This Is Your Captain Speaking: Buy Allegiant

Airlines make terrible investments -- at least, that's the conventional wisdom. There's evidence in the returns, too: Delta (NYS: DAL) is down 42% over the past five years, and Southwest (NYS: LUV) , once a reliable market-beater, is down 43% over the same period.

Not only is the airline business among the world's most capital-intensive, but air travel is heavily regulated, the industry's workforce is often unionized, mistakes are extremely costly, and airline companies' already narrow margins experience pressure from volatile fuel prices. There's room neither for management error nor, on the part of investors, a romantic view of flight and its attendant wonders. Just ask Warren Buffett. One of Berkshire Hathaway's (NYS: BRK.B) most turbulent investments was USAir.

The Oracle has spoken: Stay away from the airline industry. But there are exceptions to every rule. Flying in the face of Buffett's advice is Allegiant Travel (NAS: ALGT) , a little-known airline that has been profitable for nine straight years.

Before you run screaming for the emergency door ("AIRLINE STOCK! EJECT!"), cast your eye upon Allegiant's unique strategy, firm cost controls, and attractive cash flows. This small-cap gem is worth your consideration.

Diamond in a rough industry
Most airlines focus on business travel and major hubs like New York, Atlanta, Chicago, Charlotte, and Los Angeles. Allegiant does neither of those things. Instead, it aims to serve the leisure traveler in 64 small, regional airports like Salisbury, Md., and Minot, N.D., ferrying passengers nonstop to vacation destinations like Las Vegas, San Diego, Orlando, and Myrtle Beach.

To reduce costs, Allegiant uses older planes and only flies when those planes are booked to near-capacity. Its fares are very cheap, helping to attract customers, but the company generates significant revenue from charging for extras like checked bags and onboard snacks. This revenue center has grown significantly -- from $5.87 per passenger in 2004 to $36.36 per passenger in 2011.

The airline also keeps its marketing costs at rock bottom. According to its latest 10-K: "Our nontraditional marketing approach results in very low distribution costs. We do not sell our product through outside sales channels and, as such, avoid the fees charged by travel web sites (such as Expedia, Orbitz or Travelocity)."

It goes on to say: "We believe our percentage of website sales is among the highest in the U.S. airline industry. Further, we are 100% ticketless, which saves printing, postage, and back-office processing expenses."

Not like those other guys
It's easy to lump Allegiant in with Spirit Airlines (NAS: SAVE) , another low-cost provider that focuses on leisure destinations. However, when you compare the two airlines' route maps (see Spirit's here and Allegiant's here), you can see that they don't cross paths much. Allegiant's management isn't publicly wrangling with any terminally ill veterans, either.

Combine that good stewardship with underserved markets, a low-cost model, solid ancillary revenue, and a healthy balance sheet that includes $350 million in cash versus $144 million in debt. In 2011, the company booked revenue of $779 million, an increase of 17% over 2010. Five-year revenue compound annual growth rate looks healthy at 25%.

As the economy improves, we can reasonably expect more people to travel, and in the second half of 2012, Allegiant plans to begin offering service to Hawaii, a move that should entice even more small-city folk to climb aboard.

Should you, too, airline-phobic investor? Share your fear of flying in the comments section below.

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At the time thisarticle was published Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. She recently flew Delta and it wasn't that bad. The Motley Fool owns shares of Berkshire Hathaway.Motley Fool newsletter serviceshave recommended buying shares of Southwest Airlines and Berkshire Hathaway. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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