Allegiant’s fares stay low while its stock price soars

David Becker / AP

An Allegiant Air jetliner flies by the Luxor after taking off from McCarran International Airport, Thursday, May 9, 2013. While other U.S. airlines have struggled with the ups and downs of the economy and oil prices, Allegiant has been profitable for 12 straight years.

If a family of four in Missoula, Mont., flies to Las Vegas for vacation this May, they’d pay at least $560 for tickets on budget carrier Allegiant Air.

Not a bad deal — or they could scrap the getaway and buy a mere three shares of Allegiant’s ever soaring stock.

The Las Vegas-based company, known for its cheap fares, large menu of add-on fees and consistent profits, is smaller than other carriers but has the highest-priced stock among U.S. airlines. It's not the only one performing well, as the airline industry is popular with investors, despite aggravating fliers with cramped planes and extra charges.

Shares of Allegiant Travel Co., the carrier’s parent, closed Thursday at $184.55 apiece. That’s up 82 percent from a year ago and 427 percent from March 2009, when the stock market hit bottom during the recession.

The rise has been a boon to shareholders, including majority owner and CEO Maurice “Maury” Gallagher, and has little, if any, direct benefit to the average flier. But shares keep rising in no small part because Allegiant has been profitable for 12 consecutive years while other carriers went bankrupt, were swallowed by rivals and slashed domestic service.

Firmly in the black, Allegiant has been flying more routes and buying more planes while keeping its fares far below industry average.

“It’s just been so consistent. They’ve never really had a down year that was serious like the rest,” Imperial Capital analyst Bob McAdoo said.

Some airlines' stocks have grown faster since the market bottomed out. Alaska Air Group traded at $3.49 per share at the time and is now at $63.98, up 1,733 percent. But today, no one's stock price is higher than Allegiant's, Stifel Nicolaus analyst Joe DeNardi said.

Not all analysts think the stock will keep climbing, though. Helane Becker of Cowen and Co. expects Allegiant to dip to $172 in the next six to 12 months, saying it’s “kind of problematic” when it offers tickets for next to nothing, as it did on Tuesday with promotional airfare as low as $29 one-way.

But others say it will only go up. DeNardi said last month that Allegiant, which flies leisure travelers from small, underserved cities to warm-weather vacation spots with almost no competition on its routes, has “the best business model in the industry.” He said its stock could reach $220 a share by early next year.

One reason it outweighs larger rivals such as Southwest and Delta is because Gallagher, unlike other airline bosses, has not split his company’s shares. For instance, if you had one share worth $100, you could then have two at $50 each, making it cheaper for mom-and-pop buyers but not diluting existing investors’ holdings.

More than a few fliers complain about Allegiant — it ranked last among U.S. carriers a few years ago for on-time arrivals and charges for on-board drinks, small carry-on luggage and boarding-pass printouts at the airport. However, there are fliers who enjoy the airline and probably want to invest, but since buying “three or four shares equals the price of a vacation, they’d probably balk,” Deutsche Bank Securities analyst Michael Linenberg recently said.

Linenberg, on a conference call with analysts and Allegiant executives, asked Gallagher if he thought about splitting and making the stock more affordable.

“Does that make any sense, or are we on the Warren Buffett, Berkshire Hathaway path?” he asked.

Buffett, the famed billionaire investor, hasn’t split his conglomerate’s Class A shares, which are now worth $222,250 each.

Gallagher said the board has “had debates” about splitting but “it’s hard to get a consensus,” adding that the stock is up 10-fold in eight years.

“It’s been good,” he said.

Allegiant spokeswoman Jessica Wheeler said this week that Gallagher was traveling and likely wouldn’t be available for further comment.

Gallagher owns roughly 20 percent of the company’s stock. The other main shareholders as of last spring were investment firms T. Rowe Price Associates, with a 15.1 percent stake; Renaissance Technologies, at 7.2 percent; and BlackRock, at 6.9 percent, according to a securities filing.

Big investors are happy with Gallagher, his airline and his dividend payments, and they aren’t looking to sell their holdings, analyst Becker said.

Asked if it would help if Gallagher opened the stock to average buyers, Becker said, “I don’t think he really cares who owns the stock.”

Despite its higher stock price, Allegiant’s size and market value — $3.2 billion as of Thursday — pale in comparison to larger carriers that fly hundreds more planes and have issued hundreds of millions more shares than Allegiant.

Delta Air Lines’ stock closed at $45.92 on Thursday, valuing the carrier at $37.7 billion. Shares of Southwest Airlines, the busiest carrier by far at McCarran International Airport, are worth $44.08 each, giving the company a $29.8 billion market value. And United Continental Holdings’ stock closed Thursday at $67.42, valuing the airline at $25.9 billion.

Unlike Allegiant, other airlines have split their shares. Southwest, for one, split 14 times between 1977 and 2001.

“Southwest kept splitting time and again to keep the price down,” McAdoo said.

Larger carriers aren’t aiming for big growth spurts, he said, but Allegiant added 25 routes last year and unveiled 22 more on Tuesday.

It’s also adding aircraft. Allegiant, whose fleet is largely comprised of aging MD-80s, is buying Airbus jets in a shift to younger planes that don’t guzzle as much fuel.

The company is poised to have 80 aircraft — 53 MD-80s, six Boeing 757s and 21 Airbus A319s and A320s — by year’s end. It expects to grow to 103 aircraft by the end of 2018 by acquiring 23 more Airbus planes.

Allegiant buys oil for immediate delivery and doesn’t stock up for the future at pre-set prices, analysts said. With crude oil selling for about $50 per barrel, down 50 percent from a year ago, Allegiant is poised to save a lot of money, boosting its bottom line and perhaps sending its stock even higher.

“With lower fuel prices like this, they’re going to do even better,” McAdoo said.