Allegiant Tweaks Its Model to Run Toward Competition

Allegiant has a habit of announcing a bunch of new routes all at one time, and last week was no exception. The airline rolled out 15 new routes and 5 new cities with another one coming this week. If you don’t live in one of those cities, it would have been easy to just ignore the news, but you shouldn’t. There’s a subtle shift going on in Allegiant’s business model. And according to the airline, the shift is due to competition. It’s not running away. It’s actually running toward it.

Allegiant’s model has long been based on the simple idea of connecting people in small cities to large leisure destinations. This worked first in Vegas, Allegiant’s home base, and then it spread to several other places, many in Florida. The beauty of the model was that Allegiant could fly nonstop a couple times a week to places like Rapid City or Springfield. The fares were low AND the flights were nonstop, so it was irresistible for travelers. That’s why the airline has done so well.

But in this last announcement, Allegiant is shaking things up. Instead of small cities, Allegiant is now connecting mid-size cities with leisure destinations. While the “small” cities are getting bigger, the leisure destinations are getting smaller.

The new cities announced last week are Pittsburgh, Indianapolis, Omaha, Richmond, and Jacksonville. Then this week, Allegiant announced New Orleans service. Jacksonville and New Orleans are cities that couldn’t really support flights to small cities like Rapid City and Springfield. But when those “small” cities become places like Indianapolis and Pittsburgh, the demand is strong enough to support flights to smaller leisure destinations like Jacksonville.

What’s really strange about this is that Allegiant, an airline that used to pride itself on having almost no nonstop competition in its markets, will find plenty of competition here. Most of these routes have other airlines with nonstop flights on them already. And we’re not just talking about traditional hub-and-spoke carriers. For example, Indianapolis to Vegas and Orlando? Those are Southwest markets. And they’re not alone.

Of course, these markets aren’t the first ones Allegiant has tried like this. Allegiant does fly Austin to Vegas already, and the airlines has been ramping up in Cincinnati as Delta’s presence has shrunk. But why is Allegiant changing its model?

According to spokesperson Jessica Wheeler, the airline isn’t changing its model at all. “What we’ve been doing for a long time is making nonstop leisure travel accessible. For many years, that was geographic accessibility. As we grow and mature a little bit, we’ve started to define accessibility a little more broadly.”

So is that code for “we’ve run out of small city ideas, so we’re trying something else”? I asked Jessica.

No, we’re not out of small city ideas. We’re in an interesting atmosphere where other carriers are also looking at these medium hubs. We know it’s unlikely that other carriers will go after those [small city] markets so what you see is a little bit of a race to get to those markets where there’s a lot of interest, those medium hub markets.

Well that’s interesting. With Spirit and Frontier growing quickly, Allegiant has decided it wants to play in those markets as well. Allegiant has focused itself on leisure markets so that is narrower than Spirit’s model. But Frontier has been aggressive at connecting mid-size markets to Florida. Allegiant seems to be getting anxious about that.

In other words, small cities will just have to wait because there isn’t a competitive hurry. But why is it that medium-size markets are such a hot thing now anyway? Well, first you have a lot of capacity coming out of those markets. Hubs have been abandoned so the opportunities are there for others to come in. But most importantly, fares are getting expensive.

Many of these markets were served by AirTran, but AirTran is gone. Southwest may still serve some of these markets, but their fares are high now. So the ultra low cost carriers see nothing but blue sky ahead as they look to add service at low fares.

So far, the results are good. Take a look at slide 17 in a recent investor presentation.

In Austin to Vegas, fares haven’t changed much for the existing carriers and traffic has remained steady. But Allegiant has come in and cut the fare by more than half while stimulating the market. It thinks there’s more opportunity to do that.

Of course, the more Allegiant grows into these types of markets, the more other airlines are likely to try to defend their turf. Allegiant hasn’t really had to worry about that before, but something tells me it’s not going to be as easy of a path as the airline may hope.

[ Original scales of justice image via Shutterstock]

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