Allegiant Travel Co (ALGT) 2008 Q3 法說會逐字稿

Welcome to Allegiant Travel Company's third quarter 2008 financial results conference call. We have on the call 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 webcast 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 any 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 a 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 morning everyone. It's a pleasure to talk with you again this morning. Joining me today as the operator indicated are Andrew Levy our CFO and Managing Director of Planning, Ponder Harrison, our Managing Director of Sales and Marketing and also in the room is Robert Ashcraft, our Vice President of Planning. I'll give a brief overview, Ponder will comment on revenue results, and Andrew will wrap up with comments on our network activity, expenses and balance sheet.

Once again we had an excellent quarter. If you recall our last conversation we talked about our unit revenues begin to increase nicely particularly in June. The story this quarter is the maturing of these revenue increases. They are the culmination of a great many changes taken by our management team over the past year to maintain and increase our profitability in the face of accelerating fuel costs. It takes time to roll these changes through our system.

But in the third quarter we began to see some real traction from reductions in capacity and corresponding fare increases. The result, operating margins almost doubled to 7% this quarter from our second quarter operating margin of 3.6%, while fuel was essentially unchanged from the second quarter. I might add we produced our results without the benefit of any fuel hedges. Ironically, while operating without hedges opened us up for criticism when fuel prices were racing towards $150 a barrel it's serving us quite well now that oil prices are in free-fall.

As we've been commenting, our number one corporate goal is profits. More over we continue to be focused on double-digit margins as our standard. Last year we achieved these results through the third quarter and then fuel began its climb. We reacted by cutting long haul flights in a number of markets and trimming capacity in many others. We redoubled our efforts to increase our ancillary revenues and I'm pleased to report increase of $11 per passenger to $32 in the quarter for a 51% increase. We also focused on higher load factors. With a $30 plus per passenger ancillary revenue we wanted to fill as many seats as possible. And we achieved a 94% load factor for the quarter and our scheduled service system averaging 137 passengers per departure. The overall net effect of these changes is a stunning 33% increase in total RASM.

Regarding capacity reductions we are very focused about how we handle them. A conscious effort to end a number of our long haul flights and to trim capacity in many of our mid haul markets such as Peoria and Des Moines. We were also careful about how we redeployed our new service emphasizing short hauls looking to trim our stage length. This combination of fewer trips in a market and a shorter overall stage length we knew would allow to us increase unit revenues necessary to try and catch up with accelerating fuel costs. The outcome of these efforts this quarter for our scheduled service was 4% more departures on 3% fewer ASMs resulting in a 7% shorter stage length.

The last element of the puzzle was to focus on increasing passengers per departure. This would allow us to not only leverage our increasing ancillary revenues, but also to spread our costs particularly increasing fuel costs across more passengers on each flight. The result is we carried over 100,000 more passengers during the quarter or 14% increase compared to the third quarter in 2007. More over the combination of a shorter stage length and more passengers per flight allowed us to substantially drop our fuel consumed per passenger. We dropped our gallons consumed in scheduled service 14.5% from 18.7 gallons per passenger in the third quarter of 2007 to 16 gallons this quarter.

In summary this marginal increase in departures and fewer miles flown generated 14% more passengers, paying us an average of $32.28 in ancillary revenue at a higher average fare and we consumed less fuel per passenger while doing it. Those are very good results. As I mentioned previously these outcomes produced a very respectable return in our slowest quarter of the year, I might add, with 7% operating profit with fuel on average of $120 per barrel. And now fuel has dropped more than 50%.

Let me talk about our fixed fee flying for a moment. Another change for this year was that portion of our business was up substantially. Our departures year-over-year are up to 73% while revenues have increased 93%. Ponder will take you through a number of these details in a moment. The increase in fixed fee activity was well timed from one aspect. Namely we had limited fuel exposure from this increased flying.

Lastly, as we announced in our release, we have recently been approved by the Department of Defense as a charter services provider. We are not sure what the impact will be as of yet, but are comfortable we can do an excellent job transporting our military personnel in and around the US. Since late 2007 we have been focused on increasing unit revenues to offset our accelerating fuel prices. As I stated, trimming longer haul, poorer yielding flights and capacity in general has been required to generate higher unit revenues. We have had the added benefit of our ancillary revenues to super charge this effort.

But during this process overall growth had to slow as we have focused on rearranging our system. Reductions in capacity in the shorter stage length have generated slack in our system. We are not as efficient as we were last year at utilizing our personnel and aircraft. As an example we only flew an average of five block hours per day in the past quarter versus six hours last year, or a 16% reduction year-over-year. As a result our fixed costs for aircraft, labor, and other non fuel costs have increased on a unit basis. We have seen this reflected in our ex fuel cost per passenger this quarter. $53.44 versus $949.83 in last year's 2007 quarter.

Ours is a simple system. Out and back. We have no hubs, no connections, nor new through passengers. We are focused on the passengers we carry on a particular segment and the associated revenues and costs. As a result, we have been able to make many changes in just a few months to produce these improving returns we have seen this quarter. And I might add it's a real compliment to this management team and the 1500 team members who have provided leadership and flexibility to make these mid-course corrections necessary to deal with the changing environment dictated by fuel in the past 12 months.

In closing, our focus has been on enhancing revenues during the past year. We certainly understood unit costs would increase, but we certainly also understood it would not be as much as the unit revenue increases. The revenue enhancements we have made it to system during this rejiggering have positioned us exceptionally well for the coming months. Our 33% increase in total RASM in our scheduled service is indicative of these enhancements.

Our traffic outlook remains good. We are comfortable we should be able to maintain our $86 and change average fare from the fourth quarter of last year, as well as meet or exceed last year's fourth quarter load factor in the coming months. As fuel moderates to the $70 a barrel range and we become more comfortable that this is the norm versus the exception, we will begin looking at ways to accelerate growth.

As we look to the future of growth look at future growth we will not lose the benefits of our revenue enhancements, our $32 per passenger ancillary revenue, nor our understanding of how to manage high load factors. What we will gain will be increased efficiencies or lower cost per passenger as we improve our current aircraft and personnel utilization and better spread our fixed costs across more production.

Let me turn things over to Ponder to add his comments.

Thanks, Maury. As Maury already pointed out all facets of revenue growth during what is traditionally our weakest quarter worked out very well. We remain true to our historical approach of aggressively adjusting capacity to fit demand on a market-specific basis. This philosophy fits solidly with our flexible leisure focused destination oriented business model and has served us well even before fuel prices skyrocketed and drastic capacity cuts throughout the industry became vogue.

However, we approach the third quarter much more cautiously this year than in years past and we believe this strategy was more than validated based upon the exceptional year-over-year unit revenue improvement. Now to the numbers. As Maury mentioned, total operating revenue grew by 35% to just over $116 million, a year-over-year increase of approximately $31 million. Equally important all major revenue line items, fixed fee, scheduled service and ancillary, contributed positive year-over-year results. So let's briefly review each one individually.

First off, fixed fee. Fixed fee revenue increased significantly as Maury mentioned by 93% year-over-year producing $14 million and comprising just over 12% of total operating revenue. Year-over-year gains were driven principally by three factors. First, additional flying that we performed for Harrah's in Tunica, Mississippi. Second, track charter program flying for MLT Vacations, a contract which began in June of this year and actually will end this month. Third, significant up tick in our fall ad hoc charter work.

Availability of our east coast based aircraft for charter lift correlates well with the significant annual third quarter capacity reductions in our Florida markets. We're also seeing the benefit of a very new aggressive sales team focused on ad hocs that we put in place back in March of this year. With respect to scheduled service, despite a 3% overall reduction in capacity, as dictated by ASMs, scheduled service revenue increased year-over-year by 18.5% to just over $73 million. This represented 63% of total operating revenue.

Three key drivers stand out here. Number one, capacity management. Though scheduled service ASMs were down slightly more dramatic cuts were made in select destination markets. We've made it a habit over the years to severely reduce our Florida flying from mid-August through the midpoint of the fourth quarter. Once again we did this only more dramatically given the expected fuel environment when schedules were actually loaded.

Additionally, however, Las Vegas capacity as measured by ASMs was reduced even more severely, down 18% year-over-year. As Maury mentioned to combat lofty fuel prices we continue to actively shrink our scheduled service stage length year-over-year resulting in a 7% decline to 856 miles. As you would expect our Las Vegas long haul routes were the focal point of this effort as it's year-over-year capacity reduction far exceeded the system average. To further quantify our seasonal capacity rationalization, capacity for our entire scheduled network in the third quarter was down 23% versus the second quarter in 2008, and 29% when compared to the first quarter of this year. The advantage of our MD-80 fleet is that we don't have to fly when we cannot make money.

The second key driver is traffic. We continue to produce record load factor results filling 93.8% of our scheduled service seats in the third quarter up 7.6 load factor points year-over-year. This is our second consecutive quarter of 90% or better load factor production. When compared against all US domestic reporting carriers, Allegiant has been number one in load factor for all three-quarters in 2008. When each passenger is worth over $30 in ancillary we're obviously heavily incented to fill the aircraft. In the third quarter, scheduled service passengers increased to 854,000, or 14% year-over-year. Combined with the departure growth of 4% the resulting 10% growth in passengers per departure was nothing shy of extraordinary to say the least. Said differently we generated 137 passengers per flight in the third quarter this year versus 125 passengers per flight in the third quarter of 2007.

And the third key driver is price. While reducing our average stage length and generating record load factor results conventional wisdom would expect at least a moderate trade-off in average fare. In fact, just the opposite was true. We saw a 4% year-over-year improvement in our average fare. A gain of more than $3 resulting in an average fare for the quarter of just over $86 per passenger. As you would also expect, this, coupled with our dramatic capacity reductions, produced exceptional unit revenue metrics as passenger revenue per ASM jumped 22% year-over-year to 9.28 cents. Now let's turn our attention it to the ancillary revenue line item to complete the scheduled service revenue story.

We continue to maintain our position as the global industry leader in ancillary revenue generation. As such, we are delighted our ancillary revenue production continued its climb, increasing by 73% year-over-year to $27.6 million in the quarter. This translates into a unit rate per passenger of $32.28 or as Maury mentioned, up $11 or 51% year-over-year, and up $4 over last quarter. That's our largest sequential quarterly gain ever since we began producing ancillary revenues and recording them.

Further, ancillary revenue per passenger now represents 37% of our scheduled service average fare. Better yet, the ancillary category overall appears to present a very limited correlation to stage length, with scheduled service ASMs down 3% year-over-year, ancillary RASM was up 77%, generating 3.47 cents per available seat mile. So, when combined with our passenger RASM of 9.28 cents, our total revenue ASM, or T-RASM for the quarter, as Maury mentioned, improved 33% to 12.75 cents versus 9.59 cents in the third quarter 2007. By any comparison we believe these are exceptional results and provide further evidence of the strong pricing power we enjoy in our markets.

These ancillary gains reflect July price increases to the current level of $15 one way and $25 one way for our web baggage and our airport baggage programs, respectively. And appreciate the power of these programs. With regard to checked baggage we now carry approximately .55 bags per customer versus over 1.2 bags per customer before we actually began charging for this service. As a result, we've realized serious cost savings and revenue benefits. That said, our newest challenge, and I'm sure we're probably not alone in the industry, is managing the avalanche of free carry on bags now filling every inch of our overhead bin space. Some would argue that it sounds like a new revenue opportunity but we'll have to address in that future calls.

Additionally we've made solid strides in further developing our ability to dynamically revenue manage pre assigned seat selection by market and by seat type. For example, exit row seats and other seat types based upon their actual location in the aircraft. Our auto rental car revenues in Florida remain very strong throughout the quarter and we are also currently in negotiations to renew our exclusive partnership agreement with Enterprise Rent A Car, the parent company of National Rent A Car, Enterprise and Alamo rental car companies. As well we are pleased with our hotel production in the Las Vegas market for the quarter as we generated 14% more total room nights year-over-year, which translated into an increase in room nights per Las Vegas departure of 32%.

Looking ahead, we are constantly searching for new to improve ancillary revenue through product innovation rather than just simply by increasing price points for existing product offerings. Just last week we introduced a priority boarding feature which for a nominal fee permits passengers to board the aircraft first and possibly claim that valued carry-on luggage overhead bin space. Later in the fourth quarter we will roll out a web check-in enhancement which will allow remote boarding pass within 24 hours prior to departure. In certain of our Florida destination cities where seasonal traffic patterns will produce up to 40% local Florida originating demand, this will be a welcomed amenity.

Looking forward we are actually not adding a new destination this year as we have done in the fourth quarter of prior years. However, we are introducing a number of new routes as we mentioned in the release throughout our scheduled system in the fourth quarter, with the majority of the growth focused in our Phoenix and Florida markets. As the numbers discussed -- as the numbers above discussed prove we are incented heavily to run high load factors, maximize revenue per passenger, maximize ancillary revenues and thus total revenue per departure and total revenue per passenger.

With October's numbers all but in the bag we are pleased thus far with our progress in fourth quarter. However we obviously remain quite cautious about the impact of the recent financial disruption and what it could have on future customer discretionary spending. That said, the current fuel environment provides increased flexibility for us to aggressively price our product lower in order to drive demand if so required.

And now I will turn it the over to Andrew to review our market planning activities, as well as our fuel and financial details. Andrew?

Thanks, Ponder. We're pleased to report our 23rd consecutive quarter of economic profits, our 6.9% operating margin and 6.6% pretax margin lead all our US peers that have reported to date. While our third quarter '08 profits fall short of our goal of double-digit margins, we have made progress as compared with the preceding quarter and we remain confident that we can return to that level of profitability as soon as the fourth quarter, if fuel prices remain near current levels.

We have repeatedly stated we can produce strong profit margins at any fuel price as long as we have time to adjust our networking capacity. While these adjustments were made in the second quarter, when we loaded our third and fourth quarter schedules, based on our expectation of substantially higher fuel prices, and now instead of nearly stable fuel prices they have dropped dramatically to levels close to 50% of where the futures curve had predicted prices would be. Obviously we are very pleased with this development and we will enjoy 100% of the benefits since we ceased our hedging program over one year ago.

Turning to costs we are pleased with our cost management during the third quarter. As Maury stated in his comments, when utilization and average stage length are reduced, unit costs will increase, but this does not overly concern us as long as revenues increase faster than costs. We manage our business to maximize earnings not to minimize unit costs.

Three expense areas increased at a faster pace than revenues, and let me touch on each of these. First, fuel expense increased by 55.1% driven mostly by an increase in cost per gallon of 48.3% from $2.32 to $3.44, only slightly lower than the $3.52 we paid during the second quarter. Fuel did us no real favors in the third quarter. Our improvement in performance compared with the second quarter was mostly due to having more time for our network and capacity adjustments to take effect and our ability to increase our ancillary revenue by more than $4 per passenger. However, our fuel expense for the fourth quarter at this time looks very different and if prices remain at or near current levels that should propel significant margin and earnings improvement.

Second, depreciation and amortization expense increased 46.7%, mostly because we owned 16 more MD-80 aircraft than we did a year ago. Six of these aircraft were on lease during the third quarter to a European airline and will enter service starting later this year. I will provide further details in a moment. Finally, maintenance and repairs expense increased 70% compared with the same quarter a year ago. The increase is mostly due to more airframe, scheduled maintenance, and more expensive events because of where these particular aircraft fall in their maintenance calendar. More engine maintenance events and higher parts and repair expense.

The year-over-year comparison was particularly difficult since third quarter '07 maintenance expense of $69,000 per aircraft per month was lower than the $78,000 per aircraft per month average we experienced during 2006 and 2007. However, the $91,000 per aircraft per month we experienced during the third quarter is higher than the average, principally due to the reasons outlined above. We now expect our maintenance and repairs expense to be around $91,000 per aircraft per month through 2009. Again, this is mostly due to the quantity of aircraft heavy maintenance events scheduled for the next several quarters and our belief they will cost more per event due to many of these aircraft having more substantive seat check work required.

We are recommending you think about our maintenance and repairs expense as largely a fixed cost because of our low aircraft utilization we do seat checks when they reach their calendar limits rather than their flight hour limits. Other maintenance and repairs expense items are driven more by the quantity of aircraft as opposed to their utilization. Recall we have no power by the hour agreements. We believe if you forecast maintenance and repairs expense using this approach it will help you better predict our future expenses. Let me now touch on our balance sheet and liquidity.

We ended the quarter with $138.6 million in unrestricted cash and short term investments down from $153.8 million at the end of the second quarter. Key transactions during the quarter included, capital expenditures of $8.8 million consisting principally of the purchase of two aircraft previously under operating lease for $4.1 million and the purchase of two spare engines for $2.5 million, and the reduction in debt to $70.1 million from $75.2 million at the end of the preceding quarter.

In addition, our air traffic liability declined by $3 .8 million due to seasonal reductions in capacity and having our future schedule open for four months at the end of the third quarter versus 5.5 months at the end of the second quarter. We remain very comfortable with our liquidity position and are particular pleased that we have pre funded to large degree much of our 2009 growth through the purchase of six aircraft earlier this year. These aircraft will enter our fleet as follows. One, at the very end of this year, three during the latter part of the first quarter 2009, and the remaining two will enter service by the end of fourth quarter '09. Please note that the work required to prepare these aircraft for service is capitalized and makes up a substantial portion of the 4Q and 2009 CapEx forecast we outlined in our release.

Lastly, let me touch further on the guidance issued in the release and how we are viewing future capacity growth going forward. Assuming lower fuel prices persist, we will benefit substantially but our concern has now shifted to the global financial crisis and how it may impact demand and the price we can charge for our services. So far so good. We see no evidence of a change in demand due to the macro events, but we have been cautious about capacity growth for first quarter 2009.

As noted in our release we expect system departures to be up about 5% and ASM to be up 7% in 1Q '09. We will continue to closely monitor our forward bookings and if we believe there are opportunities to insert more capacity and grow earnings we will do so. We have plenty of time to make these decisions and still impact first quarter results since the key period for the quarter starts in the middle of February and continues through March which has historically been our strongest month of the year.

Thank you and we are now ready to take questions.

Thank you. We will now begin our question and answer session. (OPERATOR INSTRUCTIONS) And we'll go first to Mike Linenberg, Merrill Lynch.

Hi good afternoon all. I have a couple of questions. First here, just to nit here, Maury, when you had given early guidance on the fourth quarter you said the indication was that you would meet or exceed the fourth quarter of a year ago. And I just -- how does that -- how should we take that when you talk about it meeting or exceeding, yet the last couple quarters your loads have been up significantly on both scheduled and on a system basis. So are you actually -- are you tempering the load gain? Maybe it's up a couple points? Are we going to see something like what we saw in the third quarter?

Let me first clarify, Michael, that I wasn't suggesting fourth quarter numbers there. I was referencing fourth quarter statistics that we achieved last year. I think you asked specifically about the load factor that I referenced. And just to be conservative, I'm not trying to temper and say that we're not going to make good numbers, but I'm pretty comfortable that we can make those numbers at this point in time.

Okay, good. That's helpful. My second question, when we look at your departure and ASM stats for fourth quarter and even first quarter of '09, is that scheduled, or is that total? And if that is total, can you just break out between scheduled and charter? Only because your charter numbers were up a lot, and I'm just trying to get a better feel of the breakdown between the two.

Yes, Mike, those numbers are total, so it does include the fixed fee. And I'm afraid I don't think I have those numbers at my fingertips at the moment, but clearly those fixed fee that gotten larger year-over year. The business is still driven by what we do on the scheduled side of the house.

Okay. And just with the MLT piece going away in October, how much of that was what did that represent of the total?

MLT was a fairly meaningful contributor to third quarter earnings. I'd say I believe it was in the range of about $3 million of revenue, somewhere in that range. And we have a partial month of that at a much reduced amount of flying in the month of October, and then that program will be over.

Okay. Good. That's helpful. My last question. This may have come up on the last call, but where you guys are with respect to new aircraft purchases, I mean, at $110 or $120 oil and where the MD-80s are on an efficiency basis, you may have come to a different conclusion than where you would be today with oil under $70 a barrel. Just your latest thoughts on that would be great.

I'll comment and Andrew might have some further comments. The world has changed considerably, at least in my looking glass, and we're sitting on the sidelines at this point just wondering what's the outcome of all this. We certainly have our head down, focused on our activity for next year. Gotten a lot of growth already in the system. New airplanes, are they available? Don't know.

Boeing has always been very tough trying to even get stuff out of them. My guess is they are going to loosen up considerably. Having said that we like what we've got right now in our formula with fuel coming down it really has kind of made this business model even more advantageous. But at the end of the day we're on the sidelines right now. At a minimum, we've been told there's minimal debt out there, knowing you can finance the airplanes.

But be that as it may, we like what we're doing at this point. We are never going to say never in this regard, but it's a good time to sit and watch, we think. Andrew, further thoughts?

No further thoughts but let me go back to the question of MLT. It actually contributed $2.4 million in revenue in the quarter.

Okay, good. Alright guys. Nice job. Thank you.

Thank you Michael.

And we'll go next to Kevin Crissey, UBS.

Hi, guys. Can you talk about the demand by destination and maybe the trends of, I don't know how you want to classify it, fare or RASM kind of by destination, if there's been a change in that?

Kevin, as general rule we don't kind of talk about those things, on a breakout basis here. I am not sure we're even prepared to kind of go through it because we've got six, seven, eight destinations now with all the different things we're doing. Andrew?

Let me make one comment, Kevin. I think that one of the interesting things that we've done is that we've masked a little bit of the severity of the capacity reductions that we've made in some of our older destinations because we have been expanding the network. And if you were to look at kind of, let's say a same-store approach in Las Vegas, St. Petersburg, and Orlando, three major destinations that we were in all of last fourth quarter. In the great majority of those markets, the city pairs that we served this quarter and last quarter, we have fewer seats in the market.

On an overall basis, if you wanted to look at on ASMs, as much as we don't care for that, particularly as a good measure of capacity, but the reductions are very significant, well into the double digits. And so we expect to benefit as a result of that on the fare side of the equation, and obviously it's to drive very high loads when you constrict capacity the way we have.

Okay. Thanks, guys. Nice quarter.

Thank you, Kevin.

We'll go next to Steve O'Hare at Sidoti & Company.

Hi, guys.

Hello, Steve.

Just curious about your utilization. It seems like you have a ton of leverage in terms of your hourly utilization. I mean is there a limit on where you can go with the MD-80 in terms of daily utilization?

When you say limit --

I mean I guess my question is, if you -- I assume maintenance will go up as hourly utilization increases past a certain point. Is there --

Well, we've never pushed the airplane past seven hours in our five, six, seven years we're doing this. I couldn't disagree with you that if you tried to get ten hours out of the airplane you are probably going to spend more on maintenance, just day to day maintenance, trying to keep the airplanes on the line. As we look forward, though, we just don't see doing more than the seven hours a day for the utilization we're looking at. Having said that, that's kind of a 20% increase in where we are at now in the low five's for the third quarter, and fourth quarter won't be that much above that as well.

Okay, great. Then the second thing is in terms of your average stage length, I mean that's come down quite a bit. Are you comfortable with the level it's at right now? Do you see it continuing to decrease? Or possibly increasing with fuel where it is?

Well, it will be increasing somewhat in the fourth quarter as we've added some longer haul flying in Phoenix that's stretching us out a little bit. Any other longer haul we're going to be in?

There's some longer haul flights that we've added in Florida as well, which are performing very, very well, by the way. So it'sgoing to increase slightly.

Should be in the high eight's is what I'd suggest you look at, Steve.

Okay. Then lastly, the military charter, when does that begin?

As soon as now.

Okay.

There's a lot of paperwork to get done. There's always paperwork with these things. Hopefully we're ready for a phone call here in the not too distant future. In other words, go to work.

Okay. I appreciate the time.

Thanks, Steve.

Thank you.

Our next question is from Jim Parker, Raymond James.

Good afternoon. I have a question for Ponder. Ponder, what are you planning to charge for priority boarding?

Jim, right now we are just rolling it out. We actually introduced it last Thursday evening, and we initially loaded it at a rate of $5. And that is purely experimental at this point. We have moved that price point around even since the initial load to a variety of price points, not exceeding $10, I would add, but probably every variation between $10 and $5.

We may couple that with some other services and try to further create value to the idea of boarding first and, in particular, we mentioned the carry-on baggage opportunity. So if you were to look at the website last week you'd see $5. If you looked at it over the weekend you'd see some different numbers, and so it's a fairly dynamic price point at this point because we're trying to understand its take rate. I would mention that you need to book a pre assigned seat with us in order to have the opportunity to priority board as well. So those two are coupled together at this time.

That was my next question. What proportion of your passengers purchase an assigned seat?

Well, I mean, I don't know that we've ever really specifically released that number. I think we've talked in general terms. Depends on seasonality and on the destination and on the stage length as well, but oftentimes I think a good average number would be roughly half our customers in general end up booking a pre assigned seat.

So who gets on first? The people that purchased an assigned seat and then the priority boarding person gets on?

No, the priority boarding person will actually board the aircraft first. The pre assigned seat going forward simply gets you the seat.

And how do I know if I have gotten a priority boarding pass whether this aisle seat is already taken by someone?

Well, it's a separate product. If you have not purchased a pre assigned seat in the web booking pass by definition you don't get priority boarding. Priority boarding is a new product, it's called out specifically in our seat map menu and based on your confirmation and your boarding pass will you know whether or not you are a priority boarding customer.

Sounds a little confusing.

We've got to get you to fly the line, Jim. So you understand it.

Figure this one out. All right. Maury, let me get to this maintenance issue. I just think it's great that you operate MD-80s.

We love them.

Just a minute. The other side of that is maintenance, which I've been around these type airplanes for a long time, and usually any supplies maintenance it is on the up side. And I think last quarter you had pretty high maintenance cost per aircraft and you were thinking maybe this quarter it goes down, or maybe after this quarter, now you have said is going to stay high at $91,000 through '09. I mean, is this the new maintenance rate? Are these aircraft -- are maintenance costs going up that much? This isn't a blip for a quarter or two? Whatever, this is it, going forward, these aircraft just cost a lot to maintain?

first off, I am not sure I called them a lot at that point, it's just the numbers. Couple things, Jim. Organizationally, we have not done as good a job over the last six to nine months in just managing stuff. Buying, making sure we're getting proper repairs, things like that. And I think that's just endemic of any organization that grows and we are attacking it voraciously here with new systems, process. Our new building is allowing us to put everybody together, and we're literally going after this stuff day to day. We expect that to improve things.

The second area is we're just getting into some heavier maintenance checks that in the sense of -- they're progressive. You do a light one the first time, second one is a little heavier, third one is heavier still. I think the fourth one rounds out the heaviest, then you go back to the light one. So depending on where your fleet is at you can progress into some heavier checks, and I think we're expecting to see more of those next year than we saw, say, in the past year.

Having said that, as Andrew suggested, we really do believe you should look at airplane maintenance kind of as a fixed cost. And that $91,000, while it's higher, we hope to beat that I might add, but that's a conservative number that should be very doable by us as we go forward on average.

Okay. Thanks.

And we'll go next to Duane Pfennigwerth, Raymond James.

Hi, thanks. Not done with RJ just yet. Just on your routes to Vegas year to year I saw they were down four. Wondered if you could talk about how many you sort of entered in terms of new cities to Vegas. So how many routes were actually versus were how many were added in that net down four?

That's a good question, Duane. This is Andrew. I believe that we have eliminated about -- I believe it's been about nine routes or ten-- nine routes that are kind of of a long haul nature that we were flying last fourth quarter. A couple of the routes that we have kind of added and we mention in this in the release are really replacement routes like Appleton instead of Green Bay and Grand Island, Nebraska instead of Lincoln. We mentioned a couple others that we have added and not yet started here in Grand Forks and Casper, earlier this year we added Santa Barbara and Monterey into Las Vegas as well. So I think that I've kind of captured them all at this point. I am not sure how that nets out.

Okay. Helpful. You may have already answered this but if you look at the routes that were in service in both periods, can you characterize sort of same-store RASM to Vegas and what does that look like if you include or exclude trends in hotel take rate?

Well, I can tell that you same-store RASM, if you are just looking at, well, at Vegas, but the same holds true with St. Peter's, Orlando, air RASM is definitely up as a result of the capacity changes that we've made on a same-store kind of -- same routes this year, same routes last year. So you restrict capacity, there's no question that you get higher fares. And we've seen that. It's kind of independent of take rate on hotels. We view that I guess as just completely separate and distinct, I think.

Okay, that's helpful. And then just lastly on fuel, to your credit you are unhedged here. The only domestic airline we follow that is. What price do you really consider it seriously if you wanted to, given your balance sheet, how much of '09 could you hedge out, and how would you think about doing that? Thanks.

Oh, you had to bring that up, Duane. We continue to debate internally on hedging. Certainly I think it's been a wise strategy when fuel is moving so quickly. Trying to pick a point upon an up side of the mountain or the downside where you think you want to enter the market is tough.

If you are hedging you should be hedging all the time, because the theory then is that you are just offsetting -- or locking in future revenues with fuel prices that exist at the time you are making the sale. The fallacy in that argument is that, particularly in the past year, is you have not been able to raise fares to be compensatory with the hedges that are being offered at the time, so you are, in effect, locking in losses. And if the fare -- if the fuel moves off of that, then you have either got to -- a further loss or possibly a gain. But as we sit here looking forward, as we discussed internally, we are still debating should we speculate. And I'd use the term speculate, personally and at what rate should we do it?

We really believe managing the business for the business sake, using the airplanes, using the capacity, using the accordion effect, add capacity, shrink capacity as fuel dictates allows us to be reactive to fuel. But if you wanted to speculate you are starting to get down into ranges where buying fall at this point, a la Southwest buying in 50's in '07 did well for them. But we have not any specific plans at this point to buy hedges or to speculate at this point. Andrew, you have any further thoughts?

No. The only other thing I would add is that we believe we have the balance sheet strength to hedge as much as we want, certainly through the entire 2009 time frame and probably beyond that. So I don't think the balance sheet really comes into play as far as when we think about our hedging strategies.

Okay, that's great. Thanks.

And we'll go next to Bob McAdoo, Avondale Partners.

Hi, guys. Can you help us think about longer term growth profiles? And what happens as we think about -- we know about the six airplanes, but in terms of realistically, what kind of -- in terms of people trying to think about this company as a growth company going forward, what are your thoughts in terms of what's reasonable to be assuming? Or given the nature of airplanes, the nature of routes and assuming fuel doesn't go jumping around a lot, how do we tell people that they should be think about this from a longer term growth point of view?

Hi, Bob this is Andrew. The first thing I would say is that we grew revenues 35% this quarter. And so, I mean that may not have required a lot of capacity growth, but that's even better. And so I think clearly we're a growth company. As far as adding of departures, aircraft, and what not, we have lots of capacity. Historically we've operated the fleet closer to seven hours utilization per day, and we've brought that in in this quarter and next quarter we'll see the same thing.

Certainly as we get more comfortable with the economic environment, both fuel and demand, we can very quickly add a lot of that capacity back in, and on top of that we have these six airplanes that are going to be added to the fleet. So we think that we'll grow as fast as the opportunities present themselves. We think there's lots and lots of opportunities in terms of new routes and adding back capacity to many of the routes that capacity of which we took out because of what we were looking at in the futures market on oil. So I think we're going to just kind of make decisions when we need to not ahead of time, so that's why we haven't given any guidance beyond the first quarter.

I guess what I'm saying is, obviously we've seen the JetBlues of world and some of the other guys who said, oh, gee, I can grow 35 to 40% per year forever kind of thing. And without necessarily -- at some point it's just too big to be able to do that, and I'm trying to figure out where do you think you guys are in that cycle?

I think that what we've said before is we think the five-year, 15, 20% compound annual growth rate from a capacity standpoint, we think is still very, very doable. And that there's -- that we're not -- it's not a matter of a lack of opportunities for growth, if you look out in the future, but on a tactical basis, quarter by quarter, we're going to be focused on some of the issues we've discussed today.

Okay. And then the other thing is, obviously with what's going on, on Wall Street and every other crazy thing, and residential housing and every other crazy thing, what -- what's been the trend in terms of the last few days? Have we seen any pluses or minus in terms of new bookings coming in through the call center or new bookings coming through the website some is there any kind of thing you can say in terms of the last few days versus what we were a week ago or two weeks ago or three weeks ago in terms of the flow of new bookings coming in? Has there been any change one way or the other?

Yes, Bob this is Ponder maybe I can give you some color on that. You may or may not be aware, traditionally in the fourth quarter we will run a Las Vegas fare special. It's a fly free type promotion that lasts for approximately two to three weeks. And we just kicked that off this past Sunday, and that was not in any way a reaction to the current market environment. That's just something that we would normally do to try to load forward demand.

So we've got a fairly good baseline really reaching back over the last four or five years of this same type of promotion, certainly in same-store markets. I think as Andrew mentioned earlier we're not in a number of our longer haul markets at the same point last years probably eight or nine of them to be specific. And those were very strong contributors to the Vegas hotel take rate. They just couldn't make money obviously at high fuel prices.

But when we look at a same-store sale, when we look at hotel revenue, we've got a fairly good barometer like for like, as to kind of how current bookings are progressing. And right now they look like they're coming in, kind of as Maury indicated, right on target. We don't see a whole lot of reduction year-over-year. We certainly don't see significant increases year-over-year at this point. But again, the bookings look very solid relative to what our expectation would be, and on a year-over-year basis, same-store sales seem right in line as well. So we have not seen massive erosion. So --

And in terms of what's gone in to last week versus a week ago or two weeks ago when the market was maybe even looking worse, versus what -- what has happened in the last few days, other than today. It basically -- what you are saying, really hasn't been any impact?

No. I wouldn't feel comfortable giving any kind of statistical point on that. I think one other kind of variable remains, worth mentioning, and that's our stage length. As we've brought the stage length in, it's somewhat shortened our booking curve. We still have very good visibility looking out, but we just actually are putting more demand into our periods on a tighter basis.

And we do that particularly in Florida as we add some of the new markets that have a much shorter stage length. So a number of those new markets we don't have as good a visibility into them today as we would have had we been in them a year. That being said we're comfortable with what we're seeing.

Okay. Great, thanks.

Our next question comes from Travis Anderson, Gilder, Gagnon, Howe.

I was really going to ask Bob's question, and I guess the only thing I would ask in addition is I know you sell trip insurance. Have you seen any increase there, perhaps, or any fall-off in farm economy with some of the problems in commodity prices at all?

Travis this is Ponder. No noticeable movement in our trip insurance. It continues to kind of move, but it moves very slowly. So we haven't seen the jump in that as kind of a -- as a hedge, and no real noticeable impact, negative or positive, to the agricultural communities that we serve or the natural resource communities that we serve.

Okay, great.

Thanks, Travis.

And we'll go next to Scott Macke aAd Capital.

Good afternoon. Thanks for take my call. First a point of clarification that I think that I think has already been clarified. When you talked about load in yield in the fourth quarter you were talking about fourth quarter of '08 versus fourth quarter of '07, year-over-year, sustaining load and yield?

Yes.

Okay, thanks for clarifying that. And kind of a second quick point of clarification, the $91,000 per month per aircraft of maintenance, what did that look like last year?

Well, last year in the quarter, I think I mentioned that it was $69,000.

Got it.

And when we looked at it on a two-year average, looking at '06-'07, it was $78,000. And in general, it was fairly tight quarter over quarter. There were a couple of outliers, one on the high side, one on the low side. Third quarter '07 was actually the low side. But, anyway, I hope that answers your question.

No. Thanks, that's exactly what I was looking for. Then I've got a couple quick additional questions, if will you take them. First, you talk about the ability to dial up capacity on block hours, and you've have also got new routes that are already in process. As we think about dialing back up the block hours, are those more likely to come from existing routes or will those go to additional new routes?

I think those would be existing, clearly. I mean I think that we've put out a lot view new routes. We have some more we are going to be putting in. We certainly think there's lote more out there in future times. When we talk about dialing up capacity it's putting more capacity into existing routes, particularly those where we have really taken a lot of capacity out on a year-over-year basis, out of concerns over the fuel prices that we were seeing.

Okay. And so as I think about yield and load in dialing those block hours back up, then again, maybe this goes back to your point of just looking at this on an overall earnings basis, and not necessarily sustaining yield or load. As I dial those back up or will those only be dialed up if I sustain yield and load?

I think that we are going to put in capacity if we think we can increase earnings, and that's how we're going look at that. So could load and yield go down? Yes, it's certainly possible. Because at the end of the day we just want to maximize earnings, but we're going to be very prudent about how we do that, to make sure that we give ourselves the best chance to actually increase earnings.

Got it.

I do think, one other comment, I think on load factor we have said that we are going to manage for high load factors, and I think that that remains true regardless of the amount of capacity that's in the market. So I think that the load declining because there's more capacity I think is less likely than, perhaps, some yield erosion.

I see. Thanks. That's helpful and then as we go into these new routes could you talk a little bit about historical experience just in terms of load and yield your first three to six months as you get into these new routes. I mean is there an impact as I model this out or do they tend to come in higher or lower than the other aspects of the system?

This is Ponder. Maybe I can shed some light on that. You kind of have to look at each of the unique destinations. Like in our Phoenix expansion that we have put and loaded into the fourth quarter, every one of those market is a market that we actually currently serve already. So those five to six cities, I mean we're already there.

So typically where we have a presence we do see those markets come up to speed a little more quickly, perhaps, than we do markets where we have not had presence. For instance, we have added Bozeman and Kalispel into Las Vegas, those are new market where to here to for we have had had no presence. And the St. Pete market's the market expansion where we have not been is Lexington and all of the rest we actually already have a presence in. And then Sanford, again, we're adding, of the five markets, three are new. Elmira, Hagerstown, and Lexington, the other two, we've been in.

So in markets where we've had a presence, where we have a brand, where we already serve existing destinations we see -- I wouldn't say instant traction but it's very good traction very quickly. That being said we load capacity in new markets, we believe, in the right time of year. This is when the wind is at our back, there's a natural desire to travel during these periods as well and we're able to get good market response fairly rapidly.

Great, thanks. That's helpful. Just one final question if I may. As you talk about the potential or the ongoing negotiations with some of the Vegas hotels and then the rental car opportunity. As I model out this ancillary revenue, can you help me just kind of define the parameters and I appreciate the information on the take rates is very helpful. Just the potential opportunity that you see in negotiation or renegotiating some of those and what that could add to ancillary revenue per passenger?

Yes. I don't know that I can be extremely specific about that, but we have been in negotiations with a number of the hotel here. We remained constant in dialogue with them. We are always looking to maximize our position relative to reductions in rates. Rates are down year-over-year, both on a flown basis as well as a sole basis.

Really the strategy for us is to try to maintain margin and or drive margin where possible, and to try to drive that take rate. I think as we mentioned, we did sell more room nights in the third quarter year-over-year, even with the reduction in departures in Vegas, and that's what drove roughly, instead of 14% room night growth we ended up having 32% room nights per departure in Vegas. So we do believe there's upside. We are just trying to navigate that, and it's kind of a dance that we do on a daily basis. So nothing definitive at this point.

Just in terms of cars, we have worked exclusively with Alamo for a number of years. They have been acquired by the Enterprise Rent A Car holding company, and we're real pleased with our relationship. If we were to renew it we'd probably do it on an exclusive basis and it would be extremely favorable to us. Otherwise, we would look elsewhere.

Is the opportunity on the hotel side for you guys primarily on that take rate and the ability to drive that higher, or did you also in the quarter see a higher revenue per transaction, or per room as well?

I don't know that we can comment on that. I think the take rate is certainly something that -- certainly something we are going to work on.

Great. Appreciate all your time and congratulations on a great quarter.

And we'll go next to [Kim Zodder] Imperial Capital.

Hi, guys.

Hello, Kim.

Actually most of my questions were already answered but just a quick housekeeping item. What was your third quarter end debt balance?

$70 million, give or take.

Okay. That was it. My questions have been answered. Thank you.

Let me double-check, just to make sure.

Yes, that's right, 70 million.

Operator, any other questions?

And there are no further questions at this time.

Well, thanks everyone for their time. We appreciate your interest. We'll look forward to talking to you at the end of January or thereabouts as we get ready for the first report of the new year on our fourth quarter activity. Thank you very much.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.