Allegiant Air breaks new ground later this month as it debuts its first flights off the US mainland to the Hawaiian islands. In addition to revenue the carrier garners from hotel, rental car and tour attraction sales, Allegiant is looking forward to racking up ancillary revenue from air-travel product unbundling.
The carrier inaugurates its long-anticipated flights to Hawaii on 29 June with 223-seat Boeing 757s from its Las Vegas base and Fresno, California to Honolulu. Allegiant is rolling out a second batch of flights in November to Honolulu from Santa Maria, Stockton and Monterey, California, Eugene, Oregon and Bellingham, Washington. Service between Bellingham and Maui also debuts In November.
A key tenet of Allegiant’s business model is forging partnerships with third-parties based in its leisure markets to create hotel, rental and activity packages to build a steady stream of revenue generated from sales of those bundled products. The company’s net revenue produced from that line of business absent sales and transaction cost grew 30% year-over-year during the first quarter to $9 million.
But Allegiant sees a prime opportunity to jumpstart its ancillary revenue from sales of air-related products as it enters the Hawaiian market. Shortly after the flights were announced company president Andrew Levy remarked Allegiant was pleased with the air-related ancillary revenue it was generating from bookings on the new flights from Las Vegas and Fresno to Honolulu. “Perhaps not surprisingly,” he said, “people value seat assignments, checked bags, etc, to a higher degree on these longer-haul flights than our mainland network.”
During the first quarter Allegiant grew its ancillary revenue per passenger from the sale of air travel-related products by 32% to $32.39 per passenger. The carrier also introduced a fee for carry-on bags during April, joining ultra low cost carrier Spirit Airlines as the only other US carrier to charge passengers for hand luggage.
Similar to Spirit, Allegiant stresses its goal is to keep base fares as low as possible, and to an extent product unbundling allows ticket prices to remain at attractive levels. Allegiant executives conclude lower fares rein supreme over any air-travel related charges and stress the company’s average fares have only increased 6.7% since January 2005 to $94.95, while its ancillary revenue growth has sky-rocketed 339% during that time.
Allegiant management predictably stated they’e seen no negative customer reaction from the new charges for carry-on bags, which range from $10-$25 depending on trip length. In fact, there’s been a slight uptick in checked bag take rates as more customers are opting to check their luggage even though those charges are higher, said Levy.
Due to the majority of Allegiant’s customers booking their travels in advance, Levy explained the company would not see the full effect of the new charges until late in the third quarter of this year. He stated Allegiant was “not willing to make a prediction of what the value [from carry-on fees] is”, but concluded the carrier is confident the new charges “will drive higher revenue”.
Offering additional insight into Allegiant’s logic to institute a carry-on bag fee company CEO Maurice Gallagher explained that after the airline introduced checked bag charges a few years ago Allegiant has witnessed the “normal reaction” of customers bringing more bags into the cabin. “As a result, operational challenges have increased,” he stated. Allegiant’s load factors have climbed to roughly 90% since 2008, and Gallagher concluded that loads will continue to rise as Allegiant adds 16 seats to its 150-seat MD-80s, which serve as the backbone of the airline’s fleet.
“The additional seats in the MD-80 are a great thing, but we are unable to provide a like-kind increase for bags in the overhead,” said Gallagher. “We need to react to the baggage issues…charging extra for overhead storage is the logical method to rationalise this important space.”
Legacy carriers American, Delta and United are enlarging bin spaces on portions of their respective fleets to create a less stressful boarding experiences for passengers. But Allegiant’s business model is vastly different, and rests on offering cheap bare-bones low-frequency service from small US cities to leisure destinations. As a result, the carry-on charges and the revenue they generate will remain a permanent fixture in Allegiant’s business.
June 2, 2012
Ancillary Revenue, Passenger