Allegiant Travel Co (ALGT) 2008 Q4 法說會逐字稿

Good day everyone and welcome to the Allegiant Travel Company's fourth quarter and full-year 2008 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 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 may prevent us from achieving our goal, 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 & 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 listeners 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 availible on the Company's investor relations site, ir.allegiantair.com. At this time I would like to turn the call over to Mr. Maury Gallagher. Please go ahead, sir.

Thank you. Good morning, everyone. As the moderator indicated joining me today are Andrew Levy and Ponder Harrison. I'm going to give a brief overview, Ponder will comment on our revenue results and Andrew will wrap up with comments on our network activity, expenses and balance sheet, after which we will take your questions.

We are very pleased with our outcome this quarter, it appears we will once again produce industry-leading results with an operating margin of 23.4%. Net income increased over 280% compared to the fourth quarter of 2007, and 272% sequentially compared to our third quarter in 2008. If you remember back to our IPO road show in late 2006, we indicated our corporate goal was to achieve and sustain a mid-teens operating profit.

The first three quarters of 2007 had operating profits of 14%. However, beginning in the fourth quarter of that year, we had to take the next four quarters off because of the spike in fuel prices. As margins began deteriorating due to fuel increases, we adjusted the business accordingly, namely trimming capacity and reducing growth, both necessary to increase unit revenues. This allowed us to maintain profitability through those difficult months, though at a margin substantially below our corporate goal. Our 23% operating margin this quarter however, puts us back on track towards our commitment of late 2006.

How were we able to generate such a large increase in margin for 7% in the third quarter to this 23% level? Our focus on increasing revenues was evident in these results. In spite of a difficult economy, we were able to not only hold overall revenue per passenger compared to third quarter but increase it from just under $120 to $120.50. Over the past year Ponder and his team have focused increasingly on our ancillary revenues and we have seen a 50% increase during this time frame, from the low $20 range to our current $32 plus. These ancillary revenues were a critical part of our December results. As I said, overall we had $120 in revenue per passenger, and $92 in cost, or $28 per passenger in operating margin.

In the September quarter, comparatively we had $8 per passenger in operating margin on the same revenue per passenger, $120 but the costs were $112. This $20 increase in profit per passenger was attributable to our reduction in fuel costs. In the third quarter it cost up to $58 per passenger for fuel while the fourth quarter cost was $37 per passenger. And by the way, in December, fuel cost per passenger was $29.50 and mostly recently is approaching the mid-20s per passenger.

Fuel prices appear to be connected to supply and demand metrics. The speculative bubble that peaked at $147 per barrel this past summer was part and parcel of the economic turbulence we have been experiencing the past 18 months. We made a decision some 18 months ago as well, to manage our fuel issues by a capacity adjustments. We ceased entering in to traditional financial derivative contracts. Although some questioned our strategy of not hedging as prices rose, in hindsight this has proved to be a wise decision. Today we are benefiting completely from the rapid reduction in oil prices over the past few months.

I must say the reaction to the market this morning is quite surprising. Clearly the economic malice we are all enduring is caused our booking curve to compress in the past 60 days and the selling fare to commence somewhat. As we indicated in our release, in the first quarter, we expect ancillary fair to at least maintain its current levels but we expect the combined scheduled service selling fair to be down 4% to 6% compared to our Q1 2008 results. But there are offsets to this.

Offsetting this decline are two important factors namely one, our year over year stage length in scheduled service will decline more than 3%, and two, we expect our load factor to increase from 87% last year to north of 90% in this coming quarter. Results of these combinations will be an increase in total scheduled RASM, not a decline. Based on what I have heard from analysts and others, we will be one of the only players with a positive year over year RASM increase in the upcoming quarter. Those who focus just on our selling fair missed a critical part of the equation, our leisure customers will and still respond to pricing initiatives. Our scheduled reductions we initiated in 2008 as we chase spiraling fuel costs caused some of our unit costs to increase in this fourth quarter. Small increases in unit costs are not the issue when compared to substantial increases in unit revenue, such as the 24% increase in T-RASM we had in the most recent quarter. This magnitude of revenue increase is produced the exceptional results of a 23% operating margin, and a $28 profit per passenger.

Looking forward we have a great deal of clear runway in front of us. The increasing revenues we expect in this upcoming quarter, compared to Q1 2008, plus the decrease in expenses in the coming quarters, bodes well for us. With fuel approaching the mid-20s per passenger, we are expecting in Q1, a total operating cost per passenger in the mid-$70 range, down $15 or more possibly from the $92 total operating cost per passenger in this most recent quarter. In this decline is not only attributable to fuel only. We will also see our non-fuel costs per passenger retreating as well.

We continue to focus on ways to reduce our already low cost structure. Inexpensive aircraft, efficient head count, simple out and back system, distribution, and administrative efficiencies are all part of the formula we continually work on. We will begin growing again this year as well. As an example our March scheduled departures will be up around 18% year over year. We will continue this increase in the second quarter, scheduled service departures will be up at least 18% year-over-year, in particular we will be increasing the utilization of our fleet. We will have 270 departures per aircraft this quarter, versus 212 and 227 departures respectively in the third and fourth quarters of 2008.

Looking forward, we want to capitalize on our improving results and return to our double-digit growth levels of past years. Given the financial difficulties the country finds itself in, we are pleased with our position. During the last seven years our conservative approach particularly with respect to growth and the management of our balance sheet has positioned us quite well, but I want to stress that the tail wind we currently feel at our back is not from luck, but rather the direct result of a focused, dedicated management group executing a strategy we have developed and nurtured over these many years. As we look forward, we expect this [inaudible] will continue to produce excellent results.

Lastly, I want to thank all of our team members. Through their efforts, their focus, their dedication, and their friendly attitude, we continue to separate ourselves from the crowd.

Ponder will now comment on his part of the presentation.

Thanks, Maury. Well, as most US retailers lick their wounds from a -- I guess a disastrous holiday season we on a somewhat brighter note have some very positive news to report.

Our top line revenue growth for both the quarter and the calender year remain really strong. For the fourth quarter, total system revenue increased by 21% to $122.4 million, on departure growth of just 4%. And for the full calendar year, system revenue was just over $500 million, a jump of 40% on an increase of departures of 25%. Our scheduled service operations, meaning both the scheduled service and ancillary line items reported, contributed approximately 90% of system revenue, which I'll review in greater detail a second. However, fixed-fee revenue, the remaining large item was also up nicely, growing 61% year over year in fourth quarter and 49% annually when compared to the prior calendar year. This reflects the expansion of service within our Harrah's track charter program and a continued focus on profitable ad hoc charter flight utilization during seasonal periods when demand for our scheduled service is weak. This past fall in particular we successfully secured numerous college sport team charters during times when our aircraft would have otherwise been idle.

More generally, it shows the continued success of the charter sales team that we put in place back in March of 2008. Additionally, 2008 was our 7th consecutive year operating dedicated charter flights for Harrah's Entertainments Properties in [Laufland] and Reno, Nevada. We initiated similar operations for them in 2008, in Tunica, Mississippi supporting Harrah's southern properties.

Looking ahead in to 2009, fixed-fee contract revenues for Harrah's our principal fixed-fee customer will be lower due to a previously disclosed structural change in our contract which became effective on January 1st of this year. In our new three-year agreement, 100% of fuel expense is reimbursed by Harrah's, therefore our revenue per block hour is lower and fuel expense is now zero for all of our Harrah's flying. Additionally, the Mississippi flying is being done with one aircraft instead of two, which were used in the first quarter of 2008 and this will drive less flying and revenue particularly during the first quarter. We will provide more detailed guidance in an 8-K filing we plan to make later this week.

Lastly, we also recently have been approved, I think as we mentioned before, by the Department of Defense to perform official military and government charter flight operations. We be begin bidding on these opportunities and anticipate modest revenues benefits from this source during calender year 2009. And now moving on to the scheduled service numbers. Scheduled service revenues accelerated sharply by 28% year-over-year for the full calendar year 2008 finishing at $331 million. In the fourth quarter this category continued to demonstrate positive gains growing 7% year-over-year, and posting a result of just $78 million. When combined with the ancillary revenue category, [inaudible] revenue related to our scheduled service customers increased significantly year-over-year ending 2008 at $446 million, up 38%.

Likewise, in the fourth quarter of 2008, revenue improved nicely, moving up 16% year over year to approximately $109 million. Significantly, these revenue gains were achieved on departure growth of just 18% for the full year, and in fact, an actual reduction year-over-year of 2% in departures during the fourth quarter.

Given the flexibility of our aircraft resources and structural benefits of our route network, plus our known pension for micro-managing offering our capacity offering to tightly fit demand, this reduction in year-end scheduled flying reflected planning decisions taken in the first half of 2008 when fuel prices were at unprecedented levels. Had we known then that fuel prices would collapse in the last six months of the year, it is likely we would have planned for higher utilization and departure matrix. The reduction in fourth quarter and full year 2008 average stage length also reflects our past focus on combating high fuel prices. Given essentially flat capacity, the disproportionate growth in revenue would logically result from either number one, a significant increase in total passengers or a positive movement in total revenue per passenger, or third, the combination of both one and two, which indeed was the case.

Once again, with remain true our stated objective of driving extraordinarily high passenger loads by finishing the fourth quarter with a scheduled load factor of 89.7%, an increase in excess of 10 load factor points on a year-over-year comparative. For the full year, we fell just short of a scheduled 90% load factor number by 1/10th of one load factor point. Further, during 2008, we exceeded a scheduled load factor of 90% in six actual individual months.

Total scheduled passengers for the full year increased 29%, to just shy of 4 million, and even with a absolute year-over-year reduction in fourth quarter departures, we still carry lots of customers as scheduled passengers grew by 11% to approximately 937,000 customers. This substantial gain in scheduled traffic contributed to a positive result in system average passengers per departure which expanded 14% year over year as we in-planed 131 customers per trip in the fourth quarter, versus just 115 in the prior-year quarter. And for the full year, passengers per departure also improved significantly, reaching 132 customers per trip versus 120 in the full calendar year 2007, reaching an increase of 10%. With a scheduled stage length declining, relatively stable yields produced average base airfares which moved in close correlation to flight distance as Maury already mentioned. As expected for the quarter, average base airfare, that's the fair excluding the ancillary revenue retreated by 4% year-over-year to $83 from $86.57 in the prior year.

For the full year base airfare was off only 1% coming in at $85 in calender year 2008, versus $85.80 in the prior year. When coupled with the year-over-year increase in passengers of 29% and 14% respectively for the full year 2008 and for the fourth quarter 2008, you would also expect the passenger RASM trends to be positive, which they were, improving a double-digit 14% for the quarter, and 13% for the full year. And as also expected, ancillary revenue was once again a predictable and positive contributor.

Most impressive, however, was the year-over-year gain in total ancillary revenue of 76% for calendar year 2008, and 51% for the fourth quarter. Respectively ancillary revenue as a percent of base airfare revenue was 35% in 2008, and it also grew to 40% in the fourth quarter. Despite the decline in stage length and relatively flat yield environment, ancillary per passenger grew 35% in Q4, reaching a level of $32.85 versus just north of $24 in the fourth quarter of 2007. On a sequential basis ancillary once again posted positive gains for the quarter, and for the full year ancillary climbed 27% finishing 2008 at $29.43 per passenger, as compared to a $21.53 level per passenger in the prior period.

Not suprisingly ancillary RASM spiked 61% year over year in the fourth quarter and 55% for the calender year, also important was the positive movement in total average fair per passenger of 5% year-over-year for the quarter, increasing to approximately $116 from $111. A similar result for the full year was achieved with total average fair moving 7% year-over-year from $107 to $114. Total RASM trends as expected were also stellar, improving 24% year-over-year for the fourth quarter, and an impressive 21% for the full calendar year 2008.

Growth in the ancillary category resulted less from third party product revenue gains than it did from continued yield and pricing improvement in the unbundling product categories, such as seat assignments, priority boarding, web and airport baggage fees and our own unique Tripflex insurance substitute policy. Not to say that hotels, rental cars and attraction tickets aren't important, but the balance across all small cities and destinations from unbundling is extremely gratifying as we continue to grow into new markets. Growth in our Las Vegas hotel room production has remained solid when measured year-over-year on a per departure basis. For the current calendar year, rates have been reduced dramatically for Las Vegas hotel inventory, which makes Vegas a very affordable and attractive entity for our customers. As for rental cars, we successful renewed our exclusive agreement in the fourth quarter with Alamo for the 2009 period, and we anticipate continued growth in this product segment.

Looking to the future, our nation now faces a negative economic climate. That's a fact. In general, the economy basically went on strike in the fourth quarter and appears to have remained in a similar state as we peer in to 2009. Considering that backdrop, however, we're actually encouraged by our continued ability to stimulate overall demand in both existing and new markets. The advanced booking curve, as Maury mentioned for our product is compressed, as consumers in general, we believe, have been conditioned by the holiday shopping retail mantra of the longer you wait the cheaper it gets. Thus in 2009 we certainly expect reduction in average-based air fair as we strive to continue filling airplanes close to levels at or in excess of 90% plus. But based on our fair guidance and our expectation of materially higher load factors in the first quarter of 2009, versus the first quarter of 2008, we expect to see an increase year-over-year in total RASM in the first quarter as Maury mentioned in his remarks. And regardless of this relative airfare softness, we believe we are well positioned to enjoy a return to robust double digit operating margins, all else equal, due to the dramatic year over year reduction and anticipated in the cost of fuel for 2009. And contrary to other legacy and LCC industry participants, we also believe now is an excellent time to begin growing our scheduled service offerings via increased utilization in existing markets and the further development of new small cities and new destinations alike.

One interesting data point is that in our non-Vegas designation bases, there is a lot of VFR traffic visiting friends and relatives, as evidenced by the relatively high customer point of origin in both our Phoenix and Florida bases. We believe this type of traffic is much more resilient to an economic downturn since it is not truly as discretionary per se as a package vacation to Vegas. Along these lines we initiated 18 new routes in late fourth quarter 2008 and will also commence operations on seven additional new routes in the first quarter of 2009.

In fact just this morning, we announced service from Grand Rapids, Michigan to Las Vegas, and of these 18 new city pairs only two actually touched our Las Vegas designation. In fact by the end of March 2009 Las Vegas departures will represent only approximately 35% of the scheduled system total as measured by departures. This isn't to diminish the attractiveness of the Las Vegas market, but, more importantly, we think it demonstrates the balanced strength of opportunity for continued uncontested small city market growth.

And now I'll turn it over to Andrew to review our financials and our market-planning activities. Andrew?

Thanks, Ponder. We are pleased to report our 24th consecutive quarter of economic profits, our 23.4% operating and pre-tax margins represent record levels of profitability for our Company. Our net income for fully diluted share of $0.88 is also a record for us.

I will review the highlights of the income statement in a few moments, but first I would like to focus on our balance sheet and liquidity position which is already strong but has strengthened substantially during the fourth quarter of 2008. We ended the quarter with $174.8 million in unrestricted cash and short term investments, up from $138.6 million at the end of the third quarter. Excluding cash associated with air traffic liability, cash balances increased by $45 million to $105.8 million. Our debt declined to $64.7 million from $70.1 million leaving us with a net cash position of $110.1 million. We are unique among our US industry peers in having more cash than debt.

Capital expenditures during the quarter amounted to $3.8 million, this consisted of $2.4 million for improvements to aircraft previously on lease, one of which entered revenue service during the fourth quarter, and the purchase of $1.4 million in spare aircraft parts and ground-support equipment. Subsequent to year end, we purchased for cash, one MD-82 aircraft which will enter revenue service later in the first quarter of 2009. We expect CapEx with the purchase and improvements required to place this aircraft in to revenue service will be less than $4 million. These expenditures are included in the 2009 CapEx forecast provided in our earnings release. We are benefiting from substantial decline in MD-80 values that has occurred in the last two months.

For the past few years we typically spent between $5 and $6 million to acquire high-quality MD-80 aircraft and make them ready for revenue service. We now believe a range of $4 million to $4.5 million is a more appropriate estimate for these aircraft at this time. If we choose to grow our fleet more rapidly than stated in our earnings release guidance, we have the means to do so without any need for external financing. Nonetheless we are pursuing attractively priced debt financing and believe have a couple of interesting options to consider in the coming few months. And finally, we are pleased to be able to fund our growth through internally generated cash and at the same time, acquire up to $25 million of our shares under the repurchase program we announced in our earnings release.

Now let's review some highlights from the income statement. The combination of scheduled service and ancillary revenues increased by 16.4% in Q4 2008 compared with Q4 2007 despite a 2.2% reduction in scheduled service departures, and a 6.1% reduction in scheduled service available seat miles, and resulted in total RASM growth of almost 24%. Our fixed-fee contract revenues increased 61%, due primarily to our fly in for our Harrah's Mississippi subsidiaries, a contract we did not have in place during Q4 of 2007. An substantial increase in ad hoc climb also help drive our substantial year over year growth in this revenue line.

Other revenues jumped by $1.1 million as compared to the prior quarter. Other revenue during both the third and fourth quarters of 2008 is from the lease of six aircrafts and three spare engines we acquired in April 2008. Fourth quarter revenues increased due to the return of three aircraft during the period, which lead to the recognition of revenue from unclaimed maintenance reserves we held as lessor. We expect other revenues to be approximately $1.3 million in Q1 2009, $400,000 in each of Q2 and Q3 2009, and $200,000 in Q4 2009.

We continue to do an excellent job managing our costs and believe we have the best cost structure in the business. Total operating expenses declined by 1.2% in fourth quarter 2008 versus fourth quarter 2007 despite a 3.5% increase in departures, a 23.4% increase in aircraft, and a 14.2% increase in full-time equivalent employees or FTE's. In analyzing our expenses during the fourth quarter, it is important to be mindful of how aggressively we reduced our capacity to better manage through the high jet fuel prices we expected to have to pay during the quarter. Our 2.46 departures per aircraft per day during fourth quarter of 2008 was down over 16% from fourth quarter 2007, and was the lowest reported in any quarter since the fourth quarter of 2005, excluding the third quarter of each year, when we have much lower utilization, due to seasonality and lower demand trends. Our decline in utilization during fourth quarter of 2008 increased our unit costs but as we return to more normal fleet utilization levels this first quarter, 2009, we expect our operating expense per passenger excluding fuel to decline to the $48 per passenger we posted during first quarter of 2008.

Aircraft fuel expense declined 23.7%, due mostly to a 21.6% reduction in the price per gallon to $2.07 from $2.64 during fourth quarter 2007, and lower fuel burn per block hour from of 931 gallons per hour from 944 gallons per hour in fourth quarter of 2007. The decline in gallons per block hour despite significantly increased loads is due in large part to the efforts of our flight crews to be more efficient in how we fly our aircraft. The improved efficiency along with an 8.8 percentage point increase in total system load factor, lead to a 15% decline in fuel gallons per passenger, from 20.7 gallons a passenger in the fourth quarter of 2007, to 17.7 gallons per passenger this past quarter. The end result is fuel expense per passenger of $36.70 in Q4 '08, versus $54.53 in Q4 2007. December's fuel cost was $1.65 per gallon, and pricing so far this month is similar to December.

Salary and benefits expense increased 33.6%, but if accrued bonus and stock compensation expense are eliminated, the increase is only 19.5% trailing growth and revenues during the quarter. Stock-based compensation expense was $492,000, and $302,000 in Q4 2008, and Q4 2007 respectively, and bonus accruals total $2.8 million in Q4 2008, and $804,000 in Q4 2007. Bonus accrual is based on a percentage of operating profits, our results this past quarter drove a much higher bonus accrual than in Q4 '07. Excluding the items, the increase in salary and wages is due to an 14% increase in FTEs and a 4.7% increase in cost per FTE.

Station operations expense increased by 22.4%, due to a 3.5% increase in departures, and an 18.3% increase in cost per departure. Much of the increase in cost per departure is due to a larger percentage of fixed fee contract revenue flights, 14% in fourth quarter of 2008, versus 9% in fourth quarter of 2007. Station operations expenses are substantially lower in our scheduled service system compared with our fixed-fee flying.

Maintenance and repairs expense increased 25.5%, due primarily to a 23.4% increase in average number of operating aircraft during the quarter. Our maintenance and repairs expense is driven mostly by the size of our fleet as opposed to our fleet utilization. Therefore, we view these expenses are more fixed than variable. Maintenance and repairs expense per aircraft per month was $85,000 during the fourth quarter of 2008, as compared with $105,000 in fourth quarter 2007. We believe $90,000 per aircraft per month remains an appropriate forecast for this expense line but note that maintenance expense will continue to very by quarter depending on the timing of events, such as airframe heavy maintenance visits and engine overhauls. Sales and marketing expense declined by 5% in fourth quarter 2008, due to lower direct marketing expenses, and lower credit card discount fees due to our decision in early 2008 to stop accepting American Express as a form of payment.

Aircraft lease rentals expense declined by almost 60% in Q4 2008 due to the purchase of aircraft that were previously leased. Depreciation and amortization expense increased almost 44%, primarily due to having 16 more owned aircraft in fourth quarter 2008 as compared with fourth quarter 2007. These include aircraft purchased in early 2008 referenced above. When viewed in combination, aircraft leased rentals and depreciation amortization expense increased by only 27%. Expense per aircraft per month declined to just shy of $52,000 per aircraft per month, from $55,000 per aircraft per month during fourth quarter 2007. Lastly, other expense increased 3.2% in the fourth quarter, reductions in hauling liability insurance, professional fees, property taxes and training, were slightly exceeded by increased rent associated in our new headquarters building and an increase in engine dispositions.

Lastly, let me discuss our capacity guidance and how we are viewing future capacity growth going forward. We have guided to a significant amount of growth in the second quarter of this year, which contrast markedly with what other airlines have been doing. I want to outline why we think this is reasonable, the state of the economy notwithstanding.

First, no airline is more leveraged to fuel than Allegiant. This meant in some ways we are uniquely challenged when oil was $147 a barrel. But likewise, we are uniquely advantaged by the $100 collapse in pricing since then. You should expect to see us have a more aggressive growth stance than other airlines on this basis alone.

Second, our aircraft are inexpensive, so we are able to rapidly increase and decrease capacity. Our ability to quickly tailor our capacity up or down is one of the unique strategic advantages we have, and we plan to continue to take full advantage of this in our attempts to maximize profitability. Starting in October of 2007 when fuel prices began to rise sharply, we were among the first to aggressively cut capacity, and we probably cut capacity on existing routes more deeply than others. These cuts were somewhat masked by the fact that we were simultaneously expanding our root network. So a lot of the growth in the second quarter is the partial restoration of capacity cuts we made last year as fuel spiked.

Third, this year's Easter holiday will fall in the second quarter, whereas last year it was during the first quarter. As a result, our April capacity will be substantially larger this year than it was in 2008. Easter generates significant leisure demand, and we typically add substantial capacity during this period in order to maximize profits.

Lastly, we view ourselves in a niche that is still only partially exploited with many opportunities to continue to profitly grow our root network. Despite the already substantial growth in the schedule, we plan to have a major growth announced in the next few weeks which would increase our capacity growth during the second quarter as well as through the back half of the year. Of course we will only grow our business if we are convinced that we will increase profits. If the economic environment deteriorates and changes our internal forecast to the point where it does not make sense to grow, then we will reduce our planned capacity growth to ensure that we maintain strong levels of profitability, as has always been our priority.

Thank you, we will now be happy to take some questions.

Thank you, sir. (Operator Instructions) We'll go first to Mike Linenberg with Merrill Lynch.

Yeah, hi. Hey, good morning, all. Just quick question here.

Maury when you were talking about the RASM guidance, and I think everybody touched on RASM, being up in the March quarter, I think Maury you said this, or somebody indicated that your stage length would be down; that you would have a lower stage length. It looks like maybe that's not the case, but then maybe this is total and not scheduled. So if you could just clarify on that?

If I recall my comments, we said our stage length will decline somewhat, 3% in the first quarter, and certainly departures are going to be up.

Okay.

Mike, this is Andrew, the -- I think that to clear it up, the guidance was total system.

Yeah, okay.

And I think Maury's comments were specific relating to scheduled service.

Perfect.

So that is in fact how you explain the discrepancy there, that's what is going on.

Perfect. And then my next question is, I think Ponder you may have touched on this, about maybe the resilience of Florida, and maybe we're starting to see some resilience of Florida, and maybe we're starting to see some real difference between leisure travel and VFR travel, and I'm curious how that may break up across the regions, with respect to book curve and some of the decisions, is it noticeable? Say, Vegas versus Florida, or, Phoenix? How is this -- any color on that would be great.

Yeah, mike, maybe just some general comments. We have been seeing this for sometime, and I think unfairly people view our entire route network as 100% discretionary, and as we built the Florida basis, and as we built the Phoenix basis, not to exclude our mini base in the Bellingham area as well, what we see is strong points of origin traffic at a VFR level. In certain cases our Florida traffic can exceed 30% to 35%, Florida originating. Our price points for air only are so compelling, that, number 1 it is highly attractive for these particular customers.

Secondly, we serve points in small markets that there really is just no other way to get to. So, again, kind of the uncontested market theory we believe tends to somewhat outweigh some of the pure discretionary traffic considerations of the vacation. Phoenix, as we have grown our Phoenix market as well, we see a tremendous strength in our VFR market, quite frankly we thought we would sell a lot more hotel inventory, and what we have seen is a very, very strong move in both Phoenix originating -- on a seasonal basis, but on a strong VFR component.

Again, one further add to the booking curve, booking curves tend to run in correlation with stage length as well, certain of our east coast markets are shorter stage length markets than our west coast offering, and I think by definition they have kind of historically had a shorter curve. I don't know that those have contracted that much. The Vegas market, particular a we think has contracted, thus we were able to provide, total revenue per passenger guidance going forward, which, again, bare in mind, we think is conservative. We tend to always want to under promise and over deliver, and I think we have always lived that by mantra.

Just one last quick one, when I look at your network summary, you list the five major leisure destinations and then you have four other leisure destinations. What -- can you just, state those four leisure designations? The other?

Well, we're going the other routes right there.

Right.

This is the West coast side where we are looking.

If I could Mike, this is Andrew, I think that would be Reno, Oakland, San Diego and Palm Springs. And next quarter that number will be five it be include Punta Gorda, which we will be serving from a couple of markets starting later this quarter.

Is that Fort Myers or where?

Yeah, basically Southwest Florida.

Southwest Florida. Okay. Great. Thanks, nice quarter, guys.

Thank you, Mike.

We'll go next to Helane Becker with Jesup & Lemont.

Thank you very much, operator. Hi, gentlemen. Just so I'm clear on this, you guys are still targeting a load factor of 90%; is that correct?

Yes.

Okay. So the plan is to move capacity to adjust for that based on forward bookings? And then given would the capacity growth you are doing in the first quarter, so you are -- the take-away we should have is that, passengers grow to generate a 90% load factor?

Yeah. That last statement, I think is fair. We're targeting 90% certain quarters we think we can exceed that. First quarter is typically our strongest. So 90% should be a minimum we would target for the quarter. And we've -- in our formula, we believe we can put a price out there -- as I mentioned in my comments, that people will respond to fairs in our marketplace, and there has been some compression in our booking curve, but nevertheless, 90% is very doable. We should exceed that frankly in the first quarter.

Yeah, Helane this is Ponder. When question look at the load factor we see in first quarter of 2008 I want to say it was 86 -- just north of 86% on the scheduled service offerings, so I mean, in order to move that upwards say to 90%, in addition to the fact that we have guided to, approximately 5% departure growth as well as ASM increasing by 7%, again, the last part of your statement was true, we anticipate moving double-digit numbers of customers on a year-over-year basis in order to meet those kinds of criteria.

Great. Okay. And then the other question. I think you answered it for me back in November, but with respect to the decline in values that you talked about in the press release today for the MD-80s, do you have to take any kind of a charge against that equipment at any point, since they are down in value?

This is Andrew, Helane, the answer is no, because they are operating asset, and obviously generating substantial profits. If anything I think they probably should mark them up because they are so valuable, but, no, all kidding aside. No, we don't anticipate that as being an issue, same answer as in November, I think.

Right. Yeah, I think we talked about that in November. I just was confused on that -- your comments today and the press release about the decline in value, but you just mean that from an acquisition standpoint?

That is absolutely correct. It costs us less to add similar quality MD-80 aircraft now than it has in past times, the shift down in what it costs to acquire and have an air plain ready to fly in to our revenue service.

Gotcha. And then the last question I have is with respect to kind of your growth plans. One of the pushbacks I hear from investors has to do with the fact that you are, very heavily leisure, and people just aren't thinking about flying and making vacation plans, and yet, pretty much what you said today contradicts a lot of that. Can you discuss, and maybe you have can you just kind of discuss like Las Vegas versus, Florida? I mean, in the past when Florida got slow, you pulled capacity back. Can you just kind of talk about the markets that way?

Helane before I turn it over to Ponder, I would suggest you listen more to us than your investors. We're on the inside here. The world has not stopped. The world has not ended. Moreover our customer base is different than lives in the NFL cities.

Where we get our customers from, the economic upset is certainly there, but it is not, in our belief anything close to the magnitude of what the rest of the world or the talking heads on the TVs are talking about. We just aren't seeing that. But, it's hard to get that message across.

People think because Las Vegas itself is suffering, that we're going to suffer. Our people come from outside of Las Vegas, don't live in Las Vegas, so those are some frustrations at our part as we look out on the investor world, and they just can't understand how we can continue to produce very good loads at prices that make sense for us. We see a strong world relative to what we're hearing from the rest of the industry in a foreseeable future, but Ponder can talk to you on Las Vegas and the like.

Yeah, I think two more data points worth mentioning, Helane. When you look at the value proposition, say to Vegas, Vegas primarily is on sale right now. The rates are basically at historically low levels for consumers, so it is a great time to come to Vegas. Again, for a number if not the majority of the small markets we serve, Vegas is a three night stay. Take it to the bank. It's not a 10 night high end vacation in terms of total absolute cost.

I mean, when you take on the average, our customers can come in to Las Vegas, two people traveling for less than $500, and stay three nights there are many places on the east coast and elsewhere where you can't do that for one night, let alone a weekend. So Vegas is an incredibly attractive value given the nature of the length of stay, we believe. I think secondly, again, when you look at the VFR component of traffic away from Las Vegas, there's just tremendous utility to having low fair transportation that takes you to places you actually want to go to.

And our price points based on shorter stage lengths decrease proportionately, we have a number of $39 fairs, and $29 fairs and fairs ranging upwards of 50's and 60's for the East coast markets, which, again, just opened .an incredible opportunity for customers in markets that prior to Allegiant's entry, really did not exist for them. So I think we mentioned our ability to continue to stimulate demand, and you have a cost structure, you have ancillary revenue to do that an you have to have the ability to, perhaps be willing to enter small and uncontested markets that have not yet been proven.

Gotcha. You talked about the average fair being down a little bit in the first quarter. But then how much of the decline is really, same store basis versus, say, the fact that you are going in to some of these shorter haul markets with these $39 to $55 fairs? So maybe the whole decline is -- you know what I mean?

We don't want to get in to that level of detail on the call. Certainly we're suffering to a certain degree just like everybody else, but certainly not to the ultimate degree that others seem to be in at that point.

Okay. Thank very much for taking the questions.

Certainly.

We'll go next to Kevin Crissey with UBS.

Hi, guys. Couple of modeling questions and feel free to give a brief yes, no answer. The fixed-free flying, Ponder you were saying you are going to put out an 8-K later in the week, but basically it will be down -- so are we talking somewhere between the revenue generation of 2007 and 2008? Kind of want -- because a million or two here or there does kind of move your numbers.

Yeah, hey, Kevin, this is Andrew. I don't have the 2007 numbers handy, so I done want to really comment on 2007.

Okay.

Essentially, there's two things going on. There's one, which is that the structure of the contract is different, so that there was an element of the revenue -- pricing associated with fuel, so right there you have to strip down your unit revenue, so you are going to get lower unit revenue. There is also going to be less activity in the first quarter of 2009 versus the first quarter of 2008 in the Harrah's agreement, and Harrah is the primary driver of revenue in the charter area -- last year Tunica, for instance, started with two airplanes, and they flew a lot in the first quarter and then they backed off the rest of the year. First quarter this year in Tunica, in particular, is more similar to the last two quarters of 2008. So it is going to be lower.

Yep.

That's why we thought it was appropriate to put something out in an 8-K to give you more of an ability to model going forward.

Yeah. That's fine. Your $1.65 fuel for December and looking into January, thats an all in number?

Yes.

And then your operating expense per passenger --

Kevin let me go back to fuel for just a second. I think one thing that is important to note and we'll get in to this on the 8-K, but we're still going to report gallons comsumed by the Harrah's flying, but there will be a zero cost associated with that.

Okay.

That will continue to take the spot market price that we pay for scheduled service, and lower them on a per-gallon basis for the overall system, and so, December was $1.65, and that's all in. Just keep in mind, starting in January, the Harrah's economics changed. So -- it used to be about $1.25 per gallon for Harrah's fuel, now it's zero. So we actually expect that January is going to be lower, if for no other reason than the change in the structure of the agreement.

But if I were to look at just the gallons consumed for just the scheduled, I can use Bloomberg plus $0.21 or something like that.

$0.25, on top of the fiscal price of jet, and we split that about 60% Gulf Coast, 40% L.A. jet.

Okay. And I thought an important thing, and I'm not sure everyone gets it, but maybe I'm wrong about it, but, I mean, when I look at your non-fuel cost per passenger, I maybe modeled slightly different, but net-net you are saying it is going to be similar to Q1 of 2008, versus Q4 of 2008, which is to say significantly better.

Yes.

Okay. I think that's pretty important. And finally, Andrew, you said the growth -- the 21% subject to upside -- that ASM growth that's 21% subject to the announcement upside?

Yeah, we it would be both the 18% and the 21%. I mean, we prefer to focus on departures, but they are linked. But the idea is there is probably going to be more flying that we're going to be announcing which would drive both departure and the ASM growth.

And finally, I'm sorry to take up so much time. But on the ancillary, what of your ancillary revenue categories are most economically sensitive, it seems like your convenience fee seems like it would be difficult and less likely to avoid versus maybe some of the other fees, maybe, Ponder you could talk about which fee's you see as more stable and less likely to decline -- I know you are looking for sequential improvement, but if you could chat about that?

Yeah, Kevin, I mean, we have really seen a pretty good stabilizing effect across all of the product categories that we mentioned in the call, and I just want to re-emphasize that's not to diminish the third-party side. In the first and second quarters in particular we see huge, huge buildups in the rental car contributions just because of the Florida networks during spring and the Easter period as well.

I mean, you reference convenience fee, I mean certainly baggage, I think customers are trying to figure out what to do with checked baggage at this point. Do they bring the carry on, is it required to be grate checked and sent down below. I think the nature of our leisure focused customer probably gives us a better advantage to gain higher yields and higher attraction rate for the items discussed, like seat assignments, like baggage, like our Trip flex. We have seen very, very solid levels maintenance levels in those numbers. We have seen some year-over-year growth, because certain products we didn't have, like Trip flex didn't exist in the fourth quarter of 2007, so we have had a nice pickup in 2008 from it. But right now we're seeing good stability across all categories.

Perfect. Thank you very much for your time.

We'll go next to William Greene with Morgan Stanley.

Yeah, hi, I'm wondering if -- in the discussion of these growth initiatives that you may start to announce here in the second quarter, can you talk a little bit about what the constraints are, is there an upper limit as to where you would be willing to put that growth? And how many new leisure designations do you think are actually left for you?

Yeah, hi, Bill, this is Andrew. Let's see. The upper constraint, I would say is -- I don't know if I would want to put one out there. I mean, obviously there is so many additional aircraft we could bring on between now and being able to put it in service in the second quarter.

So I think that's probably the biggest constraint, so -- I don't think we're going to see though rate of growth in the second quarter double by any means, but we think that -- we plan on an announcement that will drive that number higher. As far as designations are concerned, we think there is a few kind of large designations inside the continental US that make a lot of sense for us.

I think quite honestly San Diego and Oakland are two places that we have kind of stuck our toe in the water, and over time I think those will be their own bases in time. Then there's a few other big destinations that we think are large enough to support their own base with service to multiple small cities around the US, and that's likely to be the announcement that we're going to be making in the coming few weeks would be the addition of a designation.

Have you ever talked in the past, about, sort of the upper element that you would want to grow at, regardless of the second quarter, is there a brood statement that you say that's about all realistically you are going to put in place in a given quarter.

William it is Maury. As a general theme we have told the street 20% guidance for the upcoming years. Not to say we couldn't go above that, but, on a general statement, five, six, seven, airplanes a year right now is probably where we will be. But we won't be doing 15 in a year, such as that, but, those are the general metrics we are focussed on at this point.

Okay. And then if we take a look at the ancillaries again, have you really harvested all of the low-hanging fruit with regard to the unbundling, or is there a lot you could introduce there that is not already in place?

Bill, this is Ponder, I mean, that's a fairly difficult question to answer. We believe there are others that we could explore. We really like to try to invest against the third-party opportunities, where possible, just because those are known, those are purchases that we know consumers are going to make. They just are making them aware from us, therefore, we want to try to coral as much of that revenue in to our own basket as we can. So I think that's where a strong focus will be going forward. That certainly being said, we don't think we have reached the limit of unbundling, though.

One quick last question. Andrew what is the utilization that you assume in your maintenance forecast?

Well, I think that's kind of the point we're trying to get across is we're not really assuming -- what we're trying to basically let you know that utilization isn't driving maintenance expense. Because we're a low utilization operator. When we go in to airframe heavy maintenance visits, it's due to calendar limits, not flight hour limits. If we decide to start flying significantly more that could change, but we are pretty far away from flight levels that would drive us to go into C-checks based on flight hours as opposed to the calendar. And the other components are really not driven by utilization either, whether it is be engine overhauls or parts and material expenses or part and repair expense, so, it's really more of a dollar per aircraft per month number, and as such, if we increase utilization, we believe that we'll see a pretty significant benefit on a unit cost basis.

Gotcha. Thank you for your help.

Thanks.

We'll go next to Duane Pfennigwerth with Raymond James.

Hi, thanks. On a pre SM basis if I run through sort of 90% load factor, it looks like maybe up low single-digits in the first quarter and then down in the second quarter. Could you confirm that?

What is up Duane?

Sure. Ex-fuel unit costs.

Oh, Ex-fuel unit costs.

Yeah.

Duane, I don't think we are prepared right now to speak to to that. I don't have those numbers in front of me, I would say. It does appear that that first quarter is probably that -- if you said it's probably going to be higher than a year ago, I think that that's probably right. And I don't have any comment to give you on second quarter at this time. Other than that I think that -- what we're trying to communicate in my part of the call was that, many of the expenses that we have, away from fuel, certainly, are really more of an almost fixed nature, and so by just returning to utilization levels that has been kind of the norm for us in the past, we're going to see some good pickup in unit cost performance.

Okay. Thanks. That's helpful. And then Andrew, I see you are unhedged. Can you just give us some background on what your current thinking is there, what strategies you might employ, and what you might need to see to pull the trigger on hedging here.

Yeah, okay. Sure. So I guess I would point you and anyone else interested to the investor day presentation that I made back in November, where I think that the slides presented as to why we ceased doing hedging about 18 months ago, and quite honestly, I guess I just don't see any reason to change that position.

It's kind of a philosophical view of ours, that we're not a trading Company, and we prefer to focus on running our business profitably at any fuel price. And I think we showed effectively that we are able to do that, manage our business despite the record increase in fuel, and continue to deliver profitability and -- certainly far higher margins than anybody else, in fact I think we are the only ones that really made money that had no hedges. So at this point in time we're not really considering changing that view. We certainly talk about it all the of the time and we talked about other ways that we would perhaps somehow limit our fuel risk, but the idea of going and trading financial derivatives is something that we're not really considering at this time.

Fair enough.

Duane, the other piece of that is the curve going out in the next couple of months is up, what, $15, $20, it's just hard pressed to go out and, put futures at a minimum with that kind of curve out there.

Maury it's Jim Parker.

Hi, Jim.

Just a little clarification on your fair guidance. In November you said the par for the fourth quarter would probably be down like $4 and it was down $3. Now you are suggesting it may be down 4% to 6%. However, you had negative capacity growth in the fourth quarter, but you have positive coming here in the first quarter. Is that greater decline in average fair due to economic weakness or is it due to acceleration in capacity growth or what is that all about?

That's a -- you can have theories and opinions. I think you can't sit here and say we're not seeing some softness in the selling fair. I that's certainly a piece of the equation. Additional capacity out there, I'm not going to say that's not a piece of it as well, but the key take away is the overall RASM is going to be up, because of shorter stage length, and higher load factors.

Okay. And Ponder you are suggesting that the ancillary -- that there's no softness there.

Jim, to date we have not seen it. I guess we have had a substantial increase every quarter on a sequential basis was perhaps not as high as we have seen on a per-passenger basis going back historically. But we did increase convenience fee charges on January the 1st. We have also more aggressively manage both our web and our airport bag activities.

We continue to make very, very good gains with the assigned seat program, what we call our premium seating program. So I think that we're hopeful we'll see some benefits from that, particularly, let's just say with a tightened booking curve, more of our first quarter and second quarter revenue occurred in the first and second quarter, we'll say. So we'll get the benefit of a lot of those ancillary bumps during that time.

Okay. Thanks a lot.

Thanks, Jim.

We'll go next to Steve O'Hara with Sidoti.

Hi, guys. The first question I have in terms of the fuel burn, I mean, do you think that's kind of a good rate going forward? I mean given the growth you are looking for in the second quarter. Is that something given where fuel is, down so much, it is less of a priority?

You mean the fuel burn?

Yeah, is that kind of a good rate going forward?

I wouldn't use that rate. Our crews have done, as Andrew said an exceptional job in trying to manage how refly the airplane shortest direct roots, minimizing fuel burn as far as speed and things like that. That mid 950, 955 is a good number to use. I wouldn't want to say that is a changed number at this point.

Steve, this a Andrew, typically fuel burn is higher during the summer months, so you do have some seasonality there just because of temperatures, so keep that in mind as well.

Okay. And then the second thing, you guys talked about capacity, I mean, being able to change it rapidly. What is rapidly? Is that a quarter out, a month out, things get better or worst materially than expectations.

I would say 60 or 90 days.

Okay. All right. Great. Thank you.

Thanks, Steve.

(Operator instructions) We'll go next to Adam Hoff with Holden Asset Management.

Hello. Thank you for taking my question. I saw on your 10-K that the average age of your planes, and it is getting up there, and what would be your plans to bring in some new planes? What sort of life cycle do you look at? Thank you.

Thank you for the question. We look at our airplanes on a cycle basis more than we do an age basis, and our fleet right now averages give or take 29,000 cycles, and if you wanted to be conservative with the 60,000 marker in cycles, somewhat the FAA guideline where extra air frame maintenance begins for aging aircraft, we feel we are in excel position, and flying 1,000 cycles a year on average, most of us will be gone from our jobs respectively when we hit that level, we're very much a believer in the single-aisle, type of airplane we are flying now.

The two categories there the Boeing or the Air Bus level are the 800 or the 320 if we talk about replacement, we talk to those folks all the time, just understanding what they have, what the metrics of the airplane are and the like, and if, at some point we will have to look at newer airplanes, perhaps not new, even used, but that time isn't at this moment. So, the MD-80 is doing a terrific job for us. Plenty of them out there and they are available.

We'll go next to Brian Delaney with EnTrust Capital.

Thank you for taking the call. I want to go back to a question that was asked earlier regarding same store sales metric. In your December presentation you said there was a 19% reduction in departures in your markets, so is there something that I'll missing in the analysis if I take the prior-year departure number, take 19% out of that, and then multiply it by the current load, namely 133 passengers per new departure, the difference would last year and this year would be the same-store decline on a passenger perspective, it's about a 7% decline when you think about it on a constant market basis.

That's a lot of math there.

Yeah. I don't recall the 19% departure.

It's in your appendix to our December presentation. So I'm --

No, this is Andrew. I mean, I think your numbers are correct as far as the 19% decline, and that -- the reason that the overall decline wasn't anywhere near that significant is because we had growth in fixed fee as well as we extended our network by adding new routes.

Right.

As far as the rest of the math that might be best to cover off line.

Taking 7300 departures last year, minus 19% is 5900 departures in the comparable quarter this year times, 133 passengers per flight, gets it to call it 785,000 passengers versus 840,00 last year -- so the Delta -- I think it looks like it is 57% drop in demand. I think earlier on the call you said you are seeing strong demand in both your new routes as well as existing routes so Im trying to understand what be wrong with this analysis.

Well, I think it depends on, I guess, how you define demand. We have higher load factors in the system and in scheduled service, and that was across all routes new and -- well, obviously new. There's nothing to compare it to. So I think I would object to your conclusion, I don't think it is correct. And I think if you want to get in to the minutia of numbers, we would be happy to do that and it's probably best to do that off line.

Okay.

The assumption of the definition of same-store sales assumes fixed capacity year-over-year as well.

No, I have adjusted upward.

I appreciate that, but in a number of existing markets where we have been for several years, we have taken capacity down. It is very hard to fine a same-store -- I'll just use Wichita, for instance, we have a number of markets where perhaps in December we took Wichita down flying 40%.

Right.

It varies repeatedly based on seasonality and the time of the year.

Okay.

It's not to say all sales are fixed and all store inventory is fixed because it is not.

We can very our square footage very easily.

Right. I appreciate that. Someone earlier had said that you guided down a couple of points.

I thought on your investor day and subsequently in investor meetings in early December you were guiding down to 81 and it came out at 83. So something late in December, adjusted up, I guess your expectations relative to where we were tracking in early December, but then your guidance headed to the first quarter -- what happened throughout the quarter, what happened through the end of quarter, and why we're seeing a drip down in the first quarter.

I'll make a general statement. We typically try to under promise and over deliver, so that's the general theme of what you have seen from us, I think, quarter after quarter here. And the 81 was a conservative number. We expected to beat that when we put it out there just as we think that the current numbers are kind of worse case. Now, when we did the 81, we had an extra month of visibility in to that number, so, we are now, what, 30% of the way into -- not even that -- into the quarter, and we're giving you our best visibility.

Okay. Last question, I do appreciate. When we are looking out in the first quarter adding 5% departures, second quarter 18%. And that's up against a very strong prior year in terms of overall departures. When we're trying to manage the fairs and the loads, I mean, how low will be go on fairs given the 90% given the increase in capacity?

Well, our objective is to stay at 90. We will go where we have to get there.

Right.

And that's our variable level.

Yeah, this is Andrew, but as we mentioned if the price point is at level which doesn't permit to grow profits, then we will scale back capacity growth very, very quickly.

Uh-huh. And you have 60 to 90-day -- we have 60 to 90-days worth of exposure in the capacity addition, so during that window we may run in to a period where we might have load issues, but we can adjust that pretty quickly, so that's the window in terms of the exposure we're taking?

Yes, in a word, but in general, understand we are seeing exceptional margin opportunities in the coming quarters. We made $28 a passenger in this fourth quarter. As we go in to 2009, the reason we're expanding is we see these exceptional opportunities, if all of the sudden the fair develops we will adjust capacity and come backwards. But that's the type of great place we find ourselves in, if you listen carefully to what we said, 28 should be exceeded in the first quarter.

Okay. Well thank you, much, guys, I do appreciate it.

Thank you.

That does conclude our question-and-answer session, I will now turn things back to Mr. Gallagher for any additional closing comments.

Thank you very much. Thank you all for your attention today and we look forward to visiting with you in the coming weeks, and if you have any additional questions give us a call. Thanks very much and have a good day.