Allegiant is focusing on capturing customers from small cities, where there is little or no service, to attractive destinations and operates in a low cost structure to offer low fares.
Imperial said Allegiant's operating margins are the highest in the industry, despite concerns over contentious labor negotiations, an FAA safety review and its decision to add more off-peak flying due to low oil prices. The brokerage noted that most of these issues have now been resolved.
"While ALGT now faces a number of operational and cost challenges as it transitions to a single aircraft type from its current mixed fleet, it plans to maintain lower capacity growth of 5–10 percent between FY17 and FY19," analyst Michael Derchin wrote in a note.
In addition, the airline attracts leisure customers with low fares then aggressively markets higher-margin vacation packages and ancillary products.
,p>Further, Derchin said mid-sized markets offers significant growth opportunity as many of these mid-sized cities, such as Cincinnati and Cleveland, were former hubs of the Big 3 (American Airlines Group Inc AAL, Delta Air Lines, Inc. DAL and United Continental Holdings Inc UAL) that have been "de-hubbed" following consolidation.Meanwhile, Allegiant is transitioning to an all-Airbus fleet over the next few years. The company plans to retire its highly profitable but aging MD-80 fleet by FY19, and is replacing those aircraft with a combination of new and used A320s.
"Following the MD-80 replacement period, capacity growth is expected to resume between 10 percent and 15 percent per year as a result of ALGT's scalable business model and numerous profitable market opportunities," Derchin continued.
Derchin sees 20.2 percent system capacity (ASM) growth in the third quarter, 14.1 percent in fourth quarter, 9.9 percent in FY17 and 8 percent in FY18.
In addition, the analyst projects system TRASM to decline by (7.6 percent) in the third quarter, (5.6 percent) in the fourth quarter, (0.8 percent) in FY17 and increase by 1.0 percent in FY18.
The analyst's price target of $164 assumes approximately 6.5x estimated 2017 TEV/EBITDAR, and approximately 14.5x estimated 2017 EPS of $11.35.
At the time of writing, shares of Allegiant were up 0.99 percent to $143.77. Based on October 6's close, the $164 target price implies potential upside of 15 percent.
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