Allegiant Air: Plenty of Markets to Expand to, But Could Their Success be Inhibiting Future Growth?

Allegiant Air has been expanding rapidly in the past couple years, adding new destinations in all regions of the country, as well as routes to Allegiant's new bases in Orlando and St. Petersburg (used as a secondary airport for customers headed to Tampa) from existing destinations. Allegiant has identified many markets where it can expand further, and the airline is bound to take their low-priced vacation business model to even more small and medium-size markets in the next couple years. The airline is slowly receiving new deliveries of used MD-80 aircraft to facilitate this expansion, some of which Allegiant is procuring from Alaska Airlines, which is retiring their MD-80 fleet in order to save money. But nevertheless, the company has become a victim of its own success in some of its more popular markets. On most routes, Allegiant has very little competition, because Allegiant fills an important niche that most other airlines cannot fill. Few, if any, other carriers offer nonstop service to Las Vegas, Orlando, or St. Petersburg. But when Allegiant does encounter competition, it can often be a difficult battle. Larger airlines, or imitators have sprung up in an attempt to take away Allegiant's niche in some of the larger markets it serves. In these markets, Allegiant has grown the leisure market so much from where it had been before Allegiant's entry that it attracts competitors; sometimes Allegiant is well-prepared to tackle competitors, and sometimes it isn't.

One notable example of Allegiant's successful battle against competitors was in Northwest's home turf, the Midwest. In 2005, Northwest Airlines started nonstop flights to compete with Allegiant's from Madison, Des Moines, and Rapid City to Las Vegas. (Northwest also announced service between Grand Rapids and Las Vegas, which competed with Allegiant's Las Vegas service from nearby Lansing). Allegiant did have to withdraw from Madison to Las Vegas nonstop service (as did Northwest), but it forced Northwest out of the other three Midwestern markets. However, the flights were quickly canceled as the market got too crowded, and Northwest couldn't afford to use mainline planes to fly very low-yield routes with poor load factors against an established competitor. In that instance, Allegiant successfully battled Northwest, partly because Northwest's strategy wasn't well-thought out, and partly because Allegiant had developed loyalty from customers in the area. However, that hasn't always been the case.

When Allegiant started service to Newburgh, New York, the airport was eager for new low-cost airline service. The airport had very little airline service, but was in a good location with a wide catchment area. Allegiant recognized the opportunity the market presented, and started service to Orlando in October 2005. However, about a year after that service began, both JetBlue and AirTran announced new service to Newburgh, including nonstop flights to Orlando on both airlines. Allegiant saw sales sag, as travelers jumped at the chance to fly with airlines that offered attractive amenities and more frequent flights. As a result, Allegiant withdrew from the Newburgh market. In the case of Newburgh, low-cost airlines were especially eager to fly from the airport because of its proximity to a large customer base in New York City. However, even in other small airports that don't have the potential to attract customers from large metropolitan areas, Allegiant is still vulnerable. Allegiant has had to withdraw from some of its larger markets that have their own strong customer bases, including Oklahoma City and Tulsa, because the competition, in those cases from Southwest, was too strong.

In some of Allegiant's larger and more successful markets, including Bellingham, Colorado Springs, Peoria, Toledo, Knoxville, and Greenville/Spartanburg, they may face increased competition. But in all these markets (except, possibly in Colorado Springs), it won't be low-cost carriers competing with Allegiant. Legacies desperate to protect their own turf will be the ones competing with Allegiant, much like Northwest did in 2005. Even though these markets are relatively small, they can still use competition. But carriers that choose to compete with Allegiant in these markets will be successful if they target their customers well, by marketing their own vacation products like Allegiant does, and by offering competitively-priced flights. Moreover, in order to offer affordable prices, they need to fly mainline aircraft, not regional jets. Regional jets will annoy customers with their cramped interiors and increase costs. Mainline aircraft are more of a risk, but if airlines can fill them, and Allegiant has proven that they can be filled from small markets, then they will please customers by increasing comfort and lowering costs. If Allegiant continues to spur demand from some of these "larger" small airports, then they will likely encounter greater levels of competition. And well-placed competition can hurt Allegiant, which only has limited resources to compete with larger airlines and limited brand recognition with customers (many customers would prefer to take a "name-brand" carrier that they've heard of over one they've never heard of, such as Allegiant). Allegiant's continued growth will depend on expansion into small markets from which they can grow demand, but only to an extent which still inhibits competitors from entering the market.