Every Passenger An Arbitrageur

Tiny Allegiant floats a novel scheme — having travelers buy jet fuel | “No one thought customers would pay for bag fees, and they have”

Justin Bachman


When businesses ship a package via United Parcel Service or FedEx, the freight companies assess a fuel surcharge based on market prices. The customer pays for the gas. Now ultralow-cost Allegiant Travel wants to try a similar approach on humans. Chief Executive Officer Maurice Gallagher Jr. would let fliers choose whether to lock in a set, higher fare or pay a lower ticket price in exchange for shouldering the risk that the cost of fuel may increase before they travel. Those dice-rollers would pay an additional amount — or receive money back — if energy costs changed in the period between booking and flying. Says Gallagher: “We’ll ... stick our neck out and take on the [Department of Transportation] if this price of fuel continues.”

Unlike major airlines, Las Vegas-based Allegiant, founded in 1997, has virtually no last-minute business fliers, leaving it disproportionately dependent upon leisure travelers, who often book their trips to vacation cities such as Orlando, Las Vegas, or Phoenix months in advance.

At Allegiant, about 80 percent of an average month’s ticket revenue is sold by the start of the month, Gallagher says. That leaves the discount airline more exposed than other carriers to changes in fuel costs, which Allegiant says have jumped 19 percent so far this year. That’s a big reason Allegiant — which doesn’t hedge its jet fuel purchases in the futures markets — is willing to risk regulatory resistance and consumer confusion by adopting a pricing mechanism aimed at recovering some of its fuel costs.

That may be easier said than done, because in April 2011, two months after Allegiant first floated the idea, the Department of Transportation imposed new consumer protections for air travel. Among them was a prohibition on postpurchase price hikes except for increases in government taxes or fees. “They said not only no, but hell no,” says Gallagher. “We’re going to work on that.” He says Allegiant would need six to 12 months to build the technology into its website and potentially longer than that to persuade regulators about the wisdom of variable pricing. “We as a company are not ready for it mostly because our automation is not ready,” he says in an e-mail. A big challenge will be to design its website, where Allegiant sells more than 90 percent of seats, in a way that will pass muster with regulators and consumers in terms of clarity and transparency about the transaction.

DOT rules would allow Allegiant to collect extra money for fuel, as some tour operators already do, if the ticket sale is structured as a partial payment. “Our rules do not prohibit airlines and ticket agents from selling tickets in which passengers pay part of the fare immediately and the rest later, with the final payment dependent on changes in fuel or other costs,” says DOT spokesman Bill Mosley.

Even if Allegiant wins permission to dun consumers for jet fuel after a booking, it’s unlikely the rest of the industry will rush to emulate the practice, says Vicki Bryan, a senior analyst with Gimme Credit, a bond research firm. A postpurchase charge or refund would be a logistical burden for big airlines, she says. And there’s the difficulty of explaining variable pricing to people who just want to go to Disney World.

It may still be worth the effort. “Pennies count” for Allegiant, Bryan says. “No one thought that customers would pay for bag fees, and they have. I’m not willing to just say that it’s not going to work, but it’s unique to [Gallagher] and his situation and to his business model.” Allegiant has a target of selling 90 percent of seats on all its flights, higher than the industry average, and already collects one of the highest amounts of ancillary revenue per flight in the industry: $33.90 per passenger for everything from making a reservation on its website ($10) to checking a bag at the airport ($35) to buying an inflight soda ($2). Those add-ons help, since Allegiant’s average fare — before all the extra charges — is only $89. Gallagher says fuel fees would be the next logical step. “If you truly want to build a strong [airline] industry,” he says, “volatility of fuel suggests we have no business being in the fuel business.”

The bottom line Allegiant tacks on almost $34 in passenger fees per ticket. Next, it wants fliers to absorb changing fuel costs.


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