Allegiant Travel Co (ALGT) 2007 Q4 法說會逐字稿

Welcome to Allegiant Travel Company's fourth-quarter and full-year 2007 financial results conference call.

We have on the call today Maury Gallagher, the Company's President, CEO, and Chairman; Andrew Levy, CFO and Managing Director of Planning for the Company; and Ponder Harrison, the Company's Managing Director of Marketing and Sales.

Today's comments will begin with Maury Gallagher, followed by Ponder Harrison, then Andrew Levy. After the presentation, we will hold a short question-and-answer session.

We wish to remind listeners to this Web-cast that the Company's comments today will contain forward-looking statements that are only predictions and involve risks and uncertainties. Forward-looking statements made today may include, among others, references to future performance and comments about our strategic plans. There are many risk factors that could prevent us from achieving our goals and cause the underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed in or implied by our forward-looking statements. These risk factors and others are more fully discussed in our filings with the Securities and Exchange Commission. Any forward-looking statements are based on information available to us today and 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 users of this presentation not to place undue reliance on forward-looking statements which may be based on assumptions and anticipated events that do not materialize. The earnings release, as well as a rebroadcast of this call, are available at the Company's Investor Relations site, IR.Allegiantair.com.

At this time, I would like to turn the call over to Maury Gallagher for opening remarks.

Good afternoon and thank you all for taking the time to join us today.

As Michael said, joining me today are Andrew Levy, CFO and Managing Director of Planning, and Ponder Harrison, our Managing Director of Sales and Marketing. I will give a brief overview. Ponder will comment on our revenue results and Andrew will wrap up with comments on our aircraft plans, network activity, expenses, and some balance sheet comments.

This is our one-year anniversary as a public company. It's been an excellent year for us. During the fall of 2006, when we were marketing Allegiant to you and others, we stressed a number of key points for you to focus on, including, one, we were a growth Company and that while we had grown at an 80% to 90% CAGR up to that time, future growth opportunities were still abundant. Two, we were going to be profitable, in fact, very profitable if we had anything to say about it, focusing on double-digit operating margins. Three, we were different. We focus on leisure customers. We were a travel company. We operate in an almost totally noncompetitive environment. Lastly, we have pricing power through our ancillary revenues.

Fast forward to today and we believe we have delivered on our promises. During 2007, we grew revenues 48% to $360 million. During 2007, again we doubled operating profits to $44 million. Again, during 2007, our pretax income increased 222% to $51 million. Finally, during 2007, net earnings grew 259% to $31 million or $1.53 a share. These are outstanding results by anyone's measure.

Let me comment on our most recent quarter's impressive results as well. We added our two new destinations, Fort Lauderdale and Phoenix-Mesa.

Pardon me, Mr. [Barletta], this is the operator. Pardon the interruption, this is the operator. Sir, if you are on a speakerphone, please release your mute function.

(technical difficulty) our meaningful scheduled service operational stats such as passengers, ASMs, and departures, and a 65% increase in scheduled service and ancillary revenues combined of which ancillary was up 104% year-over-year. Lastly, even with this substantial 50%-plus growth during the quarter, we increased our load factor percentage at the same time.

The lack of growth in certain areas was also impressive, mainly the low relative growth in expenses. While total system revenues were growing 60%, all of our operating expenses saved fuel, grew on an average of only 44%. As we commented in our release, substantial fuel increases in less than 60 days took quite a bite out of our Q4 results. During this quarter, our cost per gallon increased $0.32 or 14% for the quarter, versus the same period in Q3. These sudden increases typically require us to pull back our flying, particularly long-haul flights. We have faced these exercises a number of times before, particularly during the second quarter of 2006. This past November and December, we eliminated many flights 1200 miles and longer and worked on adding some of this capacity back to markets with better economics, particularly since the first quarter is our best quarter of the year.

From our original plans this fall, we certainly have reduced ASMs more than departures. While we still have excellent growth in the next 12 months, we will see the stage length again reduced during 2008 as it came in, in 2007 and 2006 respectively. Once again, the flexibility provided by our low-cost capital fleet is paying its dividends. As we have stressed many times before, our ability to contract or add flights to match the revenue or cost environment we're presented with it is a critical asset.

But, how are we going to get back to the way we were? As we look ahead, our traffic is good. Ponder will have further comments on traffic and near-term demand. Needless to say, we plan on being back in double-digit margins in the very near future. A good revenue environment is certainly critical in this effort.

Additionally, fuel can't and won't keep increasing, in my opinion, at the 60% annual clip we saw last year. However, we will adjust and have adjusted our system, particularly on the revenue side, to move to the double-digit margin goal.

Some key levers we use to improve revenues and margins include increasing loads. Not only do we get the incremental selling fare but each customer provides us with north of $20 in ancillary revenues.

The second lever is to shorten the stage length. The strongest revenue time of any flight is the first hour. Thereafter, the unit revenue declines yet the cost per hour of fuel, as an example, remains fairly constant. Therefore, shorter stage lengths provide a better revenue-to-fuel cost ratio.

Additionally, ancillary revenues are stage length agnostic. The $24 per person we collected in the fourth quarter would've been the same, for the most part, regardless of how long our trip was.

On the cost side, increasing loads also spreads these costs accordingly. Virtually all our costs are fixed per trip, marginally dependent on the size of the load. Therefore, the higher our load factors, the more we reduce our cost per passenger and hence our profitability per passenger. As an example, the fuel to fly 130 people on a trip or an 80% load factor in our 150-seat airplanes is marginally more than to fly 115 people on the same trip, or a 70% load factor. But we decreased our fuel cost per passenger as much as 15%. In 2007, even with the cost per gallon of fuel increasing 9% versus '06, our cost per passenger for fuel remained constant at $47 for both years.

On the non-fuel side, our cost per passenger since 2004 has decreased substantially from $70 to $50 per person last year; that's a 30% decrease over that time. We expect to reduce this cost per passenger again in the coming year. We're continually focused on enhancing our revenues, primarily through our ancillary component, as well as reducing our cost. That is what you as investors expect from management -- to manage.

In closing, we just received the results from a survey we conducted with a number of our customers. There were some very interesting results. First and foremost, we have created an excellent brand, as we've talked about many times on the road, with many loyal, satisfied customers. Our Web site is the first destination our customers look to when they think of their leisure travel, ahead of Expedia and Travelocity as well. The number one attribute they look for in leisure travel and from Allegiant is low fares, surprise surprise.

Word-of-mouth is our most prevalent form of advertising. Almost 40% of the respondents indicated they heard about us this way.

Surprisingly, the median household income for our customers is $91,000, higher than we would have thought frankly. Lastly, they, our customers, do not object to our charges from our ancillary revenues. We will be digesting this information and commenting further in the future. But at this point, let me turn to Ponder for his comments.

Thanks, Maury. As previously mentioned, both the fourth quarter of 2007 as well as the full calendar year were characterized by exceptional growth in virtually all relevant revenue categories. For the year, we increased total operating revenue by 48% on capacity growth on approximately 35%. For the fourth quarter, these relative values improved even further with total operating revenue up 60% on ASM growth of 49%.

Specifically for our scheduled system, the revenue metrics look equally impressive, driven principally by our emphasis on several key themes. The first of these themes is additional destination growth. As Maury said, in Q4, we saw the addition of our two newest world-class leisure destinations, Phoenix Mesa in Arizona as well as Fort Lauderdale, Florida, bringing to five the number of total destinations we served at year-end 2007. As Maury also mentioned, both of these destinations are off to a great start.

In addition to these five, we began year-round service to Reno from Bellingham, Washington this summer, and we also serve Palm Springs from Bellingham on a seasonal basis. As what we'd like to call mini-destinations, both have also performed very well.

It's also important to point out that the diversified national geographic scope of our 53 small cities allowed us to begin service to both Phoenix-Mesa and Fort Lauderdale by essentially connecting the dots from these small cities. We began service to Phoenix-Mesa in October and Lauderdale in November. Total city pairs served to each numbered 13 and 11 respectively. With these most recent destination additions, our scheduled service capacity focused in Las Vegas has now been reduced to just over 50% of the scheduled system total.

Our ability to add new destinations like these was supported by the customer survey results Maury mentioned earlier. From the data, it's quite clear that Allegiant's brand is the preferred choice for our small-city customers' leisure travel needs. This certainly bodes well for future growth as we consider the economic trade-offs of adding either new destinations, new small cities, or both. The ability we possess to quickly turn on city market, small city market demand is a function of our consistent low fare high-value product offering coupled with consistent product delivery.

As the survey pointed out, word-of-mouth is powerful and "Word of mouth travels fast in small-town America."

A second theme we've emphasized and we will continue to is our ability to drive high passenger volume without making the Faustian bargain of trading yield for traffic. In support of this objective, we're consciously adding new markets that shorten the overall scheduled service stage length. For the fourth quarter, our average stage length was down year-over-year just over 2% to 922 miles. For year ended 2007, the reduction in average stage was even greater at 8%. Consequently, we're able to increase departures by rates exceeding ASM growth, which permits us, if properly executed, to accommodate more total passengers. Evidence of this is particularly noticeable in the fourth quarter, as departures increased by 56% with passengers growing by 58% from the prior year. For the calendar year, this same relationship held as passengers grew 56% on 51% departure growth. These variables would suggest an increase in load factor levels, which was indeed the case, with stronger year-over-year comparisons for both the quarter -- 79% versus 78% in the previous year -- and the calendar year, 83% versus 81%. Further, passenger yield improved for both periods, reflecting a proper pricing and capacity balance.

The third theme and really arguably the most important revenue driver for us at the moment was the continued improvement in ancillary revenue production. As we've said in past calls, we don't focus simply on the traditional industry revenue metrics because, in essence, we're not exclusively just an airline. As Maury said earlier, we're focused exclusively on leisure customers and their vacation purchasing potential.

While it may sound great and to not be an airline at times, particularly when fuel escalates at rates previously unimagined, we obviously do fly aircraft. However, we fortunately do not rely solely on scheduled air revenue to support our objective of generating industry-leading profit margins.

As a business, we're focused on total unit revenue generation or what we like to term the acronym TRASM versus the traditional metric of Air RASM. Let's quickly review these unit revenue drivers and then focus on ancillary.

Though our total average fare, the sum of average fare per passenger plus average ancillary revenue per passenger, was down very slightly for the calendar year, moving from $108 to $107, this was in fact expected as our scheduled systems stage length declined by just 8%. However, at the unit revenue level, key RASM for the calendar year was up 12%, $0.095 per ASM versus $0.085.

For the quarterly comparison, the numbers are also very pleasing. Those stage length was down 2%, total average fare increased by 4%, $111 per passenger versus $107 in the prior year's fourth quarter. TRASM rose by 8% as we produced $0.094 per ASM versus $0.087 in the previous year.

In general, during the fourth quarter, we continued to see strong year-over-year growth in the ancillary revenue category. This resulted principally from several products' pricing adjustments, such as our convenience fee, which in July we increased to $8.50 per passenger, plus the continued maturation of TripFlex which was introduced in the third quarter.

For the quarter, we generated $20.4 million of ancillary revenue, up 104% from the $10 million produced in the fourth quarter of '06. For the calendar year, the percentage gains were also impressive. Ancillary was up 108%, driven by $65 million in ancillary revenue for calendar year '07. Ancillary revenues per passenger grew 29% year-over-year for the quarter, generating just over $24 per passenger. This also reflects a sequential quarterly increase of 14% over the third quarter of 2007 per passenger rate of $21. As mentioned earlier, we achieved these results despite a reduction in system average stage length (inaudible) on a RASM basis, ancillary revenue grew by 33% for the quarter and 51% for the calendar year. The ancillary figure of $24 per passenger segment is approximately 28% of our scheduled system average fare. Impressively, both of these figures remain among the highest in the world for any airline or travel company, as we would like to call ourselves.

Our ability to generate and maintain and continue to even grow ancillary revenue provides a unique degree of pricing power, as Maury said. For instance, though our average selling fare may be flat or even slightly down year-over-year, we as a company are incentivized to run high passenger volume levels in order to capture that extra $24 in "leisure spend". Furthermore, marginal cost of carrying a truly incremental customer is essentially negligible. As our recent survey data confirms, the Allegiant customer prefers to have choices and welcomes the ability to build their leisure travel itinerary to specifically reflect their personal spending threshold levels.

Further, the key to our business model is the requirement to continually stimulate new demand. Maintaining low prices is essential to this strategy. So, even when fuel prices spike, we don't necessarily increase our average selling air fare but we do attempt to drive more ancillary revenue by continually introducing new products and services. The fourth-quarter results confirm this strategy. For instance, we introduced a modified travel insurance product in August called TripFlex for a fee of roughly $5 to $10 per one-way passenger segment. The acceptance rate for this product by our customers continues to be excellent.

Additionally, in mid-October, we adjusted our Internet baggage fees from $3.00 to $5.00 for the second checked bag and have experienced no perceptible reduction in customer take rate. In late November, we completed one of the numerous automation upgrades in our project list pipeline, which enabled us to begin charging for checked baggage at our airport locations. These fees apply specifically to bags which were not prepaid at the time of original itinerary creation. Currently, the airport rate is $10 for the first two bags and $50 for bags number three and beyond.

Earlier this month in January, we entered into an agreement to begin monetizing the customer traffic on our Web site. If successful, we will certainly pursue additional such relationships. Allegiant is uniquely suited to enter into these types of arrangements as we produce approximately 90% of our scheduled system revenue directly with our customers through our proprietary Web portal. More importantly, as we add new destinations and routes, the total number of unique visitors to our Web site continues to grow at rates far greater than our actual traffic growth.

Finally, in late fourth quarter of 2007, we began testing variable seat assignment pricing and we have now begun to implement it on a system-wide basis. Our standard preassigned seat fee has historically been $11 but it can now be varied based upon various characteristics within the aircraft.

A couple of other points -- regarding Las Vegas hotel demand, recent trends indicate a definite softening for the city as a whole, which somewhat counterintuitively actually benefits us. We've begun to see both increased hotel room availability and reduced pricing from our Las Vegas hotel partners, all of which translate positively for our leisure customer direct distribution strategy.

Last, before I turn it over to Andrew, let me quickly touch on the near-term revenue environment in 2008. As Maury indicated earlier, if this is a recession, we can't wait for the good times. Our traffic for the first quarter of '08 appears very strong. Demand for all five primary Allegiant destinations is certainly in line and, in many cases, ahead of our internal expectations. The cold climate throughout most of the U.S. in early July, at least we believe, has produced added justification for travel to warm weather clients. As well, Easter falls in March this year, which should further consolidate demand into the first quarter. Our schedule has been available for sale through mid-May and just recently was extended to include the summer months. So, our ability to speak to customer demand up to and including the third quarter is somewhat limited. However, suffice it to say we're pleased with both the revenue and expected passenger demand for the first quarter of 2008. In fact, we fully expect to achieve double-digit year-over-year TRASM growth in this year's first quarter.

Now, Andrew will recap our aircraft and planning activities, plus review our expense results and balance sheet.

Thank you, Ponder. We're very proud to report our 20th consecutive quarter of economic profits. The fourth quarter is historically our third-best quarter of the year. First and second quarters are our strongest.

While we are disappointed the sharp rise in fuel costs severely impacted our fourth quarter, we're pleased that we were still able to produce a U.S. industry-leading operating margin of 6%. Despite fourth-quarter results, our full-year 2007 operating margin of 12.2% represented a 2.9 percentage point increase over full year 2006. Our full-year operating margin is also the highest among our peers but we're not satisfied with this result. We plan to do better in 2008 and expect to again show improvement a year from now when we discuss year-end 2008 results.

We continue to do an excellent job managing our costs. Our fourth-quarter cost per ASM, excluding fuel, declined 3% to an industry-leading $0.0421 despite a 1.4% reduction in average stage length. Our full-year CASM, ex-fuel, increased only 2.4% to $0.0425 despite a 6.2% reduction in average stage length. Including fuel cost per ASM for the quarter increased 14.5% to $0.0869 and increased 6.5% to $0.0819 for the full year. Both increases were driven by increased fuel expense.

Our balance sheet is also one of our core strengths. We ended the quarter with about $171 million in cash and short-term investments and debt of only $72 million, leaving us with negative net debt of almost $100 million. During 2007, we added $55 million of fixed assets. Our long-term debt remained largely constant. 10 of our 35 aircraft are currently unencumbered.

We continue to quickly pay down existing debt, which is entirely aircraft related. All of our existing debt matures by the end of 2011. We have a commitment to purchase two more aircraft by the early part of the second quarter, both of which will be financed through seller-provided mortgage debt. We expected to end the second quarter with 37 MD-80s in-service. We have no additional aircraft commitments at this time but we are in advanced stages of negotiations for a transaction which would help us meet our remaining 2008 aircraft needs and some of our 2009 requirements. The ample availability and low prices for high-quality MD-80 aircraft remains unchanged from our previous conference calls.

We're also very pleased with our continuing ability to generate large amounts of cash from operations -- $11.1 million for the quarter and $74 million for the year.

Our MD-80s generate significant amounts of cash, enabling to pay down our aircraft in three years. We continue to be very excited by the exceptional leverage we get out of this asset. Our excellent balance sheet, coupled with our consistent ability to generate cash from operations, provides us with many alternative uses of our capital to enhance shareholder returns. The $25 million share repurchase program we announced in our earnings release is such an example.

Now, let me briefly touch on 2008. Year-over-year comparisons will continue to be tough. Our first-quarter 2007 operating margin was 17% with a fuel price of $1.97 per gallon. Through January 29, our month-to-date system fuel price is about $2.80 per gallon. Current prices are lower but we're still far north of last year's first-quarter average fuel price. As a result, it will be difficult for us to match last year's first-quarter margin performance if fuel prices stay at current levels. That being said, we certainly expect our first-quarter operating margin to be far better than our fourth-quarter performance.

As we have stated, our primary goal is growing the bottom line. If we determine we need to slow our growth in order to maintain our industry-leading margins, then we will do so. At this point, however, our first-quarter 2008 and full-year 2008 departure and ASM growth forecast remains unchanged, except for an increase in our forecasted first-quarter departures from 40% to 42%, as stated in our earnings release.

Lastly, let me comment on our network. We have announced our first two routes of 2008, Plattsburgh, New York to Orlando, and Huntington, West Virginia to Tampa/St. Pete. Both of these routes will commence during the first quarter. We also expect to announce shortly the addition of up to five more new routes with service starting in the second quarter.

This concludes our prepared remarks. Moderator, we're ready to take questions.

(Operator Instructions). Mike Linenberg, Merrill Lynch.

Good afternoon, or good morning. I just -- sorry, there's an echo on this line so hopefully you can hear me. But getting back to a point that Ponder made about how hotel rates have been coming down and, as a result, it's an opportunity or a benefit from Allegiant's perspective. When we look at the ancillary revenue and how that's grown and we look at how your fares have hung in there, I'm curious. When you think about revenue managing the business, if you take the perspective from the entire itinerary cost -- that is the combination of the fare, the hotel, the car, etc. -- what the consumer sees and so as hotel prices come down and the overall itinerary package maybe comes down in value, there may be an opportunity to keep your fares flat if not push them up if fuel prices stay high. So whatever sort of your thoughts on that and how it relates to the elasticity of demand.

This is Ponder. One of the things we've seen, particularly here recently with the Vegas hotels, is last-minute demand. They are very dependent on California drive demand coming inside ten days, so we've seen really an added inventory ability that we have room availability open to us up to and including day of arrival. So, we have begun moving much more rooms at even a later period than we kind of previously had.

Furthermore, we aggressively revenue manage that price point and we're fairly cognizant if not very cognizant of kind of how the overall absolute trip price looks, inclusive of hotel, as well as what the hotel component is, relative to airfare. Suffice to say, we're revenue managing the hotel piece as aggressively as we are the actual airfare component.

Just another question -- Ponder, earlier, you had talked about monetizing customer traffic on your Web site and I think something -- I think the statistic was at 90% of your systems scheduled revenues are through that Web site. Can you give us some examples? What's there? What's maybe the revenue potential, profit potential from going down that path?

Sure. As we grow and particularly in the fourth quarter as we expanded the route network, the traffic to the Web site surges and it surges by a greater percentage than it just does from a standard traffic growth metric. So, what we've seen is the number of unique visitors to our Web site continues to increase. We're starting to enter an absolute level where our traffic is extremely meaningful to many other third-party providers, advertisers, people that want to speak and/or transact with travel related customers. Again, our ours is a very unique customer base as well. So, we've actively been begun to partner with some groups that again want to transact with our customer base at the conclusion of the itinerary on a paid level or share the database. Again, kind of heretofore, we could've done it but we've got such a specific demographic, it's a very unique demographic and its volume has increased to the point where our idea is we can start to monetize that. In the past, we've really not felt that we were able to at this point.

If I could just one last accounting question -- maybe this is for Andrew. When we think about the ancillary revenue, isn't there some seasonality that we need to be mindful of? I think some quarters yet better uptick on hotels. Can just kind of sort of run through that again for modeling purposes in 2008?

I think Ponder is probably better to answer that. I think that the only seasonality we see really, Michael, is I believe on the hotel side of the equation.

Yes, we're going to see it, Mike. Here in the first quarter, it's going to be very strong. Obviously February and March are very strong, July very strong. We see somewhat of a reduction obviously in our third quarter and rates come in, generally speaking, in the fourth quarter, to December in particular, for the Vegas hotel groups. That's fairly soft period and as a result, they tend to price more aggressively than they otherwise would.

Jim Parker, Raymond James.

Can you see anything in your bookings beyond Easter? I'm just curious if the strength you're seeing currently is -- are you able to determine that it's being sustained in bookings beyond Easter?

Jim, this is Ponder. We did mention clearly the first quarter is strong. As we also said, we have the schedule loaded through pretty much mid-May, so we've got very good visibility into April, in that first part, and we're very pleased with what we see. We don't see any difference there than we did in the first quarter. So, I think yes, to answer your question. It seems good.

Ponder, what is your current hotel take rate -- proportion of your passengers that purchase a hotel?

Well, Jim, I guess look at that in two ways. As we've grown the route network on a scheduled basis away from Las Vegas, we're certainly not seeing the same level of consistent take rate in some of the newer destinations. They take time to ramp up. Again, I don't know that, as we have said before, anything is ultimately going to compare to the Las Vegas hotel take rate. So, we've seen some dilution in that regard. But the Las Vegas rate, on a same-store sales basis, has held. I think we had mentioned before that ebbs and flows, but on a sold basis or even on a flown basis, it can range anywhere from at the low of 20% to a high of 50%, depending on seasonality.

So, Ponder, your take rate in Las Vegas I think used to be something like 28%. So you were able to provide a number overall. Then how does it vary, Vegas versus Florida or Phoenix?

Well, Vegas is going to be higher than our Florida or our Phoenix markets, at least at this time.

So you're not going to say what it is? Because that's what I'm asking.

No.

Jim, we are -- you know, pretty proprietary information there on how we are able to get that stuff. So, certainly, Vegas is the strongest by a margin and you're going to see a fall-off from that. Overall, our revenue per passenger will fall proportionately based on those ratios. So we're seeing it come in a little bit but we're certainly making up for our ancillary revenue per passenger in other areas.

Were there any unplanned engine removals or anything out of the ordinary in maintenance in the quarter?

Jim, I think there may have been one, but I wouldn't call that material. We do have a couple that will affect our first quarter. So, engines have failed in the fourth but the expense will hit the first quarter, but nothing outside of kind of ordinary expectations. So, yes, we do expect to have a certain amount of unplanned engine removals during the year. We just have no ability to time when that will be. But, we've had our fair share but nothing out of the ordinary.

Frank Boroch, Bear Stearns.

I was curious. Back in October, I think when you made the announcement about the new Tunica arrangement with Harrah's, you talked about expectation that fixed fee may be flattish year-over-year in Q1 and then growing about 20% for the full year '08. As you sit here today, does that still seem reasonable? Have there than any other changes in that category?

Frank, this is Andrew. That guidance remains very sound. There's no other agreements that have been entered into. If there were, we would be disclosing that with an 8-K. So, at the moment, nothing has really changed since our last guidance.

Okay. I think, Ponder, you mentioned that -- or maybe this was Maury at the beginning -- that the stage length would decline again in '08. Should we think about that in the same magnitude as '07, down 6% to 8% or so with some of the network or the new world-class destinations or are we talking a much slower rate of decline?

Tentatively, based on what we're looking at, I think in the same ballpark is okay, maybe a touch smaller. We had 6% I think last year, 6.5%, somewhere in there.

Yes, 8% was scheduled.

For scheduled, it's down 8%. So, you should -- if you're in the 5%, 6% range or comparable, I think that's a reasonable place to be.

That helps. Maury, just how low can you get unit costs, ex-fuel? I know you have a laser-like focus on keeping close control on costs. What do you feel is the limit or is there?

I don't want to forecast any particular number but certainly as you grow and the size of what we do gets -- we just get bigger, that helps a great deal. I think we have very predictable cost structures now with the airplane, our departures and our stations; all of those things are very good. As we increase the loads, we're spreading those fixed costs across more passengers. That's one way of certainly bringing it down even further.

Are you seeing any changes in competitive behavior? I realize there's not much direct competition. But in some of your key markets, like Vegas and some of the Florida markets, are you seeing any pullbacks in this fuel environment?

Well, our competition I think was eight or nine direct routes here in the fall when we were talking to folks. We're down to five now, so we've had three or four pullbacks there. I think you're just seeing consolidations appropriately [slow] around the industry. You know, Andrew may have more detail than that, but we're certainly not seeing an increase. I don't know we've had much in the way of kind of big announcements or people pulling back at this point.

I think that's right. I think, for the most part, it is largely unchanged, Frank. I mean, we -- there is -- we don't see any pricing pressure by other airlines trying to price against us or any change to direct competition other than what Maury mentioned. We actually have fewer routes where we have direct competition on top of us. So, I think the answer to your question is no, we haven't seen a change.

Great, thank you very much.

John Langston, Hodges Capital Management.

Back in the summer, you were saying that there were about 45 additional small cities that you could serve. What's that number today?

We haven't looked at it terribly closely in the last couple of months but we're in the same ballpark. Conservatively, you might pull it back a couple, three or four or five, if you wanted to. But there's still a lot of fresh fields out there that we look like -- look opportunistic for us.

I know that kind of as a practice you obviously want to limit the cities you enter where you compete. I was curious about a market like Fort Worth, Texas where you could -- obviously Southwest flies out of Dallas -- but you could possibly attract some people from Fort Worth maybe flying out of the small Fort Worth airport. I'm sure there's other markets like that across the country. Would you all ever entertain entering a market like that where you could certainly get some -- gain some market share in a market like Fort Worth?

This is Andrew. Let me answer that. We certainly look at all opportunities out there. I'm not sure Fort Worth is really a legitimate opportunity at this point in time. I think there's no interest in the part of the airport of having commercial scheduled service there. But even if there were, I don't think that is our kind of an airport. We really do better in smaller communities that are more isolated, as opposed to secondary airports of larger metropolitan areas. We serve both types of airports. But in general, we do better in a smaller, isolated place. So I think you know we certainly look at those things and we know -- we think we know where all the opportunities are out there. The ones that are most interesting to us are ones that are more like Bangor, Maine that we announced not too long ago and Plattsburgh, New York that we announced not too long ago. Those are a little more of interest to us.

John, it's Maury again. I think you also have to discriminate between destinations and origin points. We would look at Fort Worth as an origin point. Just on a macro basis with all the service right down the road at DFW, it would probably be difficult for us to try to get our oar in the water very well there, but you take Phoenix where we put our destination. That's a big city and we are very cognizant of that but we don't have a lot of origin there and we're able to generate demand from our smaller cities into the big city. That's key in our ability to sell and to add, if you will, value into a community or surrounding communities based on the distance and level of service they might have access to.

Right. One more quick question -- I know that another thing that greatly differentiates you all from the other airlines out there is your ability to ramp back capacity. I know you talked about that a little bit with going to a shorter stage length. But could you give us a little bit more color on how you did that this quarter and so forth?

I'm sorry, the question is about the change in capacity?

Just ramping back flights from --?

Right. You know, just to give you an idea, in about October, late October/very early part of November, we reacted to the very sharp increase in fuel. We eliminated a number of routes into Las Vegas, all of which were very long flights, 1400 miles or more I think in each case. Since then, we've gone back and eliminated a couple of others where it just, at current fuel prices, it just -- we just don't think we can earn the kind of returns that we think are acceptable. So we just simply eliminated those routes.

The nice thing that we're able to do is, when we sit down and have those discussions about which routes perhaps don't work and we should eliminate them, in that same discussion we don't need to talk about, well, geez, what do we do with the airplane now. Which where we find newer equipment, those would have to go hand-in-hand with one another. So, you know, we got out of a lot of routes that we don't believe we can make money at with today's fuel environment. We've added routes in other locations that are performing very, very well. But I think the ability to do that and do that quickly is a real strength and it's one of the reasons that we like the MD-80s so much.

One of the other things, John -- it's been gratifying to listen to some of the other calls and hear how they are using their flexible fleets to particularly eliminate flights on Tuesday and Wednesday. I think one of the majors talked about that. You really come to -- people recognize the seven-day cycle that exists out there, be it even our business or any other carrier where that Tuesday or Wednesday flying is pretty weak flying, regardless. Saturday also is poor. So, the smart money is to put your airplanes on the ground or really reduce your flying at that point. So we've been doing that consistently for many years. You're starting to see others, I think, recognize that aspect as well.

[Steve O'Hare], Sidoti & Company.

I just had a quick question on the three planes you purchased in quarter four. It was substantially all of the $55 million?

No, no, no. The $55 million is purchases made throughout the year.

Oh, okay. (inaudible) (multiple speakers). I thought I misheard you.

You misheard me there. If I said that, I apologize. No, the $55 million is an annual number in the fourth quarter. It was far south of that.

We've also added eight engines in the back half of the year as well on a transaction. So, we have airplanes, engines, and the fixed assets.

Can you give a number on the three planes in Q4?

Three planes in Q4 -- about $15 million. That's the aircraft as well as improvements made to the airplanes, in terms of maintenance, just to have them ready to be able to fly.

Okay, great. What about a maintenance CapEx? Can you give me a number on that?

I'm not sure what you mean by maintenance CapEx. There is no -- none of our maintenance expense can be capitalized except for --.

No, I'm sorry, just in terms of kind of running the business as it is.

On kind of a forward-looking basis? Well, I think that we have reaffirmed our CapEx number for this year -- expecting to be about $45 million. We broke out last release. I believe that that consisted of six airplanes. So, at that kind of run rate, we think that remains a pretty good estimate on an annual basis.

(Operator Instructions). [David Vincent], Lehman Brothers.

Thanks for taking my question. A question -- you talked a little bit about what you're seeing in the Vegas hotels. Are you see anything similar in Orlando? I know that's less hotels and more cars but even spreading out into the cars?

David, at this point in time, we have not. Our car demand remains very strong. It's as strong if not stronger than the previous year. We've not seen the same type of behavior, relative to, say, what you do see with the Las Vegas hotel properties.

Just overall, I know you've broken out the relative margin performance in the past. How does Orlando stack up in the fourth quarter? I know the seasonality is different. It's not a number, just sort of a sense. Is it developing?

What we've seen consistently for the last several quarters -- take away the third of course because the because the third quarter is very, very soft in Florida. But, in general, we see very good consistent margin performance across the system. The fourth quarter is a very good quarter for Florida. October is so-so. November and December start to get pretty good, especially around the holiday period. So, Orlando did just fine, as did St. Pete. Ponder commented on the new systems, the Fort Lauderdale and the Phoenix gateway that are off to a very good start as well.

Thank you, everyone. That does conclude the question-and-answer session. I would now like to turn the call back over to Mr. Maury Gallagher for final remarks.

Thank you all very much. We appreciate your interest today. If you have follow-on questions or issues, please contact any one of us, myself, Andrew, or Ponder, and we will be glad to update you as best we can. We look forward to talking to you in three months. Thanks very much. Have a good day.

Once again, thank you all very much for joining us. This does conclude today's teleconference. You may now disconnect your line and have a wonderful day.