Allegiant Air, the discount carrier fliers love to hate, is on a borrowing binge.
Las Vegas’ hometown airline, which historically hasn’t carried a lot of debt, in recent months sold $300 million in bonds and borrowed another $85 million by mortgaging almost its entire fleet of planes, putting 53 MD-80s and six Boeing 757s up as collateral.
The deals nearly tripled Allegiant's debt load to $619 million as of June 30 from $234 million as of Dec. 31.
Executives are using the proceeds in large part to buy Airbus planes, which, like other aircraft, have dropped in price since the economy collapsed. They also are cheaper to maintain than MD-80s and, depending on the model, hold more passengers.
Allegiant currently has 53 MD-80s, six 757s and 10 Airbus planes in service. It expects to have 20 Airbuses flying by the end of 2016, though it won’t ditch the aging MD-80s anytime soon, said Jude Bricker, senior vice president of planning for Allegiant Travel Co., the carrier’s parent.
The MD-80s are an average 24 years old and, according to Bricker, get about $100,000 worth of monthly maintenance each.
“We’re very comfortable operating that airplane as long as necessary,” he said.
Allegiant jets leisure travelers across the country, mostly from small, underserved cities such as Missoula, Mont., and Fresno, Calif., to popular vacation spots like Las Vegas and Orlando, Fla.
Base fares are dirt cheap, but in exchange, fliers put up with frequent delays and a growing menu of add-on fees, including, most recently, a $5 charge for printing boarding passes at the airport ticket counter. The fee takes effect Sept. 1.
The carrier also is a cash cow, profitable for 11.5 years straight. Allegiant earned almost $68 million in profit for the first half of 2014, up 17 percent from the same period last year.
Aviation Week magazine, gauging financial performance, recently named Allegiant Travel the top-performing airline in North America and No. 2 in the world.
Bricker recently spoke with VEGAS INC about the company’s new loans, its changing fleet and why the company believes add-on fees are good for passengers.
Allegiant relies heavily on its MD-80s. Why move toward Airbus?
The MD-80s aren’t going anywhere in the short-term. That airplane remains productive for us. We have 53 in service for us today, and I expect we’ll have those same 53 in service two to three years from now. When we started out and had a dozen airplanes, we were flying weekend patterns into Vegas and nothing else. As we expand, we get the opportunity to fly more days of the week, and we started getting a fleet big enough and a network large enough to support a larger schedule. The MD-80 flies about five and a half hours a day on average, and the Airbuses fly eight hours a day.
What condition are the planes in when you buy them? I’ve heard the interiors are a mess sometimes.
When they go into service they look like new, but sometimes they require a lot of work. Almost always, we replace the entire cabin. We buy planes from all over the world, so we standardize them. But the mechanical condition of the aircraft is as good as new.
What were the reasons for the $300 million bond sale?
We tried to do a bond deal in 2011, but we ended up pulling it because of pricing — investors were demanding too high interest rates. From this deal, we’ve already spent $100 million of the proceeds to buy 12 Airbus A320s. We’re also in the middle of negotiating to buy planes that we lease from GE Capital Aviation Services. Six others are coming in on lease, but instead of renting them, we want to buy them.
Why did you borrow $85 million by mortgaging most of your fleet?
For capital expenditures. We have $550 million in cash; we’re going to spend $170 million to buy the planes from GE, and another $50 million for three others coming into service. We want to have a cash balance of about $300 million so we can buy more planes, or buy back our own shares. We’d have liquidity for an unexpected event.
Is it common for airlines to mortgage their planes?
It is uncommon for them not to. The airline industry in general carries a lot of debt. The planes are the most valuable collateral we have.
Have carriers lost planes to lenders?
Usually if you have an airline bankruptcy, they’re able to retain their assets. There are probably some planes they don’t want and give up to the lender, but the lender doesn’t want them either. Airlines have come out of bankruptcies with fleets that are very similar to the ones they went in with.
An industry analyst recently pointed out that Allegiant historically hasn’t carried much debt. Is your current borrowing a blip or a change in strategy?
We’re very comfortable with the debt level as it is today, and we’re even comfortable with more debt if the opportunity to spend the capital presents itself.
Allegiant often gets criticized for what people perceive as your nickel-and-dime fees. The company just announced it would charge customers $5 to print boarding passes at the airport. How do you expect fliers to react? And what is the main purpose of the fee?
Philosophically, we believe that customers want the pricing structure we give them. There are no secret fees; they’re well advertised, well represented. It’s not a way of trying to drive revenue higher in spite of passengers. We think it’s the right way to sell air, and it’s better for the customers because they can build the service level to whatever they want. If they don’t want it, they don’t have to pay for it. If they don’t want to pay $5, they’ll show up with their boarding passes, and we won’t have a long queue at the check-in counter. We pay for ticket counter space in many cases by linear foot, and we want as few staff there as we can and as little space as we can so we can offer lower and lower fares. The print-out fee allows us to process passengers cheaper and faster. They’ll show up at the airport with an itinerary that doesn’t need to be modified. They have a boarding pass that’s printed and they can go right to the gate. That’s the cheapest passenger to carry, and that’s what we’re shooting for.