Allegiant Travel Company
Q4 2015 Earnings Call Transcript

Published: 28 Jan 2016

[Operator:]

Good day, ladies and gentlemen. Welcome to the Allegiant Travel Company's Fourth Quarter and Full Year 2015 Financial Results Conference Call. We have on the call today Maury Gallagher, the Company's Chairman and Chief Executive Officer; Scott Sheldon, the Company's Chief Financial Officer; and Jude Bricker, the Company's Chief Operating Officer. We ask that you begin to queue up for questions now as we will have a brief commentary and we will shortly begin our question-and-answer session. [Operator Instructions] As a reminder, this call maybe recorded. First, we wish to remind listeners that the Company's comments today will contain forward-looking statements, and they are only predictions and involve risks and uncertainties. Forward-looking statements made today may include, among others, references to future performance and any other comments about our strategic plans. There are many risk factors that could prevent us from achieving our goals and causing the underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed or implied by our forward-looking statements. These risk factors and others are more fully disclosed in our filings with the Securities and Exchange Commission. Any forward-looking statements are based on information available to us today and we are undertaking no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. The Company cautions users of this presentation not to place undue reliance on forward-looking statements, which may be based on assumptions and events that do not materialize. These earnings release as well as the rebroadcast of the call are available on the Company's Investor Relations site at ir.allegiantair.com. At this time, I would like to turn the call over to Maury Gallagher. Please proceed.

[Maury Gallagher:]

Thank you, operator. Since we have no prepared remarks at this point, would you please proceed the calls?

[Operator:]

Thank you. [Operator Instructions] Our first question is from the line of Joseph DeNardi. Please go ahead.

[Joseph DeNardi:]

Jude, I am just wondering just given your new hat as COO, if you could just comment on what the operational challenges you faced in 2015 were and what you plan to do to correct them. Then I think investors struggle a little bit with given some of the headlines that come out trying to decipher between what are real safety issues that the airline and what is maybe overhyped by the media, so I am wondering if you could comment on some of that, are they are safety issues that need to be addressed or is it more subtle than that?

[Jude Bricker:]

Let me start with the safety point, no. There isn’t, it is a safe operation last year, and there will be safe operation this year as well. Operational challenges that we had over the last several months really had to do mainly with the growth that we were putting through our network and that manifest itself in a couple of different ways. The first is that we are taking on a lot of new airplanes and they have been slow to come up to the fleet average reliability and we will still work through those issues, the reminder of the first and second quarters. More materially, we continue to struggle with crew availability as our training pipeline tries to catch up with fleet growth, so we think to that will have been solved by the end of the first quarter and continue to improve to where we were in a small surplus accrues by the end of summer period, so I think we are on top of those two main issues. Combined now with slowdown in the growth rate, so our year-over-year by quarter comps for capacity growth will decline as the year progresses, so first quarter will be the fastest growing quarter and then each successive quarter after that will slow down a bit. I think the main issues is just us catching up the operation to where the network has been and most of the solutions to that program, to that endeavor are already in work and we will get there. Now, your other point was that a lot of what you read about us in the press, what is the source to that? Why is that out there? Maybe Maury if you want to comment on that.

[MauryGallagher:]

Well, I think, Joe, maybe a simplest answer, but we are in negotiations with our pilots and particularly the Teamsters have a history of this tactic of making sure all of you packables are out there and available for everybody to see and papers and media are where juicy type of story in many cases, so every airline has operational issues. As I tell our people, the systems are setup to deal with problems when you have people and machinery, you are going to have issues with those and a safe environment such as what the FAA and the NTSB have put together allow for those to be anticipated and corrected accordingly. Certainly you go for root cause and you are looking into all the particular as to why things happened, but we have invested tremendously in safety system over the last few years, the FAA has suggested as many as seven voluntary safety systems and we are in all of them. We have a terrific SMS program if you are familiar with that, so as I tell people this industry is -- all it ultimately sells is safety and we are currently at the forefront of all of those respects. As Jude said, we are safe. We are continually working toward these changes between Scott and Jude. I think we will go a long way towards enhancing where we were going, but perhaps getting us there faster and in many ways more in depth than we might have done otherwise.

[Joseph DeNardi:]

Okay. Thank you for that. Then Maury, if the current forward curve actually plays out you guys are going to be generating a ton of free cash flow this year. I am just wondering if you could talk about how you plan to deploy that. Is it aircraft that you guys are looking at or should we think of return to the shareholders?

[Maury Gallagher:]

Yes. Your math works bas as well as I did. I was looking at the fuel prices today in Las Vegas at $5 in the plane this week, which is this is déjà vu back to 2002 or 2003. Do not expect it to stay down that low certainly, but I think it is not going back to $3 anytime soon, so you are correct about the cash and alike and it is always going to be a trade-off between capital and going into airplanes and return to shareholders. We have been doing both pretty well over the last many years. The benefit of - I think, we had EBITDA of close to $470 million this year or something like that and that is a lot of money comparatively to where we were even a few years ago, but we will keep you up to speed as where we are going to go. Certainly, the MD-80 program is, we have to replace those airplanes and we have got a plan in place to do that. Perhaps, we would move faster if the right deals come along. We will just have to see, but it is a good place to be at this point, Joe.

[Joseph DeNardi:]

Okay. Thank you.

[Operator:]

Our next question is from the line of Dan McKenzie. Your line is now open.

[Dan McKenzie:]

Yes. Hey, good afternoon, guys. Thanks.

[Maury Gallagher:]

Hello, Dan.

[Dan McKenzie:]

Maury, we know there is a high correlation between operations and revenue. I am just wondering if you could help characterize to what extent the challenges may have hurt the revenues in 2015 and maybe one way to think about that is just actual versus expectations that you might have had at the beginning of the year.

[Maury Gallagher:]

Well, candidly our results are little better than we expected with where we are at. Certainly, I think fuel is a component of that. Revenue has been a volatile area this year. I will turn it over to Jude in just a minute, but we have work to do to get our operations where we need to be, but we have had a lot of good months as well, Dan. I remember in March of this year, we run like a Swiss top. We were in great shape. We had a more difficult summer in a June and July period. Even through the fall, we were not in bad shape. Having said that, we have places we want to go and improve and the management changes you were seeing and have read in our release are key to getting to those points. Jude, comments on the revenue?

[Jude Bricker:]

Dan, we have never been able to tie short-term revenue with operational challenges. We do not see any correlation. I think you have to have faith in a long-term that a good operation creates a stronger brand association with our customers and therefore is a good investment in the long-term and we believe that. Certainly, fourth quarter revenue was not affected by fourth quarter operations.

[Dan McKenzie:]

Yes, understood. You know, Maury, thanks. I was not actually picking on the revenue performance. It actually to your point is, pretty good and I obviously see that you hit the high end of your revenue guide for the quarter and the better end of non-fuel cost guide, so it seems like a pretty good quarter. I was just thinking that - trying to get out if there is may be 100 basis points to 200 basis points of improvement that there could have been that there was. I guess that is all I was trying to get at, but just following up here in kind of the second question, just given the weakness in energy, I am just wondering if you can just remind us what percent of the fine is tied to the Dakotas or Montana or just specifically to energy heavy end markets and what are you seeing in those markets and how are you thinking about the drag of these markets relative to your system average?

[Jude Bricker:]

Hey, Dan. It is Jude. I will take that one. It is tough to tie sometimes in some of these markets whether what we are seeing in the form of weakness can be associated with currency changes that are affecting cross-border traffic or rather just the local economy there, but I would say about 5% of our traffic is from local economies that are dependent or associated with oil and gas industry.

[Dan McKenzie:]

Okay. Thanks, guys. That will do it for me.

[Maury Gallagher:]

Thanks, Dan.

[Operator:]

Our next question is from the line of Duane Pfennigwerth. Your line is now open.

[Duane Pfennigwerth:]

Hey, thanks. Good afternoon, guys.

[Maury Gallagher:]

Hi, Duane.

[Duane Pfennigwerth:]

I was hoping if you could just playback fourth quarter revenue a little bit. Obviously very strong results bottom-line, but I think over the course of the quarter, you did moderate top-line expectations. I was wondering if you could give any color as to when that happened and what you thought was sort of driving it relative to your initial expectation.

[Jude Bricker:]

Yes, so this will be a bit of a review, but generally speaking, we have the same external influences that had been pushing down revenues as what we have had in previous earnings calls. As I mentioned, the foreign exchange changes have really materially affected our cross-border traffic, Canadian and Mexicans. We have these local economies that Dan mentioned that are affected by the follow-up in oil and gas prices. We have some directly competitive markets and many of those now have other ULCCs in them like in Cincinnati and Austin. I think that what surprised us a little bit is, some of the influences of adjacent markets, so we are seeing ULCCs, in particular, fighting over big city markets to our leisure destinations and that has had some adjacent effects into some of our markets. A good example would be Philadelphia, whose fares have gone down significantly and that has affected some of our markets that are a three-hour drive from Philadelphia like Allentown. I think for first time in recent history, we have seen really aggressive flow pricing, which is based around these leisure markets that have seen really, really expensive growth of seats domestically, so Vegas and Orlando in the fourth and the first quarters have had about 10% seat growth and that is creating a lot of requirement at discount fares and we are sort of ancillarily associated with some of that fare discounting, but internally, and this is -- go ahead.

[Duane Pfennigwerth:]

Go ahead, Jude. Sorry.

[Jude Bricker:]

I would just say internally, you know, the story is more the same as that is adjusting the network to a lower fuel price, so some of this marginal flying becomes more viable as fuel prices come down, so we are rapidly adding new markets. We are selling today 60 markets that we weren’t selling a year ago. That is really rapid growth in that regard, increasing utilization, which affects the increase in off-peak period flying so we are increasing off-peak day week flying, we are increasing the seasons. The seasonal effect for the first quarter will be material and that we are growing March only about 13%, but the growth in the quarter will far exceed that. Meaning, January and February with much weaker unit revenues are getting materially more growth and that is just our availability of mainland pilots during that period and then a little bit, which is kind of my third point. We just want to be operationally conservative as we push up growth in our peak periods. This coming March is, kind of, March on steroids, because Easter is in March this year, so our 13% growth with our margins, we would like to go higher, but we just want to be careful and keep operational integrity through that period. That is kind of what we are seeing. I mean, most of what we are doing is, ourselves making rational decisions; we are getting a small influence from general decline in the fare environment. I think if we operated in the fourth quarter of '15, the same network that we had in the fourth quarter of 2014, our unit revenues would only be down about 4% if we also did not include the effect of the debit card discount, so 3% or 4% decline in revenues with the kind of, fuel falloff that we are seeing, that leads us to grow as rapidly as we are growing and particularly in the off-peak period, where we have the crews and airplanes to do so.

[Maury Gallagher:]

Duane, this is Maury. Just a general statement, once again your part of the world seems to be focused totally on that one variable revenue side and we sit here idle and look at the bottom-line and these are very rational things we are doing and if the fare goes down that the fuel to offset it and then some. If it turns around it goes the other way and they are not making money, we will backup and adjust accordingly. That is what we have done over the years and that's what I would think investors will be more interested in as management that takes care of particulars.

[Jude Bricker:]

Our smallest unit of capacity allocation is a single roundtrip, because of the outback nature of our network, so if you look at how many of those roundtrips that we make a decision to fly that did not contribute positive with EPS, it was less than 0.5%, and so we are making 30% margins and on that margin basis and you think about how many flights out there did not cover variable cost is pretty close to zero. If we did not perfect information going in the quarter the network would have looked almost exactly the same.

[Duane Pfennigwerth:]

No. I really appreciate all of the details from the both of you. It is obvious that you are trying to maximize your profitability, which one would think would be appreciated. Just as one follow-up there on, when you referenced flow pricing, I assume that means competitive pricing on a connecting basis that is influencing your fares. Is that true? If that's true, what are you seeing more importantly on a go-forward basis? Has it changed at all with respect to the March quarter?

[Maury Gallagher:]

Yes. We have always said if we did not have any non-stop direct competition, and the number has changed, but it has been over about 80% of our markets. That remains true today, but there is other air service in those markets and most of it offers flowing and connecting opportunities for passengers to get to Vegas or Orlando or other leisure destinations we serve. Really, in years past, that connected traffic was not appropriately priced for the leisure customer. I think for the first time, we are seeing some of the network carriers that offer that connecting service, price aggressively and aggressively is still not stimulatory, but they have a lot more seats to fill and they are cutting prices to do so, particularly in the off-peak periods.

[Duane Pfennigwerth:]

Okay. Thank you.

[Maury Gallagher:]

Thanks, Duane.

[Operator:]

Our next question is from the line of Andrew Didora. Your line is now open.

[Andrew Didora:]

Hey, everyone. Thanks for taking the questions. I guess, Maury, I mean, in this time of exceptionally low oil prices, do you ever think about changing your hedging strategy and may be looking to lock-in some of these lower rates into the future and I guess help further your cost advantage in future years at all?

[Maury Gallagher:]

Usually, in these situations, I have not seen a curve recently, Andrew. You get a contango curve.

[Andrew Didora:]

Yes.

[Maury Gallagher:]

…so the ability to lock-in something six months from now, when you look at to trade-off of putting the capital up and whether or not it will go there, we will get the same price when we get there. It has really been a kind of easy decision not to make. If they were flat or looking down, what they call that backwardation curve that would be something else, but we have given up hedging so long ago in 2007. That was our last hedge. We just do not even think about it at this point. It has worked very well for us and we manage fuel prices through capacity. Jude and his team has such a great ability to look at markets, anticipate the situation, we are adjusting. Certainly, we can go backwards, do things as weekly or certainly monthly, if we need to, but that is the best way to deal with changing fuel situation is through capacity and associated profitability.

[Andrew Didora:]

Now that makes complete sense. Just thought I would ask. I guess, secondly, here on the CapEx guide of $188 million. Is that all aircraft CapEx? Any color that you can provide around that would be great. Thanks.

[Scott Sheldon:]

Yes. This is Scott. If you look at the breakdown, it is basically $140 million in flying assets. That would be airframes, inductions, engines. You have about $20 million in CapEx and the remainder would be kind of maintenance CapEx and other.

[Andrew Didora:]

Thanks, guys.

[Operator:]

Our next question is from the line of Savanthi Syth. Your line is now open.

[Savanthi Syth:]

Hey, good afternoon. Just one more line of questioning on the operations side, I thought the pilot pipeline issue addressed earlier last year maybe I am wrong. More importantly, I was just wondering if you could share how much of the unit cost pressure this year is in addressing the operational issues. I would assume that some of that goes away in 2017.

[Scott Sheldon:]

On the pilot staffing, while we have the pilots on property, they were largely in the training pipeline through the fourth quarter, so we experienced some shortages, particularly in the kind of November-December timeframe. I think March will be the first, we could say the first peak month. There's four peak months, basically. It would be the first one since 2013, where we would be comfortable with the staffing level. I think it's kind of a two-step process when you get to staffing to where you need it and then we can grow without that constraint, so the effect of shortages in staffing affects the bottom-line in the sense that we are scheduling the airline a little more conservatively and expectation of having those shortages. The second part of your question about what portion of revenue declines can be associated with…

[Savanthi Syth:]

On the CASM...

[Maury Gallagher:]

Okay. I got it.

[Scott Sheldon:]

This is Scott, by the way. I would say the largest impact is simply crew productivity. As folks are moving seats and upgrading, and as Jude still grows the fleet count it really takes a hit on your productivity, so block to paid is basically down to 50%. Historically that has been a run rate around 75%, so until you can sort of hit this kind of critical mass, you really are not going to see productivity gains like you would hope to expect, I should say. Anything else to add?

[Jude Bricker:]

No. Not really. No.

[Savanthi Syth:]

Okay. Just on the revenue side, just third-party ancillary had flattened out a little bit and saw a decline in the fourth quarter, is that just kind of the mix of off-peak fine that we are doing and we can expect to see that a little bit more in these off-peak heavy months or?

[Scott Sheldon:]

Sure. There is a lot of noise in that number. I think the big thing to realize is that the most substantial change affecting third-party ancillary sales is network shifts away from Vegas. Second of that would be the demographic that it was the most prolific buyer of third-party products was Canadians and that traffic pattern has really, really suffered with the currency change, so I think that you will continue to see over the next year our third-party revenue grow, but less slowly than top-line revenue. That dynamic will continue to flow through the system. I am hopeful we can turn the corner on hotels. We have got some good plans for some technology that we will be launching that should help us, as it relates to if you were to adjust the network shift and all of that, but we are going to continue to be challenged. You know, revenues being down and fares being down has another affect on third-party sales and that people are booking closer to the day of travel, and typically that is a good indicator of propensity to attach to a third-party product. Closer end bookings, network shift away from Vegas, decline in Canadian travelers are all going to be impactful and have been impactful thus far.

[Savanthi Syth:]

All right. Thank you.

[Operator:]

Our next question comes from the line of Julie Yates. Your line is now open.

[Julie Yates:]

Thanks. Hi there. Off-peak flying is up to better quarter of total ASMs in Q4 and Q1, how far can you push this, especially with the most recent tick down in crude and has your thinking changed at all since you gave your initial 12% to 16% ASM growth for the year?

[Scott Sheldon:]

I think that as we look forward over several years, we can take utilization up 10%, which would mean that 25% number would go to about 35%.

[Julie Yates:]

Is that assuming fuel prices remain relatively low?

[Scott Sheldon:]

Yes. Absolutely. No that trend would reverse itself very rapidly if we saw fuel prices come up, so the weakness in off-peak flying is a truism and it always exists and off-peak flying will always be less productive than peak flying, so that is the lever we pull to respond as Maury said when we changed the network in response to fuel prices. With 30% operating margins, there is a lot of room to add to off-peak flying that we are not able to take advantage of just yet, but if fuel stays where it is we will get there.

[Julie Yates:]

Is that within 2016 or beyond 2016?

[Scott Sheldon:]

That is beyond 2016.

[Julie Yates:]

Okay. Then any update on the credit card rollout in terms of timing or any other details you can share?

[Scott Sheldon:]

Yes. There is. We signed a deal with Bank of America for a co-brand card, which we are very excited about. We have also terminated our agreement with our previous contract, so all that stuff is done. We are excited about launching the program. It will happen this year. I would not expect material ancillary revenue from the credit card program on our books until the beginning of 2017. Right now, we are planning for a launch here in about six months and everything is on track. As compared to earlier guidance, we are probably going to be a couple months late, but we are running out of things that are standing in our way, so I am very excited about getting the co-brand credit card out to our customers.

[Julie Yates:]

Okay. Great. Then just one last one on costs, so it looks like the CASM mix was down 2% to 4% in Q1, the full year is still at 0% to 4%, which is a rather wide range. Can you help us think about the puts and takes and just help backend loaded the year will be?

[Scott Sheldon:]

Yes. Kind of the themes and these would be out through 2016. It looks like maintenance based on our 2016 forecast is going to be higher. I think, we guided 115 to 125 on a per aircraft basis per month. Some of the things there and I think we should just highlight the fact that for the most part we have expressed our maintenance expense for heavy maintenance on a direct expense method. 2016 will represent the first period in which we will start to experience heavy maintenance related to our Airbus fleet, so what we are looking to do - and that is basically the put in 2016 on a year-over-year basis, so basically there is about $20 million that you would experience in 2016 versus 2015 related to the Airbus fleet. Our peers in the industry whether they are the LCC or ULCC, majority of these folks are on the deferral method, which essentially allows you to capitalize it and amortize it over a period to the next overhaul or so or C-check, so it is likely we are going to be adopting a prospective application related to that fleet. In addition, the other just talking 2016 themes, we talked a little bit about labor that would be the other pressure. The pilot pay scales, year-over-year basis are up for the first half of the year based on profitability. Productivity is likely going to be where it is at until we catch up and with the training pipeline in the back half of the year, so those are kind of the two of their really influential aspects of the CASM guidance in 2016.

[Julie Yates:]

Okay. Excellent. Thank you very much.

[Operator:]

Our next question is from the line of Mike Lindenberg. Your line is now open.

[Mike Lindenberg:]

Hey, just a couple questions here, I guess, to Jude. Just looking at your TRASM in the March quarter, it looks like it improves as we move through the quarter and I am not sure if that is just moderating capacity growth or maybe how Easter falls or maybe there is something implicit about how bookings look in maybe the February-March timeframe. What's maybe driving this? It looks like an improving revenue trend or TRASM trend?

[Maury Gallagher:]

Sure. Yes, so what has happening in the first quarter this that March is a really good month and so it's less affected by rapid growth of that whole industry, so we are seeing demand hold up fairly well. We are growing March less. In our own network, we are growing March less quickly than the other two months of the quarter, so that is the dynamic for March. March is going to be a great month and maybe our best month EPS-wise ever. As we look going forward from the first quarter, we expect all things being equal just based on our own network planning, we expect to see year-over-year declines to slow. In other words, we are going to get closer to the year-over-year comps as we move on through the year and that a function of both, us optimizing a lot of the new markets that we are in on a year-over-year experience basis and also slowing total network growth as we move on to the fourth quarter.

[Mike Lindenberg:]

Okay. Great.

[Maury Gallagher:]

We are kind of planning internally as we do network planning on a flat revenue environment basically.

[Mike Lindenberg:]

Okay. Great. Then, Jude, with respect to reporting for the DOT consumer reported, you are probably very close to the size where it is a requirement. Are you close to that? Do you represent whatever what percent of the U.S. national system or than you have to provide that data? Are we near that or we are not going to see that this year?

[Jude Bricker:]

We are getting close to it, so our expectation is that we are going to have to report a '14 beginning in 2017.

[Mike Lindenberg:]

Okay. That's helpful. Then if I could just jump over to Scott. Scott, what are you paying now all-in for fuel? You can include interplaying on top of spot just to give us a feel for the market for you in your market?

[Scott Sheldon:]

Yes, so the weighted average lifted last week was about $1.14. Maury indicated the spot at interplaying and Vegas is 1.05. You are going to pay a little higher in the East Coast.

[Mike Lindenberg:]

Okay. Fantastic, then just one other; Scott, you talked about the direct expense method with respect to heavy maintenance on your Airbus fleet. Then I think you went on to say that you would be adopting sort of prospectively, I believe, the deferral method that we see at other LCCs, ultra low cost carriers. I believe, I heard that correctly. Why did not we move into that type of accounting treatment from the get-go? Why straight to the direct expense method today and then transitioning over? What's behind that decision?

[Scott Sheldon:]

Well, we have not adopted any accounting treatment specifically for the Airbus. Even though we have been flying it for a couple of years, we have not had any scheduled maintenance up until this year, so basically to the point where U.S. GAAP allows for multiple heavy maintenance treatments depending on fleet type driven by a number of circumstances, so we are at this decision point, I think, more importantly is the comp to our peers in the industry. These folks all reflect this type of treatment on a go-forward basis. It does things like it does help to dampen volatility. If you went back and looked over the last couple years, you have seen our maintenance expense peaking value pretty dramatically depending on what the year looked like and more importantly what engine overhauls did, so it is just something you know, just working through the process is all and nothing is hitting in the first quarters relates to the Airbus fleet, but it is something assuming this goes forward as planned it is likely we will re-guide our ex-fuel.

[Mike Lindenberg:]

I see, and that would re-guide ex-fuel sometime this year, it sounds like…

[Scott Sheldon:]

Right.

[Mike Lindenberg:]

Okay. Perfect. You sort of have a little bit of a shock upfront, but then going forward until I do not know into the latter part of 2016 and beyond, you will have a much smoother impact with respect to maintenance expense as you - Great. Okay. Thanks. That is all my questions.

[Maury Gallagher:]

Thanks, Michael.

[Operator:]

Our next question is from the line of Hunter Keay. Your line is now open.

[Hunter Keay:]

Hi, everybody. You guys have talked about, I think, a 250 passenger segment for the credit card deal far, so is that math roughly about $25 million in annual incremental very high margin revenue. Is it fair to think about that?

[Jude Bricker:]

Hunter, hi this is Jude. We do not really know how quickly that program will mature.

[Hunter Keay:]

Sure.

[Jude Bricker:]

While we think we will get there to the $2.50 range, between $2 and $3 range, I do not know when that will happen, so we need to be really careful about when we expect that to be affecting our P&L.

[Hunter Keay:]

Okay.

[Jude Bricker:]

As soon as we launch, we will know kind of uptick rate and we will know adoption rate and it may take a while as we experiment with incentives to get people to sign up for the card, but we would like to give you more guidance on that later, but yes I mean, I think your numbers are about where we expect over the long-term.

[Hunter Keay:]

Good. Okay. I can't believe this came up early in the call. I can't believe it is really strange, but I was going to ask you about sort of the evolution of the catchment areas and some of the bigger airports that you compete against, like not so much the flow traffic issue. That's a different issue, but as it relates to the ULCC sort of flooding, airports like BWI for example, with more low fares, to places that you serve and you said people are going to show a little bit of the willingness to drive further. I mean, in the event, this is probably not going to change, particularly in the sort of lower for longer fuel price environment, so I guess if that's the issue, which we have identified and it is the source of material incremental weakness even if it is just around the edges. What you do to sort of combat that? Do you have to think about maybe like bolstering frequencies at a place like Hagerstown or something like that or do you have to think about maybe making departure times a little bit more attractive or maybe sort of invest in the product a little bit? I mean, put Wi-Fi in your planes or something like that to make yourselves more competitive against that ULCC's, the bigger airports which now have a lot of catchment areas?

[Maury Gallagher:]

You mentioned BWI, I just want to be clear. The markets that we launched BWI two weeks ago are non-competitive markets but for a delta connection to Cincinnati, so…

[Hunter Keay:]

I was talking about BWI [ph] more than anything else, but yes.

[Maury Gallagher:]

On the issue of catchment, so first thing would be that as we have the capacity in the schedule the thing that we do would be to discount, so that is affecting the short-term and that is kind of why you are seeing. We are real positive about capacity in the back of the year, because we are able to tramp for some of these effects, so kind of mid-range response to fare weakness would be trimming capacity and you are right about how we would schedule premium times, premium days of week or premium season peaks. Then I think our planning would stop there. I mean, our product is appropriate for the passenger segment that we are shooting for as it exists today, so I mean, we are making broad strategic initiatives to be more customer-centric, but that is not as a response to competitive influences in our markets.

[Hunter Keay:]

Okay. We are not talking about any major product overhauls or anything like that or bundled fares? Okay.

[Maury Gallagher:]

That's a different issue. When you talk about bundled fares, that something we would like to do regardless, that is a revenue maximizing option to customers, where we would pre-bundle ancillary products with the existing fare. That is an initiative we have that we would like to launch regardless of competitive influence.

[Hunter Keay:]

Thanks.

[Maury Gallagher:]

I think it’s just better.

[Hunter Keay:]

Like when? This year?

[Maury Gallagher:]

No.

[Hunter Keay:]

Okay. Then last question [ph] about that $8 million of stock when your stock was down so much?

[Maury Gallagher:]

Say that again?

[Hunter Keay:]

$8 million a stock, with given the stock performance, however, I thought you guys would have supported it a little bit more given the flows in liquidity you guys actually have the opportunity to support it, not have an earnings accretive in terms of learning share count.

[Scott Sheldon:]

You know, just the way the cash flows work this quarter, Hunter, we have a internal guidelines where we try and maintain certain balances and just given the timing of what we had cash available, we did not have the resource to go do that. Certainly, it is sort of still key to our long-term strategy, but just the timing did not work well.

[Hunter Keay:]

Okay. Thank you, guys. I appreciate it.

[Operator:]

Our next question is from the line of Helane Becker. Your line is now open.

[Helane Becker:]

Thanks, operator. Hi, guys. Thanks for the time.

[Maury Gallagher:]

Hello.

[Jude Bricker:]

Hi, Helane.

[Helane Becker:]

Just two questions., one question is on CapEx. Should we be thinking about that? Can you just tell us quarterly is it evenly distributed, is it more first half, second half? How should we think about that?

[Jude Bricker:]

It is front-loaded based on delivery, so we are taking most of our planned deliveries for 2016 in the front of the year.

[Helane Becker:]

Okay. Can you say or did you say and I miss cash percentage versus what you are thinking about in terms of borrowings?

[Jude Bricker:]

Your question is, how much will we pay? How many other deliveries will we fund with cash versus financing?

[Helane Becker:]

I guess that's the question. Yes. Sure.

[Jude Bricker:]

Okay. Our cash strategy has not changed, so we continue to target around $400 million of liquidity. We have some internal targets around catchment of ATL [ph]., so I would expect us to kind of softer that number as we go forward and we continue to find a very robust market for financing these airplanes, so I am not concerned at all about raising debt. The issue is just we do not want to take cash too high considering the seasonality of our ATLs through the first quarter. Scott expect us to buy for cash, the near-term airplanes penning share buybacks and how that plays itself out. If we need to raise the money, we will call up one of our banking partners and raise it very quickly. We are raising money. Our last deal was done in December. We are financing a couple of airplanes this week and we are seeing really constant financing rates of under 2% and around 2% on a floating rate basis, so there is plenty of debt out there to be had if we need it.

[Helane Becker:]

Okay. That was actually going to be a follow-up question with respect to your banking partners and whether or not you are seeing any concerns or increases in cost of capital given their exposure energy, but I think you just answered that part of the question. Then the other question I had actually was, and you may have answered this in other peoples' questions, but when you guys talked last quarter, you talked about the off-peak flying and how it would affect margins and so on, so it is not really a margin related question, but it is more, is the off-peak flying meeting or exceeding your expectations, or how is it may be shaping up relative to your expectations?

[Maury Gallagher:]

It is a bit of a mixed bag. I mean, I think, we overestimated some of the off-peak flying, particularly in new markets, but there are certainly markets that we have had that off-peak flying outperformed as well. Generally speaking, if you would take all off-peak flying, I am surprised to the downside. It underperformed our expectations, but as I said earlier, look, I mean, we need to keep this in context. We come in and we are reporting our best fourth quarter ever after our best year ever. The network would look almost exactly the same had we had perfect information. While those flights did not contribute what we had hoped, they still contributed positively.

[Helane Becker:]

Yes. I mean, you just look at your year-over-year margin and you still reported a 38% margin. As I recall your last comments publicly were that you would not be surprised if that margins would decline in the event of more off-peak flying, so I am like half surprised to hear you say that it may have underperformed to the downside, but I understand all the puts and takes, so I get that.

[Jude Bricker:]

I mean, the truth is we are going into some markets where we do not have any operating experience, we are adding off-peak flights into those markets. We do not know exactly what they are going to do and that is a good thing about the schedule as we look forward into 2016, as we will be able to trim around the edges to optimize the markets that we do not have any experience in.

[Helane Becker:]

Okay. Then my last question if I could just sneak one in one more is that, I do not really watch a lot of TV, but I watch occasional TV, and I have been seeing Allegiant ads in New York, and I have not seen them before. I mean, what market are you actually targeting with those ads?

[Maury Gallagher:]

Those ads are around a national ad buy and there is just efficiencies of buying nationally as opposed to locally. When we have a bigger footprint as we do, we are not in Chicago and New York, but we are in 110 cities around the country and in some point it starts to become cost-effective to buy nationally. We will run a couple of campaigns a year. It will not be huge parts of our marketing spend, but it will be a significant part.

[Helane Becker:]

Perfect. Thank you very much for your help. I appreciate it.

[Maury Gallagher:]

Thanks, Helane.

[Helane Becker:]

Of course.

[Operator:]

Our next question is from the line of Steve O'Hara. Your line is now open.

[Steve O'Hara:]

Hi. Thank you.

[Maury Gallagher:]

Hello, Steve.

[Steve O'Hara:]

Hi. Can you just maybe frame the cost guidance, if the perspective treatment goes through and if it doesn't? I thought a couple of years ago you guys tried to do this, but it was, I do not know if rejected is the right word or what, I am just wondering what is different this time versus the last time? Thank you.

[Scott Sheldon:]

Yes. This is Scott. If you look at 2016, I think earlier I said there is approximately $20 million in schedule heavy maintenance that is going to hit for the Airbus fleet in 2016. Regarding application of these specific accounting treatments for the Airbus versus what we tried to do with the MD-80, fleet back in 2011. Honestly, the facts and circumstances are very different. The unit cost per event, the duration between events, it is really just a completely different animal. Looking back to the MD-80, that was a fairly high hurdle rate that we were trying to cover and the fact that our peers have applied the same accounting treatments for instance, an overhauled CFM will go eight years based on our utilization. The average duration between JT8 is roughly a couple of years, but it's really night and day. The accounting treatment, the qualifications and U.S. GAAP allow us to apply to separate treatments as long as the facts and circumstances support it. As I mentioned, it is the point where we are going to start experiencing some of these heavy maintenance events, so it makes sense to apply this on a go-forward basis.

[Steve O'Hara:]

Okay. Then, I mean, maybe I do not understand the guidance. Then is the 0 to 4, is zero assuming you do not or you do get the perspective and then it is something above that if you do not or zero to 4 assuming you do not get it and then you take kind of $20 million off the top depreciate a part of it maybe during the year and that is kind of your new guidance?

[Maury Gallagher:]

Yes, so the flat up 4 was put out there in early December. I think Jude was back at a conference. There are some definitely some puts and takes there. I think we have pulled ASMs down about a point, which is going to impact ex-fuel full year 2016. Yes. I mean, if you are looking at just off the top of the maintenance, in particular, and that's been depreciated over a certain amount of time, flat to up 4 is not going to be the final number. It is going to be somewhere south of that.

[Steve O'Hara:]

Okay. All right. Thank you very much.

[Operator:]

We have a follow-up question from the line of Dan McKenzie. Your line is now open.

[Dan McKenzie:]

Yes. Hey, thanks again, guys. Jude, you alluded to a new initiative tied to hotels I think in response to an earlier question. First, did I hear that right and if so, I am wondering if you can elaborate a bit further about how you are think about the size of that opportunity and potentially the timing here?

[Jude Bricker:]

Hotels remain a very Vegas-centric market, so increasing to-date what we can do is basically discount. That's the main thing we can do. We like a lot more e-commerce tools. Keeping in mind that a lot of the shifts that we had talked about that are affecting hotels will still remain and they will be negative decline in Canadian customers and they shift away from Vegas from a network side. What we would like is to be just a better e-commerce company in merchandising our hotel products. In order to get there, we would like to be able to consume multiple rates from our hotel partners. We like pat dependency and merchandising. We like an increase promo engine, just becoming better at merchandising the stuff on our website. I do not know the effect that that's going to have, but we know that it will be helpful.

[Dan McKenzie:]

Any timing on that?

[Jude Bricker:]

I can't commit to when that will happen.

[Dan McKenzie:]

I see. Okay. Then just to clarify, with respect to the opportunistic purchase of aircraft tied to the acceleration of MD-80s, it sounds like the share buyback comes first as a priority, and then using financed to make up the difference or is there a sense that you need to keep cash higher potentially to jump on an aircraft order at some point down the road here?

[Jude Bricker:]

I do not think.

[Scott Sheldon:]

Yes to both. I mean, certainly, you need to keep a certain amount of leverage in there for buying the airplanes. Having said that, we have the luxury of buying in for cash and then financing and packages when it make sense and that all gets timed around cash that is available for share buybacks as well.

[Jude Bricker:]

The spot market strategy is here to stay. I mean, I think we need to be real responsive to the market and use the aircraft purchases tend to come in bunches just because a lot of time the source of the aircraft is a bankrupt carrier somewhere in the world, so we will maintain extra liquidity for that, but we have enough liquidity that our share buyback strategy can co-exist with our spot market buying strategy for aircraft.

[Dan McKenzie:]

Got it. Okay.

[Maury Gallagher:]

Still even last year, Dan, brought back doing dividends and buyback $190 million. Is that the number, so we were pretty generous in the past year.

[Dan McKenzie:]

Yes. Understood. Okay. Thanks again.

[Maury Gallagher:]

Thank you, sir.

[Operator:]

We have a question, follow-up from Duane Pfennigwerth. Your line is now open.

[Duane Pfennigwerth:]

Actually, I am off that guys. Someone asked the question, so thanks for letting me get back in the queue.

[Maury Gallagher:]

Thanks, Duane.

[Operator:]

Thank you, ladies and gentlemen. This does concludes the question-and-answer session of today's program. I would like to turn the call back over to Mr. Gallagher for any closing remarks.

[Maury Gallagher:]

Thank you, operator. Thank you all for your attendance and we will talk you in 90 days. Have a good day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's program. This concludes the program and you may all disconnect. Have a wonderful day.