Viva Las Vegas and the King of Ancillary Revenues

Allegiant Air’s recent stock prospectus reveals it is changing the business model for US
low cost carriers.

Ryanair is generally accorded “rock star” status for its prowess for generating non-ticket
revenue from its customers. But another star is standing in the curtains and may take a
portion of the stage from this European phenomenon. Las Vegas-based Allegiant Air
has perfected its craft in the most unlikely of markets – the United States – where airlines don’t typically charge extra for all the extras they provide.

Allegiant Air reports it generated ancillary revenues of €10.79 (US$13.58) per passenger
during the first 6 months of 2006,1 which substantially bests the €7.84 (US$9.87)
posted by Ryanair 2 for the same period. This activity translated into overall revenues in
excess of €10 million (US$12.6 million), which admittedly were dwarfed by the €147 million (US$185 million) reported by the LCC giant Ryanair for the same period.

But Allegiant’s results are remarkable contrasted against the prevailing bundled-services airline business model that exists in the United States.

Revenues from non-ticket sources, which are called ancillary revenues, have become an
important financial component for low cost carriers (LCCs) in Europe and throughout
the world. Ancillary revenues derive from the a la carte services and features that passengers may purchase before or during their travel experience.

Legacy airlines bundle these services into the price of an airline ticket. LCCs, especially those outside the United States, tend to unbundle the travel experience. Under this business model, consumers purchase basic airline transportation and pay extra for services such as
advance seat assignments, checked baggage and onboard snacks and drinks.

Allegiant Air has veered from the model currently favored in the United States, which
bundles amenities in the price of a ticket. Many LCCs in the United States don’t charge
extra for advance seat assignments, checked baggage, onboard beverages, and payments
made by credit card. But it’s difficult to argue with the success enjoyed by Allegiant Air.

For fiscal year 2005 it enjoyed 46.6% revenue growth above its 2004 results. And its cost structure is an astounding 18.3% lower than the average costs of its LCC peer airlines.

Click on the following link to see the full analysis: Analysis Allegiant Air