Allegiant Travel Co (ALGT) 2009 Q1 法說會逐字稿

Welcome to Allegiant Travel Company's first-quarter 2009 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 could prevent us from achieving our goals, and cause the underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed in or implied by our forward-looking statements. These risk factors and others are more fully discussed in our filings with the Securities and Exchange Commission.

Any forward-looking statements are based on information available to us today, and we undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.

The Company cautions users of this presentation not to place undue reliance on forward-looking statements, which may be based on assumptions and anticipated events that do not materialize. The earnings release, as well as a rebroadcast of this call, are available at the Company's Investor Relations site, ir.allegianttravel.com.

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

Good morning all. Thank you for joining us again. It is a pleasure to be with you for our quarterly conference call. As Michael indicated, joining me today are Andrew Levy, CFO, Managing Director of Planning, and Ponder Harrison, our Managing Director of Sales and Marketing.

I will give a brief overview. Ponder will comment on our revenue results, and Andrew will wrap up with comments on our network activity, expenses and balance sheet. And after that we will take your questions.

We are very pleased with our outcome this quarter, as you can imagine. It appears we will once again produce industry-leading results with an operating margin of 31%.

Operating income increased over 200% compared to the first quarter of 2008, while net income for the same period was up 190%. Exceptional results by any standards.

The question at the end of 2008 was how the difficult economy would impact revenues. Initially many leisure travel might be the hardest hit; however, as the quarter progressed, it became apparent business, international and premium traffic were suffering the most. March traffic results for the industry in a number of instances had historic declines approaching 20%. We however do not have a decline.

Our scheduled service passengers were up almost 15% year-over-year on a 10% increase in scheduled departures. The only decline we incurred was a 4% follow-off in our combined average fare, a $109 number this year versus $113 last year. It turns out leisure is not such a bad place to be after all.

How were we able to generate 31% margins in what is arguably one of the most difficult operating environment on record? It is a combination of reasonable revenues and falling expenses.

On the revenue front, (inaudible) again was a big contributor for us. As we commented in January, we didn't expect any follow-off in our $33 per passenger during the first quarter. Our results proved us out, we averaged $34.

We certainly saw some [slowing] fare compression on our scheduled service, but we were able to actually slightly exceed our guidance of a 90% load factor in total scheduled fare in the range of $105 to $108. In the end our total RASM for our scheduled services system could actually increase by 2%.

The key to our results was a decline in expenses. The cost per passenger has declined in the past six months from $112 in the third quarter of 2008 to $92 at the end of the year 2008 to $75 this most recent quarter. Fuel returning to a more normal range certainly was a major component of this decrease.

Additionally though we flew 25% more departures in Q1 compared to Q4, and therefore had utilization benefits, which help lower our non-fuel costs. As a result, our non-fuel costs per passenger declined $6 sequentially from $55 in the fourth quarter to just under $50 in this quarter. Andrew will provide more color on this in just a moment.

Let me talk about our growth. We have announced Q2 and 3 quarter departure growth of 20% and 35%, respectively. We do not think this growth is out of line when understood in context. Again, you will hear more about that from Andrew.

The key question is why are we pushing the go faster button at this point, particularly in the middle of a terrible economic environment? Two reasons. One, we're making exceptional money, particularly on a unit basis. And two, our flexible structure provides us the ability to add or subtract capacity quickly. In the latter instance, if you recall, we began capacity reductions well ahead of everyone last year. It was the only rational action available in the face of spiraling fuel costs.

The economy is indeed improving by the back half of 2009 as many conjecture, and we will behead of the pack again, adding capacity -- inexpensive capacity, I might add, back into our system.

But the most persuasive reason to grow is that we were making terrific money. While we may give up some margin with these increases, we feel the absolute increases in profitability are worth the investment. Indeed, should we overreach, we can post some of these adds back quickly and adjust accordingly.

In summary, we are very well positioned. 31% margins are exceptional in anyone's book. The results, I might add, have been primarily driven by a substantial reduction in our costs. Looking forward, we expect these outsized margins to continue for the foreseeable future.

I can't stress this point enough. While we may not see 31% margins, we certainly won't see dramatic fall-offs either. Our cost structure, away from fuel, will continue to decline, particularly as we add back capacity in the coming quarters.

On the revenue front, the sales side of the business for the second quarter schedule service, with the holidays during the second week of April, has not had time to reach a level of maturity to generate a range we are comfortable sharing with you at this time. However, we will continue to target our 90% load factor.

What we do want to emphasize though is that the reductions in our cost structure, particularly our non-fuel side, will go a long way to offset any softness there might be in second-quarter revenues.

We are intent long-term on maintaining margins substantially above the industry norm, beginning with a 2, if possible. We have proven we can do it. So that is our new goal. And we are intent on doing this now while continuing to grow as well. The benefits of operating margins at this level are enormous. Our industry balance sheet for, one, will continue to improve to dramatically, and we will generate amazing amounts of cash.

I what to take a moment and recognize two of the most critical ingredients in our winning formula, our team members and our management team. Once again, our team members, some 1,600 strong, continued to perform at the top of their game. It is safe to say our great reputation, our strong following among our customers can be traced to the excellent performance from all of our great team members. Every day they show up and offer our customers a terrific experience. As we stress constantly, we need to exceed our customer's expectations, not just with rock-bottom fares, but more importantly with a great travel experience. Thank you all for your continuing, exceptional effort.

I am comfortable stating that this is the finest management team that has been my privilege to be associated with. The past 18 months have thrown every challenge imaginable at this group. They have taken it all in stride and adjusted the Company according to the environment at hand. Over the past eight years they have developed one of the best business plans in the industry in recent memory, and more importantly have executed on it. Their focus on low-cost and profitable execution are rewriting the standards and expectations for industry performance. Looking forward we will continue our focus on growing our unique, might I say with emphasis, profitable business.

Over the past eight years our model has generated a great deal of goodwill and brand recognition as well in our small cities. Looking forward, we want to look at ways to monetize this exceptional asset we have created. Ponder will have more thoughts on this subject.

Thank you very much, and at this point, Ponder.

On the revenue front, despite a quite poor macroeconomic backdrop, we resumed capacity growth and posted positive first-quarter year-over-year gains in total revenue, advancing 6.7% to finish just over $142 million for the quarter.

Key to this accomplishment was the continued strength of our scheduled service operation, by which I mean both the scheduled service and ancillary revenue lines. Both of these comprise 93% or $132 million of total operating revenue, and increased by more than 10% year-over-year.

As the economy eroded demand for leisure travel, our sole focus I might add, turned out to be far more resilient than business travel demand. In terms of traffic, we flew over 1.2 million scheduled passengers, up almost 15% year-over-year, and still continued to deliver industry-leading load factor results. Our quarter ended scheduled load factor mark of 90.8% reflects an increase of 3.9 load factor points year-over-year, despite significant growth in both scheduled departures and ASMs, which grew by approximately 10% and 8.5%, respectively.

As expected, we saw yields soften in the quarter, reflecting the poor macroeconomic. Base scheduled average fare, as Maury mentioned, fell 14% year-over-year to just north of $74 per passenger, down from $87. As a result, corresponding yield slid to just over $0.08, resulting in a 13% reduction year-over-year. However we more than offset this by a combination of two factors, significantly higher year-over-year ancillary revenue and higher load factors.

On the ancillary front, total ancillary revenue continued its upward trend, accelerating by more than 52% year-over-year, while generating $41.3 million during the first quarter. Ancillary production, as measured by revenue per passenger, also move forward eclipsing $34 per passenger, which was up roughly 32% year-over-year, and on a sequential basis was also slightly higher than the prior quarter. This is a significant achievement in almost any economic environment.

Looking forward we continue to believe in the stability of the ancillary revenue model. However, as 2009 progresses, ancillary revenue will certainly not grow by the same dramatic percentage year-over-year as it has in previous years. That said, we continue to review and explore additional sources of ancillary revenue, particularly those centered on third-party product opportunities in all of our respective destinations as well as small cities. As we stated in our release, the recent acquisition of CMS should help facilitate this ongoing initiative.

The combined per passenger revenue line items of ancillary and scheduled service thus produced a scheduled service total average fare of $109, which was just slightly north of our guidance range of $105 to $108, as Maury previously noted. When coupled with the average fare -- average passenger per departure growth of 3.9%, we actually achieved a positive year-over-year total RASM comparison. As you can imagine, we are very pleased with that result, given significant RASM degradation happening across the industry.

So much for the past. Looking forward, as we say in the earnings release, the booking curve is so compressed that at this time we are not going to give specific detailed guidance the way we did last quarter, other than noting that total RASM will drop this quarter. However, I will just reiterate what Maury said, namely that we are committed to keeping our margins high, and ultimately profitability is the prime directive at Allegiant Travel Company.

In addition, looking further forward, we will continue to focus on extending our unique business. As Maury pointed out, the combination of serving small markets with limited frequencies and big aircraft with a laser focus on leisure customers has worked well for us thus far, and we want to leverage it even further. The Allegiant name is becoming very well known in small town America. And we think we have just scratched the surface of using our brand and the power of the Internet to offer additional travel-related services to a service area which contains, we believe, over 100 million people.

Developing our online travel agency capabilities is a very natural evolution to our travel company concept. We are more than willing to sell customers not only our own travel products, but also those of third parties. The website is there, it has been built, and we need to continue to fully exploit it.

Let me conclude with a few comments about a recent fare initiative that we undertook recently in the past weeks. Over the years we have stayed away from large markets, because in addition to competition, there is the issue of dealing with very expensive media purchases.

When we announced our new service into Los Angeles back in February, we felt we had sufficient brand awareness in our small cities to originate the maturity of our traffic from these areas to fill up the aircraft. And of course historically, the majority of our demand is driven from our small city markets.

Since the LA announcement, however, we have had a couple of introductory fare sales to get the word out, which is pretty typical for us. Most recently, it was our $15 tax day sale which we ran on April 15. A couple of things worth noting. First of all, the response was absolutely off the charts, far greater than we have seen in previous instances.

And geographically the single greatest concentration of bookings, about one-third, came from the Greater LA Basin. This total is about double what we expected from Los Angeles. But even more interesting, we don't advertise these sales, other than through e-mails to existing customers. And we have not yet spent one dime of traditional paid consumer advertising in LA to announce our service.

Virtually all of the response to this particular initiative was viral and/or organically generated. This is also indicative of, and supported by our strong year-over-year systemwide website visitor data for our site, www.allegiantair.com, as measured by both unique visitors and total visitors. In the first quarter these categories grew by 37% and 42%, respectively, far outpacing actual passenger growth for our scheduled service operation.

Also important, due to the strength of the Allegiant brand we are able to derive the majority of these numbers from organic search methods as opposed to traditional paid search strategies.

The main point here is that we have a powerful brand in our small cities, and when combined with the Internet, we have an even more powerful tool to drive business through our website. And going forward we absolutely intend to further exploit these advantages.

Thanks, and I will now pass it on to Andrew to hit the financial highlights.

This quarter marked our 25th consecutive quarter of economic profits and all our profitability metrics, operating margins, pretax margin, earnings per share were at record levels.

Our balance sheet is stronger than ever. Cash balances continue to grow, and our debt continues to shrink, despite spending $11.5 million in CapEx and $7.1 million in share buybacks during the quarter.

We did acquire three aircraft during the quarter, with two on operating leases. The total cost to acquire the one purchased aircraft, including all expenses necessary to place the aircraft in service, was about $3.6 million. This aircraft was placed into service during the first quarter. We now own 42 aircraft.

The cost to place MD-80s into our fleet continues to be extremely reasonable, about $3.5 million to $4 million for a purchased aircraft all-in. Our strong and growing cash position enables us to grow the fleet without the need for external financing.

Turning to the revenue side of the income statement, I would like to touch on fixed fee contract revenue, which declined by 29% compared with 1Q '08. As we discussed during our January earnings call, there are two principal reasons for this decline, both related to our new Harrah's contract, which was effective on January 1 of this year.

First, the Tunica program now has only one aircraft, down from two aircraft during 1Q '08. And second, the structure of our contract has changed. Harrah's now reimburses us for 100% of the cost of fuel, so there is no buildup of fuel cost in the price we charge Harrah's. The result is less unit revenue and zero fuel expense recognized on our income statement from this contact.

We are very pleased with our ability to maintain an extraordinarily low cost structure. Excluding fuel, our cost per passenger increased by only 3.7%, and our cost per ASM increased by only 10.8%, despite a 6% reduction in fleet utilization, a 1.3% decline in average stage length, and the additional ownership cost of aircraft not operated by the Company, but leased out to a third party.

Let me add some color to the salary and benefits line, which increased in nominal terms by 36.7%, primarily as a result of bonus accruals and stock compensation expense. Excluding bonus and stock compensation, the year-over-year increase was only 13.1% due to a 10.9% increase in full time equivalent employees, and a 2% increase per FTE. The increase on a per passenger basis is less than 1% to $14.10.

Our record first-quarter profits resulted in a large accrual for employee bonuses, which will be paid in the first quarter of 2010, assuming we maintain certain minimum profitability levels for the entire 2009 fiscal year.

Lastly, let me touch on capacity guidance. Once again, we differ from the rest of the industry in our plans for substantial growth in the second and third quarters. The projected capacity increase is in part a reflection of how tightly we constrained capacity during 2008, particularly in the third and fourth quarter, as we reacted to extraordinary fuel prices. As a result, our quarter by quarter capacity profile in 2008 was highly unusual, including negative growth in 4Q '08.

Returning to a more normal seasonal capacity profile results in significant growth, even more so considering we entered the second quarter with five more aircraft than we had a year ago. Of this growth, about two-thirds is associated with new routes, and one-third is capacity we have added into routes we served a year ago. This ratio is consistent over both the second and third quarters.

Most importantly, we are growing because we believe it will result in the growth of earnings. We have a strong wind at our back in the form of much lower fuel prices, which benefits us more than any other airline because our MD-80s are less fuel-efficient than most other aircraft their size, and we were and still remain completely unhedged. We took the full brunt of the fuel prices last year and we enjoy the full benefit this year.

We also have fewer headwinds than most other airlines, because our experience is that this economic downturn has disproportionately affected business traffic.

Lastly, we are fortunate that many of our small cities are in parts of the country that have so far avoided the worst of the economic downturn. There was a map in this weekend's Wall Street Journal which showed that places like Wyoming, Montana, the Dakotas, Iowa, and so forth have held their own far better than the coasts, which is consistent with our own experience.

So we see the opportunity for profitable growth and we are going to pursue it. However, if we see growth threatening profits, we will turn on a dime and rein back growth. We did it in 2008, and if necessary we will do it again. That is the advantage we believe we enjoy by having the lowest fixed costs in the industry.

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

(Operator Instructions). David Fintzen, Barclays Capital.

Just a little bit of a question how revenue progressed through the quarter. Obviously, you have a lot more growth once you hit March. Just any color on how say January and February looked versus March as you got back to the growth.

Ponder?

Dave, I think that March was an interesting month. Obviously, Easter has moved into the April month, so we are going to see Easter in the second quarter this year. But I think we have heard some signs of maybe sequential degradation going forward in terms of average fares.

Really I think when you just look at a high level we managed to manufacture a revenue month number in the month of January, which I think generally the industry has to do every year. But we saw very, very good strength as we moved into March.

The thing that we are seeing, and we saw it in the first quarter and we continue to see it in the second quarter, and I think we referenced it, is simply just a compression of the curve. We tend to believe the demand is there, as evidenced by the load factor results and just a slight reduction in overall average fare for Q1. But we are having to wait later in order to retrieve that.

That has not been the case for us historically. We have generally had a much longer view into our revenue, into our booked results, due to the leisure base and to the long-haul nature of our route network. We just believe that has been compressing and perhaps could compress even further.

This is Maury. The other thing too, you have to remember last year we were taking up revenues as quickly as we could, particularly as we go forward in the second and third quarters, with fuel going up through the roof. So our sales revenue was moving up nicely by the middle of next -- last year because of our capacity constraints, and our focus on that, as well as ancillary, obviously.

But we certainly saw some of the same kind of fall-off in the first quarter that everyone saw that was -- January was one number. February was weaker and March was a bit weaker than that. But we certainly didn't see the level of fall-off that the rest of the industry saw.

As you're getting back to growth, historically guys in a new market started at like 10% to 12% sort of discount to the rest of the system. Any reason to think that markets like LA, even some of the Myrtle Beach or the Punta Gorda, any reason to think it won't have a normal development, or do you guys think it will just spool as new markets historically have?

It is Ponder again. Our anticipation is they spool just as planned and as we have seen historically. One of the initiatives we do want to do is continue to really run very, very high load factor levels. And with the current margin, again, if we have to attempt to fill the airplane with some slight reduction against yield or overall average fare, particularly in new markets, we obviously will do that. But we don't see anything at this point that leads us to believe that we have material differences from new markets that we have grown historically.

We want to push the envelope a little bit on the growth side just to see where the sensitivities are from a bottom-line benefit. Because we've got the capacity. We really pulled it back in the back half last year, so a lot of the growth we are talking about is normalized growth of what we would do anyway and it is coming back into the system. If we see a softness in the selling fares and too much capacity, we will just pull it back in very quickly.

Duane Pfennigwerth, Raymond James.

Just to follow-up on David's question. I wonder if you could give us selling fare by month in the first quarter, what you saw in March relative to the $75 you put up for the quarter? And along those lines, some of April on the books, can you speak to either the year-to-year change in RASM or the selling fare that you're seeing thus far in April?

On the first question, we don't break that detail out at this point, so we don't want to go there today. As far as the April selling fare, Ponder, this is pretty -- we are just tight right now with Easter being what it was, bookings just aren't coming in because it is normal around the holidays and the first two weeks of the month. Maury?

Right. We just haven't broken that out, I think as Maury said, and we are probably not going to.

Okay. I think Jim had some questions.

Your capacity growth where you accelerating it in the second and third quarters, but actually I think it is a deceleration from what you had maybe posted on the Web, whereas in the second quarter you were going to do something like 40%. You pulled it back to 22%. The third quarter was going to be 59% or 60% and you pulled it back to 40%. What is the rationale for pulling back from those very large numbers to some still pretty aggressive numbers?

You kind of got us flat-footed on that one. I don't remember those numbers. Maybe Andrew, can you --?

No, I was going to say, Jim, I don't think we would agree with your numbers that you just quoted. But we have pulled it back a little bit. And really the reason to do that was we had this opportunity that we are pursuing with flights in Cuba. And we didn't want to go out and hire additional crews to be able to take advantage of it. So we decided that it would make sense to trim some capacity in the scheduled system and free up the resources that we needed to pursue the opportunities that we have with the charter flying into Cuba.

That is interesting. I thought you had much higher numbers.

I am not saying we didn't have higher ones, though we didn't have the ones you quoted. I think your third quarter number, you quoted, I think was a number for one month of July, not for the quarter. But it is what it is. The numbers are what they are, and they may have come in a little bit, but not materially like you just quoted, and not in the second quarter either.

I noticed also that you decreased this first quarter year-to-year that you had fewer flights to Fort Lauderdale. I'm just curious what went on there that caused the service frequency to come down in Fort Lauderdale?

We pulled that service last spring. We probably flew through the first spring -- we pulled some capacity back, and we are down to one airplane in Fort Lauderdale at this point from -- we started with two. And we just want to make sure that -- we want to make sure that it works. So Fort Lauderdale, frankly, was a little tough on pricing in the early days down there, because it is getting paid that extra 100 miles. So we just pulled it back as we indicated.

William Greene, Morgan Stanley.

This is actually John filling in for Bill. I just had a couple of quick questions here. First of all guys, can you talk about how you think about the timing of repurchasing shares in the market. Are there any metrics that you tie your repurchase decisions to, or is it fair to say that you are consistently buying back shares at regular intervals?

Also, just in general as your balance sheet continues to strengthen, can you update us on your philosophy as it relates to additional buybacks going forward?

This is Andrew. I don't want to give a tremendous amount of color on that, but I would say that our approach to purchasing shares in the open market is more opportunistic and based on relative value the stock price has relative to what we think fair value is, taking into the fact our view of future earnings, and not a consistent approach where we are just simply going to spend the money as fast as we can over a period of time.

Forgive me, I think that was the first question. I think you had a second one there as well?

Yes, just as a follow-up to that. Your philosophy going forward as it relates to additional buybacks as your balance sheet strengthens.

I think our view is that, if we feel that we have adequate liquidity to maintain balances of cash that we think are appropriate for the size of our business, as well as to fund future growth of the business, anything beyond that we feel we have the luxury of being able to consider returning that to the shareholders. We have chosen to date to do that in the form of share purchases.

So we will continue to look at it that way, take into account the different alternative ways we can enhance value to our shareholders. And we have the authority to buy another $18 million under the program that was announced in January. We will continue to pursue that over the next -- through January of next year, when the authority runs out.

Great, then just in terms, like you said, funding growth going forward. You have mentioned in the past, or you have acknowledged, that you're going to have to change fleet types, and that you are regularly in contact with Boeing and Airbus. Can you give us an update on how you're thinking about that, and how that has evolved in terms of timing, and whether you are thinking about new or old aircraft, just given your recent out-performance on the P&L and the balance sheet?

It is Maury. At this point we are not very active on new airplanes. The debt markets are very difficult out there, and we're just sizing up our own internal needs as well. Andrew may have further color, but we will continue to visit and talk to the Boeings and the Airbuses of the world. But given the state of the economy and where it is at right now, we don't think that is the best move for us to be undertaking at this moment in time.

This is Andrew. I would just add I guess I don't feel that there is a need to go into a different aircraft type. I think it is something that might make some sense at some point in time in the future. There is no need to get away from the MD-80s. In our judgment it is obviously a terrific asset, and it is helping us produce great results.

So it is fair to say that nothing in '09, we shouldn't expect any sort of announcement on that in '09?

Never say never, but at this point that is not an unreasonable statement.

Michael Linenberg, Banc of America - Merrill Lynch.

Two questions here. You talked about the changes in the booking curve. Can you just tell us -- give us maybe round numbers here what the length of the booking curve was before, where we have had it? And if there is anything else that you may be seeing with respect to the patterns of purchase by your customers. Are they buying cheaper rooms? Economy cars as opposed to more expensive cars that they rent. Anything along those lines, just give us a sense of just how customer habits may be changing in light of the downturn.

It is Ponder. A couple of -- there is a couple of questions. Let me try to hit them all. I think historically we would cross into a given monthly period, let's say, with roughly 80% of our revenue on the books. I think now we probably cross over that same threshold with, call it, 65% to 70%. And yet we are still able to move that revenue needle and move that load needle in the last 30 to 45 days.

A significant amount of the compression though has also come probably nine weeks out to say four weeks out. So you've got some very discreet periods where we've seen acceleration.

That being said, the stage length, though it shrunk just by a couple of percentage points year over year, isn't material to the point where a significant reduction in stage length would drive a more compressed booking curve.

Some of our growth though has occurred in shorter haul markets, in general. When you look at the St. Petes of the world and some of our services over in Florida. And by definition we think Florida has a shorter curve on it then does even say some of the West Coast markets, and particularly short-haul Florida markets.

We were learning to trust the curve, we are just having to recalibrate our expectation and get comfortable with it, because we have been running the business based on a different set of metrics with a different economic backdrop.

In terms of maybe customer purchasing behavior, we didn't talk about it in our prepared remarks, but again I think we have tried to make a stated point that Las Vegas, in particular, has had issues, but our service in and out of Las Vegas really has almost never been better. We are seeing very, very high load factor levels. We are able to sell far greater hotel demand as measured by total room nights in any given comparable period than we ever had historically.

That said, it is driven because of the rate reductions. The rates here have come in year-over-year, in some cases, upwards of 50% plus. We have seen a rebalancing and a remixing of how our customers buy hotels. Many people who purchased a call it a C property last year can migrate upwards to a B level property almost for the same price year over year. So I am not so sure that 50% is an accurate number in terms of price rate reduction, it might even be greater.

We are seeing customers take advantage of, say, Las Vegas, as well as other ancillary opportunities, because the rates are down. We think that is helping stimulate a net new ridership on the airline.

I think thirdly, one of the things that we at least continue to believe to be true at this point, and we are asked constantly, is if the average fare environment shows perhaps weakness, wouldn't ancillary also be correlated as well, and that too would exhibit weakness?

At least at this point we have not seen that. So we view the average selling air fare as that flexible tool to move people in terms of price stimulation. The ancillary seems to be somewhat more resilient, for sure, than that base selling air fare.

My second question to Andrew. When you provided us the information on the purchase of the MD-80 in the quarter, I believe you said $3.6 million, that was all-in, so not just buying the airplane, but it sounded like that also included the modifications and/or induction costs. I'm just curious, was that a one-off deal or is that indicative of the pricing that you are seeing out there for MD-80s. What is our takeaway from that, or what should be our takeaway?

It is all-in. It includes everything -- paint, seats, you name it. I think that it is indicative of where the market is. There is certainly variations in price, mostly driven by the condition of engines that are part of an aircraft.

But, yes, we believe that we should be able to continue to add high-quality MD-80s in the $3.5 million to $4 million price range. They won't all be in that range, but in general that is our new expectation. That is what we see in the marketplace today.

Do you have an estimate of what you think the potential payback is on that airplane? It sounds like it is even shorter. I think in the past it was only a few years. It sounds like on a cash basis it may be even shorter than that, given the price of the airplanes.

We would agree with that, especially at the kind of margins we are posting, yes, the payback on that is obviously extraordinarily fast, maybe even around a year.

That is amazing. Great quarter, guys. Thank you.

Stephen O'Hara, Sidoti & Company.

The first question in terms of your fuel burn, it appears to have gotten better again off of last quarter. Was that changes in the Harrah's contract, or is that just really good fuel management, I guess?

We have seen our unit fuel burn come down pretty noticeably in the last year to year and a half. Total credit goes to our pilots, who have really joined into the active approach of managing fuel.

In a lot of our secondary airports in big cities we, for instance, don't get treated as well as the primary airport would be, such as in Orlando, with the approach that you get from air-traffic control coming down to Stamford versus MCO.

So our crews, working with our flight management, have gone out and we have worked very hard -- they have anyway -- to really optimize our approaches, optimize how we fly the airplane, all of those things. As a result we are seeing unit burn down probably 3% to 4%, somewhere in there, which is meaningful. We are not forecasting with that yet, but it has been pretty consistent.

This is Andrew, let me add something just to clarify for you and others. The amount of fuel that we consume associated with all of our flying, including Harrah's is included in the statistics that we provide. That the statistics of gallons consumed includes Harrah's fuel. So, yes, the efficiency and gains are completely what Maury was talking about, has nothing to do with anything related to any of our charter contracts.

Perfect. That is better fuel consumption then. The second question I have, in terms of running the high load factors versus -- and with cutting your fare, I guess my concern is, going forward are you going to be able to raise fares should the environment improve, or are people going to be stuck in that $75 range and maybe refuse to pay higher? Do you feel you can raise that in the future should things improve markedly?

It is Ponder. Our sense would be that, as you said, that would be the case. Just look back at the experience of last year. We took fares up because we had to, and I think the world could digest those. We certainly don't voluntarily take them down for any other reason, other than what is the market clearing rate. So we are always looking to clear with the market. And we believe that to the extent things to improve at a macro level, we can certainly enjoy higher yields and higher overall average fares.

That being said though, we are going to keep the airplanes fill at the market clearing rate, whatever the economic condition. I don't know if I can add any color beyond that.

Kevin Crissey, UBS.

Hi guys, this one is for Ponder. Ponder, maybe you could talk about the timing of your ancillary initiatives in terms of what the bigger ticket items that you have started and when you may have started them? I think you started an initiative in January. I just want to understand when we are modeling your ancillaries on a per passenger basis going forward when we would see the annualization of some of your initiatives?

I don't know how specific we can get. We did put in a product, our priority boarding product, but that actually went in -- I think we instituted that back in October of 2008. And we continue to see that mature through the system and actually grow on a revenue contribution basis.

Away from third-party products and services, we are now, or I would say differently -- the industry is kind of like we are and have been. We are charging for checked bags and charging for items on board the airplane and charging for other unbundled products.

We also believe perhaps that there is sensitivity to those and there is even upside related things like assigned seating. We continue to yield manage that and actually drive unit revenue gains from that as well.

I made the comment in my script about just the pursuit of third-party products and services, and particularly having our CMS resources in-house now. Part of the advantage we have had historically is we control our IT resources. We control them to even a greater degree now. I think that is going to, we hope, give us the better opportunity to exploit more hotel sales, more car-rental penetration, not just in destinations, but also even in the reverse direction in our small cities.

So that being said, I'm probably not giving you what you need in terms of what is it going to be in the second quarter, third quarter and fourth quarter. But I think our historical sequential numbers are a fair guide. That being said, we have never said ancillary continues to go up. We just generally say it doesn't go backward.

Kim Zotter, Imperial Capital.

If I recall correctly, based on your prior guidance, in your release you give system capacity. Could you provide a breakdown of scheduled ASMs for 2Q and 3Q?

You are right. Those are system numbers, so it does include scheduled and fixed fee flying. And I think there is more detail about that breakdown on our website. Or there will be more detail on our website, where you would be able to see the difference -- or how that builds up, both scheduled and fixed fee. And we don't publish through the LAG, so it's a little hard for folks like yourself to get that data, so we'll trying to make it a little easier. And so check our website. And we will drop you an e-mail and let you know when it is updated.

And one additional. Alaska recently announced service from one of your focus cities, Bellingham to Vegas. I believe it was their first attempt at head-to-head competition. Any comments on that? As well as have you seen any other carriers move in on your nonstop markets? I think at last count you guys had direct competition only on a small handful of markets.

I will give you a general overview. Ponder can be more specific about the Alaska. We started last year, I think we had 105 or 6 routes, and we had 8 direct competitors in those roots. We ended the year with, I think, one direct competitor, our Fresno/Las Vegas, was it. And with last count I've got us at four or five, with some of the recent announcements, including Alaska's.

So we have had numbers like this bouncing back and forth for a number of years. In '05, probably the biggest one we have ever had was Northwest took three or four of our markets in the upper Midwest and matched our capacity for about a year. We made money during the whole period, not as much certainly, but they lost a lot of money, because we do what we do. We're really not worried about the other guy nearly as much as maintaining our own interests. Ponder, any comment on that?

Yes, we have never said that we won't have competition. We would certainly like to build the system to avoid it if possible. You know, the Alaska situation is -- if you look at our capacity let's say on Bellingham/Vegas in a given month -- I don't know, take April perhaps or May, and we probably have upwards of 70, 80 round trips, probably 24,000, 25,000 total seats in the market. I think the addition perhaps of Alaska would have been, I think, three non-stops a weak, and perhaps one-stop service Seattle on Horizon the other four days.

With connections.

Sure, with connections. So at this point we don't view it as material at all.

Bob Maca do Avondale Partners.

Thanks guys, already got my question answered. Sorry.

Helene Becker, Jesup & Lamont.

Just on the Cuba program where you've got one aircraft dedicated to four cities from Miami, how should we think about that? Are they one-off charters that you will be called about or are they -- should we think about them as scheduled service charters? Can you just talk a little bit more about how the implementation of that will go?

This is Andrew. They are more of a scheduled charter. It is more similar to the Harrah's programs that we operate. It is an airplane that is going to be pretty busy flying in and out of Miami. We are very excited about the opportunity there to get into the market. And we think as we mentioned in the press release that there is going to be some good expansion opportunities later in the summer, we believe. And obviously if all of a sudden scheduled service becomes possible, then who knows what that will bring.

But for now they are all charter flights. But they are -- it is is scheduled charter program with a fixed schedule, working with several of the authorized brokers that are legally allowed to sell tickets between the US and Cuba to the different people that are authorized to purchase those tickets.

When you are doing that is there a set fare that you have to ascribe to or can you set your own fares? How does that work?

No, we charge on a per trip or per block hour basis essentially. And it is up to the broker. The brokers own the airplane and they sell the seats on the airplane for whatever price they see fit. It is just like Harrah's, we take no fuel risks. There is going to be zero fuel expense recognized again, like the Harrah's contact.

So it is just fixed fee flying, no fuel risks. The marketing is all for the brokers to handle. And we just fly the airplane when they want us to fly and where they want us to go.

Then just, Andrew, on the 10-Q, what is the timing of your filing that?

Two weeks from now, we expect.

(Operator Instructions). And at this time we have no further questions. I would now like to turn the call back over to Maury Gallagher for further comments.

Thank you all very much for your participation today. We look forward to talking to you again sometime in July. In the meantime, have a good day. And we will see you in a couple of months.

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