Allegiant Travel Company
Q1 2013 Earnings Call Transcript

Published: 25 Apr 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to Allegiant Travel Company's First Quarter 2013 Financial Results Conference Call. We have on the call today Maury Gallagher, the company's Chief Executive Officer and Chairman; Andrew Levy, the company's President; and Scott Sheldon, the company's Chief Financial Officer. Maury Gallagher and Andrew Levy will provide us with brief commentary, then we will begin our question-and-answer session. But first, we wish to remind listeners that the company's comments today will contain forward-looking statements that are only predictions and involve risks and uncertainties. Forward-looking statements made today may include, among others, references to future performance and any comments about our strategic plans. There are many risk factors that could prevent us from achieving our goals and cause the underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed in, or implied by, our forward-looking statements. These risk factors and others are more fully discussed in our filings with the Securities and Exchange Commission. Any forward-looking statements are based on information available to us today, and we undertake 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 anticipated events that do not materialize. The earnings release, as well as the rebroadcast of this call, are available at the company's investor relations site, ir.allegiantair.com. At this time, I would like to turn the call over to Maury Gallagher.

[Maurice J. Gallagher:]

Thank you, operator. Good afternoon, everyone. Welcome to our call. 41st quarter of continuous profits, very pleased about that, over 10 years. One of our strongest quarters, if not our strongest quarter in history, in many ways, certainly in revenues. Great operating margin for the quarter of 19%. $1.65 a share, 47% increase over last year. And we did this, I might add, this is our third-highest quarter of fuel cost at $3.37 a gallon compared to the other 2 quarters in the middle of '08. We saw, as well in particular, strong benefits from our ancillary revenues and the like, but you all can see that in the release. We're going to do a new format today. We're not going to be sitting here reciting things to you. We're going to just basically take questions after Andrew has got a few clarifying comments. But we'll be ready for your questions in a couple of minutes. Andrew?

[Andrew C. Levy:]

Yes, thanks, Maury. I want to highlight a few topics that we're sure going to cover during the Q&A session. First, the second quarter will not show the same year-over-year strength as we saw in the first quarter due to the Easter shift, which pulled peak period demand into the first quarter of 2013 and out of the second quarter, which is different in 2012 when Easter fell in mid-April. This is consistent with our internal forecasts and does not represent any change in our expectations. In fact, our second quarter internal revenue forecast was just raised slightly based on strong forward bookings and our view of a robust demand environment during the summer peak period, which begins in June. Early bookings for the fall also look very good, so we expect good revenue performance through the balance of the year at this point. Secondly, our full year capacity plan that we're showing today, we've updated that. It has lower ASM growth than what we had forecast in November 2012 during our Investor Day, which was the first and only other time that we've provided guidance on full year 2012 -- or 2013 ASM growth. The change at this point in time was due to 2 reasons. First, with the benefit of having more experience in the Hawaii market, we are seasonally adjusting our capacity during the fall off-peak period in order to maximize our profitability. This capacity adjustment is consistent with how we manage capacity in our overall network and similar to how we have managed our network capacity for many years now. The second reason is the termination of our planned aircraft acquisition from Cebu Pacific, which, as you recall, was going to be 10 A319 aircraft. And this is not new news. We've disclosed this a while ago. But as a result of that, it resulted in fewer aircraft units in service this year, and therefore, less growth as a result of that. Our third quarter capacity plan is largely final, but we have an upward bias so we may grow slightly more during that period. And our fourth quarter capacity plan is still being developed, and we will potentially allocate more capacity than we currently plan depending on our view of macroeconomic conditions and fuel prices. However, at the current time, we also have an upward bias during this period due to lower fuel prices that the forward curve is suggesting for that timeframe. We are going to finalize our schedule, which is currently selling through October 29 in about 30 days or so. And at that point, we'll have a much better sense as to what the full-year numbers are going to be. The result of the pulldown in our capacity growth rate is going to result in a slightly higher ex-fuel cost per ASM or unit cost than when we forecast this in November of 2012. And the change there is for that reason and only that reason. We do not see any unanticipated new cost pressure, so it's strictly a result of pulling out. We're not growing as much as we had anticipated when we gave that first CASM ex guidance. And lastly, there still remains outsized interest in our Hawaii operations despite the very small percentage of our revenue network that it represents. That being said, the Hawaii peak period is during the summer, and we expect very strong performance during this period. As previously stated, we have adjusted our Hawaii capacity beginning in late summer when we expect demand to wane due to seasonality. And that is similar to demand patterns we've experienced in the Florida market since we entered there in 2005. We expect these seasonal adjustments matching supply with demand to enhance our profitability. The reduction in 757 flying to Hawaii will enable us to utilize these assets in our domestic mainland network on routes where we believe the 757 can drive higher profitability than our core MD-80 fleet. And we are now ready for questions. Operator?

[Operator:]

[Operator Instructions] And our first question is coming from the line of John Godyn, Morgan Stanley.

[John D. Godyn:]

I have a couple of questions here. First of all, just kind of taking a step back. I think there's a little bit of a view out there that Allegiant, over the next few years, doesn't have as much leverage to sort of the industry thesis if it plays out of rising returns at legacy airlines and consolidation and things like that. Obviously, you're not directly involved, but I was hoping that you could just sort of speak to us in terms of, if that thesis plays out, what kind of opportunities are uncovered for you? How does sort of your business benefit? Or maybe, you just -- it doesn't. Maybe it is very insensitive thesis, I'm not sure. Perhaps rising prices create new growth opportunities, but I was hoping you'd kind of just sort of speak to that.

[Maurice J. Gallagher:]

John, it's Maury. We're just bullish, terribly bullish about our opportunities as a general rule. The -- for many years, people have told us, "Gosh, I wish I bought you when you talked to me the first time, but you don't have much growth left now, so I can't buy you." We've moderated our growth continuously over the years, and we'll continue to do that. As far as the thesis of consolidation, we think that's a real positive. The American U.S. Air deal, any time you do something that big and the like, it's going to be distractive to their efforts, which, out here in the West, we think is a positive. On the East Coast, same thing. So consolidation is a good thing. We think we're in the captain's seat, long-term. We don't have to be in a rush; it'll come to us. But all in all, where we look at what the opportunities, the airplanes, it all looks very positive at this point. Andrew?

[Andrew C. Levy:]

Yes, let me add onto that, Maury. I've got a couple of comments to that, John. I think what we've seen in prior periods of consolidation is a couple of things. In some cases, we've seen new route opportunities open up, where services left markets that are within our sweet spot, these smaller communities. So obviously, that's a possibility. Secondly, what we've seen is less capacity in the hubs. And also, fewer hubs. And therefore, the indirect competition that a hub and spoke carrier might offer to these smaller communities is -- there's just less capacity, less alternatives. And as a result and apart from that just in general, I think what we're going to see is just higher prices. That's what consolidation is all about, is being able to price higher. And as long as our cost advantage remains intact, and we have an enormous one, then that just gives us a good pricing umbrella under which we can operate and offer really attractive fares to continue to stimulate demand in these markets. So I mean, it's hard to see how it's anything other than a real positive for us.

[John D. Godyn:]

Is it fair to say that as we think about what that means for sort of the margin profile over the next few years, if the -- if sort of industry prices go up and that's the driver of sort of whatever amount of points of margin improvement at the legacy airlines, we should expect the Allegiant kind of all else equal to track that improvement in margins. Is that a fair construct?

[Andrew C. Levy:]

Yes, I would say not necessarily, because we're looking to maximize earnings as opposed to necessarily margin. And so it may very well afford us the opportunity to add maybe more capacity in certain markets and grow earnings that way through volume, as opposed to yield. There's only so much yield we can capture in the leisure space, and our market is -- or our business is built on stimulating demand. So that's -- I would just say, that's one issue. I think it certainly allows us to grow earnings, certainly, all else being equal. So I don't know if it tracks that way. But I think the other thing that we have in our favor in terms of increasing margin performance is the bringing on of the more efficient Airbus aircraft. That in and of itself is going to allow us to be much more fuel-efficient, which, again, will either translate into higher operating margins or maybe more volume and growth in earnings that way. So it's a -- it's just a positive for us, no matter which way you look at it. It's hard to say if we will better than the network guys.

[Maurice J. Gallagher:]

Just thinking big picture stuff, John. We've seen everybody pay up on the cost side. I think they hit their nadir in cost in the pre-consolidation. But to get deals done, everybody's increasing their -- certainly their labor cost and the like. So cost don't seem to be nearly as powerful or as prevalent. And if they take their cost up, they have to take revenues up. Additionally, the capacity discipline seems to have been terrific, so that's going to drive revenues. And if we stay underneath the relatively -- that absolute number and we manage our cost better, which I think we can, it should be net positive to us. But with all the points Andrew made, it's -- we're very bullish on where we sit right now as far as opportunities and earning power. This quarter being a classic example, 19% margin, that's up by 4 points from last year's margin. So we're very pleased with that outcome.

[John D. Godyn:]

That's really helpful. And if I can just ask one more. You guys referenced 2 things, reaccelerating capacity growth as sort of a concept for the next couple of years and the new aircraft. And we've seen for a bit now kind of a pattern of, I want to say, high teens or maybe 20% kind of capacity growth and a lot of benefits on CASM ex-fuel as a result of that. I know that there's some hiccups now in the back half of the year with capacity and CASM ex-fuel. But as we think about 2014, the new aircraft, all of that, the potential opportunities from industry consolidation, is it fair to say that we sort of return to that prior ASM growth profile and the cost declines year-over-year that come with that? Is that the right framework to be using for kind of 2014 and 2015?

[Maurice J. Gallagher:]

I think that'd be -- I'm not going to suggest our costs are going to go down. Having said that, I'm bullish about adding airplanes. Our growth, candidly, could be a bit lumpy, depending on aircraft availability and the like. The deals come along, we can acquire them easier and faster. As we saw with the Cebu deal, we got hung up on a technicality, and so our ASMs are down as a result of that this year. But there's lots of opportunity when airplanes come along. I think the benefits, as we grow with the Airbus and fuel savings, they're substantial. We saw it in March. So those things should definitely help us to certainly keep a lid on cost, if not potentially take them down. But I don't want to sit here and say that today.

[Operator:]

The next question is from the line of Hunter Keay, Wolfe Trahan.

[Hunter K. Keay:]

The share buyback, curious -- the opposition, I should say, curious to what drove the timing to do it now. And what are sort of the mechanics of how it can be executed? And by that, I'm really driving at how much of that $100 million is sort of scheduled, like prescheduled with the SEC versus you having the ability to go on and just be opportunistic and buy it whenever you want?

[Andrew C. Levy:]

Hunter, this is Andrew. The reason that we addressed it with the board is, quite honestly, because we were down to a fairly low amount of authority remaining, and we just felt it was appropriate to get a higher level of authority. We were pretty aggressive buyers during the first quarter of the stock. And I think we've been pretty candid and we feel we have excess cash on the balance sheet, and we've chosen at this point in time to utilize some of that cash returning to shareholders through share repurchases. We have not filed nor intend to file like a 10b1 (sic) [10b5-1] program with the SEC. So the purchases will be made at our discretion, and that'll just be dependent on a number of different factors. But we intend to continue to take shares out of the market.

[Hunter K. Keay:]

Okay, no, that's the perfect answer. I appreciate that. And on the hotel nights, obviously, we're seeing some divergence here between rental car days and hotel nights. And I think you guys said it before, you stopped discounting air to sell hotels. Wondering if that is something that you think is proving to be a good strategy? Is it something that you're going to maybe think about changing as it sort of pretends to sort of modeling up the hotel nights going forward?

[Andrew C. Levy:]

I think kind of the -- there's a couple of reasons hotel room nights are down, one of which is the fact that we had -- we went backwards in terms of departures in Las Vegas this first quarter versus a year ago. So we carried fewer people into Vegas, and Las Vegas is still the dominant part of our hotel sales, so that certainly had an effect on hotel sales. I think the fact that we're not subsidizing hotel sales with discounted fare is another factor, and I think that the overall results of doing that have been extremely positive. As far as going forward, we are going to try to drive a greater number of hotel sales in the Las Vegas market. We've been pretty successful at driving up the volume in the other markets. And Vegas is a smaller percentage of the total than it has been, and it's been decreasing as we've been more successful in selling hotels in other markets. But we're constantly looking at ways to obviously maximize overall profits. But certainly, we would like to drive as much revenue and profit to the sale of hotel rooms as we can. We think strategically, that's important, especially our long-term vision about being able to continue to sell a lot more travel-related products and services to our customers, other than just simply the air transaction. And so, we're going to be looking at a number of different things, especially as the automation continues to evolve and we have more -- different tools available to us to do some more sophisticated kind of pricing than we've been able to do historically. So I guess, stay tuned. It's -- the optics for that are perhaps viewed as not so good, but the overall net revenue is up and we're really pleased that that's the case, especially on a per passenger basis. So we're growing our revenue, but we're growing it even more on a per passenger basis, and that's really what we want to try to do.

[Hunter K. Keay:]

Okay, yes. So you're comfortable with that sort of optically is what you're getting at in terms of the hotel room rate and [indiscernible].

[Andrew C. Levy:]

Yes, I mean we're very comfortable with it. I think it's not a surprise to us. And the overall effect of -- I mean, look, at the end of the day, we grew net revenue on an absolute basis by 18%. So obviously, we always try to grow it faster, but we're pleased with where we are. We think we have tremendous growth opportunities in that area as we go forward, and in particular, as we continue to enhance our automation platform and have additional tools available to us.

[Operator:]

Your next question is from the line of Helane Becker, Cowen Securities.

[Helane R. Becker:]

I have just a couple of questions. One is I read in I think the Journal today that the sequester was starting to hit Las Vegas, and I wondered if you saw any signs of that, a. And b, by operating out of smaller airports, there will be any impact of that and what you're thinking about that, I guess.

[Maurice J. Gallagher:]

The 2 impacts potential from sequester include towers and then the flight ATC stuff. The last 3 days, we've seen nothing here in Las Vegas that I'm aware of, which is good. Certainly, you're seeing your big cities impacted, L.A. I think we said we had a 3-hour delay the other day going into L.A. We had a little flow control over Jacksonville, which is more south than the East Coast, not much but it was half an hour to 45 minutes the other day. Our small cities, we just don't expect to be impacted. Half of our departures are inbound because you just not -- you don't have traffic around Sioux Falls to speak of. As far as the departures relative to airports and towers, we've been operating in towerless airports for -- since our early days. We don't care for it candidly, but it is what it is and we can make it work. It's safe and we take particular procedures to deal with it. Adding a few more to our system, while it's not desirable, we will manage it just fine. We have not found any instance here where we don't think we can operate in a city because of that. But should we have problems, we'll back up there. But like I said, we're fairly -- I'm not going to call it routine, but it's very close to a routine for us to do that. So we don't expect impacts.

[Helane R. Becker:]

Okay. And then I thought I saw in the commentary in the press release that first quarter departures to Las Vegas decreased compared to last year. So I'm sorry, I missed it if you said it earlier, is that decline going to continue or will that change again in the second and third quarters?

[Andrew C. Levy:]

Helane, I think -- I don't have those numbers in front of me at the moment. But the reason that it declined as much as it did this year is really more lessons learned from last year. Last year, we had a lot of capacity on offpeak days, trying to drive incremental profits during the first quarter, in March in particular, which is a very strong period in Las Vegas. And what we found was that those departures were dilutive to profits. And so we -- this year, we were just much more focused on flying Las Vegas routes on peak days of the week. And that really explains much of the decline year-over-year. The additional is there's been a little more expense in stations, so that affects things, too. But as far as the next few quarters, I think you're going to see something that's not nearly as dramatic in Las Vegas.

[Helane R. Becker:]

Okay. And then just one clarification point on Hawaii. With -- so it's just a seasonal decline, right? It's not completely leaving Hawaii, and I think actually you're keeping Las Vegas and Bellingham, as I recall. But it's not pulling out, it's just for now, and then coming back to it in the winter months or next summer months. Is that how we should think about that? Like stay tuned to the schedule?

[Andrew C. Levy:]

Well, yes, I think that's right. I mean, as you know from following us for many years, for example, in Florida in September, we simply stopped flying many routes. And in Hawaii, when much of our -- many of our routes are only once a week. If we don't think we can cover the direct expenses during that offpeak period on that one flight a week, well, the only way to go down is to go to 0. So, yes. These are not cancellations. This is typical Allegiant style of managing routes and capacity, and stay tuned as far as what we bring back and when. But, yes, this is kind of business as usual for us.

[Operator:]

Your next question is coming from the line of Glenn Engel, Bank of America.

[Glenn D. Engel:]

Can we go over some of the cost items? Station operations was down despite capacity being up a lot. I think there were some one-time items that made other airlines relatively high. And are the salaries and the maintenance lines, are those numbers that we should assume to stay at roughly these levels for the balance of the year?

[Scott D. Sheldon:]

Yes, Glenn, this is Scott. Let me tackle the salaries line item first. As we said in the release, I mean kind of the lion's share there has to do with the pilot increase as far as the paydowns and then just the absolute number of heads driven from additional flight attendants. One of the things we didn't really highlight in there is bonus and stock comp, which are obviously included in that line item, were substantially up year-over-year. If you look forward in the Qs 2 and 3, you're going to see the same sort of pressure. As -- if you backtrack to the number of 166 seat tails throughout 2012, you're going to be able to add the heads in there, and then the lumping effect from the pilots would have been in November of last year. So maintenance, we've guided full year from $100,000 to $110,000. Clearly, the first quarter came in under that range, mentioning that the second and third quarter are going to be our heaviest of the year. The third quarter in particular is definitely going to be outside of the higher part of that range. Obviously, the maintenance is lumpy. Timing on when events come out of the shop or out of the C check line can move those numbers a little bit. As far as stations, the big item in there, obviously Vegas coming online. You're going to have a pretty insightful impact year-over-year. There were some good guys that ran through the first quarter. Not operating the Caesars program has allowed us to more or less reduce some of the accruals that we had outstanding, which is why you see maybe not follow the trends exactly, so...

[Andrew C. Levy:]

Yes. And, Glenn, this is Andrew. Let me add onto that, that departures are really more tied to station expense, at least in our system. And on a systemwide basis, our departures were actually down a little over 5%. So I think it's -- that's probably a better number to focus on than ASMs.

[Glenn D. Engel:]

Second on the 757, if they're not going to be effectively on Hawaii, do you need as many or are there other -- what other type of markets make sense for those planes?

[Andrew C. Levy:]

Glenn, the airplanes we acquired to do Hawaii, and it's a great airplane for Hawaii. Over time, as we have more Airbus narrowbodies than any route that an Airbus can operate, it's probably going to be the right airplane as opposed to the 75 because it's so much more fuel-efficient. But that's not where we are today. So the 75, there are many routes where it is better in terms of enhanced profitability than operating MD-80s. It's not a huge number, but because it's a big airplane, so it needs to be on denser routes. But we're going to operate them in the mainland, and we think they'll do very well. And yes, I think as far as how many long-term, I think that'll be determined by our success and the size of the opportunity we think we have in the Hawaii market. And that's not anything we're going to have a real strong opinion about until -- with the passage of time, as we continue to learn the market and better understand the opportunities there.

[Glenn D. Engel:]

And finally, the Airbus planes, are those initially going to be substituting for other planes? Or will they be growth markets? When do you start to really use those to penetrate new markets?

[Andrew C. Levy:]

Well, this year with the reduction of 5 150-seat MD-80s, 4 of which will be in this summer, 1 at the end of the year, the first 5 Airbus narrowbodies are really replacement units. And so they're just simply kind of keeping us where we are. And then as we add more Airbus aircraft, they will be used for a combination of replacement of existing routes, and then it will enable us to open up a few new routes that the Airbus can do and the MD-80 can't. But to the extent it frees up MD-80 capacity, those MD-80s will, in many cases, be used to open up new routes. So it's a little bit of all of the above.

[Operator:]

Your next question is from the line of Jim Parker, Raymond James.

[James D. Parker:]

Andrew, of course, your logic is very good about capacity decelerating and that pushing up unit costs. One of the things that stands out here in your guidance, and it appears to be a bubble, is your CASM ex in the second quarter and your capacity growth is going to be 20%. And in the first -- and you've guided up 5% to 7%. In the first quarter, your capacity growth was 17% and your CASM ex was flat year-to-year. What is going on? Is there something in the second quarter that's just timing-related, or why is CASM ex going to be up so much in that particular quarter?

[Scott D. Sheldon:]

Yes, Jim, this is Scott. We mentioned maintenance is going to be sizeably higher this year, year-over-year, that...

[Maurice J. Gallagher:]

Second quarter.

[Scott D. Sheldon:]

In the second quarter, that's correct. In addition, we kind of highlighted some of the D&A that's -- that we're seeing with obviously a much more expensive aircraft. You're going to see the same sort of year-over-year increase that you saw in the first quarter year-over-year. So other than that, it's nothing that we haven't highlighted. The labor components are just pilots and flight attendants primarily, and then maintenance. Nothing really else is out of the ordinary.

[James D. Parker:]

Scott, what do you mean -- what maintenance? What is unusual about maintenance in the second quarter? What items are falling in that quarter?

[Scott D. Sheldon:]

Jim, it's just the timing of heavy maintenance. So these are the heavy check lines, there's minimal engine overhauls this year. So it's just the impact of when frames are coming out of the heavy check cycle.

[James D. Parker:]

Okay. You mentioned, of course, you started flying to Reno. And is that a destination or a small origin, small market?

[Andrew C. Levy:]

Jim, it's a little bit of both. Right now, we're flying Vegas-Reno. And there's good 2-way traffic between us. There's quite a few people from here who go out there to vacation and vice versa. But we're also going to be starting flights out of Bellingham, Washington in the second quarter, I think. And that clearly is directed toward people going to Reno to go on vacation.

[James D. Parker:]

Got it. And, Andrew, in that context, you mentioned you're going to start service to Little Rock. Now, it is not a big city, but it appears to be more than just a small city. So what -- you have pretty good schedule service by other airlines in there, so what is your -- the spectrum of size of markets as you're now expanding it, and we'll be into markets like that where you've got a lot of scheduled service with other airlines?

[Andrew C. Levy:]

Well, Jim, I don't know if it's -- I don't know if Little Rock is necessarily bigger, if at all, than many of the markets we serve. It's certainly bigger than the average market, I guess, if you look at it that way. So I guess, that's one point. Second point is there's no nonstop service from Little Rock to Orlando this summer, and so we saw an opportunity there to provide a service that the market didn't have and we're very pleased with the -- what we're seeing in terms of advanced sales in that market.

[Maurice J. Gallagher:]

Jim, this is Maury. We've done that since we started. We went into places like Des Moines and Wichita, and all of those places had plenty of commuter service in the hubs. I mean, Little Rock shouldn't be a different profile. So that's commonplace for us.

[Operator:]

Your next question is from the line of Michael Linenberg, Deutsche Bank.

[Michael Linenberg:]

I guess just a couple of questions here on the numbers. When I look at the improvement in gross margin for the third-party products, you have a nice bump-up. You talk about the switch in the mix from car rentals versus hotels, but you also talked about selling less Las Vegas hotels. Is the driver there the shift in mix or maybe just getting better returns on hotels outside of Las Vegas? What's driving that big bump-up?

[Scott D. Sheldon:]

Mike, the increase is really -- we're just optimizing our pricing better. We're capturing more yield on not only car but also hotel. Certainly, there's volume in car, there's volume reduction in hotel. But from a pricing standpoint, we're capturing more yield on each transaction, not each and every one. But we're pricing -- we're getting more yield on the average hotel sale and the average car sale.

[James D. Parker:]

Okay, great. And then just looking over at the ancillary fare for ancillary fare-related charges, I mean, a nice bump up to 29%. What's the big driver behind that?

[Scott D. Sheldon:]

The single biggest driver is bags, bag-related revenue, the carry-on bag fee which we first announced in, I think, it was April last year. So as time marches forward, we're going to start to lap that in that revenue stream, and so the comps will get a little tougher. But the other is checked bags. We've seen a nice increase since we implemented that fee and then started enforcing it in the summer, and as it rolled through the -- more and more of the travelers that we're booking, we've seen a nice increase in ancillaries. And so I'd say, by far and away, that's the largest driver of the increase.

[James D. Parker:]

Okay, great. And then just your TRASM, you talked about what it was for same-store sales versus the system. Are both those numbers stage-length adjusted?

[Scott D. Sheldon:]

No, they're not.

[James D. Parker:]

Okay, so that -- okay. Because you would think maybe the new stuff gets pulled down by the Hawaii. Is that the way to think about it, the longer-haul service?

[Maurice J. Gallagher:]

Yes, I think that's fair. I think that's certainly fair.

[James D. Parker:]

Okay, great. And then just one more, how you adjust the -- on the numbers. You guys normally give us what -- I usually do it, I think on an after-tax basis, what your ROIC was for the trailing 12 months into this quarter. Do you have that? And maybe what it was versus the prior period, just the prior 12-month LTM period?

[Scott D. Sheldon:]

Yes. The number I have is 16.9%, that's up from 15.7% at the end of '12.

[Andrew C. Levy:]

On a trailing 12-month basis.

[Maurice J. Gallagher:]

Right.

[James D. Parker:]

Okay, that's fine. And that's on an after-tax basis, right?

[Scott D. Sheldon:]

Right. Everybody seems to calculate it differently, Mike. So we provide that information as to how we arrived at that. But the good thing is it trends very positive.

[James D. Parker:]

Yes, I mean, at least you can articulate it. 5 years ago, most companies didn't seem to know what that was, so very good.

[Operator:]

Your next question is from the line of Duane Pfennigwerth, Evercore Partners.

[Duane Pfennigwerth:]

Can you talk about the operational reliability of the 757 versus your expectations? Is there any learning curve ahead with this aircraft? And specifically, with the maintenance expenses that you cited, is any of that sort of related to the 75?

[Maurice J. Gallagher:]

Duane, the 75, we had some speedbumps with that in the first quarter, more so than we would have liked. A couple of campaigns we're going through right now to clean it up, but we'll get there. Probably, should be on top, most of it by now. We certainly are going to spend some more money in the first quarter than we anticipated. But, again, we'll level that out. It's -- in general, it's what we expected, and we're -- it's an operationally very sound airplane for us long term.

[Duane Pfennigwerth:]

Okay. And then is CapEx, it looks like it's up a bit versus the last update. Can you just clarify that?

[Scott D. Sheldon:]

Duane, in general, it's usually a fluid number. There's a couple of transactions that may be finalized here, but there's nothing substantial. I mean, the lion's share of the CapEx this year is going to be A320-related, so nothing significant.

[Maurice J. Gallagher:]

If we can get some deals that do -- that will pop up and things like that, [indiscernible] may affect it as well.

[Duane Pfennigwerth:]

How much of that number do you anticipate to get financing against? And what sort of ratio would we be thinking about?

[Maurice J. Gallagher:]

50%?

[Andrew C. Levy:]

Yes. Duane, I mean I think we're expecting to most likely finance each airplane that we acquire. And looking on the last set of financing structures, there's -- we have so many different alternatives to consider. They're all very attractive in terms of price and advance rate. The beauty where we said is we can just go ahead and pay cash and then [indiscernible] after the fact that, that's an option that we can pursue. So yes, we're active in the market. And we have a lot of finance offers to help us effectively.

[Maurice J. Gallagher:]

I think it's fair to say we'll probably finance the airplanes. That's a reasonable assumption.

[Operator:]

Your next question is from the line of David Fintzen, Barclays.

[David E. Fintzen:]

On the TRASM guidance for the quarter, for 2Q and for the next month, are you really just taking the bookings as you're seeing and sort of using that to guide the guidance? Or are you baking in some incremental softening, just given fuel's down and just given that relationship, which I think you guys have talked to before in terms of lower fuel often comes with lower demand, but the net's still fine. I'm just kind of curious what might be baked into that guidance?

[Scott D. Sheldon:]

Yes, we're not expecting that, David. Obviously, April is -- with our booking curve being much more extended than most anyone, April's pretty much done. And as we head into May, we have the vast majority of our revenues on the books. And June is a peak period. We just see no signs to suggest that we're going to see a revenue decline. I think there's a lot of reasons that we could debate why oil prices have come in a little bit. I'm not sure we're believers in that it's reflective of some kind of slowdown in the consumer spending out there. We're not seeing that at all.

[David E. Fintzen:]

Okay, that's very helpful. And with some of the seasonality of Hawaii, and does this -- as you're looking at destinations, I'm not talking sort of specific fleets, et cetera. But as you're looking at destinations over the next few years, and do you start to think a little bit more about looking for maybe counter-seasonal destinations or some winters that you think it doesn't even factor in? You just kind of go -- regardless of seasonality, you just want to go where the best new opportunities are? And how should we think about that?

[Maurice J. Gallagher:]

Dave, it's Maury. Interestingly enough, don't forget, our best quarter is the winter quarter. Compared to everybody else, I mean that's our big #1 as we like to tell our folks, our Christmas season starts February 15. And all hands on deck, and that's when we do the lion's share of our business. So we're pretty counter-seasonal in many ways, our off-peak, and I think -- joked, if you could get rid of September and January, the airline business would be the best industry in the world. But you can't fix September. I don't care where you go. And January is pretty much the same. So while we can look for counter-seasonal, we really do very well in the 2 peak seasons, winter and summer. Shorter months are okay but not great, and Septembers are very poor and January is not far behind it.

[Andrew C. Levy:]

As far as new destinations, we look at a number of different factors, not just seasonality. I mean there's just so many different factors that get baked into our decisions, opens up a new destination market. But we certainly been on record of having a strong interest in the Mexico market, and that's both as a point of origin into Las Vegas and Orlando, as well as hitting those destination markets in there, and so stay tuned on that. But we have no issue with seasonal markets. I mean, we're used to it. Myrtle Beach is the market we've been flying only in the summertime for many years now. And I think you'll probably see a fad, more markets like that in time that are very good during a specific period of year but don't make sense to fly during the remainder of the year, and we're just -- we're very comfortable with that.

[David E. Fintzen:]

Okay, that's helpful. And then just a quick one. On the fleet plan, when you have the 7320s coming in the fourth quarter, that's into the fleet, not necessarily in the service? Is there a big -- how should we think about sort of into service?

[Scott D. Sheldon:]

That is into service.

[David E. Fintzen:]

Oh, that is into service, okay.

[Andrew C. Levy:]

That is flying in service by, we believe, mid to late fourth quarter. And yes, so obviously, that implies taking possession of those aircraft well before that and getting them ready for maintenance -- or getting them through maintenance and ready to operate.

[Operator:]

Your next question is from the line of Steve O'Hara, Sidoti.

[Stephen O'Hara:]

Could you just talk quickly on 2 things? The IT rollout, where that stands, is it fully operational? Is it kind of meeting your expectations or exceeding them? And then in terms of the aircraft that maybe you're seeing offered for sale, do you see the opportunities getting better or kind of still the same in terms of pricing from your standpoint?

[Maurice J. Gallagher:]

Let me touch on the automation. Andrew can tell you about the aircraft. Automation is moving on very nicely. We have a couple of fundamental building blocks to finish off, hopefully, in the next 60 to 90 days, maybe the end of the summer, the worst case. And at that point, I'd like to joke that we're going to move up to the top of the ocean cruiser. We've been down in the bowels now, fixing the engines, so we're going to be up on top playing with the products. And a lot of opportunity to enhance our pricing group. They've got a number of requests in to do things. We'll hopefully have a shopping cart approach, which will let us sell land-only products that we today need an airplane seat for. So those are all positives. I might add the data mining we're getting out of this is exceptional, too. The system and the -- just the data available and then turning it into usable information is a big task, but we're well down the road with the data warehouse approach and a lot of data mining that we're using all through the company. So very bullish on all of those things. It's going to be hard to measure some of that as we go forward, but it's -- we're all very comfortable that it's going to be a big plus for us.

[Andrew C. Levy:]

As far as the aircraft is concerned, we remain very bullish about our ability to grow the fleet with very high quality used A320 family equipment. We're in the market and looking for opportunities. But just as we've done for 12 years now, we are very price-sensitive, and we will let the market come to us and we don't anticipate any problems at all in executing transactions to enable us to grow at a pace we're comfortable with going forward. So stay tuned. We're constantly out there looking for opportunities, and there's a lot of aircraft out there.

[Stephen O'Hara:]

Okay. And then maybe just a follow-up in terms of the IT system. I mean, what's the grand plan for that? I mean, is it something where -- it's much more of a comprehensive system where you're offering all sorts of travel-related products? Maybe not just your own but other airlines or other maybe European travelers, something like that?

[Maurice J. Gallagher:]

At this point, it's just internal. We're looking to enhance our third-party products in particular. Stuff that ties into activities with vacations and leisure travel, enhancing the selling of it, the display of it, as well as pricing inside the airline, being able to kind of understand better from a CRM perspective who's on the line and what they want, being able to market to them more specifically than we do now, all were tied to both data and IT capability.

[Operator:]

Your next question is from the line of Bob McAdoo, Imperial Capital.

[Bob McAdoo:]

A little more on the fleet thing. Can you tell us what you've got committed beyond the fourth quarter of '13? It seems like, at one point, we had some easyJet airplanes, there were A319s that were more than just the 2. Is that what -- are these 2 that you have here, the easyJet planes, are there more of those? And how much of an appetite do you have over the next year? So if A320s got really cheap, would you take another 10 and ground in the 80s? What's your -- how do you think about that?

[Andrew C. Levy:]

Bob, we have 7 more -- first of all, yes, the 2 A319s we're operating are formerly owned -- or formerly operated by easyJet. And those are 2 of the aircraft that we leased from GECAS, and that deal is for a total of 9 aircrafts, so the other 7 will be showing up here in late '14 and '15. So nothing has changed there. And that information, I'm pretty sure, is available in some of the information we put out there on presentation as far as the fleet plan growth over the next few years. The 7 A320s is part of the deal to acquire 9. And so, there are 2 additional A320s that will come in, in back half of '14. So right now, we have commitments for 18 A320 family aircraft. Yes, we're opportunistic we're in the market. Candidly, we'd like to bring on board some additional A320 units in the first half of 2014, which would fill a gap that we currently have. And as far as the replacement of MD-80s, I think that just depends on a number of different factors. It's just going to depend on the price, on the availability and economic conditions. We don't feel any need to replace MD-80s. I suppose in an environment where maybe economic conditions were very challenging and we wanted to slow down the growth rate, then perhaps in that scenario, it might make sense to start to retire additional MD-80s. But at the moment, we plan to enter next year with 51 MD-80s, and there's no plans at all to retire additional MD-80s at least -- I mean, that will change in due time. But there are no plans at the moment, and we expect the MD-80 to make up the core of the fleet for many years to come.

[Bob McAdoo:]

I guess I was really more thinking about it in the context of, gee, if 10 A320s became available early in '14, would you go ahead and take -- what would -- how would you think about the possibility of taking an additional 10 of those and maybe really reducing the usage -- call them grounding, whatever you want to call it, reducing the usage of some of the MD-80s until you can kind of grow into all 10 of the A320s? Go ahead and do an early substitution of the 320s for the MD-80 hours.

[Andrew C. Levy:]

No, I think that there's -- we would absolutely -- that's absolutely what we would do. And if we have an opportunity to acquire high-quality aircraft at prices that we felt were attractive, we would do exactly what you described. We'd bring them in, and then the MD-80 utilization would go down for a period of time until we could manage the growth. And then we would start to ramp up utilization of MD-80s, growing into new opportunities. So, yes, it wouldn't be a retirement of MD-80s. But that's -- we have so much flexibility with the fleet of MD-80s that is largely depreciated. So we can do the kind of things you described very easily. It gives us great option value, the MD-80s. And we think that has -- we think that's extremely valuable.

[Bob McAdoo:]

And -- but now, right now, the total is 18 basically, the A320 family?

[Andrew C. Levy:]

18, with deliveries through 2015. And we are actively in the market, and we certainly hope to add to those numbers in 2014 and '15.

[Bob McAdoo:]

And an A320 is more exciting than an A319?

[Andrew C. Levy:]

Well, that comes down to price. One has 156 seats and one has 177, so it just comes down to what the price is. But we do like having a number of the smaller units. We think that, that fits better on a lot of our routes. But I think we predict over time that the bulk of our A320 family fleet will consist of A320s as opposed to 19s. But we like the 19s quite a bit as well.

[Bob McAdoo:]

Okay, one last quick question. What are you paying for fuel today?

[Maurice J. Gallagher:]

Less than we were paying awhile ago. I think we're seeing in Las Vegas right now, we're paying about $2.85 to $2.90 a gallon, all-in. That's this week in Las Vegas.

[Bob McAdoo:]

What would that -- how would that equate to -- I'm trying to think about where we are today versus where we were on average in the first quarter. How much is it? Is it down $0.25? Is it down $0.30?

[Scott D. Sheldon:]

Well, I mean, obviously, that's just this week. And who knows what next week looks like. But not knowing Vegas in the past -- in the first quarter, it's at least $0.30 -- it's a bit lower, yes. I mean, it's at least $0.30. It's probably closer to $0.40 to $0.45 in this market. In Avecino, we have L.A. pricing risk and then Gulf Coast pricing risk. So Vegas is off of L.A. Don't have an Orlando number right this minute or Gulf Coast number, but it's coming nicely.

[Bob McAdoo:]

Okay. So if we start to think about the next quarter or 2, assuming nothing changed, think about down $0.30 overall?

[Maurice J. Gallagher:]

You want to see a relative change? Just go out, Bob, and check the L.A. prices like in February. And my guess is you're going to see them over $3 a gallon, and worse, $0.30, $0.35 under that right now. So I mean, let's just follow Gulf Coast or L.A. and that's going to be our fuel movement differences.

[Operator:]

Ladies and gentlemen, this concludes our Q&A session. I would now like to turn the call back over to Maury Gallagher for final comments.

[Maurice J. Gallagher:]

Thank you all very much. Glad you enjoyed our new format. We'll make this a common practice, all [indiscernible]. So see you in 90 days. Thanks very much.

[Operator:]

This does conclude today's teleconference. You may now disconnect. Have a wonderful day.