Allegiant Air expanding into resort business
by Jason Garcia
Updated 4 yearss ago
Henry Flagler once built a railroad to bring wealthy travelers to Florida and lavish hotels to house them once he got them here. More than a century later, discount airline Allegiant is dusting off the Flagler playbook.
Allegiant, which built its business shuttling tourists between small cities and secondary airports, is now building a $470-million resort in southwest Florida that it expects to fill with those flyers. Called Sunseeker, the three-tower, nine-story hotel will have roughly 500 standard rooms and 180 extended- stay suites charging an average rate of more than $200 a night. The hotel, which Allegiant expects to position as an “upper upscale” property similar to a Hilton, will include meeting and conference space, a dozen or more bars and restaurants, a scenic boardwalk and a marina, along with access to a private golf course a short shuttle ride away.
Rising on a narrow slice of land where the Peace River empties into the Gulf of Mexico, the Sunseeker hotel will be the tallest building in Charlotte County when it opens in 2020 — and the largest resort in a part of the state still best known as the place Hurricane Charley came ashore in 2004.
Sunseeker isn’t a one-off. Allegiant executives envision it as a beachhead in a cross-country network of Allegiant-owned or managed hotels, golf courses and Dave & Busters-style family entertainment centers, all fed with customers from their core airline business.
Investors hate it. Since Allegiant announced Sunseeker nearly two years ago, growth in its share price has lagged competitors like Miramar-based discounter Spirit Airlines and the broader airline industry as a whole, even though Allegiant’s core airline business has performed well. Daniel McKenzie, an analyst at Buckingham Research Group, estimates Allegiant’s share price should be about $10 higher than it is today, calling the company “a good, albeit controversial story.”
Conference calls with Wall Street have at times become unusually testy. “I’m sure you guys are aware that a lot of people don’t like this idea,” said Joe DeNardi, an analyst at Stifel Nicolaus, during a Sunseeker presentation that Allegiant management staged last fall in hopes of soothing skeptics. “I’m wondering if you could articulate what you think everybody is missing?”
“I understand their strategy, but I don’t agree with it,” says Helane Becker, a managing director and senior research analyst covering airlines at investment-management firm Cowen. “If you’re an investor and you wish to invest in a low-cost airline, you would theoretically invest in Spirit or Allegiant. But perhaps now you would choose not to invest in Allegiant because it’s a hybrid airline-hotel company. I feel like they could have gotten what they wanted working with a hotel brand or by doing some kind of a joint venture.”
Allegiant leaders are defiant, criticizing what they’ve characterized as tunnel vision and short-term thinking on Wall Street. The company has spent $50 million buying and clearing land and expects to spend another $420 million to complete Sunseeker. It also says it is prepared to lose as much as $17 million this year from its non-airline operations.
Executives at Las Vegas-based Allegiant may not be gambling the future of the company on Sunseeker. But they may very well be gambling their future at the company on the project.
“It’s critical for us to get this project right,” says Micah Richins, whom Allegiant hired last year from MGM Resorts International to run its new Sunseeker Resorts division. “There’s no question we would like to do more. But putting this property in the ground, bringing it up, executing on it, showing the margins that we think we we’re able to obtain — those are the things that will be the drivers of anything that we do in the future. It gives us credibility.”
Beating the odds
Allegiant has a history of hitting on unlikely bets. The airline’s core business model is based on flying to small and medium-size cities that big carriers ignored. “You didn’t go to Sioux Falls with a 160-seat airplane back when we did this stuff,” says Chairman and CEO Maurice Gallagher Jr., a member of the investment group that founded ValuJet Airlines. That discount airline became infamous after one of its planes crashed into the Everglades in 1996. Gallagher later became a major creditor of Allegiant and gained control of the company after it declared bankruptcy in 2000. Allegiant went public in 2006.
Today, Allegiant carries nearly 14 million passengers a year — more than 8 million of them to and from Florida — on a fleet of more than 80 jets flying nearly 450 routes. By passenger count, it’s become the ninth-biggest airline in the U.S., and it’s still growing.
Yet Allegiant still only faces mainline competition on 25% of its routes. Allegiant flies into seven airports in Florida and is the only regularly scheduled domestic carrier at three: Orlando-Sanford, St. Pete-Clearwater and — most important for Sunseeker — Punta Gorda, whose airport is just 10 minutes from the Sunseeker site.
More than planes
Executives often note that they chose to name their company Allegiant Travel Company — rather than, say, Allegiant Airlines — as a sign that they’ve always intended to do more than fly planes. But the plan for Sunseeker didn’t really begin taking shape until the fall of 2016, when the company brought on John Redmond as president. The former president and CEO at MGM Grand Resorts, who had been serving on Allegiant’s board for eight years, had never been to Florida before. He then spent a month in the state, driving up and down the Gulf coast scouting potential locations.
Executives say they chose to plant their flag in Port Charlotte for several reasons. For one, it’s in a relative backwater where most existing hotels are older and smaller — echoing the airline’s strategy of targeting smaller markets with little competition and lower costs. More important is the proximity to Punta Gorda Airport, where Allegiant flies more than 1.5 million passengers each year. Sunseeker also is just a 90-minute drive from St. Pete-Clearwater International Airport, where Allegiant flies another 2 million passengers a year. In fact, Allegiant says it could fill Sunseeker just by capturing one out of every 15 inbound travelers it brings into Punta Gorda and St. Pete.
Allegiant says it is emulating the strategy of Florida’s most successful tourist business. “All of the airlines fly millions of people in and out of Orlando, and Disney sits there on the end and collects 90% of the leisure customers’ spend, and the airlines get 10%,” Redmond says. “We’ve been looking at that for some time and saying, ‘Well, that makes no sense.’ We want to have the other 90% of that.
“We’re now the Disney of Southwest Florida,” he adds.
Disney, of course, has added hotels to a collection of theme parks that draw millions of visitors each year. And even Disney has run into trouble trying to build beyond its berm. More than a decade ago, the company unveiled an ambitious plan to build standalone hotels, niche parks and retail centers in outposts far beyond its signature theme-park resorts in Florida and California. But the company abandoned that plan after building an $850-million hotel and timeshare in Hawaii that didn’t perform as well as Disney executives expected.
Investors are also troubled by Allegiant’s decision to redraw its Sunseeker plans on the fly. The company initially pitched the resort primarily as a real-estate play that wouldn’t involve as much of its own capital. The original vision called for a much smaller hotel, with fewer than 300 rooms, and more than 800 condos.
Executives say that as they continued to dig more deeply into the plans, the math was so compelling that it made more sense to own the project outright and run it as a pure hotel. Another factor: The federal tax cuts passed in late 2017, which Allegiant says will save the company $500 million over the next five years.
“You’re looking at over $500 million in cash flow relating to tax benefits that weren’t present when we announced this resort a year ago,” Redmond says. “All of a sudden, the IRS, the government, is helping us finance this project interest-free.”
Allegiant executives say they have an ace up their sleeve: The airline. The company says 85% of its customers purchase their plane tickets before anything else when planning their vacations. And because Allegiant does not make its flights available on third-party websites like Expedia or Priceline, Allegiant itself is the first point-of-sale for those customers — which should be an edge when it comes time to market its own hotel.
Allegiant also says it can offer convention members or other large groups that book events at Sunseeker chartered air service to Punta Gorda. It says it can waive the charge for checking golf bags for passengers who book a stay at its resort. And the hotel and airline can protect each other should another airline start flying into Punta Gorda.
“You could never compete against us down there,” Redmond says. “When that opens up, there’s no fare wars because no one else has the ability to do that. Anyone who stays at the resort, we can offer airfare for free, and it’s game over because I get the other 90% of their spend to give up the 10%. Everyone else, they don’t have anything else to pull that lever.”
If Sunseeker is a hit, Allegiant says it will transform the entire company. The company wants to own only a handful of hotels itself but hopes to operate an entire portfolio of Allegiant-branded hotels whose owners would hire the company to run them via management contracts.
While many investors remain skeptical, others are buying in. In March, TPG, a private-equity firm, agreed to invest an initial $175 million in Sunseeker. The deal could grow to $1 billion if Allegiant’s hotel brand grows beyond that first resort.
Allegiant’s management doesn’t lack confidence.
“When you look at it like Netflix, when they announced they’re going to start streaming versus sending a disk in the mail, their stock went down 80%. Everyone said this is the dumbest thing we’ve ever heard of,” Redmond says. “So you could point to these examples all over — people who don’t get the story at the outset.”
Select from the following options:
* offer valid for new subscribers only