Allegiant Travel Co (ALGT) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2017 Allegiant Travel Company Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

Now it's my pleasure to hand the conference over to Mr. Chris Allen, Investor Relations. Sir, you may begin.

Thanks. Welcome to the Allegiant Travel Company's Second Quarter 2017 Earnings Call. On the 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 and interim COO; Lukas Johnson, our SVP of Commercial; and a handful of others to help answer any questions that you have. John and Lukas will have some brief commentary and then we will immediately move into questions.

Before we begin, I have to remind listeners that the company's comments today will contain forward-looking statements, and they are only predictions that involve risks and uncertainties.

Forward-looking statements made today may include, among others, references 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 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 don't 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 Maury.

Chris, thank you very much. Good afternoon, everyone, and welcome to our second quarter call. We had a very good quarter, very bullish on where we're at. We're making good progress with our transition. It's obviously a multiyear effort. There's a number of areas, as Chris mentioned, where we're going to have some preliminary comments on and answer some of your questions. And to that end, I'm going to turn the microphone over to Mr. Redmond. And after that, to Sheldon and Johnson, and we'll try and get your questions and follow-on questions answered. Thank you very much. And John?

Thanks, Maury. Good afternoon, everyone. The release, of course, is quite detailed. It has a lot of good transparency and clarity in dealing with a lot of the issues. So I'll just try to keep my comments brief and touch base on some issues that I know you're going to have some questions on and that's not in the release.

Dealing with the first and most obvious question I'm sure you would have has to do with a Chief Operating Officer and where we stand. In that regard, we do have a Chief Operating Officer. I think I made this comment before, but Scott Sheldon is functioning in that role. He's doing it full-time and has done a fabulous job to date.

When you look at our operations in the quarter, in Q2, we did not meet our expectations at all and surely not those of our customers. So Scott and others have taken this opportunity to take a real deep dive and examine our policies, procedures, various processes we use, as well as our personnel in for the early part of June. And as a result, we instituted a number of changes around areas like personnel, parts and tooling, better support of our basis, a dedicated effort around AOG and a much faster recovery with AOS aircraft.

We've -- I've made the comment in the past. We have great depth and talent in the organization. We just need to direct and did direct more effort to better managing this talent and to holding people accountable and instilling a higher degree of sense of urgency, if you will.

So when you look at the month of July, realizing that the reaction time has been relatively short and quick, the performance does reflect this focus and the various changes that we have made, which has resulted in dramatically better measurements against any and all metrics you want to look at, including the completion factor, A14, turn performance, et cetera. So these significant changes during the busiest time of the year are not a desirable time, but they do recognize the sense of urgency we have around here. And this performance is the level that we expect now and what our customers, of course, expect. So very happy with these changes. They represent dramatic improvements over the month of June, as well as, of course, prior year July.

And with that, of course, I want to thank the hundreds of employees that's been involved and responsible for these dramatic improvements and appreciate that. And of course, under the leadership of Scott, it's been amazing to see the transformation. And these efforts, of course, and the momentum will continue throughout the year. And that's why we want to focus on maintaining this momentum going forward. And as a result, are not looking to add to our bench for at least another 6 months, if not a year, because we've made so much progress. And a lot of these changes we've made, of course, have longer lead times. So the benefit from that still isn't reflected in the results that we have seen in the month of July, as dramatic as they've been.

On the CMO front, we are involved in a search. I think I've mentioned that in the past, that we would yet to get that process started. The encouraging part there is there's been a great pool of individuals that we have looked at, and we're hoping to have someone onboard here before the end of the quarter. So excited about that and excited about the talent that was out there.

One item that was pointed out in the release had to do with the significant share repurchase of $84 million. Wanted to touch base and give you a little bit of color on that. We've also -- we've always said that '17 would be a transitional year, a foundational year in many respects, with the results being very lumpy from quarter-to-quarter. But we still are looking at the year being in line with previously provided guidance. The good news here is all the expectations that we had in monitoring the year, from pilot training to IT enhancements and fleet transition, have gone without a hitch and have been very smooth so far. While we acknowledge the execution risk, we have not had any problems to date, nor do we foresee any in the immediate future. So very happy with that.

So our share repurchase does not reflect the -- our share price does not reflect the longer-term value of our stock, in our opinion, which is why we made the most significant share repurchase to date ever and have also decided to increase the repurchase authority to $100 million as well.

Touch base real quick again on hotels, since I know some will ask about that. Again, we have no comment. I've always said that I would do that towards the back half of the year. I think in the last call, we said we were targeting the month of September. And as of now, we are still targeting the back half of September to provide quite a bit of information on that front.

And on that note, I'll turn it over to Lukas.

Thanks, John. I'd like to give a bit of color to our year-over-year unit revenue for the second quarter results and our third quarter guide. Before I start, I'd just like to highlight that we recently had our largest route announcement ever. And since our last earnings call, we've announced 31 new markets, 3 new cities, most of which will start service in the fourth quarter. And our growth plan remains very comfortable, and we feel very good about these markets. The initial bookings were very excellent for these markets and we feel good about that.

So we were rather pleased with our second quarter revenue results and finished towards the higher side of our initially guided range. A couple reasons for that, we beat our co-brand credit card projections and are extremely pleased with the way the program is spooling up. Another factor in our improved numbers is the maturation of some of the pricing initiatives we started in the beginning of the year.

As you may remember, our year-over-year load factor took a hit in the first quarter as we started raising yields. Very encouraged that for the second quarter, that strategy of better controlling our own pricing power has resulted in both improved yields and closing that year-over-year load factor gap. And just a reminder, the Easter shift contributed to 150 basis points of that increased TRASM for the second quarter.

Turning to the third quarter. We do project that year-over-year TRASM will be between negative 0.5% and 1.5%. The large increase in spare aircraft year-over-year is a unit revenue headwind as we've been growing departures only on off-peak days for the summer. For the third quarter, we're actually down 2% in peak day ASMs while growing off-peak ASMs by over 26%. That will result in a roughly 100 basis point headwind for our third quarter TRASM result.

And although we only have about 10% of our bookings so far for the fourth quarter, we're very excited about what we're seeing so far. And one last note for me, our new revenue management system is performing well, with roughly 30% of our ASMs for the second and third quarter, which are on the new system. And while still learning and gathering data, we're kind of encouraged by the results. And as previously stated, we should be close to 100% of our ASMs on the new system by the end of the year.

With that, I guess we'll take questions.

(Operator Instructions) Our first question will come from the line of Duane Pfennigwerth with Evercore ISI.

I wonder if you'd expand a little bit on the comments about a COO. It feels new that that's not an area you want to recruit for. And maybe you can just expand on why it doesn't make sense to sort of search for one now?

Duane, this is John Redmond. When we started looking into our operation, we weren't happy with how May went, and as we started to move into June, how June was going. And as I'm sure you can appreciate, a lot of the results that you see are a reflection of decisions made some time well before that. We do a lot of work on trying to prepare for the busy times of the year. So there was a total realization on our part that whatever decisions were made going into the year were not something that were resulting in the expectations that we would expect as a company or our customers. So that's why we started to take a real deep dive and we wanted to understand the problem as much as we could realizing that, that could be beneficial even in trying to hire a COO, to the extent we needed to try to describe not only our operations, but why we were having problems. So there was a lot of time and effort that has gone into that to date, as you could imagine. We wanted, again, to make sure that it was something from point A to point B of our operations, mostly around the area of maintenance, that we had a much better grasp on what we were doing. After getting a lot more visibility in that area, in some cases, we had none in the past, just by virtue of our various roles, we realized that there was a significant number of changes that need to be made that collectively would result in what we felt would be significantly better results. When you looked at what happened in July, our thoughts came true, realizing that some of these have long lead times to them. But we were able to make a significant number of changes very quick. Scott and with his efforts and those of a lot of other people, and of course, the tremendous leadership that he has shown in that role, have brought about these significant changes in a time frame that's far sooner than we would have ever gotten out of a new person in that role, keeping in mind that if we brought someone in from the street, one, it would take a lot of time and we don't want to sit there waiting for a new person to come in and make changes. When that person got here, just trying to understand the culture, figure out where the bathroom is type of thing, that takes time. And so we knew we didn't have time to spare or waste. We have a sense of urgency around here and we have a high expectation out of all of us, and we didn't want to wait. So in taking that deep dive, we have found a lot, and we understand a lot more about what we were doing and what could be done better. So the things that have long lead times, we have instituted that already, and we're continuing to institute the changes that we think need to get made. And we will see significant benefits going forward. As I said, we saw them in July already. August and September, of course, the rest -- the middle of August, we start to wind down from a very busy summer. And then we will put a lot more effort and energy after that into making our operations that much better. So while we always look for the opportunity to add more depth to our management bench, if you will, we are busy fixing what we think needs to get fixed quickly. So that effort will direct to looking for added depth in that role, not for at least 6 months. And then we'll see what happens, but that's why. We just don't feel we need to bring someone on because that person is not going to have the opportunity to make change in a very quick manner and we wanted to make change in a very quick manner. So again, as I said before, we're blessed with a lot of talent. And so we're able to tap into that talent and fill this role and perform -- I mean, I can say -- go without saying that the month of July we just had was better than any recent month of July.

Okay. And then a question for Scott, if he's on the line. With respect to your cost outlook in the third quarter, which, I guess, implies a mid single-digit growth rate in the fourth quarter. Can you commit to CASM-X being down in 2018 at this point?

At this point, that's a pretty good assumption. This year, as we get in the process of making sure planes deliver on time, retirements go to schedule, the pilot training pipeline isn't interrupted, I think you're going to start to see, hopefully, some efficiencies getting back into the -- in the organization. We're operating 5 split bases now, that will be down to 2 MD-80 bases only at the end of the year. So you're starting to see some of these efficiencies that we think will bear fruit and will start to show up in 2018, so that's -- I think that's an okay assumption at this point. Obviously, we'll guide formally towards the back half of the year. But yes, that's what it's turning into.

Our next question will come from the line of Helane Becker with Cowen and Company.

This is actually Conor on for Helane. So just a little bit more on the cost side. So you cited a 2-point headwind from irregular ops during the quarter. Should we assume that there's going to be an additional headwind in the third quarter? Or is the underlying spare increase sufficient enough to like support any potential problems there?

Yes, I wouldn't use that as a go-forward percentage. We were really impacted by June. Particularly in the second quarter, June was very bad, year-over-year, and that's strictly due to aircraft availability. If you recall, we put in Baltimore one retirement of an MD-80, that was supposed to be the back half of '17 into April. In addition, we had a number of tails that we haven't planned to be unavailable. Some were out of our control, some were in our control. So basically, it was -- as the sparing count grows throughout June, peaking at, call it, low double digits into July, we just -- we didn't meet that sparing ratio. So we were kind of playing catch-up throughout June. And so going into the third quarter, we don't expect nearly the impact, considering July is almost in the books and it's substantially better than what we've seen in prior quarters, both sequentially and year-over-year. So I wouldn't use that as a run rate into the third quarter. Hopefully, a lot of this is behind us.

Okay. And then in terms of the -- of off-peak flying, so that's not -- and that represents about 25% of your flying. Should we expect that to be kind of the rate going forward into 2018, 2019? Or should that decline as your spare count kind of rationalizes going forward?

Conor, I would say that the off-peak percentage won't accelerate as fast as it did this summer, based on the spare count. But it'll remain fairly high as we go throughout the transition plan.

Our next question will come from the line of Joseph DeNardi with Stifel.

So Maury, the timing of the buyback is a little bit interesting, just given the hotel announcement coming in the fall, it seems like the market is a little bit concerned about what's coming there. So should we read the buyback as maybe that the hotel strategy won't be as capital-intensive as expected? And when do you expect to deploy the additional $100 million buy? When is the authorization for?

I think I'll try to address both points. I think you shouldn't read into anything, we just -- whenever we're looking at buybacks, there are obviously -- this was a very opportunistic time to buy. We look at this longer term than obviously some shareholders must look at. So that's why we jumped in, in a very significant way. And the -- I'm sorry, the second part of the question you were asking?

Just on the, I think, the $100 million authorization you mentioned, what's the time frame for that being deployed?

Again, no time frame at all. We take a -- we follow a similar approach. We think it's an opportunistic time frame and balance against other cash flow requirements that we have over the -- over periods of time. We make decisions accordingly. So no commitment regarding when we would jump back in the market.

Okay. And then, Lukas, just on your load factors, just kind of high level. Obviously, there's some ULCCs in Europe, like Ryanair's mid-90 loads. You guys are well below that. Can you just talk about like on your peak flying, are the load factors in general kind of in that mid-90s range and then off-peak brings down the average? Or is that an opportunity kind of going forward?

Yes, there's a couple of factors there. Yes, peak days have significantly higher load factors than the off-peak days. And also, with -- we're pretty unique in such a high percentage of our flying is twice-a-week markets. And really, we were running kind of peak day only load factors, say, 5 years ago, closer to 90% range. As you've gone through and we've evaluated was that optimal or not, we have taken yields up. And I think it's a positive thing in that sense. You're getting total revenue up higher, even on this twice-a-week peak day markets. So those 90% markets are in sort of the 88%, 89% range. The other thing is off-peak flying. And realistically, when we're flying our routes that are 4x, 5x, 6x a week, those routes tend to have higher load factors where it's easier to balance the schedule. When you're flying twice a week, that one off-peak leg, we found it dilutive to be offering a $10 price point, because what we were doing was really lowering the revenue on the other 3 legs of the week. And we've decided to take up yields in general, which is kind of what I was talking to in my initial comments, that we've raised passenger yields in general. It takes a while to adjust to that, but long term, it's the right strategy, to have the right kind of price point in the customer's mind and make sure that the new reference price for the customer is one that's controlled by us.

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

Lukas, could you tell us -- I'm sorry if you talked about this at your Analyst Day, could use probably a refresh. Can you just remind us, the new RM system? What changed, and how is it improvement over the old one?

Sure, it's a long answer. So I will kind of give a very high level. It's a completely new system, and at its core, it groups individual flights together versus taking flights from a region to a destination and saying that's the historical basis. So the system does have to organize and it's a machine learning system. So it's got to learn from its own groupings, and so we were fairly cautious early on. We wanted to make sure we're not going to go out and throw 100% of our flights on, because you need to see how the system performs. So it's performed well so far. We want to make sure we're very confident in the results so we can actually start sharing with you about, you know, is it leading to increased load factors, leading to increased yields? How is it changing the booking curve? And is it stronger or weaker in certain periods? Right now, there's certainly some differences. We want to make sure it's improving in all aspects. But right now, it's improving -- we've seen large improvements in kind of the peak day pricing and the peak period pricing. We want to make sure we're understanding the entire system.

And when are you going to be sort of fully spooled up and then running on this?

Yes, so by the end of the year, we'll be close to 100%, probably just shy, but 80%, 90%, 100% of our flights will be -- our ASMs will be priced on the new system. We're about 30% right now. So it's going to be a big jump up. And I think, in our Investor Day last year, we talked about a minimal impact towards the second half of this year. We're seeing some good things in the fourth quarter, but we're 10% bookings. So I don't want to get ahead of ourselves. We're really excited, but we'll see in 3 to 6 months how that ended up. And I think most of the benefit for the system will hit into 2018. And then beyond that 2019, 2020, will be against small gains once the system's already up and running.

And then Maury, can you talk about, obviously, we've seen some changes in the C-Suite here lately, including Scott as COO and everything. So can you tell us how you and the board are thinking about succession planning now and maybe how that conversation has changed over the last, I don't know, 6 months or something like that? How are you thinking about your own future?

Well, I'm getting older, that fact continues. So we have to have a plan in place. And I think that the -- John is doing an exceptional job and the board, I think, is very pleased with 2 fundamentals that we're focused on in the near term. It's this transition plan and this transition year, are we executing? And so far, we're executing very nicely. And second thing is operationally, are we improving? And as John has said, we've made some extremely good improvements in the last 30 to 45 days with a higher degree of focus and a greater attention to detail and holding people accountable. Essentially, we're just fixing airplanes better that we weren't doing previously. And so those types of things are really giving good underpinnings on the carrier. So that's a long-winded answer that basically says that these things come together. I'm comfortable with where I'm at. I'm going to stay involved in the company as a Chairman. I don't need to be CEO of this company forever and ever. So some time in the not-too-distant future, I'll probably kick myself upstairs or recommend to the board that they do that. And this depth of management that we've bragged about is showing its skill set and we'll just let these young bucks do their thing and continue down the road what we're trying to outline to all of you.

Our next question will come from the line of Michael Linenberg with Deutsche Bank.

A couple of questions here. John, you talked about just the share repurchase and being opportunistic. I just -- I don't have the press release in front of me. At what price did you buy back the stock? What was that average price?

I think we were around $142.

Yes.

Yes.

Okay. Okay, great. And then just on the CASM-X guide, the 16% to 18%, I did miss the first part of the call. I mean, I sense that obviously, it's pilot training and transitioning to a new fleet. And I think you talked -- I heard Scott talk about some of the split bases, I guess, MD-80/A320s or the Airbus narrow-bodies, and that's just going to obviously be addressed. But can you talk about just -- because that is a big increase, what are the big headwinds there?

Michael, so we tried to give as much clarity as we can in the release. But basically, this is kind of low single-digit growth year-over-year. So it's going to put some automatic pressure on ex-fuel. This was recorded in the last (inaudible) of our agreement, the CBA, when it was instituted in August last year. We continue to carry very heavy crew levels. So we're running about anywhere from 55% to 53% productivity within the pilot group, and that's just the nature of going through this sort of transition. So a lot of labor inefficiencies in a number of areas. That could be the same, that could be said the same in the maintenance area, as you're supporting 3 fleet types. Other areas we're obviously quickly depreciating our MD-80 and 757 assets. So there's an acceleration there, with the sunset on the MD-80 still scheduled for, call it, mid-'19. And then the other line item, which is going to be lumpy, when you -- as you look at training costs, we do -- our training pipeline at any given time, we still have 30% of our workforce as [non-bidders]. So these guys are in some sort of training profile at any given time. So those are kind of the 3 areas, between wages, D&A and other, where you're going to see the most pressure. Maintenance, in general, will start to settle down and will be very consistent on a go-forward basis. Sales and marketing, we talk about -- we have talked about the surcharge impact, about where it was an offset in previous years and now it's up in the revenue line item. And then stations, stations, actually on a fully burdened basis, was actually down. So that's a good guide. But basically, the 3 areas that we'll continue to see pressure is salaries and wages, D&A and other.

Okay. On the pilot side, just given that the major carriers have really turned up their hiring, are you guys seeing any additional challenge in sourcing pilots? Or is it just -- you know, say anything on that front.

No, we're still getting a lot of activity, we're hiring about 10 or so a month. Is that the run rate?

Yes.

About 10 or so a month right now. The attrition has dropped dramatically from where it was kind of pre CBA. But I think everybody obviously is concerned in the industry. There's going to be some pressure on the pilot pipeline over the next couple of years. And so we're definitely keeping an eye on it, trying to get creative on how do we create additional lines of opportunities for pilots to join the ranks. But right now, we're -- the trends we're seeing are actually very positive.

Our next question will come from the line of Brandon Oglenski with Barclays.

This is actually Matt Wisniewski on for Brandon. So I was just looking back at kind of the Investor Day and going through a lot of the slides, and one thing that was hit on was a lot of the ancillary revenue opportunities outside of hotels. I know you weren't going to comment too much on that. But I was wondering if you could talk a little bit about the credit card business a little bit more, maybe the loyalty plan and some of the main drivers behind those line items.

Yes, sure. Hey, Matt. So the credit card program, as I mentioned previously, is spooling up even better than our expectations. I believe we raised guidance last quarter or the quarter before about it. We're certainly on track for that for this year, in both sign-ups and sales. And obviously, part of that, that every other carrier has that we don't yet have is a non-card loyalty program. And as we're looking at the future of the company and having the ability to kind of clean slate, clean sheet, what would make most sense for the company going forward, we're designing a program with that in mind and obviously, it's going to take time. But the credit card is a large revenue driver of everything loyalty-related. So I think we're all very excited about some of the ancillary possibilities. With us having a higher percentage of third party and regular ancillary options than other carriers, it should only be able to enhance that or supercharge that. So I think you just have to stay tuned about what that will be, but it is something we're actively working on.

Our next question will come from the line of Kevin Crissey with Citi.

Scott, can you discuss the specific operations changes and maybe measurement changes that you made? It was discussed at a kind of a high level, but specifically, what did you implement or have your folks implement that maybe wasn't being done before? Or get rid of things that had been -- being done that you didn't think made sense?

Yes, so it's obviously during peak flying periods, it's really tough to make real substantial changes. But there were some things that we identified in the interim that would allow us to increase certain metrics, if you will, in the interim. So some of the things that we kind of got our teeth into immediately is we've pulled certain types out of training. So basically, we stopped the training pipeline to give more relief on the line. We created a kind of a forward recovery base out of Cincinnati that will allow us to better recover outstation, AOG events. And that's -- that was actually a very huge help. As you can imagine, it's tough to recover in some of these small cities. If you look year-over-year, we have made some pretty substantial management changes in some of the larger bases. Sanford just underwent a major overhaul, and that was under Jude's watch. Las Vegas here, over the last couple of weeks, we've gone through all the management side. And we have new faces and fresh blood there, which has -- some of these are starting to take effect. But if you look at just kind of the impact we've had on July, it's not so much that you're really changing the failure rate or the AOS event per cycle rate, it's just that we're recovering in a much more quickly fashion. So you start to see the hours per event go down dramatically. So we're getting planes up in a much faster way. Some bases in particular have seen some -- both drops in hours per event, in addition, events per 1,000 -- per 100 cycles. And so Fort Lauderdale, PGD, IWA, has made a nice recovery. So you're starting to see kind of the light switch, the light starting to flicker. There's obviously some other foundational changes that we'd like to make, but we need the schedule to settle down, and that's kind of mid-August and beyond. I mean, in general, the group has done a fantastic job of kind of rallying around what started out as a very troubling June, some of which was out of our control with some aircraft availability, but it's been a nice path back into July. And so there's a number of other initiatives that we hope to execute on here in the next kind of 30, 45 days.

Okay. And when I look in the press release, you talk about the second quarter cost trends and 2 percentage points of the CASM-X coming from irregular operations in the second quarter. And I understand how irregular operations can add to costs. But you came in within your guidance. I can't remember if you raised guidance during the quarter. Were you running better than your guidance and then this brought you into your guidance range? Or -- because I don't consider irregular operations something you would have planned for when you got it.

So we didn't raise the range, what we put out there in April for 2Q. That being said, if you look at the comp last year, we did have some additional expenses in there baked in, just because last year was so troubling. So maybe the floor was artificially high. If you look at April through kind of mid- to late-May, it was trending positively. And then June, we definitely had a 30-day period where it was really tough. And so not only did it chew up into that, it actually exceeded just a little bit. And so we were just a little conservative from a forecasting perspective, and so that's why we didn't bust the range. But I think, obviously, we can't continue to have summers and specifically, 30, 45-day periods like this. It's just -- it's not sustainable, we really beat our crews up by doing it, so we just -- we took a very conservative approach from a forecasting perspective.

And if I could squeak one more in. Just your capacity growth as you look forward in general, I think in my notes, I had like 5% to 10% through 2019. What are your thoughts on capacity? You talked about CASM-X next year. What are your thoughts on capacity growth in general?

Yes, so this is Lukas. 5% to 10%, I think, is a decent baseline. Most of that is going to be driven, though, by our transition plan. And as you have certain events with the MD-80s, timing with new Airbus coming in, we may decide to dial that up or down, because really, we're going to be first and foremost, focused on the operation, getting out of the MD-80 over the next 1 to 2 years. And what's surplus to that will be used for growth. So I wouldn't say this isn't the kind of typical plan for us, where we're going out and we've identified X percent new markets that we're going to launch for next year. We have more than enough stuff that we want to grow into in the future that we're holding in our back pocket. And we will certainly be choosing strategically where to add, based on what the fleet plan evolves to.

Our next question will come from the line of Dan McKenzie with Buckingham Research.

A couple of questions here. First, with respect to the non-fuel cost outlook for the third quarter, I'm wondering what kind of benefit is embedded from some of the operational changes that could drive a better op? In other words, could there be some upside to this non-fuel cost outlook? Or could non-fuel cost outlook come in a little better if the operations are a little better than expected from a lot of -- from these changes?

Yes, it's a fair point. And the fact that July is relatively down in the books, there might be -- there's some upside. I don't think it's terribly material, second quarter from an -- just an operating perspective and exposure perspective, when things fall apart, they can fall apart in a big way. So there is some upside, but it's not terribly material as it relates to kind of the 2Q expenses and the guidance that we put out.

Understood, okay. And then, Lukas, what's the peak day trajectory as we head into the fourth quarter? I guess, do any of these MD-80s now functioning as reserves go back into service? Or is there something -- and I guess I'm just kind of thinking about the peak holiday travel season. Is there going to be fewer peak travel days during the peak travel holiday season this year versus last year because of the reserve issue?

So we won't be exactly constrained like we were for the summer. We shouldn't have negative peak day ASM growth, like we did for June, July, August, which will allow us to focus a little bit around some of those peak days. And obviously, there's a couple tailwinds for the fourth quarter as well. We had large weather events for another peak period in -- around the Columbus Day in October. I believe Christmas is on a little bit better schedule this year for us. So there are some good guides for the fourth quarter from a [reference] front, in addition to us being able to grow a little bit more on the peak day specifically. And I think there's a lot going on there, but we're very encouraged by how some of the markets we launched last fourth quarter, fourth quarter of 2016, are maturing. So I think we're going to see some positives there as well.

Very good. And then, Lukas, I guess while I've got you, how much is the new revenue management system contributing to RASM in the markets where you've deployed it? So 30% of the ASMs, it's improved unit revenues in those markets by 1 percentage point, 2 percentage points. Any kind of clarity you can give around what your -- the kind of benefit that you're seeing?

Yes, so I would say it's a mixture right now because the system is still learning and being tested. So in some cases, you've got markets that will be a little bit headed in load. In some cases, it will be a little bit headed in yield. And in some cases, it may not have even been better when you make adjustments in the past. And that's why we took it a little bit slower. So if I had to generalize, I would say it's performing better in peak periods, which is unfortunate we're not growing peak days right now. So when we are able to, we're pretty excited about the capabilities of the system. And we're making tweaks throughout to better handle some of the trough periods and say, okay, what should be the baseline and historical for some of these flight histories that it's taking a look at. So I'd say, it's certainly positive enough that we're comfortable going full force with almost our entire system by the end of the year. But for the first half of the year, I would say smallish benefit. In the second half, I think the Investor Day estimate of -- I think it was high single-digit millions for revenue, is a good estimate going forward. We haven't materially seen something that would deviate from that plan.

Our next question comes from the line of Andrew Didora with Bank of America.

John, I know you said you really weren't going to talk about the hotel, but just a bigger kind of sort of strategic question here. In the grand scheme of things, the hotel would likely be small on both a CapEx and earnings basis. So I'm just wondering, do you think it's the best use of management's focus right now, given all the changes going on in the C-Suite? And maybe given this, could a hotel decision potentially get pushed out of 2017 until a new COO is in place?

Well, the short answers to the 2 questions are yes to the first and no to the second. So the thing is, we have the talent capacity, et cetera, for us to do multiple things at the same time and so that doesn't bother us at all. So I think, again, we'll put a lot of color to that when we talk about it at greater length. We're, as I said, we're targeting the back half of September. We've said that for some time now, and that still looks like a viable time frame.

Okay, fair enough. And then just lastly, just a quick housekeeping question for Scott or if Chris is on the line. Just 2017 CASM outlook, you said in the release it was reiterated at 10% to 12%. Last quarter, you said 9% to 12%. Did I miss a little tweak in the guide along the way?

We just brought the floor up a point.

We just tightened it.

I'm sorry?

We just tightened the range is all we did.

Our next question will come from the line of Steve O'Hara with Sidoti & Company.

Just quickly on the ancillary revenue front. Can you just talk about some of the factors that are leading to the air-related charges being down in the quarter, and I assume the third party is the credit card improvement. Is that fair?

Yes, the improvement in third party is majority driven by the credit card line item. And I would say for the ancillary portion, off-peak days do have a slightly lower ancillary component to them. And that's really what you're seeing. They have lower revenue in general, and it's a little bit more of a shift of business.

Okay. And then maybe, I think in the past, you had talked about maybe the full run rate from the credit card being -- and I want to say $3 a passenger, something like that, can -- is there any update on maybe the projection there?

It's -- we said it's $2.50 a pax. That was our run rate that we were thinking of long term, and we said that at the time when we announced the card. We haven't changed that estimate yet and we'll realistically probably be a little bit conservative until we get there. But right now we're encouraged. I think right now, it's supposed to be 3 years plus buildup for us. It's really early. Talking to the bank, it's -- even on the monthly spend per cardholder, it's still too early to drive too much insight into a program that's less than a year old. In terms of sign-ups, sign-ups are -- we're ahead of both of ourselves and the bank's projections when we started the program last year, which is the 2 major components are how many people are using the card and how much are they spending on it, for the most part. So we're encouraged by one sign, but it's still too early to see what that top end number is.

Our next question will come from the line of Savi Syth with Raymond James.

Scott, maybe on the core unit cost, it looks like in the first half, it was running about kind of 1%, if you can exclude some of the items that were kind of unique to this year. And based on guidance, it looks like 3Q is running 2% to 4%. Is that just a function of slower capacity or timing of maintenance? Or how should we look at that kind of core trend?

It's more capacity than anything.

Okay. So if you think about the kind of the 5% to 10% growth, then the core, excluding year-over-year comp, is probably close to 1% on a 10% growth and maybe 2% to 4% on a slower growth? Is that how we should think about just kind of the underlying cost trend at Allegiant?

I think that's fair. In the near term, obviously, there's a lot of moving parts here and a lot of -- yes, a lot of moving parts. But I think in general, it's a fair statement.

Okay, that's helpful. And then maybe Maury or John, on the -- in regards to the kind of CMO position, Allegiant's pretty unique. And I'm just trying to figure out what are you hoping kind of the new hire will bring to the table? And what are you hoping to address with the new hire?

Well, our requirement was not to find someone who just was limited to an airline background. I think we said that from the get-go. At the end of the day, airlines have a large database of names and it's always been our intention to figure out how to unlock the value of that in a much more significant way than may have been traditionally looked at by airlines in the past. So we were looking for a CMO candidate who has expertise in understanding that data, the data analytics that allow you to enhance your ability to transact with -- on a more frequent basis with a customer and add more customers. So the key to this at the end of the day, as all of you I'm sure are aware, is to add more customers and transact with all of those people more frequently. So that's what we need to do, and we need to get significantly better at, in order for us to drive more revenue. So that was a criterion, really, was people who have that kind of a background, stop trying to put the boundaries of an airline against that, because a customer is a customer.

That's helpful. And if I may, just ask one last question on -- now that you've kind of gone through a summer with this fleet transition, in the past, one of the kind of concerns I've had is when you do have a big transition, the timing of when you kind of get behind it has been somewhat longer. And I don't know if this is for Scott. Like are you to a point where you have kind of enough experience in seeing how the fleet transition has been so far to get comfortable that most of this will be behind us by second half, next year, I mean?

[C. J.] is right here. Why don't you take that C.J. ?

Yes, I mean, the fleet transition has gone really well. So far this year, we've had -- we've been able to offset any late deliveries with early deliveries. But through the first half of next year, we'll take a larger percentage of used aircraft.

Okay. And that means...?

So I think we'll be a lot more confident after the first half of 2018.

Okay, I get it. And then from a, kind of the pilot productivity and efficiencies, is that kind of continuing to improve, so you feel like you've got a handle on the training and the pipeline there?

Yes, the training pipeline is executing well. We're getting great utilization out of our assets. Obviously, we talked about the number of pilots we continue to add to the pool, the good recruiting efforts by our flight ops staff. So that appears to be going quite well right now.

Our next question will come from the line of Joseph DeNardi with Stifel.

Lukas, I know you guys don't have a ton of overlap with kind of the basic economy fares, but sometimes you have interesting insights into pricing environment. So can you just kind of talk about what you're seeing in the market in terms of the impact from the basic autonomy rollout?

Yes, Joe. Like you said, we don't have a ton of overlap. And I -- and what I have seen, it tends to be used as a fare increase by most of the legacy carriers. And I think that's the appropriate way of kind of fencing in, and it's taking less super-low fares out of the market that you would have seen maybe 1 year ago or 2 years ago. And I think that's a positive for the industry. I also -- I think it might have been a little bit overstated about the total impact to the industry 6 to 12 months ago. I think it's a net positive, but it's not going to fundamentally change the cost that you can provide a seat or the fare that you can really provide on a seat.

Okay. And then, Scott, just given kind of the importance of improving performance, does it make any sense to, I mean, just on our end, how we can kind of gauge how that's going? Can you guys start providing like an on-time performance metric when you report traffic? Or how should we track how that's going?

I think there's a report. I mean, obviously, DOT reporting will kick in for us 1/01 of next year. Until then, we probably aren't going to be -- real transparent on what kind of the internal targets are. Obviously, we want to be aggressive and really push folks to try to really pull this thing up in the next kind of 6 months until we're required to report. And so I think in general, those KPIs and how we look at operationally what a success is defined as, I don't -- it's going to be a moving target over the next 6 months.

Our next question will come from the line of Duane Pfennigwerth with Evercore ISI.

What happened to Ponder's equity grant? Isn't getting that back a cost tailwind? And when did that refund hit the cost structure?

Greg?

This is Greg Anderson. So with Ponder's departure, his equity grant was fully terminated. And so that was -- that's being reflected now going forward as a reduction in costs for our forecasted equity cost going forward, stock cost.

So that was in the June quarter or that's baked into this 16% growth in the third quarter?

Yes, that would be reflected in the June quarter.

Okay. And then my second question is for Maury. I wanted to push back a little bit on the concept that investors are being short term-oriented. I mean, it's great that the board here is so patient. You have obviously a very long time horizon. But even your very long-term investors have to explain why they own Allegiant versus alternatives in airlines over the last 1, 2 or 3 years. And many of your peers have worked, right? Your stock has not worked, but many of your peers have. So can you just comment on the board's awareness of what Allegiant's relative performance has been? Are they aware of it, one? Two, is it a concern at all? Or does everybody have a pass here until 2019 when your fleet transition is done?

Well, certainly, the board's aware of Allegiant's -- what we're doing internally. The transition is going to take longer perhaps than we originally thought once upon a time. More importantly, we're trying to do it as quick as we can, which means we're not being as mindful of the cost structure that we might do if we had taken times that normally, perhaps, others might have taken. And as a result, the board has bought into this, but I appreciate other people are long term and what they're doing, Duane, and so are we. But it's -- the company's performed pretty well over the last many years. And we had, I think, a pretty good quarter relatively to the industry. But we just have work to do and there are cost structures that are going to go with this work are onetime. We -- the revenue side is not so much under pressure as the cost side is. But we're just carrying a lot of overhead. Spirit went through this, candidly, 10 years ago when they were moved out of their 80s. There's just no way around this to do it easy. So we are interested in investors and returns to investors, but you just have to make your way through this stuff.

Our next question will come from the line of Dan McKenzie with Buckingham Research.

One of my follow-up questions was actually already just -- was already asked. But Scott, I'm just wondering, can you just remind me, what is the non-fuel cost benefit provided by the A320s versus the MD-80? Because you've got some new, some that are used, I'm just kind of wondering what the average cost benefit is? And then just separately tied to this, what percent of the ASMs are being flown today by A320s versus the MD-80s? And then what does that look like next year? That actually might -- the follow-up question actually might be for Lukas.

Yes, I'll take that really quickly. I've got it offhand, but for the second quarter, 55% will be Airbus or was Airbus. That accelerates to 63% in the third quarter. So really, the last couple of quarters, we haven't grown Airbus percentage of flying as quickly. And the third quarter will be 63%, fourth quarter will be 70%. So we -- you can see we kick into pretty high gear in terms of this Airbus transition after we get through this summer.

And then for 2018?

What was the part?

Sorry, what was that?

Well, I was just going to say and then for 2018, what does that mix become, ASMs flown by the Airbus?

I don't have the exact number, but it will be a little around 80%, low 80s, I think.

Got it, okay. And then just average benefit from the A320 versus the MD-80, how much does non-fuel cost improve?

Yes, this is Trent Porter. The non-fuel cost on the A320 is roughly about 5% better than the MD-80 as we sit right now.

5% better than the MD-80, okay.

Ladies and gentlemen, this concludes our question-and-answer session for today. So now it's my pleasure to hand the conference back over to Maury Gallagher, Chief Executive Officer, for some closing comments or remarks. Sir?

Thank you all for your time, and I appreciate you joining the call. We'll talk to you again in the next 90 days. Thank you.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody, have a wonderful day.