Allegiant Travel Co (ALGT) 2009 Q2 法說會逐字稿

Welcome to the Allegiant Travel Company's second 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, and 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 performance and any comments about our strategic plans. There are many risk factors that could prevent us from achieving our goals to 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 at ir.allegianttravel.com.

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

Thank you, ma'am. Good morning, all. It's a pleasure to be with you again at the end of our second quarter to report on it. I'll 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'll be glad to take your questions.

We are very pleased with our outcome this quarter, our third quarter in a row of 20% plus operating margins. Our year-over-year comparison is exceptional, as well, and we produced these results in spite of one of the most difficult revenue environments on record. Our selling fare declined over $9 to $65 just short of 13% compared to Q1 results. We also saw a slight reduction in our ancillary per passenger this quarter down just $2 per passenger compared to Q1's $34, but year-over-year we saw an ancillary increase of $460 per passenger or 16.6%, which mitigated our overall passenger revenue decline to just 12% for the quarter. In addition to these drops in average fare, we also saw a 13% increase in our fuel expense compared to our first quarter and lastly, we added substantial capacity during the quarter, 30% more scheduled service departures compared to the second quarter last year and 13% more than we had in the first quarter. Overall, we couldn't be more pleased with the outcome.

Our 25% operating margin this quarter in spite of headwinds from weakened revenues, higher fuel prices and a meaningful increase in capacity during the quarter proved we have developed a sustainable, highly profitable business model. Looking forward the booking curve still remains somewhat short compared to historical norms. One of the benefits however of a shorter booking curve is the ability to manage capacity closer in. To that end, we recently trimmed capacity from our existing markets in Q3 in response to the recent increase in fuel and an effort to bolster pricing somewhat and we are seeing some firming I might add in our selling fares in July in the near term. Ponder will comment more on this shortly. I'm very pleased with the way our system has matured in the past year. We now own or control 46 aircraft and operate 44. We have service to 71 cities and 60 small cities in that setup, with 134 routes and direct competition on only six of these routes. Geographically, we cover every portion of the country. We have substantial growth prospects remaining in our system as well.

Lastly, we have excellent margins baked into this formula. All in all, an optimistic situation. Let me comment some on our cost. Our non-fuel cost structure has improved markedly in the past two quarters. We reached a peak of $55 per passenger in the December quarter, as we felt the effects of our reduced capacity during the back half of 2008. Our return to our more normalized aircraft utilization approaching seven hours per day recently helped substantially in reducing our non-fuel cost per passenger of $46 this quarter, a 16% reduction from our December peak. As I mentioned, fuel costs increased this quarter up by $.19 per gallon or 13% and in particular we saw June affected by the quick run up in oil prices since they moved in June and early July. The recent pull back has knocked off about half of the increase in the last couple of weeks. Andrew will comment further on our cost side.

In summary, we are exceptionally well-positioned. Three quarters of 20% plus margins indicate we have a winning sustainable formula and moreover to produce these results with the current economy and the state of the rest of the industry is even more amazing. Three key variables have put us in this winning position: Fuel costs are reasonable, fuel spike from last year appears to be behind us. It's not to say fuel won't increase, but we believe it will be a more moderate, manageable escalation, particularly with the current economic and employment environment. We have low costs. Our focus on running an efficient operation is critical to our success. Our unit revenue is one of the strongest in the industry. Our two tiered fare approach, a very low selling fare, and our associated ancillary revenues allow us we believe to generate overall more revenue per passenger than others.

As we planned for 2009 at the end of last year, we could see this formula coming together, a formula which would provide us with exceptional performance in the coming months and years. Given this belief, we looked at how we could maximize total profits. Our conclusion was we believed we could increase total profits by growing, perhaps at the expense of some margin points, but the best outcome would be to add capacity. We also believed we should continue to focus on high loads. Maturation of our ancillary revenues north of $30 per passenger at the end of last year pointed towards maximizing loads first and letting the selling fare float to achieve this goal. The outcome has been all we hoped it would be. This quarter's 25% margin on top of 30% more capacity clearly validated our strategy. But like all successful formulas, everything should be reviewed and refined.

The past 60 days, we have been fine tuning our system accordingly so we all know capacity drives pricing. Knowing what we know today, we might have had a bit too much new capacity in the existing markets, particularly in June, given the pricing environment we experienced. On the other hand, our new markets are working just fine. For instance, Southern California is working very well, profitable in its first full month. We are adjusting our schedule as always is the case in a new market as we see performance of these 13 cities that have been opened to Southern California. Looking forward as I indicated previously, fuel changes and pricing increases suggest we should trim capacity in the upcoming third quarter and possibly the fourth. As I'm sure you've seen, we've reduced our forecasted system departure growth from 35% in the upcoming quarter to 30% in this release. Please note, however, these comments describe a fine tuning of our operations, not an overall or a structural change of any kind.

Overall, we find ourselves in an exceptional place including industry leading operating and profit margins in the worst economic times since the 1930s, arguably the lowest unit cost within the business. Growth (inaudible) are shrinking, excellent future growth prospects in our system, a national footprint encompassing 71 cities and 134 routes, a very defensible model with minimal direct competition, a strong balance sheet, among the best in the industry and lastly, a terrific group of employees who deliver inexpensive air service to our customers safely and reliable every day. This is a solid formula that will continue to produce outsized results for the foreseeable future.

Let me turn it over to Ponder to comment on the revenues.

Thanks, Maury.

As you mentioned, unlike every other airline, we expanded a bit in the second quarter, but like every other airline, we also faced other issues that impacted the consumer in the second quarter, such as reverberations from the swine flu pandemic, tightening of credit, the willful state of the economy and just general malaise on the part of the customer. However, despite these challenges, we grew scheduled service capacity by more than 30% year-over-year, increased scheduled passengers by 31% and produced scheduled service load factor results in excess of 90% with positive year-over-year gains. And most importantly, despite significant growth and a distinctly unhelpful backdrop, we delivered an impressive 25% operating margin for the quarter. Let's review the revenue. Total operating revenue for the quarter increased 12.5% year-over-year to $148 million. By contrast, scheduled service revenue was essentially flat year-over-year at approximately $90 million for the quarter, representing 60% of the system total. Ancillary revenue grew nicely year-over-year by 53% to $44.5 million while generating 30% of this quarter's system total top line revenue.

And lastly, fixed fee revenue dropped from 9% of the system total revenue in last year's second quarter to just over 6% of the total this year. We're very pleased with these revenue results given the difficult environment. When we first established capacity levels for the second quarter, we actually assumed a bit of a higher fuel price than what ultimately transpired, but what we did not anticipate was the steep slide in consumer demand over the course of the quarter. April was actually surprisingly strong; whereas June was disappointingly weak. Of course, the other thing that impacted June results was our continued rollout of new routes, especially our new Southern California base at Los Angeles, which we launched in May with routes, as Maury said, from 13 of our small cities. Oddly, some people viewed this new base as a significant departure from our business model, but Southern California in our view is just another sunny leisure destination, albeit one that happens to be the second largest metro area in the country, and we've treated it just the way we have all other new bases, providing affordable, low cost, low frequency service to a wide variety of small cities across our network, and it's reacted very well. We were profitable, as Maury mentioned, in our Southern California base in June, the first full month of operation, and we fully expect that it will continue to flourish.

So, with scheduled capacity up 30% of the second quarter and with states going basically flat year-over-year, our average scheduled airfare declined from $84 a year ago to $65, representing a 22% yield decline. However, as you all know, average scheduled airfare is only part of the story. Ancillary revenue per passenger was up year-over-year by 17% to over $32 per passenger and as a result, our total average fare, including both ancillary and scheduled airfare per passenger was down 12% year-over-year from $111 to $98. Total revenue per ASM or TRASM, one of our favorite acronyms, was off by a similar percentage to 9.95 cents from 11.27 cents last year and though TRASM was negative year-over-year, we were still relatively pleased with this result given the task we set ourselves with increased capacity on top of a softening revenue environment. Maury also mentioned continued compression of our booking curve and interestingly, we've seen this effect more in our longer haul markets as we progressed from first to second quarter. Sequentially, our second quarter total average fare dropped 10% from $109 to $98 as demand continued to soften and our average scheduled airfare declined by 13% from $75 to $65.

We believe consumers are unfortunately being conditioned to expect lower prices as time passes, not just in travel but in all other industries besides. As one notable retailer recently observed about consumers, "the longer they wait, the cheaper it gets." The retail world seems to be perpetually on sale and we've certainly seen other airlines conform to this same pattern. That said, we've seen our average fares for travel in the near term future months begin to firm somewhat after bottoming in the June timeframe. Certainly, we'll have a series of tough comparables given our outstanding revenue performance in the second half of last year; however, sequential firming of overall pricing as we continue to add capacity year-over-year is not an unreasonable expectation. And now, turning to our hotel production for a second, we've said that our Las Vegas operation has benefited from the distressed economic climate as Las Vegas -- as Las Vegas casinos discount rooms helping drive incremental customers on to our aircraft and in fact, Las Vegas was clearly one of our top performing destinations in the second quarter. Our Vegas hotel rates remained favorably low for consumers in the second quarter, declining over 33% year-over-year and more than 5% sequentially. This helped drive a higher conversion rate for our air/hotel packages.

For example, Las Vegas second quarter departures increased year-over-year by 16%, yet our total room nights occupied grew by 35%, far outpacing our historical take rates. Moreover, we also improved sequentially in this regard as Las Vegas departures in the second quarter grew 9% and total hotel room nights occupied were up 24% over the first quarter. Another aspect in our favor in the second quarter, especially in the west, is our broad exposure to parts of the country, such as the northern plain states that have so far, in our opinion, withstood the effects of the downturn better than the coastal areas. Bismark, North Dakota is an example which has been been reported in such magazines as Time. Our experience confirms that places like the Dakotas and the Great Plains are still doing quite well. In fact, we recently capitalized on this by announcing service earlier this week from Grand Island, Nebraska to Phoenix. This will compliment our existing service from Grand Island to Las Vegas. Let me briefly touch on the sequential drop in ancillary revenue per passenger and this was the first such sequential drop that we've seen since we began reporting as a public Company in the fourth quarter of 2006. Ancillary revenue per passenger declined sequentially, as Maury mentioned, by just 5% from the first quarter while our average scheduled airfare was down 13%.

This is something we're analyzing thoroughly, but we believe the combination of extreme economic pressure on consumers along with potentially a certain amount of customer adaptation to the ancillary pricing model resulted in lower passenger take rates this quarter. Further, the categories where we experienced the majority of the sequential reduction were focused primarily in three product areas: Checked baggage, assigned seating and travel protection. As a general statement, the utility and corresponding value of each of these arguably seems to diminish perhaps as (inaudible) and even more importantly average fare levels contract. To help improve this condition, as of July the 1st, we enhanced our automation platform to incorporate dynamic pricing for checked baggage, i.e., variable price points for different markets. We anticipate that this adjustment will more accurately align consumer demand with product value going forward. Additionally, pricing for assigned seating has been dynamic for some time already and we continue to explore the optimum market clearing price for this feature in every one of our markets.

And finally, the value of our travel protection product, which we call Trip Flex, while certainly correlated to total trip value which is a function of absolute fare levels is also aligned generally with the advanced booking window or the time between purchase and actual travel and as this gap narrows, which we've seen for travel in the second quarter, the potential risk to be insured by the consumer using this product, in fact, is reduced. Regardless, we don't believe that these unit revenue reductions necessarily represents the future trend of declining sequential per passenger ancillary results. We've been in an extreme pricing environment recently and it's finally perhaps spilled over in a very small way into the ancillary bucket and I think most importantly, we're very weary of drawing any kind of long term conclusions from this. One final point is the more that we add capacity also in destinations other than Las Vegas, the associated relatively lower level of our third party product sales, namely hotels in particular, we believe could possibly continue to temper our ability to grow the ancillary line item at historical year-over-year and sequential levels. Looking forward, the overall revenue environment seems to have stabilized somewhat, albeit at future run rates, in our opinion, more similar to our second quarter results than those of prior quarters. But fortunately, our cost structure allows us to generate very profitable returns, even in the face of an extremely tough demand environment.

Thanks for your attention. And I'll now turn it over to Andrew Levy to discuss our financial and market planning issues. Andrew?

Thanks, Ponder.

We're very proud to report our twenty-sixth consecutive profitable quarter. During this quarter, we continue to strengthen our balance sheet. We ended the quarter with $228.2 million in unrestricted cash and short-term investments, down $8.2 million from the end of Q1 2009; however, excluding cash associated with advanced sales or air traffic liability, our unrestricted cash actually increased by $5.4 million despite $7.8 million in CapEx and $10.5 million in share buybacks spent during the quarter. The sequential quarterly decline in air traffic liability is a reflection of normal demand seasonality. Of the $7.8 million of CapEx, $3.7 million was for the purchase of two aircraft, (inaudible), adding to our engine and parts inventories and almost $3 million was associated with the preparation work required for the induction of three aircraft into our fleet. We ended the quarter with $60.7 million in debt, up slightly from $59.3 million at the end of the prior quarter. During the quarter, we chose to issue $7 million of debt backed by two MD80 aircraft under attractive terms, including a fixed interest rate under 7% fully amortizing over 60 months. Our leverage ratio and return on capital continue to improve.

Total debt to equity was 22%, down from 36% a year ago, and return on capital over the trailing 12 month period ending 2Q 2009 was 26%, up from 10% during the trailing 12 month period ended 2Q 2008. Our strong balance sheet and continued profitability enable us to grow the Company without the need for external financing, while at the same time, rewarding our shareholders through the repurchase of common stock. During 2Q 2009, we repurchased 255,350 shares at an average price of $41.25 per share. Our Board of Directors recently approved a $10 million increase to the amount authorized under the repurchase plan, increasing it from $25 million to $35 million. Turning to the revenue side of the income statement, I'd like to touch on fixed fee contract revenue, which declined by almost 25% or $3.1 million compared with 2Q 2008. In April, we started flying for the Department of Defense on an ad hoc basis and in early June we started our Cuba flying. Both help to mitigate the decline in revenue from our Harrah's contracts, which is due to both fewer block hours and lower prices. The decline in block hours is due mostly to a previously disclosed decline in flying in Tunica, which was a two aircraft program in 2008 and is now a one aircraft program, and also a recent reduction in flying in the Reno program. The decline in price is due to a contractual change, which reduced the price Harrah's pays us, but also eliminates fuel expense. This has also been previously disclosed.

Lastly, other revenue, which consists of rent and maintenance reserves associated with aircraft and engines leased to another airline will likely end in the third quarter. We have negotiated for the return of our 45th and 46th aircraft to occur in September, which will enable us to use these two aircraft for growth starting in late fourth quarter 2009. We estimate we'll recognize $500,000 in revenue from these leases in third quarter 2009. On the cost side, we're very pleased with our ability to maintain a very low cost structure, which we believe is critically important. Cost per passenger, excluding fuel, declined 2% to $46.38 compared to $47.52 in 2Q 2008 and declined almost 7% versus $49.62 in 1Q 2009. If bonus accruals, tied to profitability, are excluded, the 2Q 2009 cost per passenger is $43.84, down 7% from $47.26 in 2Q 2008 and down 5% from $46.23 in 1Q 2009. On a CASM basis, our ex-fuel CASM was $4.65 cents flat versus a year ago and down 4% versus 4.82 cents in 1Q 2009. If bonus accruals are excluded, 2Q 2009 ex-fuel CASM drops to 4.4 cents, a 5% decline versus 4.62 cents in 2Q 2008 and a 2% decline versus 4.49 cents in 1Q 2009.

Like to add some color to salary and benefits expense, which increased in nominal terms by almost 38%. As noted above, our accrual for bonus is based on the Company's profitability so when our profits increase, so does this expense. We increased full time equivalent employees or FTEs, by 14.3% over 2Q 2008 and continue to maintain a ratio of 35 FTEs per aircraft. Excluding the bonus accruals our salary and benefits expense per FTE was up only 1.3% over 2Q 2008 and flat versus 1Q 2009. Station operations expense also increased faster than both revenue and capacity growth during 2Q 2009. This increase was due in part to the beginning of our Cuba and also our DOD fixed fee flying, both of which started during the second quarter and have more costly station operations expense on a per departure basis than does the rest of our system. Maintenance and repairs expense was $101,000 per aircraft per month, which is higher than the $90,000 per aircraft per month long term budget guidance that we have provided to investors. Maintenance expense will continue to be lumpy, driven by the timing and scope of aircraft heavy maintenance visits and engine events and we expect the next two quarters to be similar to the cost per aircraft we experienced in 2Q 2009; however, we expect to see a reversion in 2010 to the $90,000 figure we've used historically and therefore continue to believe it is a good long term estimate.

Lastly, let me touch on our capacity guidance. As indicated in the press release, we expect a significant amount of growth in the next two quarters. it is important to dive into the details to better understand what we're doing here and why. First and foremost, let me be clear that we're not managing capacity to try to maximize revenue per ASM, and we also do not believe in growing for the sake of growth. We manage our capacity to maximize our earnings. While revenue trends are very important, and is the area in which most investors have been focusing, it appears many are paying too little attention to the cost side of the equation. If you ignore the dramatic reduction in costs, you miss the big picture, which is the tremendous earnings we posted in 2Q 2009 and our expectation of this trend continuing in the coming quarters. Our growth in the third quarter is less than 15% on a true same-store sales basis, i.e., considering only those routes that we flew last year and will fly again this year. Fourth quarter growth in same-store sales or in same-stores is only 5%.

Therefore, the vast majority of the increase in capacity is associated with the expansion of our route network, including our new Southern California network, and also flying routes which we seasonally suspended a year ago due to our expectation of continued extraordinarily high fuel prices. Furthermore, we most recently trimmed our third quarter and fourth quarter planned capacity when June revenue weakness was apparent and oil prices touched $75 per barrel. Although fuel is now lower and we are seeing signs of revenue firming in July, we do not expect to revisit capacity again unless there is a material change in our expectations for revenue or fuel. If either occurs, we will move quickly as we always have to make the necessary adjustments to our network to maximize our profitability. We recently announced the elimination of two routes and a couple of others remain under review. We can cut further routes with no more than 60 days notice, possibly even less, so we can certainly have an impact on the fourth quarter if we need to. Thanks, very much, and we're ready for questions.

(Operator Instructions). We'll go first to William Greene with Morgan Stanley.

Yes. Good afternoon. Ponder, you mentioned a couple of times that June was weak, I think you even mentioned sort of surprisingly weak. Can you give us any color around that in terms of maybe what the average fare was or how we want to think about what that meant?

Well, I think one of the things that we did see was we fully expected May to be a shoulder month and I think historically we would begin to move off that May trough into June moving more fully into the summer period where again based on year-over-year historical metrics those months are generally very strong. I believed and I think we all believed we would have seen some of the fare firming that we're now seeing in July for the months going forward, probably earlier than we have, and again, I think at least my personal view was we would have begun to see that in June. We didn't and we began to really try to drive the fare in June while still hitting the 90% load and I think that's what you have to understand is unlike some others where the load factor perhaps will fluctuate and there may be perhaps competitively locking in a fare, we decided to let the fare float by trying to strive for load particularly with capacity. June would have been our largest increase in capacity of any month that we have flown and as a result, we thought that we were not seeing fares come in as strongly as we had thought across the board, and I mean that's really as specific as I can be about it.

Just to be clear, I think back in April you said the average, the total average fare was around $98. Do I remember that correctly?

For the month of April, you're saying?

Yes. I thought you offered sort of an update as we went through the quarter.

I don't know that we did that. I mean, we may have, Bill, but I --

Bill, I don't think we ever did that. This is Andrew. But it was a good bit higher than that.

It was $97.65 for the quarter, so April was definitely up from that.

Okay. I must have it off in my head then what it was. Andrew, can we also talk a little bit about -- or maybe Maury, maybe it's a question for you and more the board. I'm trying to think about uses of capital and trying to understand how we should think about what the first and best use of capital would be and then sort of rank them from there. You've increased the share repurchase program so maybe there's a target payout ratio we should think about. Any color you can add there would be helpful.

Yes. Bill, certainly, we've targeted our share repurchase program as a means to take our capital that we're generating $37 million operating margin plus $6 million, $7 million so we had over $40 million of EBITDA in the quarter and just bolster the stock price it's a bit frustrating to see us lumped in with the rest of the crowd with what we're doing on multiples and things like that, so we think the Company is undervalued that way. Beyond that, we've talked to a number of different opportunities, first and foremost, to maintain our profitability and then we'll look at growth opportunities, more airplanes and things along those lines, but I'm not sure in this industry having too much cash is a problem.

That makes sense, but should we think about you having a more sort of regular share repurchase program? I think if I remember correctly, Andrew, correct me if I'm wrong, but I thought that you don't have a regular program in place but you're opportunistic, if you had a more regular program, I'd think you could take advantage sort of of these volatility in the stock price as well in perhaps a more efficient manner. I mean, how do you think about that?

Well, Andrew, certainly can comment. We've got a 12-week cycle of which half of it we can purchase and half we can't with -- since we don't use a 10-B5 program, but we're really sensitive to try and to buy what we think are reasonable amounts, and for the most part we were buying under $30 or $40 in the past quarter, so Andrew?

Yes, no, Bill, I think that we've chosen not as of yet, we've chose not to enter into some kind of basically essentially a 10-B5-1 program where the Company can buy on a methodical basis and the decision, the purchase decision is kind of transferred to an independent party. We've instead elected to be in the market during our trading window which opens one full day after earnings comes out and lasts for about a six week period, and try to be opportunistic and take down more shares when the price is further away from what we believe to be appropriate value and take down fewer shares when it's closer to that point. So, I think we're going to continue along those lines and just try to be opportunistic about it and maybe not as methodical but just simply opportunistic would be a better way to describe it, I think.

Okay, thanks for the help.

We'll go next to Jim Parker with Raymond James.

Good morning, guys.

Hi, Jim.

Andrew, regarding your capacity growth plan for scheduled service, what are you looking at in the third quarters and fourth quarters and then what is the aircraft utilization that underlies that capacity growth?

Well, let's see, Jim. On a scheduled service basis, it's -- you know what, Jim? I would prefer to get back to you on that. I don't want to throw out numbers on the fly. I don't have that number right in front of me. We are expecting higher utilization of our fleet. I don't know if Robert, if you have that handy?

We have (inaudible).

Yes. Okay, that's true. There is a slide in the management presentation that's on our Investor Relations site, Jim, that goes into that on a month by month basis and that's largely still accurate. We are expecting a good increase in aircraft utilization in the third quarter as we mentioned or as I mentioned in my comments we are going to fly more this third quarter so you'll see definitely some of it is driven by that and obviously we have a larger fleet as well.

All right. What about the fourth quarter?

Well, I think fourth quarter is the same story. I think that we will definitely have higher aircraft utilization, but the difference will be a little less I think than what we'll see in the third quarter. The third quarter we're really going to see a tick up in our utilization of our fleet.

It appears that you were well below five hours per day in some of the slower months, but above seven like perhaps in this month, in July.

Yes, that's accurate.

I'm curious where you're going when you say greater utilization, in the say slower months, September fourth quarter through the fourth quarter, you're going back to the lower end of that I guess but maybe you're up year to year.

Yes, Jim, I think that, for instance, September this year we're going to fly more than last year. I mean, it's partially because as I noted we're flying Phoenix through the third quarter, which we didn't last year. We're flying LA, which we didn't have last year, and because of the lower direct expenses, variable direct expenses, which is principally fuel, we do think that it makes sense to fly more in certain markets during the September period than we did a year ago, so we will see higher utilization in September than we did a year ago, but in general, seasonality is still what it is. I mean, July is still a very busy month, August is less so, September is less so, October is busier than September, November is more busy around the holidays and December is busy around the holidays, so I mean nothing -- we're not, we still recognize the seasonality that exists in our business, so we're just simply trying to allocate capacity as effectively as we can.

Right. Okay. Last year, in the month of September, you cut capacity year to year scheduled capacity, I believe it was 18%. You're saying this year, you're actually going to go back into some of those markets, actually fly those markets in the month of September.

That's correct.

I'm curious about that, the logic.

Well, the logic is kind of what I just described. I mean, there's fixed costs in our business, right? The airplane, the crews have a minimum guarantee they get paid whether they fly or not. Maintenance, for us at least, because of our low utilization is largely a fixed expense so the true variable direct expense associated with flying or not is really fuel, some stations expense and a very small amount of marketing expense, so if we believe that by flying an incremental flight, we can cover with revenue the direct variable incremental expense, then we're going to do it because that's the right decision for the business. So, we're gauging our estimates about where is revenue going to be and where are those direct variable expenses going to be? And if we think that we can drive incremental gross profits, let's say, then the right decision is to fly and so that's what we're going to do and that's how we've always looked at it.

This is not a departure in any way. It's just simply the calculus this year. Revenue is down a lot, without a doubt, but fuel is down a lot as well and the other thing is obviously, I think it's important to note that when you're flying new routes, it's different. I mean LA, we expect to do quite well in September and we'll see if we're wrong after the fact but we haven't been there and usually when we start something new, we like to let it run and gather data and make decisions based on the results in future time periods.

Okay. Duane has a question, as well.

I'm okay for now. I'll key back in, thanks.

Okay. Thanks, Andrew.

Thank you.

We'll go next to Michael Linenberg with Banc of America.

Oh, hey, guys. A couple questions. When you guys started the Phoenix service, as I recall, I think one of the things that you noticed it seemed like there was a mix of some VFR traffic, not everybody was flying from the spoke cities to Phoenix, they were actually pulling from the Phoenix market and I was just curious if you were seeing that out of the new service out of LA.

Yes, Mike, this is Ponder. We are seeing that. I mean, again, I think we've said it time and time again. Each of the destinations reacts a bit in its own way in somewhat of a unique way whereas Las Vegas perhaps is the most pure vacation package leisure destination within our route network. LA perhaps is reacting more similarly to Phoenix or even certain of our Florida markets. In some cases, we've seen significant penetration for kind of Southern California origin traffic as well and we also see that same phenomenon both in Phoenix and as well in our Florida markets. We're a great means to an end in terms of someone needing to get to one of the plain states or the Midwest from that Southern California region, when the alternative is either an extremely expensive trip or a very time consuming trip via connections and/or both. So --

Ponder, I know you said significant and I don't know what the percentages are but maybe as that mix shift or point-of-sale changes, does that, when you think about your ability to generate ancillary revenue there will be a certain number of passengers who maybe originate in some of these leisure destinations and I know I'm not sure if you're filling hotels in Bentonville, Arkansas or wherever, I don't think you are, I mean, is that -- as that shift maybe changes over time and I don't know exactly how big it gets, but will that put some pressure, natural pressure, not bad pressure but put some pressure on your ability to generate ancillary revenue per passenger?

I don't know that that in and of itself would, Mike, but I think when you look at that in combination, by no means is the origin traffic in the destinations the majority, okay? I mean, when we say significant, it's probably more than we would have thought going in in some cases, but I think too, one of the things is that a huge opportunity for this business is the growth in third party ancillary sales, things like hotels and cars and other attraction related items away from the destination cities. Those opportunities still exist. There are far more small markets out there than there are destinations and to the extent we can capture that reverse flow, which is a fairly intense automation exercise and has a number of moving parts associated with it behind the scenes and that's one of the things we've been working towards, we think that's a big opportunity quite frankly and so the ancillary today really is principally driven and in fact in markets away from Las Vegas against the unbundled kind of pieces of overall ancillary, so I mean we kind of look at it in one of two ways. Sure, there may be less hotel purchases from someone coming from one of the destination cities, but that exists today from an unbundling of the product, I don't know they are any less apt or more apt to buy than others and yet I think over time we do have opportunities to sell more of the third party ancillary services where we're needed. Certainly, not 100% penetration levels, but certainly more than we have today.

Okay, good. And then, just my second question, I just -- back on the press release. You sort of noted in the press release that the seasonal reduction in the air traffic liability was less this year than a year ago and I'm just trying to figure out what we're supposed to conclude from that. I mean, are we supposed to come to the conclusion that maybe you are less seasonal? I mean, I know you highlighted maybe LA could be a strong market in the month of September, which is one of your tougher months, or maybe it's a means of telling us that maybe we're coming out of a period where the revenue environment, you saw a very discounted fare period and as you move into that July-August timeframe, maybe the fares aren't as less discounted, maybe that's suggesting it's firming or is it just the fact that you are bigger this year in the third quarter versus the second quarter versus where you were a year ago or maybe another way to say it is that your decline from the second quarter to the third quarter in capacity seems to be a lot less this year than last year because of this big growth? I mean, what -- I was trying to get to what the takeaway is on that if you could give some color.

Mike, this is Andrew and maybe Ponder wants to expand on it, but I'll tell you the reason we put that in there was simply just to show that air traffic liability was down and it was down a year ago and therefore you shouldn't really read too much into it other than that. I don't know if we have a sense as to why. I mean, there's so many variables, including how far out in advance we're selling the schedule.

Well, we really constricted third quarter last year, so that would have driven your air traffic liability at the end of the second quarter down noticeably and we're up in the third quarter this year, although we have a shorter booking curve. All of the things you suggested, Mike, could potentially be part of the answer because we've not analyzed it in quite the depth or approach you've suggested, but certainly last year, with our third quarter really being cut noticeably, you would have had sales down accordingly.

Yes. Okay. That's helpful then. Okay, thank you. Good quarter. Great quarter.

Thank you.

We'll go next to Kevin Crissey with UBS.

Hi, guys.

Good morning, Kevin.

Very good. Wanted to see, you guys have the best balance sheet out there, you have best returns out there, you've got aircraft values that are inexpensive, certainly for the aircraft that you fly today. What about looking at this opportunistically if we're going to come out of this economy gets better next year, it would have to get better fast, what about being opportunistic with the second aircraft type? What are your thoughts there?

I think that's a terrific word, opportunistic. We've always prided ourselves on trying to take this on a very methodical basis, but when the opportunities are there you look at different things so with the balance sheet, those are possibilities that we can look to. As I've said consistently, the MD80 is not going to be our airplane 20 years from now and we need to have a transition plan over time that will work for us, so we consistently look at that, Andrew and his staff have looked at airplanes consistently for the last four or five years and the only issue right now with other airplanes is financing and Andrew can comment some more on that, but opportunistic is the appropriate word, Kevin.

Yes, I think the only thing I'd add to that, Kevin, is, as Maury mentioned, we're always looking at the aircraft markets and always asking whether we should be in another type and that analysis continues and at some point in the future, it will be the right time to perhaps move in that type of direction and we'll let you know when that is.

Is a newer airplane, some of your business model is built on flexibility and a low ownership cost. Is the analysis a newer airplane or does it encompass used airplanes as well? How extensive is that analysis?

No, we look at all options. We obviously are very comfortable with used aircraft, so when we think about an airplane that might be an eventual replacement to an MD80, we certainly look at the options in the new market as well as in the used market so to speak.

Is that really how we think about it as a replacement for the MD80 or is it supplementing the MD80 or both?

Well, it's both because the newer piece of equipment is going to give you better range and it's going to give you better short feel performance, so I think that we've always said when we've thought about the idea of a different narrow body type of equipment that we would view that as perhaps some kind of a growth vehicle for us which would give us more seats, better operating expenses on a unit cost basis and allow us to tap into revenue opportunities that currently we can't get to with the MD80 aircraft type, so, but again, this is stuff we look at all the time. We're not prepared to suggest that we're about ready to do anything in this regard but we just continually look at that and want to consider all options out there to, as you mentioned, to take advantage of some of the advantages we have and do what we think is going to be right for long term creation of value.

Okay. And if I could, one more. The industry downturn has lead to basically some of your competitors to the extent that you actually have competitors in your markets, but let's just use broadly competitors, to be in extreme financial difficulty with say terrible liquidity and the potential for maybe some event to have happen, what is your positioning with regard to that, how do you think about that as it relates to opportunities for you maybe to increase your growth in the future?

When was the last time somebody ever kind of gave up the ghost in this business, Kevin? I mean, I'm sure more than one of us are sitting around waiting for that, but I think that's a defining moment for the industry and will be positive. We certainly don't want to lose our focus of growing towards what has made sense for us over time, staying away from head-to-head competition, and we see a lot of growth, I might add, out there for that, still in the system. But I don't want to speculate about somebody else's demise on a public call here at this point in time, but the industry you would think something should give so to speak in the next six to 12 months with the environment we find ourselves in if it doesn't change.

Okay, thank you.

Thank you. Operator?

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

Thank you very much, operator. Hi, gentlemen. Just two questions. One is on aircraft that you are getting from Japan Air, all of those aircraft are going to be parted out; is that correct?

Yes, that's correct, Helane. We will not operate any of those aircraft.

Okay. So, how should we think about that in terms of, I guess it's part of the capital spending that you're talking about, but then it goes right into inventory. Is that how we should think about it?

Yes, I mean, we're buying, essentially you should think about it as we're buying a whole bunch of engines and parts and we're spending capital to do that, obviously, and they will go into PP&E so to speak and be depreciated over time consistent with our accounting policy.

Okay. Great. I just needed to have that clarified. And then my other question is on the guidance where you talk about the capacity in departure growth and so on, I know you said and I just missed it, is it system or scheduled?

I believe that's-- Everything we've put out there publicly is system capacity, and we're not prepared to provide anything on the scheduled side, at least not right as of this moment.

Okay. That's fine. I wanted to make sure I have that correct. That's all for me, thank you.

Thanks.

We'll go next to David Fintzen with Barclays Capital.

Good morning, guys. Just a quick follow-up on the average fare through the quarter. I think the release specifically mentioned degradation on a year-over-year basis. Is it a safe assumption to say sequentially, fares got worse May to June or is that not a safe assumption?

No, I would--

It came up in June.

Yes, I mean, I would have said already, this is Ponder. We say kind of June bottom but June bottom relative to our expectation, certainly June was an improvement from May, but we would have expected that as well so we're on an upward trend. June just was softer than I think had you asked us in advance, we would have suggested it would have been.

Okay. So, on an actual fare basis, May would have been the bottom, or hopefully, is the bottom?

Yes, that's correct.

Okay. All right. That's very helpful. And then, I take it from your Bismark comments that there's an opportunity for folks from the Northern Plains to buy distressed houses in California and you guys can fly them there.

(Inaudible), but that's interesting.

That's new marketing.

That's good ancillary opportunity. On LA, you mentioned in the release, it's profitable and it sounds like it's doing well. You did drop Monterey, just curious if there's a lot of disbursion from market to market, obviously there's going to be some, or if that was something of a one off?

Oh, yes. I mean, I think we can come at this a couple of ways . This is Ponder and Andrew may want to fill in. Certainly, Monterey was a one off and we don't go in with the anticipated desire that we'll have to eliminate a market, but I think Monterey when you look at the context of the other markets in and out of that destination, Monterey was certainly unique. It was an outlier relative to stage length, it just has different market characteristics around it and as always, we are trying things. We want to try to delve and determine which markets work and if they don't work, it's very helpful for us to even know why they don't work, and so I think maybe Monterey fits probably more into that category than not.

Yes. This is Andrew. David, let me add one thing. When we announced Fort Lauderdale with about 12 routes into Lauderdale and we did Phoenix with 12 or 13 and we're doing LA with 13, I mean, I think that you'll see in LA the same thing we saw in Lauderdale and in Phoenix, which is that some work better than we expected, some work as expected and some don't work, and the ones that don't work, we will eliminate and Monterey will go away. It was not good at all. There's a couple others we have our eye on, but I think that's kind of expected. We expect that not everything we do is going to work and sometimes it's a little hard to predict. Well, I wouldn't say sometimes. It is generally hard to predict what our service will do because, again, nobody has ever done this before, so we don't always know what to expect when you go in with a low frequency, low fare service from a small city to a big destination until you actual go do it, so we'll continue to monitor the results and I wouldn't be surprised if there's more network changes that will be made in the Southern California area over time.

Right. And to the extent you want to grow, are there ample facilities in LA?

Yes, we certainly believe so.

Okay. And then, just following up on sort of the experimentation side, and you've been around the Myrtle Beach and Punta Gorda (inaudible) certain experiments in smaller destinations. Any color? Was it the same commentary with LA, or are those things not really developing like you would hope?

I think Myrtle Beach has been tremendous. Now, that's not a year round location, but the two routes we've flown into there so far have been very, very good. Punta Gorda has been good. So, no, I think we're pretty pleased with most of what we're doing out there. I mean, the routes that don't work, we get rid of and we've never been shy about doing that, so we recently announced not only the elimination of Monterey to LA, but also Columbia, South Carolina to Fort Lauderdale, which is a route we started not that long ago but it just wasn't going to get there, we could tell, so it's gone. But, no, I think in general we're very pleased with how we're doing in some of these kind of smaller destinations that we're going after and I think you'll see us expand what we've done in Myrtle Beach next summer if trends continue and I think you'll see the same thing with Punta Gorda next winter.

And do you think those are very specific to locations or do you think that speaks to maybe some of these places like Savannah. I know you've mentioned in the past where maybe these things create some opportunities for growth.

I think that we want to fly people in small cities to the places they want to go to on vacation, and not every destination needs to be the size of Las Vegas. I mean, I think one of the things we do that's perhaps a little unique is we don't force it. We can put the right demand or the right supply for the right demand and if that means that it's never a base, but it has service to four or five locations on a seasonal basis, that's fine. So, I'd say yes, I mean, I think that there's a lot of other potential destination markets where we think we could probably fly people and make some money doing it like Savannah and New Orleans, perhaps. You can go kind of down the list. There's quite a few others that we haven't gotten into yet and that doesn't even touch on what's outside of the United States that in Mexico and in the Caribbean in particular that we think we can fly and do very well in.

Got you. Great. Appreciate the color, guys. Thanks.

We'll go next to Bob McAdoo with Avondale Partners.

Hi, guys. Could you go back through what you said? Somehow I had noise on the line. I couldn't understand, what did you say about station costs in Cuba and what else did you say about station costs?

Yes, Bob, this is Andrew. What I was saying is that our stations expense on a per departure basis was actually up and the reason that it's up is because of the introduction of flying for DOD and Cuba. Station operations expense for those programs are a good bit higher on a per term basis than our scheduled system and so the introduction of those flights has caused the overall per departure cost to go up slightly.

And what are you doing for DOD? What kind of stuff is that?

Oh, it's just ad hoc troop movements. We started, we did a full month of April and May and what I mean by that is we didn't do anything in June or July because we're so busy with our scheduled system, we just don't have any free capacity in June and July, but in April and May we did a fair amount of flying, it's all ad hoc, short notice. It's not material in the big scheme of things, but it's good incremental profitable flying when we have airplanes and crews available.

So they pay you enough to cover this incremental cost and it's higher cost because it's not someplace you're always there so you don't have your long term contracts?

Well, unless we misprice it, which I know we're not, then yes, it's very profitable. It just simply tends to increase that particular line item, but profits more than overcome that.

And I guess one other thing. As we start looking at the next two or three or four months or six months for the balance of the year, should we decide to hold the ancillary revenue number down about where it is? Is it likely to stay down at this level? Is this kind of a new level that we're going to live with given everything else we talk about in terms of customers adjusting to accommodating how you do business and all that or what do you think is the right way to think about that?

Hi, Bob, this is Ponder. I think we said in the comments that we have seen some firming on both the average fare as well as the ancillary. The ancillary is really a function of a number of variables as you know, kind of not the least of which some of it is timing and for instance, Trip Flex is kind of an interesting category. You could argue that the booking window influences Trip Flex or travel protection, travel insurance, but also when we extend the schedule, we also account for Trip Flex as it's sold in some cases, not as it's flown and various categories are accounted for differently and as a result, if we do a large schedule expansion for demand out six months, five months, seven months, for instance, we'll see kind of a flood of activity and again, customers in some cases are more apt to buy Trip Flex. So, there are some timing issues that ripple through that impact the numbers, but at this point in time, I think we've said we're fairly comfortable at these levels and we don't anticipate that this sequential reduction is a trend by any means.

But wouldn't necessarily mean that it's going to go back. Will you kind of hang at this level? Is that a reasonable thing to think about?

It's probably not unreasonable.

Bob, in our modeling, in our internal modeling, we are keeping it at these levels, but that's what we've always done is used the preceding --

Kind of the most recent data is what you rollout?

Yes. I mean, that's, we think, a reasonable assumption, but we'll see.

Very good. That's all I've got. Thanks.

Thanks, Bob.

We'll go next to Kim Zotter with Imperial Capital.

Hi, guys.

Hello.

Now, in mid-March, you announced an acquisition from your IT provider CMS. Now, with the full quarter under your belt, can you discuss kind of the progress and the benefits from this deal and also, was the enhancement to your automation platform that Ponder mentioned part of these benefits?

Kim, yes. We, as you suggested, closed on that deal last quarter, Quarter 1, and we've rejiggered, if you will, a number of the personnel that were working with them and (inaudible) and bringing them in-house. We're bringing along some senior management from their firm that have come on board and it's giving us a better focus internally strictly on our projects, better planning and certainly the revenue piece is going to be a key piece of what we'll do going forward. It's a number of actions underway to enhance the website functionality. For instance, letting customers do their own updates, things along that line, and certainly the revenue pieces that Ponder was mentioning, enhancing your ability to say book hotel only. We only allow air and hotel together at this point, so those things are in the works. We need to get our feet underneath us but we're moving very nicely forward on that stuff.

Okay, great.

Yes, this is Ponder. I would simply add that the horizon for this is not certainly in the next quarter, but I mean, we're starting to kind of on a piecemeal basis, roll these enhancements out, but ultimately we're looking at far more of a movement into a more comprehensive online travel portal than we have today and the blueprints are there and the work has already begun to accomplish that effort, so I mean we are definitely making progress and the CMS acquisition was certainly a critical piece of that direction.

Great. Thanks for the additional color.

Thanks, Kim.

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

Hi, good morning.

Good morning.

I was wondering if you could just talk about first the profitability of the fixed fee segment. I mean, despite revenue being down, is the profitability up with the DOD charters and so fourth?

I would say that the profitability of fixed fee on a percentage margin basis is probably pretty similar quarter-over-quarter. I'm not sure DOD is any more profitable than Harrah's or some of the other programs we operate in the fixed fee side of the equation, so I think that on a percentage basis, it's going to be a fairly steady number, I would say.

Okay. The other thing is in terms of, I know you guys have gone back and forth on the hedging and I mean I guess I'm wondering if there's any lean one way or the other with revenues being down. I mean, I guess it would appear to me that to have one of your largest costs a little more under control might be a benefit. I'm just wondering if you guys, if you could add a little light on that.

Yes, I would say that I would dispute your characterization of back and forth on hedging. I think that we've been very clear. We hedged from February 2002 through September of 2007 and since that point in time, we stopped and we haven't entered a derivative transaction ever since that point in time and our view is that we're managing fuel risk in the right manner, which is by principally by using one of the biggest advantages we have, which is our ability to manage our capacity very flexibly and very nimbly, and so we'll continue to manage our fuel risk exposure in that same manner. So last year, as you recall, fuel shot up and we took lots and lots of capacity out very early on and as a result we were able to drive up our unit revenue and maintain profitability, despite not having any fuel hedges in place. I don't think there's anybody out there that can say the same thing. This year, it's a different environment and but that being said, I think it's a different environment and that's why we're growing just to kind of amplify that point. So, we certainly always talk about the idea, but we're very comfortable with where we are right now without having any derivative trades in place and if we change our posture in that, we'll certainly disclose that.

Yes, I mean, I guess I was talking about internal discussions that you've mentioned instead of going back and forth on hedging, maybe I mischaracterized that. The other thing, Ponder touched on this and I mean it seems to be, I think, a problem within the economy in general, is how to get prices up and I mean I guess I'm wondering what color you could add on, what you think you guys can do to get your fares up and is this just a matter of an overall economic recovery? Is it a matter of the industry, somebody in the industry just deciding they are going to start to raise fares and the rest of the industry follows?

Well, Steve, fares are one piece of an equation. Just to talk about fares without the overall macro statement of what your objective, our objective is higher profits and then you drive your capacity according to what you think you can maximize your profits, so capacity and fares are all linked together in kind of a micro environment we live in and as far as a macroeconomic environment, sure you need the economy to improve for everybody, but we're managing very well, thank you, inside of the macro environment we're in and the fare reductions we saw in the second quarter, unexpected certainly, as Ponder was suggesting in May and June on the selling fare, the ancillary we didn't expect to go down, but just given the pressure that was on just the overall economic environment, we're not surprised it dropped a touch, but we're going to, we're managing capacity right now taking the touch out in the third quarter, so we can firm up. We're seeing better July as we mentioned, so will fares go up? Yes. I think we're at the bottom of where fares are from an industry and where we are in our system, so that should be a positive for us over time.

Yes, I mean -- Steve, this is Ponder. I'd also add just one follow on to Maury's comment is I think we do believe that in general, we do have capacity and demand in alignment and we don't really look at the PRASM component of RASM P as in Paul. We look at the TRASM as in Tom because you cannot discount the overall price point that a consumer pays so just to simply look at the average selling airfare and suggest that it's down 20% year-over-year plus the capacity is out of line with demand, we think is flawed logic. You'd have to look at the overall and again that reduction perhaps with say 12% on the total value that a customer pays all in ancillary average fair, etc.. And sure, we can fine tune it around the edges, but the real question would be have we flown less would we have made more money and that's ultimately what the asset test is and I think we believe the strategy we deployed this past quarter was the way in which we could overall maximize the profitability of the business.

Okay, I guess the only thing my concern was that you're talking about the consumer getting conditioned to pay lower fares and I guess that's my concern, not whether -- at some point, I think your cost may increase and therefore, you'd have to raise fares, but I mean, it sounds like that's more of a macro picture and you think it will go there when the industry does.

Our view is over time, if things improve, fares can improve, too. I mean, I think there's a symmetrical relationship between those two.

We're not as bad as the auto industry because people buy our product a lot more often and when they want to go because they're feeling better about themselves, they will pay up.

I completely agree with you on that. All right. Thanks for the color.

Thank you, Steve.

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

Thanks for taking it. I'm sorry, I didn't know we were going to run quite this long, but I'll ask a quick one. Just on your cost per passenger going forward, it looks like you got a slightly smaller base of departure sequentially, so how should we think about that down year to year maybe up modestly sequentially? Thanks.

Sequentially Q3, Duane, and Q4?

And this is ex-fuel. Yes.

Yes. It always goes up in Q3, just because we, it's our slowest quarter of the year, we pull our capacity way back. We typically do more maintenance in the third quarter and as Andrew said, our maintenance is going to be lumpy upwards in the back half of the year. Our seat checks are some of the heavier ones that we'll see for the next cycle, so we're going to see an increase in the non-fuel expense going forward in the third quarter and fourth quarter.

Okay, that's great. And then, in your press release, you may want to actually put the calculation for return on capital. This is the airline industry, so we don't really know how to do that.

Hey, and by the way, let me clarify just I think it's clear what Maury said, but just to be totally clear is that the increase per passenger in the third and the fourth quarter is off of the second quarter, not on a year-over-year basis, just to be very clear.

Sequentially.

Yes, sequentially higher in the third and the fourth than it was in the second.

Understood. Thanks.

All right

We'll go next to DeForest Hinman with Walthausen & Company.

Hi. I'm fairly new to the Company, but I'm still trying to get a handle on the fuel hedging strategy, just thinking about it from a big picture perspective, you guys are claiming that you have in the United States industry the leading operating margins, we have very strong balance sheet from the capitalization standpoint. How are we thinking about the risk reward in terms of not hedging in a sense where if we had 31% operating margins in the first quarter 2009, what are we in a sense giving up if we were to lock in aircraft fuel?

DeForest, let us give you a call back. Give Robert Ashcroft a call and let us take you through some of that. You're into a very exotic description of what you think you're giving up and exercising it and we've talked about that now for, gosh, a year and a half, two years, so rather than keep the whole audience there, let's go that direction if you don't mind.

All right. And I have another question on your ancillary revenue that's coming from the up sells of the packages. How much visibility do we get from those partners and how are we actually paid for those upsells?

Well, again, just -- this kind of goes back five, six, seven years since we've been doing this. We function on the merchant model as we sell hotels we don't take inventory risk and we actually manage the margin off of a fixed price for purchasing those rooms from our hotel partners, so that's the model we use and we control the markup.

And again, that's probably a better question to be handled offline with Robert Ashcroft, our IR person will be happy to walk you through that in a lot more detail.

All right. Why don't I give you guys another call?

Great.

All right, thank you.

We'll go next to Brian Delaney with EnTrust.

Hi, guys. Thank you for taking the call and thank you for disclosing the same-store sale metrics. I do appreciate it. Getting back to the fares, can you just help understand how much of the Fare pressure is coming from changes in the competitive landscape, something like what's happening in Bellingham versus how much of it is just strictly to stimulate demand in markets where we don't have much competition?

That's a pretty theoretical question, Brian. At this point in time, the macro overrode everything else as a general statement what we saw in the second quarter and as we target the 90% load factors, we will let the selling fare float to accommodate that.

I guess the question is, I mean I think you guys are of the belief that your capacity is in line with the demand, so it just begs the question, why do we see fares at all times lows then if we do have such a good match up between capacity and demand?

This is Andrew. If I could add, I think that what we're saying is that you can always fill up an airplane seat and it's just a question of what's the price, so I mean, the idea of capacity and supply and demand and balance, I would theoretically say they could always be in balance because you could always fill up airplane seats, but the question is can you fill them up at a price that maximizes your earnings, and that's the trick. And that's where we think that despite the fares being dramatically lower, which is mostly a function of a very difficult economic environment, we think that our capacity out there in the system is the right amount to maximize our earnings and I think the fact that we were able to do a 25% operating and pre-tax margin with $1.17 earnings per share is I think probably a fairly good evidence that I think we're probably right about that.

Okay, and I would agree. When I look at your operating profit per passenger excluding fuel, the last six quarters it's been year on year and sequentially trending down. Absent increases in fares, what is the strategy to reverse that trend?

I guess I don't know, I think we would have to confirm that number and to see if we agree with that number.

Operating profit ex-fuel this quarter was $51 per passenger. Last year I think it was almost $64, so if you go back, over a decent amount of time it has been trending the wrong way so I'm just trying to figure out is there's anything within our control that could help reverse that trend or is it a function of fares just having to come back?

Yes, but I think that you're making, I think there's a flaw in the logic. I mean, revenue and fuel are linked. The reason that revenue is down is the same reason fuel is down is because of the malaise that's going on in the world and so I don't think that you can just simply ignore fuel. I mean, I just think that that's, I just don't think that's the right way to look at it.

Okay, but the concern would be if -- all else being equal, fuel starts going back up we're not hedged and we have an underlying trend where operating profit ex-fuel is going the wrong way, that becomes a risk.

That is a risk, but I guess you have to ask yourself, do you believe that fuel and revenue are not linked, and if you think that then you're right. That's probably not a good thing. I mean, we don't believe that and I guess we'll see. So, I think that's our view, fuel and revenue, there is a link and that will continue to be the case.

Okay, and the last question on maintenance. If I look at the maintenance trend per block hour, there has been an underlying trend of that moving up and I know you guys said you think next year it will revert back to the more normalized maintenance dollar amount. What gives you that comfort, just when I think about an aging fleet, why would the maintenance cost stay flat as opposed to just continue to grow as the fleet gets older? And thank you very much for taking the call.

I'd suggest you move away from block hour. We can bring our block hours dramatically like we did in the back half of last year and that would have driven up your maintenance cost. You should look at departures are what we suggest is the best thing, so much per airplane, and we have been pretty constant in and around $90,000 an airplane per month, and we're up this quarter for some seat checks and some other things along that line and we'll be up as we said in the third and fourth quarters as well, but it's an older fleet. The trend will be to be more expensive, certainly, and we're not going to sit here and tell you it's going down, but we think we manage it pretty well and we certainly are very aggressive as Andrew indicated, going out and buying airplanes for part-outs and things like that so we're seeing a lot of the fundamental cost of stuff, engines, pieces, bits, going down and opportunistic buying on our part gives us an advantage.

Brian, one other thing. We do a bottoms up analysis of maintenance so our view is based on our bottoms up expectations of individual events that are going to occur next year. We're happy to walk you through that offline where we can get into a lot more detail about why maintenance is lumpy, so if you want to do that, you can call us.

Operator, thank you, very much. We appreciate the call today and look forward to talking to our investors and analysts 90 days from now. Thank you, very much.

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