Small carriers with a limited or no presence in the market(s) generated a significant amount of the feedback. That’s not too shocking, as the slots to be potentially divested at the airports will only be be allocated to such carriers. I’ve had a chance to review some of the carriers’ comments, and I found Allegiant’s to be very interesting.

The Las Vegas-based carrier said it would be interested in acquiring some of the divested LGA slots, adding that it “does not consider service to Newark or JFK an adequate substitute for service to LGA.” Allegiant, however, disagreed with the way the government was planning to bundle the divested slots, saying that it “would not be in the public interest, and Allegiant urges the FAA not to take it.”

The FAA outlined in its tentative approval that slots at each airport would be divested in bundled of eight slot pairs (16 total slots). Two of these bundles would be available at LGA, while only one would be available for new DCA service. According to the agency, “this arrangement would be preferable to dividing the slots into smaller packages that could cause underutilizations or inefficiencies—at gates and terminal facilities, with aircraft and in staffing.” But the FAA also said that it sought comments on this idea.

In response, Allegiant said the idea “will not encourage entry into the LGA market by new carriers. It will have precisely the opposite effect, as only those carriers already having a foothold at LGA can reasonably be expected to take on 16 slots in a single transaction.”

Allegiant proposed an alternative on how to bundle the slots:

At a minimum, one of the LGA bundles should be subdivided into eight bundles containing one arrival and one departure slot, or four bundles containing two pairs of slots, or some combination thereof. Some of these small bundles should offer slot pairings conducive to LGA RON (remain overnight) operations (e.g., 2130 arrival paired with 0700 departure), while others should offer pairings conducive to LGA turnaround operations (e.g., 1100 arrival paired with 1230 departure). The use of smaller, discrete bundles will make it possible for the largest number of carriers with differing types of operations to participate; carriers would be free, in any event, to bid on any or all types of bundles if desired.3 In this manner, the pairings will appeal to the broadest spectrum of new entrants and limited incumbents, best serving the public interest and advancing all – rather than just some – of the statutory objectives identified above.

“It is neither accurate nor appropriate for the FAA to presume that a larger bundle would automatically benefit a purchasing carrier,” Allegiant said.

There were a few other interesting comments on the slot swap made by airlines, and I hope to review a couple others over the coming days. And, of course, it will be fun to watch if/how the government will adjust its approval based on this feedback.

Yesterday Allegiant released its March traffic results, which includes an updated capacity forecast, and the carrier’s second quarter schedule has been cut once again. Allegiant now expects scheduled ASMs to decrease 2-6% compared to the second quarter of 2010.

Allegiant’s news release also includes a forecast for the third quarter (the first I’ve seen) – the airline is also expecting a 2-6% decrease for that time period.

This update compares to a prior forecast of flat to 4% growth. The carrier first provided capacity guidance for the second quarter in December. At that time, the company estimated that capacity would grow from 6% to 9%.

Of course, airlines (and all companies for that matter) are going to update forecasts as more recent data becomes available, but it is significant that Allegiant has essentially reversed course for the second quarter.

The guidance was part of Allegiant’s news release of February traffic. The carrier saw traffic dip by 1.3% on its scheduled service, but the decrease was outpaced by a 3% capacity cut. As a result, load factor increased 1.6 points to 93%. Allegiant estimates that unit revenues for scheduled service increased between 13.7 and 14.1% in February.

Allegiant will be presenting at an investor conference today, and it will be interesting to see what insight is added.

One would assume these capacity cuts are driven by fuel prices. I wonder…is Allegiant more exposed to fuel risk than other carriers? Obviously a fleet of MD-80s isn’t exactly the most fuel-efficient, but the majority of their passengers are traveling for leisure purposes. If consumers rein in discretionary spending due to higher prices (driven by commodity increasing prices), how will Allegiant be affected?

Obviously I’m just openly speculating here, but I’m interested.

What only complicates the situation is that airlines sell inventory many months in advance. If an airline sells a bunch of seats at a low price, an increase in fuel prices will put pressure on margins. Meanwhile, if an airline ends up raising prices for higher fuel prices, does that end up chasing away demand?

Allegiant Air is mulling a way of passing along this fuel risk along to its consumers, according to a filing with the Department of Transportation. Under the proposal, Allegiant will offer passengers a normal fare, but will also offer a lower fare that will be adjusted to fuel prices. After booking, the fare can go even lower or “could increase (up to a set maximum that would be clearly disclosed) depending on changes in fuel price between the booking and travel dates,” Allegiant says.

The company notes that it is “especially difficult” for the airline “to predict what the fuel price might be at time of travel” because it primarily carriers leisure travelers who often book their travel arrangements far in advance. In addition, it says such a policy “strikes an appropriate balance between the interests of consumers and the interests of carriers.”

Allegiant provided details on this possible new product in comments on proposed DOT rules covering passenger protections, such as post-purchase price increases, which are currently allowed. The DOT wrote in a document outlining the proposed rules that it had found that carriers do not participate in such increases, but that the DOT has “have often found this to be the case in the sale of tour packages that include air transportation.” The DOT also said that in many cases ”consumers are not made aware of the potential for a price increase at the time of purchase, and therefore are deceived when the increase is imposed and the seller uses the terms of the contract of carriage to justify an additional collection.”

The DOT has proposed a ban on all post-purchase increases, but also presented two possible alternatives. One of these is to allow increases “as long as the seller of air transportation conspicuously discloses to the consumer the potential for such an increase and the maximum amount of the increase, and the consumer affirmatively agrees to the potential for such an increase prior to purchasing the ticket.” Another option is to allow such disclosed) increases, but prevent them from taking place after a certain time period (60 or 30 days before departure).

Allegiant opposed this alternative in its comments, writing that “such a time frame would negate essentially all benefits of the concept for consumers and carriers alike.”

When I first saw this idea, I thought it was a little bit out there, but it started to make some more sense after some thought. Every year, my family decides if it’s worth pre-buying heating oil for the winter, or just rolling the dice with market prices. How is this any different? As long as Allegiant (or any airline considering something similar) fully explains this new fare option to its passengers to the time of booking, I don’t see any issues.

I’m not sure if I would choose this potential option if it were ever offered, though. It would depend on the amount saved.

Photo Credit: David Parker Brown.

Allegiant said in November that it was now planning to launch Hawaii service in 2012. It also said it would purchase its third and fourth 757s in December 2010 and January 2011. These aircraft would then be leased through 2012, though Allegiant can bring one back after summer 2011  if it so desires. The next two 757s would then be purchased in November of this year.

The company’s fourth quarter earnings release hinted at some changes, as it mentioned one 757 purchase has been pushed to 2011, and that three 757s had been leased. An investor presentation posted today provides some more insights.

The leasing agreements for the third and fourth aircraft appear unchanged, but Allegiant has now leased out one of its first 757s until summer 2012. Meanwhile, the purchases for the third and fourth aircraft that were scheduled for December and January have now been pushed back to February. The purchases of the fifth and sixth 757s are still expected to close in November.

Allegiant will now have one 757 operating this year, and the airline says it will start flying in revenue service early this summer.

As I look at this, I would guess that Allegiant doesn’t have too much interest in operating the 757 domestically, but operating one aircraft will allow them to get experience with the aircraft type, which should help in the ETOPS application process. (ETOPS180 certification is required for Hawaii flying.)

I have to say I like this move, though. The 757 acquisition might not have gone as well as originally hoped and planned, but Allegiant has found an interesting solution through these leasing agreements. In fact, the company expects to earn between $15 and $18 million in revenue from them.

Meanwhile, it will be interesting to see where Allegiant schedules the one 757 this summer. And of course, since the leased aircraft are scheduled to be back in 2012, it will be exciting to find out what Hawaiian routes will be launching with its 757 fleet that year.

So why go back? Well, Allegiant says in their press release some passengers preferred Sanford. But I think the biggest reason that Alleigant mentions is the low costs of Sanford.

The reason I think Allegiant moved to MCO in the first place is because there was some competition from other airlines in most of the moved markets – most notably from AirTran.  My guess is Allegiant thought they could gain some market share or increase their (ticket) revenue by moving to MCO. But my guess is that the higher costs may have wiped out any of the benefits of shifting airports. But that’s just a wild guess on my end.

I really wanted to analyze this move a bit more by digging into some DOT data and trying to see if Allegiant was able to exact any kind of revenue premium or gain market share, but I really don’t feel all that comfortable doing that. When I started looking into the second quarter DB1B numbers, I noticed that there were still itineraries booked to Sanford for cities that had experienced the switch. I’m guessing these are trips that were booked prior to Allegiant’s announcement. Since the data reflects some itineraries of people who were expecting a different airport at first – and since the MCO bookings were made closer-in, I didn’t want to make any premature conclusions.

Anyway – Allegiant’s earnings call is later today – so maybe we’ll get some more insight there.

The airline operates 48 of the aircraft – and says it owns nine more that will be entering service in 2011 and 2012. Its three MD-87s will stay put at 130 seats.

Allegiant President Andrew C. Levy had this to say in a press release:

These added seats will allow us to grow our capacity with the least amount of risk. This project effectively increases our capacity by 11 percent while lowering our cost per seat. In addition, we expect to fund this through internally generated cash-flow.

So, how does adding seats reduce unit costs? Well, the extra capacity will add some expense – like a fourth flight attendant – but the additional seats mean that fixed costs are spread out more (at least that’d be my guess after a couple of accounting classes ).

Photo Credit: Allegiant

I found this pretty interesting, considering that back in 2004 Allegiant removed seats from its MD-80s to go down to the current 150. (Allegiant said that on average the aircraft seated 163, though there were a couple of slightly different seating configurations in service.) I decided to ask them about what’s changed over the past couple of years:

When the decision to move to 150 seats was made, Allegiant was a very different company than it is today. The move to 166 seats has been under consideration for some time now, as we feel it aligns with our current revenue strategy.

The way I read that – each additional seat that can be filled not only represents another fare, but another ancillary revenue opportunity like a hotel room, rental car, etc. And it would appear that Allegiant likes to pack ‘em full – the airline has been running very high load factors this year – with some months right around 90%.

This would also make me think that the math on the fourth flight attendant has changed a bit. Basically, FAA regulations require an additional flight attendant every 50 seats. So by going down from 163 to 150, Allegiant eliminated the fourth, but that’s now coming back. So Allegiant must think the additional revenue more than compensates for this expense.

I was also interested in seat pitch – one would assume that extra seats would mean a reduction in seat pitch. But this won’t always be the case – on some aircraft Allegiant will be doing work like removing unused galley space, creating room for the additional seats. Allegiant tells me most of its fleet already has around 30-32 inches of pitch, with some having around 33-35 inches. Once the reconfigurations are done in 2012 – the whole fleet will have 30-32 inches of pitch. (And that’s not much different from anyone else.)

The first word that popped into my head was “Allegiant.” And I’m sure many others had the exact same thought – this announcement could be a preemptive move in response to Allegiant’s plan to enter the Hawaiian market. It does seem logical that Alaska would want to protect its Hawai’i operations from the Pacific Northwest that have been significantly built up over the past few years.

Of course, Allegiant hasn’t announced any Hawaiian routes yet, but that’s just my read on this one. Alaska’s listing of all the amenities included in the fare – like online reservations – seems like a direct shot at Allegiant. And Alaska hasn’t been afraid to go head-to-head with Allegiant in the past. More importantly, Allegiant has expressed interest in Bellingham already, if we look at this summary of a presentation given by an Allegiant executive.

Regardless of if this is a preemptive move against Allegiant or not, I’m not sure how well this one will work. That Allegiant presentation contains Hawai’i Tourism Authority data that estimates 11,271 visitors came from the Bellingham area in 2009. That comes out to about 216 travelers per week. That number makes the market appear to be a perfect fit for Allegiant’s potential non-daily service. I really do wonder if Alaska’s slated 1,099 weekly seats are a bit excessive.

Of course, the existence of a nonstop could help boost demand, but I’m just wondering if Alaska’s being a bit heavy-handed here to fend off Allegiant.

Either way, if this is truly Alaska expressing concern about Allegiant, then we’re in for an exciting few months as Allegiant continues to prepare  for its Hawai’i service.

EDIT: As has been pointed out to me in the comments, I am neglecting the possibility of Vancouver metro residents making the drive down and adding more passengers. It’s a fair point. Right now Air Canada and WestJet are each flying to Honolulu nonstop from there, with 767-300s and 737-800s, respectively. I’d be interested in knowing how much of Alaska’s and Allegiant’s Vegas traffic comes from Canada. Despite that factor I still find the move a bit on the aggressive side. I’m interested in seeing Alaska’s fares on the route and how they compare to the Canadian competitors.

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.