Things in the Sky

The Hawaii market has been fun to watch for the past few months, but it just got more interesting for those who observe the industry. It’s been rumored for awhile that Allegiant wants to go to Hawaii, and they’re finally doing it. The airline announced Friday that it will be acquiring six 757s from an unnamed European carrier, and they’ll be arriving over the next couple of years. The first two are slated to arrive within the next two months, and will be placed into service in the fourth quarter of this year.

Other than that, we don’t know much more. So let’s get into the analysis/speculation, shall we? To make it easier to read I’ve divided the rest of this post into shorter sections.

A Change in Strategy?

Do I see this as a big change in strategy for Allegiant? No. Allegiant’s current system has been kind of simple – big leisure market on one end of the route, small market on the other end, with MD-80s flying the route a few times a week. President and CFO Andrew Levy said in a press release that “this transaction will enable Allegiant to extend to Hawaii its strategy of serving large leisure destinations from smaller cities with no existing nonstop service,” so that doesn’t seem like there will be any big changes here.

Yes, adding a new fleet type is a big change for Allegiant, but I wouldn’t classify it as a major shift. The airline’s current strategy has been to buy cheap MD-80s that are in good shape, and basically they’ve extended that to another type.

So Where Are the Aircraft Coming From, Anyway?

The answer to that question will help clarify Allegiant’s strategy here, at least a bit. For example, there are two exit configurations for the 757 – three doors and two overwing exits, and four doors. The former can hold no more than 224 passengers in a one-class configuration, while the latter can seat up to 239 passengers.

Another big factor is the engines – 757s come with either Pratt & Whitney PW2000 series or Rolls Royce RB211 series engines. There are a couple of different versions of each type, but it can make a difference. For example, if Allegiant wanted to fly out of Bellingham, Washington to Hawaii with a PW2037-powered 757s, some weight restrictions might be in order, but might not if powered with RB211-535E4 engines. (According an investor presentation released today, the company reports that the aircraft are RB211-535E4 powered.)

So where are these coming from? All Allegiant says is, “The six 757 aircraft are sister-ships and have been in service with a single European operator since original delivery from Boeing. The aircraft come equipped for extended twin-engine operations (ETOPS), as required for long overwater flights.” In a SEC filing from today, the company also reports that the aircraft have RR21-535E4 engines, have an average age of seventeen years, and an average cycle count of 19,000.

Here are my best guesses, from what I think is the most likely to least likely:

1. Thomson Airways. The initial rumors about Allegiant and Hawaii involved Thomson 757s.
2. British Airways. Yeah, they announced in 2008 that the whole fleet was sold off to be converted into freighters, but, they conveniently have six in storage right now. (Though it appears one of them was with a couple of airlines.)
3. Finnair. The carrier is dumping its fleet of seven leisure 757s, conveniently from 2010 to 2012. (Finnair’s have Pratt engines.)
4. Thomas Cook.
5. Icelandair.

What Routes Will Be Flown?

Well, obviously the 757′s range is limited as to where it can go to the mainland. The longest 757 nonstops to Hawaii are United’s from Denver, and Allegiant has already said the Rockies are the limit. So there’s one constraint.

If Allegiant were to follow its current strategy, these 757s would be based in Hawaii and fly them to smaller destinations like Bellingham, WA or Eugene, OR. Of course, Allegiant’s bases are possibilities, too. Though a route like LAX-HNL is crowded already, and Allegiant probably isn’t going to start setting up connections through its bases. I think we’ll see an extension of what Allegiant does already – go to smaller airports with minimal competition, and carve out a niche for themselves. The airline would most likely want to avoid any heavy competition from Alaska and Hawaiian if possible.

How Will The Aircraft Interiors Be Configured?

Allegiant has said this morning that the expect the aircraft to seat around 200-220 passengers. I expect the number of seats might be at the higher end of that range when one is flight attendant costs. Per FAA rules, the number of flight attendants is set by the number of seats in (except for the beginning) 50 seat increments (1 FA for 20-50 seats, 2 FAs for 51-100 seats, etc.).Let’s say the 757s have 190 seats. Four flight attendants are needed. If the 757s have 205 seats, five flight attendants are needed, and that increases labor costs. So the way I set it, Allegiant will have just under 200 seats, or go all-out and go around 220 to spread out the cost of that fifth flight attendant.

Another issue to consider here is range. Extra butts in seats means a heavier aircraft, which means less range. If Allegiant were to seat 20 more than United’s domestic 757s (182 seats), for example, they’d lose a couple hundred miles in range, which potentially has an effect on the routes Allegiant can fly. To mitigate that effect, I would not be shocked if Allegiant slapped some blended winglets on these bad boys, if they don’t have them already.

One thing that could happen as well is some kind of premium cabin from Allegiant. Nothing like traditional first class, but maybe something along the lines of United’s Economy Plus or Frontier’s STRETCH products – a coach seat with a few extra inches of legroom. That wouldn’t be anything fancy, but travelers on a long flight like that would be tempted to upgrade.

And what about IFE? I doubt we’ll see any kind of AVOD from Allegiant here. But Alaksa and Hawaiian already have digEplayers available for rentals. Something like that to drive Allegiant’s ancillary revenue is certainly within the realm of possibility.

An Extra Step: ETOPS Certification

Over the past two decades, it has become easier for new carriers to get certified for ETOPS (Extended Twin Engine Operation Standards). Originally, new carriers would have to had to operate new aircraft domestically for a year to get ETOPS 120 certification, and then fly for another year to get ETOPS 180 certification. (That certainly would have been interesting to watch for Allegiant!) But the FAA slowly changed the requirements, and issued a new new Advisory Circular that outlines the ETOPS certification process in 2008, including an accelerated program. It will certainly save Allegiant a lot of time, but it’s still a long and expensive process. Basically, the airline has to set up a whole bunch of internal procedures, and will probably have to fly to some “validation” flights for the FAA to show they’re ready for ETOPS flights. The FAA might ask them to simulate a diversion or engine failure, for example.

Currently, Allegiant expects to be certified in the first quarter of next year.

Another issue I see with ETOPS is the required “pre-depature service check” that must be performed by “an appropriately trained maintenance person, who is ETOPS qualified, and authorized by the certificate holder, must accomplish and certify by signature the completion of ETOPS specific tasks.” Do some of the smaller airports serve have these mechanics available on demand? It’s not a huge issue, but just another factor to consider.

If you want to learn more about what a carrier needs to do to be certified for ETOPS, you can read the FAA AC on the subject here.

Will It Work?

Short answer: it should. Remember – one should not think of Allegiant of just an airline, but as a travel company that flies airplanes, so they’re not just looking at the financial performance of the flights. Chairman and CEO Maurice J. Gallagher, Jr. put it best in the press release announcing the acquisition:

We are very optimistic about our ability to exploit the large third party ancillary revenue opportunity we believe exists in Hawaii. We expect the sale of hotels, rental cars, and many attraction and activities popular with Hawaii visitors will provide a very meaningful contribution to the success of the service

I have faith in Allegiant’s management team to make this new service work. Now, it’s time to grab a bag of popcorn and watch the new service unfold.