The excellent Airline Observer newsletter covered Allegiant Air’s earnings call (paywall) and there were a couple of striking things in the piece. Their executives believe ticket sales will remain strong in a recession because their flight product is an inferior good, and their credit card deal is more lucrative than anyone realizes because it generates 90% margins. I’m not sure either of these cashes out exactly as strong as they claim.
Allegiant Air Executives See Themselves As Selling An Inferior Good
Allegiant doesn’t see the possibility of recession as hurting their business – they think everyone else’s customers will trade down to fly them.
In other words, Allegiant’s leadership describes their business precisely as what economists refer to as an inferior good: demand is inversely related to the income of the consumer. As consumers become wealthier, their customers trade away from the brand. But in recession they expect consumers to ‘trade down’.
Other examples of inferior goods, besides Allegiant, are store-brand groceries and instant noodles. Consumers would – in general – prefer more premium products if and when their income allows.
Although to be honest I think of Allegiant more as an opportunistic leisure airline, with many of their routes no competing directly against legacy airlines. If you want to fly from Pasco, Washington to Mesa, Arizona before Noon on a Thursday they’ve got you covered. (And there’s no similar service into Phoenix.)
The Allegiant Credit Card Produces 90% Profit Margins. But Does It Really?
Brian Sumers writes that the Allegiant co-brand card has 435,000 customers and that “more than 46,000 who signed up in the first quarter” compared to about 35,000 in the fourth quarter of 2022.
This was their best quarter ever for acquisitions but since we don’t know how many had the card going into the quarter we don’t know how many cancelled (and so we don’t know net cardmember growth). , the highest quarterly acquisition period, ever. That’s about 11,000 more sign-ups than in the fourth quarter.
Currently fewer than 3% of Allegiant’s customers have the card, compared to about 14% of passengers flying American. They see a lot of upside in that number, though infrequent flyers with lower average incomes suggest that the upside may not be as big as with a legacy airline.
Still, the co-brand deal should generate over $100 million in revenue for Allegiant this year and they claim “it has an EBITDA margin of almost 90 percent.”
But wait, does it really have a 90% margin? I’ve argued that a 50% margin may be a more reasonable estimate at least for major airlines, even though they can book miles sold to third parties at a much higher margin due to weirdness in accounting rules.
- When an airline awards points for travel on its flights, accounting standard 606 governs this as essentially a joint purchase of current travel (the ticket) and future travel (the redemption of points) and requires airlines to book a liability to cover the value of that future travel. Roughly speaking assume a major airline books around a penny of liability for each mile sold.
- But when an airline sells points to a third party the accounting rules are different. They split the revenue up for the different components of what they’re selling to the partner (say, a bank) – use of the travel company’s brand, access to their marketing lists, sometimes other benefits like free checked bags. And then they book a small piece of the miles sale price as a liability for future travel. Say for instance they book 1/8th of a cent per mile as a liability for travel when selling miles to banks.
An airline like American, Delta or United might have a gross margin of over 90% on miles sold to banks but that’s only because of the funny accounting for what future travel from miles sold is going to cost them – perhaps an eighth as much as when they produce that same mile to reward a customer for flying. Even though both miles actually have the same cost.
It’s probably true that Allegiant has an “EBITDA margin of almost 90 percent” on its credit card deal in an accounting sense. And it’s also true that the margin on selling miles is very high compared to most products. But it’s also not likely quite as good as their suggesting, even though their redemption costs may be lower than other airlines, too.
As an economics major in college Allegiant is a perfect example of an “inferior good”…back in the day the example we always used was instant ramen, the wealthier you got the less you’d buy it!
@ Dan
Ramen Airways may be a better name
Or Crocodile Rock Airways from their valujet crash days
Sorry if thats crude the product as bad as the name
I think ppl who fly Allegiant will be the first to experience financial pain.
ValueJet became AirTran, later sold to WN
An inferior good’s Demand falls at a rate slower than customers’ income. But it still falls. And for a product with high fixed costs, like flying airplanes, profits fall way faster than revenue. So “inferior goods” with high fixed costs still get hammered in a recession.
A product whose Demand remains the same or goes up when customers’ income goes down is a Giffen good, and those are rare.
Once Allegiant sells out their teaser rates on a flight, the remaining options often seem to be close to WN/legacy 3 pricing. Two things they do have are a lot of nonstop flights from places that normally only get spoke service and there are apparently a ton of folks out there who want to plan their vacations around where they can get a nonstop lifght instead of having to connect in ATL or DWF or ORD, and then another group that actually would rather fly into smaller airports like Mesa than Phoenix Sky Harbor. I’ve got a cousin in metro Orlando who goes up to Michigan a couple of times a year to visit family. He usually flies Allegiant because Sanford is convenient to his house and he then doesn’t have to fight his was to and through MCO, which he sees as a hellhole.
Oops look like I confused these premium carriers lol
The Allegiant card is backed by Bank of America with interest rates of 19.74% to 27.74% .That’s why I avoid cards issued by big box vendors (Lowes, BB&B, Best Buy), department stores (Kohls, Dillards), gas stations, and airlines. Teaser rates are fine, but the fun ends after several months.
I’m bemused by the “people who fly Allegiant” stank coming from other commenters.
I’m a middle aged White guy with a household income of just under $750,000 per year and a net worth in the mid-single millions. I fly Allegiant monthly between the Charlotte area and Orlando. And my father, retired but wealthy, flies is back and forth from SFB to Asheville, as do many of his friends with second houses up there.
I mean having a high income is great, but I can fly Allegiant for a third the round trip cost of AA’s captive Charlotte hub, and parking and boarding at Concord is ridiculously easy. Ditto Sanford, which is a lot less annoying than MCO and for non-tourist locals/ex-pats a better destination. And I use my Amex Platinum card to book every flight.
Would I prefer to take Southwest out of CLT? Sure, but they don’t do FL from Charlotte, and if they did, I’d still be having to deal with CLT construction as the city crowds twenty-five years of deferred needs into a five year construction project.
I’m a PHX based former AA CK of 5 years and now that my status has reverted to PP, I consider myself a free agent. I’ve got two trips to MT this summer and would have taken AA in the past despite a connection in either LAX or DFW making the trip 6+ hours in length. Instead, I’m flying Allegiant direct from Mesa to Missoula and Kalispell on a < 2.5 hr flight for 60% of the cost AA is charging, inclusive of paying extra for my carryon, my bulkhead aisle seat and pre-boarding privilege's. You can knock Allegiant all day (as you can AA) but it has its place!