the basic ALGT model having reached its limits. Of course if the idea works then this could become very interesting over the long run.

Bottom line is I don't like it, but at this stage I'm giving management the benefit of the doubt.

https://www.sunseekerresorts.com/

I read your post in full, but I get the feeling your a little conflicted? 

What's funny is that Buffett coined the term "diworsification," yet the breadth of Berkshire's diversification is stunning!
Sure. Don't like them going into the resorts business, but my analysis concluded that I needed to give them the benefit of the doubt. Also as things stand it won't blow up the business if they get Sunseeker wrong. Still, don't like it.
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 26, 2018, 01:37:04 PM
Allegiant just tied for 3rd place in the American Customer Satisfaction Index and handsomely beats its peers Frontier & Spirit. Also if you look the improvement, since 2016 after the Tampa Bay Times investigative report on which the recent 60 Minutes piece was based, then it is clear that they’ve been making significant progress and also seem to indicate that the 60 Minutes report is rear view mirror stuff.

Go Allegiant!

https://www.theacsi.org/index.php?option=com_content&view=article&id=149&catid=&Itemid=214&c=Allegiant
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on April 28, 2018, 08:00:30 AM
Allegiant 10 yr financial track record per annum.
------Sales growth 15%
------Sales/share growth 18%
------ROE 30%
------AVG net margin 11%
------Low reliance on operating leases.
------Currently 53% Total debt/Total assets, but generally they run with lower debt.

In terms of financials there is really no other airline that comes close.

Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on May 08, 2018, 11:49:57 AM
Allegiant 10 yr financial track record per annum.
------Sales growth 15%
------Sales/share growth 18%
------ROE 30%
------AVG net margin 11%
------Low reliance on operating leases.
------Currently 53% Total debt/Total assets, but generally they run with lower debt.

In terms of financials there is really no other airline that comes close.

Agreed and it looks like you're not the only one that thinks the company will succeed!

https://www.sec.gov/Archives/edgar/data/1362468/000021545718005597/us01748x1028_050318.txt
Title: Re: ALGT - Allegiant Travel Company
Post by: globalfinancepartners on May 08, 2018, 01:14:55 PM
You are comforted in your analysis because Blackrock has a position?  That's a lot like getting excited about finding Vanguard on the shareholder register...
Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on May 08, 2018, 01:16:14 PM
You are comforted in your analysis because Blackrock has a position?  That's a lot like getting excited about finding Vanguard on the shareholder register...

I don't have a position...just pointing out a recent filing for 10% ownership...
Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on May 21, 2018, 08:44:46 AM
pg 14

https://fpa.com/docs/default-source/investor-day/capital_investor-day-presentation-v-final_watermark.pdf?sfvrsn=2
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on June 09, 2018, 10:30:40 AM
Good piece on the ULLC market
https://thesis.eur.nl/pub/39727/Regt-T-de-453462-MA-thesis.pdf
Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on June 11, 2018, 07:49:50 AM
Thanks for posting that paper, it looks very interesting and perhaps provides another angle to the LCC/ULCC thesis.

Ever since the Southwest accident, metal fatigue has been on my mind. 

I would think regional carriers have more of a concern than say Delta or United.  The more time spent in high-stress, ie lift-off and landing, would result in greater probability of an incident resulting from metal fatigue.

The problem, of course, is that the FAA is behind the ball here, and it may be argued that the agency was at greater fault than GE/Safran or Southwest. 

Why? Previously, blades required visual inspection for metal fatigue, but a tiny crack may not be easy to spot...the solution is to use ultra-sound on each blade for higher definition than a visual inspection.   

What I wonder is when/if those costs translate into higher maintenance fees for low cost carriers or if GE/Safran will be required to eat the cost for current contracts then increase prices for new equipment and training requirements?
Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on August 30, 2018, 09:39:24 AM
this might be getting interesting at these levels again...anyone have a compelling short thesis to round out the positives?
Title: Re: ALGT - Allegiant Travel Company
Post by: CLM5 on August 30, 2018, 04:32:02 PM
Haven't seen a short thesis, but it would contain the following:

- In a rising fuel price environment, which most people expect for the next few years, Allegiant will scale back capacity meaningfully. This makes the total ASMs/capacity forecasted by 2020 a large over-estimate. The capacity growth by 2020 is a big part of the bull thesis, as the fleet transition finishes and they continue to add to their A320 fleet.

Certainly, if fuel prices rise for the next few years, an investment in Allegiant now won't be very successful.

- Allegiant's business model has essentially no competition currently. From what I've seen in headlines recently, it looks like Spirit might be getting into some of the smaller cities that Allegiant currently exclusively serves. There is also a potential startup ULCC that could be focusing on smaller cities as well. I can't remember who the founder is, but it was one of the guys involved with a ULCC that was taken over in the last decade or so. Any competition in these small cities could be pretty devastating either to margins and/or capacity.

- For some reason, Maury Gallagher has decided that despite their current business model which has very attractive returns on capital and limited competition, he wants to branch out into the hotel/condo business.... could be a potential destruction of a huge amount of capital depending on how they work out the financing and the demand they see for the condos.


With all that being said, we're going to see a pretty mechanical drop in Cost/ASM over the next 3 years as the fleet transition finishes up, and they scale back all the extra staff/pilots, training for new aircraft, etc... If we assume they don't see any new entrants into their niche, and fuel prices stay the same or drop, this will have a pretty impressive return over the next 3-5 years. Realistically, no one knows what fuel prices are going to do, and they're cyclical anyways so I think the more important point to focus on is the quality of the business and the returns on incremental capital they see throughout an entire cycle.
Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on August 31, 2018, 08:35:24 AM
Haven't seen a short thesis, but it would contain the following:

- In a rising fuel price environment, which most people expect for the next few years, Allegiant will scale back capacity meaningfully. This makes the total ASMs/capacity forecasted by 2020 a large over-estimate. The capacity growth by 2020 is a big part of the bull thesis, as the fleet transition finishes and they continue to add to their A320 fleet.

Certainly, if fuel prices rise for the next few years, an investment in Allegiant now won't be very successful.

- Allegiant's business model has essentially no competition currently. From what I've seen in headlines recently, it looks like Spirit might be getting into some of the smaller cities that Allegiant currently exclusively serves. There is also a potential startup ULCC that could be focusing on smaller cities as well. I can't remember who the founder is, but it was one of the guys involved with a ULCC that was taken over in the last decade or so. Any competition in these small cities could be pretty devastating either to margins and/or capacity.

- For some reason, Maury Gallagher has decided that despite their current business model which has very attractive returns on capital and limited competition, he wants to branch out into the hotel/condo business.... could be a potential destruction of a huge amount of capital depending on how they work out the financing and the demand they see for the condos.


With all that being said, we're going to see a pretty mechanical drop in Cost/ASM over the next 3 years as the fleet transition finishes up, and they scale back all the extra staff/pilots, training for new aircraft, etc... If we assume they don't see any new entrants into their niche, and fuel prices stay the same or drop, this will have a pretty impressive return over the next 3-5 years. Realistically, no one knows what fuel prices are going to do, and they're cyclical anyways so I think the more important point to focus on is the quality of the business and the returns on incremental capital they see throughout an entire cycle.
after a quick glance, I couldn't find anything in the 10K, but they don't hedge fuel?
Title: Re: ALGT - Allegiant Travel Company
Post by: CLM5 on August 31, 2018, 09:05:31 AM

after a quick glance, I couldn't find anything in the 10K, but they don't hedge fuel?


Correct, they do not hedge fuel. But the more important factor with fuel pricing isn't the rise in cost itself, it's the scaling back of the capacity. Because they have no competition in most of their routes and they offer extremely cheap pricing, their demand can swing pretty significantly with rising ticket prices due to rising fuel costs. This leads them to axing routes that are no longer attractive in that environment. 

E.g. - in today's fuel environment, say they're able to offer a 1 way ticket in a certain route for $60. For this route at this price, they see high load factors, and about 20% operating margin (which is what they target for individual routes). Now say fuel prices go up a dollar in the next year. There's still no competition on the route, but fuel prices alone have caused airfare to spike. Now, theoretically, they have to charge $90 for the same route to see that 20% operating margin. However, at $90, there isn't the same demand for the route so they're unable to achieve their operating margin. In this scenario, Allegiant just axes the route and focuses on the routes that they can achieve their target margin on.

This happens in a significant way in a rising fuel environment. They have to meaningfully scale back capacity to hit attractive returns. Obviously, the opposite happens in a falling fuel environment. They can add back in a bunch of routes that weren't attractive at the higher fuel price. 

This is in pretty stark contrast to every other airline. Allegiant is the only US-based airline that allocates flight paths like this to achieve their desired returns.
Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on August 31, 2018, 10:50:57 AM

after a quick glance, I couldn't find anything in the 10K, but they don't hedge fuel?


Correct, they do not hedge fuel. But the more important factor with fuel pricing isn't the rise in cost itself, it's the scaling back of the capacity. Because they have no competition in most of their routes and they offer extremely cheap pricing, their demand can swing pretty significantly with rising ticket prices due to rising fuel costs. This leads them to axing routes that are no longer attractive in that environment. 

E.g. - in today's fuel environment, say they're able to offer a 1 way ticket in a certain route for $60. For this route at this price, they see high load factors, and about 20% operating margin (which is what they target for individual routes). Now say fuel prices go up a dollar in the next year. There's still no competition on the route, but fuel prices alone have caused airfare to spike. Now, theoretically, they have to charge $90 for the same route to see that 20% operating margin. However, at $90, there isn't the same demand for the route so they're unable to achieve their operating margin. In this scenario, Allegiant just axes the route and focuses on the routes that they can achieve their target margin on.

This happens in a significant way in a rising fuel environment. They have to meaningfully scale back capacity to hit attractive returns. Obviously, the opposite happens in a falling fuel environment. They can add back in a bunch of routes that weren't attractive at the higher fuel price. 

This is in pretty stark contrast to every other airline. Allegiant is the only US-based airline that allocates flight paths like this to achieve their desired returns.
that's pretty interesting... I wonder if the hotel development is a way to make some extra money to offset the need to cancel routes that are not hitting targets?  as in this is a way to invest excess capital in exchange for stability, even if it reduces returns?
Title: Re: ALGT - Allegiant Travel Company
Post by: CLM5 on August 31, 2018, 11:38:13 AM

that's pretty interesting... I wonder if the hotel development is a way to make some extra money to offset the need to cancel routes that are not hitting targets?  as in this is a way to invest excess capital in exchange for stability, even if it reduces returns?

I think that a least touches on a valid point. Obviously they won't come out directly and say it, but I think they branched out because they're hitting a limit on growth in their niche. Their business model is to connect small cities to vacation destinations, which has essentially zero competition. I think they're running out of routes, which is forcing them into medium sized cities - routes with much more competition. I think this real estate is their way to keep with the growth, but I definitely wouldn't call this excess capital. They're already pretty extended leverage-wise with this fleet upgrade. So yeah, in a sense, I think the hotel is a way to combat slowing capacity growth.

I think they're being far too optimistic and promotional with the real estate opportunity... but it undoubtedly should have at least SOME synergies with the airline. Still doesn't mean it was a good idea.
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on October 06, 2018, 03:36:12 AM
Really don't like what's happening on the resort side, but these are impressive numbers
https://seekingalpha.com/news/3395594-allegiant-reports-september-q3-traffic
Title: Re: ALGT - Allegiant Travel Company
Post by: CLM5 on October 06, 2018, 02:03:38 PM
They look especially attractive after management sandbagged guidance which tanked the stock in the previous quarter.
Title: Re: ALGT - Allegiant Travel Company
Post by: DTEJD1997 on October 31, 2018, 07:10:03 PM
Hey all:

Anybody else currently looking at ALGT?

They had a somewhat less than anticipated quarterly earnings report.

The stock is essentially at 52 week lows.

It would interesting to counter a position in ALGT with O&G equities.

Any thoughts/insights?
Title: Re: ALGT - Allegiant Travel Company
Post by: BeerBBQ on November 01, 2018, 07:34:46 AM
They look especially attractive after management sandbagged guidance which tanked the stock in the previous quarter.

What don't you like about it: funding/risk? not core business/loss of focus on core? something else?  The overall strategy seems to make sense on paper i.e. use airline to funnel vacationers to a resort where more of the vacationers wallet can be captured.  I realize on paper and execution are two vastly different things.  I'm sure you saw the presentation on sunseeker a few weeks ago.  The numbers, competitive position, etc. again on paper look interesting.  Did you see anything in there that gave you pause, you don't believe, was wrong etc.?
Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on November 01, 2018, 07:41:45 AM
Hey all:

Anybody else currently looking at ALGT?

They had a somewhat less than anticipated quarterly earnings report.

The stock is essentially at 52 week lows.

It would interesting to counter a position in ALGT with O&G equities.

Any thoughts/insights?
the real estate development activities don't make this as clean as another ultra low cost carrier or even a save or jblu...aal is possibly cleanest since aal doesn't hedge against oil
Title: Re: ALGT - Allegiant Travel Company
Post by: CLM5 on November 01, 2018, 09:22:50 AM
They look especially attractive after management sandbagged guidance which tanked the stock in the previous quarter.

What don't you like about it: funding/risk? not core business/loss of focus on core? something else?  The overall strategy seems to make sense on paper i.e. use airline to funnel vacationers to a resort where more of the vacationers wallet can be captured.  I realize on paper and execution are two vastly different things.  I'm sure you saw the presentation on sunseeker a few weeks ago.  The numbers, competitive position, etc. again on paper look interesting.  Did you see anything in there that gave you pause, you don't believe, was wrong etc.?

I agree with you that it does make sense on paper. But there are a few things that give me pause:

- They initially said that the entire project would be de-risked, funded with non-recourse debt and owner deposits. Over time, they've walked those goals backwards. We're at a point now where the only plan in place is to entirely fund the project from operational cash flows. On one hand, it's extremely impressive that an airline would be able to fund a project like this out of cash flows. On the other hand, the entire project is now a risk to shareholders. They say the budget left for the project is $420mm, which is over 20% of the entire market cap of the business. I ask you, which would you prefer.... $420mm of share buybacks at these prices, $420mm of dividends, $420mm of fleet expansion into more Airbus A320s with proven good returns on capital, or a real estate development project outside management's core competency in an unproven area? I would prefer any of the above to the real estate.

The other point about the funding is if they could have funded the project without risk, they would have. This probably means, a) they struggled to get deposits on condos meaning the demand is not there, and b) they were unable to secure non-recourse debt for the project. Neither is a good sign.

- I think the most important point is that Maury has been extremely successful growing ALGT over the past 17 years. The business model is pretty incredible considering the industry they're in. The returns on capital are very high, especially for an airline. The returns on capital for their new A320 fleet is likely to be above 30% for each A320 (they cost on average $17mm per plane, and they see cash returns before interest and tax of >$5mm per plane. If you believe management, they'll see over $6mm per plane). Management SAYS that there's more room to grow into their niche - more small cities with zero competition as well as a huge opportunity in underserved mid-sized cities. If you believe that they have this huge market to still grow into, then why in the hell would they pivot to this huge real estate development project when they have such high returns on capital in their core competency? It certainly makes one think that the market opportunity isn't as big as they say it is (at least the portion in which they have no competition), and they may be nearing the end of growth in their niche.

- Lastly, they're doing this at a point in time where their balance sheet is more stretched than it's ever been. They just went through a fleet transition, leaving them with over $1B in debt to entirely replace their MD-80 fleet with A320s. I want to say they have about $900mm in obligations over the next 2 or 3 years, on top of that $420mm budget for the real estate project.

With that being said, EBITDA-post transition should be around $350-400mm this year, and upwards of $600mm within 3 years if managements goals are believed. I think worst case operations-wise, EBITDA is $500mm in 3 years. The transition is entirely completed as of now, and costs should inflect down/earnings should inflect upwards next year. This makes the debt less of a concern. However, further large increases in the price of oil and/or a huge downturn in the economy could cause some serious concern in them being able to meet their obligations, yet they're planning on funding a real estate project with cash flows rather than shoring up their balance sheet.

Also, ALGT doesn't hedge against oil either. Good in the long run, but with quick run-ups in oil prices like over the past year, it can be a bit painful. You can see from past results that yields take a bit to catch up with fuel prices, but ALGT can generally pass along their margin to customers as they don't really have competition in their niche. Even at the top of oil prices in the past decade, Allegiant maintained an impressive operating margin unlike pretty much any other US-based airline.


Edit: I should say.... despite all of the reasons the real estate is not appealing, I still own ALGT. I think the fleet transition is pretty deeply misunderstood by the market, and projections going forward seem far too low to me. On the airline side, we're going to see a pretty mechanical reduction of costs and increase in ASMs over the next 3 years that is just not being recognized by the market. And the real estate project likely won't have any material affect on the income statement for quite some time ( the same obviously can't be said of the balance sheet ). 
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on November 01, 2018, 09:33:40 AM
They look especially attractive after management sandbagged guidance which tanked the stock in the previous quarter.

What don't you like about it: funding/risk? not core business/loss of focus on core? something else?  The overall strategy seems to make sense on paper i.e. use airline to funnel vacationers to a resort where more of the vacationers wallet can be captured.  I realize on paper and execution are two vastly different things.  I'm sure you saw the presentation on sunseeker a few weeks ago.  The numbers, competitive position, etc. again on paper look interesting.  Did you see anything in there that gave you pause, you don't believe, was wrong etc.?

I agree with you that it does make sense on paper. But there are a few things that give me pause:

- They initially said that the entire project would be de-risked, funded with non-recourse debt and owner deposits. Over time, they've walked those goals backwards. We're at a point now where the only plan in place is to entirely fund the project from operational cash flows. On one hand, it's extremely impressive that an airline would be able to fund a project like this out of cash flows. On the other hand, the entire project is now a risk to shareholders. They say the budget left for the project is $420mm, which is over 20% of the entire market cap of the business. I ask you, which would you prefer.... $420mm of share buybacks at these prices, $420mm of dividends, $420mm of fleet expansion into more Airbus A320s with proven good returns on capital, or a real estate development project outside management's core competency in an unproven area? I would prefer any of the above to the real estate.

The other point about the funding is if they could have funded the project without risk, they would have. This probably means, a) they struggled to get deposits on condos meaning the demand is not there, and b) they were unable to secure non-recourse debt for the project. Neither is a good sign.

- I think the most important point is that Maury has been extremely successful growing ALGT over the past 17 years. The business model is pretty incredible considering the industry their in. The returns on capital are very high, especially for an airline. The returns on capital for their new A320 fleet is likely to be above 30% for each A320 (they cost on average $17mm per plane, and they see cash returns before interest and tax of >$5mm per plane. If you believe management, they'll see over $6mm per plane). Management SAYS that there's more room to grow into their niche - more small cities with zero competition as well as a huge opportunity in underserved mid-sized cities. If you believe that they have this huge market to still grow into, then why in the hell would they pivot to this huge real estate development project when they have such high returns on capital in their core competency? It certainly makes one think that the market opportunity isn't as big as they say it is (at least the portion in which they have no competition), and they may be nearing the end of growth in their niche.

- Lastly, they're doing this at a point in time where their balance sheet is more stretched than it's ever been. They just went through a fleet transition, leaving them with over $1B in debt to entirely replace their MD-80 fleet with A320s. I want to say they have about $900mm in obligations over the next 2 or 3 years, on top of that $420mm budget for the real estate project.

With that being said, EBITDA-post transition should be around $350-400mm this year, and upwards of $600mm within 3 years if managements goals are believed. I think worst case operations-wise, EBITDA is $500mm in 3 years. The transition is entirely completed as of now, and costs should inflect down/earnings should inflect upwards next year. This makes the debt less of a concern. However, further large increases in the price of oil and/or a huge downturn in the economy could cause some serious concern in them being able to meet their obligations, yet they're planning on funding a real estate project with cash flows rather than shoring up their balance sheet.

Also, ALGT doesn't hedge against oil either. Good in the long run, but with quick run-ups in oil prices like over the past year, it can be a bit painful. You can see from past results that yields take a bit to catch up with fuel prices, but ALGT can generally pass along their margin to customers as they don't really have competition in their niche. Even at the top of oil prices in the past decade, Allegiant maintained an impressive operating margin unlike pretty much any other US-based airline.
Couldn't agree more. Also what is interesting is the pace of change in the story. Over the space of a few quarters, it has moved from being a side project with shareholders funding land only to the airline supporting this massive hotel project.
The airline is one hell of a business, that's why we own it. However, I'm being dragged along kicken en screaming at this point!!
Title: Re: ALGT - Allegiant Travel Company
Post by: MrB on November 02, 2018, 02:09:05 AM
President John Redmond (their MGM real estate guy) purchased 12,000 shares, taking his stake up to 108,125



John Redmond
Director


John Redmond was originally elected to our board in 2007 and served until June 2013, when he resigned to assume a full-time commitment in Australia. After the completion of his commitment, he was once again designated to serve on the board in April 2014. He is an independent Director. From January 2013 until April 2014, Mr. Redmond served as managing director and chief executive officer of Echo Entertainment Group, Ltd., a gaming and hospitality company. From 2007 until January 2013, Mr. Redmond devoted his time to his private investments. Mr. Redmond served as president and chief executive officer of MGM Grand Resorts, LLC and a director of its parent company, MGM Mirage, from 2001 until 2007. Prior to that, he served as co-chief executive officer and a director of MGM Grand, Inc. from December 1999 to March 2001. He was senior vice president of MGM Grand Development, Inc. from 1996 to 1999. He served as vice-chairman of MGM Grand Detroit, LLC from 1998 to 2000 and chairman from 2000 until 2007. Prior to 1996, Mr. Redmond was senior vice president and chief financial officer of Caesars Palace and Sheraton Desert Inn, having served in various other senior operational and development positions with Caesars World, Inc. Mr. Redmond has served as a director of Vail Resorts, Inc. since 2008 and served as director of Tropicana Las Vegas Hotel and Casino, Inc. from 2009 until June 2013 and of Echo Entertainment Group Limited from September 2011 until April 2014.
Title: Re: ALGT - Allegiant Travel Company
Post by: BeerBBQ on November 06, 2018, 01:28:00 PM
They look especially attractive after management sandbagged guidance which tanked the stock in the previous quarter.

What don't you like about it: funding/risk? not core business/loss of focus on core? something else?  The overall strategy seems to make sense on paper i.e. use airline to funnel vacationers to a resort where more of the vacationers wallet can be captured.  I realize on paper and execution are two vastly different things.  I'm sure you saw the presentation on sunseeker a few weeks ago.  The numbers, competitive position, etc. again on paper look interesting.  Did you see anything in there that gave you pause, you don't believe, was wrong etc.?

I agree with you that it does make sense on paper. But there are a few things that give me pause:

- They initially said that the entire project would be de-risked, funded with non-recourse debt and owner deposits. Over time, they've walked those goals backwards. We're at a point now where the only plan in place is to entirely fund the project from operational cash flows. On one hand, it's extremely impressive that an airline would be able to fund a project like this out of cash flows. On the other hand, the entire project is now a risk to shareholders. They say the budget left for the project is $420mm, which is over 20% of the entire market cap of the business. I ask you, which would you prefer.... $420mm of share buybacks at these prices, $420mm of dividends, $420mm of fleet expansion into more Airbus A320s with proven good returns on capital, or a real estate development project outside management's core competency in an unproven area? I would prefer any of the above to the real estate.

The other point about the funding is if they could have funded the project without risk, they would have. This probably means, a) they struggled to get deposits on condos meaning the demand is not there, and b) they were unable to secure non-recourse debt for the project. Neither is a good sign.

- I think the most important point is that Maury has been extremely successful growing ALGT over the past 17 years. The business model is pretty incredible considering the industry they're in. The returns on capital are very high, especially for an airline. The returns on capital for their new A320 fleet is likely to be above 30% for each A320 (they cost on average $17mm per plane, and they see cash returns before interest and tax of >$5mm per plane. If you believe management, they'll see over $6mm per plane). Management SAYS that there's more room to grow into their niche - more small cities with zero competition as well as a huge opportunity in underserved mid-sized cities. If you believe that they have this huge market to still grow into, then why in the hell would they pivot to this huge real estate development project when they have such high returns on capital in their core competency? It certainly makes one think that the market opportunity isn't as big as they say it is (at least the portion in which they have no competition), and they may be nearing the end of growth in their niche.

- Lastly, they're doing this at a point in time where their balance sheet is more stretched than it's ever been. They just went through a fleet transition, leaving them with over $1B in debt to entirely replace their MD-80 fleet with A320s. I want to say they have about $900mm in obligations over the next 2 or 3 years, on top of that $420mm budget for the real estate project.

With that being said, EBITDA-post transition should be around $350-400mm this year, and upwards of $600mm within 3 years if managements goals are believed. I think worst case operations-wise, EBITDA is $500mm in 3 years. The transition is entirely completed as of now, and costs should inflect down/earnings should inflect upwards next year. This makes the debt less of a concern. However, further large increases in the price of oil and/or a huge downturn in the economy could cause some serious concern in them being able to meet their obligations, yet they're planning on funding a real estate project with cash flows rather than shoring up their balance sheet.

Also, ALGT doesn't hedge against oil either. Good in the long run, but with quick run-ups in oil prices like over the past year, it can be a bit painful. You can see from past results that yields take a bit to catch up with fuel prices, but ALGT can generally pass along their margin to customers as they don't really have competition in their niche. Even at the top of oil prices in the past decade, Allegiant maintained an impressive operating margin unlike pretty much any other US-based airline.


Edit: I should say.... despite all of the reasons the real estate is not appealing, I still own ALGT. I think the fleet transition is pretty deeply misunderstood by the market, and projections going forward seem far too low to me. On the airline side, we're going to see a pretty mechanical reduction of costs and increase in ASMs over the next 3 years that is just not being recognized by the market. And the real estate project likely won't have any material affect on the income statement for quite some time ( the same obviously can't be said of the balance sheet ).

Thanks for the detailed comments.  Very Helpful!     
Title: Re: ALGT - Allegiant Travel Company
Post by: walkie518 on November 07, 2018, 07:29:35 AM
They look especially attractive after management sandbagged guidance which tanked the stock in the previous quarter.

What don't you like about it: funding/risk? not core business/loss of focus on core? something else?  The overall strategy seems to make sense on paper i.e. use airline to funnel vacationers to a resort where more of the vacationers wallet can be captured.  I realize on paper and execution are two vastly different things.  I'm sure you saw the presentation on sunseeker a few weeks ago.  The numbers, competitive position, etc. again on paper look interesting.  Did you see anything in there that gave you pause, you don't believe, was wrong etc.?

I agree with you that it does make sense on paper. But there are a few things that give me pause:

- They initially said that the entire project would be de-risked, funded with non-recourse debt and owner deposits. Over time, they've walked those goals backwards. We're at a point now where the only plan in place is to entirely fund the project from operational cash flows. On one hand, it's extremely impressive that an airline would be able to fund a project like this out of cash flows. On the other hand, the entire project is now a risk to shareholders. They say the budget left for the project is $420mm, which is over 20% of the entire market cap of the business. I ask you, which would you prefer.... $420mm of share buybacks at these prices, $420mm of dividends, $420mm of fleet expansion into more Airbus A320s with proven good returns on capital, or a real estate development project outside management's core competency in an unproven area? I would prefer any of the above to the real estate.

The other point about the funding is if they could have funded the project without risk, they would have. This probably means, a) they struggled to get deposits on condos meaning the demand is not there, and b) they were unable to secure non-recourse debt for the project. Neither is a good sign.

- I think the most important point is that Maury has been extremely successful growing ALGT over the past 17 years. The business model is pretty incredible considering the industry they're in. The returns on capital are very high, especially for an airline. The returns on capital for their new A320 fleet is likely to be above 30% for each A320 (they cost on average $17mm per plane, and they see cash returns before interest and tax of >$5mm per plane. If you believe management, they'll see over $6mm per plane). Management SAYS that there's more room to grow into their niche - more small cities with zero competition as well as a huge opportunity in underserved mid-sized cities. If you believe that they have this huge market to still grow into, then why in the hell would they pivot to this huge real estate development project when they have such high returns on capital in their core competency? It certainly makes one think that the market opportunity isn't as big as they say it is (at least the portion in which they have no competition), and they may be nearing the end of growth in their niche.

- Lastly, they're doing this at a point in time where their balance sheet is more stretched than it's ever been. They just went through a fleet transition, leaving them with over $1B in debt to entirely replace their MD-80 fleet with A320s. I want to say they have about $900mm in obligations over the next 2 or 3 years, on top of that $420mm budget for the real estate project.

With that being said, EBITDA-post transition should be around $350-400mm this year, and upwards of $600mm within 3 years if managements goals are believed. I think worst case operations-wise, EBITDA is $500mm in 3 years. The transition is entirely completed as of now, and costs should inflect down/earnings should inflect upwards next year. This makes the debt less of a concern. However, further large increases in the price of oil and/or a huge downturn in the economy could cause some serious concern in them being able to meet their obligations, yet they're planning on funding a real estate project with cash flows rather than shoring up their balance sheet.

Also, ALGT doesn't hedge against oil either. Good in the long run, but with quick run-ups in oil prices like over the past year, it can be a bit painful. You can see from past results that yields take a bit to catch up with fuel prices, but ALGT can generally pass along their margin to customers as they don't really have competition in their niche. Even at the top of oil prices in the past decade, Allegiant maintained an impressive operating margin unlike pretty much any other US-based airline.


Edit: I should say.... despite all of the reasons the real estate is not appealing, I still own ALGT. I think the fleet transition is pretty deeply misunderstood by the market, and projections going forward seem far too low to me. On the airline side, we're going to see a pretty mechanical reduction of costs and increase in ASMs over the next 3 years that is just not being recognized by the market. And the real estate project likely won't have any material affect on the income statement for quite some time ( the same obviously can't be said of the balance sheet ).

Thanks for the detailed comments.  Very Helpful!     
While I don't necessarily disagree, I would note that construction loans tend to be a multiple more expensive than mortgages on stabilized properties.  Moreover, the kinds of lenders willing to do construction loans at this size and in this area are likely somewhat limited. 

Moreover, while ultimate build costs tend to be what they are, in many new builds, total cost is deferred by phase.  In a way, because payments are scheduled, there is a form of "built-in" financing before working with a lender.  And in the case where a firm uses a lender, there is additional red-tape regarding how and when checks get cut.  This can put strain on the builder as well as the sponsor, especially in a lesser developed area. 

Also, companies that build and keep risk on the balance sheet tend to be better businesses than companies seeking to de-risk at every stage.  Non-recourse loans shouldn't be thought of as lender's risk only...if the sponsor has no interest in making the project work, the lender will shy away.  If it's the first of its kind, a lender will want some kind of backup...what I imply is that you have to put your feet in the shoes of the lender given the circumstances. 

And last point on this topic, I would note that a loan against a stabilized asset could be non-recourse and cost the company half the interest expense.  This provides a liquidity windfall for further development if needed to create a necessary center of mass.

There will certainly be additional costs down the line to market, not borrowing and using cash flows as available might be the cheapest and most flexible way to get it all done. 
Title: Re: ALGT - Allegiant Travel Company
Post by: CLM5 on November 07, 2018, 08:26:08 AM

While I don't necessarily disagree, I would note that construction loans tend to be a multiple more expensive than mortgages on stabilized properties.  Moreover, the kinds of lenders willing to do construction loans at this size and in this area are likely somewhat limited. 

Moreover, while ultimate build costs tend to be what they are, in many new builds, total cost is deferred by phase.  In a way, because payments are scheduled, there is a form of "built-in" financing before working with a lender.  And in the case where a firm uses a lender, there is additional red-tape regarding how and when checks get cut.  This can put strain on the builder as well as the sponsor, especially in a lesser developed area. 

Also, companies that build and keep risk on the balance sheet tend to be better businesses than companies seeking to de-risk at every stage.  Non-recourse loans shouldn't be thought of as lender's risk only...if the sponsor has no interest in making the project work, the lender will shy away.  If it's the first of its kind, a lender will want some kind of backup...what I imply is that you have to put your feet in the shoes of the lender given the circumstances. 

And last point on this topic, I would note that a loan against a stabilized asset could be non-recourse and cost the company half the interest expense.  This provides a liquidity windfall for further development if needed to create a necessary center of mass.

There will certainly be additional costs down the line to market, not borrowing and using cash flows as available might be the cheapest and most flexible way to get it all done.

I agree with everything you said. Using cash flows is definitely the cheapest and most flexible way to get it done, and they definitely have the cash flows to do it. And you're probably right that them choosing this route doesn't necessarily mean anything negative. But that doesn't change the fact that, as a shareholder, this is the option that has the largest potential downside and it's immediately felt on the balance sheet. I would much prefer no real estate development project at all to a real estate development project financed via cash flows which could have been used for a number of other things with proven returns...

Edit: After thinking about it a little more, the one thing we failed to touch on would be using customer deposits to fund the permanent living facilities of the project. I don't recall them mentioning anything on this line, but if they were unable to secure any of this type of funding, that's a pretty big bummer. This would have been a free float that would have significantly reduced their cost of capital for the project. Landing this type of funding for any real estate development project is a huge advantage. I don't know if they didn't see any demand or what (which could potentially have negative implications), but I haven't seen it mentioned since their initial plans.