Allegiant Travel Company
Q2 2013 Earnings Call Transcript

Published: 23 Jul 2013

[Operator:]

Welcome to the Allegiant Travel Company's Second 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 some brief commentary, then we will begin our question-and-answer session. 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 with our -- 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 a 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. Please proceed.

[Maurice J. Gallagher:]

Good morning, everyone. Thank you for joining us today. Per our new approach, we're going to go directly to questions. Operator, do you have questions available?

[Operator:]

[Operator Instructions] Yes, sir. Our first question comes from the line of John Godyn with Morgan Stanley.

[John D. Godyn:]

I have a couple here. First, on the TRASM outlook. If I remember correctly, your last comments were that you might have a credit card and fare club kick in, in the third quarter. I was wondering if that's in the third quarter TRASM guidance.

[Andrew C. Levy:]

John, it's Andrew. No, it is not. At this point, I think that it's more likely we'll see those roll out in the fourth quarter. And -- but no, there's no new product assumptions in our revenue guidance at all.

[John D. Godyn:]

Okay. And is there a reason why it got delayed a little bit?

[Andrew C. Levy:]

You know, it's just automation. It just -- there's just an enormous queue of work that's being done. And we're just waiting on the automation capability to roll those things out. They're being worked on as we speak, but I don't ever recall committing to the third quarter. I've always said second half. But regardless, we do expect to roll that out before the end of the year. And hopefully, it'll be towards the earlier part of the fourth quarter.

[John D. Godyn:]

Okay, fair enough. And if that occurs on schedule, we would expect to sort of -- TRASM to reaccelerate kind of in the fourth quarter, maybe even more than it's done in the third quarter? Is that kind of a fair understanding of the trajectory?

[Andrew C. Levy:]

Put it this way. It's not in any of our models. I think that new products, like those in particular, it's really hard to forecast what the impact would be and whether the impact would be felt immediately or further on down the road as bookings increase and more people take it. I mean, we rollout a credit card, there's no revenue on day 1. You have to get people to sign up for it, and then that's how you start to see some contribution. Fare club, we'll see. We're still finalizing what that looks like. So I think that there may be a contribution in the fourth quarter. I wouldn't want to forecast how material it would be. But we're -- we clearly are working on adding new products that could drive more revenue. So right now, the TRASM increase and the past [ph] rising, that's all just existing products based on our view of revenue, advance bookings and how we're managing our network.

[John D. Godyn:]

And if I could ask as a couple of questions about capital returns. Just first of all, we've seen you guys show willingness to buy back stock at sort of increasingly higher levels. I know you're not going to give us a framework for sort of thinking about how you price the stock, but is it fair to assume, on a go-forward basis, that we should expect maybe a -- now sort of a consistent buyback process quarter-to-quarter that's a little bit less sensitive to maybe what the stock has done, even if the stock continues to go higher? Is that a fair way to think about it?

[Maurice J. Gallagher:]

John, it's Maury. We're committed to buying our stock back. I think we announced last quarter a $100 million authority. And so the board has endorsed that. Certainly, we need to be mindful of buying at a reasonable price, but given the trajectory of the stock, it's -- we debate that internally, certainly. But we're going to be buying our stock back as we go forward.

[John D. Godyn:]

That's helpful. And Maury, at times in the past, and I know this is related to certain kind of tax issues, we have seen you guys pursue special dividends. Is there any chance that something like that could be on the horizon too? Is that something that's being debated?

[Maurice J. Gallagher:]

We never say never. We certainly have not committed to a continuous dividend at this point. But the special dividend has worked very well, we think, in the past to return capital to shareholders. And there's no reason we would foreclose it going forward either.

[Operator:]

Our next question comes from the line of Hunter Keay with Wolfe Research.

[Hunter K. Keay:]

So I guess, Andrew, there's been some lessons learned in Hawaii, obviously, I think, in terms of the capacity being a little more seasonal, the demand for that market being a little more seasonal than you guys originally anticipated. And I appreciate there's a learning curve for this stuff. But what have you learned in terms of sort of demand for hotel nights? What's the difference between, a, one of your consumers flying into Vegas and booking a hotel for you and flying to Hawaii and booking a hotel for you? Have you found that there's more demand for more upscale hotels? And maybe you don't have the inventory that's appropriate for the types of places looking at people to -- people looking to stay in Hawaii versus Vegas? Or have you found that they're willing to cash in, say, loyalty points from, say, like a Starwood or something in the Hawaii market, which is maybe whether or not booking as many hotels through your site to Hawaii as maybe originally anticipated? I guess, can you just tell me what has changed relative to your expectations to the hotel nights in Hawaii and how it differs from the demand in Vegas?

[Andrew C. Levy:]

Yes, Hunter. So Hawaii is our second highest take rate market of hotels, but it's -- it lags behind Las Vegas by a considerable amount. It's not an inventory issue. We have ample inventory at the right price, so I think that it's more a variety of reasons. I think you hit on one, as far as loyalty. Certainly, there's timeshare condominium. And we have a few things in -- that are being worked on in the automation projects to allow us to do some things that, say, we can't do. For instance, it's difficult today for us to sell a stay -- a one-way kind of hotel stay. And a lot of our customers, just like people in general that go to Hawaii, they visit multiple islands, so that makes it a little bit tougher. Right now, we're limited to selling, essentially, kind of on a round-trip air basis, a hotel that kind of starts when you arrive and ends when you leave. Those are some of the enhancements that we think are going to be very helpful in terms of driving up hotel sales, not only in Hawaii but in other locations. Florida, specifically, would be a good example, where I think that, that would be helpful. We are continuing to try to figure out how to drive more hotel sales in Hawaii. And we think that there's still upside there. We'll see if we can get up to kind of the forecasted levels that we had anticipated when we made the decision of going to Hawaii. We're certainly not there yet.

[Hunter K. Keay:]

And how much were hotel room nights down in Vegas on a year-over-year basis?

[Andrew C. Levy:]

I'm sorry, could you repeat the question, please?

[Hunter K. Keay:]

Sorry. Yes, I was just wondering, how much were hotel room nights down in Vegas on a year-over-year basis?

[Andrew C. Levy:]

Hotel room nights in Vegas were down by a little bit more than the Vegas passengers, which were -- I think it was slightly down in Vegas this year. I mean, we have far fewer departures in Vegas. And, as a result, that's part of what contributed to the decline in hotel rooms on a year-over-year basis. It's just simply the network. It's less activity in Vegas. Year-over-year, less activity. And overall, on a relative basis, compared to the rest of the network, we've been really growing a lot in Florida, which is a great rental car market, but not as attractive on the hotel side.

[Hunter K. Keay:]

And one last quick one for Scott. I'm just kind of curious, what actually has changed over the last few months on CASM? Because you cited a few things in your release, obviously, salaries, maintenance and accelerated depreciation. I thought, Scott, I mean, some of those things you probably should have foreseen, but when you adjust for capacity, your unit cost -- non-fuel unit costs have continued to kind of inflate as we move through the year. So what has changed incremental to your original baseline plan on the cost side?

[Scott D. Sheldon:]

Yes, I think a couple of things stand out. Within the wages area, there was a stock comp adjustment that was related to some liability equity awards. These things, which are a substantial amount of our uninvested equity out there for employees, these things are more or less revalued every quarter. And with a substantial run-up in the stock in the second quarter, there was roughly about $1.5 million more or less unknown out there at the time. So it was kind of a high-quality problem, so $1.5 million year-over-year was not modeled out. During the second quarter, we did change the estimates for a residual value and useful lives for our MD-80 engine pool. A lot of this has to do with just change in market conditions. And so reducing those are more or less going to accelerate some depreciation. There's roughly a $400,000 charge in the second quarter that would look like, more or less, $500,000 in the third quarter. Those are the really -- the only 2. We did have some maintenance scope creep on some of our heavy checks in the second quarter. Roughly, I want to say, it was $700,000. But in general, the cost structure remains intact and as we forecast, with the exception of a couple of these things. One of the things to note, utilization -- block hour utilization continues to go down year-over-year, and that puts a tremendous drag on the cost structure as well.

[Maurice J. Gallagher:]

Hunter, given the stock price and that we've just got part of that stock comp back, so put it into the third quarter.

[Operator:]

Your next question comes from the line of Mike Linenberg with Deutsche Bank.

[Michael Linenberg:]

This is a question for Andrew. The announcement that you're going to go into the LAX/Honolulu market, that seems -- it seems like a little bit of an experiment. And I just -- it's sort of different than -- when I think about the markets that you historically focused on. Can you talk about how do you differentiate yourself in a market like that? What do you have to offer that is currently not being offered in the marketplace today?

[Andrew C. Levy:]

Sure, Mike. It is a bit of an experiment, you're right, and that's something we've always done and we'll continue to do. In this particular case, I think what we offer is very clear. It's by far and away the lowest price point out there. And that's because we have an enormous cost advantage over the other carriers in the market. We've done very well out of Vegas despite having a lot of competition in that market from Hawaiian. So based on our experience in Vegas, as well as the fact that we have operated in L.A. for many years, we have a pretty decent-sized database there that we can market to, and we're getting more confident in our ability to market in larger DMAs in a cost-effective way. And so all of those things led us to want to want to try this route and see how it goes. I think the other thing too, that what we've recognized in Hawaii is that some of the smaller markets that we serve just -- there are just not enough bodies there to support year-round service at prices that make sense. And so we're seeking another market or 2 that we can operate on a year-round basis because there's enough traffic density in the market, and that's what we think L.A. will do for us. So, so far, so good. Advanced bookings are great. It got off to a terrific start. And those who are price sensitive -- and if they know we're in the market, I think they're going to gravitate toward our product.

[Michael Linenberg:]

Okay, good. And then just a second question. I know Hunter brought up the hotel room nights. And you had indicated that Vegas was down a little bit. It was down, reflecting the fact that you were carrying less passengers to and from Vegas as a function of having less departures. When I look at the year-over-year decline of close to 17%, if Vegas is down a little bit, what's the bigger driver there? Is there -- is it other markets? Or is that just how the math flows through? Can you give some additional color that?

[Andrew C. Levy:]

Sure, sure. Standby one second.

[Unknown Executive:]

19%.

[Andrew C. Levy:]

So Vegas is down 19%, so it's a little bit -- room nights, yes. And passengers are down slightly. What we've done, Mike, and I think this probably contributes to it, is -- the other markets, by the way, are up in terms of hotels. Vegas still is the largest contributor of our hotel room night production. What we've done, about a year ago -- or not even, actually, more like about maybe 2 quarters ago, we really started to phase out the subsidy that we were offering to customers if they booked a hotel room with us, and that subsidy was in the form of a discounted air seat. And so that doesn't show up in terms of driving up hotel room sales higher or net revenue, but what it does show up is overall greater profitability for the company. So when we look at the production of hotels, despite the fact volume's down, it's more profitable than it has been in absolute numbers, as well as on a per passenger basis, when you take into account that we're not discounting the air seat to sell the hotel. Clearly, what we want to try to do is continue to drive take rate higher in all of our markets, and we think, with some of the e-commerce tools we're going to have by the end of the year from our IT shop, that, that's going to enable us to be more effective in continuing to grow that business line.

[Michael Linenberg:]

Okay, great. And then just on my last one here. In your guidance for the third quarter, you talk about the depreciation per aircraft per month to be between $92,000 and $97,000. And I know that, that's actually in reference to a full year depreciation number. What is the average aircraft number that you're using to calc that, just because you've had so many airplanes coming in, you have airplanes going out? Can you give us a base on that?

[Scott D. Sheldon:]

We're talking the third quarter, correct?

[Michael Linenberg:]

Well, it's in the third quarter guidance, but it talks about a full year depreciation per aircraft per month.

[Scott D. Sheldon:]

Yes, our full year average -- excuse me, average aircraft in service, assuming that there's none of the tail slip into the -- into 2014, would be roughly 62.5.

[Operator:]

Our next question comes from the line of Helane Becker with Cowen.

[Helane R. Becker:]

Just a couple of questions. The first question is, I think you're still negotiating, actually, with your pilots, and it's kind of a part a and a part b. Number -- part a, is any progress on an initial contract? And part b is, are you at all concerned about the major airlines starting a pilot hiring program and [indiscernible] for you to keep and attract and retain pilots?

[Maurice J. Gallagher:]

Helane, it's Maury. On part a, we're certainly negotiating as appropriate with our crews. At this point in time, we're about, what, 5, 6 months into the process. And everything has to be done on first contract, so it's always usually a longer period of time to do something. That's going along as expected from our side of the house. On the shortage of pilots, we haven't seen that. I don't believe we're going to be as affected. Perhaps maybe as in a food chain factor, the folks who are commuters, as they traditionally are known as the regionals, with the change in the -- our requirement from 250 to 1,500, that's going to put pressure on early applicants that historically have gone through the system by getting a job with a regional and then, as openings move, come about in bigger main line carriers or flying bigger airplanes. They move up at that point. So we've certainly not seen anything. You see commentary about possible pilot shortages, but in my 30 years of doing this, there's been -- always been crews around every place I've been. So it's a good job. They get paid well, and there'll be a demand for that -- or supply of that position, as far as we can see.

[Andrew C. Levy:]

Helane, this Andrew. Let me just -- let me mention one thing. We have a few former AA pilots, some of which have been recalled from furlough, and some have chosen to go. A couple have regretted that decision, and many others have chosen not to go. So there is a little bit of a demand just in that regard. And so far, it's nothing that gives us a lot of cause for concern. We'll manage through it.

[Maurice J. Gallagher:]

One other point. Pilots come into the airlines at the bottom of the seniority chain. And if you're in a 7,000-, 8,000-, 9,000-pilot environment, such as a major, and there's little or no growth, your opportunity to move up is going to be slim and none. Carriers such as ourselves, Spirit, that are growing, adding more airplanes, that's the quickest way to get to the captain's side of the house and the compensation that goes with that.

[Helane R. Becker:]

Right. I was going to ask if you knew or had a sense of how long it takes to make Captain at Allegiant.

[Maurice J. Gallagher:]

I'm guessing that's 4...

[Andrew C. Levy:]

I think it's about 4 or 5 years right now.

[Maurice J. Gallagher:]

Yes, 4 years, that would be -- maybe 5 type of thing.

[Helane R. Becker:]

Yes, yes, yes. So it's just 5 years for you and 10 or more for another choice. It would be easy. The choice would be easy, right?

[Maurice J. Gallagher:]

I think 10 is very aggressive for any traditional carrier that's not growing, Southwest, United, American, Delta, those guys. 10 would -- I don't think you'd see the love seat in 10.

[Helane R. Becker:]

Okay. All right. Well, yes. So that makes it even more likely they would choose Allegiant versus another choice, right?

[Maurice J. Gallagher:]

Right, yes. It's not a worry of ours today.

[Helane R. Becker:]

Yes, okay, that makes sense. And then recently, I think jet fuel prices have increased a little bit. And I was just kind of wondering if that is causing you to rethink the capacity plan for the fourth quarter? So I think the third quarter is pretty much set, but the fourth quarter plan.

[Maurice J. Gallagher:]

Well, Helane, we always keep our options open. Jet fuel prices have gone up a little bit. It's relatively -- it's still within a relatively tight range that it's been for awhile. But no, I think you're right, I mean, the third quarter is pretty much set. Fourth quarter, we have opportunity to tweak things, if we think that opportunity's there. Now keep in mind, a good portion of the growth in the fourth quarter is driven by flying A320s that are going to be coming in, that are larger gauge and are materially more fuel-efficient. So that will help us manage through any uptick in fuel prices that we see. We like that kind of capacity growth. The 11 additional seats with a couple hundred gallons out of less fuel burn, that's a good combination for us. As far as network adds or frequency adds, yes, we're going to keep our options open, and we'll react accordingly.

[Helane R. Becker:]

Okay. Is the program to add seats, then, to all the other aircraft done? Is that all in? And is the uptake on that in line with your expectation?

[Andrew C. Levy:]

Yes, that program is done. It completed last quarter. We still have a handful or fewer, at this point, MD-80s that are going to be retired that are operating with 150 seats. By the end of this quarter, we'll only have 1 remaining, that's 150-seat airplane, and that will go away in January of next year. So we have 51 airplanes with 166 seats, MD-80s. And we're very pleased with the results of that program. The capital investment per aircraft came in underneath what we anticipated, and the incremental seats are very powerful. It puts pressure on RASM, certainly. But in terms of overall profitability, it's very strong, and we're real happy that we went ahead with that project.

[Helane R. Becker:]

Okay. And then my last question just on average airfare is, do you have the ability, do you think, to push the average airfare higher? I think even your total fare went down a little bit, but it looks from prior years that it generally goes down from first to second quarter. So I was just kind of wondering if you have any opportunity to push the other [indiscernible].

[Andrew C. Levy:]

Well, I mean, look, we, as everybody else, is always trying to maximize revenue. Second quarter this year, in particular, was a little weaker relative to the first quarter, mainly because of the Easter shift. So March benefited from Easter being in March, which led to a very strong first quarter as a result of that. And without that being in the second quarter, on a relative basis, you're going to see that. And then -- and that's -- historically, that's what you always see when Easter moves around between March and April. But we're always trying to find ways to drive more revenue. But honestly, we'd prefer to drive more revenue in the ancillary line items as opposed to the base fare. But we're certainly trying to maximize profitability overall. And wherever we can push up the fare, we certainly try to do that.

[Operator:]

Our next question comes from Jim Parker with Raymond James.

[James D. Parker:]

First question has to do with your -- some commentary following your second quarter or June quarter traffic release. You indicated that there was perhaps some softness in demand. And of course, that would be leisure, since that's what your business is all about. It appears that we haven't seen that with other carriers. We haven't seen Southwest numbers yet or any detail about it, but is there something unusual about your customer base, where you might deviate from what's going on in the industry?

[Andrew C. Levy:]

Jim, this is Andrew. I don't think so. I think, historically, we haven't seen that be the case. I don't think this is any different. I think June was a little weaker than we anticipated. I think part of that is probably just a forecasting issue on our end. So I think June results were good. They were very solid. It was a very, very profitable month, it just wasn't quite as strong as we thought it would be on the fare. So we got the load, we just didn't get the fare that we anticipated. As we look ahead, we're encouraged by the demand environment. This quarter looks good. The fall looks very good, although obviously it's early. But for now, we're -- we're feeling really good about the demand environment. It's not accelerating, necessarily, but it's stable and, I think, pretty strong.

[James D. Parker:]

Okay. Andrew, also, you've indicated that some of your markets -- your small markets don't have enough bodies to support the 757 to Hawaii. And you've also, of course, moved that -- or you're opening up L.A. to Hawaii with that aircraft. Do you have too many 757s? And is there an opportunity to move those out -- some of them out of the fleet?

[Andrew C. Levy:]

Jim, I think that we don't know the answer to that question just yet. If we can make Hawaii work, as we had forecast initially, albeit maybe with a different seasonality and mix of markets, then no, I don't think we have too many 757s. If we can't have somewhere around 6 airplanes running to Hawaii year round at acceptable margins, then the answer is probably to go to 0. But I think that it's still too early to make that call. We're learning a lot about the seasonal trends there. I think the network changes we've made are going to be very, very accretive. And we are optimistic that a market, like in L.A., for instance, is something that can help us drive the returns that we anticipated when we decided to go to Hawaii.

[Operator:]

Your next question comes from the line of David Fintzen with Barclays.

[Isaac Husseini:]

This is actually Isaac Husseini for Dave. I had a question for you guys maybe on the A320 and the A319. Obviously, you've timed your acquisitions really well on those assets. But what we're hearing from the lessors, pieced anecdotally over the last 6 months or so, is that those asset prices have stabilized. Is that something that you're seeing in the market as you look at more A320 or A319s? And more importantly, if that does change and values become -- start recovering, does it change your view one way or the other as it relates to your fleet plan and growth plans?

[Maurice J. Gallagher:]

Dave, it's Maury -- or Isaac, sorry. I'm not surprised you hear that market prices are stabilizing from lessors. That's important in their business model. We're opportunistic buyers, lessors -- lessees, rather. And we see long term that the marketplace will be sufficient to supply our demand at prices that makes sense just given the change over at a minimum that's going on between engine types over the next 2, 3, 4 years. So I would say it's reasonable to say that the market price hasn't gone down since we probably commented a year ago when we were doing deals. But it's still attractive. We find deals out there. We're looking -- we've got our feelers out all the time.

[Isaac Husseini:]

Okay, that's helpful. And maybe just one for Scott. Wanted to follow up on a CASM question that you got earlier and just maybe get to it slightly differently. The progression is really -- between the 3Q and 4Q on CASM ex-fuel, it looks a bit strange. Could you maybe just help us understand what's happening sequentially between those 2 quarters? And maybe also if you can just give us a sense of the 7% to 9% CASM growth that you expect in 3Q? How much is the accelerated depreciation?

[Scott D. Sheldon:]

Yes, regarding the accelerated depreciation, I mentioned about $500,000, there's more or less -- was -- is incremental. If you look on a per aircraft basis, I believe we're at $95,000 per aircraft in the second quarter. Third quarter will definitely be a little bit north of that. Regarding the full year unit cost trends, as I mentioned, I mean, everything hasn't materially changed, with the exception of a couple of uniques that I identified. Utilization, I feel, is probably one of the biggest factors out there. As far as labor, we know there's a lapping effect in the fourth quarter. Utilization being down means you're just not as efficient with your flight crews. We know maintenance for a full year basis should be relatively flat, and then D&A is really the story. So there's really not much else out there.

[Andrew C. Levy:]

This is Andrew. Just to add on to that, I mean, third quarter, we typically see a spike in our CASM ex-fuel because of, like Scott mentioned, we fly less because it's the seasonally weakest quarter for us. And while -- and at the same time, while we fly less, we do a lot more heavy maintenance during that period of time because the fleet is not as active. So that's kind of normal for us. You see a drop in the utilization, a spike in maintenance expense because we take advantage of the fleet being less utilized. And so that's why you see a little bit of a burst up in the third quarter, but it's kind of normal. And then fourth quarter, we start flying more, utilization picks up and things get a little more normalized.

[Scott D. Sheldon:]

And just one more thing to add. With 3 MD-80s being retired early in the quarter, your aircraft's count is relatively flat, although your infrastructures doesn't -- can't flex accordingly. So you're going to see a spike in the FTEs per aircraft in the third quarter, with utilization being down. I mean, you start adding these things up and you can get to the number fairly easily.

[Isaac Husseini:]

Okay, and just on the -- of the 7% to 9%, can you -- do you have the number? Maybe -- I don't know if you don't have it. How much of that is because of accelerated D&A, the 7% to 9% increase?

[Andrew C. Levy:]

Why don't we get back to you on that.

[Scott D. Sheldon:]

Yes, let me get back to you on that one.

[Operator:]

Your next question comes from the line of Duane Pfennigwerth with Evercore.

[Duane Pfennigwerth:]

Just on your CapEx, can you remind us what change did -- and I think this is a second revision, up modestly this year. What was the sort of 2 changes -- what have driven the 2 changes so far this year?

[Scott D. Sheldon:]

Duane, this is Scott. We did transact on a new headquarter building for roughly $12.5 million. That wasn't anticipated early in the year. Yes, and then we were able to acquire an additional 319 as a one-off early in the second quarter as well. So those 2 transactions were not anticipated when we put out full year guidance at the beginning of the year.

[Duane Pfennigwerth:]

Okay, that's helpful. Any early thoughts on '14 CapEx?

[Scott D. Sheldon:]

No, not at this time.

[Andrew C. Levy:]

It's going to be materially lower. Yes, we're buying the 9 A320s that we've committed to. Seven are going to be purchased this year. I think 3 or 4 have already been purchased. And the remaining 2 are scheduled to be purchased in the fourth quarter of '14. And other than maintenance CapEx, that's it for 2014 as of right now.

[Duane Pfennigwerth:]

And then just to stick on '14, can you talk maybe broadly about the ASM mix by aircraft type?

[Andrew C. Levy:]

In '14?

[Duane Pfennigwerth:]

Yes. So as we think about some of the efficiency factors on the 319s and the 320s versus the MD-80s, how do we think about that mix of line?

[Andrew C. Levy:]

Well, I mean, the 10 319/20 aircraft that we're going to go into the year with, we'll start the year with -- well, it's in the release here

[Operator:]

Your next question is from Glenn Engel with Bank of America Merrill Lynch.

[Glenn D. Engel:]

Your -- when I look at your numbers, your capacity growth sort of flattens out at the end of the third quarter and then reaccelerates in the fourth quarter. Where is the growth coming from in the fourth quarter year-over-year?

[Andrew C. Levy:]

Yes, the fourth quarter growth is a combination of things. The largest contributor are new routes. So the net of subtracting discontinued routes, adding new routes, that's the bulk of the growth. A good portion of it also, a smaller contributor, is just larger-gauge aircraft. Certainly, we have the 19s, which are slightly smaller gauge. But with the A320s and then more 757s flying last year, we had, I think, 2 75s. In the quarter this year, we have 6. So that's the second biggest contributor. And the last is stabling. We expect stabling to be higher on a year-over-year basis, so that'll contribute to it as well.

[Glenn D. Engel:]

And is Hawaii bigger or smaller in the fourth quarter of '13 versus '12?

[Andrew C. Levy:]

Fourth quarter '13 versus '12? Yes, Hawaii is larger, certainly. Fourth quarter last year -- well, I shouldn't say that. I think it's a little bit larger. We did announce a lot of routes in the fourth quarter of last year. Bear with me one second. No, I stand corrected, Glenn. I'm looking at the data right here. It's actually slightly down, Hawaii, on an ASM basis year-over-year.

[Glenn D. Engel:]

And internationally, where are we in terms of getting the computer set? Southwest is struggling to get their computer set for international? What do you have to do? And then two, it would seem like to attract Mexican traffic, the distribution system would have to be a lot different than domestically, or maybe I'm wrong?

[Andrew C. Levy:]

So Glenn, we're -- we've applied for [indiscernible], and we expect to get those granted. The automation project is -- has begun. The biggest issue that needs to be managed is just payment and taxes, things of that nature. So that work is being done. We do not expect to have a different distribution approach to generate traffic in Mexico. Certainly, that's not the kind of the traditional -- distribution in Mexico over the years has been more of the kind of traditional GDS-based distribution. We have or believe that we can be effective selling on the web, direct to consumers, and we will start that way. And if we have to modify that, then we'll do so. But we think we can be very effective going direct to the customer. We start next summer with one route into Vegas, northbound, and then another route from Vegas to Cabo. So the northbound route into Vegas will be the only one we have. We'll grow it, if it performs as we think it will. But the effect of Mexico -- the contribution of Mexico next year is going to be incredibly small on the overall system. We're going to grow it conservatively and just react accordingly and learn as we go.

[Glenn D. Engel:]

And the MD-80 fleet, is that going to be changing much in 2014?

[Andrew C. Levy:]

No, the MD-80 fleet is going to remain constant. We have -- the last retirement, the 52nd airplane is going to retire at the end of January, when it goes into a heavy check. And the remainder of the year, we'll operate 51 MD-80s, all with 166 seats, and there is no retirement plans at this time for any of those aircraft in '14 or '15 or even beyond. As we're able to get more Airbus aircraft at prices we like, then we'll probably start looking to retire MD-80s over time when they reach the expensive heavy checks. But at the moment, there's no plan.

[Glenn D. Engel:]

And finally, going back to international side on the automation, when do you hope to -- when do you need to complete that buy? And is that a risk at all for the next summer start?

[Andrew C. Levy:]

Well, I think it's definitely a risk. I mean, there's no question about it. We'd like to be selling by the end of the first quarter or early part of the second quarter, and so there's a lot of work that needs to be done, in order to make that happen. We believe that, that is very doable at this point. But we'll see. I think what we're trying to is, with our own systems and -- I don't know, I can't speak for Southwest issues. They've clearly -- have some issues with automation, and automation's really complicated, and typically it does take longer than you expect, but we feel confident right now with the date we put out there.

[Operator:]

Your next question comes from the line of Bob McAdoo with Imperial Capital.

[Bob McAdoo:]

A couple of things. On the A319, A320s, could you refresh my memory on, are these owned airplanes that we worry about depreciation or are they leased airplanes?

[Andrew C. Levy:]

Bob, 2 of the A319s are leased, and that's what you see in the aircraft lease rentals line. The third A319, which was -- went in service this week, is owned, so there is depreciation on that. And then the 7 A320s are all going to be owned aircraft, so you'll have D&A on that as well.

[Bob McAdoo:]

And when do the A320s come in relative to the start of fourth quarter versus the end of fourth quarter? And how do we think about -- obviously, we've seen some improvement in the fuel burn, fuel per ASM and whatever. Even in just going from sequentially quarter-to-quarter, we're seeing little bits. But when we see that many A320s coming in, it probably is going to make a more dramatic difference. I'm trying to think about -- as we think about fourth quarter, are those going to be coming in early in the fourth quarter? Are they going to kind of hang back and come in, in December [indiscernible]?

[Andrew C. Levy:]

So, Bob, we think we'll have all 7 of them running by the end-of-year holiday period. And we think we'll have the vast majority running by the Thanksgiving holiday period. Our schedule in the fourth quarter, we start to ramp it up again in places like Florida and Phoenix really in the early- to mid-November timeframe. And we think that we'll have most of those in the fleet at that time, and the remainder before the Christmas holiday period.

[Bob McAdoo:]

Okay. And then one last thing. When you talk about southbound Mexico destination of Cabo, is that to bring people out of the small cities to Cabo, like you would take them to Phoenix? Or what's the...

[Andrew C. Levy:]

Well yes, Bob. I mean, initially, it's going to be Vegas originating traffic, which, although it's not a "small city," it's our base and we have a very large presence there and a lot of customers there. Over time, we do expect to serve Mexican vacation destinations like Cabo, like Cancún, from many of our small-city markets. So we're just kind of getting started with Vegas southbound and then MCO northbound into Vegas, and we'll kind of go from there.

[Operator:]

Your next question comes from the line of John Godyn with Morgan Stanley.

[John D. Godyn:]

You had some good qualitative sort of commentary around the PRASM to, I think, Jim's question. But I just wanted to a ask a couple of specific questions around it. July 4th holiday traffic, just in general, how did that shape up? And September, I know it's a little bit early to comment on September, but how is September specifically shaping up, as you look out? Just some context would be helpful.

[Andrew C. Levy:]

Well, sure, I think July 4th kind of was like we would expect it to be. It's obviously a very busy travel period. July in general is very busy, and obviously it probably peaks up a little bit during that vacation window. September right now, actually, it's not that far -- keep in mind, our booking curve is a good bit longer, probably, than most anybody else out there. So we actually have pretty decent visibility into September, and September looks very good right now. Certainly, we're going to help ourselves by flying less in Hawaii this year than last year during that off-peak period. But we're encouraged by the advance bookings in September and then beyond into the fourth quarter.

[John D. Godyn:]

Great. And on the CASM ex-fuel guidance, you have a 2-point range for the third quarter, but you still have a 3-point range for the full year, which just implies a pretty huge range for the fourth quarter in terms of CASM ex-fuel outcomes. I know you're taking a lot of A320s, but if you could just sort of more specifically to talk about kind of the key points that drive the higher versus the lower end of the range for the fourth quarter, that would be helpful just to kind of understand the variance there.

[Andrew C. Levy:]

Yes, I mean, I think a lot of it is aircraft. But I mean, look, we're not trying to get too precise. We like having some room there and hopefully to do better than what we expect to do. That's the range we're going to give you today, and we'll obviously tighten it up at the end of the third quarter.

[John D. Godyn:]

Okay. And I think you mentioned that the majority of the A320s are hitting by Thanksgiving, which is sort of halfway through the quarter. As we roll into 2014 and we think about rolling fourth quarter costs into 2014, is it fair to think that first quarter of 2014 starts with an even better year-over-year CASM ex-fuel growth rate than whatever we're modeling for the fourth quarter?

[Andrew C. Levy:]

I think that, that's how I would model it. If you're talking specifically about the contribution of the Airbus aircraft, yes. I mean, fourth quarter is kind of a tale of 2 quarters. The first half is pretty slow, and the second half is real busy. And -- whereas first quarter is our best quarter and our busiest quarter, and for that entire period, we expect to have 10 of these airplanes flying around and flying really hard. So yes, I think your assumptions are correct.

[John D. Godyn:]

Got it. And then I think there were some of these questions earlier sort of asking about hotel trends. One of the kind of related but slightly broader questions that I've been getting is just that ancillary revenue per passenger sequentially seems to have kind of underperformed people's expectations. I think, by my math, it ticked down sequentially. We haven't seen too many phases for Allegiant where we've seen ancillaries per passenger tick down sequentially. And that does tend to concern investors when it happen -- when it does happen. As we look forward, is there anything that you can sort of tell us to give us comfort that maybe that number is, at worst, going to be flat, if not start to tick up again as we look deeper into 2013 and in 2014?

[Maurice J. Gallagher:]

You're talking about the third party specifically, right?

[John D. Godyn:]

Ancillary revenue per passenger just as a total.

[Maurice J. Gallagher:]

Okay. Well, the total, it was up. So I think that if you're talking about third party, I'm with you. Let me just comment on that. Look, as I mentioned before, we could go back to giving air discount, which would pull down our passenger RASM and fare and benefit the third-party line. We've chosen not to do that. We've chosen to change that approach because we believe that it drives overall higher revenue and higher profits to the company. We think that this line item will continue to grow on an absolute basis, and that's what we're really focused on. As the mix of the network changes over time, if Vegas becomes a larger percentage, then that gives a little more upside there on hotels. As Vegas gets to be a smaller percentage, then it does the opposite. But in absolute terms, we drove $10.5 million of net revenue in the third-party line, and that's up 6%. And we'd like to see that growth rate be much higher. We do think that the automation enhancements and some of the tools we're going to have will enable us to be more successful in doing that. But overall, we're really pleased with where we came out in revenue, and particularly in this line item. We're more profitable in this area than we've been in the past. So that's what we're looking at as profits.

[John D. Godyn:]

Got it. That's very helpful. And just last question, a follow-up on my capital returns question earlier. When we think about just sort of the idea of continued earnings growth and then CapEx falling significantly in 2014, that's a year where you could build significantly more cash. Can you just, maybe bigger picture, address the idea of would you accelerate buybacks? How do you think about trade-offs versus a special dividend? What would you do with that cash if that turns out to be a year where you build a lot of it?

[Maurice J. Gallagher:]

John, we've been internally looking at all the avenues, the ones you just mentioned. There's 3 basic approaches, 2 of which are out of the same family. You can do a dividend special or do a dividend regular and/or buy stock back. So those are all under consideration. We've already committed to the buyback of the stock, so we'll -- no precise choice of one over the other at this point in time.

[Andrew C. Levy:]

I think the only thing I'd add, John, is that you're right. We do expect to add a very significant amount of cash next year.

[Maurice J. Gallagher:]

Well, I think, two, if you look at our overall EBITDA numbers, they've been going up as our depreciation's gone up. So our cash flow has been improving right along with our increased margins, but even stronger.

[Operator:]

Our next question comes from the line of Hunter Keay with Wolfe Research.

[Hunter K. Keay:]

Just a couple of quick ones here. Scott, can you just tell us what you're paying for fuel? Not with the spot prices, but the interplaying costs or whatever you want to call it that's hitting your P&L right now?

[Scott D. Sheldon:]

Yes, it's roughly $3.20 a gallon.

[Hunter K. Keay:]

Okay, that's helpful. And you may have touched on this a little bit before, but can you help us think about ASMs per gallon going forward? You're continuing to sequentially drive it higher. Maybe for the third quarter and the fourth quarter, some of the new A320 family airplanes come online, can you help us maybe think about it? Is that going to hit maybe $0.70, $0.80 per gallon at some point this year or maybe 2014? Or if you don't want to answer that, just maybe help me out for the third quarter on that line?

[Scott D. Sheldon:]

It's definitely trending towards $0.70. It's not likely to get there this year. But if you look at the year-over-year increase and the fuel efficiency, $0.80 per gallon, you could likely take what you saw in the second quarter and the third wouldn't -- shouldn't be drastically different.

[Hunter K. Keay:]

Okay. Yes, that's cool. So it's possible that gallon consumption actually might even decline a little bit, third quarter?

[Scott D. Sheldon:]

That's correct.

[Hunter K. Keay:]

Okay. And maybe one last bigger picture one for you, Maury or Andrew. With fuel up here again, I'd love to hear your thoughts on sort of where you stand with regard to your appetite for post-purchase price adjustments. I know that there's been some DOT rulings on this area that can be, I think, open for interpretation. That's one way of putting it. Where do you guys stand on this process? And do you think it's something that we should maybe expect at some point this year?

[Maurice J. Gallagher:]

Not this year. We don't -- again, all the things -- 90% of our activity, Hunter, goes through our website, and so it's all automation driven. And to do that would be a pretty fundamental undertaking to throw into the website at this point. While we've chatted about it, I know I, in particular, have thought it to be an interesting approach for the industry to sell the seat ex-fuel and then the -- or an option, if you will, and then let people choose to adjust for fuel at the time of purchase or we sell them an insurance policy that guarantee's their price at the time that they travel -- or excuse me, at the time of travel, both cases. But we're not ready to do that at this point. The other thing, too, if fuel's stabilizing and able to work around it, it's kind of fallen back with the volatility seeming to be more contained, if you will, in the last 1 year, 1.5 years in the project.

[Operator:]

Ladies and gentlemen, that concludes the presentation -- the question-and-answer session.

[Maurice J. Gallagher:]

Thank you all very much. We appreciate the questions. We'll talk to you again at the end of the third quarter. Thank you all.

[Operator:]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.