MrB Posted April 15, 2018 Share Posted April 15, 2018 Not a bad time to start a thread Airing today 60 Minutes Preview: Is Allegiant Airlines Safe to Fly? https://www.cbsnews.com/video/60-minutes-allegiant-air-flying-under-the-radar/ Link to comment Share on other sites More sharing options...
MrB Posted April 18, 2018 Author Share Posted April 18, 2018 LUV accident https://www.swamedia.com/releases/release-de080387b716f7f68a21d1f864938d7a-southwest-airlines-confirms-accident-our-hearts-are-with-those-affected Link to comment Share on other sites More sharing options...
BeerBBQ Posted April 19, 2018 Share Posted April 19, 2018 Do you have an opinion on the company and/or stock? Link to comment Share on other sites More sharing options...
Gamecock-YT Posted April 19, 2018 Share Posted April 19, 2018 Do you have an opinion on the company and/or stock? https://en.wikipedia.org/wiki/ValuJet_Airlines https://en.wikipedia.org/wiki/ValuJet_Flight_592 Link to comment Share on other sites More sharing options...
MrB Posted April 19, 2018 Author Share Posted April 19, 2018 Do you have an opinion on the company and/or stock? https://en.wikipedia.org/wiki/ValuJet_Airlines https://en.wikipedia.org/wiki/ValuJet_Flight_592 Gamecock-YT do you care to elaborate on the connection you're making between ValuJet & ALGT? Link to comment Share on other sites More sharing options...
MrB Posted April 19, 2018 Author Share Posted April 19, 2018 Do you have an opinion on the company and/or stock? BeerBBQ I should be more diligent and put a short synopsis in the first post. Been meaning to do it, but a bit swamped right now. Generally speaking the space interests me, because I view the ULCC (Ultra Low Cost Carriers) market as distinct from the LCC (Low Cost Carriers) market with a significant runway for growth if you compare US penetration v the rest of the world. From memory the US is at something like 6% and Europe for example at 31%. You also have a major consolidation story that's played out by the main price setters over recent years in the US. Specifically, I think all three companies (Frontier, SAVE & ALGT) in that space are interesting, but I prefer ALGT over SAVE (Frontier is not listed, but their S1 of last year is an excellent read), because Gallagher has a big stake, runs it very conservatively, focus on a different market (leisure with 80% of routes without any competition) and runs a low frequency, low capex model (most LCCs have high capex, high frequency models). For valuation I refer you to recent presentations where you will note the company is going through a major fleet change, which management pegs at 110 planes by 2020 x $5m EBIT/plane, throw in the Trump tax rate and you're getting to a sensible multiple considering the $2.4Bn market cap. Major risks - Gallagher related party transactions (not material) - Airline (plane goes down) - New property venture - Getting too big? - Does switch to A320 imply they're changing the model? - Fuel (oil goes up; they don't hedge, which I like, but it means you take any increase on the nose) - Labor (not a worry for the foreseeable future Thanks for the nudge-got to run Link to comment Share on other sites More sharing options...
bizaro86 Posted April 19, 2018 Share Posted April 19, 2018 Do you have an opinion on the company and/or stock? https://en.wikipedia.org/wiki/ValuJet_Airlines https://en.wikipedia.org/wiki/ValuJet_Flight_592 Gamecock-YT do you care to elaborate on the connection you're making between ValuJet & ALGT? Not Gamecock, but the CEO of Allegiant was a director of Valujet at the time of their fatal crash. Link to comment Share on other sites More sharing options...
Gamecock-YT Posted April 19, 2018 Share Posted April 19, 2018 Do you have an opinion on the company and/or stock? https://en.wikipedia.org/wiki/ValuJet_Airlines https://en.wikipedia.org/wiki/ValuJet_Flight_592 Gamecock-YT do you care to elaborate on the connection you're making between ValuJet & ALGT? Same CEO taking a wreckless track towards safety eventually will get burned (no pun intended). Just copy over the ValuJet wiki and that'll be the story of Allegiant. If they are already cutting corners when oil is as cheap as it has been, imagine what they'll do if we get a permanent spike. Sure getting rid of the MD80s to a younger fleet will help, but only a matter of time. I would never recommend my family travel on G4. Link to comment Share on other sites More sharing options...
MrB Posted April 19, 2018 Author Share Posted April 19, 2018 Do you have an opinion on the company and/or stock? https://en.wikipedia.org/wiki/ValuJet_Airlines https://en.wikipedia.org/wiki/ValuJet_Flight_592 Gamecock-YT do you care to elaborate on the connection you're making between ValuJet & ALGT? Same CEO taking a wreckless track towards safety eventually will get burned (no pun intended). Just copy over the ValuJet wiki and that'll be the story of Allegiant. If they are already cutting corners when oil is as cheap as it has been, imagine what they'll do if we get a permanent spike. Sure getting rid of the MD80s to a younger fleet will help, but only a matter of time. I would never recommend my family travel on G4. "same CEO" Gallagher was an investor, lender to and in that sense one of the founders of ValuJet; as a result he was also a board member, but Robert Priddy was the CEO. http://getfilings.com/o0000950109-97-002648.html Even so, "wreckless track towards safety" - contractor SabreTech was ultimately singled out for the ValuJet accident; improperly preparing cargo (old oxygen generators) that was loaded, caught and set the plane on fire. SabreTech was criminally charged with a 24 count federal indictment in 1996 and by 2002 only one survived the appeals process, (the failure to train their [sabreTech] employees on hazmat procedures). Even the initial NTSB investigation did not apportion the blame to ValuJet's approach towards safety. https://www.ntsb.gov/investigations/AccidentReports/Pages/AAR9706.aspx Ultimately, I think defence lawyer for two SabreTech defendants, Jane Moscowitz, put it best, "The crash of the plane was not a criminal act, it was an accident and a tragedy." Best piece by far on the accident https://www.theatlantic.com/magazine/archive/1998/03/the-lessons-of-valujet-592/306534/ Link to comment Share on other sites More sharing options...
siddharth18 Posted April 19, 2018 Share Posted April 19, 2018 No dog in this fight. But I did watch the 60 Minutes segment. They mentioned that pilots are disincentivized from reporting mechanical problems. The attitude and incentives from the top seem to favor flight utilization rate over safety. What would Munger think about that? Link to comment Share on other sites More sharing options...
Jurgis Posted April 19, 2018 Share Posted April 19, 2018 Best piece by far on the accident https://www.theatlantic.com/magazine/archive/1998/03/the-lessons-of-valujet-592/306534/ The author makes good points about system failures and their unavoidability. However, he is also consciously pursuing this line of reasoning and overemphasizing it. He himself admits that there were issues with ValuJet and contractor safety procedures (as well as numerous FAA complaints regarding ValuJet) that are not just "complex system" issues. Apportioning all the blame to "complex system" and saying "it is unavoidable" is IMO rather misleading and unintentionally providing justification to bad practices. No dog in this fight, but I read the article. 8) Link to comment Share on other sites More sharing options...
MrB Posted April 19, 2018 Author Share Posted April 19, 2018 No dog in this fight. But I did watch the 60 Minutes segment. They mentioned that pilots are disincentivized from reporting mechanical problems. The attitude and incentives from the top seem to favor flight utilization rate over safety. What would Munger think about that? I'll take the 60 Minutes opinion for what it's worth, but it is generally true that ULCC/LCC pilots are incentivised to keep the rigs rolling, especially the high frequency operators. Yet, it is highly unlikely any pilot is going to take to the skies with knowledge of a serious mechanical issue; the incentive is obvious. Link to comment Share on other sites More sharing options...
MrB Posted April 19, 2018 Author Share Posted April 19, 2018 Best piece by far on the accident https://www.theatlantic.com/magazine/archive/1998/03/the-lessons-of-valujet-592/306534/ The author makes good points about system failures and their unavoidability. However, he is also consciously pursuing this line of reasoning and overemphasizing it. He himself admits that there were issues with ValuJet and contractor safety procedures (as well as numerous FAA complaints regarding ValuJet) that are not just "complex system" issues. Apportioning all the blame to "complex system" and saying "it is unavoidable" is IMO rather misleading and unintentionally providing justification to bad practices. No dog in this fight, but I read the article. 8) I cannot recall if it was in that article, but at the time there was a report floating around the FAA that had significant questions about ValuJet, but it was mainly to do with the fact that they were growing so fast and for one the FAA could not keep up with checking the planes ValuJet was bringing into its fleet. Either at the time of the crash or at the end of '96 the FAA had checked less than half ValuJet's planes, something like that. However, that is a very different issue and to draw a straight line between that and the ValuJet Flight 592 crash and/or Gallagher is not supported by the facts. It is a pretty mainstream opinion, but simply not true. Link to comment Share on other sites More sharing options...
bizaro86 Posted April 19, 2018 Share Posted April 19, 2018 It seems to me that allegiant would have some of the lowest incentive to keep utilization high by flying planes that aren't fixed yet. They fly a low number of flights per plane, which is economically efficient because they fly mostly older, cheaper planes. By comparison, Southwest flies newer more expensive planes, but turns them fast to get lots of use out of them. Looking only at the incentive to get the plane turned fast, Allegiant seems like a better choice in some ways. Link to comment Share on other sites More sharing options...
MrB Posted April 19, 2018 Author Share Posted April 19, 2018 It seems to me that allegiant would have some of the lowest incentive to keep utilization high by flying planes that aren't fixed yet. They fly a low number of flights per plane, which is economically efficient because they fly mostly older, cheaper planes. By comparison, Southwest flies newer more expensive planes, but turns them fast to get lots of use out of them. Looking only at the incentive to get the plane turned fast, Allegiant seems like a better choice in some ways. Yes that is correct. In some ways ALGT's "low capex approach" means they can afford to NOT fly. That is why you see them fly only two days out of the week on a lot of their routes. I'm not sure which model is the best, but ALGT does sport a 30% ROE over 10 years versus LUV's 14%, SAVE's 20% (7 yrs), RYAA's 18%, etc . Maybe what is more important in this case is that you must choose one, but you cannot be both. Currently I'm concerned that the change in the fleet and size of the network, might be an indication that they're trying to shift to a higher frequency model. In fact their last 2017 ID presentation mentions utilization is expected to increase from 5 block hours/aircraft/day to 7 as they migrate from the MD80s to the A320s, which would support my concern. Having said that, it still puts it significantly shy of Southwest's 10.5, so it will have to increase utilization of the A320s by another 50% before it fits the Southwest/high frequency model. Link to comment Share on other sites More sharing options...
MrB Posted April 20, 2018 Author Share Posted April 20, 2018 Rather late than never. Poor response when compared to the way Southwest management handled its crisis. https://www.usatoday.com/story/opinion/2018/04/19/allegiant-air-proud-safety-record-editorials-debates/34001143/ Link to comment Share on other sites More sharing options...
BeerBBQ Posted April 20, 2018 Share Posted April 20, 2018 Do you have an opinion on the company and/or stock? BeerBBQ I should be more diligent and put a short synopsis in the first post. Been meaning to do it, but a bit swamped right now. Generally speaking the space interests me, because I view the ULCC (Ultra Low Cost Carriers) market as distinct from the LCC (Low Cost Carriers) market with a significant runway for growth if you compare US penetration v the rest of the world. From memory the US is at something like 6% and Europe for example at 31%. You also have a major consolidation story that's played out by the main price setters over recent years in the US. Specifically, I think all three companies (Frontier, SAVE & ALGT) in that space are interesting, but I prefer ALGT over SAVE (Frontier is not listed, but their S1 of last year is an excellent read), because Gallagher has a big stake, runs it very conservatively, focus on a different market (leisure with 80% of routes without any competition) and runs a low frequency, low capex model (most LCCs have high capex, high frequency models). For valuation I refer you to recent presentations where you will note the company is going through a major fleet change, which management pegs at 110 planes by 2020 x $5m EBIT/plane, throw in the Trump tax rate and you're getting to a sensible multiple considering the $2.4Bn market cap. Major risks - Gallagher related party transactions (not material) - Airline (plane goes down) - New property venture - Getting too big? - Does switch to A320 imply they're changing the model? - Fuel (oil goes up; they don't hedge, which I like, but it means you take any increase on the nose) - Labor (not a worry for the foreseeable future Thanks for the nudge-got to run Thanks for the insights. The strategy seems to be very different from rest of industry. Curious what you think the competitive advantage is here (if there is one). Seems like historically anyone with capital could enter the airline business. What keeps existing competition from replicating their strategy? Is it the infrastructure already in place and devoted to corp travelers? Would gate access be a hindrance to new competition from replicating strategy? What else will prevent others from encroaching on their profit pool? Link to comment Share on other sites More sharing options...
Spekulatius Posted April 21, 2018 Share Posted April 21, 2018 Gate access hardly would seem a hurdle, if the frequency on a route is only 2 flights / week. I think with these low frequency routes, it would just be hard for a new operator to make only returns against an entrenched competitor, unless he is willing to eat losses on that route for a while. Link to comment Share on other sites More sharing options...
MrB Posted April 21, 2018 Author Share Posted April 21, 2018 Thanks for the insights. The strategy seems to be very different from rest of industry. Curious what you think the competitive advantage is here (if there is one). Seems like historically anyone with capital could enter the airline business. What keeps existing competition from replicating their strategy? Is it the infrastructure already in place and devoted to corp travelers? Would gate access be a hindrance to new competition from replicating strategy? What else will prevent others from encroaching on their profit pool? In the LCC/ULCC industry you don't have natural barriers to entry, so you have to create and maintain them yourselves, which also means yes that anyone can come in and duplicate it with the basic deterrents being what Spekulatius spoke to. Execution is key and might seem easier than it is. Good LCC and ULCCs demand to be well run (daily operation & strategy). Most differentiators between the industry and NLCs (network legacy carriers) e.g. no frills, max seating density, secondary airports, etc is essentially designed to be the lowest cost operator (strategy). You have to buy planes competitively and you have to stay disciplined on route ROIs. This can bee seen in significantly higher entry/exit rates for routes, which ULCC/LCCs fly compared to NLCs (operation). In ALGT's case a lot of their advantage lies in their capital discipline. They can only pay so much for planes and have to make their numbers on a route otherwise it gets closed down fast. They fly from small airports, focus on leisure and generally stay out of the way of competition. So no surprise that it is a commodity industry, where lowest cost operator wins. Having said that the 10 year ROEs for LCC/ULCC globally are clearly above average and does not point to commodity type returns. The following MIT study is a good read on the industry U.S. Airline Business Models 2006-2015: Trends and Key Impacts https://www.google.co.uk/search?q=U.S.+Airline+Business+Models+2006-2015%3A+Trends+and+Key+Impacts&oq=U.S.+Airline+Business+Models+2006-2015%3A+Trends+and+Key+Impacts&aqs=chrome..69i57.244j0j4&sourceid=chrome&ie=UTF-8 Link to comment Share on other sites More sharing options...
walkie518 Posted April 23, 2018 Share Posted April 23, 2018 Thanks for the insights. The strategy seems to be very different from rest of industry. Curious what you think the competitive advantage is here (if there is one). Seems like historically anyone with capital could enter the airline business. What keeps existing competition from replicating their strategy? Is it the infrastructure already in place and devoted to corp travelers? Would gate access be a hindrance to new competition from replicating strategy? What else will prevent others from encroaching on their profit pool? In the LCC/ULCC industry you don't have natural barriers to entry, so you have to create and maintain them yourselves, which also means yes that anyone can come in and duplicate it with the basic deterrents being what Spekulatius spoke to. Execution is key and might seem easier than it is. Good LCC and ULCCs demand to be well run (daily operation & strategy). Most differentiators between the industry and NLCs (network legacy carriers) e.g. no frills, max seating density, secondary airports, etc is essentially designed to be the lowest cost operator (strategy). You have to buy planes competitively and you have to stay disciplined on route ROIs. This can bee seen in significantly higher entry/exit rates for routes, which ULCC/LCCs fly compared to NLCs (operation). In ALGT's case a lot of their advantage lies in their capital discipline. They can only pay so much for planes and have to make their numbers on a route otherwise it gets closed down fast. They fly from small airports, focus on leisure and generally stay out of the way of competition. So no surprise that it is a commodity industry, where lowest cost operator wins. Having said that the 10 year ROEs for LCC/ULCC globally are clearly above average and does not point to commodity type returns. The following MIT study is a good read on the industry U.S. Airline Business Models 2006-2015: Trends and Key Impacts https://www.google.co.uk/search?q=U.S.+Airline+Business+Models+2006-2015%3A+Trends+and+Key+Impacts&oq=U.S.+Airline+Business+Models+2006-2015%3A+Trends+and+Key+Impacts&aqs=chrome..69i57.244j0j4&sourceid=chrome&ie=UTF-8 Thoughts on ALGT's interest in real estate dev? Link to comment Share on other sites More sharing options...
MrB Posted April 23, 2018 Author Share Posted April 23, 2018 Thoughts on ALGT's interest in real estate dev? What's to like? Diworsification, overly bullish sounding Sunseeker President, too much talk of synergies, etc. Maybe I'm too cynical, because John Redmond (President) does have the relevant experience, having spent many years at Vail Resorts, Ceasers World, MGM, etc. He also pulled a few people from his MGM days e.g. Ben Mammina (VP Design & Construction), John Cunningham (VP Project Development and Operations), etc. We've double checked a lot of what they're saying and building a resort in the Punta Gorda area seems to make sense from the data that we can see. When you combine Allegiant's proprietary data (flying all these folks into resort areas, Allegiant credit cards, etc) and the project team, which includes people like Paul Steelman who understands the resort concept business well then it does possibly translate into some kind of an edge. They also claim to have a lot of flexibility with their commitment, which means they will not blow much beyond the sunk cost of $35m for the land. Essentially they're depending on two things a) funding via condo deposits and short term funding (not sure about the recourse) and b)phased project (only start the next of the 10 phases if the last one looks certain to be successful). The 2017 ID suggests the board will only make a final decision in June 2018 to go ahead with breaking ground, depending what all the data they have at that point tells them. Big question for me though is whether this is an indication of the basic ALGT model having reached its limits. Of course if the idea works then this could become very interesting over the long run. Bottom line is I don't like it, but at this stage I'm giving management the benefit of the doubt. Link to comment Share on other sites More sharing options...
MrB Posted April 24, 2018 Author Share Posted April 24, 2018 Thoughts on ALGT's interest in real estate dev? What's to like? Diworsification, overly bullish sounding Sunseeker President, too much talk of synergies, etc. Maybe I'm too cynical, because John Redmond (President) does have the relevant experience, having spent many years at Vail Resorts, Ceasers World, MGM, etc. He also pulled a few people from his MGM days e.g. Ben Mammina (VP Design & Construction), John Cunningham (VP Project Development and Operations), etc. We've double checked a lot of what they're saying and building a resort in the Punta Gorda area seems to make sense from the data that we can see. When you combine Allegiant's proprietary data (flying all these folks into resort areas, Allegiant credit cards, etc) and the project team, which includes people like Paul Steelman who understands the resort concept business well then it does possibly translate into some kind of an edge. They also claim to have a lot of flexibility with their commitment, which means they will not blow much beyond the sunk cost of $35m for the land. Essentially they're depending on two things a) funding via condo deposits and short term funding (not sure about the recourse) and b)phased project (only start the next of the 10 phases if the last one looks certain to be successful). The 2017 ID suggests the board will only make a final decision in June 2018 to go ahead with breaking ground, depending what all the data they have at that point tells them. Big question for me though is whether this is an indication of the basic ALGT model having reached its limits. Of course if the idea works then this could become very interesting over the long run. Bottom line is I don't like it, but at this stage I'm giving management the benefit of the doubt. https://www.sunseekerresorts.com/ Link to comment Share on other sites More sharing options...
walkie518 Posted April 24, 2018 Share Posted April 24, 2018 Thoughts on ALGT's interest in real estate dev? What's to like? Diworsification, overly bullish sounding Sunseeker President, too much talk of synergies, etc. Maybe I'm too cynical, because John Redmond (President) does have the relevant experience, having spent many years at Vail Resorts, Ceasers World, MGM, etc. He also pulled a few people from his MGM days e.g. Ben Mammina (VP Design & Construction), John Cunningham (VP Project Development and Operations), etc. We've double checked a lot of what they're saying and building a resort in the Punta Gorda area seems to make sense from the data that we can see. When you combine Allegiant's proprietary data (flying all these folks into resort areas, Allegiant credit cards, etc) and the project team, which includes people like Paul Steelman who understands the resort concept business well then it does possibly translate into some kind of an edge. They also claim to have a lot of flexibility with their commitment, which means they will not blow much beyond the sunk cost of $35m for the land. Essentially they're depending on two things a) funding via condo deposits and short term funding (not sure about the recourse) and b)phased project (only start the next of the 10 phases if the last one looks certain to be successful). The 2017 ID suggests the board will only make a final decision in June 2018 to go ahead with breaking ground, depending what all the data they have at that point tells them. Big question for me though is whether this is an indication of the basic ALGT model having reached its limits. Of course if the idea works then this could become very interesting over the long run. Bottom line is I don't like it, but at this stage I'm giving management the benefit of the doubt. https://www.sunseekerresorts.com/ I read your post in full, but I get the feeling your a little conflicted? What's funny is that Buffett coined the term "diworsification," yet the breadth of Berkshire's diversification is stunning! Link to comment Share on other sites More sharing options...
MrB Posted April 24, 2018 Author Share Posted April 24, 2018 Thoughts on ALGT's interest in real estate dev? What's to like? Diworsification, overly bullish sounding Sunseeker President, too much talk of synergies, etc. Maybe I'm too cynical, because John Redmond (President) does have the relevant experience, having spent many years at Vail Resorts, Ceasers World, MGM, etc. He also pulled a few people from his MGM days e.g. Ben Mammina (VP Design & Construction), John Cunningham (VP Project Development and Operations), etc. We've double checked a lot of what they're saying and building a resort in the Punta Gorda area seems to make sense from the data that we can see. When you combine Allegiant's proprietary data (flying all these folks into resort areas, Allegiant credit cards, etc) and the project team, which includes people like Paul Steelman who understands the resort concept business well then it does possibly translate into some kind of an edge. They also claim to have a lot of flexibility with their commitment, which means they will not blow much beyond the sunk cost of $35m for the land. Essentially they're depending on two things a) funding via condo deposits and short term funding (not sure about the recourse) and b)phased project (only start the next of the 10 phases if the last one looks certain to be successful). The 2017 ID suggests the board will only make a final decision in June 2018 to go ahead with breaking ground, depending what all the data they have at that point tells them. Big question for me though is whether this is an indication of the basic ALGT model having reached its limits. Of course if the idea works then this could become very interesting over the long run. Bottom line is I don't like it, but at this stage I'm giving management the benefit of the doubt. https://www.sunseekerresorts.com/ I read your post in full, but I get the feeling your a little conflicted? What's funny is that Buffett coined the term "diworsification," yet the breadth of Berkshire's diversification is stunning! Sure. Don't like them going into the resorts business, but my analysis concluded that I needed to give them the benefit of the doubt. Also as things stand it won't blow up the business if they get Sunseeker wrong. Still, don't like it. Link to comment Share on other sites More sharing options...
MrB Posted April 26, 2018 Author Share Posted April 26, 2018 Allegiant just tied for 3rd place in the American Customer Satisfaction Index and handsomely beats its peers Frontier & Spirit. Also if you look the improvement, since 2016 after the Tampa Bay Times investigative report on which the recent 60 Minutes piece was based, then it is clear that they’ve been making significant progress and also seem to indicate that the 60 Minutes report is rear view mirror stuff. Go Allegiant! https://www.theacsi.org/index.php?option=com_content&view=article&id=149&catid=&Itemid=214&c=Allegiant Link to comment Share on other sites More sharing options...
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