Allegiant Travel Company
Q1 2017 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen. And thank you for standing by. Welcome to the Allegiant Travel Company First Quarter 2017 Earnings Conference. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question and answer session later and the instructions will be given at that time. And as a reminder, this conference is being recorder. Now, it's my pleasure to turn the call to Mr. Chris Allen, Investor Relations.
- Christopher Allen:
- Thank you. Welcome to Allegiant Travel Company's first quarter 2017 earnings call. On the call with me today are Maury Gallagher, company's Chairman and Chief Executive Officer; John Redmond, the company's President; Scott Sheldon, our Chief Financial Officer; Jude Bricker, our company's Chief Operating Officer; Ponder Harrison, the company's Chief Marketing Officer; and Lukas Johnson, our SVP Commercial and the others. Well, Lukas and Scott will have some brief commentary and then immediately we'll move into questions. Before we begin, I must remind listeners that the company's comments today will contain forward-looking statements and they are only predictions and involve risks and uncertainties. Forward-looking statements today may include, among others, references to future performance and any other comments of our strategic plan. There are many risk factors that could prevent us from achieving our goals and causing the underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed or implied by our forward-looking statements. These risk factors and others are more fully disclosed and our filings are linked with the Securities and Exchange Commission. Any forward-looking statements are based on information available to us today. And we are under no obligation to update publicly any forward-looking statements whether as a result of future events, new information or otherwise. The company cautions users of this presentation not to place undue reliance on forward-looking statements, which may be based on assumptions and events that do not materialize. This earnings release, as well as the rebroadcast of the call, are available on the company's Investor Relations' site at ir.allegiantair.com. With that, I'd like to turn it over to Lukas.
- Lukas Johnson:
- Thanks, Chris. First some commentary on how the first quarter finished up. Heading into the New Year, we are seeing significant booking strength that we are projecting to continued to last period. We turn positive year-over-year yield in both February and March and before our price sensitive leisure customers raising fares various typically how they lag on low factors and they adjust to a new set up reference prices for the market. And this shows up in our lower low tax for the first quarter. Our forward looking trends look better on the second quarter for both low factor and a continuation of the positive yield environment. For the second quarter, we expect TRASM to be up between 1.5% and a 3.5% year-over-year with a consistent over the past year and identifying second quarter 2017 as the inflection point for our unit revenues to turn positive and showing sequential growth throughout that last 12 months. We hope to see continuous strength throughout the rest of 2017. And going forward, one other note, we will continue to guide quarterly TRASM forecast, I will no longer be reporting monthly TRASM for models very different and the day we changes how all the ships tend to give very choppy monthly TRASM numbers that don’t really provide a great sense of underlying demand. And with that, I'll turn it over to Scott.
- Scott Sheldon:
- Thanks Lukas and welcome to the call everyone. I want to take a few minutes to provide some color on our full-year 2017 TRASM next year reguide, in addition to read out some of the costings we will see as we press through our fleet transition. Non-true cost pressure particularly in 2017 can be summarized into five main areas. Increased pilot expenses related to our first contract signed in August of last year, the elimination of our credit card surcharge in January and how these charges roll through the P&L. essential changes to our fleet retirement schedule changes in system capacity as it relates to those fleet decisions and noncash.com granted for retention purposes. Non fuel cost during the quarter increased 11.6% year-over-year which is within the previously guided range of up 10 to 12. Non fuel cost excluding the impact of our pilot agreements, incremental noncash.com in the elimination of our credit card surcharge. Our non-fuel cost would have increased just 1.1% as compared to the first quarter in 2016. We expect to give you some additional color in the earnings release for Q1, Q2 and full year as well. A couple of quick comments on the pilot cost and the elimination of our credit card surcharge since I have the largest impact on our year-over-year cost structure. On a full year basis we expect pilot contract headwinds related to increase in rates benefits and reduced productivity of nearly $55 million. That makes up approximately 7% of our new reguided range of up nine to 12. Year-over-year comps become easier in the back half of the year, though we will continue to be challenged by historically low price pilot productivity as defined by brought to pay until mid-to-late 2018. As many of you may recall, we made a decision in late January of this year to eliminate our credit card surcharge. The surcharge was designed to be as close to a 100% offset on interchange cost and fees related to credit card transactions as possible. The fee or charge was then offset to credit card expenses in the sales and marketing line item on the P&L. with the elimination of the charge, the P&L will no reflect growth credit card charges which correlates to as much as 23 million to 26 million in increased cost year-over-year or nearly 3 percentage points of our newly guided full-year CASM ex range. From an operating margin perspective, removal of the credit card surcharge is neutral to slightly positive due to the change in credit debt the transactions well size and take rate. In addition, the new revenue stand is going into second 2018 will not allow us to account for this type of presentation. And with that we'll open it up for questions.
- Operator:
- Thank you. [Operator Instructions] And our first question is from the line of Savanthi Syth with Raymond James. Your line is now open.
- Savanthi Syth:
- Hey, good afternoon guys. A quick question on the fleet guide, just with the MD80 retirement, I was wondering if there is any change to kind of this fair for the summary and also any color and there were further along the year on the timing of the new A320 is coming onto the fleet in 2017?
- Jude Bricker:
- Sorry, there's really no change. We're going to redo the schedule slightly so that we can continue to have the same sparing allocation and the MD80 retirement are said in the sense that they can't be extended from where we are today that we may from time-to-time retire an MD80 earlier in the event that it has suffers from a long out of service time that doesn't just fire repair or for some other reason. The induction schedule is the same as it was as we reported last time. So, by the end of the year we're going to have 51 in service A320 series aircraft and we remain committed to another 16 purchases and 12 aircraft that we have on lease now that will be redelivered from lease in the summer of 2018 and beyond for total commit to three to 79. Now, we continue to work on finding additional aircraft but today although we have 85 airplanes in service and in the summertime that number be a little bit higher. We're scheduling about 76 or so of those. So, we're kind of already in embedded in the plan no growth scenario we'd like to grow obviously. So, we're going to go and park a couple more airplanes but we already have the point is we already have sufficient A320s in order to execute on the MD80 and 757 retirement plan.
- Savanthi Syth:
- Got it. Thanks, Jude. And then if, I'm not sure if Ponder Harrison is on the call today but just wondering with Ponder's rejoining, if there's any, is that related to any strategic initiatives on the fleet side or just so any update there?
- Maurice Gallagher:
- Hi Savanthi, we're always looking to continue to grow and some many revenues and I don’t know that there are any specific new initiatives right now, but stay tuned.
- Savanthi Syth:
- Alright, thank you.
- Operator:
- Thank you. And our next question comes from the line of Joseph DeNardi with Stifel. Your line is now open.
- Joseph DeNardi:
- Yes, thank you. Scott, I appreciate the color on the CASM guidance. Can you just walk us from the prior guidance I guess to the new guidance, what change from last quarter?
- Scott Sheldon:
- Yes. So, initial was up five to nine that was on the January call. We were just running test to see any impact whether we have the surcharge or not, despite the fact that we eliminated it. We still would have been in the range, that'll be on the very high end of the range. So, you would have been touching up towards the high eight. Things that have happened subsequent to that, we polled one in the '18, that was going to be retired in the second quarter of '18, which was is not going to be retired in the second quarter of '17. We put forward a tail from the third quarter this year to the second quarter. So, there's going to be some losses there, in addition we took a slightly more conservative outlook on ASM production for the full-year '17. So, you look at all three of those at the '18 in, it's we're going to bust the top end of the range, but that's really the story, we try to be as transparent as we can on the cost side. But there's really no other surprise. I think maybe, the last thing maybe was is just the productivity matrix are down even more than we anticipated. I think I mentioned that in my prepared remarks, we're kind of the low 50% and that's up in the chart what we ever seen here to lead in.
- Joseph DeNardi:
- Okay, that's okay.
- Maurice Gallagher:
- Joe, its Maury. Let me just put an overview on this that take the word I used was lumpy. There's going to be what we're trying to give you as much clarity and specifics as possible and activities happen during the quarter and we see ways to do things better as Jude mentioned here for instance early retirement of airplanes or whatever. It's a one-time event that it's going to be puts and takes as we go through. And so, I ideally we move through this as quickly as we can and we come out the other side, we're still incredibly bullish that single fleet, all the things that you've heard us talk about before are still on track. But there will be puts and takes while we're doing this.
- Joseph DeNardi:
- Okay, that's helpful. And then Maury, I think there's been some discussion out there that maybe you guys are looking at getting into the hotel business and get an acquiring a property and not sure this is a form you want to use to discuss that. But if it is, can you just kind of walk through what you see is the strategy there, why you need a property and then what the size of an investment you are looking at?
- Maurice Gallagher:
- You're right, this isn’t the right form for that. We've been looking at alternatives in one of the things that we want to do is enhance our ability to get further revenues out of our existing customer base as we can do that. We've already done a great deal of hotel third party work. So, we're looking to enhance that jobs on the phone too we can have come comments as well. But its we're bullish on opportunities that we might be able to kind of tag on and make it more of the same if. More, John?
- John Redmond:
- Yes. I think on that point, one of the things we've been pretty consistent about saying is we want to wait until we've had the enough time to fully explore all the various leisure option that we have and that we've identified. It's going to take some time to determine exactly what course of action to take and it would be a mistake to try to articulate something until all of our ideas have been fully flushed out and embedded. So, I think I've been telling people that we hoped to be in a position to do that by end of year and at that point in time, we should be able to properly articulate what that strategy is and why we're going to embark on that strategy and what the related impacts would be. So, that's a timeframe that as of today we still feel comfortable with by year-end.
- Joseph DeNardi:
- Thank you, very much.
- Maurice Gallagher:
- Thanks, Joe.
- Operator:
- Thank you. And our next question comes from the line of Rajeev Lalwani with Morgan Stanley. Your line is now open.
- Rajeev Lalwani:
- Thanks for the time. I'm just coming back to I guess some of the comments on 2Q RASM. The industry is obviously seeing some real strength here in 2Q. Is that what's driving the strength in your number and how does that tie with them, I guess all those folks are on that for now?
- Scott Sheldon:
- Yes. I think the second quarter certainly looks stronger than the first quarter from a booking standpoint and obviously you get the benefits of the Spring break Easter shift, moving from March to Easter which we put at a 0.5 of TRASM method. But even if you took out kind of adjuste4 for the mutual underlying demand, things do look more positive. I think the big Telco sign or what we're waiting to see is how the peak in the off peak period performance throughout 2016 and in the first quarter, the peak periods have held up well. How with the up peak periods of have kind of suffered in. So far the center encouraging the second quarter but it's also so quite a bit of ways to go on in terms of the booking curve.
- Rajeev Lalwani:
- Okay. And the other question I was going to ask was just as you look at to the third quarter, your capacity growth is starting to decelerate pretty meaningfully. Can you talk about where you're going to be prioritizing that growth and what means as far as developing markets and so on?
- Lukas Johnson:
- Yes, sure. So, unfortunately it's not going to be concentrated into our kind of peak period, peak day's schedule. So, obviously this the big go for us is to improve operations over last summer, summer 2016. So, our actual peak day growth is going to be flat year-over-year. We're not going to be increasing departures on our Thursday, Friday, Sunday, Monday. Most of the growth is going to be in the off peaks in our third quarter about 20% growth on the Tuesday, Wednesday, Saturday since that on the peak day. So, that as well as the back half of the quarter, for the third quarter is going to be slanted towards end of August September which is a naturally off peak period. That's where the ASM growth going. So, unfortunately from short term CASM is going to be flat near schedules and facing a little bit headwinds on that same point that hopefully we'll be able to recapture once we took it to more to retransition.
- Rajeev Lalwani:
- Okay. Thanks, Lukas.
- Operator:
- Thank you. And our next question comes from the line of Helane Becker with Cowen and Company. Your line is now open.
- Helane Becker:
- Thanks, operator. Hi guys, thanks for the time. Just on the new roots that you guys have opened to over the last year. Could you just talk a little bit about how they're developing and what you see for that going forward? I think I just heard you say that in your, there's just one new root that you're opening now, is that going to be the for last of them or are there going to be more?
- Lukas Johnson:
- For this, Helane, for this summer we're going to just having one new city, that's correct. And after the summer we'll probably have a couple of more, but those won't be launching until the fourth quarter. So, for the second and third quarter this is the new city development that we have.
- Helane Becker:
- Okay. But then I think you said that something like 13% or 16% of your roots were still under development and I'm just kind of wondering where you are in the development stage for that. Are those contributing to the bottom line or you expecting that to accelerate and so on?
- Lukas Johnson:
- Sure. So, the new lots are developing kind of as expected. A lot of the summer out we launch this summer seasonal markets that are performing well, we're excited about that. As we go into the fourth quarter, we'll have again the things that we launched, the markets we launched over the last 12 months would be more maturing but at that point we'll finally be caught up on a lot of the same transitions that we have been launching new markets. So, I don’t expect that 15%, 12% to 15% new market development number to change materially throughout the year which be cycling in new markets.
- Helane Becker:
- Okay, alright. Thank you, very much.
- Operator:
- Thank you. And our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Please go ahead.
- Maurice Gallagher:
- Go on, Duane.
- Operator:
- Duane, please take your mute button.
- Maurice Gallagher:
- Put a new one.
- Operator:
- Alright. And our next question is from the line of Hunter Keay with Wolfe Research. Your line is now open.
- Hunter Keay:
- Hi, guys. How are you doing? So, you've given so many CASM pressure here. Do you feel like you can still hit the CASM ex target if just under $0.06 by 2020 that you laid out at the Analyst day till they come in cost or that kind of that?
- Scott Sheldon:
- Hi Hunter, this is Scott. I think you have to normalize it for the surcharge offset that was not contemplated during our Investor Day. But al the other initiatives are intact, so that would be the only thing that you'd have to modify for.
- Hunter Keay:
- I got you, okay. And then given some of the issues that Airbus has been having with the 320 deal production. I know you said I think there's no change of fleet, but has there been any impact of 320ceo delivery schedule you guys have and maybe about polling around in Skyline a little bit. Is some on track for deliveries as you expected them?
- Maurice Gallagher:
- Yes, no impact on it.
- Hunter Keay:
- Okay. And then just on a modelling question. Do you still thing 60 revenue came really strong in one year, you should be thinking about like $40 million this year or can you give a better sense?
- Maurice Gallagher:
- 60.
- Lukas Johnson:
- The only thing that would change that probably is really on the ad hoc side as we should run frames with the MD80 retirements. Right now it's on track for that in move very bullish on that but as retirement change and if prior there's going to be flying settle service though. Certainly if we have the same amount of frame to no change of plan, then I'd be hoping to get that number.
- Hunter Keay:
- Well, thank you.
- Operator:
- Thank you. And our next question comes from the line of Brandon Oglenski with Barclays. Your line is now open.
- Brandon Oglenski:
- Hey, good afternoon everyone and thanks for getting us on the call here. I guess I want to follow-up in Hunter's question. It's first one on cost. It just seems like such a big move to your change in guidance this year. So, should we be thinking that we consider to improve the benefits a little bit faster than as we head into 2018? Because I guess when I heard the response, it was only a change or maybe two aircraft schedules that you guys were talking about 0.4 to earlier retirements. So, can you just hash out the significant in place we're seeing this year and maybe what's potential once we get beyond this?
- Lukas Johnson:
- I think you mentioned that the retirement schedule is pretty much in tact with the exception with the details. And those are anticipated Ely fine where the end user are going to be found through mid-2019. So, unless there is significant movement and those being brought forward the timing of a lot of the efficient of the single free type really won't be realized kind of at a minimum until late '18 and into '19. So, those will be the biggest drivers, obviously if you could, if you are going to be retire these at a faster pace, but that's not the expectation at this point.
- Maurice Gallagher:
- I think it's important to mention that this is probably the peak of our inefficiency which is to say that we have right now the most pilots in training and we're dealing with more split bases than we will anytime in the future. So, kind of between now and through August as we work with the existing fleet to the summer peak will be the peak of our inefficiencies. Then we try to build those efficiencies back into the business pretty much nearly from here on until 2020 for the investor deck. Most of the efficiencies need to come through crew simplification based on getting an aircraft amortization base-by-base. So, by the end of this year, we're going to have complete basis of all Airbus operation and all the two of our bases in Sanford and I guess and that's going to drive significant efficiencies in the short term and then we'll have to execute better as we start to focus on efficiencies beyond the summer.
- Brandon Oglenski:
- Okay. I appreciate that and on the revenue side Lukas, I think I heard you say was either in response to your question in the quick prepared remarks about how you were definitely seeing the improvement versus 1Q in revenue and holiday shift staff. Obviously favorable here right now. But I think you also commented that off peak is still a little bit challenging or the booking curve just isn’t made to materialize as quickly as possible. Can you just speak a little bit more to that?
- Lukas Johnson:
- Yes, sure. So, kind of what I'd said was 2016 and even into the first quarter here, the off peak periods and not necessarily the days if we but we actual weeks in the schedule. Those periods had then softer than the big periods, of all the factors and so. What we see positive for the second quarter, one thing they weren’t be washing and I think the industries going to be washing is how do there was off peak seasons in weeks do going forward. So, again forward bookings were positive but second quarter has more shown the periods and the do to the off peak periods. So, that maybe one thing but the third quarter once you start hitting into the September, end of August, October periods, you get to some pretty dead periods. And that'll be interesting to see how pressing is there. Again, it's we've got 5% bookings for the September period, and things with there but you have a 5% sample. So, we're not going to make any color from that.
- Brandon Oglenski:
- Okay. I appreciate it, thank you.
- Operator:
- Thank you. And our next question comes from the line of Mike Linenberg with Deutsche Bank. Please go ahead.
- Michael Linenberg:
- Oh yes, hey. I just want to go back to on the cost side, Maury and Scott, I think Maury you talked about this being a year puts and takes. What's the likelihood that between now and year-end we get early retirement of a few more MD80s and so obviously you incurred the cost and then get impacted as a result of a choose day at sense. I mean, is there the risk that the CASM guidance as it stands, those are pretty high probably that we could see that in a raised as we move to the year. What's the risk there, can you talk about that?
- Scott Sheldon:
- Hi Michael, this is Scott. No, the new guidance we think has ample headroom. Obviously if you start pulling out a lot of shows then that's another issue. But the retirement schedule for the 75s that solidifies I think some was mentioning if you look at the ASM growth on the back half of the year, it's pretty restricted. So, maybe the opportunity even fly more which is obviously help cost on the downside which is good. But in general, our anticipation is not the guide now and then have to reguide. We think we have enough kind of we have widened up guard rails in order to protect the back half of the year.
- Maurice Gallagher:
- Michael, you're putting together three variables that'll be somewhat independent. New appointing, delivered, how they come on. Pilot training and how they progresses and last but not least MD80s activities. And our mode on the MD80 is minimal expense, minimal investment at this point. Live off the land if you will with them and so far that looks very good relatively speaking. But occasionally an airplane comes up and it just doesn't make sense to put a big number into it to we store it if you will if that happens. So, we don’t expect a lot of that but in past days we would put that number in, we don’t do that now.
- Michael Linenberg:
- Okay.
- Maurice Gallagher:
- It's a juggling act with those three variables coming together and we put a lot of time and effort having it and it will lay out and it's a one-time event, back to the data as it present itself.
- Michael Linenberg:
- Okay, great. Now, thanks Maury. And then just one quick one for Lukas. Lukas, if you kind of go back to January maybe earlier than the year and I realize it's looking maybe a bit far out for the June quarter. But if you think about where you say the TRASM could be versus where you're guiding to for the June quarter as of now. Would you say that your view is somewhat tampered because of the response and some of the optics lying or is it basically and maybe in line where you thought it would be back in January, February, I mean I realize sort of asking a difficult question for you to kind of go back and think about how you're seeing your shape up for progression. Any thoughts or color?
- Lukas Johnson:
- Second quarter has for the last year we've really been identifying the second quarter 2017 is the moment that we doubt we're going to break positive and I think that's held up. I'd say the surprise happened as we were going into the last earnings call was we had a lot of pent up the band from the election and the other situation. We got very strong bookings, so we thought that would continue in though the uptake period. The first quarter, it kind of flattened out, it wasn’t bad but it wasn’t good. It didn’t really accelerate to where we thought it would be. So, the first quarter was just pointing from that standpoint. But the second quarter or the last three months has been pretty consistent. Yes, I think this is right around the midpoint that we would have expected three months ago. From that standpoint I think we're all encouraged that things are going well. And like you said it takes a while for the reference pricing to kind of hit for a consumer. If you are a price sense and leisure customer and you've been seeing kind of two years spiral of negative favors and kind of sale for throughout the industry and also you got their increases of 5% or 10%. It's going to take you a while till you recognize that hey this is a fair I mean because this is the new normal. And let's say we knew consciously we're going to suffer a little bit load through the first quarter as we went to that. But the most important thing for us is look you got to get out of the cycle of showing increasingly negative numbers to the consumer and the second quarter looks positive from that same point, even with positive yields and positive fair increases.
- Michael Linenberg:
- Right. Thank you for that.
- Lukas Johnson:
- Thanks.
- Operator:
- Thank you. And our next question comes from the line of Dan McKenzie with Buckingham Research. Your line is now open.
- Dan McKenzie:
- Okay, good afternoon. Thanks, guys. If I can go back to the fleet, and I apologize I may have missed this, but you put forward a couple of retirements. First, what drove that decision and then I believe he had planned in the year with 85 aircraft as of the first quarter but as of today's release I think the plan is to now end with 89 so four more aircraft despite the early retirements yet somewhat slower growth that I just secondly do I have that right and if so what's driving the reduced productivity exactly?
- Jude Bricker:
- So, from the productivity standpoint I can talk about that and Maurice just after. So the fourth quarter we have a couple of underutilized shelf that's really a mismatch of both metal and the crew where you have them. So as Maurice said we are not going to invest the time into [MDAT] frames if they need them at this point and on the flip side we are not going to trade up MDAT crews if we can only get one to two months productivity before that to go through training again into the beginning of 2018 we will take a large slug of airbus equipment. So it's really trying to match up what's the best multiyear or even one year strategy for crew productivity and unfortunately you get into the end of the third and the fourth quarter when retiring MDs you have got this kind of severe mismatch up of some underutilized MDAT frames that's what's driving some of the tightening and lowering of the top end of ASM guide.
- Unidentified Analyst:
- Understood. And then, the difference in aircraft you are ending with 89 aircraft rather than 85 is that correct and yet the slower growth which seems you are going to end the year with more aircraft you would have potentially more growth here, but maybe that's not the case.
- Jude Bricker:
- There is no change to the A320 induction schedule as what we have talked about in the past there may have been refinement in service state so we can, we are publishing here in service state and sometimes the purchase can happen up to several months in advance to that. But basically the free plan is the same as what it was the last time we spoke about it. Little bit more on the early retirement in MDAs, every time we do a repair or c-check on an aircraft now we have a known operating life so as Maurice said we are making decisions based on new information everyday and one of the options now is to put forward the retirement and that is going to happen from time to time. I think importantly that's the aircraft that will be utilized the least and scheduled service as we make that decision. So, I mean from time to time we are going to have this happen. I think it's probably at the peak now because we are more heavily relying upon the aircraft that we choose to retire than we will be in the future when we start basically building in excess of MDA availability there will be turned into the charter business where they are not to be retired. It's just a comment, just to reiterate with Lukas said most of the crew inefficiencies come from training transition so beginning now and going all the way to December 2019 we are going to take two MD80s or 757 and retire them and take on two additional aircraft. So the amount of crews that we have in the training status today is really high and that will – and they rate as we move forward with the fleet transition.
- Unidentified Analyst:
- I see and then, one final one here. As we think about the pre-tax profit improvement initiatives I actually have the same question but just following up what would be the incremental benefit, how should we think about the incremental benefit that phases in next year, $75 million of incremental benefit that you work towards that revised pre-tax profit outlook, $100 million incremental benefit. So any kind of perspective you can share on those lines?
- Jude Bricker:
- No, it's different based on the categories across those guides. Some of it's going to be back end loaded like particularly the identification on the existing A320s and also reduction in spares and some of it will be layered in more than like the credit card program which is showing effects already in the reported results for the first quarter some of the e-commerce initiatives so it's kind of a mix that they generally speaking it's going to be weighted towards the back half of the period that we were guiding towards.
- Unidentified Analyst:
- I see. Okay. Thanks guys.
- Operator:
- Thank you. And our next question is from the line of Duane Pfennigwerth with Evercore ISI. Please go ahead. Your line is open.
- Duane Pfennigwerth:
- Hey thanks for the second chance here. Is there any cost related to your hotel initiatives in the revised cost guidance?
- Maurice Gallagher:
- No.
- Duane Pfennigwerth:
- So that's not a material driver at this point.
- Maurice Gallagher:
- That's correct.
- Duane Pfennigwerth:
- Why would MD80 retirements drive higher expense? I assume you are basically scrapping them, is this something write down related and if so how much of the higher cost guide might be non-cash in nature?
- Maurice Gallagher:
- Yes, so going into 2017 we had about 43 million in book value related to the MD80 fleet. We tried to match the depreciation stream and when we think the shelf is going to retire which obviously can be very lumpy. So there is going to be individual write downs at the time we choose to retire the plane, obviously the less planes in the fleet are going to impact how much planes we can reduce there is an ASM impact on that. Regarding the non-cash expenses that's the run rate on that is about 8 million incremental over in 2017 over 2016. So that's in a fairly flat run rate. So the comps will get obviously flat this time next year.
- Jude Bricker:
- One of the MD80s retired this quarter for avoided a c-check that had high number of abnormalities. So the cash positive decision took a write down and is basically P&L neutral at the time but it did produce ASM going forward which is why it negatively affected unit cost. In this quarter it's a cash positive decision.
- Duane Pfennigwerth:
- Got it. And then [Ponder] just wanted to say welcome back it feels like you had many chances over the last few years to get the band back together. Maybe you give us the color on why now and maybe between you, Maurie and John, how you see that when you -- responsibility going forward. Thanks for taking the questions.
- Unidentified Company Representative:
- Yes thanks Duane. I appreciate the thoughts. There is no real timing. I just think there is a natural cycle in every business and I was excited about John's joining several months back and I think there is quite a bit of work around the airline and then also on some of the ancillary areas in particular that that is quite positive and that has a lot of good potential for the future while being very cost effective as well, remind you. So the timing was great to try to reintegrate myself into that mix and I am very happy to be here.
- Duane Pfennigwerth:
- Okay. Thank you.
- Operator:
- Thank you. And our next question is from the line of Joseph DeNardi with Stifel your line is now open.
- Joseph DeNardi:
- Thanks. Lukas just a question on load factors I mean we are obviously little bit below 90% range that you guys ran out for a little while can you get back there or are there just too many utilization markets that are driving ASMs for you to get back that high?
- Lukas Johnson:
- While we have a pretty balanced schedule and we can get back to re-peaking I would say little factors are going to be depressed. Little factors on the optic data are going to be materialize lower than the normal peak days and we don't have the benefit of having higher frequency markets to even that out like other airlines. So I would say it will continue to be depressed although we won't be like first quarter. Our goal is by the end of the year to be stabilized on that front. The third quarter again like I said most of the growth all the growth really is in off peak days and so you see us kind of try to come back then. By the four quarter hopefully will be able to get back to little bit more the peakness.
- Joseph DeNardi:
- Okay and then Lukas, I’m sorry Jude on the international side. I hope the plan was to hopefully start that next year. So when would we expect to see the fist announcement for international service this year?
- Jude Bricker:
- We can't commit anything to today. We are really challenged to try to execute on the fleet transition strategy and also launch international service which has lot of operational technology constraints. So, we will not buy scheduled service in 2017. It's a winter peak so we would like to launch around the Thanksgiving. We can't say today that we are not going to do anything in between Thanksgiving 2017 and 2018. But the project is moving forward more slowly than we could like but it, we do intend to be international to some point.
- Joseph DeNardi:
- Okay. Thanks.
- Jude Bricker:
- Yes.
- Operator:
- Thank you. And our next question is a follow-up from Savanthi Syth with Raymond James. Your line is open.
- Savanthi Syth:
- Hey thanks. Lukas I was just wondering with your kind of the changes that you are making at the revenue management system could you provide an update are you still going to test it out on a small segment or have you –
- Lukas Johnson:
- Yes we are about. Thanks Savy, we are about 30% and are now being priced on the new system and I think it's like completing online and we are continually optimizing it going forward. It goes by the end of the year to be at 90% or 100% of our ASM price on to the new system. And we will be able to once we are at that point we will be able to gives some comparisons as the actual [indiscernible] effect.
- Savanthi Syth:
- Okay. Great thank you.
- Operator:
- Thank you and ladies and gentlemen this concludes our Q&A session for today. I would like to turn the call back to Maurice Gallagher for any final remarks.
- Maurice Gallagher:
- Thank you all very much. I appreciate time and effort and we will talk to you in 90 days. Thank you.
- Operator:
- Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.
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