Business Strategy

Profiting in an Unprofitable Industry

Written by James Garvin for Gaebler Ventures

Allegiant Air is a story of an airline that did the impossible by defying the laws and rules of the airline industry and became the most profitable airline in the United States. This article describes how they did it and how you can learn from their processes and practices to profit from the unthinkable.

Allegiant Airlines flipped the traditional airline business model upside down, and as a result reaped enormous benefits while other airlines struggled to stay out of bankruptcy.

Profiting In An Unprofitable Industry

Allegiant is focused on serving rural areas that are not served by larger airports or airlines, such as Fort Collins, Colorado, Rochester, Minnesota, and Billings, Montana. They focused on providing customers in these towns, what they wanted; direct flights to leisurely locations like Las Vegas, Florida, Arizona, and Southern California. Allegiant Air only has competition on 3 of the 132 routes that they fly across the United States, giving Allegiant a near monopoly in most markets it serves, yet its ticket prices are among the lowest in the country.

Maurice Gallagher, the CEO of Allegiant Air presented to a class of MBA students on how he built Allegiant Airlines from an airline flying to only 3 cities into a $500 million company; flying into 71 cities, with only 43 airplanes. The successful story of Allegiant can be likened in many instances to that of Wal-Mart. They both focused on providing customers with the best value possible by having he lowest cost structure in the industry (see Michael Porter's Value Chain). Both companies served small, rural towns that major competitors had strayed away from, and both companies built large successful and sustainable organizations.

As a result of their dedicated focus on serving unmet markets in the airline industry, Allegiant has launched itself into the top spot in most of the airline profitability measures. Typically profits drive competition, but because Allegiant's business model and cost structure are nearly the opposite of every other major airline, competitors simply cannot compete directly with Allegiant Air, leaving Allegiant as the sole airline serving over 120 routes.

Some key takeaways that Mr. Gallagher presented for other entrepreneurs are:

1.) Start Cheap - Do not focus on fund raising. When you start cheap, you learn quickly how to turn a profit and live with out things that are not critical to your business.

2.) Go to where the defense is not - Like an offensive player in basketball who needs to stay away from defensive players in order to get the ball, the same rule applies in business. Find markets or opportunities that the competition is not and cannot get too.

3.) Give the Customers what they want: Allegiant customers wanted affordable, direct service to leisurely locations. They did not care about the type of airplane they flew on, or the type of food served on the plane, so Allegiant built its no frills airline fleet using airplanes that cost 1/10 of what other airlines spend on airplanes all in the name of providing customers with the best value possible.

When evaluating your business and the markets you serve, think of how you can find a niche that current competitors do not and cannot serve. Allegiant is an airline that many thought couldn't survive, because its business model was so radical compared to the traditional airline. However, competition is bad for business and if you can enter a market with little or no competition and provide that market what they want in a profitable manner, you stand a much greater probability of successfully creating a profitable enterprise with a durable competitive advantage rather than entering a market where it is easy for competitors to enter. Building a monopoly, even in small markets, is a path to long term sustainable profits.

James Garvin began his education studying biotechnology. In recent years he has turned his interest in technology to helping two internet startup companies. The first business was an online personal financial network and the second was an e-marketing platform created to help entrepreneurs demo their web sites. Currently a student at University of California Davis, James is spending his summer incubating two new online businesses and writing about his entrepreneur experiences.

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