Allegiant sees significant potential carrying leisure travelers to Mexican resort destinations, but the cost – both real and relative to domestic expansion – is too high. Viva Aerobus wants to expand deeper into the US leisure segment, but its prior attempts mostly failed. Together, however, the two believe they can become a strong player in the transborder market, commanding a double digit share.
Assuming regulators approve, that’s exactly what they plan to do. The two carriers announced plans for a joint venture that would operate dozens of new transborder routes, dramatically changing the market.
This groundbreaking alliance should reduce fares, stimulate traffic, and ultimately link many new transborder cities with nonstop service. In short, it will bring meaningful ULCC competition to the U.S.-Mexico market for the first time in history.
– Allegiant CEO Maury Gallagher
The metal-neutral alliance will see the two carriers share in costs and profits across new transborder markets. Assuming approval, they will effectively operate as a common unit in the US-Mexico market. This covers all fleet planning, network management and revenue management. Pricing strategies, fares, and product bundles would be coordinated to compete against the entrenched incumbent air carriers.
The carriers will align their on-board products and continue to take advantage of their similarly low costs and high-density aircraft configurations. Integration of the loyalty programs is also proposed, likely taking advantage of Allegiant’s recent revamp of its Allways Rewards program.
We think these are two cultures that are really aligned, and we’re excited about this partnership long-term. We think that provides a lot of benefit to the public. It would help increase competition, reduce fares and provide nonstop service between city pairs that don’t have it today.
– Allegiant CFO Greg Anderson
Significant change for Allegiant
Allegiant does not operate scheduled service to Mexico today. That is expected to change, assuming the deal goes through. In their filing to the Department of Transportation the airlines note that Allegiant will commence such flying and that “these operations will ultimately represent a substantial percentage of the Joint Applicants’ combined transborder operations.”
Getting there, however, will require a substantive change to the company’s infrastructure. The IT systems in place today do not support international flying.
The pair expect to leverage Viva Aerobus’ Navitaire implementation to launch the venture. Assuming the timeline holds, Viva Aerobus will also do the initial JV flying.
Allegiant will, in the meantime, make the necessary adjustments to its systems to support international service. CFO Greg Anderson acknowledges the challenge, with the IT upgrades “the largest” consideration. But he’s also optimistic that working with the Viva team and their Navitaire implementation will help ease that effort.
Ultimately, that could mean replacing the company’s home-grown booking and passenger management platform. Anderson notes that the existing platform “has been really successful for us, but there’s functionality that we need to increase and enhance.” Whether that is a buy or build decision remains to be seen, but those evaluations are already underway.
In it DOT filing the company does note parallels to Southwest Airlines and its lack of international operations until it bought AirTran and the IT infrastructure it inherited with that deal. The JV with Viva could deliver a similar motivation to Allegiant.
A smart investment
Allegiant didn’t identify an explicit cost to the IT work, but Anderson did suggest it would “not be massive in the grand scheme of things.” Moreover, the company sees the transborder deal as a catalyst for significantly boosting its international presence on a long-term basis. “We could leverage the investment in this infrastructure moving forward. In addition to the work with Viva, we could go into other routes, such as the Caribbean or any other international market,” Anderson explains.
Potential new markets include the Bahamas, Jamaica, Bermuda, and the Dominican Republic. All these markets offer sizable all-inclusive or hotel/airfare package demand, making them prime targets for Allegiant’s business model.
Demand-driven growth
One thing that will not change for Allegiant is the focus on limited frequency flying to fill planes. The companies call attention to the complimentary peaks and troughs of their operations, both on a month-to-month and day-of-week basis.
Viva sees high demand on Saturdays, for example, while Allegiant typically operates very few Saturday flights. A jointly-managed schedule could see more Saturday flying by Allegiant planes to capture Viva’s demand that otherwise is leaking to competitors.
We’re very adept at matching our capacity with the demand. We fly lower utilization than others because for our customer base and our network, we feel that’s the proper balance between capacity and demand. If we do add more capacity, it’ll be a result of demand, not just for us trying to chase yield.
– CFO Greg Anderson
Many international leisure markets also see high Saturday-to-Saturday demand for timeshares. While Allegiant would certainly hope to capture more of those hotel nights directly, boosting nonstop options to those international leisure markets would not be completely out of line.
A fleet boost…eventually
Allegiant currently sees about 1,000 domestic US city pairs where it believes domestic service could be profitable. Adding these new international markets would not erode that growth plan, though some of the details may shift a bit.
The cyclicality of its operations means many transborder markets could be added during what would otherwise be lulls in existing demand. This translates a far more cost-effective use of the existing aircraft and other fixed assets. But, should demand dictate, the company is also ready to explore fleet expansion opportunities to support the growth. Anderson explains:
We potentially have this ability to use idle capacity initially. But then, if it is successful, we would absolutely need to add planes on top of that. So there’ll be incremental aircraft. And we think it’s going to be very successful.
But we don’t have to go out and invest today in X amount of aircraft. There’s no incremental cash outlay today. We think it is an elegant solution for us wading in there and making sure it comes to fruition. And then at that point, when we see everything’s approved and successful, then we would love to make a broader investment in adding incremental aircraft to support it.
Don’t expect the fleet make-up to change, however. Anderson suggests Allegiant is very happy with its mostly A320 operations and does not anticipate changing models anytime soon.
Taking a stake
As part of the deal Allegiant will also invest $50 million in Viva Aerobus and take a seat on the board. While the companies are not disclosing what size a stake $50 million buys, Anderson suggests “it’s not a double digit ownership stake, more like the single digits but a nice, meaningful piece.”
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Great write up Seth, interesting material for sure. The main thing Allegiant has working against it is the lack of ANY external messaging today (GDS or OA partnership). Which most in the industry perceive to mean they have no concept of the amount of work it will take to get their system to support this level of connectivity, even in the ULCC space. It will be fascinating to see how this develops…will they keep an in house system or move more mainstream once they realize the enormous task that lies ahead?
I agree that the PSS challenges at Allegiant are massive. Even if they don’t want GDS integration the effort to communicate with the Viva Navitaire implementation is massive. That Anderson admitted they’re in the “build or buy” discussion phase is a big reveal. They know that the in-house system will not support what they need today and that the updates will be a huge lift. That said, the company’s internal IT team is (at least historically) really, really strong. I would not put it past them to try the build option rather than the buy.