Allegiant Air 10-K Analysis

Business and Competitor Analysis

Business Model

Allegiant Air is a low-cost Airline that gives its customers flight and vacation deals. It is owned by Allegiant Travel company that is listed on the NASDAQ (Ticker Symbol: ALGT). Their business model entails providing low-cost flight and vacation deals to people residing in small cities without any connection flights. Some of the highlights of their business model is as follows:

    • The main revenue generator are the low-cost non-stop flights from small cities to leisure destinations such as Vegas, Orlando and the San Francisco Bay Area.
    • Another major revenue generator are the fixed-fee contracts with casinos and hotels, mainly with Harrah’s Entertainment.
    • They also provide charter flights on ad hoc basis.
    • Allegiant also generates ancillary revenue via flight fee, baggage fee, affiliation with hotels, affiliation with car rental places, entertainment shows and advanced seat assignments. This revenue also includes items for sale on board such as food and beverage.

    Competitive Advantage

      • Main focus is on transporting passengers from small cities to leisure destinations without any stops in between.
      • Low operating costs: Allegiant has its aircrafts come back to base to better utilize the labor, airport facilities and spare parts inventory. They own about 46 MD-80 aircrafts and plan to purchase another 15 of them as they are less costly to maintain than the A320 or the B737.
        The company also keeps its product simple by not having any affiliations with other airlines and only selling direct flights. Allegiant also, like mentioned before, sells food and beverage on board to keep the fares low. They also have only one type of cabin class.
      • The airline unbundles its products and services that other airlines usually include in the cost of travel. A great example of such product is advanced seat assignment. Allegiant airlines gives an option to pay and obtain advanced seat assignment.
      • Unlike the big airlines, Allegiant taps into the smaller cities where the target market is primarily leisure and not business and are looking for low fares to travel and less burden of having to change flights to get to their travel destination.

    Financial Analysis and Future Projections

    Breakdown of Year End Financials

    A brief recap of the financials throughout the 2009 fiscal year:

    Earnings per share: Basic EPS for Allegiant at the conclusion of 2009 FY was $3.82 signifying a 118% increase from $1.75 the year before. This was a giant leap for Allegiant compared to the years prior.

    Also, the change in Net Income for the company was approximately 116% going up from $35,407 million to $76,331 million.

    The significant increases in the EPS and the Net Income for Allegiant came about as a result of 3% drop in the operating costs of the firm which is in perfect sync with their business model and competitive advantage of maintaining lower costs. The two costs that were decreased drastically were the Aircraft lease rentals and the fuel costs.

    The 10K reports how Allegiant achieved a decline in the aforementioned costs:

      • The company leased two less expensive aircrafts by replacing two aircrafts from the prior year.
      • The reduction in fuel costs was a result of investment in fuel storage units, fuel transportation facilities and a wholly-owned subsidiary with a limited liability contract with an Orlando Stanford International Airport Affiliate.

    The above two strategies helped Allegiant reduce their leasing costs by 28% and fuel costs by 28.1% further reducing the operating expenses and increasing Net Income.

    Calculating Intrinsic Value of Stock To Determine Fair Value

    Allegiant’s stock price as of March 1, 2010 was $53.

    I performed my intrinsic value calculation using the following steps:

      • Calculate growth rate (g) in Earnings per Share from 2006 (the company went public in 2006): EPS in 2006,2007,2008 and 2009 were $1.23, $1.56, $1.75 and $3.82 respectively. 2009 was an exceptional year in terms of EPS. Growth rate calculation revealed an 18.26% growth rate over the years. However, the number was at approximately 5% prior to 2009. To maintain somewhat of a conservative approach, I will be using an average of 10% for calculation.
      • Calculate average Price to Earnings: P/E ratio is calculated by dividing the stock price with the EPS for a particular period. After obtaining numbers from the 10K for 2006-2009 and dividing it by 4 to get an average, I got a figure of 18.26.
      • Calculating future share value: Calculating the value of the stock 10 years from now. This is done by:
        EPSx({1+g)^10}xAvg. P/E Ratio=$3.82 (1.1^10)x18.26= $180.92 approx.
      • Now we divide the number obtained in the previous step by the expected returns.
        The stock has shown a growth of somewhere between 9-10% in the stock price over the past 4 years. We will use 11% as a standard expected return for this particular investment as the company has shown significant growth and with their recent affiliations and cost-cutting strategies, the growth rate is likely to go up.
      • The intrinsic value obtained after the above calculation is: $180.92/(1.11^10)=$69.75. Comparing this figure to the stock price of $49.54 on NASDAQ as I write, it can be concluded that Allegiant Air is a viable investment.

    (Please Note, these are my personal calculations and conclusions, I do not assume any responsibility for the changes in stock price or any losses incurred upon taking my advice.)

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