A Valuation Analysis

Drew Hamilton, Daniel Maki, and James Mellen – Sun Devil 6

Acc 591 - Arizona State University
February 2019
Table of Contents

Executive Summary 3

Company Background
History 4
Mission Statement 4
Management 4
Competitive Environment and Risks 5
Business Strategy 7

Reformulated Financial Statements

Reformulated Statement of Shareholder’s Equity 9

Reformulated Balance Sheet 10
Reformulated Income Statement 11
Free Cash Flow 12

Financial Statement Analysis

Profitability Analysis 13
Common Size and Trend Analysis 14

Valuation
Pro-Forma Financial Statements 15
Full Forecasting Valuation 18
Composition of Equity 19
Discounted Cash Flow 19

Reverse Engineering 20

Recommendation 20

Appendices 21

References 27

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Executive Summary

ALGT Current Stock Price $135.76

DCF Valuation $182.76

Bull (12% growth) Scenario $219.20

ReOI Valuation Expected (10% growth) Scenario $155.28

Bear (5% growth) Scenario $ 82.01

The following report presents a comprehensive examination of Allegiant Airlines Corporation

(ALGT), including the firm’s history, competitive environment, balance sheet, and full
forecasted valuation of equity utilizing both DCF and residual operating income techniques.
The analysis reveals that the airline has uniquely positioned itself in smaller markets to minimize
competition and utilizes flight scheduling to maximize load factors and minimize costs, rather
than catering to customer convenience. These approaches have reaped favorable ROCE and
RNOA values historically for the company and will help the firm weather increasing competition
in the ever-continuous landscape of airline competition and gyrating fuel costs.
Despite these innovative approaches, requirements to accelerate replacement of the jet fleet has
decreased asset turnover and growing labor and fuel costs have put pressure on the expense side.
As a result, Allegiant has seen decreased profit margins.
On the other hand, Allegiant has successfully grown a non-airfare line of business primarily
through non-air travel reservations booked through their website which has helped buoyed
revenues. They are also currently building their first hotel resort in Florida, which will provide
an additional new revenue stream starting in late 2019 and hopefully provide some stabilization
to their airline revenue fluctuations.
We performed stock valuations based on our expected sales growth base case (10%), as well as
for a bull case (12%) should the resort line prove rapidly successful, and a bear case (5%) should
the hotel business prove a poor line of expansion.
Based on the expected base case scenario, the stock would appear attractively priced currently,
with significant potential upside. However, as noted on the composition of equity box diagram,
much of the value is based on future (speculative) earnings, with only a 1/3 of share price
anchored in book value or near-term forecasts. The investment should therefore be considered
moderately risky, albeit attractively priced.

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History

Allegiant Air is an ultra-low fare US airline carrier privately founded in 1997. The Las Vegas
headquartered carrier began service with short flights between Southern California and Nevada, gradually
expanding to neighboring Western states. In 2000, the company filed for Bankruptcy protection due to
high fuel cost. However, the firm arose from Chapter 11 after restructuring and began a recovery via
continued growth in under-served markets and new-found, casino-based charter services (1). The
company went public with an IPO offering in December 2006.

By 2007, Allegiant served 14 cities and opened a new hub at Mesa-Gateway airport in Phoenix, Arizona.
At the time of this report, the carrier operates over 80 aircraft and serves over 100 cities nationwide (1).

In an effort to keep overhead costs low, Allegiant has historically steered clear of purchasing new aircraft
and instead bought used aircraft, occasionally even third or fourth-hand. It has been suggested that this
fact, along with spartan maintenance crews, have contributed to the inordinate number of aborted takeoffs
and numerous serious mechanical incidents. These issues have even attracted the intense scrutiny of the
FAA. However, since 2016, the airline has accelerated its replacement of older aircraft by converting
most of the firm’s fleet into more modern MD-80 jets, resulting in cleared claims with the FAA (1).

Mission Statement

“Our mission is to provide high-value, low-cost travel experiences to our customers. We do this by
driving continuous innovation, structuring the organization to ensure flexibility and nimbleness, a
relentless management of costs, and maintaining a crystal-clear vision of who our customers are and
what they value.”

Management

The Allegiant management team is led by Maurice Gallagher, who serves as CEO and Chairman of the
board. He is a technology and airline entrepreneur who previously co-founded WestAir and ValuJet
airlines, in addition to several non-aviation technology companies prior to coming to Allegiant. Gallagher
initially served as angel investor to the company before taking over a management role when the
company faced bankruptcy. He continues to be a major stockholder to date, owning almost 21% of the
airline as of recent filings (8). As CEO, he draws no salary and instead receives all compensation in

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Allegiant stock and equivalents. Given this large personal investment in the company, it would seem
logical to assume that his interests are likely aligned with other shareholders. Indeed, he is often
chronicled as being intensely much more focused on profitability rather than volume growth. He has been
quoted as saying “we have never aspired to be the biggest airline…just the most profitable” (8).

John Redmond was appointed President of Allegiant in 2016, after spending 30 years in the travel and
leisure industry (primarily in the casino business). He has served as a Director on Allegiant’s Board of
Directors since 2007, prior to being named president.

The remaining four Directors of the Board are all prior airline executives, with backgrounds including
United, Air Canada, and ATA. As of January 2019, company insiders had bought more than 33% greater
number of shares of Allegiant’s stock than they sold in the preceding 12-month period. This suggests an
overall favorable insider view of the stock’s value (perhaps hints at it being underpriced).

Competitive Environment and Risks

Allegiant acknowledges that the industry is highly competitive, with demand for their travel services
strongly dependent on a number of factors outside their sphere of control:

Fuel Prices: As with most airlines, fuel remains the number one operating expense and the risk of a
spike in fuel prices serves as a constant threat to Allegiant’s profitability. While many airlines attempt to
hedge this risk by tinkering in speculative futures, such hedging introduces the risks of being on the
wrong side of such plays. For example, in 2015, Southwest Airlines lost almost $600 million due to
incorrect bets on fuel hedges (8). Instead, Allegiant utilizes a third-party to assist with fuel management
and contracting. This allows Allegiant to rely on their unique ability to increase or decrease routes and
flight frequency in concert with swings in fuel pricing, a luxury the full-service carriers do not enjoy (8).
These measures reduce, but do not remove, the risk of a crisis from fuel price changes at any time.

Overcapacity and Competition: Since the airline industry is a capital intensive and fuel-dependent
business, maintaining margins is highly correlated with maintaining pricing power and minimizing empty
seats. In many metropolitan markets, the competition between full service carriers, low-cost carriers, and
charter services has become so intense that airlines often operate on razor thin margins even in times of
average fuel prices. Allegiant has somewhat mitigated these risks by choosing to operate at under-served
airports and being a well-established carrier has raised the barrier to entry for other ultra-low-cost carriers

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within most of these markets. However, there is always a risk that a full-service (mainline) carrier could
enter any one, or all, of Allegiant’s markets. These full-service airlines could even choose to operate at a
loss in a predatory attempt to drive Allegiant out of business. Yet, to date, the airline continues to enjoy
little competition from mainline carriers on the vast majority of its routes, as shown in the chart below (7).

Terrorism: Numerous studies have evaluated the impact of international terror attacks on the airline
industry, ever since the attacks of September 2001. When adjusted for changes in the overall economy
and other macroeconomic factors, it has been estimated that each reported international incident can
negatively impact air travel by 1.6% or more (9). Since this issue is completely out of the control of
Allegiant or any airline, it remains a wildcard that cannot be hedged, insured against, or predicted.

Overall Economy: In times of recession, it is well-established and logical that demand for air travel
declines (10). While all carriers feel the pinch of decreased demand, the full-service carriers continue to at
least draw business travelers whom are less able to defer travel than leisure customers. An ultra-low-cost
carrier such as Allegiant would thus be expected to experience more severe revenue losses than mainline
carriers. On the other hand, as noted previously, Allegiant has a unique ability to contract its own capacity
by flying fewer days per week, unlike full-service carriers. Thus, Allegiant can enact such measures to
avoid empty seats, even in times of economic downturn.

Government Regulation/Subsidization: Allegiant has taken advantage of federal grants to under-served

airports/markets, which has reaped substantial cost savings on operations. Discontinuation of such
programs may decrease the airlines ability to continue rapid expansion into new markets. On the other

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hand, governmental regulation results in increased overhead costs for airlines which, as in any industry, is
more easily absorbed by larger companies with massive fleets and deeper pockets than smaller firms.

Labor: As with every airline, labor is one of the largest cost centers after fuel and negotiating power of
pilot or attendant unions can weaken the ability of management to constrain operating costs. In an effort
to stay ahead of the curve on labor, Allegiant signed new collective bargaining agreements in 2016 for
pilots and in 2017 for attendants (11).

Business Strategy

Allegiant, like many ultra-low-cost carriers, focuses on smaller airports and under-served destinations,
rather than battling the larger full-service carriers in major airport markets. While the full-service carriers
jockey for the lucrative first class or full-fare business passengers, Allegiant instead targets the low-fare
chasing leisure segment, looking to profit from maximizing full flights and minimized overhead rather
than charging maximal fares.

As evidence of success in this regard, the airline was reported to have competition on only 5 out of 136
routes according to a 2009 report (2). By choosing these markets, the airline preserves some ability to
maintain pricing despite being a discount carrier. In addition, in some markets, this has even allowed the
company to take advantage of federal grants for under-utilized airports.

The carrier is also able to keep fares low by offering a bare-bones, no-frill service without meals,
entertainment, or other amenities. The firm also garners revenue by charging for checked luggage, carry-
on luggage, seat-assignments, and other services usually covered by full-service carriers.

The carrier also keeps costs down by flying a limited number of days per week and typically only one
flight per day, per route. This flight strategy has led to a 90+% full flight average which is above industry
averages (3). Additionally, in an effort to keep labor costs minimized, Allegiant operates each plane with
an average of 35 workers which is significantly lower than most carriers (which average 50 per plane).
Also, all workers return home at the end of each days, so the company is not required to pay hotel costs
for its crews like many other airlines do (3). As the following graph shows, Allegiant has successfully
leveraged these cost measures into operating margins that are near the top of all low-cost carriers,
including during times of recession and high oil prices (7).

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Finally, the carrier also adds to its top line revenue through commissions for hotel and car rental
bookings, which can be reserved on the Allegiant website at the time of booking a flight. As of a 2019
report, up to one-third of the company’s revenues came from these ancillary travel commissions.

As shown in the chart below, ancillary revenues have grown substantially relative to actual flight fare,
over the past decade (7):

Coincidentally, while Allegiant itself continues to vertically integrate and reach for new revenue streams
via commissions from non-flight travel reservations, Allegiant does not allow their flights to be sold
through third-party travel agents or consolidators. Thus, the company further keeps its own costs down by
avoiding the need pay commissions on any of its fares, unlike most airlines in the industry. Furthermore,

8
Allegiant developed and owns its own online reservation system, unlike most other airlines which
typically outsource these platforms. This results in additional cost savings on acquiring each reservation.

Lastly, in 2017, the company announced development of a $600 million resort and condominium targeted
for completion in late 2019 in an attempt to take steps towards further vertical integration into the
accommodations side of the leisure industry (4).

In review, Allegiant’s business strategy can be summarized as:

1. Minimizing overhead, via use of smaller less expensive airports, fewer but fuller flights to
maximize load factor, and minimizing required labor per plane/flight.
2. Ancillary revenue streams from charging for baggage, food, and non-fare services.
3. An additional predictable fixed revenue stream from charter operations.
4. Passive revenue streams from commissions for hotel and car reservations.
5. Future vertical integration into the hotel industry, slated to open in late 2019.

Reformulated Financial Statements

Shareholder’s Equity (See Appendix A for Reformulated Statement)

The statement of shareholder’s equity was reformulated in order to provide a clearer picture of the
comprehensive earnings and shareholder transactions of the firm to ensure that the changes in
stockholder’s equity are organized in a way that provides meaningful insight to the common shareholders.

Adjustments and Assumptions

- There were no preferred dividends, dividends payable, or NCI interests on Allegiant’s available
2016-2018 financials, so there was no beginning/ending balance reformulation adjustment needed.
- Tax rate used is the Federal statutory rate plus 3.5% for state taxes. State statutory tax rates were not
given, but effective rates were 3-4% in the 2017 10K so the midpoint was used for our analysis.
- Full year 2018 net income is known (and thus used) from Allegiant’s Q4 partial financials release.
- The statement of shareholder’s equity was not included in the Q4 partials financial release, so we
assume 2018 shareholder’s equity line items start with 2017 values and then increase/decrease by the
same amount from 2017-2018 as they did from 2016-2017 (except for net income as mentioned).
- Assumptions and calculations for loss on Exercised Options can be found in Appendix B.
- Assumptions and calculations for Stock Overhang (used in forecasting) can be found in Appendix B.

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Analysis

Total shareholder’s equity increased steadily from 2016-2018, but the year over year growth rate dropped
significantly between 2016-2017 (15.7%) and 2017-2018 (3%). This decline in equity growth is largely
the result of declining comprehensive income that is fueled by dropping net income (due to higher
expense percentage growth relative to revenues). Additionally, net outflows from transactions with
shareholders increases every year (decrease in equity) from growing share repurchases and dividend
issuances, which offsets comprehensive income increases to equity and mutes overall equity growth.

One particular item to note regarding the reformulated statement of shareholder’s equity is the inclusion
of the hidden-dirty surplus for the portion of employee stock options that are not recognized. After taking
tax benefits into account, this hidden expense totaled $4.1 million for 2016-2018 and this surplus expense
was appropriately backed out of our comprehensive income values. While this “expense” ended up being
immaterial relative to the overall equity value, it is important to continue to calculate this hidden-dirty
surplus moving forward in case option plans become more prevalent among employees or in case future
stock price increases lead to significant differences between exercise prices and market prices.

Balance Sheet (See Appendix A for Reformulated Statement)

Reformulation of the balance sheet was performed by segregating assets and liabilities into operating
versus financial categories in order to better understand which assets are truly deployed in maintain core
operations, thus being more likely to add long-term, predictable value moving forward.

Adjustments and Assumptions

- Cash and Cash Equivalents are financing assets, as they include investments and interest-bearing
instruments. Restricted cash is a financing asset too as it represents escrowed funds.
- Other current assets/liabilities are assumed to be operating assets/liabilities due to non-material
nature and vague detail in the notes to the financial statements (using 2017 10K).
- Short-term and long-term investments are financial assets. Long-term investments are in debt
securities with maturities in under 2 years.
- Nothing in the notes suggests that Accounts Payable is interest-bearing, so it is an operating liability.
- Accrued Liabilities including various operating accruals with no inclusion of dividends payable
(2017 10K), so it is presented in the reformulated statement at full value.
- No adjustments needed for redeemable preferred stock (there is none).

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- 2018 Net Income is known from the Q4 2018 partial release, so the value impacted retained earnings.
- 2018 Equity values were not part of the Q4 2018 partial release, so 2018 equity values start with
2017 values and increase/decrease by the same amount from 2017-2018 as they did from 2016-2017.
- Since full 2018 Asset and Liability values were not part of the Q4 2018 partial release, Q3 2018
ending values were used instead since they were reasonable relative to the ending 2016/2017 values.
- However, due to these differences in asset, liability, and equity calculations the new estimated 2018
Asset values were larger than 2018 Liabilities plus 2018 Equity. Thus, the Cash balance was used as
a plug for the difference (decrease of $90MM) which resulted in an ending 2018 Cash balance that
was more in line with 2016/2017 balances and resulted in all estimated statements tying correctly.

Analysis

NOA increased substantially from 2016-2018, due in large part to increases in property, plant, and
equipment. This correlates with the company’s major overhaul and replacement of outdated planes in
response to FAA investigations and public questions of safety. Additionally, Operating Liabilities rose
slightly during the period due primarily to increases in deferred taxes. Lastly, NFO almost tripled over the
same time period due to an increase in debt and reduction of long-term investments, with proceeds from
these financing activities being used for reinvestment in the business (i.e. aforementioned upgrades to the
fleet) as operating assets that should generate future value for the firm.

Income Statement (See Appendix A for Reformulated Statement)

The income statement was reformulated to better differentiate the impacts of core operations, non-core
activities, and unusual events. This was performed to allow more reliable assessment of value-forming
activities going forward and facilitate prediction of long-term earnings.

Adjustments and Assumptions

- The full year 2018 Income Statement values were given as part of a partial Q4 2018 financial release,
so the true 2018 values were incorporated into our reformulated statement and analysis.
- Tax rate used is the Federal statutory rate plus 3.5% for state taxes. State statutory tax rates were not
given, but effective rates were 3-4% in the 2017 10K so the midpoint was used for our analysis.
- From 2016-2017, “Passenger Revenue” was split out as “Scheduled service revenue” and “Air-
related charges” before being combined in 2018. They are combined in our reformulated statement.

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- Passenger revenue, Third-party products revenue, and Fixed fee contract revenue are all included in
the reformulated income statement as separate revenue line items to ensure clarity and line of sight to
the growth of each category as each of those areas represent different business strategy pillars.
- Other expense is included as an operating expense since it relates to administrative expenses
incurred to support operational growth (per notes of the 2017 10K).
- The Special charge was related to an impairment on their MD-80 series aircraft, thus it was included
as an other operating expense.
- Other revenue is included in other operating income due to immateriality and current classification.
- Other, net is included as financial expense given the immateriality and current classification.

Analysis

Operating revenue increased by 22% from 2016-2018, but operating income nonetheless dropped by 34%
over this same time period due to a 43% rise in total operating expenses. This was partly due to a spike in
fuel prices as fuel costs rose 73% from 2016-2018. Additionally, Allegiant experienced a 42% bump in
labor and benefits expenses over this period. Costs for sales and marketing also rose relatively
dramatically (tripled) during this period under review but remain a small portion of overall expenses, so
this rise was not overly impactful to their bottom-line earnings or expected long-term operating margins.

For net financial expenses, taxes dropped 66% over this period primarily due to changes in Federal
corporate statutory rates as a result of new 2018 tax legislation. Overall net financial expenses rose a
whopping 220% due to an increase in debt to expedite airplane replacement. In totality, the sum of all of
these financial effects resulted in a 20% drop in comprehensive income over the 2016-2018 interval.

Cash Flows

Free Cash flows were calculated using two methods for 2018. Allegiant had negative free cash flows of
$42M due to their large capex investments in their fleet and the Sunseeker Resort project in Florida.

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Profit & Growth Analysis, Financial Result Trends

PM / ATO

Profit margins decreased from 15.43% to 13% year-over-year, largely due to increased expenses
(primarily fuel and labor), as discussed previously. Asset turnover declined from 1.45 to 1.2, reflecting an
increase in NOA from substantial reinvestment in the business and replacement of planes.

RNOA

Return on net operating assets fell from 22.37% in 2017 to 15.97% in 2018. Breaking down the 6.4%
decrease in RNOA from 2017 to 2018 using a level two analysis, there is a -5.55% contribution from drop
in core profit margin, a -2.4% contribution from decrease in asset turnover, and a +1.5% contribution
from change in unusual items. Since asset turnover has likely leveled off and unusual items have
historically been a small portion of income, long-term RNOA will likely be dependent on preservation of
gross profit margins.

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FLEV

Financial leverage increased 52% year over year, which resulted in a positive impact on RNOA and
ROCE. However, this rise will likely ultimately result in higher net costs of borrowing and will increase
the overall risk of default or financial strain to the company.

ROCE

Return on common equity declined from 40% in 2017 to 32% in 2018. When broken down further, this
8% reduction is made up of a -6.4% drop in RNOA and -6.6% is due to change in spread. However, these
items are partially offset by a +5% addition due to increased financial leverage.

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Forecasting
Allegiant has enjoyed accelerating sales growth the past three years, comfortably exceeding the industry
expected long term CAGR of 4.7%. This is not only due to continued expansion into new markets, but
also from rapid growth of ancillary revenues (including non-fare travel reservations). Although the
success of the new resort scheduled to open late 2019 is yet uncertain, it is clear that non-fare revenues

15
will continue to serve an important role in stabilizing income during periods of heavy industry
competition or fuel price crises.

Internal forward-looking statements and external analyst consensus forecasts (12) suggest Allegiant can
grow top line sales at 10.1% annually for the next five years, and the company has successfully met or
beat analyst sales forecasts consistently over the past few years. Although Allegiant did disappoint on
bottom line earnings in September 2018 due to fuel costs and other expenses, they have continually
surprised to the upside on top line sales relative to the company’s own guidance and analyst projections.

Unfortunately, as discussed previously, the company’s expenses have grown significantly the past two
years. Escalating fuel and labor expenses and reinvestment in the fleet will continue for the next 2-3
years, which will continue to put pressure on gross and net profit margins for its core air transport
business. On the other hand, the company is rapidly growing its non-airfare revenue, which is of lower
capital intensity. Through continued growth in this segment, Allegiant may be able to offset dropping
margins in the flying segment. Long-term, the airline should be expected to see a gradual decline in sales
towards the mean of other airlines and ultimately towards GDP growth rates. Once fully mature and past
the growing phase, however, expenses should be expected to decline in lockstep leading to stabilization of
gross margins. Though this will still depend on the overall economy, fuel prices, and other external
factors. Over the next three to five years, we believe Allegiant can comfortably achieve 10% top line
revenue growth, with sales even growing by as much as 12% if their new resort business is successful.

The long-term key factors to success for Allegiant will be stabilizing fares due to competition and
keeping a maximized load factor on all planes. The airline has had considerable success preserving fares,
since it already boasts the lowest fares in most markets it serves and faces little competition from
mainline carriers in almost all markets. The load factor will need to be watched closely, however, as it has
crept slowly lower from 88.9% in 2013 to 83.7% in 2017 on scheduled (non-charter) flights (13). Fuel
prices obviously are important, but as noted previously, Allegiant has the unusual ability to contract or
expand flights in response to fuel prices and can thus adjust to spikes more nimbly than larger airlines.

Taking the above into account, we believe that gross margins will stabilize over the medium-term
horizon. Adding to this is the recent decrease in corporate tax rates, making us more comfortable with
projecting that Allegiant can comfortably maintain net profit margins in the 12-14% range the next few
years and minimal gradual decline long-term. Asset turnover has declined in the past two years as a result
of substantial investment in upgrading and modernizing the aging Allegiant fleet. As this replacement
cycle wraps up in 2020 and the company matures from an early growth story, we expect this fall in asset
turnover to level off and perhaps eventually begin to rise again thereafter.

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Valuation Analysis

Critical to any valuation analysis is the company’s weighted average cost of capital (WACC), which we
estimated by the standard accepted technique outlined below. Our calculation was based on widely
available data such as the risk-free rate, market risk premium, and published beta for Allegiant.

Pro-Forma Financial statements

Using the forecasted growth rates described above and the calculated cost of capital, we established the
following Pro-forma Statements for Allegiant. These statements include a projected bear (5% growth)
model, expected base case (10% sales growth) model, and a bull (12% sales growth) scenario.

Note that because market value of debt closely approximates book value, we can ignore financing
activities in the valuation model. Instead the focus is entirely on current book value of equity and go-
forward projections of residual operating income.

The detailed pro-forma statements for the base case scenario is included on the following page, along
with a comparison pro-forma for the three scenarios showing resulting estimated values of the firm and
share price valuations under each scenario, using standard ReOI valuation techniques and WACC as
calculated previously. Other operating income is shown as flat and positive, consistent with the ‘16-’18
results. 2019 Capex on fleet renewal programs and Sunseeker resort construction drive a large negative
free cash flow, however those expenses will moderate in 2020 as fleet renewal is largely completed and
Sunseeker construction is finished.

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Full Forecasting Valuation

Using the three scenarios above, and previously outline assumptions, we calculate valuations for the
above three growth scenarios as follows:

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Composition of Equity

Using only the base (10% growth) scenario, we generated the following equity box graph to better
demonstrate how much of projected stock value is due to book value, present value of ReOI, and CV
(terminal value), respectively. As evident below, approximately 2/3rd of the stock value is based on long
term speculative growth, while only 1/3rd of the valuation is based on current book value and near-term
(more predictable) projections.

Discounted Cash Flow Analysis

Utilizing the same WACC calculated above, we used standard DCF techniques to discount projected
future and terminal cash flows of the airline to estimate current present values of the enterprise.

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Although the current and most recent years were negative FCF, we used the same forecasting assumptions
as the ReOI model to predict future positive FCF moving forward to allow for completion of DCF
analysis (which we performed for the base case scenario). The resultant value per share projected by DCF
analysis was approximately 18% higher than the value calculated using the ReOI model.

Reverse Engineering

We performed reverse engineering to calculate an implied growth rate of Allegiant from current market
values and 2018 RNOA values. The result, detailed below, indicates that the market has priced Allegiant
as though its growth rate is only 0.58%, which is significantly lower than our forecasts.

Recommendation

As of February 9th, 2019, the stock price of ALGT last traded at $135.76. This price is substantially above
the bear case scenario modeled above, but significantly below the base expected case scenario values
projected as $155 by ReOI modeling and as $182 by DCF valuation.

Achieving the forecasted 10% growth necessary to fulfill the base case forecasts will require the company
to constrain growth of expenses and successfully offset declining base profit margins of the fares segment
by growth in non-fare ancillary revenues and the new resort line. If the latter is successful, however, the
potential bull case scenario would project share value up to $219. Based on these assumptions and current
market price, the stock appears attractive at present price levels.

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Appendix A – Reformulated Statement of Shareholder’s Equity

21
Appendix A – Reformulated Balance Sheet

22
Appendix A - Reformulated Income Statement

23
Appendix B - Loss on Exercised Options

Adjustments and Assumptions (See 2017 10K – Note 7)

- 2016/2017 Stock Option, Restricted Stock Award, and SARS exercise price/count is listed in Note 7.
- 2018 Stock Option and SARS exercise price based on weighted-average remaining at 2017 year-end.
- 2018 Restricted Stock Award grant price based on weighted-average remaining at 2017 year-end.
- 2018 Stock Option exercise count uses all remaining shares at 2017 year-end, as compensation
expense note (in Note 7 too) shows no remaining unrecognized Stock Option cost after 2017.
- 2018 Restricted Stock Award and SARS exercise count is assumed to be zero due to grant/exercise
prices that are higher than the average 2018 market price (i.e. out of the money).
- Average market prices are calculated from Yahoo Finance daily closing stock prices from 2016-2018.

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Appendix B – Option Overhang

Adjustments and Assumptions (See 2017 10K – Note 7)

- Stock Options do not have an overhang value after 2018 as the Stock Option loss calculation assumes
all outstanding options are exercised by the end of the year.
- Outstanding Restricted Stock Awards are assumed to have no exercised options in 2018 (per loss
calculation above). As a result, outstanding Restricted Stock Awards at the end of 2018 reflect the
weighted-average values at the end of 2017 with an adjustment for forfeited awards in 2018. The
weighted-average price at the end of 2017 was $153.32 and the compensation expense note states
that the weighted-average term remaining at the end of 2017 was 1.74 years. Thus, the Restricted
Stock Awards remaining at the end of 2017 were multiplied by (.74/1.74) to account for 2018
forfeitures and get an overhang option count for 2019 and forward. This count was then multiplied by
$153.32 to come up with the Restricted Stock Award overhang value, as of the end of 2018.
- Outstanding Cash SARS are assumed to have no exercised options in 2018 (per loss calculation
above). As a result, outstanding Cash SARS at the end of 2018 reflect the weighted-average values at
the end of 2017 with an adjustment for forfeited awards in 2018. The weighted-average price at the
end of 2017 was $150.74 and the Cash SARS note states that the weighted-average term remaining
for exercisable shares at the end of 2017 was 1.85 years. Thus, the Cash SARS remaining at the end
of 2017 were multiplied by (.85/1.85) to account for 2018 forfeitures and get an overhang option
count for 2019 and forward. This count was then multiplied by $150.74 to come up with the Cash
SARS overhang value, as of the end of 2018.
- The 2018 marginal tax rate used in the Tax Benefit calculation is the same as the rate used for the
reformulated income statement and statement of shareholder’s equity (24.5%) for the same reasons.
- We assumed there were no 2018 options issued under any option class as the amounts and pricing
would be highly speculative and based on no real data since the 2018 10K has not been issued.
Additionally, the stock overhang value represented approximately 3% of the overall equity value,
likely making any 2018 equity issuance value non-material to our forecasting and valuation process.

25
Appendix C - Scenario Proforma’s

26
References

1. https://en.wikipedia.org/wiki/Allegiant_Air

2. Charisse Jones (October 21, 2009). "Allegiant profits by catering to passengers in small areas". USA
Today. Archived from

the original on November 1, 2009.

3. Peter Pae (May 13, 2009). "Allegiant Air's prudent ways help it soar amid slump in travel". Los
Angeles Times, archived at

webcite.org. Archived from the original on May 18, 2009. Retrieved May 17, 2009.

4. https://airwaysmag.com/airlines/analysis-allegiant-air-enters-the-hotel-business/

5. https://csimarket.com/stocks/compet_glance.php?code=ALGT

6. https://www.nasdaq.com/symbol/algt/insider-trades

7. https://seekingalpha.com/article/4058085-allegiant-travel-ultra-low-cost-carrier-can-fly-even-higher

8. https://www.fool.com/investing/2016/07/25/southwest-airlines-gets-burned-by-fuel-hedges-agai.aspx

9. https://www.iata.org/publications/economic-briefings/European-terrorism-impact.pdf

10. https://www.oig.dot.gov/sites/default/files/Aviation%20Industry%20Performance%5E9-24-12.pdf

11. http://ir.allegiantair.com/static-files/fe794c1e-040f-48ac-8321-6a1fb76972a4

12. https://money.cnn.com/quote/forecast/forecast.html?symb=ALGT

13. http://ir.allegiantair.com/static-files/fe794c1e-040f-48ac-8321-6a1fb76972a4

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