Allegiant Travel Co (ALGT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2016 Allegiant Travel Company earnings conference call. (Operator Instructions) As a reminder, today's program may be recorded.

I would now like to introduce your host for today's program, Mr. Chris Allen, Investor Relations. Please go ahead.

Thank you. Welcome to Allegiant Travel Company's third-quarter 2016 earnings call. With me today are Maury Gallagher, the Company's Chairman and Chief Executive Officer; John Redmond, the Company's President; Scott Sheldon, our Chief Financial Officer; Jude Bricker, the Company's Chief Operating Officer and SVP of Planning; and a host of others. Jude will have some brief commentary and then we will open up for questions.

As a reminder, we will have our Investor Day on Tuesday, November 29 in Las Vegas and we will be reserving 2017 guidance for that event rather than on this call.

Before we begin, I have 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 cause 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.

This earnings release as well as a rebroadcast of the call are available on the Company's Investor Relations site at IR.AllegiantAir.com. With that, I would like to turn it over to Jude.

Hello, everyone. As in quarters past, we found it useful to go over some of the main topics that we expect to generate questions on this call. So I'll start with revenue. Our 3Q results finished on the high side of guide, which we revised up mid-quarter; and that was primarily due to outperformance relative to our expectations of our midsized markets based on three factors primarily.

There is a slight improvement that we've seen in the revenue environment, consistent with all the other carriers that have reported thus far. We continue to see maturity in these markets, which we attribute to increased customer awareness due to the time that we've been in these markets and our marketing efforts there. And finally, the secondary destinations that we serve out of these midsized markets outperformed significantly our expectations going into the quarter.

However, generally, we've seen continued weakness in economies that depend on oil and gas, and those depend on exchange rates. And that softness was expected in our guide. So most of the change for 3Q had come from our midsized markets.

For 4Q, just to give some color around it, most of this was included in the release. We, as an airline, focus so much on Florida, we were impacted significantly by Hurricane Matthew. That resulted in a downward guide of about a half a point of TRASM year-over-year.

The Columbus Day weekend is the strongest of the October period, and so it was an outstated impact for us. We canceled about 175 flights and incrementally we incurred cost as we positioned aircraft out of the path of the storm.

A day week shift for the holiday season is expected to reduce TRASM by an additional 1 percentage point for the quarter, as compared with previous quarters on the positive side. The growth of our peak season, peak day and week flying will be reflected in total capacity growth for the quarter; and also new market growth as a percentage of total will be reduced. Both of these factors will be a positive for unit revenue comps.

On other topics, in September we pulled a bond offering that we went to market with. Quite simply, this was because we couldn't find the demand at the pricing that justified that unsecured offering relative to our alternatives. So you'll see us raise debt during this quarter using other means.

On a positive note, we launched the Allegiant World MasterCard on September 1. The program had negligible impact during the third quarter and we're including minimal impact during the fourth quarter, but we have seen customer response and enrollments that vastly exceed our expectations. We hope to give more guidance during our Investor Day in November, as Chris has talked about.

Operating stats continue to improve after a tough summer season. This is evident in our third-quarter results in the fact that we outperformed our fixed fee flying, which reflects our ability to allocate surplus aircraft and crews to charters instead of supporting scheduled service recoveries.

As an operating department, we remain focused on the two most critical projects we're currently undergoing, which is the fleet transition to an all Airbus fleet and the pilot contract implementation.

During the first half of 2017, we continue to expect sequential improving of year-over-year TRASM results due to a slower rate of growth and the continued maturation of our younger markets. And with that I'll turn it over to Q&A.

(Operator Instructions) Joseph DeNardi, Stifel.

Yes, thanks very much. Maury, could you talk a little bit about the appointment of John? Typically that's a role with somebody with some airline experience. And John, if you want to participate in response, feel free.

So I mean, Marty, what does that say about the future of the airline, I guess? And what opportunities do you see to create value outside of just the airline business?

Joe, that's a good question. I'm a little less worried, if you will, in quotes, about airline experience. We've got a couple of non-operations guys doing operations at this point with Scott and Jude, doing a great job.

Good management is good management. The model is pretty well set. There aren't any mysteries as to how to do what we're doing.

Having said that, John brings a wealth of knowledge that's been very instrumental to what we've done in that area. In fact when I asked him to join the Board years ago, it was for that very reason: having that hospitality background, the hotel, leisure, those types of things. Nothing against airline guys, but they don't quite understand it nearly as well as John does and will help us as we go forward.

So I'm excited about John's knowledge base. He has, obviously, a lot of knowledge, specific knowledge here in Las Vegas; but in general we're giving him Airline 101. He's got a firehose.

He's doing pretty good with it at this point, but it's going to be a great addition. He knows the Company, having been on the Board for so long and we're very excited to have him onboard. John?

Well, as Maury alluded to, I mean, we have 3,000 airline experts here. And I'm fortunate enough to join an All-Star team, quite frankly.

I think outside the obvious Maury pointed out with my hospitality background, it just gives the organization or myself the opportunity to look at it in a different way as well. Obviously without having airline background, I don't approach it with an airline mindset.

So everything I've been looking at, you take it from a different viewpoint. And it's healthy to question the business, question the process, and question the various practices we have so we continue to get better. So that's what we've been doing to date.

Okay, that's great. Then, Lukas, just on the PRASM guide for 4Q -- or Jude, I guess. I mean, capacity growth is slowing quite a bit quarter-over-quarter but RASM guide isn't getting a whole lot better.

So why is that? And what gives you confidence that 2017 gets better?

Yes, if you strip out some of the impact of the hurricane and the impact of the holiday shifting, we have a higher percentage of holiday ASMs than any other airline, so certainly we're more calendar challenged. That's about a point and a half of TRASM.

The midpoint of our guide would be right around the 5% mark, which is a couple points better than third quarter. We've still got some moving parts, and certainly we're seeing core trends improving in close-in yields, some of the airlines, where about the August point was an inflection point for that, where August and September have improved on the close-in yield side.

So we do see some of that, but it takes a little bit while longer for us because of our longer booking curve to see some of that benefit. So we're going to continue to improve sequentially, as Jude mentioned, and we hope to see positive unit trends next by mid-next year.

Thanks. I'll hop back in the queue.

Hunter Keay, Wolfe Research.

Thanks, Joe. So the CASM, if I'm doing my math right, is that right that the pilot deal is like 7 points of CASM ex in the fourth quarter? And if that's the case, isn't it highly unlikely that your CASM ex will be up less than 7% all of next year, assuming high single-digit capacity growth? And that's not even factoring in the flight attendants. Is that right?

Yes, hey, Hunter. Yes, on an absolute basis, fourth quarter is call it $14 million, $15 million. I think the guidance we've given in the past was a $45 million run rate; and that was August through July of next year.

So there's going to be a lot more color on, obviously, 2017. But yes, the pilot agreement is going to put a lot of pressure on the ex-fuel cost structure.

Okay, so you'll [do] that at the Investor Day. Hey, Jude, how do you use TRASM when you plan?

You plan around a margin. So typically when we build a schedule we're focused on individual flight pairings, so a round-trip, that being the smallest unit of capacity allocation. And if that reaches a margin target, from which you could extrapolate a TRASM goal, then we schedule a round-trip; if we don't, we don't.

So you don't use TRASM to plan?

No. As you would expect, TRASM could be an input from cost structure, not the least of which is the input of fuel price that we expect.

Then why do you talk about it? Why do you guide to it?

We guide to it because as our bookings become clear we get more and more confident about what TRASM is going to be, and therefore we can make that guide. It's the main thing that investors want to hear from us in an earnings call.

Are you saying, Hunter, we shouldn't guide to it?

Yes. Don't cater to us. Do what you are going to do.

If you don't even use it, then why even include it? I think you guys have more control of the conversation than maybe you realize.

Good point. So noted.

I didn't mean to proselytize, I was just --

Tired of talking about it. (laughter)

Yes, it's ironic. All right, I'll get back in the queue. Thank you.

Helane Becker, Cowen and Company.

Hi, everybody; thank you for the time. I see in the press release today that you're starting service to Trenton; but then later this quarter you're also starting service to Newark. Is that -- do I get that right?

You do have that right, yes. Trenton we look at --

And they're different --

yes; go ahead. They're different markets? Sorry.

Yes, exactly. We look at Trenton as a source market; we look at Newark as a destination market. We hope over time that Newark becomes a source market for us; but right now the schedule includes markets that are primarily inbound into Newark.

Newark was, as you're well aware, it was deslotted and that created an opportunity for us to serve that market. The New York City area being one of the largest leisure destinations that heretofore we hadn't had a presence in --

Right.

-- we looked at that opportunity that way. Trenton is a different thesis, which is basically if you look at all our service around Philadelphia area, Scranton, Allentown, we understand it's a different market, but we think it will have a similar pattern for demand.

Okay. Yes, I actually happen to have a lot of friends who live in that area and they fly out of Trenton on Frontier, especially to like Chicago and Florida. So is it a similar pattern that you're going after?

Yes, absolutely. Not the Chicago bit, but the Florida bit, yes.

But the Florida? Okay. Then I know I should know this, and I apologize that I don't. Can you just update me on the status of the flight attendants? I feel like they might've rejected the contract, but I might have lost sight of it in all the earnings releases.

Yes, the flight attendants did reject the tentative agreement that we had in place, and we are currently waiting on the NMB to schedule dates for the next mediation session.

Okay. All right; well, those are really all my questions. Thanks, guys.

Duane Pfennigwerth, Evercore ISI.

Hey, thanks. Maury, wanted to ask you some perspective. I guess there's a lot of revisionist history about who is responsible for destroying industry pricing last year.

Who in your opinion is responsible for destroying industry pricing last year? And is it actually getting better? And if not, how should we measure if it's getting better?

You know, Duane, I appreciate you thinking of me as an expert on industry pricing. I read this stuff as much as you do, but I'm not sure I'd use the word destroy and things like that.

I think the market did what it normally should do by taking pricing down because people were making more money by filling up more seats with fuel doing what it's doing. So it's starting to come back now, as you would expect, as fuel is going up.

I think we've seen fuel jump what, $0.25, $0.30 a gallon here in the last couple months. And we're changing our pricing accordingly as the economics change. Capacity will change as well as you go along that route.

But clearly the American Spirit program was pretty aggressive. But it's just I think good economics and the way the industry was structured with all the margins that are unprecedented; those things made sense from where we sit.

I guess the revisionist history is that it was -- the 4% of the market that wrecked -- and those are my words -- that wrecked domestic industry pricing last year, it was the 4% of the market and not the 96% of the market or one of the players that controlled 85% of the market.

Well, you can go back historically and typically see those seats at the margin, if you wanted to look at it, that historically it can be very influential in pricing. When you had 10 carriers of size, one or two of them could certainly drive the majority of the ASMs and the reaction.

If we're that powerful, that's more than I expected to be. But perhaps you could look at it that way.

But it takes two to tango, too. The others didn't have to react.

Okay. Then just with respect to your CASM guidance, certainly appreciate you guys have a conservative nature. But I think it's been, I don't know, up mid-singles; and it winds up, up closer to 1%.

Can you just walk us through maybe for the third quarter specifically, how did it get it from up 4% to 6% to up 80 bps? What shifted?

Yes, Duane; this is Scott. So it was really two areas, the first being stock comp expense for the quarter year-over-year was down. A substantial piece of our outstanding equity grants are liability based, so they reset with the decrease in stock price, and so year-over-year comps was down about $3 million in absolutes.

Within the maintenance line item, there was two tails that didn't go through a C-check. One was a 75 which we retired, and one was an MD-80 that was damaged that we chose to retire as well.

So between really those two items was the driver between the guidance of up 4% to 6% to where we came in at.

Okay. Thank you very much.

Savi Syth, Raymond James.

Hey, good afternoon, guys. On the cost side in the fourth quarter, I guess I have a little bit of different math than Hunter has; but you got about 6 points from pilot cost and then you have 2 points from the MD-80. And I was wondering what's driving the remaining 2 to 4.

Yes. In the release, we did accelerate some depreciation for our MD-80 fleet; that's $3 [million], so we took the residual values down. So that's a component of it.

Station expenses, there's pressure there as we go into larger, midsized cities. We have less cost control. We don't have the ability to control cost as well as we do with small cities, so we're seeing some pressure there.

Some timing of some maintenance events. It's a little heavier this fourth quarter of 2016 versus 2015.

And then other -- I mean, an area that we're seeing a lot of pressure is property taxes. As you're starting to fly more expensive aircraft, you are starting to see the tax obligations go up pretty dramatically from flying a very inexpensive MD-80. So those are the themes that you would look for in 4Q 2016 over 2015.

And if I think of just next year from a, like, maintenance events standpoint, should it be similar to 2016 or higher?

It should be lower. A component of our Airbus fleet, heavy maintenance components of our Airbus fleet are capitalized which is consistent with other ultra-low-cost carriers. So what would have rolled through the P&L are now sitting on the balance sheet, and they are depreciated over a specific time.

As we continue to phase out the MD-80 fleet, you're going to see less and less C-check events, less and less in the overhaul events. And so you should start to see the maintenance line item go down pretty dramatically over the next couple years.

I think we guided, for instance, this year, full-year, 105 to 110 per aircraft. You're going to see that come down pretty dramatically over the next couple years.

Helpful. If I may just switch over to the revenue side, I guess I'm a little surprised there is not more than -- I know you said down 5% at the midpoint, which is an improvement from the third quarter; but you're also moderating capacity quite a bit more. I think at the same time, as you pointed out, there's more even growth between the peak and off-peak, whereas I think in the third quarter and before there was a lot more growth in the off-peak versus the peak.

So I'm surprised that maybe the year-over-year unit revenue declines aren't moderating a little bit faster. I just wonder if you can comment on that.

I think from where we said we were kind of excited about these results, with the capacity guide that we have, relative to the 5% down in unit revenue. I looked at it differently. I thought that was a pretty positive result, and we should see that continue to see that sequentially improve into the first and second quarters of next year.

I have trouble answering the question because I just look at it from a different perspective.

Then is there any point where -- I mean -- and so you're thinking mid-next year for turning positive; is that right?

Yes, it's difficult for us to predict that far out accurately. But second quarter would be where that is possible to happen, yes.

Got it. All right. Thanks so much.

Rajeev Lalwani, Morgan Stanley.

Hi, thanks for the time. Jude, just to pick up on the last question, what drives you to get to positive RASM in the second quarter of next year? Is it that you're bringing capacity in, or is it comps, or is it something else?

Primarily it's going to be growth rates. And the negative influence will be that we will hold down summer peak flying days in order to improve operational performance; and then on the upside we're going to see (technical difficulty) growth in the second quarter of 2017 certainly than what we had in the second quarter of 2016.

And we're going to circle our comps. So I think we're looking pretty positive. Where we are today from a unit revenue perspective second quarter is where we think we might see a zero.

Okay. Then in terms of competition from other ULCCs, can you talk about how you are expecting that to ramp as we look into next year, if at all?

Well, I can't, actually. We react as we see things happen, and we haven't seen many announcements really since Akron that would impact us significantly. We continue to focus on our franchise model out of midsized markets, which is based on low-frequency service to some of the secondary destinations that have been so profitable for us over the summer period. And I don't think there's going to be any encroachment into those markets.

So we feel fairly good about where we are. Let me turn it over to Lukas and see if he wants to provide any other color.

Yes, just one other comment on the second quarter that Jude mentioned, the Easter shift and spring break shift. It will be certainly calendar beneficial to us versus any other airline, just the way that our network is structured.

And then again, like reiterating what Jude said, we're going to wait to see what announcements are there. We'll make changes to our network accordingly based on those. But until then, no deviation from what we're looking to grow into.

Think you, gentlemen.

Michael Linenberg, Deutsche Bank.

Yes, hey, can you just -- maybe this is a question for Lukas. Just the thoughts behind -- you were in Akron; then you moved out. I don't know if Spirit moving in drove that, but now you've camped or set up shop in Cleveland.

Just the thoughts about the market and the dynamic there. What drove what?

Yes, we've been in Akron for about a year and a half now, and we found that the majority of our passengers were coming from the Cleveland Hopkins Airport side. Looking at the competitive landscape of both airports and the amount of seats in each destination that were serving, it made more sense for us to move to the primary. And we had enough scale that the cost structures were beneficial for us to move to the primary.

So a very easy decision for us. Certainly our secondary cities should do better out of the primary airport, and we feel pretty confident about the decision with or without the competitive capacity added into Akron.

Yes, Mike, I just want to make the point that we added a bunch of new markets to that franchise when we picked it up out of Akron and put it in Cleveland that are noncompetitive. So we feel like the secondary market franchise -- the total franchise in that region is better supported out of the Hopkins Airport.

Okay, great. And then just a second question, thoughts on this, I guess, advanced Notice of Proposed Rulemaking. It seems like it's a follow-on from something that was put out by the DOT in 2014.

But what I'm really focused on is I guess the government having some control over where you can distribute your product, which -- I mean that seems very much like the end of at least some element of deregulation.

You guys are basically a closed system. How would the government tell you where to put your wares? Which storefronts to put your wares in?

It just doesn't seem to make any sense. I'm just curious of your thoughts on that and how the government would even implement that. It just seems like a nonstarter; but anything that you can add would be great.

Well, I think, Mike, you hit a pretty interesting question. It's always been hanging out there with the OTAs and the like, and passing costs through, and having to have this kind of vertical system that all the numbers have to move all the way through to the end person, which is a monumental task given the antiquity of a lot of the systems and the volatility of changes that people make and product enhancements.

It's going to be an interesting dynamic, one, just to come up with a rule set to implement it. And two, then how do you enforce it?

To your point, we're isolated. We've stayed away from those things, albeit we use Kayak a little bit. And not to say we'd ever do that, but it makes you think long and hard before you venture down that road if you're going to have all these rules.

But I think you're spot on. The government -- they just want to control this stuff and deregulate -- or reregulate, it seems.

I mean, Maury, isn't the unintended consequence that although, while this is under the auspices of spurring competition, doesn't this ultimately result in higher cost to consumers? Like, why would this be good?

Especially for somebody like yourselves and other carriers that are trying to keep distribution costs as low as possible to be able to offer the lowest possible fares, it just doesn't -- I don't -- (multiple speakers)

Well, I think the irony of ironies is coming from the 1980s, when they were regulating the Sabres and the Apollos and telling them what screens they had to have -- it's all about information flow. There's never been a greater level of information available to a consumer in the history of travel. And to think that consumers aren't savvy enough to go find out all the information they need is pretty ironic on their part.

But this is the same group that felt they had to put 1934 telephone laws on the Internet. So it is what it is.

All right. So we just stay tuned. Okay, great. Thank you.

Julie Yates, Credit Suisse.

Hey, everyone. It's Parker Kim on for Julie. You guys noted that midsized markets ramp faster than expected; but as a result of all the industry capacity cuts we've seen in Q3, did you see any less aggressive flow pricing, less migration of your customers to further-out airports in your catchment areas, or better capacity on the routes you flew getting better?

I haven't.

Yes, specifically what we can say is that pricing through the quarter improved. Again, similar to what other airlines saw. If you looked at pricing within say the seven- or 14-day window from when a flight departs, the trough of that pricing, the yield there, was in the June/July period.

Once we hit the fall, it started improving into the back half of September. That's when we raised up our guide.

And our expectation is that going through the fourth quarter that will continue to improve. We're a little bit of a -- hard to read through the rest of the industry, given that's a lot of indirectness. But our impression is that that flow pricing is improving certainly within the last two or three weeks of a flight.

Yes. I'd still attribute most of our outperformance relative to expectation in the back half of the third quarter due to capacity: tactical capacity changes that we implemented based on the experience of the previous year. I think it's a lesser impact -- lesser readthrough, as Lukas termed it -- to the rest of the industry for pricing purposes.

I think this is really just about us having a better schedule for revenue.

Got it. John, you bring a lot of expertise from the hotel and the casino side to Allegiant. Where do you see the biggest missed opportunity on either travel packages or Allegiant's relationships with hotels? What do you think are the low-hanging fruit there?

I resemble that remark. (laughter) These aren't missed opportunities; they are enhanced efforts. But go ahead.

I mean there's a multitude of issues where we're looking at there; probably a little bit premature at this point in time to definitively say whether or not they are genuinely opportunities until we've had further time to flesh them out.

But there's a lot of different issues we're looking at. I think that there as, to use your term, some potential for low-hanging fruit. But again it's always things you've got to run through the traps a little bit more before you feel pretty comfortable about definitively saying that there is some upside there.

Maybe by the Investor Day we might have a little bit more clarity in that regard and we can share some of that with you.

Got it. That's it for me. Thanks.

Dan McKenzie, Buckingham Research.

Yes, thanks, guys. John, I guess just following up on that last question, assuming there is some low-hanging fruit, how are you thinking about the compatibility of IT and the ability to implement any potential initiatives? If you do find low-hanging fruit is it something that would take potentially six months, one month, a year to initiate? Or how do we think about that part of the equation?

Well, that's why, frankly, it takes a little bit more time so we're not overstating or understating anything that we think is an opportunity, to see just what type of initiatives, if any, would have to be undertaken in order to take advantage of those opportunities. I think, hopefully, by that November time frame, again, if there is some clarity I can give you, I will in terms of timing because that's obviously the most beneficial thing we can provide: not only what the upside is but when.

So hopefully by that time, we'll be able to do that. Obviously if I can't, I'll tell you that. But there are a lot of issues we're taking a look at right now, and I think it's encouraging.

But at least for purposes of our outlook, I guess, Jude, just going back to you, safe to say the revenue commentary you shared thus far isn't factoring in any of these additional potential opportunities; is that a fair statement?

That's upside. You're right, Dan.

Okay. Then I guess either Jude or Lukas, just going back to the earlier question on competitive capacity, I think the competitive dynamic historically for Allegiant has been about maybe 20% of the routes. Just wondering: where are we in the fourth quarter exactly?

And then philosophically, is there some reason why that might potentially change next year?

Let me just affirm that 20% competitive route is relative to our total route count. Lukas, do you have any comments on forward-looking?

Yes, certainly, as we continue to build out our presence in a lot of these larger markets for us, we'll be continually evaluating more noncompetitive routes, as those tend to be the next best opportunities.

To get a route for midsize markets established, we'll typically have a bit of overlap into the major destinations. We have that going into a lot of these midsize markets, so it's not a surprise there.

We can only control what we're -- where we're growing into. So I don't see us deviating too much from that in terms of what we add, and we'll take additional competition as it comes.

Yes, think the growth rates to watch are growth rates in some of our major destination markets. Vegas and Orlando had seen outsize growth relative to the domestic market, and that pushed a lot of our growth. As you would imagine, capacity has been deployed into less competitive markets that we would terms secondary like Destin, Savannah, Myrtle, Baltimore, etc.

Okay, very good. Thanks for the time, you guys.

Joseph DeNardi, Stifel.

Question for Doxey or Jude. Andrew Levy on United's call was talking about bringing in some used aircraft and suggested that there might be more coming in as he reviews their order book and fleet needs. I'm just wondering if you see that as a risk to your ability to source used aircraft, if an airline of that size gets a lot more active in the used markets, since he may know the playbook, so to speak.

Oh, we know that guy. (laughter) Look, we have had great success sourcing used aircraft during this year where -- in contrast to what the leasing companies and OEMs have said about the used market for aircraft. And I can -- from what we see right now, there is still great opportunity there for us to go out.

We hope to announce something that we're working on right now at the end of the fourth quarter or around there. The real focus is to try to firm up the total inductions required to support growth while we transition the fleet over to an all Airbus operation.

Tom is a little closer to the market now. Any other color?

No. I mean for me, I don't think that we are seeing anything in the market that would suggest that we'll have difficulty getting to the goal of being at 100 aircraft by the end of the decade based on the fleet plans that you see in our management presentation. And we've been successful so far this year.

Jude mentioned the potential to add some additional transactions in the next several months. So I don't see it as an issue that would keep us from getting where we need to be.

Okay, okay. Then Maury, I know at least some of the investors I talk to, they get a little bit more nervous when you and Spirit start to bump up against each other a little bit more. I'm just wondering if you think at a high level at some point there needs to be more consolidation in the ULCC space. And what would the catalyst be for that, in your view?

Consolidation has gone on in the business now for a while. You've got, obviously, major changes at the top end of the spectrum.

If the numbers start driving those kinds of decisions, people look at that type of thing. At this point, though, we are certainly not looking at it on our side.

I think the other prior issue for us is we don't fit real well with a Spirit and a Frontier, as an example, or the usual suspects.

But we have a very like-kind business model in a lot of way with how we price and our approach to things. Certainly with a lower revenue customer.

But I don't -- hard to say what the catalyst will be. I think there is certainly growth left for all those suspects at this point independently. And over time may be there is something that happens, but nothing that's going on that I'm aware of at this point.

Thanks, Maury.

Duane Pfennigwerth, Evercore ISI.

Thanks. Maury, you passed on being an industry expert on pricing. Maybe I'll try Lukas here. Just in terms of the improvement, look, I have no issue with your guidance. Like, your revenue guidance is right down the middle and you guys are still very, very isolated. I think in many respects you control your own destiny with your own capacity growth, so you could solve for whatever price you wanted.

So this is again more from an industry perspective. It seems to me that people are making a mountain out of a mole hill with respect to ULCCs tripping all over each other.

One, what would be a bigger influence on your destiny in 2017, for example: ULCC growth, or like a return of garbage walk-up fares day of travel for $60, $70?

Yes, I tend to think the return of garbage fares would have more impact. Certainly we saw -- we talked about the last few quarters that we had some driveaway traffic as closed-in fares started getting back to the levels they should be, considering you can't stimulate too much in the last week or two.

I think our yields have improved, as have others. I think that's where the industry needs to get to so we start seeing positive unit revenues for all carriers.

So I think that has a bigger, significantly bigger impact than a couple percent of ASM overlap between some carriers.

I agree. Then with respect to those garbage walk-up fares, are they completely gone? And is pricing really getting better? Or is this just a function of easier compares?

It's not completely gone, but it's improved. Certainly there are some aggressive fares out there still. And so there's -- to me that's upside still for next year.

Thanks very much.

Savi Syth, Raymond James.

Hey, I just have two quick questions. One is on the December holiday timing aspect. Do you expect to recapture most of that drag that you are identifying for 4Q?

And then also just on the ancillary side, as you retire those or you're going to take out the 757s, how should we think about those that trend in the ancillary per pass next year?

On the first question, no. The issue is around the days of week that the holidays fall on, and so we don't expect much recapture. We just expect it to be a shorter overall season. That happens in December.

I should point out that as we are such a carrier focused on volatile demand patterns that we have a much higher dependence on that winter holiday season of Christmas and New Year's than other carriers, because we peak up for it. So it will be a shorter period for us to optimize around and there will be some uptick probably, but it will be very minor.

On the second question, the 757 flying to Hawaii is such a small portion of what we do now that it will not be -- it will be a very small factor in ancillary unit revenue per passenger going forward. In fact, I don't know, but it may even be positive because so much of that capacity now is deployed in the Lower 48 that the large gauge of it tends to depress fares and therefore also ancillary fares as well.

But you're right, Hawaii is the highest yielding ancillary market that we have. But it's just such a small thing of what we do now that it won't be that impactful going forward.

Got it. All right, thank you.

Hunter Keay, Wolfe Research.

Hi, yes; thanks. I have two more as well. I think as we think about the fleet transition as well, can you maybe help us think about -- maybe this is a question for Tom as well -- $0.08 per gallon in the model, you're going to be -- you're going to have significantly fewer MD-80s in 2018 and none at the end of 2019. Is there a number that we should think about in terms of absolute ASMs per gallon, especially given the 57s and Hawaii and all that noise, we think about modeling out over the next two to three years? Maybe where you can be in more of a study run-rate basis once you're an all A320 family.

Sure. Yes, we're trying to pull that number for you now.

Hunter, this is Scott. I think what you're seeing now is close to 2% ASM per gallon increases year-over-year. You really don't see a spike until basically 2018. You start to really get through the glut of the retirements.

So look at that 2% profile up until then.

So you think like 80 is too aggressive a number to get to, two years down the road?

I think the top end, yes, I think the top end you're mid-80s based on per gallon.

Mid-80s? Oh, wow. Okay, great.

And then my second question, Jude, I think you said the credit card is vastly exceeding your expectations. I don't think I've ever heard an airline say an initiative is not exceeding their expectations. You maybe want to put some numbers around that?

I know it's very early, but maybe help us think about what -- just when you -- I was intrigued by use of the word vastly, let's put it that way. So if you maybe want to put a little color around that, knowing that it's early.

Last-minute add, Hunter. (multiple speakers) would be was our forecast too much sandbagged? We don't know.

What we did, as you would imagine, is we launched a credit card and then we reached out to all our passengers letting them know that it was available. So the original bump that we saw in sign-ups, we don't know if we can attribute that to us essentially fishing in our own pond or a trend that's going to continue on into the future. We really only have about a month's experience, as we did a soft launch in September 1; and mid-September we reached out to all our customers in our database, making them aware of the offering.

So it's really too early to tell whether or not we're seeing a long-term trend or just the effects of launch.

Okay, thanks, Jude.

Dan McKenzie, Buckingham Research.

Oh, hey, thanks for the time here again. Maury, I know you are managing the airline for growth, but what are the key financial metrics that you're telling your team to solve for?

Is it pretax margins? Is it growth in pretax earnings? And then just how should we think about those goals as we look ahead to next year?

Then I guess just related to that, how do we think about capital returns to shareholders from here as well?

We're entering a unique phase for us, Dan, as we transition to the Airbus. And while growth is still going to be part of the formula, I think we can't keep up with the levels we were at in the past years, so we'll be pulling that back.

And we really want to make sure that this transition happens, so that will take top priority. Operationally we need to get that in place.

So certainly next year will probably be the hardest year for this stuff, while we take delivery of the airplanes, train our crews. We've got a lot of crewmembers we have to transition.

So those are one-time events that we'll have to take in mind -- or keep in mind. But growth is part of our formula. I think we can moderate it. We don't certainly have to grow at 20%; an 8% to 10% number can work for us over time.

As we get bigger it's more meaningful, I might add, on the numbers. But with regard to returns to the shareholders, we're going to still continue that. One of the benefits of our model over the years is we've created good, excellent return on capital. It was 25% here in the last year, last 12 months. So we're still seeing exceptional numbers there.

As far as specific returns, we've got a -- what's our annual dividend now?

$2.80.

$2.80 a share, so what's that? That's $50 million, something like that. So, yes. No, we're going to continue that.

Share buybacks we've backed off a little bit on that as we've gotten into some heavier capital requirements. But those will be available as well.

Understood. Then I guess if I could just clarify, I understand the growth just dialing back to high single digits, 8% to 10% or so. In terms of the financial metrics, Maury, are there financial metrics that you specifically are targeting either with operating margins or pretax margins or just in general with the pretax growth?

Well, I think it's -- personally, I just want to optimize my operating margins. They start there.

Give me the combination of revenue and expenses that give me that best operating margin in the context of certainly some of the growth that we have to take into account. But we're not -- as Jude said earlier, we don't focus on a TRASM number or -- they go through a very detailed review of every market based on expectations of pricing that's available, capacity that we have, and we plan accordingly.

That capacity can be added, and we've got new markets that we have to take into account, which obviously aren't as strong as existing markets. All that blends down to a formula of the amount of capacity, and we plan airplanes around that as well.

But I'm not saying I want to -- I'd love to have a 25% operating margin. Jude: 25% operating margin.

Yes, sir. (laughter)

Those would be great, but I'm not holding my breath that we're going to do that for the foreseeable future.

I understand. Okay, thanks for the time again, you guys.

Joseph DeNardi, Stifel.

Sorry, just two quick ones. Lukas, I think you mentioned that a noncompetitive route is down to about 80% of the network. I think at the end of the year it was like 85%, and I thought the plan was you guys thought you could hold it there.

Were you just rounding down? Or is that where you're going to end up at the end of the year, is about 80%?

Just rounding down; we're still at 85%.

Got it. Then, Scott, just on the 85 ASMs per gallon, like what's the -- you guys think that's what it will be by, like, the end of 2018? Or is that beyond that?

No, it's beyond that. 2020, 2021.

Got you. Okay, thanks.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Maury Gallagher for any further remarks.

Thank you all very much. Appreciate your interest and your time. We'll see you in the end of the next quarter. Thank you. Have a good day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.