The Business of Low-Cost Airlines: Allegiant Air COO Lands in McCombs Marketing Class
While budget-conscious travelers look for cheaper flights, low cost airlines are experimenting behind the scenes with new routes and cutting-edge technologies to strengthen their businesses.
Allegiant Air, a low-cost carrier based in Las Vegas, serves both major U.S. cities and smaller destinations. Jude Bricker, the airline's chief operating officer, shared thoughts on his airline’s pricing strategy with McCombs School of Business students during a November visit to Senior Marketing Lecturer Herb Miller's Foundations of Marketing class.
Following his presentation, Bricker discussed Allegiant's business serving customers who might not otherwise be able to afford to travel and the airline industry more generally.
How are new technologies helping Allegiant's business?
One is integrating capacity, planning, pricing, and scheduling. Putting that all together so you can optimize a schedule for profits is really powerful. And no one else in the industry does it the way we do.
The second is e-commerce: Put the right seats into the right market at the right time, add a marketing department that brings customers to the website, and an e-commerce department that optimizes that interaction. And then combine that with the loyalty program, so we started having a customized experience for each customer.
Why don't Allegiant flights appear on aggregator websites such as Expedia or Priceline?
The customer and Allegiant manage that relationship. I don't think we need to pay a third party.
We think there's value in having a direct relationship with the customer, because we can reach out to them with marketing opportunities. That's the cheapest form of distribution and allows us to have a customized experience for the customer. When you book a flight on Allegiant, we're able to dish out in-store products that may not be supported in a global distribution system like Sabre. We were the first to charge for carry-on bags that go in the overhead bin, for example. And because we control the environment, we launched that product without having to integrate with a bunch of distribution systems. There's a lot of value in that. Southwest has the same reasoning.
If I wanted to offer a new product, the third-party website would either give that idea to all their other customers so everybody would help pay for the development of that technology — or they'd say "no" to the idea. So, the choices are to either give up an innovation to all my competition or I don't get to innovate at all. That's awful. So if you can do it, I think it's better to be on your own platform.
What ticket-buying tips do you have for travelers?
The way algorithms work around the industry causes the biggest displacement on Monday and Tuesday, so those are the days to buy. The algorithms work every day and there's human input every day except for over the weekend. So you'll see the biggest variance between algorithmic pricing and manual pricing on Monday or Tuesday.
Also, you can seek out opportunities to buy a flow itinerary that's priced a lot more cheaply than a nonstop itinerary, but has a nonstop flight in it that you want. Then, you just walk off the airplane. For example, from San Diego to Dallas-Fort Worth, it's cheaper to buy a connecting itinerary on the same airline on the same flight to Nashville because San Diego to Nashville is a really competitive market. Then just fly to DFW and get off the plane.
Those products are priced independently: They're pricing for a traveler from San Diego to DFW and they're pricing for a traveler from San Diego to Nashville and they do it separately. So the first leg of the trip is actually underpriced in flow itinerary.
There are lots of websites to help find those, but I use Skiplagged.
How can buying two one-way flights, rather than a round trip, save you money?
Cancellation fees vary by airline and the fare class you buy. People don't tend to value the cancellation price. For example, if you're buying a round trip itinerary, you might find a cheaper flight on the outbound leg at a new time or on a new day, but want to keep your return flight. If you booked a round trip and you don't show up for the first leg, they'll cancel the second leg.
Let's say you’re going to fly round trip from Austin to Seattle on Thursday and come back on Sunday. But now you need to go on Friday and come back on Sunday. If you booked it as a round trip and you find a cheaper fare on Friday, you can't keep the return flight. You would have been better off buying two one ways and either cancelling, changing, or just not showing up for your first leg.
I coach consumers into considering options. Make sure you're reading the fine print, because airfare is so expensive. If you're buying a TV, you read about it, you research Consumer Reports. I think for an airline ticket, you should be as thorough.
A recent Tampa Bay Times investigation highlighted unexpected landings by Allegiant flights. How do you address that investigation's challenge?
In the case of Tampa Bay Times — and this did not work out in that particular case — we invited them and other third-party experts out to substantiate what we think is a really good safety culture. We showed them all our data. They made comparisons to other airlines, which report differently so it's difficult to compare.
We have airplanes that fly long stage lengths at isolated areas that may not have the same support as, for example, Delta Air Lines Inc. in Atlanta. Our fleet on Delta's network would do better, and their fleet on our network would do worse. The key point is the difference between reliability and safety. I assert that passengers on those diverted flights were never in harm's way. Most of the time it's an indication problem; there's really nothing wrong, but out of an abundance of caution, we encourage our pilots to divert an aircraft. Safety is the No. 1 priority.
We're investing about a billion and a half dollars over the next several years in upgrading our fleet. We're continuing to invest heavily in our existing fleet as well, but they're old. So they are going to have interruptions associated with mechanical issues more frequently than new airplanes.
What the Tampa Bay Times did was very frustrating. I thought the article was unfair, particularly the characterization of "scattershot" or "slipshod" maintenance, which is offensive to the hardworking men and women who maintain our airplanes.
FAA inspectors who have every incentive and desire to find things wrong came out and they didn't find anything. We meet with the FAA and their experts bi-weekly or more often. The company is an open book. My family, friends, teammates, and I fly Allegiant all the time. We have a safe airline.
Allegiant flies to some lesser-served cities. How do you select these routes?
It's really about experimenting. That's because the value of a successful market far exceeds the cost of a failing market.
It's a bit like the sequel business in movies. If I'm able to build a market flying out of Minot, North Dakota, the Minot to Florida route we now fly was much easier to launch because we already had a presence in the Minot market. It's much easier, lower risk, and more profitable than the original.
The incentive is to try everything that you think may work, and if you find a winner, it will pay for all the failures.