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Allegiant Air was born from used aircraft. Starting with the McDonnell Douglas DC-9, then moving on to the MD-80, Boeing 757, Airbus A319 and finally the A320, Allegiant built a commercial model by combining second hand (and latest generation factory fresh) aircraft with low flight utilization. Indeed, this combination has proven successful for the self-proclaimed travel agency with years of consistent profitability and the highest profit margins in the country.
It’s the balance between fixed and variable costs that the Allegiant team learned early on and has since perfected. Used aircraft can be acquired at a lower cost of ownership that must be paid for regardless of whether the aircraft is flying – a fixed cost. This then offers the trade-off of higher operating costs due to fuel burn and higher maintenance costs that are only paid when an aircraft is flying – variable costs.
Related: Understanding the formula behind how Delta buys planes
While all airlines focus on the cost of flying – Allegiant included – only Allegiant has mastered the art of not flying. By keeping fixed costs low, even at the expense of higher operating costs, Allegiant has created ultimate flexibility in a highly cyclical market. Allegiant’s business model is simple: fly planes when they make money; keep them on the ground when they don’t.
The fundamentals of this business model so successful for Allegiant have been made possible by the use of inexpensive second-hand aircraft. Yet the airline’s recent announcement of plans to purchase 30 new 737 Max 7 and 20 new 737 Max 8200 aircraft from Boeing appears to run counter to those very fundamentals that bring consistent profitability to Allegiant.
For Boeing, in order to convert Allegiant into a shared buyer alongside mostly cheap second-hand Airbus aircraft, one can also easily assume that Boeing would have to charge ultra-cheap pricing to secure the Allegiant order. When asked whether Allegiant has fundamentally changed its business model or whether Boeing has priced the 737 Max so low that it is courting a used aircraft buyer, the answer is – neither the other.
This TAC analysis, divided into parts, dives deep into the misconceptions of Allegiant’s business model and the intrinsic value that a next-generation aircraft like the 737 Max brings to the airline. In a follow-up article, we’ll take a closer look at this high-profile deal and how the power of duopoly ultimately brought the 737 Max to Allegiant.
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