S&P Assigns 'BB-' Rating to Allegiant Travel (ALGT); Notes Relatively Small U.S. Market Share

Standard & Poor's Ratings Services said that it assigned its 'BB-' corporate credit rating to Las Vegas, Nevada-based Allegiant Travel Co. (Nasdaq: ALGT). We also assigned our 'BB-' issue-level and '4' rating recovery rating to Allegiant's senior unsecured notes. The '4' recovery rating indicates our expectation that lenders would receive average recovery (30%-50%) in the event of a payment default.

Our corporate credit rating on Allegiant reflects the company's relatively small market share within the U.S. airline industry, with a focus on carrying leisure travelers from midsize cities to vacation destinations; the airline industry's high risk and cyclical nature; and the company's low operating cost structure. The rating also incorporates the company's financial profile, which, even with an increase in debt to acquire aircraft, will remain among the better of the rated U.S. airlines. Pro forma for the notes' issuance, we expect funds from operations (FFO) to debt to decline to the mid-20% area from 47% in 2013 and debt to EBITDA to increase to the mid-2x area from 1.5x in 2013.

Allegiant is a low-cost, low-fare airline that serves primarily leisure travelers to vacation destinations from small and midsize cities. As of June 1, 2014, the company served 231 routes between 85 small cities and 13 leisure destinations, including Las Vegas and Phoenix as well as destinations in Florida, California, and Hawaii.

Allegiant's margins benefit from its low-cost structure as well as from a higher level of ancillary revenues than other rated U.S. airlines (about 33% of revenues in 2013). These revenues are related to fees charged for checked bags, assigned seats, on-board sales, etc. The company's operating cost per available seat mile of about 10 cents is among the lowest in the industry, which average more than 13 cents. The company's low costs result from its use of less-expensive older aircraft, its relatively low labor costs, and its high seat density. Some employee groups have voted recently to join unions, which could raise labor costs over time, but it will probably take several years to reach initial contracts, based on precedent cases for U.S. airlines. In 2013, the company began to acquire more fuel efficient Airbus A319 and A320 aircraft from other airlines (the planes are about 10 years old), which added a third type of aircraft to its fleet (older McDonnell Douglas MD-80 and Boeing B757 aircraft).

"The stable outlook is based on our expectation that Allegiant's financial risk profile will remain relatively consistent through 2015, though greater-than-expected shareholder rewards could increase leverage above our expectations," said Standard & Poor's credit analyst Betsy Snyder.

We could lower the rating if the company's earnings and cash flow are weaker than we expect due to higher-than-expected fuel prices or weak demand and pricing, or if there are greater-than-expected shareholder rewards, resulting in FFO to debt declining to below 20% on a sustained basis.

We believe an upgrade is unlikely over the next year, based on the company's limited market position and narrow business model, which we don't expect to change significantly. Still, over the longer term, we could raise the rating if we reassess Allegiant's business risk profile as "fair," and the company is able to maintain FFO to debt of at least 25%.

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