The Allegiant business model leads the way post-COVID
Anyone following the United States commercial aviation market might spot a trend within the two most important and advanced startups: their business model is basically the same, offering unbundled service for very low fares and serving less dense markets, which mostly never saw any nonstop services.
The first, Avelo Airlines, has already started sales, and the first routes came to no surprise. 11 nonstop routes from its initial base -- Burbank, a secondary airport in the Greater Los Angeles area -- that didn’t have competition, with most focusing on the leisure traveler.
Flights will be operated by densified Boeing (BA) 737-800s, with 189 seats, and frequency will be relatively low for U.S. standards, ranging from three weekly to daily operations.
(Image: Avelo Airlines Route Map created using gcmap.com)
The second startup airline, Breeze Airways, has yet not announced routes, but its business model is crystal clear, paralleling that of Avelo. The airline, founded by David Neeleman, will will use smaller aircraft - starting with the Embraer (ERJ) 190, adding the Airbus (AIR) A220-300 in the future.
If it raises eyebrows that both business models are similar to Allegiant Air’s (ALGT) proven one, it is no coincidence. If before COVID-19 it was already clear that this was an overlooked model, post-pandemic airlines -- and apparently investors too -- have doubled down on this belief.
Las Vegas-based Allegiant has shown its point-to-point, leisure-centered ideals were very resilient even during the downturn created by the pandemic. In the third quarter, according to data by Raymond James (RJF) and compiled by the Cranky Flier blog, the airline was the U.S. airline with the least daily cash burn, with numbers adjusted to 2019 revenue.
And there is enough reason to believe that. “Spatial and operational factors behind passenger yield of U.S. nonhub primary airports”, a 2020 study by Yi Gao and Joseph B. Sobieralski, two researchers at Purdue University, coined the term “Allegiant Effect” in non-hub airports, inspired by the famous “Southwest Effect” in major hubs.
The Professors found that the presence of the airline in non-hub airports significantly shrinks the average yields in said markets.
However, despite bringing yields down, Allegiant consistently delivered high profit margins, reaching a GAAP operating margin of 21.3% in the full year of 2019, versus Spirit Airlines’ (SAVE), which hovered around the 13-14% mark, and Southwest’s (LUV) 13.2%.
The similarity to Allegiant’s business model does not seem coincidental. The executive teams of both startups include former Allegiant management. Avelo’s Founder, Chairman and CEO, Andrew Levy, as well as its Chief Operating Officer are Allegiant Alumns. Likewise, Breeze Airways also employs Allegiant pedigree amongst its ranks in the roles of Chief Commercial Officer and Chief Financial Officer.
“[What] Allegiant has [done] a spectacular job in doing”, said David Neeleman in a February 2020 interview, “is like, to break down markets that maybe have five passengers a day, and then they take it up to a hundred passengers a day.” Apparently, both well-funded startups will follow these steps, proving the resilience of this business model even after the worst crisis of the history of the airline industry.
In many markets around the world, this is a model with underlying and overlooked potential, as airlines sail in the other direction, trying to fuel their hubs to counter lost demand, although many times, for many reasons, to no avail.
Some startups elsewhere, like Italy’s EGO Airways, are already looking into it. EGO, with an initial fleet composed of the Embraer 190, initially planned to be a feeder for the international carriers into the Milan/Malpensa hub. Since the start of COVID-19, however, its launch has focused strictly on a point-to-point network, with all eleven routes avoiding any overlap with Ryanair (RYAAY) or any other airline. The airline even avoided Milan.
(Image: EGO Airways has Route Map created using gcmap.com)
The fact that, back in the U.S. legacy carriers had to resort to point-to-point routes that avoided hubs during COVID, catering to leisure, price-sensitive travellers, shows that this is a model that is here to stay. And ultimately it is up to the airlines to adapt accordingly.
