Allegiant Travel Co (ALGT) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Allegiant Travel Company Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over to our host for today, Chris Allen of Investor Relations. You may begin.

Thank you. Welcome to Allegiant Travel Company's Second Quarter 2018 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 Chief Operating Officer; Drew Wells, our VP of Revenue Planning; and a handful of others to help answer questions.

We will start with some commentary and then open it up to questions. The company's comments today will contain forward-looking statements concerning our future performance and strategic plans. Various risk factors could cause the underlying assumptions of these statements and our actual results to differ materially from those expressed or implied by our forward-looking statements.

These risk factors and other are more fully disclosed in our filings with the SEC. Any forward-looking statements are based on information available to us today. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. The company cautions investors not to place undue reliance on forward-looking statements, which may be based on assumptions and events that do not materialize.

To view this earnings release as well as a rebroadcast of the call, feel free to visit the company's Investor Relations site at ir.allegiantair.com.

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

Thank you, Chris. And good afternoon, everyone. Of course, another great quarter, as you can see in the release we've put out. A lot of detail in there, talking about all things are happening. But first and foremost, I have to say thank you to the -- all of the employees we have here at Allegiant. We -- they've done a great job this quarter in executing on -- the continued execution on the transition we've been going through from a fleet standpoint. And as importantly, a lot of things that you don't see are a lot of advances we've been making here operationally that aren't even reflected in the numbers as of yet. So the performances gets better and better, and we're very proud of that as we move forward.

Some of that, of course, is recognized in the recent industry surveys that have been out there as of late. J.D. Power, of course, had us listed as the most improved in customer service. And then, you look at the American Customer Satisfaction Index as well as Forrester Market Research, both of which identified the airline as having the largest year-over-year improvement. So we're very proud of the progress we've been making. And again, to be able to do it against a very difficult fleet transition that, thank God we're on the back end of that, that's great.

Touch base real quick on Sunseeker. We did have a comment in the release regarding financing and timing. We're looking at having that done in 60 to 90 days. So we'll be happy to put that behind us. But I did want to mention as part of that, that we fully anticipate having a dedicated either roadshow or investor-type day that would do nothing but explain that project in significant detail. I mean, obviously, as of to date we haven't been able to do that for a multitude of reasons. But as we concluded or get closer to concluding on our financing, then we will be very comfortable sharing a tremendous amount of detail and data on that project.

So stay tuned. We look forward to doing that, so that'll be shortly after we get the financing done. And of course, that would be -- that information will be released as well.

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

Thanks, John. And good afternoon, everyone. I'd like to thank all of our team members and partners across the network for delivering another solid operational quarter. Despite some pretty significant scheduling challenges, driven by some unplanned retirements, 2 MD-80s in particular, and some delays associated with the induction of 6 A320s, the team was still able to drive substantial operational improvements in virtually every area.

Most notably, the team drove a 1.3-point increase in controllable completion factor to just under 99.5%; reduced the regular operations expense by just over $6 million; and most importantly, reduced the number of operationally impacted customers by over 50% year-over-year. Pretty fantastic results given the circumstances.

And then lastly, a couple of comments on changes to our full year 2018 guidance. As you can see in the release, we've provided a number of updates, which are primarily driven by changes to our fleet plan and updated assumptions on full year 2018 fuel prices. As mentioned on earlier calls, our 2018 results were going to be largely impacted by our ability to execute on a pretty aggressive fleet plan. Our initial plan called for the induction of 30 A320 aircraft and the retirement of our entire MD-80 fleet by year-end. Although the MD-80 retirement schedule remains intact, we're experiencing some delays in used Airbus deliveries and some critical Airbus kits needed for induction. That being said, our fleet plan now reflects the reduction in planned inductions from 30 to 25 units by year-end. And we plan to end the year with 77 aircraft in service.

Based on reducing the number of aircraft in service and taking into consideration some potential timing events, we've reguided our ASMs per gallon. We previously guided 77.5 to 79.5. So we've taken a point out of the top end. We reduced our ASM growth profile from up 11% to 15% to now up 9% to 11%; recast D&A and M&A expense per aircraft per month from $115,000 to $120,000 and $80,000 and $85,000, respectively. And lastly, we did take our EPS guidance from up $10 to $12 per share down to $9 to $10.

So as I mentioned, this is largely driven by timing of aircraft. 2Q was impacted. There was upwards of 8 units, cost us nearly a point in ASM production in 2Q.

But with that, I want to turn it over to Drew Wells. As you guys are all aware, Lukas Johnson has left the company to pursue another opportunity. Drew is the new Lukas, and he's better looking for sure.

So with that, I'll let Drew talk about some of the network and pricing interesting in the environment.

Well, thank you very much, Scott. And good afternoon, everyone. Lukas' shoes are definitely a big one to fill, but I'm very grateful for this opportunity and look forward to furthering the commercial success that we've experienced under his leadership.

Second quarter revenue results came in quite strong on the back of our third consecutive quarter of both positive year-over-year growth in load factors and air ancillary per passenger. This is the first time since 2011 that we've had such a load factor streak. We launched a total of 28 new routes in the quarter, including service to 3 new cities: Charleston, South Carolina; Sarasota, Florida; and Nashville, Tennessee. We are very encouraged by the early results in these markets and look forward to developing 3 new destinations within our network.

On to the numbers. Including the impact of the new revenue recognition rule, Q2 TRASM improved by 0.5 points year-over-year. We had previously assumed a 200 basis point headwind due to the Easter holiday shift. However, the next-gen RM system continued the strong success we saw in the best flights through the spring break period and drove exceptional returns during the first 10 days of the quarter to overcome the majority of that headwind.

We continue to learn about and improve the RM system on a daily basis. As we talked about from the start, this system will take time to fully develop across all of our different flight profiles. We've seen meaningful results through off-peak periods and hyper-focused peaks like spring breaks and holidays. One area where we still have room to improve the system is through the summer period. While they're certainly not setting us back, it's unlikely we achieve the same gains that we've seen through the other periods. We are, however, confident enough in the results from the 75% of nonsummer flights to begin pricing all flights on the next-gen system starting with our winter schedule. This is a very exciting milestone and a big testament to the work put in by the team as we continue to push this forward.

While we will still be growing peak capacity more than off peak in the third quarter, that gap has narrowed for some targeted market and capacity cuts due to rising fuel and some irregular operational-driven cancels at the beginning of this month. As noted in the earnings release, and as Scott noted, we are revising our full year ASM guidance lower to a new range of 9% to 11% due to slower-than-expected aircraft deliveries in addition to the aforementioned targeted fuel cuts.

And with that, I'd like to turn it over to the operator for questions.

(Operator Instructions) Our first question comes from Brandon Oglenski of Barclays.

This is actually Matt on for Brandon. Sorry about that. I just wanted to talk -- kind of go back to the growth, the reduction in growth this period. And I understand kind of the -- at the Investor Day last year, there was some talk of expanding to some smaller to middle -- some of the mid-market cities. And I wanted to talk about kind of competitive capacity and what the management team was seeing in that regard.

Yes. So we're so very, very focused on the competitive capacity that's out there. And we're holding still with our range about 80% to 75% noncompetitive market. And that hasn't changed as we viewed our network moving forward and including the network we operate today.

Great. Just another question. I just noticed that on the press release of kind of some of the new hires on the Sunseeker team. They've kind of started referring it to as the Resorts division. I was wondering if there'd be -- we'd see greater kind of division among the teams going forward and how the management structure would kind of ultimately work towards?

Sure. We hired a gentleman by name of Micah Richins. Micah came on as the Executive Vice President, Chief Operating Officer of Sunseeker Resorts. So he will be responsible for everything regarding that project that we're doing and, of course, any future projects. He'll have complete responsibility for all of those. We just have a couple of other people on staff, and we would probably start to bring some additional management talent on some time probably in the next 60 to 90 days as well. But we're continuing to run as lean and mean as we can until we have to scale up. So you won't see -- at the resort itself, you're going to probably have somewhere in the 500 to 600 employees. But a significant number of those would never come on until, call it, a month before opening. So we'll continue to scale in the management side at the resort level. But those are people that are dedicated 100% to the resort and don't have any crossover responsibilities. People that have some crossover responsibilities, whether it's finance, HR, marketing, et cetera, the ones that you would expect, I mean, there's some limited time and energy going in from these various areas now, but it's not significant.

Our next question comes from Hunter Keay of Wolfe Research.

Trying to figure out this new earnings EPS range. I mean, you've already earned $6.50 so far for the first half of the year. Capacity growth is slowing, but it's not that much driven in the first half. Fuel is not that much higher. I'm a little surprised to see you cut the guide. It would imply that you've got to do pretty bad for second half margin, the worst you've done in like 4 years. Are you baking in some conservatism on this new range? Or are you just -- or if not, what do you expect to get worse? Cost or revenues? Nonfuel costs or revenues, I should say.

Hunter, this is Scott. If you kind of break it down, we're seeing -- if you look at ex fuel, despite (inaudible) a little more than the usual guide, that still remains a good story. I think directionally we said we should see year-over-year reductions in ex fuel and that should continue on through 2020. There's just a lot -- there still just a lot of moving pieces as it relates to, obviously, the fleet plan we highlighted. That's probably the single most impactful item. We hadn't addressed fuel. I think even at our 1Q earnings release I think we took fuel up maybe $0.02 or $0.03. So this is a pretty big move from, call it, low $2.20s to mid $2.35s. So I think on a full year, that's another $35 million to $37 million. I can -- Drew kind of weighed in on kind of the inner revenue strength we're seeing. But those are kind of the bigger items. I think if you had to quantify margin performance, 3 is definitely lighter than 4 for sure. 4 at this point is looking pretty strong. But there's really nothing else other. We're still being very conservative. Obviously, the timing bit us on some of these planes coming in. The expectation -- despite the team doing a really good job managing through a pretty tight schedule with the reduced units, we still put together a pretty good operation. Our regular ops costs are a little higher than we anticipated, for sure. We think there's going to be some headroom as we go through the end of the year. Drew, I don't know if you got anything on the revenue side.

Sure, I'll tack on real quick. Kind of going back to the initial comments. When we were first thinking about full year revs, we had built in some of those gains from the RM system. So like I said, while it's not holding us back moving forward, especially through the third quarter, we're a little bit disappointed at where RM system ended up relative to previous expectations.

Okay. Yes, I'm just surprise given -- given what you said about the RM system in the winter and how you came out in 2Q. It just seems like you can do better than this guide. But we'll see. Okay. And then, my second question is Sunseeker related. John, you've got a lot of experience running casinos. People I talked to tell me you did a pretty good job doing it. So why don't you put a casino in this place? I mean, it seems like -- no, I'm serious. I mean, like you know it. I mean, there's some Native American tribes down in Florida, and I don't know anything about this business, but have you thought about -- I remember when you bought a golf course. You're obviously beefing this place up a little bit. Have you thought about putting a casino in there?

It's obviously something against the law. It's kind of funny. Every time I speak anywhere in Florida everyone -- that's like the first or second question I get. And when you tell people you can't, they always tell me I'm lying. But we can't. The Seminole tribe has rights to gaming in the state of Florida. So the only way you'd ever going to get gaming in the state of Florida is for the Seminoles to give that right up, and I don't see that happening anytime in the not-too-distant future. The only opportunity that could present itself -- and we haven't even explored it, so I don't want someone to walk away that this might be something we're going to do. But I have no idea with the recent changes in the sports betting laws whether that would open up an opportunity. Again, it's not something we've even looked into. But to the extent there was something, I would imagine, it would be limited to just that.

Our next question comes from Helane Becker of Cowen.

Guys, it's actually Conor Cunningham on for Helane. So there's still been some talk in the industry about peak versus nonpeak unit revenue trends. Can you just talk about what you're seeing there? And maybe where the capacity adjustments are happening? I assume that's on the off-peak flying?

Yes. Yes. Conor, this is Drew. You're exactly right there. We haven't seen, I guess, significant capacity cuts yet, but what we have seen has come through the off-peak period. In general, I think we're still looking at the same environment that we've largely seen for a few years, where capacity is generally rightsized during the peak periods but still a bit high during the off peaks. That will continue to be a headwind against unit rev.

Okay. And then maybe a follow-up on Hunter's question, just on your capacity growth commentary and the reductions kind of going on with the EPS. It seems like -- maybe I'm confused. Would you have not lowered capacity growth in 2018 if it had not to do with the delays of the aircraft? Or did fuel kind of -- I would assume fuel played a role within that on some level.

Yes. This is Drew, again. So fuel definitely did play a role. I would say at this point it's still outweighted on the fleet but some portion certainly related to fuel.

Okay. And then, just to follow up on that. How are you kind of -- how are you like approaching 2019 with the context of all that? I would imagine your deliveries are going to be a little bit more elevated in 2019 now. Can you just talk about how you're viewing -- I mean, I know it's early. How you're kind of like thinking like 2019 capacity growth?

Yes. It's obviously still a bit early, and we're not going to be guiding anything for 2019 now. But we're working very closely with the fleet team to kind of align when -- as deliveries come through. And sure, we're trying to match those up with our peak periods as best as we can. So I think we're still kind of targeting similar levels to what we've talk about in the past, and that's probably the best we can give you for today.

Our next question comes from Joseph DeNardi of Stifel.

Maybe just kind of following up on Hunter's question as well. It seems like if you just plug in $35 million more in fuel expense that accounts for the guidance revision. Can you just talk about what you're doing from a revenue or cost standpoint to maybe mitigate some of that pressure? It would seem like one of the advantages of your competitive position is that you should have some pricing power in these markets. So has the revenue environment gotten any better as fuel has gone up? Has it gotten any worse? And what's the way to think about any revenue impact from your prime-time television appearance?

Sure. So I'll start, and maybe I'll turn it over to Scott to talk about the network promotion there. On our front, we sell to a very price-sensitive customer. We are able to kind of slowly chip away and pass through some fare increases, but it's not going to be an immediate thing for us. The biggest thing we'll be able to do is change capacity, which will drive fare increases. And to that extent, we have trimmed out particularly off-peak periods but also a couple of market throughout the year in anticipation of fuel rising. So from the rev front, that's really the biggest lever we could pull, and we started in earnest really in April and have been kind of chunking away since.

Yes, the only thing I'll add -- thank you, Drew, is that -- well, obviously, the first prime time mentioned was in (inaudible). The second one was us launching a new brand advertising campaign. And we literally saw that in conjunction with integrated elements such as our e-mail and other related digital aspects that we were able to pull right back at where we were before that thing started. So we expect going forward to continue to plow ahead from a booking's perspective.

Okay. And then, Scott, I guess, the downside of your new guidance strategy here is we're not talking about CASM as much, and CASM's finally starting to do better. Can you just talk about how sustainable these trends are maybe even into 2019?

Yes. So a couple of things. I mean, if you look at some of the larger gains, probably the biggest gains that you can see over the next couple of years as you go from 3 fleet types down to 1 you start to regain some of the efficiencies that we experienced in the -- kind of 2010 time line before we were operating 3 fleet types. I think you're going to see the operation get much more lean than it is now. Obviously, with so many movements this year with the incremental 25 tails minus 37, our training pipeline continues to churn out and upgrade folks into new equipments. Ideally, we start to get more efficient with how we deploy crews. I think one of the big areas that you're seeing a direct result of running a much better operation is in the maintenance area. If you look at maintenance expense, we've taken the guide down, which is a good thing. If you stripped out the noise of having maintenance related to MD-80s year-over-year, you would see kind of a 10% to 12% decrease in MNE per aircraft per month. Ideally, that continues to get better. I think we're just scratching the surface on what we can attain there. We're starting to see a nice uptick in operational reliability of our MD -- or excuse me, on the Airbus fleet. Yes, I mean, I think across the board I think this is going to be a really bullish ex fuel story. Not to mention we're getting the benefit of more fuel-efficient aircraft. I think you're seeing a nice uptick in ASMs per gallon, so that will continue on. It's unfortunate that we're having a couple of tail slip from 2018 into 2019. But we should be able to see that benefit as we move forward. So I'm really bullish on the cost side.

Okay. So I guess to sum that up, ex fuel cost in '19 probably should be down year-over-year also?

Directionally, yes.

Our next question comes from Savanthi Syth of Raymond James.

Okay. Scott, just a little bit more on the cost side. The cost execution on safety was much better than I thought. I figured, first half maybe kind of low single-digit type declines and maybe better in the second half as more of the transition takes hold. Could you give any color on the cadence from that perspective? Should we kind of expect similar in the second half? Or improving because of the transition?

The comps -- I'm trying to think how to put this. So -- yes, it was a good quarter. It definitely beat internal expectations. I think the -- if we're -- if you're looking kind of a full year kind of guardrail, we're probably a point or 2 higher than what we anticipated beginning of the year. There's still, obviously, a second half of the year. Third quarter of last year was heavily impacted by irregular operations, particularly weather. We think there's some upside in the back half of the year in that respect, assuming that the environment cooperates. And some of the teams I just mentioned, I mean, it's going to take a little bit to grow out of, particularly operational productivity related to labor. And some of the other areas should really calm down and be very repetitive and sustainable, and it's more aircraft driven than anything. And so I think that if you [actually say] on an asset basis they're probably higher than what we experienced in 1Q and 2Q, but the underlying theme should remain.

That's helpful, Scott. And just digging into that a little bit more. If I looked at the wages and benefits on a per-ASM basis, that really kind of nicely flattened out. I probably would have expected more so in the second half. Was there something unusual this quarter? Or is that kind of how we should think about it kind of flattening out this year and then start to see year-over-year declines next year as you kind of get that -- get more efficient and less training costs and things like that?

Yes. As far as crews, you should start to see efficiency start to come back into the operation. We're kind of at peak levels as far as staffing, whether you're using FTE per aircraft. We have a (inaudible) effect of a new in-flight CBA. So there's new payrolls that went in effect this year, which increases some of the noise. But yes, that's going to be one of the good guys as we go forward, as we start to grow into a lot of the infrastructure that we have to support multiple fleet types. We had to -- we obviously carried a lot of excess heads. We run that operation we chew through a lot of labor. And so you're starting to see a real consistent, repetitive operation, allows you to be more targeted in your staffing levels. So yes, I think you'll start to see -- on a unitized basis, you should see that gains come in.

And then just one quick one on the fuel efficiency. As we exit this year and all the MD-80s are out, what should we kind of expect from a fuel efficiency perspective versus the 76 you reported this quarter?

I think long term we've targeted at 85 ASMs per gallon. You should start to see that continually creep up over time.

So do we get into the 80s as we exit this year? Or is that a little too soon?

I think it's too soon, particularly given the number of tails that are sliding. These are all A320s, 186-seat configured.

Our next question comes from Duane Pfennigwerth of Evercore ISI.

Just -- I don't want to belabor the guidance, but I just want to make sure that you intend to communicate that RASM, which was up in the first half, will be down in the back half. That's what the guide implies.

We're obviously not going to give a specific guide on that front. So I think -- as we think about 2Q, we -- it certainly outperformed what we thought, particularly as it pertains to the RM system. And I kind of come back to talking about how RM system probably isn't giving quite the gains we wanted through 3Q. But I don't think I'm going to go further than that talking about specific numbers.

Okay. Can you speak a little bit more about what drove the fleet delays?

Yes. I'll turn it over to B.J. He's been running point on this.

Yes. They're just delays of -- I guess it's about -- during the first half of this year, there were 4 aircraft which were late getting on a certificate. And there were a handful of aircraft coming from another transaction which are laid out of another jurisdiction. And we took that trend and applied it to the remaining airplanes in that same deal. So we're assuming those come in during 2019 now.

So the issue is your induction or the issue is -- where is the issue? Sorry.

The issue looking forward is late arrival of aircraft from another carrier.

Okay. And then just lastly. John, correct me if I'm wrong, but I think you had hoped to have the financing in place by the end of the second quarter. Can you just speak to why there are delays? Is it a function of the cost of that financing? Or is it a function of your desire to have nonrecourse debt and you just haven't been able to get a party to sort of sign off on that yet?

No. I appreciate it, Duane. No, there's -- there just -- put it this way. There's a lot of complexity around it in trying to come up with the best program possible. So whether that's recourse, nonrecourse, size of the project and whether we want to partner, not partner, all these things are still on the table and still being evaluated. Clearly, we would like to be in a position of all of it being nonrecourse. But it's just been the complexity of evaluating everything together. So we're getting closer to a resolution on all fronts, and that's why there's been some delays. But I -- I'm pretty comfortable with the 60- to 90-day outlook on getting this finalized.

Our next question comes from Mike Linenberg of Deutsche Bank.

Not to beat a dead horse on this guidance and the change to EPS, but I guess just the math would imply that the 3 additional points of capacity, you're just -- you're assuming a breakeven result on that. I mean, is that safe to say or fair to say?

It wouldn't necessarily be breakeven, but we are being very targeted how we're approaching that, and we would be trying to take out the worst lines from a schedule that we can. So it'd be kind of directionally towards that, yes.

Okay. And then -- just my second question, and this is probably to Scott. Just -- you've done a really nice job on the ops over the last 6 to 9 months. Recent headlines in the press on the labor front. Anything more recently or noticeable showing up in your operational performance? Or is it steady as she goes?

No, it's really steady as she goes. Yes, unfortunately, implementing a replacement -- the PBS replacement from what we have, it takes time. I mean, every CBA is different. There's subtleties to every agreement that have to be taken into consideration. In general, the tool or the application that the IBT chose it's a relatively small outfits. It's not being used kind of in the nature that we're going to use it. So it's just taking a long time to develop it to more (inaudible) supports the contractual obligation between the company and the IBT. But two, and I think importantly, is how do we communicate how these things solves and how do we articulate it to our pilot group. And so yes, unfortunately, it's just the process. We're spending a substantial amount of time and money. That's our obligation, and that's our input to this solution, so -- but other than that, I'm really proud of the operation. I think there's -- there were some attributes to the second quarter that if they would have had happened a year ago we probably would have melted down, so to speak. It would have been a really difficult operation. And our guys really answered the bell. I think they still put out a really good quarter, despite being down 8 tails, particularly during June. So a lot of the hard work and the structural changes that we've made, they've somewhat solidifying. And so you're seeing less variation, higher execution across the board. Some of our larger basis have seen substantial improvements year-over-year. The capital that we deployed from a parts and [tail wind] perspective, so it's more consistent. And we give techs and pilots the tools real time. You're seeing trends of -- upwards trends in the right direction. And I'm really proud of the operation.

Our next question comes from Kevin Crissey of Citigroup.

Maybe, Drew, can you talk about how you think about which routes to pair back? Meaning, what is the financial threshold that makes you make that decision?

Sure. So there's kind of 2 different ways of thinking about this. If we're getting out ahead of markets, we have the ability to find -- find markets that have multiple frequencies across the week, maybe 4 or more. That's where we'll have the ability to [recomm] passengers as best as we can and continue to service them. If we're talking more of a fuel-driven and kind of a long-term thing, we go back to our planning process where we're planning every round-trip at certain thresholds depending on the season, generally right around 20% margin. As markets start to fall consistently below that and included with fuel rising, those would be the candidates. And you saw it over the summer when we trimmed out Ogdensburg to St. Pete. We had tried to push that into a summer season, and demand just didn't come around for us. So that'll stay until the winter. But that is kind of a tangible example of how we're addressing markets in the face of rising fuel.

Terrific. And maybe you could talk about Punta Gorda and how you're thinking about the airline itself -- the natural profitability of the airline itself versus maybe the incentives for Sunseeker to have maybe more frequency into that market.

Yes. So we've been growing Punta Gorda extraordinarily fast. We were over 30% in the last 12 months. As it stands right now, we're kind of growing at the pace the actual infrastructure of the airport will allow. We feel we have abundant opportunities there that will take us through the next several years as the airport allows. So I don't even think that we need the incentives from Sunseeker in the meantime. Additionally, as we've launched new plane bases kind of in the middle of a town that we're able to kind of fill in the gap in the middle of the day, where as your morning plane from Punta Gorda goes out, that airport will stay relatively calm for the few hours until that plane comes back. As you get bases in Asheville, soon to be Knoxville by the end of the year, you can fill in those gaps at the middle of the day to give yourself a little bit more growth while you wait on airport infrastructure.

Our next question comes from Dan McKenzie of Buckingham Research.

I too am kind of scratching my head here at the revised EPS guide. I guess, just kind of a couple things here. If we could -- just on revenue, I'm just wondering if you can talk -- is there an uptick in competitive capacity as you look at your routes in the back half of the year? Because it does seem that there is going to be deterioration in revenue. And I'm trying to reconcile it. I'm just trying to understand if it's the core business, if there's something going on in the ancillary revenue side of the business that's maybe just not firing as strong as it should? I'm just wondering if you can add a little bit more perspective on kind of how the core business is running here.

No. I still think that the core businesses is running strong. On a competitive front, we're within 1 point of where we were last year. There's not a meaningful change on that front. Like we mentioned at the beginning, we're still over 3 quarters of -- consecutive quarters of air ancillary growth on a per-passenger basis. So really, the biggest meaningful thing for us was trimming out of the capacity and putting a little bit of pressure on the absolute dollars from the rev front more so than a unit basis.

Okay. And then, I guess, if I can just kind of pursue that a little bit more. I know, Maury, one of the things you love to say is capacity drives pricing. I absolutely love that phrase. And as we think about the pricing that you need to get Allegiant back to pretax earnings growth -- because as I think about annualizing sort of the implied pretax earnings outlook in the back half of the year, it kind of gets us to a pretax profit that's similar to 2012. What should the right size of Allegiant -- or I guess, what profit targets are you -- you think -- do you manage the business to as we look ahead here?

Well, first and foremost, fuel drives near-term profits. You go back, I was looking at last year. For '16, we had like a $1.29 fuel in the first half of -- first quarter of '16. And we were facing, I think, we had $2.40 or something in June. You just -- you can't catch up to fuel when it moves like it did this quarter. But over time, you anticipate that, and we've had one diligence over the time. We've generated our profitability per route, and we'll pull the capacity accordingly. And in particularly, you start with some of your longer-haul stuff and pull that down because that's always weaker. And we'll catch up to it here. Fuel has been moderating around the $70 a barrel on WTI's front and jumped up to $77, $78 there for a little bit. So we'll be responsive to that. But our pricing and how we deal with things, the strong point of this business model is we still have 75%, 80% of our routes are noncompetitive, and we claim capacity based on what we think we can drive margins to be able to derivative of price. So capacity drives pricing. That's how we get there. And with where we're at right now, we're not -- we're just in this final quarter of -- 2 quarters of transition. So while we think we've got everything pretty well laid out, just like last year, within the overall year we're in pretty good shape. There may be a bump here or there from -- in the middle of the year. But third quarter, as we go into it, is our weakest quarter. So as we transition into that we're going -- [post] rising fuel. It hard to kind of gauge exactly where that will come out at times.

Understood. If I can just squeeze one more in here. I guess, Scott, if we were just to strip out the cost from everything tied to the fleet transition, how much of that impacting the cost structure this year? I guess I'm trying to get a sense of is if this were a normal year from a cost perspective, no fleet transition, what might this year look like?

Sure. This is Trent Porter. It's difficult to strip all that away in one go, primarily because of the transition of the pilots. It would be a -- at least 1/3 to $0.005 if you take all of the pilot -- extra pilots that we're carrying as well as the operational impacts and the additional heads and programs that we carry for these different fleet types across the board. But like I said, that's not something that just goes away with us transitioning to Airbus. It takes us growing to be able to grow into the pilot heads and then also discipline executing to get the other expenses out.

Our next question comes from Andrew Didora of Bank of America Merrill Lynch.

I think, Scott, back at Investor Day, I think you threw out a $5 million EBIT per Airbus plane figure. As you come to the end of the fleet transition here, is there anything so far that you've seen that would maybe change that number either higher or lower?

No. Those are kind of the guardrails that we're seeing for the A320 revenues, mostly at reducing utilization. It's a completely different profile. But I think, Greg, are we still looking at $5 million to $6 million comparably, even at this fuel environment?

Yes. Even at this fuel environment, yes.

Interesting. And how long would you say does it take to ramp up to that number? Because at $5 million per Airbus aircraft, I think that's a meaningful earnings upside.

Yes. I mean, we're still flying 27 MD-80s. With the delay and some of the Airbus units coming on, we're leaning on the 80s that much more than we anticipated, which is problematic because you're crewing for a certain level of utilization. And so that's going to be with us a bit longer than we anticipated. So definitely upside in 2019 from where we sit now.

And we do have a follow-up question from Hunter Keay of Wolfe Research.

A couple of more for me. Sort of on that same -- in that same vein, Scott, do you see any reason why you don't feel good about still hitting that $0.0628 of CASM-X in 2020?

Yes. I mean, I think, short of [referring] our 2020 plan, we think the cost side is going to be a really good story over the next couple of years. I think you're going to see us get back to kind of a real lean, lean airline.

Okay. And then, I just want to make something totally clear. John, did you open the door to traditional debt to finance Sunseeker that is not nonrecourse debt? Is that new?

Hunter, we're just -- we're looking at everything. Like you never heard me in the past even mention a partner. So I think it's one of those things that it's in our best interest to make sure that everything's on the table. We have preferences like you. I mean, a preference would be nonrecourse and a partner. So that's always the best approach from your standpoint, and we would like to see something like that if that ever came to fruition as well. But if we did have a partner, it would be a strategic partner that brings a lot more to the table than just a wallet. So that's why we're looking at all the options, and we want to make sure that those options are all exhausted so we end up with the best outcome possible.

Great. I just want to make sure that we're on the same page here, and this isn't another sort of change. I mean, I'm not an expert on this stuff, and I need -- I think it's important that I'm able to isolate the financial risk from this thing. So I just -- I feel uncomfortable if you're going to sort of start pledging assets from the airline to this project, which is going to be hard to rope off and isolate the upside and downside risk if we're going to change the terms of how you're going to finance it. So I guess, the nature of the question is, are you still prepared to commit that whatever financing you use isolates the risk to this resort and there's no bleed into the assets of the core airline itself?

I just think at this point in time it's too early to make those kind of commitments, Hunter. I think at the end of the day for me to say that when we're still 60 to 90 days out, I don't want to mislead in any way, whether I say we're going to have a partner than not have a partner or say recourse and then it's nonrecourse, vice versa. I mean, as I mentioned, the best outcome we would like to see if we could strip it would be to have a nonrecourse piece of paper on the resort with a strategic partner. That would be the best outcome for us. And if we can make that happen, that would be great. But we are working, trying to get this financing done. And all I can say at this point in time is we're comfortable getting it done within the 60- to 90-day time frame, but I'm not going to make any more commitments as to how exactly that's going to look at the end because I can't predict that.

Our next question comes from Joseph DeNardi of Stifel.

Yes. Drew, just on your commentary around the RM system maybe not working as well in third quarter. I mean, it kind of, unfortunately, coincides with Lukas leaving. So can you talk about why that's not a factor in it? And maybe provide a little bit more detail in terms of why it's not working?

Sure. I would view it more as we -- historically, we don't have as many peak periods as we do off-peak periods. The kind of machine learning aspects of this need data in order to build up kind of proper models by which to price up the flights. Off-peak periods, we have tons throughout the year. [Trying to] figure out holidays or spring break, we got in the habit of such a unique pattern that it was a bit easier to beat the prior RM system in terms of the top end. With summers, it's a bit more spread out. You have 10, 12 weeks of peak periods. I think there's a bit more difference when it comes to somebody traveling, say, June 17 versus June 24. And trying to balance all of those peak periods out while maintaining the top end, I think is something that we just really need another year of data to help feed the next-gen system in order to produce the better results.

Okay. And then maybe just a question on pricing power. Why isn't there more just core pricing power? You'd think there'd be a little bit more, given how noncompetitive your network is. Is this something that you try and then it doesn't work, so you pull back? Or you're just not trying because of the TV special? Or you don't want to impact your customer loyalty? Maybe just talk about that a little bit.

Sure. I think there's a couple of responses to this. Number one, we're constantly trying. So we're pricing each flight on an individual basis and pushing and pulling on the fare that's available. So with every single flight, we're trying to push fare where we can. We'll see whether there comes a retraction in terms of the number of bookings relative to expectation. On the second front, well, we're not necessarily competitive with another airline. We are competitive with other options for the spend. And if we push to a point by which where we're too much for what they're willing to travel for, then they'll drive to their vacation or they'll spend it on an entertainment center. We're kind of fighting against a different spend relative to most of the airline -- most other airlines.

Okay. And then, John, just following up on Hunter's question a little bit. It feels like the project started out and the first standard was you were going to sell x percent of the condos before moving forward, and that changed a little bit. Then it was we'll do nonrecourse debt. That's our preferred way to do it. Now that's changing a little bit. Can you just talk about why it seems like the standards to push forward with this project continued to go down and whether that is sending you a message that maybe just the demand isn't there?

Sure. No problem. The preference for nonrecourse debt has not changed. That is our preference. So that remains the same. When you look at the project that we announced, that was a year ago, and there's a lot of things that have happened since then that it's prudent for us to continue to evaluate how to make the best possible project. So that's what we have done over that, call it, passage of the year is evolve that to become the absolute best possible project long term. You can make money in the short term selling a condo. That might not necessarily be the best long-term strategy for us. So we are continuing to evaluate that. That's why it's taken the time it has taken because we're coming up with the most prudent project that's going to have the greatest long-term impact for the airline. So for us, it's not all about trying to make sure that the next 30 days, 60 days or a year are the best. This is trying to make sure that this project is going to be viable, and it's going to be a very high performer for a very long period of time. So that's why as the various data points have shifted -- I mean, one data point -- and it doesn't drive our decision, but it's worth mentioning. And I've mentioned in the past calls is a tax law change. I mean, there is significant impact that tax law changes have on analyzing some of these projects. So that in and of itself is not a driving decision. It's just a data point that wasn't there when we first announced this resort back last year. So I think when we do provide all the detail, as I mentioned I would, on the project, I think everyone is going to be impressed by the potential of this project, as I say it, long term.

Okay. Maury, I would just throw in, maybe to you and Scott, if you really think like you can do $5 million in EBIT per [3 20], I would maybe use some of the buyback, right?

Yes. Well, that's a good point. Appreciate that, Joe. And we not only think, we have proven it so far, so.

We do have a follow-up question from Dan McKenzie of Buckingham Research.

John, I just had a couple of more questions on Sunseeker. I know in the past you'd talked about -- I think in the last call talked about 45 signed registration agreements. And I know -- I think you wanted to pause that a little bit to get a sales office up. How -- is that a metric that we should be looking at to sort of assess how this -- how the project is going? And from your perspective, what are your goals as you kind of think about the ramp-up of the resort?

Well, we -- we're not completely focused, as you mentioned, on trying to drive the numbers. We got plenty of runway to do that. When I say drive the numbers, I mean the number of registrations. We are as of now approaching 60 in that regard, but we're not actively trying to push that as much as we can. We also have if you go out online -- on the site, which I'm sure you and others have, there's also -- you can push a "Become an Owner" button, and you provide an extensive amount of information through that channel as well. So we have -- over 900 people have done that. So we have a lot of demand for this product if we choose to sell it, but there is no doubt that you can make a lot more money off running a hotel than you can selling a condo. Because as I mentioned earlier when Hunter was asking the question, selling a condo is a great short-term strategy but not necessarily a great long-term strategy. So we're trying to balance the 2 to see what's going to be the best outcome for us long term. So we're continuing to pursue this long list of people who have an interest. We want to make sure that if that list becomes real long and there's some tension that allows us to price up, then maybe there is a greater opportunity in selling a condo hotel unit. But I guess, the key takeaway in that regard is we're maintaining the optionality to go in any direction we choose to by moving in parallel tracks in that regard. So we continue to develop the potential for units, and we continue to develop the potential for straight hotel rooms. And the combination and mix of all that is something that we will present once we have the financing done. And as I said earlier, I will do that in a tremendous amount of detail and answer every question and help out with -- as best as I'll be able to for you to model this.

Okay. And then the last question really is a simple house cleaning one. I know in the last call you had shared that most of the expenses would be capitalized. And I just wanted to circle back and, I guess, just see if that's still how you're thinking about this, if there's going to be presumably the labor -- I think you had talked about some of the operating costs as being capitalized. Would the financing costs be capitalized as well? And does the EPS -- the revised EPS guide factor anything in incremental costs or cost headwinds from the Sunseeker development here?

No. The EPS provisions have nothing to do with Sunseeker. Everything that we're doing in that regard is capitalized. So you shouldn't see anything there. When we get to a point where the resort opens from an operational standpoint, mean accounting laws force the type of presentation as you know we're going to have to make from a financial statement perspective. So you're going to see detail broken out, so you can still focus on the airline to the extent you're going to want that continued detail. And you'll be able to see the resort. So again, we're going to have accounting requirements, but we would want to do a lot of that anyway so you can have visibility on an airline stand-alone operation as well.

And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Maury Gallagher for any closing remarks.

Thank you very much. Appreciate your time, and we'll talk to you in the next 90 days. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.