Airline industry followers all know that Allegiant Air (ALGT) flies a fleet of MD-80s, so it shouldn't be a surprise to see the airline pick up a bunch more as they did this week. Digging in to the order, which was for 18 aircraft from SAS, shows how different this airline's model truly is when compared to just about any other airline.
Allegiant currently operates 46 MD-80s, so this order for 18 MD-80s from SAS is a big deal. It's not, however, as big of a deal as it may seem at first. Of those 18 airplanes, only 13 will actually be put into service. The remaining 5? Those were bought simply to be used as parts for existing airplanes.
But this is still a big increase for the airline. In addition to two other SAS aircraft bought previously, this will increase the fleet size by nearly a third. These aircraft won't be fully integrated into the fleet until the end of 2011, but that's still a large amount of growth. How are they paying for such growth? Cold, hard cash. Wait, what?
That's right, they're paying cash. And you know why? These airplanes are absurdly cheap. Allegiant says that it expects to pay less than $4 million per airplane to acquire it and get it prepared completely to enter service with the airline (new seats, paint, maintenance etc). In fact, in a recent investor report, Allegiant noted that MD-80 prices were falling off a cliff. The acquisition cost is probably closer to only $1 million. So if we look at buying 13 airplane to get ready for service along with 5 just to hold on to for parts, that's probably only around $57 million, less than the list price of a single new 737-800.
No wonder they're paying cash. Allegiant is really the only buyer out there, except for scrap yards. And since Allegiant doesn't run its airplanes too hard, these can probably be good for many years to come. Douglas used to build planes like tanks. Heck, Delta is still running 40+ year old DC-9s. The SAS MD-80s are mostly early to mid 1990's vintage, so they still have a long time to go.
But the purchase of those 5 MD-80s for parts is actually a particularly interesting twist to this model. The price of an MD-80 has come down so much that Allegiant can save a ton by simply buying these up and using the parts. That investor presentation had more on this.
It apparently costs about $1 million for Allegiant to overhaul an engine. Now they can buy an entire plane for that price, so they just ditch the old engines, slap some new ones on, and part out the rest of the airplane to use as spares or to sell on the open market for profit. This is one case where the parts are worth more than the whole.
It's also a great example of how Allegiant continues to keep its costs incredibly low. They're really looking at all possible angles to find ways to remain highly profitable.