Allegiant Travel Company (ALGT) Enters the Big Time

Searching for bargain hunters
The real question for Allegiant is whether it can make a name for itself on a highly competitive route. The company’s strategy seems quite simple: dramatically undercut competitors on price. Allegiant is offering $99 one-way tickets on the route (in limited quantities). By contrast, the cheapest tickets on market leader Hawaiian Holdings, Inc. (NASDAQ:HA) for travel in November are $273.50 each way. Even with Allegiant’s additional fees, its cheapest tickets are half the price of tickets on Hawaiian.

Allegiant thus hopes to stimulate new travel demand in the LA-Hawaii market. By offering base round-trip airfares that are hundreds of dollars lower than competitors’ prices, Allegiant will make a Hawaii vacation affordable for many travelers who could not pay today’s market price. Given the size of the Los Angeles market, it seems quite plausible that Allegiant’s lower fares will stimulate enough demand to fill its two weekly round-trips to Honolulu without having a major effect on competitors like Hawaiian Holdings, Inc. (NASDAQ:HA).

Foolish bottom line
In some ways, Allegiant Travel Company (NASDAQ:ALGT)’s new service between Los Angeles and Honolulu represents a big change. For the first time, it will be serving a route with many direct competitors. That said, the route still fits into the company’s broader strategy of stimulating demand for leisure travel to warm weather markets with low fares and infrequent service. Allegiant’s lower cost structure and ancillary revenue opportunities give it a good chance to succeed in this new market.

Allegiant stock has dropped by more than 10% this week, based on a relatively minor earnings miss. This could be a good time for bargain-hunting investors to buy stock in a company that has consistently posted strong margins and free cash flow growth over the last 10 years. If Allegiant can succeed in the Los Angeles-Honolulu market, it could create numerous future expansion opportunities in similar markets.

The article Allegiant Enters the Big Time originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Hawaiian Holdings (NASDAQ:HA) and is long October 2013 $6 calls on Hawaiian Holdings. The Motley Fool has no position in any of the stocks mentioned.

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