Allegiant Travel Co (ALGT) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allegiant Travel Company first-quarter 2016 earnings conference call.

(Operator Instructions)

I would now like to introduce your first speaker for today, Chris Allen of Investor Relations. You have the floor, Sir.

Thank you.

Welcome to the Allegiant Travel Company's first-quarter 2016 earnings call. With me today are 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 and SVP of Planning.

We're making a very slight change to the Maury format, as both Scott and Jude will briefly touch on some of the highlights of the quarter and our guidance. After that we'll open it up for questions.

Before we begin I'd like 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, reference to future performance and any other comments about our strategic plan.

There are many risk factors that could prevent us from achieving our goals and causing the underlining 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 our future events or new information or otherwise. The Company cautions users of this presentation not to place undue reliance on forward-looking statements, which may be based on assumptions and events that do not materialize. This earnings release as well as the rebroadcast of the call are available on the Company's investor relations site at ir.allegiantair.com.

With that, I'd like to turn it over to Jude.

Thanks, Chris.

Maury didn't give me a whole lot of time here but I wanted to touch on just a few highlights that will probably come up in the call anyway. I'll start with revenue. We're pretty excited about our report today of 10.5% down in unit revenue, which is above where we thought we'd be this time. And that's pretty good considering 18% scheduled ASM growth.

The surprises to the positive included better than expected close-in bookings, and also some of our mid-sized markets are maturing a bit more rapidly than we had expected. We still face some of the same challenges we've talked about in past earnings calls, namely growth overall but specifically into new markets. Today we're selling 75 markets that we weren't selling same time last year.

We continue to de-peak somewhat the schedule, which is a logical response to the low fuel price environment. And notably we lapped, as of the end of the first quarter, the effect of the change from debit card discount to credit card surcharge, which contributed negatively about 1 percentage point to 1Q TRASM.

We're also guiding second-quarter unit revenue of down 8% to 10%, which is really good considering a negative 2 percentage point effect of the Easter shift into the second quarter. We continue to see, I believe we're going to see sequential year-over-year improvements in unit revenues as we move on through the end of the year. And I'm making that statement based on the schedule that we have loaded, which has some decline in growth rates relative to where we are today and where we were in those quarters in the prior year, and also allows us the opportunity to optimize some of the capacity into our new markets.

A couple operational updates. The first is we talked about pilot staffing levels in past earnings calls. I think where we are today, we don't need to talk about that any more; namely, pilot staffing levels allow us to run the airline without consideration of a top end cap on capacity growth for pilots. And you can see that in increased capacity guidance for second and third quarters, also in the increased ad hoc charter activity that shows up in our revenue lines with our first-quarter results, and our Hawaiian extension, which will now run through Labor Day of 2017 relative to the prior plan, which was to end it in August of this year.

Today we're announcing 11 new aircraft that we are acquiring -- new to us, that is. Which brings our total Airbus commitments to 61 aircraft. And while we'd like to see a little more deliveries in the near term, we're certainly confident in our ability to go out and get quality aircraft at the price points that allow us to execute our business plan.

A couple balance sheet highlights. We're ending the first quarter with $650 million, of debt outstanding. I want to highlight that $110 million, roughly, of that is pledged to leased aircraft, the leases of which service the debt, so our leverage is a little less than it appears.

And we ended the quarter with $411 million of unrestricted cash. Keep in mind that that doesn't include a $56 million undrawn revolving credit facility. And we also have available for financing, eight unencumbered aircraft, A319s and A320s, available to raise liquidity if we have a use of proceeds.

And with that I'll turn it over to Scott.

Thanks, Jude.

Just a couple comments on the cost side. Q1 came in within the guidance range of down 2% to down 4%, so really nothing unexpected there to highlight.

A couple themes as we move through 2Q. We guided a range of up 4% to up 6% off a base of $0.0559. Two areas in particular, one being labor; we continue to be challenged by labor headwinds specifically as it relates to flight crew and productivity. We've been in this pattern of degradation of productivity around 55% and 70%, respectively, on a block to pay ratio for those respective groups, which is definitely below historical norms.

Some of the contributing factors being that the continued transition from the 80 to the Airbus, the opening of small mid-town bases where it's difficult to optimize productivity. So, we should expect to see those types of trends as we move through the future.

On the maintenance side, 1Q of 2016 was relatively in line. Engine overhauls basically offset the decrease in heavy checks. Although we did reiterate our full-year maintenance per aircraft per month guidance, I wanted to provide a little more color into the timing of maintenance events as we move through the back half of the year.

We do expect 2Q and 4Q to be the high-level watermark as it relates to maintenance. That's assuming events don't slip as they're currently modeled.

2Q pressure, both on the airframe and engine side, will be substantially higher than it was in 2Q of 2015. So, on an M&E per aircraft per month basis it would be north of our full-year range of $125 thousand. So 2Q, 4Q should be fairly heavy this year. And so with that, we can open it up for questions.

(Operator Instructions)

Savi Syth, Raymond James.

Jude, maybe this is for you. I just wanted to touch on the [same-store sales decline] that you provided. It was great color on the release. I appreciate it. But it is a weakening of the trend that we saw latter part of last year. And I was surprised, given that you did have the Easter benefit pull forward to 1Q. I wonder if you could talk about that. And maybe the off-peak flying, the mix increasing versus last year, and maybe the new market mix increasing versus last year, when does that turn where it's lower this year versus last year?

I had trouble hearing the first part of your question. Which negative decline are you talking about?

The same-store sales decline. I think it was down 6% in 1Q. And I think the last couple quarters you mentioned it was down maybe a couple of points?

Right. In the past quarters, the reference there would have been a scenario where we operated the exact same network as we did in the prior-year's quarter. So, a 6% decline does include the negative impact of growth. That's just the same-store sales, which would have been subject to de-peaking and overall growth that we did in those markets in the first quarter this year.

We've talked about de-peaking a lot over the last several calls. In the first quarter, we grew March capacity by only 13%, far below our scheduled service capacity growth of 18%. And a lot of that trend starts reversing, really, in the second and third quarters as we guided up capacity. That's a result of our ability to extend some of the seasonality in some of our markets, which is reflected in our schedule today. We're showing June growth at about 21%, roughly is what's in the schedule today. So, we're seeing more proportional growth going forward and that's just the natural process of us optimizing the schedule in response to lower fuel prices.

So, what was the equal into that 2 points that you talked about before in 1Q?

That would be a scenario where we had the same markets operated with the same capacity as we would have in the prior year's comp.

So, is it consistent with the 1% to 2%?

Yes, that's about overall how we would judge the revenue environment, absent of all the things we're doing.

Got it. And just if I may ask one last question on the aircraft side. When do we need to see the purchases of any new aircraft to support -- I think the whole is for 2017. Is that early part of 2017? Is that right?

We have MD-80s that we can extend. I don't think there's an urgency to that. But, yes, we would like to take a few more aircraft than what we have planned for delivery in 2017 based on today's fleet plan.

All right. Thanks, Jude.

Hunter Keay, Wolfe Research.

Jude, it seems like there's been a little bit of a change in the domestic airfare environment about how customers are buying tickets these days in this high-capacity low-fuel environment. We're hearing about inverted booking curves, for example. Have you seen any changes to how your customers typically buy your airfares? And do feel like your yield management system is adaptable enough to forecast any changes in behavior?

I think we're managing the situation quite well. The characteristics have adjusted in the sense that we have pull through in bookings overall. We're certainly seeing web behavior change in the sense that we see more visitation to our website on mobile devices and tablets, which is expected, just with all the e-commerce platforms today. But there's nothing we need to do.

We're in a pretty good situation with our yield management tools today to manage through the changes. It's not a macro change in behavior, more just a lot of capacity out there that is pushing fares down. Certainly in our little micro-environment, we're selling flights into times of year much more frequently than we had in the past, and that's what's driving down our average fare.

Sure. It's not a criticism of the TRASM or anything like that. I'm just wondering if you've seen your own booking curve inverted. I'm not saying you're not managing through it. I'm just wondering if you've seen a change in the behavior at all.

It definitely took us a couple quarters to adjust down initial selling fares so that we didn't get too far behind booking curves going into them. We did have a couple quarters of learning passenger behaviors. But we run an automated process. It responds pretty well. I think where we sit today we've optimized under the current environment and it's upside from here.

Got it. Okay. And I think you hosted a media day a couple weeks ago. I'm wondering, was that new for you? And why did you do that?

Yes, that's a new thing in the sense that we had never done it before.

That's what I meant.

We're trying to be a lot more active in generating positive publicity for the Company. PR for us in the Company's history has always been looked at just a way to get the word out that we existed in markets that we were new to. And so it was a function of our advertising, really.

Now we're responding to an extended negative PR cycle, which basically began when our pilots called a strike in April of last year. And managing through that, part of that is to be more proactive with our media partners. So, we brought them into the building, showed them our facilities. We made available to them the senior executives to answer their questions. A lot of publicity we got out of that was really positive so we intend to do things like that more often.

Another initiative is to try to drown out some of the bad with the good like our million dollar giveaway that we're in the process of doing now for airfares, which started with the tax day giveaway two weekends ago. So, we're just trying to generate some positive publicity. And media is a little more dear in today's environment, being an election year and things like that. So, we're just trying to be tactical and thoughtful about publicity, more so than ever.

I was asking the question because I was wondering if you figured that you can deal with bad publicity, but [when it gets to the point] where you felt like it was really starting to effect your business. We can all deal with criticism but if it starts to affect the business, had you guys felt like -- all right, this is actually starting to affect bookings and we actually need to take the bull by the horns here a little bit and get ahead of this?

We haven't been able to show empirically any correlation between negative publicity and bookings.

Okay. All right.

But it is impacting the business in the sense our team members have to deal with it every day. And we'd like the cycle to stop, so trying to be more active.

Hunter, it's Maury. We need to just mature into that aspect of growing up, if you will, as a young company. So, we've been more proactive trying to make sure the message gets out. If somebody just says something negative with pieces of the story, we certainly want to be ahead of that, even, and do the proper thing. So, it's just part of our maturation process, too.

The short pants. Okay, thank you, Maury.

Short pants, that's right. (laughter)

Duane Pfennigwerth, Evercore ISI.

I think you were the only US carrier where revenue guidance actually improved over the course of the quarter. There's only one other carrier I cover where RASM estimates went up this quarter, and that was Volaris in Mexico. Just to temper some of that. You'll have to forgive us for asking such cautious questions about revenue. I think you guys actually delivered what you said you were going to deliver.

But, anyway, with respect to the Airbus fleet, is there any way to segment margins on that fleet type, how much higher they might be? And if we could hypothetically think about this fleet transition being over, how much money are we leaving on the table today with the mixed fleet type?

It's difficult to ascribe margins across the fleets because, as we have a mixed fleet right now, we're dispatching the A320s on the longest lines every day, typically. So they get much higher utilization. And also some of those flights tend to be our best flights.

So, just looking at it from a cost basis, it's about 25% perceived more fuel-efficient. And the dispatch reliability on the Airbus relative to the MD-80 is about 2 percentage points better. So, I think those have material improvements into our finances. This is a long-term march towards an all-Airbus fleet, and getting there has cost-benefits because of reduced complexity and more efficient crews and things like that. But it's very difficult to ascribe margin difference across the fleets.

One more comment -- the MD-80 is a great airplane in today's fuel price environment. Our EBITDA production is so high and the teardown value of that airplane, which is basically how we would dispose of them, is under $1 million. So, return on asset value on that aircraft is through the roof in today's environment.

We're trying to be deliberate in marching towards a single fleet type, but every MD-80 we retire, I miss it. I think that there's not a whole lot of near-term A320s probably in the short term helps our financials.

Okay. Can you talk about how long we should be thinking about this transition, and how you might envision more aircraft deals, maybe chunkier deals, becoming available? And then have you seen anything in maybe the more distressed parts of the world -- South America, Brazil? There were some 737-800s you probably could have taken a crack at. But are you seeing any enhanced availability on the Airbus platform?

Not much that we can comment on right now. We're certainly aware of all the fleets, who owns them and operates them, that would work well in our operation, and we're talking to those folks right now. But there's not a whole lot of guidance I can give you on that, as we sit today. We'd like to be out of the MD-80 before Delta. And we would like that to happen by the end of this decade.

Thanks so much.

Helane Becker, Cowen and Company.

Just a couple of questions, I think the first one probably for Scott. There's no aircraft rent expense, I think, on the P&L, and I feel like you had that in prior quarters. Is there a new characterization for that?

Your referencing 1Q of 2015 when we were crew constrained so we subserved a lot of our lists to accommodate our schedule. We don't lease any planes currently so absent any subserve activity moving forward, you shouldn't see anything in that line item.

Got you. Thank you. And then can you say how many aircraft you will have in the fleet at year-end 2017 and 2018 with this new aircraft order? I know it's not in order, I don't know what you want to call it.

We revised the 2016 fleet plan in the release. We can't give any details, as we said, today on 2017 and beyond.

Okay. So, you can't say how many aircraft you're going to have in the fleet at year-end 2016 and year-end 2017?

No. We're out trying to acquire 2017 deliveries today. And we also haven't solidified retirement plans on some MD-80's. So I can't be --.

That's okay. I'll try another question. As oil prices have gone up -- actually I have two other questions, if it's okay. One is, as oil prices have gone up in the past, you guys have adjusted your capacity growth. With oil prices up 50% after their lows how should we think about capacity going forward?

I think the main point is that, as we responded to fuel price drops over the last 18 months, we've been under capacity allocation just because of practical constraints around our ability to grow capacity quick enough. And that shows up in our really high margins for the first quarter. We're reporting 35% operating margin with 18% growth. There's probably an EPS scenario, a scenario where we produce higher earnings per share with more growth even if it had put pressure on operating margins.

That's a long way of saying, even if fuel goes up $10, $15 a barrel, we're still going to be having the same network basically. Now, if it goes up $100 or something like that, then, of course, there's marginal flying that would be dropped from the network and probably markets that would also be affected.

Okay. And then my last question, I think, is, as these A320s come into the fleet, do you have the capacity to train pilots off the MD-80s to go into the A320s? How are you staffing that?

It's a lot easier to replace an airplane than to have incremental growth. So, you're right. I think what you're getting at is, yes, we do have this ladder system to create an A320 captain off of we transition an MD-80 captain, and then two FOs, and finally we hire an FO into the MD-80 fleet. That does happen. But as we work towards a replacement strategy, that's somewhat simplified because we already have the crews on property.

But we're much better at training pilots today than we had been when 117 went into effect -- and facilities. We are going to be up to three sim trainers by the end of this year. We're increasing the number of Check Airmen, which was a major constraint on our ability to train pilots more in the fourth quarter.

So we're addressing each of the bottlenecks in our pilot training pipeline. And then we're slowing growth down somewhat in the fourth quarter, so our needs are going to be less. So I think we're going to be fine on pilots for the rest of the year.

Okay. And then I promise, last one. Maury, I think, had a quote in the press release that said he is bullish about reaching a first contract agreement, et cetera. And that's new language for you guys, I feel like. Has something changed in the discussions that you're having with your team members that leads you to be that much more bullish than you've been in the past, say, one year?

Helene, I'm not sure I agree with your comment that we weren't bullish. I think we were talking positive in January. Certainly we made progress in the last few months. Maybe the bullish factor is up some. Work to do, but I think both sides, in particular the pilots, can see the end, if you will -- as Mr. Churchill said, the beginning of the end.

But there will be work to do and there is work to do but we want to get it done. I think the pilots do, too. That's their sentiment back to us and we take them at their word. Same thing with the flight attendants.

Great. Okay. Thank you very much. I appreciate your indulgence.

Joseph DeNardi, Stifel.

A couple questions for Scott. On your commentary around the productivity headwinds you're seeing right now, when you think about maybe getting a new contract with the pilots and the FAs, obviously there's going to be some cost pressure from pay raise. But can you maybe help us think about what would the offset be on the productivity side? Are there some pretty significant opportunities there?

I think the productivity gains will come from simplifying the fleet allocation. So, once we go back to a single fleet type, we'll dramatically improve. Right now it's taking about four months to get a pilot through new hire. So, we should be able to compress that.

Jude alluded to Helene's question about our capabilities to train. We're opening an East Coast training center. It'll be similar in size and footprint of what we have out here in Las Vegas. If you look at a just the single fleet type, trying to expand the funnel, push pilots through, get AQP, which allows us to utilize TDs as opposed to full-motion sims, I think that's where you're going to start to see the productivity come from.

Joe, it's Maury. Understand, though, there's a lot of training to do as we move from 50 MD-80s to a like kind Airbus, moving those guys over. And it will take us, as Jude said, to the end of the decade to do it. The activities going to be more robust than it has been historically. So, we'll have to pay for that transition but it's certainly worth the investment.

Okay. And then, Scott, I think on the last call you spoke about maybe looking into a deferral method for your maintenance events. What's the latest update there?

We're still working through it. Nothing really new to report. If you look at the maintenance expenses related to the Airbus fleets, are all going to be called the back half of the year before you're going to see any impact in the P&L. But we stand by the fact that there are acceptable methods similar to our peers out there and it's just a process we're working through. As we get some more clarity here, within this quarter, you'll likely see something coming out.

Okay. And then, Jude, just absent any new A320s coming in, how much can you grow next year just by flexing up the MD-80s?

We've already committed to retiring a couple 757s, so we could probably safely depend on about six to eight aircraft net growth for full-year 2017 based on where we are today. We'd like that to be happening at the same time as we are transitioning over. So, that would require a couple more transactions out there that we're working on today.

Okay. Thanks a lot.

Michael Linenberg, Deutsche Bank.

Just a couple here, if I could start with just a couple route questions. I was curious, with the slot controls coming off at Newark, if there was any interest on your part to serve that market. And the reason I ask is, I think in the last week, week and a half, United did put in some new service out of Newark in the schedule. It looks like markets like Fort Wayne, Chattanooga, Flint. Those markets seem to be very Allegiant-esque. It would seem as if they had gotten a hold of an Allegiant internal memo about opportunities out of Newark. So, I'm just curious, is that potentially in the cards or am I just on a wild goose chase here?

It's in the cards. We're studying it. I think the model that we have in BWI where we are flying noncompetitive markets with the theory that would include both originating traffic out, in the case of BWI, the Baltimore-Washington area, and also providing leisure opportunities for inbound traffic. That's basically what we're testing that would also be applicable to Newark. I think, Importantly, we're not really interested in flying New York area to Florida. But, yes, I think you're on the right track there.

Okay, good to hear. And then just another route. Jude, this is probably for you, as well. I saw that you started to serve, or maybe you're going to fly later this year, some intrastate markets, like Las Vegas, Reno, and then within Florida. And those seem to be really unique. Is that just moving aircraft around? Is that just additional utilization, which would seem something that you typically wouldn't engage in? What's driving those types of services? Maybe it's just experimental, nothing more.

It is experimental. Those are a very small part of what we do. And you're right, those two markets you highlighted. There's a couple other that are in that category that don't really fit into our traditional model of highly directional service to leisure destinations. And in some cases it does allow routings and utilization.

But we've been really successful in Reno-Vegas for a long time now. Not really successful, but we've been successful. And, by the way, Destin and Lauderdale is selling really well. There doesn't exist any service on it today.

Providing service between mid-sized cities is something we've talked about for a long time. If there's enough PDUs on a whole week we feel like we can aggregate them on twice-weekly service at low fares and stimulate and make that a business. That kind of service isn't too different from some of our other expectation in places like Austin-Cincy, or Austin-Memphis.

Okay. Great. Just one last one, with respect to re-upping the $100 million share repurchase -- this is for Scott -- when you re-up, I think you've already finished half of the prior one, do you finish the previous one or do you just go from this point forward and it's another $100 million? It's not clear from the press release if you complete each one and then go on to the next one. I'm just trying to accumulate the total here.

We are authorized at $100 million back in 4Q last year. We exhausted a little bit of that in the fourth quarter and the rest of it in the first quarter. So, this would be a net new $100 million as we move forward from this point.

Perfect. Thanks for the clarification. Thank you, everyone.

Rajeev Lalwani, Morgan Stanley.

Jude, I wanted to come back to a comment you made. You talked about wanting to get out of the MDs by decade end or so, and ahead of Delta. To the extent that Delta goes ahead and accelerates retiring that aircraft, just given some of the headlines that are out there, how does that impact you guys?

One of the main challenges we're having with that airplane is lack of OEM support. So, Boeing and also, importantly, Pratt & Whitney, but some smaller component manufacturers like wing heater blankets, or some components in the EE bay, all of which are difficult for us to find support there. We depend on the OEM, in many cases, as the sole provider of parts. So, a deliberate plan to retire the airplane will allow us to support ourselves, in some ways, with parts off retired aircraft.

So I think, give or take a year from when Delta moves out of the fleet, we'd be comfortable with. But we have to be marching along that path now because we don't want to shrink. So, we're going to be growing the airline. We want to stay with our strategy of buying used aircraft in the spot market. So, that's going to be inherently a little bit unpredictable. So, I think it's just prudent for us, as we sit here today, in spite of our growth opportunities and margins, to go ahead and continue to push out MD-80s in a very planned and deliberate method.

Thanks. And then just another question for you, similarly, high level. It seems like other ULCCs are talking about servicing mid-sized cities and smaller cities a bit more. I was wondering how you view that in terms of a competitive threat or not, especially just given that the fleets, over time, seem to be becoming more similar. So, I wonder how you approach that or think about it.

It's not a great thing. And in spite of our success we're always going to have a good deal of paranoia as a management team, as you'd expect. But I want to highlight the structural advantages that our business has over a Spirit or Frontier, namely we have a closed distribution system which allows us to have a direct relationship with our customers. We have ancillary revenues that are trending in the right way, as opposed to what Spirit is experiencing today, which is largely due to our launch of a loyalty program which will happen in the third quarter of this year.

And, most importantly, we can schedule to peaks, without affecting our unit costs. In the case of Spirit and Frontier, they depend on high utilization to achieve their unit cost objectives and that requires them to put a lot of flying into unproductive times of day and days of week and seasons. So I think that structural advantage remains. And so long as we maintain our really low fixed cost base, we're going to have that advantage and we're going to be successful.

Another point on that is that I'm not so concerned about encroachment into our existing market because of those strengths that I listed there already. Really, the concern is about overlapping growth opportunities between us and them. It's why we've been exploring growth in new ways, not the least of which has been the expansion in some of our smaller destination markets. Which isn't something I would have predicted a year ago, like growth into Destin and Savannah, and making destinations out of New Orleans and Austin and Jacksonville; all of which have been really successful.

So, we continue to find ways to grow in markets that just aren't that inviting to those two guys. Cincinnati to Vegas and Orlando, definitely that's on their radar, but I don't think Cincinnati to Destin is anything they would intend to do any time soon.

As far as risks go, as a management team we're much more focused on internal risks today, like operational excellence, systems and process optimization, labor relations, and cost discipline. And I think risks that we get asked about often but that we don't worry much about, really, are fuel price, availability of aircraft for growth, and encroachment into our existing markets.

Very helpful. Thank you, Jude.

Dan McKenzie, Buckingham Research.

Jude, I wanted to follow up on some of Duane's questioning. If I adjust for Easter, it looks like there is some sequential revenue weakness versus what we saw a year ago. And I appreciate the messaging here that it's temporary not permanent. And I, of course, recognize the sequential performances is better versus your peers. But I'm wondering if you could help us peel back the onion here somewhat. Is the TRASM weakness coming from a few markets? Is it perhaps more widespread? I'm wondering to what extent, if any, the pricing might be impacted by incremental exposure to ultra-low-cost carrier pricing.

There's a lot there. First of all, we're revising up capacity growth, which is going to have a negative influence on unit revenue. That's absolutely logical and earnings accretive. We have a lot of the same characteristics causing revenue weakness that we've talked about in past quarters, like weakness in [middle] economies, which make up about 5% of our ASMs. Those economies still remain challenged.

We have had some challenges with markets that depend on Canadian travelers crossing the border and Mexican travelers crossing the border. Markets with those characteristics are struggling because of the currency issues. And then for us, we're flying more often when last year at the same time we would have sat aircraft. And that's just because we're adjusting to availability of pilots and availability to make money at today's low fuel prices. Most of the revenue weakness we have is generated by our own actions.

As we've talked about in the past, we still have some catchment area issues. Philadelphia has really low fares right now. We have markets like Allentown, for example, which is under a little bit of pressure to Florida because it's drive distance from really low fare environment in Philadelphia. But that's not getting worse. So I think that's a constant.

And then growth, particularly ULCC growth into Vegas and Orlando, and increasingly so into LA, puts pressure. That's mainly hub to hub fare pressure. But, for example, on the West Coast, if we see severe discounting to, I don't know, Salt Lake City and Seattle from Vegas, that's going to put pressure on flow itineraries coming out of Montana that compete to fill some of those seats that are in a little bit of distress.

But we remain in our own little world over here finding new market opportunities, for the most part, that are not affected by the competitive environment. Our response to competition is what it's always been, that there's a capacity change that we can do to maintain our success. So, I'm very positive on where we are today.

I think it took us a little while to adjust for the environment, certainly over the last several quarters when we were revising done outside of our initial expectations for unit revenue. But we're on the right path now, and certainly through the end of this year I'd expect us to move closer and closer to flat year-over-year unit revenues.

And I think you just pre-empted my next question, and that was just that I was just curious as to how you were thinking sequentially about improving trends throughout the year. The thought is you can get back to flat TRASM in the fourth quarter?

Don't hold me to that, but I think we'd be certainly in the low single-digit range by then. That doesn't include anything that can't be predicted, like changes to the external environment. But based on the schedule that we have loaded today, which slows growth a bit and optimizes around our experience in our new markets, then, yes, I would expect us to be able to produce low single-digit TRASM declines by the fourth quarter.

Very good. And I wonder if I can just squeeze in one more question here. Potentially an opportunity for you guys, I don't know, but one of the trends in airfares, of course, has been unbundling. You guys have led that. We're seeing some airlines turn around and then re-bundle some of the ancillary opportunities, and having a lot of success at that. And I'm just wondering if you can remind us of where you're at. Is it still an a la carte purchase with Allegiant, or have you experimented with rebundling? Is that a potential opportunity for you guys?

Dan, I think it is. I think it's a long way off for us, though. It's probably way down the list of other ancillary initiatives that we would like to do in the short term. And a lot of our resources today are focused on the operations. So, I think experimenting with rebundling ancillary products is a long way off for us. But, yes, but I think there's opportunity there. I think it's relatively small though.

Okay. Thanks for the time, guys.

Steve O'Hara, Sidoti.

I was just wondering if you could talk briefly about Hawaii and what the plan is there in the medium term. And is it more about when the aircraft come up for heavy maintenance events or something like that, given where the fuel environment is? Or is this potentially something you're looking to revisit on a more broad basis? Thank you.

Steve, it's Jude. That's an easy one. The end of Hawaii was dictated to us by retirements of the 757, which is the only aircraft that we have in its current configuration that can serve the islands. So, the original plan was to end Hawaiian service with the end of our Hawaiian-based aircraft on Labor Day of this year. Hawaii has since overperformed our expectations and, therefore, we've decided to continue to run Hawaii out of Las Vegas, with the Las Vegas-based airplane, on Wednesdays and Saturdays. It's just the best thing we can do with that airplane on Wednesdays and Saturdays based on current fuel prices and the yield environment in Hawaii.

Hawaii is really one of the only US domestic markets that has yields that are holding up really well in a low fuel environment. So, we intend to be there so long as we keep the airplanes around. But the fleet plan dictates us leaving Hawaii, and that hasn't changed. And the reason we're getting out of the airplane where we are, as you said, is because of the really significant maintenance that we would have to invest in that airplane over the next 18 months.

Okay. Thank you. And then just on the growth profile now versus several years ago, I think it was dictated more by the capabilities of the MD-80 and where it could fly and how far. It was focused around small cities to, let's say, non-NFL cities. I'm wondering, the growth in the future, how much of that growth have you already tapped? Where is that maybe in terms of what you thought it would be and maybe what you thought it could be eventually? And then the medium-sized cities growth seems to be a little more prevalent now. So, where does the growth come from percentage-wise maybe in the future, and where are the better opportunities for you, as well?

First on aircraft type, we're really not constrained by the MD-80 because we're committed, for the most part, to schedule aircraft in such a way that they come home to base every night. And that's on about an eight hour and 15 minute block hour round trip based on the current 117 rules. And that prevents scheduling transcontinental flights and things like that. We'll revisit that from time to time but right now that's plenty of opportunities.

On the growth question, I would basically just look at Cincinnati as an example of where we can take growth over the next several years. Today we have 14 destination markets served out of Cincinnati. We continue to expand that with our relationship with Apple and growth into other markets. I think internationally we could certainly look at that, as well. So, if you take Cincinnati network and put that into a bunch of other mid-sized cities into which we're building a presence today, that's the growth thesis for Allegiant for the next several years.

Okay. All right. And then just on the small city to major league destinations, maybe the pure MD-80 model from several years ago, how much of that have you tapped maybe? And would you be less willing to do that with the Airbus fleet going forward than you would have under the MD-80? Thank you.

We continue to have a mix of markets that are new to our network that include some small cities and some mid-sized cities and some rather large cities, as well. I don't look at it as we've tapped out all the small city opportunities. We continue to find new ones as they present themselves to us, either because other people leave them, like what happened in Flint and Dayton, or because we finally get the right contract from the airport, or because there's a structural change in the airport that allows us to serve it today where it wasn't possible operationally in the past. That would be Santa Rosa.

So, you're going to continue to see a mix from us. I wouldn't consider the small city opportunities to be exhausted. I think we're going to continue to find other small cities. We're targeting 10% growth rate annually. And as the airline gets bigger, a twice-a-week market is just difficult to find enough twice-a-week markets that can provide that 10% growth rate. So, inevitably we will have some larger markets in our network over time.

Okay. Thank you very much.

David Fintzen, Barclays.

Jude, to follow a little bit on your last comments, although with more of a fleet angle, do you get to a point in the medium-term here where you're big enough, maybe you have enough density, and enough lines of flying, where new 320s start to make sense? Do the economics of it really work?

There's certainly a price point where we would consider it but Airbus is nowhere near that price today.

Okay. Obviously, if they give you free aircraft I'm sure you'd be more than happy to take them. But is it just something that you would not see happening for many years?

They don't have any problems selling airplanes today. I think that's probably the scenario we need to be in for us to push forward a new aircraft deal.

And in terms of the used fleet, we always think about low utilization peak scheduling, but how much further do you feel like you can push utilization on the Airbus side when you need to versus, say, the MD-80s of the past? Could you run certain hours on the Airbus fleet that you're buying?

Utilization constraints come in two forms. One is the revenue opportunities of off fleet flying. And then the second one is the operational reliability of the airplane type. On that last point, with our used Airbus and getting them to where we think they should be, I think that there's really very little constraint on where we can take utilization. Certainly with some of the newer equipment that we're getting it, I think we can fly 9 to 10 hours a day, if necessary. And we do that in our peak periods today.

On the revenue environment, I think we're always going to be -- not always but for the foreseeable future -- we're going to be an airline that focuses on volatile demand patterns associated with leisure travel, and, therefore, there's no opportunity to add a third frequency into some of our markets. So, our Tuesdays, Wednesdays, and Saturdays will be always be lower utilization than what we have today. That puts a more practical cap on fleet utilization. I'd put long-term fleet utilization goals, with a single fleet type, at more like seven hours a day.

Okay. That's fair.

David, it's Maury. Even if we wanted to push up the utilization, that's such a structural change because you have to hire pilots, flight attendants, that now become fixed costs. And so once you commit to that, you are in for a penny, in for a pound, at that point. You've made a very fundamental change to the way our model works. Flying [200] hours in September is one thing but flying them consistently more would be a big structural change.

Okay. That's helpful. I've just been thinking of some of your experimentation. On a separate, maybe a question for Scott, in terms of the CASM pacing in 3Q, 4Q to get to the guidance, does it broadly follow the maintenance pressures you talked about in 4Q? Or is there something else on how we should be thinking about the split between the back of the year?

No. The maintenance trend is the one that's most volatile. Other the things that we've already guided on the full-year basis being D&A is relatively flat. Sales and marketing continues to be a relatively good guy as it relates to the surcharge on a full-year basis.

Stations, there's some pressure but we're working through that. There's some new agreements that were in place but we're managing more aggressively, managing our providers. But short of maintenance you shouldn't see any other line item with that severe volatility.

Okay. That great. That's all very helpful. Appreciate all the comments.

Savanthi Syth, Raymond James.

Just a couple of quick follow-up questions. On the cost side and the capacity side, I know capacity has been tweaked up, maybe coming in at the higher end of the original guidance. On the cost side, any reason for maybe not getting more optimistic on the cost side?

No. Flat to up for a full year we think is still a decent range, despite the incremental capacity that you put in the schedule.

All right. Great. And then just on the fixed fee, I recognize the pilot issue being resolved is maybe providing some good opportunities there. What's driving that? I'm just trying to get a sense of the international charter that you're doing. What kind of an opportunity can that be and how big can that be?

A lot of carriers are leaving the charter space and we think, then, that there's an opportunity for us to come in and backfill some of those opportunities. And it also gives us a good way to launch a new base in the mid-continent where we can combine scheduled service usage on the airplane with charter commitments and get really good utilization out of the airplane, allowing us to test markets essentially risk-free.

So, we're working with Apple and some other charters to try to expand those relationships, and hopefully you'll see more on that. But the expense in fixed fee flying has to do with Apple replacing our prior Peppermill commitment, which Apple is more productive. And then also, particularly in the first quarter, we just had a lot of opportunities with March Madness that we didn't predict having, as pilots matriculated through training and were available so that we could take those ad hoc opportunities.

We continued to see a lot of traction in the ad hoc business into the second quarter, and we're investing a lot in that direction. We think it's a good opportunity for us. Fixed fee will always be a pretty small part of what we do but it's a great way to use surplus aircraft and crews, and we intend to do it for a long time.

All right. Great. And just a final follow-up on the credit card you mentioned (cajilgul) for third quarter. Any more thoughts on the timing of once that's released and when we might start to see a contribution?

We're not trying to be coy there. We really don't know. It depends on how quickly we're able to get adoption from our customers. What we know is that it will launch in the third quarter. The technology is on track and the marketing plan is in place. We're working with our flight attendants to help market the card on our aircraft. But there's still going to be a little bit of uncertainty about when the revenue shows up. And we won't know that until it's out there and we're selling it.

Got it. Understood. Great. Thank you.

Hunter Keay, Wolfe Research.

As you guys ramp up charter non scheduled ASMs, if we were to call it, last time you guys had that as a pretty big portion of your flying. You were able to pass through fuel effectively for free, so you had this gap between scheduled fuel and systems fuel. As charter ramps up again, is it fair to assume that free fuel will create a little bit of a tailwind, what you might see in the spot market like you had last time? And then the second question that relates to fuel is, given the changes in the fleet plans, is it fair to assume maybe like a low single-digit improvement in ASMs per gallon next year?

Let me comment on the structure of the charter contracts and then I'll turn it over to Scott. Just like all our charter agreements, we don't take risk on the fuel price. So, that will cause some reporting challenges because there's an ex-post settlement on the actual fuel price paid. But, as you point out, it's very important to us because of that risk transfer onto whoever's chartering the airplane. So, you're right there.

On the ASMs per gallon, first quarter you saw a 3% increase year over year. I think as you move through the year, it's likely you'll see a 2% to 3% increase year over year for Q2, Q3, and Q4. 2017 is a little more convoluted with the retirement of the 75 fleet and getting out of Hawaii, so it's going to negatively impact ASM per gallon metrics, not to mention some Airbus units that we'd like to put in if there available.

Got it. All right. Thanks a lot.

That's all the time that we have for questions for today so I'd like to turn the call back over to management for closing remarks.

Thank you all very much. Appreciate your time. If you have any follow-up calls, please talk to Chris. We'll talk to you in 90 days. Thank you again.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone, have a great day.