Allegiant Travel (Allegiant Air) held its Q2 2020 Earnings call last week and in so doing provided insight into what travel might look like following COVID-19 and the future is bright.
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News From Allegiant’s Q2 2020 Earnings Calls
As acknowledged on seemingly all of the airline earnings calls, business travel is not the market right now, leisure is the only travel segment being purchased. Allegiant believes this puts them in an excellent position as they do not fly business-to-business markets.
Management made a few interesting points, notably for this site, that business travelers will use up their remaining miles and then shop fares. Traditionally, business travellers accrue miles on business trips and then spend those miles for leisure flights, but with a lack of business traffic, they won’t have as many miles to spend. Leadership feels this will lead to loyalists from other carriers shopping for deals and finding Allegiant.
“As these other carriers pivot to a leisure travel-only environment, they are marketing to people who historically have not used their own wallet for leisure travel. Will some of these people fare shop going forward when using their own money? I would imagine some percentage will after burning off their accumulated points.”
Allegiant also decided not to retire as many aircraft as originally slated. The carrier initially advised that 22 planes would leave the fleet but has since changed that to just seven; a sign of optimism.
What Happened in June 2020?
Recovery appeared to have arrived in early June and it led to higher absolute bookings. The airline was able to turn cash positive for the month after just a few days. The airline saw a brief glimpse into the pent up travel demand as new COVID-19 cases decreased and states began opening up. Just a few good days led to a profitable month.
“Regarding cash burn, our second quarter average daily cash burn was $900,000, down from our original estimate of $2.1 million per day. And in fact, for the month of June, we produced a slightly positive daily cash inflow. As a reminder, our daily cash burn is defined as cash from operations, less debt and rent payments and CapEx. It excludes aircraft acquisitions, new financings and cash benefits from the CARES Act.” (emphasis mine.)
Management later added “in June, we only pulled back capacity by 30% due to the relative demand strength. This flexibility not only allowed Allegiant to take full advantage of the stronger demand in June, but also reduced direct operating expenses in April and May.”
Then the point was touched on again, “we’re making money in June. I don’t think anybody can say that take away the exceptional stuff.” (exceptional referring to CARES Act funding.)
Adding more on June’s strong start and poor finish, “That was kind of when we were at our high point and really looking forward to what the rest of the year could be before — about the third, fourth week of June when it turned back down that you’ve heard from everyone else.”
Allegiant’s customer surveys have been mostly upbeat, or at least that’s what they are sharing with the Street.
“We’re finding that the everyday mobility of our customers has become a leading indicator of sorts for their willingness to travel. About 2/3 of our customers currently say they feel comfortable eating on at restaurants or going to shopping centers where they live. When it comes to travel, nearly 1/3 tell us they plan to travel by air in the next 3 months and have planned to do so before the end of the year. Only 1/4 of customers say that they’re actually delaying travel plans altogether.”
That’s, of course, a survey facilitated by Allegiant and completed by customers. That is unlikely to be representative of the market. However, the June response reinforces that Allegiant experienced a substantial lift in the narrow window between getting the virus under control and re-opening, before civil unrest then further outbreaks closed state economies up again.
The carrier also warned that full flights won’t necessarily lead to better financials, citing a recent fare from New York to Atlanta on a competing airline for $9. I’d spend the nine dollars if I were looking for that flight, but the thought that 750 Ultimate Rewards points with the Chase Sapphire Preferred could cover a distance of over 800 miles is astonishing.
One final interesting note, the carrier cited a phenomenon it called a “reverse travel trend.” Residents of larger markets are travelling to smaller markets like Yellowstone, Mt. Rushmore, and the Smoky Mountains from places like Los Angeles, Tampa, and Fort Lauderdale.
What Does This Mean for The Rest of the Travel Industry?
If Allegiant’s June is a sign of what is to come in a post-COVID-19 world, pent up demand for the leisure market will help the industry rebound. Business travel is down everywhere, and that may not change for a while. But just how much pent up demand is out there and how fast will it allow airlines to fill planes on routes? One thing that’s certain, many workers have not used their vacation time for the year yet and will lose it if they don’t spend it by the end of the year.
Cabin fever is real.
Airlines have adjusted their fleet size, schedule, and crews to be smaller and focused on these markets. While larger carriers have bigger challenges, the immediate future may, in fact, be the leisure market. If so, hub and spoke airlines like American, United, and Delta may increase point-to-point routes as markets come back to life, but not for business travellers.
Earnings calls are meant to hedge enthusiasm but appear optimistic. I might have fallen victim to their rosy outlook, but the airline’s assessment of pent up demand resonates with me and people I know. Many people are looking for a green light to go anywhere and with many international markets out of consideration for Americans, the domestic market is a free-for-all. Allegiant was unique in its June run compared with the other airlines. I tend to agree with management’s assertions that pent up demand with a smaller airline could lead to profitability not just at Allegiant but across the industry.
What do you think? Is Allegiant’s June performance a bellwether for the post-COVID-19 recovery? Was it just a meaningless blip?