Jetrader - Summer 2016 - 13

its aviation authority. Our maintenance
expense is comprised of heavy airframe
checks that are performed at predetermined
intervals, component repairs for items such
as engines and landing gear, and line maintenance that are performed at our airport
locations. Our heavy maintenance is performed with our direct oversight by third
party facilities that also perform similar
work for the other major U.S. carriers. The
work performed at our major cities is generally completed by our own technical staff.
JT: What do you see as the future of the
ultra-low-cost carrier segment?
TD: Worldwide, the ULCC market share has
increased dramatically over the last decade.
In the U.S., the ULCCs have grown rapidly on
a percentage basis, but still represent only
a small fraction of overall capacity. With
price being the primary driver for such a
large number of travelers, there is tremendous opportunity for ULCCs to continue to
stimulate new demand through low prices.
Recently we have seen some of the larger
carriers begin to compete with the ULCCs by
adding capacity in certain markets, through
new basic fare products, etc. Allegiant's
route structure and peak day schedule
make it generally less appealing for other
airlines to compete directly, in that they
would need to pull capacity from the rest
of their networks during time when demand
is naturally high. This provides a bit of a
barrier against encroachment. In general,
I am bullish about our future and about
the continued success of ULCCs in the U.S.
JT: Do you see Allegiant stretching
beyond leisure/destination travel to
gain a larger portion of the commercial
airline market?
TD: Our network and cost structure make
us uniquely positioned to serve the leisure
traveler and, for now, we will continue to
focus our efforts on those travelers.

JT: Taking a wider look at the commercial airline market today, what do
you see as the biggest opportunity for
Allegiant - whether it is a new segment
of the market, new geographical region,
or new technology?
TD: The current fleet renewal campaign is certainly a critical opportunity
for the entire company. As we induct a
more modern aircraft and standardize
around one fleet type, we will be able to
simplify many areas of the business. The
lower relative unitized variable cost of the
A320 series aircraft has also allowed us to
increase the level of flying during our lower
utilization periods.
JT: Why do you believe it is beneficial
to acquire aircraft rather than lease the
aircraft? Are there exceptions to this?
TD: You are correct that in today's market we favor purchasing rather than leasing our aircraft, and we currently own our
entire fleet. Our decision models take into
account the cost of owning and maintaining an aircraft from the time of acquisition
until it is retired. Our purchase prices for
mid-life A320s consist of a base amount
plus about $13 million in maintenance value
for things like engine overhauls, engine
life limited parts, component repairs, and
heavy maintenance. We assume that we

will be the last operator of the majority of
our aircraft, so our residual value assumptions are modest. The current availability
of debt at low interest rates obviously
has an impact on our decisions. We have
normally found that the financing terms
offered to us by the debt markets are more
positively impacted by our credit standing
than are the financing terms offered to
us in the lease market. When we model
this scenario and compare it to what we
are being offered in the lease market for
these aircraft, the numbers favor owning
the assets. We certainly aren't opposed
to leasing (as it is definitely possible to
structure a lease in a way that we could
derive many of the benefits of our current
transaction structures), but we just haven't
yet come to terms with any of the lessors
under that type of structure.
JT: Any predictions regarding commercial air travel in the United States? How
are airlines preparing for the future of
air travel and the growing demand for
air travel?
TD: The only prediction that I can be
certain of is that I am likely to be wrong
in many of my predictions. As a management team, we can guess about fuel prices,
interest rates, the economy, competition
from existing airlines, new entrants, technology improvements, etc., and we need
to understand how changes in these areas
can impact our companies and the industry.
However, in the end, what is most important is that we maintain enough flexibility
in the structure of our respective businesses to effectively react to those changes
as they inevitably occur.
Jetrader * Summer 2016 13

Jetrader - Summer 2016

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