Friday, September 21, 2018

At Allegiant, a board and business model with roots in ValuJet

ValuJet broke into the airline industry in 1993 with a distinctive business model: offer ultra-cheap fares to undercut larger competitors and attract new customers who otherwise couldn't afford to fly.

It did so by acquiring second-hand planes from all over the world. It operated them as cheaply as it could, paying workers far less than others in the industry.

For three years, the strategy paid off big. ValuJet became one of the most profitable airlines in the U.S.

Then, on May 11, 1996, Flight 592 caught fire and crashed into the Florida Everglades, killing all 110 people on board. The ValuJet name was irreparably tarnished.

Associated Press

Families left flowers and mementos to mark the 20th anniversary of the 1996 crash of ValuJet Flight 592 in the Florida Everglades.

For the past 15 years, one of ValuJet's founders, Maurice Gallagher Jr., has been using the same basic business blueprint — relying on used airplanes to fuel rapid growth — to transform Allegiant Air from a tiny charter service into one of the largest carriers in the U.S.

The result is an airline more profitable than any other, but also more likely to break down in midair.

Former federal aviation experts, including those who investigated the 1996 crash, say Allegiant toes the line between mechanical reliability and profitability in some ways that remind them of ValuJet.

To compare the two airlines, the Tampa Bay Times reviewed securities filings and hundreds of pages of federal reports on the deadly crash and interviewed aviation experts, former federal officials and ValuJet and Allegiant employees.

Five key ValuJet figures, including three of the company's four founders, made their way to Allegiant as it emerged out of bankruptcy.

At ValuJet, the company grew so fast that it was not able to hire enough qualified mechanics and inspectors. Under Gallagher's tenure as chief executive officer, Allegiant has expanded to nearly 120 cities, an expansion that even he acknowledged put a strain on its operations.

Like ValuJet did before it, Allegiant built up its fleet with second-hand planes from foreign companies that wound up breaking down more often than those flown by other major carriers.

Before the 1996 crash, ValuJet had a string of mechanical breakdowns, including a 1995 engine explosion on a runway in Atlanta, according to federal investigators and news reports.

Last month, the Times used a first-of-its-kind database to show that Allegiant's planes are four times as likely to break down in midair as those flown by all other major U.S. airlines.

In an email to Allegiant officials on Dec. 5, the Times described this story in detail and asked the company, through a spokeswoman, for comment. The company declined.

On Dec. 16, a lobbyist for Allegiant emailed a letter to Pinellas County public officials in which Gallagher appealed directly to the local leaders.

"I expect the Times will continue to trot out more of the same, misleading storylines as they have in the past," Gallagher wrote. "They will attempt to paint me, as well as our team members, as indifferent, or something worse, with regard to safety."


Allegiant Air CEO Maurice Gallagher Jr. speaks to the Tampa Bay Times at the airline's Las Vegas headquarters in October.

In an October interview with the Times in Las Vegas, Gallagher acknowledged similarities between the business models of Allegiant and ValuJet.

Both companies expanded quickly. Both competed against larger airlines by offering low airfares. Both targeted customers on vacation, rather than business.

As a model, Gallagher said, both were successful. But he said neither was unsafe. He said that the run-up to the 1996 crash "was a completely different set of facts than anything we've ever had" at Allegiant.

Gallagher and other former ValuJet officials say the blame belongs to a maintenance contractor, not the airline itself.

"It is what it is," he told the Times. "If you guys stopped talking about it, that'd be fine, too. But that's not what you do."

No Allegiant plane has ever crashed.

In his letter to Pinellas officials, Gallagher acknowledged "delays and turn backs" in 2015 but said the company "operates at the highest levels of safety."

Seven aviation experts, including former federal officials, interviewed by the Times said Allegiant exhibits some of the same traits as ValuJet, and the Federal Aviation Administration should take note.

"ValuJet, before the big accident in the Everglades, had a number of aircraft that had to return to the field because of maintenance problems that at that time were the highest in the industry," said John Goglia, the National Transportation Safety Board member who chaired the public hearing into the 1996 crash. "And what we see here today in history, what we see with Allegiant, is that same kind of pattern repeating itself."

Associated Press (1996)

ValuJet CEO Robert Priddy, left, speaks to reporters alongside president Lewis Jordan shortly after the 1996 crash.

Growing fast

The ValuJet crash left the American flying public deeply rattled.

The likely cause was listed as a fire that started in the cargo hold, sparked by oxygen canisters that were improperly packed by ValuJet's contract maintenance workers.

But federal investigators also found that a push for rapid growth put so much pressure on the company's maintenance programs that mistakes were more likely to occur.

"It is apparent now that the extraordinarily rapid growth of this airline created problems that should have been more clearly recognized and dealt with sooner and more aggressively," said then-FAA administrator David Hinson at the opening of congressional hearings on the FAA and ValuJet.

From 1993 to 1996, ValuJet's fleet expanded from two planes to 52. In one 14-month period, the airline went from operating eight flights a day to four cities to running 124 flights to 17 cities.

As the Atlanta-based company expanded, its stock price soared. In the fall of 1995, shares of ValuJet hit $34.75, up from $12.50 at the initial public offering about a year earlier.

"I used to listen to the business channel on the way home every day," said the company's former president, Lewis Jordan, the sole ValuJet founder who did not go on to manage Allegiant. "If our stock price wasn't up significantly, we would be quite disappointed."

But company insiders soon were becoming concerned.

In the 1997 postmortem of the crash, the NTSB found that one senior vice president complained to his supervisor in 1995 about "sloppiness due to rapid growth." Mechanics described "a great deal of pressure" to get planes back in the air.

Newly hired contractors and employees had little experience and earned low pay, according to the NTSB report.

Former executives, including Gallagher, expressed regret over the crash, but also defended the ValuJet business model.

"One mistake we made at ValuJet — that Maury didn't make at Allegiant — is that we grew too fast," said Robert Priddy, the former ValuJet chairman who had been on the Allegiant board until last year.

Allegiant takes off

Six years after the crash, Gallagher brought ValuJet's business model to a new airline.

When he took over in 2001, Allegiant had just four planes. The company added two dozen over the next four years.

"Just about everybody else says, 'We're going to buy expensive aircraft that are relatively reliable because they're new,'" Allegiant's chief operating officer, Jude Bricker, told the Times. "We just kind of built up under a different philosophy, largely because we started off with just a few million dollars."

"That's all we had."


Allegiant Air is based in the Las Vegas suburb of Summerlin, Nev.

As the fleet expanded, so did the number of passengers. The airline transported 80,000 people in 2002. By 2004, that number had climbed to 539,000, and tripled by 2006 when it hit 1.9 million.

Last year, nearly half of Allegiant's 86 jets broke down at least once, and mechanical problems forced at least 77 unexpected landings across the country. The FAA conducted a review earlier this year and concluded the company had "minor" problems that it planned to address.

In his letter to Pinellas leaders, Gallagher described the examination as an "exhaustive, top-to-bottom review and audit of all of our operating procedures and practices" that "speaks for itself."

In interviews with the Times, Allegiant executives acknowledged the company grew too fast.

"We're going to slow down growth so we can get back on top of reliability," Bricker said. "It's probably worthwhile."

Company officials said they are installing safety procedures to identify minor issues before they become major ones. They also plan to upgrade the fleet by purchasing new planes. In the letter to Pinellas County, Gallagher said the FAA's recent inspection found no evidence "Allegiant is an unsafe airline."

'Midas touch'

Gallagher has been in the aviation industry since he earned an MBA at the University of California, Berkeley, in 1974. He says he has "kerosene in his blood," ran a successful California airline in the 1980s and joined with two others in 1992 to invest $1 million and launch ValuJet.

He was the second of the founding members to sell significant shares after the 1996 crash. As the stock was falling, Gallagher walked away with at least $8 million, according to news reports at the time.

In a few years, Gallagher was poised to take over an airline again.

Courtesy of Tony Jannus Aviation Society

Maurice Gallagher Jr. took over Allegiant Air shortly after it declared bankruptcy.

Unable to keep up with rising fuel costs, Allegiant — then a California-based charter service — filed for bankruptcy in December 2000. Gallagher loaned the fledgling company about $2 million and, as its largest creditor, emerged with near total control of the company in 2001.

From the start, he imbued the place with a ValuJet-like sensibility.

Executives bragged about saving money by building their own office furniture, just like ValuJet's leaders had.

Both airlines offered low prices to entice customers who normally wouldn't fly.

Both operated only a few flights per week between cities, and hired staff mechanics at only a handful of airports where it flies.

Allegiant also bought used planes from foreign carriers like ValuJet did.

Soon the company was on a path toward 55 straight profitable quarters, a streak that still remains unbroken.

"Maury has the Midas touch," said Priddy, the ValuJet cofounder and former chairman. "He knows how to make money."

After he took over Allegiant, the airline began doing business with other companies that he had a stake in — firms that had little or nothing to do with aviation. Investors questioned many of these deals, saying there is no way to tell whether the arrangement is good for the company or just good for Gallagher.

Securities filings show Allegiant paid at least $26 million to companies in which Gallagher is an investor or manager.

The airline paid at least $15 million to lease its headquarters from real estate companies partly controlled by Gallagher, Timothy Flynn and John Redmond.

Flynn served on the Allegiant board from 2006 to 2013; Redmond is a current board member.

It paid $3.2 million to Alpine Labs, a TV production company co-founded by Gallagher, to produce an on-plane game show.

It paid more than $1 million to sponsor a professional truck racing team controlled by Gallagher. His son, Spencer, is one of the team's seven drivers.

These transactions were approved by Allegiant's board members but drew criticism from at least one investor. The head of CtW Investment Group, which invests money from union pensions, sent two letters in the past 20 months asking whether the board was truly independent of Gallagher.

One board member, Redmond, did outside business with Gallagher while two others — Gary Ellmer and Linda Marvin — worked with him at a different airline in the past, wrote CtW executive director Dieter Waizenegger.


Maurice Gallagher Jr. talks with Richard Y. Newton Jr., left, and Tom Jewsbury, the director of St. Pete-Clearwater International Airport, during an awards ceremony in Gallagher's honor last November.

CtW is a coalition of unions, including the International Brotherhood of Teamsters, which represents Allegiant's pilots. The letters came at a time when the pilots and the company were in a labor dispute and amid a string of local news stories about its plane's breakdowns in the summer of 2015. Waizenegger called for change among board members and asked that the board set up its own safety committee to better keep track of problems.

"The company's own pilots have pointed to a corporate culture where profits come before safety," wrote Waizenegger, referring to concerns raised amid an ugly labor dispute. "Considering that a key element of Allegiant's business model is the reliance on older aircraft, which require more extensive maintenance, a board committee that focuses exclusively on safety would appear long overdue," Waizenegger added.

Gallagher dismissed the concerns as "unfounded public allegations," part of a campaign by a grasping pilots union.

The board remains the same, and it has not started its own safety committee.


Sonya Jensen of St. Petersburg buys a ticket to Peoria, Ill., on Allegiant Air at St. Petersburg-Clearwater International Airport.

Contact William R. Levesque at [email protected] Follow @Times_Levesque. Contact Nathaniel Lash at [email protected] Follow @Nat_Lash. Contact Anthony Cormier at [email protected] Follow @Cormier_Times.

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