Allegiant’s Condo Project Could Mean Trouble for the Airline

I really enjoyed this year’s Boyd Conference, but I’ll admit I wish it had all happened one day later. Why? Well, I was able to speak with Lukas Johnson, SVP of Commercial for Allegiant, one day before the airline made its long-anticipated announcement that it would begin building condos in Florida.

When we spoke, Lukas wasn’t able to talk about that side of the business. Instead, he focused on the fact that despite what some (*cough* Scott Kirby *cough*) are saying, the Ultra Low Cost Carrier model isn’t dead. In his estimation, “most of the consumers are buying based on fare… in an industry where it’s mostly a commodity, the highest cost producer can’t produce more than the lowest cost producer.” And while the legacies can match while margins are high, if fuel rises or demand tanks, the legacy airlines won’t be able to continue to match such low fares with their costs being so much higher than ULCCs.

For Lukas, it’s business as usual. He continues to look for new routes. The original small city-to-big destination model may have a little more growth opportunity, but it’s not going to be a real driver. Instead, the growth will be largely be in markets where the origin city gets bigger (think Cincinnati, already with flights to 20 destinations) and the destination gets smaller (something like Destin, Florida). There will be more growth in existing cities, but there may be new cities as well. Allegiant will continue to enter markets with less than daily service and do its best to avoid being seen as a threat by other airlines. The MD-80s will be gone within 2 years, and Allegiant will be all-Airbus. At that point, it may even have its operational act together. In theory.

You’d think that an airline that generated a ton of cash and has growth opportunities would get the full attention of the senior management team, right? After all, you want to keep that gravy train in top form, but nay, that’s not what’s happening. Instead, founder Maury Gallagher decided to bring in John Redmond as President, a guy with no airline background but a whole lot of hospitality experience. So it should be no surprise that his focus seems to be on anything but the airline.

As mentioned, his first big project was announced the day after the the Boyd Conference. The airline is rolling out a company called Sunseeker Resorts which will have its first gigantic development on 20 acres on the water near Punta Gorda in Southwest Florida.

This development will have up to 9 condo towers along with a 75 room hotel, and owners can put their units into a resort pool so that rooms can be rented out. In other words, it’s just another big condo project.

What does this have to do with the airline? Well, I assume this map (thank you, Great Circle Mapper) of Allegiant’s flights into Punta Gorda Airport tells the tale.

Allegiant already has a substantial operation at Punta Gorda with flights from more than 30 cities arriving a couple times a week. Allegiant has always focused on trying to sell people ancillary services, including hotels and more. In my conversation with Lukas, he explained that Vegas was the best hotel market in the country. But he said in Florida, it’s not as good. Instead, they do really well selling car rentals. Now, the plan must be to try to bundle the flight and the hotel together (probably with a car too) and aggressively try to get people to stay there. Then the company makes more money, right? That’s the idea, but there are some red flags.

Let’s not forget that since these are condo towers, the big push won’t be just on bundling a flight with a hotel stay. There is undoubtedly going to involve a push to sell those condo units. (Fly Allegiant for cheap, then stay at your condo!) Maybe people in, say, Peoria buy in droves. But, uh, what if that Peoria starts performing horribly? Will Allegiant drop it, leaving condo owners livid that they can’t get to the Allegiant-built condo they bought? Or will the needs of the condo project override the airline’s profit needs, and the airline will be forced to keep flying? Allegiant (the airline) has never had loyalty to a specific route. If it does well, it stays. If not, it goes. If that strategy stays the same, then condo owners might want to think twice about buying. If that strategy changes, then that’s not good news for the airline and its profitability.

Take that a step further. Will Allegiant be forced to make new route planning decisions that support the hotel instead of what’s best for the airline? Lukas assured me that the airline will be kept separate, but if the resort is empty or the the condos aren’t selling, do you really think there won’t be internal pressure on which routes need to be flown to support the project? Maybe there will be some big buyers in Youngstown, Ohio who really need that flight to be convinced to buy. Allegiant just left Youngstown thanks to poor performance. Could it be forced back in by its own leadership?

I can understand the draw of wanting to vertically-integrate, but history shows us it hasn’t worked well with the airline industry. I’d much rather see Allegiant’s senior management team focus on running a great and highly-profitable airline. Instead, I fear Lukas and the rest of the airline folks are going to find themselves in some uncomfortable situations down the road.

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Muscat,  Oman
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