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An argument for stricter cost control

Cost control is something we often consider in the context of budget cuts. But as a priority part of our business plan? Perhaps not. Still, if it can prove a successful strategy for an airline, it could be useful in a boat dealership.

Recently, I had to go to Chicago. I saw an ad for low fares on Allegiant Air and, although I found they’d been around for 16 years and fly 99 U.S. routes, I didn’t really know them. Still, after a little homework and reading that Allegiant tops the list of profitable airlines, I booked. An $84 fare couldn’t be ignored.

But I wanted to know more about Allegiant’s business model. Very low fares and very profitable — how does that work? The simple answer is strict cost control and niche marketing. The real question was: is there a takeaway for marine dealers? Here’s their story.

Keeping operating costs low is the cornerstone of their business operations. And it’s visible everywhere you look, from the comfortable but tightly packed-in seats that can’t recline, to an extra fee if you want to reserve a seat or put a bag in the overhead or have a Coke. Moreover, this Las Vegas-based carrier primarily goes to smaller regional airports where rents are cheaper and usually flies there just twice a week (my Chicago flight was to Rockford, Ill.)

Cutting costs while seeking all possible ancillary income to supplement base ticket revenue is clearly a model that can work. These tight controls reportedly help Allegiant to make $11.22 per passenger each way, while the average for other airlines is 37 cents. Allegiant earned a net profit of $78 million on revenue of $909 million. That 8.6 percent profit margin was the highest of any U.S. airline.

Allegiant CEO Maurice Gallagher once explained things this way: "We collect $110 from you at the end of your trip. If I tried to charge you $110 up front, you wouldn't pay it. But if I sell you a $75 ticket and you self-select the rest, you will.”

Other interesting keys to the company’s impact on costs come from purchasing used MD-80 jets that they buy and refurbish for around $4 million. These planes burn more fuel than newer planes, which is why other carriers are dumping them, but Allegiant is buying them for one-tenth the cost of a new Boeing 737. That leads to other notable benefits.

Specifically, the low cost of acquisition enables Allegiant to profitably fly its planes only seven hours per day versus 13 hours or more for other carriers. In turn, this keeps labor costs lower. For example, Allegiant operates with 35 full-time workers per plane compared to more than 50 at other carriers. Moreover, flight crews can be scheduled to always finish back at their home base, thus avoiding the costly need for hotel rooms.

Overall, tight cost controls — call them frugal business practices — that help keep prices low to the customer can be a success formula for the business. For Allegiant, its strategies have amazingly resulted in a profit in every quarter for more than nine years now, in spite of the Great Recession, fuel-price fluctuations and other airline industry challenges.

There are takeaways worth contemplating at every dealership.



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