Thursday, April 26, 2018
Business

Allegiant Air continues explosive growth despite the bad press

LAS VEGAS

Black smoke billowing from a jet about to take off from McCarran International Airport. A raging engine fire. Emergency slides deployed. Panicked passengers, some injured, running from the plane.

It was the sort of horrific scene that turns an airline executive's stomach.

At Allegiant Air headquarters just a few miles away, executives were thankful nobody died Sept. 8 on that British Airways Boeing 777. For some, there was another thought, too:

"If you can imagine that happening to us even on a tiny scale," said Allegiant vice president of network and pricing, Lukas Johnson, "it would have kind of blown up" in the media.

Allegiant, the feisty low-cost carrier packing St. Pete-Clearwater International Airport with record numbers of passengers, has suffered through a bruising summer of emergency landings, negative press and questions about its safety — some posed by its own pilots.

The airline's executives say Allegiant's safety record is one of the best in the industry. And none of the talk about safety appears to be slowing the airline's exponential growth and popularity with many budget-conscious travelers.

With a 24 percent profit margin that is the highest of any airline on the planet and 50 straight quarters in the black, Allegiant is finding success by throwing the staid airline industry playbook out the window.

Rather than a complex system based on hubs at major airports offering connections to multiple cities, Allegiant links small cities with undersized airports, ignored by other carriers, to sun-dappled vacation destinations like Las Vegas, Tampa Bay or Myrtle Beach, S.C. Allegiant offers no connecting flights, reducing labor costs.

And the airline profits while flying mostly gas-guzzling aircraft constituting one of the oldest airline fleets in the nation.

Analysts say the secret to the airline's success is so obvious, most people miss the point. Allegiant, they say, has more in common with Home Depot or Apple than Delta or US Airways because the airline earns so much income hawking high-margin products:

Hotel bookings and rental cars, on top of entertainment tickets and yes, even the occasional game show at 30,000 feet.

• • •

"They're not an airline," said aviation consultant Michael Boyd. "They'll tell you they are a travel company. They're offering a product. They just happen to use airplanes to deliver it."

In 2014, Allegiant booked 595,000 hotel nights and 844,000 rental car days, company figures show. The company earned $36.6 million on all bookings.

Allegiant lets other carriers bloody themselves competing for business travelers. Instead, the airline markets itself to someone with Disney tickets in the back pocket, a tube of sunscreen and a bikini in a carry-on bag.

"They do things that didn't make sense to other carriers," said aviation consultant George Hamlin. "When you have people with the entrepreneurial spirit who analyze their market and understand their business, something like Allegiant occasionally pops out."

The airline is now a robust engine for Tampa Bay tourism, local officials say, and is one of the biggest bookers of hotel rooms in Pinellas County.

St. Pete-Clearwater is Allegiant's third-busiest destination, behind Las Vegas and Orlando-Sanford.

Next year, St. Pete-Clearwater is forecast to handle a record 1.75 million passengers, 95 percent on Allegiant flights to 47 cities, up from the 1.6 million expected by the close of 2015. And that assumes Allegiant adds no new destinations, an unlikely scenario.

Allegiant added flights to 12 cities at the airport this year. The airline, which promises more cities to come, said it already carries more than 8 percent of total passenger traffic in Tampa Bay, remarkable numbers for an airline with about 77 planes as of September. Delta owns about 621.

Airline consolidation, Allegiant officials say, forced larger carriers to run more efficiently, taking them out of the smaller markets now feeding Allegiant's bulging bottom line.

"I'd rather be lucky than good," said Allegiant chief operating officer Steve Harfst. "We're really happy about what has taken place in the industry. We like that. We see a lot of runway ahead of us when it comes to growth, and St. Pete is going to be the beneficiary of that."

To passengers, it is all about Allegiant's fares, which the airline said averaged $91.30 for a one-way ticket. Many say the airline's safety record is something they don't spend time worrying about.

"I haven't heard about Allegiant's problems," said Kyle Abel, 59, an Iowa resident, as he recently awaited a departing flight at St. Pete-Clearwater. He said the inexpensive tickets helped make it affordable to attend his son's Pinellas wedding with his daughter and two grandkids. "Everybody's got problems, don't they?"

• • •

Investor Maurice Gallagher Jr., 65, took control of Allegiant in 2001 after the airline, then based in Fresno, Calif., entered bankruptcy.

The airline, founded in 1997, operated just four aircraft, only one of which was operational when Gallagher, Allegiant's largest creditor, stepped in. He relocated the airline's headquarters to Las Vegas.

Gallagher was a co-founder of ValuJet, the low-cost airline that was crippled in 1996 when one of its aircraft caught fire and crashed into the Everglades, killing 110 passengers and crew. ValuJet bought a small carrier, AirTran Airways, and adopted that name. AirTran was later bought by Southwest.

The immediate need for Allegiant as it emerged from bankruptcy was cash, and quickly.

"We needed a strategy that was low cost and could make money from day one," Gallagher would tell Fast Company magazine. "Slowly we figured it out: Go where they ain't."

Over the next several years, the struggling airline began service to the smaller markets abandoned by other airlines because they did not have a population base to support regular service: Cities such as Colorado Springs and Fort Collins, Colo., Des Moines, Iowa, and Lansing, Mich.

Gallagher was about to throw the traditional airline business model out on its ear.

For starters, Allegiant would not buy new aircraft. His company would focus on the world's aging fleet of MD-80s, an aircraft sometimes described as the "jalopy of the skies."

By the mid-1990s, airlines faced with high fuel costs were dumping many of their MD-80s to buy newer aircraft 20 percent or more fuel efficient.

Allegiant purchasing agents would scout used MD-80s anywhere in the world, typically for about $4 million, Allegiant says.

It would have cost $1 billion to buy a fleet of 21 new 737-700s in 2006. By that year, Allegiant had a fleet of 21 MD-80s valued less than a tenth of that, according to a New York Times report.

The older airplanes cost more money to maintain, Allegiant officials say, but those costs are far less expensive than buying new. (The company is now transitioning to an all-Airbus fleet — used, of course — and is slowly retiring the MD-80s.)

In 2006, Allegiant set its sights on St. Pete-Clearwater. The Pinellas airport had hit hard times by then. Passenger traffic had plummeted after it lost two of its biggest airlines. Largo-based Southeast Airlines went out of business in 2004. In 2005, ATA also left the local market.

The airport fit the Allegiant business model. It was small, but still large enough to handle 1.3 million passengers in 2004, a figure then projected to drop to close to 300,000 by the end of 2006 without a new airline.

Like many small airports, costs for things like landing fees and security were relatively cheap. Currently, such costs at St. Pete-Clearwater come to $1.60 per passenger, compared to about $5.50 at Tampa International.

When the airline was first considering operating out of Pinellas, Brian Davis, Allegiant vice president of marketing, said he was struck by a distinct Midwest flavor with many transplants in Tampa Bay from places like Ohio and Indiana. Those Florida immigrants maintained familial ties to markets Allegiant was anxious to tap.

"It was very Midwest centric," Davis said. "You could see the influence."

• • •

Being cheap — and proud of it — is part of the Allegiant corporate culture.

There is no reserved parking for employees, even for CEO Gallagher, or offices. Employees work together in open areas with no privacy and only small conference rooms available for meetings. Desks are identically sized. Ostentatious material displays are seldom seen. One top executive drives a Honda Civic.

Gallagher, who was not available for an interview, lives nearby, often walking to work.

This egalitarian mindset, the airline says, promotes collaboration and an emphasis on keeping fares low.

While the carrier stresses it does not skimp on safety — Allegiant has two state-of-the-art simulators at its training center worth $10 million each — it can squeeze a penny like no other, analysts say.

It starts with the fees that all airlines generate to create revenue for things like early boarding and baggage. Everyone does it. Allegiant does it with gusto.

Didn't print your gate pass at home? That will cost $5 at the airport. Buy a ticket by phone? That will be $28. Buy it online? That's $15. Want to avoid a purchase fee altogether? You'll have to buy the ticket at the airport.

Tom Gratias, 69, an Iowa man who owns a Pinellas condo and flies Allegiant once a month, bought a $79 one-way fare home but complained that the extra charges are maddening.

"I think it'd be smarter public relations-wise just to throw that stuff in," he said. "Geez, they charge for everything."

But then, says Allegiant, it would have to hike fares.

Allegiant's no-frills flights might remind some travelers of Greyhound buses.

The airline has removed mechanisms allowing passengers to recline their seat. Removing the gear saves weight, and thus fuel costs. Seat pockets have been removed so clean-up crews don't waste time picking up passenger trash. Allegiant doesn't offer hot coffee — coffee makers occasionally require maintenance.

Allegiant flights don't have Wi-Fi, and if you want in-flight entertainment, bring a book.

Well, some flights do have entertainment — a TV game show called The Game Plane.

Passengers compete for prizes in contests that include golf-putting and the "Barf Bag Challenge," where they pull trivia questions from air-sickness bags.

The game show is filmed on some flights out of the Midwest going to Las Vegas.

Allegiant doesn't expect a ratings hit. Instead, the airline says the show generates media coverage and buzz that are the best advertising of all for one reason:

It's cheap.

• • •

That frugality can be an irritant to customers.

A company spokeswoman giving a tour of a call center noted that if customers' calls were being answered too quickly, it was a sign staffing levels were too high.

Carmen Consalvo of Seminole said his wife, Indy, bought an Allegiant ticket to attend a 50th high school reunion in West Virginia. But she later tried to cancel by calling Allegiant's customer service number.

The couple said they were on hold 11.5 hours over several days in June before giving up. They drove to St. Pete-Clearwater airport, Carmen Consalvo said, but a ticket agent told them to call customer service.

Allegiant does not dispute the couple's story. The airline said it will soon increase call center personnel by 22 percent, apparently no longer concerned at having too many customer service representatives.

"The low cost and sort of frugal mentality permeates throughout the culture,'' said Jessica Wheeler, an Allegiant spokeswoman. "You won't find executives wearing fancy watches or particularly expensive shoes. Most are in pretty casual clothing. For them it is really their lifestyle. Spend money on the things that are important, and don't spend money on things that are there for show."

The result of the chintzy approach: profitability that is the envy of the industry.

Allegiant posted $1.13 billion in operating revenue in 2014 and $86 million in net income flying 8 million people, up from $243.3 million and $8.7 million in 2006 when it flew 2.1 million passengers. Shareholders have been amply rewarded.

A $10,000 stock purchase when Allegiant went public in December 2006 would be worth roughly $94,000 today, according to SplitHistory.net.

That success has allowed CEO Gallagher to make some eye-catching investments.

In 2014 he purchased with a partner something absent from the portfolio of most airline chiefs: a Las Vegas wedding chapel where couples can have the ceremony officiated by an Elvis impersonator.

• • •

Allegiant's public image hit some turbulence in 2015.

In April, the pilots' union, the Teamsters, released a report listing 65 incidents between September and March when Allegiant aircraft were diverted to another airport, returned to the gate or aborted a takeoff due to mechanical problems.

The pilots are engaged in bitter labor negotiations and charge Allegiant's low-cost model has created a safety culture frayed at the edges, focusing on profits at the expense of maintenance.

Pilots, saying Allegiant has curtailed benefits, voted 465-8 in January to strike, but a federal judge blocked a walkout. The airline insists pilots are trying to create a public perception that Allegiant is unsafe to gain leverage in labor talks. The union bristles at such talk. Negotiations stumble along.

"The union and its members did not create the safety violations that we have called attention to," said Dan Wells, president of the Airline Professionals Association Teamsters Local 1224. "If we had a contract signed today, tomorrow we are going to have exactly the same concerns and you will hear us talk just as loudly until our safety concerns are corrected."

Wells said the company has a "virulent anti-union" culture that starts at the top with Gallagher. There might be some truth to that attack.

Gallagher said in 2011, according to the Las Vegas Review-Journal, "Unionization is one of those things that clogs the arteries and makes you less quick and not as nimble as you need to be on top of your game."

• • •

Allegiant calls the idea that it undermines safety to focus on profits absurd.

"To me, it's always about being safe because you never undermine or take for granted being safe," said Harfst, the COO. "We're not insensitive to the media attention when our operation doesn't do what it is supposed to do. But we hope and we think most of our customers recognize the value we give and our intent to do what's right for them."

Harfst and others at Allegiant said they don't spend time worrying about what the media says about them. But something Allegiant officials recently installed on a wall at their headquarters indicates otherwise.

It's a big monitor showing how Allegiant is faring in real time on social media. Blue dots displayed on the screen represent positive online mentions, while red ones show the negative. The bigger the dot, the larger the influence of the social media source.

The summer brought its share of big red dots that tested the mettle of Allegiant's public relations staff.

In June and July, three Allegiant flights made emergency landings at St. Pete-Clearwater. On one, flight attendants smelled smoke fumes and burning rubber, and the pilot ordered evacuation chutes deployed upon landing. Four passengers suffered minor injuries.

Mechanics found no problem with the plane, and the pilot was fired after his boss accused him of trying to make the company look bad, the union said.

The union said that was retaliation for pilots calling the airline out on safety issues.

About a dozen emergency landings or flights diverted from destinations because of mechanical problems have since been reported by the media.

The most serious involved an Aug. 17 flight that departed Las Vegas. Seconds before takeoff, the elevator on the tail of the aircraft became jammed in one position after a part disconnected, the Federal Aviation Administration said.

Pilots managed to stop the plane before it left the ground. Had it lifted off, they might have lost control of the aircraft.

Does any of this amount to any pattern indicating underlying maintenance issues? The union said the airline, like Gallagher's ValuJet before it, relies too much on outside vendors for major maintenance. The 1996 ValuJet crash was caused by a contractor who improperly packaged oxygen canisters in a cargo hold, which triggered the fire.

"It's no coincidence that Maury was part of that," said Wells.

Others say all airlines have mechanical issues, but those don't get reported because nobody is paying any attention.

"That gets blown out of proportion," said Boyd, the aviation consultant. "Once it starts, everybody is looking. . . . This is part of the normal give and take of labor negotiations."

Allegiant insists that customers are satisfied the airline does not shirk safety.

"At the end of the day, if the passenger doesn't like our business model and doesn't feel safe," said Johnson, the Allegiant vice president of network and pricing, "they will vote with their wallets and go elsewhere."

Times researcher John Martin contributed to this report. Contact William R. Levesque at [email protected] Follow @Times_Levesque.

     
       
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