Allegiant Travel To Be Pressured By 2017, 2018 Costs; Imperial Downgrades

Labor and fleet transition costs are likely to exert pressure on Allegiant Travel Company (NASDAQ: ALGT)'s earnings in 2017 and 2018, Imperial Capital’s Michael Derchin said in a report. He downgraded the rating on the company from Outperform to In Line, while reducing the price target from $196 to $182.

Headwinds And Challenges Ahead

“ALGT faces significant cost headwinds and operational challenges from new labor deals and transitioning out of MD-80s to an All-Airbus Fleet, which is likely to pressure earnings and margins in FY17 and FY18,” analyst Derchin wrote.

Although the company has cost initiatives in place to offset these expenses, there is lack of clarity into their timing and impact, Derchin commented.

Revenue Acceleration Expectations

During the company’s investor day on November 29, management provided details of its strategy to boost revenue in an attempt to offset the increase in costs.

These initiatives include an upgraded revenue management system, further development and enhancement of its e-commerce platform, a new credit card agreement with Bank of America Corp (NYSE: BAC) and Mastercard Inc (NYSE: MA), and higher fixed fee revenue, with pilots and aircraft in place.

The analyst said, however, that these initiatives are expected to be “significantly accretive by 2020, with a modest impact in 2017.”

The EPS estimates for FY 2017 and '18 have been reduced from $11.00 to $10.50 and from $11.25 to $11.00, respectively.

At last check, shares of Allegiant were down 2.41 percent at $168.40.

Image Credit: By Aero Icarus from Zürich, Switzerland - Allegiant Air MD-82; N415NV@LAX;10.10.2011/622np, CC BY-SA 2.0, Wikimedia Commons