Allegiant Travel Co (ALGT) 2010 Q3 法說會逐字稿

Welcome to Allegiant Travel Company's second quarter 2010 financial results conference call. We have, on the call today, Maury Gallagher, the Company's Chief Executive Officer and Chairman, Andrew Levy, the Company's President, and Scott Sheldon, the Company's Chief Financial Officer.

Today's comments will begin with Maury Gallagher, followed by Scott Sheldon, then Andrew Levy. After their prepared remarks, 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 risks and 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 these 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 re-broadcast of this call, are available at the Company's investor relations site, ir.allegiant.com. At this time, I would like to turn the call over to Maury Gallagher for opening remarks.

Thank you. It is a pleasure to talk again with you this afternoon. As you heard in the introduction, Scott Sheldon and Andrew Levy are joining me today. Scott will take you through our balance sheet and cost areas, and Andrew will address our revenue and quick comments.

We had another excellent quarter. Our 31st consecutive profitable quarter with after-tax income of $13.2 million, just a hair below last year's $13.8 million. Total revenues grew 23% or $30.5 million for a year-over-year increase to $163.6 million.

Fuel expense increased as well during this period 43% or $18.7 million, while non-fuel operating expenses grew 21.2% or $14.3 million. These results produced a $19.5 million operating profit and a 12% operating margin, down from last year's 16.5% operating margin in what is our seasonally-weakest quarter of the year.

We programmed ourselves for our 24% increase in capacity that we experienced in this quarter earlier this year. It appears the problems of mid-2009 were behind us and reasonable unit revenue growth back towards 2007 and 2008 levels would continue as we moved into the remainder of 2010. This was the impetus for us to increase our planned schedule activity, particularly in our recent quarter.

In hindsight, we were too aggressive with our capacity increases, given the consumer coming summer slowdown that was soon upon us. So, we have grown our production in the various quarters over the past year, we have seen corresponding increases or decreases in unit revenue growth. As example, first quarter we had capacity up 17%. Our PRASM was up 4.3%. Second quarter, not as much capacity, 9.4% increase and a lifetime PRASM of 9.4%. Third quarter, as we just discussed, capacity up over 24% and PRASM up to 3.6%.

This is a graphic demonstration of capacity controls revenues. Complicating event in these results, as I mentioned, has been the economic slowdown of this past summer. The slowdown, plus our increase in ASMs resulted in less-than-anticipated unit revenue growth, and that less-than-anticipated revenue growth resulted in lesser revenues than we had hoped for, given the growth we had put in, plus the continuing increase in our overall unit energy cost reduced our operating margin year-over-year. Andrew will have further comments on these aspects in his comments.

Let me move to a number of other efforts currently underway. Last quarter, we reported on the progress of our automation upgrade. I am happy to report we have completed the first phase of our upgrade, the conversion to our new database. This is a substantial undertaking not without risk. Some of you may have heard of some computer outages we had in late August and early September. These were related to the introduction of our new software and hardware.

I'm happy to report that (technical difficulty) the first few days, our upgrade has been a complete success. Phase 2 is now underway, namely, upgrading our application software to take advantage of the power of our new hardware and operating system. We expect some initial deliverables in the first half of next year. Thereafter, we will be continually upgrading our software with new capabilities which will allow us to offer our costumers enhanced products, particularly third-party products that we sell.

With regard to our 757 effort, we have taken delivery of two aircraft, and they are currently in heavy maintenance, including adding winglets for additional fuel efficiency. The 757 project is a time-consuming effort, and we are continuing to move ahead. We are still focused on a start date sometime in mid 2011. We have also announced an expansion of our MD-80 internal capacity from the current 150 seats to a planned 166 seats.

Over the years, we have acquired our 50 aircraft from a number of different operators. While each aircraft has 150 seats, their internal configurations vary. To convert all of our interiors to 166 seat standard configuration requires a great deal of planning and preparation. The earliest we expect to begin the conversions is mid next year, and once we start it, it will take, we think, at least nine to 12 months to complete.

We are very bullish on the revenue from this conversion. The increased seat count will provide us 16 additional seats per departure. This would have produced an additional 650,000 seats on our 40,000 plus departures over the past four quarters. These seats will be particularly valuable on our peak travel days, where the additional seats can be sold at premium prices.

The incremental operating cost to provide these additional seats includes a small increase in fuel burn, the addition of a flight attendant, and other miscellaneous expenses, but overall, the majority of the costs are fixed, and as a result, we expect to see a corresponding decline in our unit operating cost.

A business model focusing on leisure customers must maintain an efficient low-cost structure so we can stimulate our ridership through exceptionally low fares. We are on-track to grow over 16% this year in one of the most difficult environments on record. Our operating margin year-to-date is just short of 17%.

2010 should produce our second-best results, as well, in our short history. Our corporate goal, however, is a 20% operating margin. It's an aggressive goal, but one we believe we can and should target as our standard. Growth, also, is important. Our growth in 2011 and 2012 is already programmed into our system for the most part, including our 166 seat project, the 757s and additional MD-80 aircraft owned by us but still in storage.

Our near-term objective is to increase our unit revenues back to where they should be, as I mentioned previously. This is a key component of maintaining and increasing our operating margin percentage. At this point, let me turn the comments over to Scott. Andrew will have further comments, as I mentioned, on revenues and schedules.

Thank you, Maury. As Maury mentioned, we had a very good quarter in what has, historically, been our seasonally weakest quarter. During the third quarter we generated $28.4 million in EBITDA, $19.5 million in operating income, and $13.2 million in net income or $0.67 per fully-diluted share.

Moving on, let me now highlight our balance sheet and liquidity before commenting on our third-quarter cost performance. We ended the quarter with $125.7 million in unrestricted cash and short-term investments, down from $185.4 million at the end of the prior quarter. The decline in our unrestricted cash balance was primarily driven by $40.4 million share repurchases, $18.5 million in CapEx, $7.2 million in accelerated debt payments on four MD-80 aircraft.

These expenditures were partially offset by proceeds of $14 million related to fixed-interest financing, secured by two of our Boeing 757 aircraft.

Of the $18.5 million in capital expenditures for the quarter, $11 million was for the purchase of a spare Boeing 757 aircraft for parts, and induction costs related to our two previously-delivered 757 aircraft. $2.4 million was for the purchase of three MD-80 aircraft to be used for future revenue service, and $4.7 million related to other MD-80 induction costs and our aircraft part-out activity.

We currently have 8 MD-80 aircraft in storage to be used for future growth. Looking forward to the fourth quarter, we expect capital expenditures not to exceed $28 million. On a full-year, calendar-year basis, we expect capital expenditures to not exceed $110 million.

As previously 8-Ked, we entered into a financing agreement for $14 million secured by our two 757 aircraft. Some of the proceeds from this transaction were used to extinguish debt on four MD-80 aircraft, and for the purchase of two MD-80 aircraft off cap lease.

We ended the third quarter 2010 with $33.8 million in total long-term debt, $19.8 million of which is secured by MD-80 aircraft, $14 million secured by our two 757 aircraft. At year-end, we expect total long-term debt of $28.1 million and 34 of our projected 51 in-service MD-80 aircraft to be unencumbered.

During the quarter, I'm pleased to announce we have entered into a new credit card processing agreement with JPMorgan Chase's processing arm, Chase Paymentech. Not only do we feel Chase Paymentech will be a valuable, long-term strategic partner, but this agreement should allow us to substantially reduce our processing costs.

Our new processing agreement is based on financial triggers and performance thresholds that, when met, allow us to manage unrestricted cash and short-term investment balances more aggressively with limited exposure to any sort of hold-back requirement.

We are pleased to return substantial capital back to shareholders during the quarter by repurchasing 950,000 shares for $40.4 million at an average price of $42.39. Year-to-date repurchases through 3Q 2010, a total of 1.2 million shares, for $53.6 million at an average price of $44.40. Currently, we have $46.4 million remaining, under a board authorized (inaudible).

We remain very comfortable with our liquidity position and balance-sheet metrics, particularly given our new processing agreement. Our leverage ratio remains steady, our debt-to-equity is now 11.9%, and our interest coverage is 46 times. Our return on equity is [22.4]%, and our return on capital is 18%, both measured on a trailing twelve-month basis. We expect to continue to generate sufficient cash from operations to finance all CapEx requirements and debt-service obligations.

Turning to our cost performance, operating expenses increased $33 million, or 29.7% year-over-year on a 21.9% increase in ASMs and a 14.8% increase in departures. Much of the year-over-year increase can be attributable to fuel, as fuel expense increased 42.8% on a 5.8% increase in stage length.

Our cost-per-passenger ex-fuel increased 4% to $52.34, which was at the bottom of our previously guided range. CASM ex-fuel for the third quarter was down 0.6% to $0.0496.

Fuel expense increased year-over-year due to a 19.2% increase in gallons consumed and a 19.7% increase in cost-per-gallon to $2.25 from $1.88 in 3Q of '09. On a cost-per-passenger basis, fuel expense increased $7.38 to $40.06 per passenger, from $32.68 in last year's third quarter. Excluding fuel, our third quarter costs increased at a slower pace than our capacity growth with the exceptions of salaries and benefits and maintenance.

Salaries and benefits expense increased 27.5% or $6.1 million in the third quarter compared with the same period in the prior year. This increase is primarily driven by a 7% increase in FTEs year over year and a 19.4% increase in the cost per FTE.

This quarter was the first quarter that fully reflected the new pilot and flight attendant compensation agreements that we put in place in May and July of this year. Looking forward to 4Q of 2010, we will continue to see cost pressure on a year-over-year basis as a result of these agreements.

Furthermore, we continue to see increased cost pressure in the benefits area, where we have seen double-digit increases year-over-year. We are currently in the process of structurally changing our benefit program beginning in 2011, which should help us control these costs over time.

Turning to maintenance and repairs, third-quarter expenses increased $3.7 million or 29.2%, up to $16.3 million year-over-year, primarily due to a 16% increase in revenue service aircraft and a 2.6% increase in utilization, as defined by a block hour per aircraft basis. The third quarter is typically a very heavy maintenance quarter, due to the seasonality of our business. Engine overhauls and heavy maintenance checks totaled $5.9 million in the third quarter, which was a 34% increase from the same period a year ago.

As previously discussed in prior calls, maintenance expense and repairs continues to be lumpy, and we have historically guided to $95,000 to $105,000 per aircraft per month. We continue to feel this range is appropriate moving forward and will continue to evaluate it over time.

Looking forward to the fourth quarter, we have guided in our earnings release to a cost of $56 to $58 per passenger, excluding fuel. Cost-per-passenger ex-fueling in fourth quarter of '09 was $57.93, and $0.0545 on a cabin ex-fuel basis. On the capacity front, we will likely see a slight increase in stage lines and a reduction in aircraft utilization which will, again, put upward pressure on our cost structure. Now, I would like to turn it over to Andrew to discuss third-quarter revenue results.

Okay, thanks, Scott. Revenue in the quarter was up almost $30 million-- or up $30.5 million, or 23% year-over-year, driven by gains in scheduled service in both air-related and third-party ancillaries, compared with 3Q '09, scheduled service revenue increased $23.1 million or 28.5%. Air-related ancillary increased 23.6%, or $8.3 million, and third-part ancillaries were 32.2% higher, or $1.6 million, than a year ago.

Load factor was slightly lower. Average fair was 4.3% higher, and both ancillary categories were slightly higher on a per-passenger basis versus third quarter of '09. Flattish earnings, year-over-year, on a 24% increase in scheduled capacity is a disappointing result, as Maury mentioned. Our capacity plans for 3Q of '10 were largely finalized by the early part of the second quarter, and were developed with the backdrop of the improving demand environment we experienced during the first four months of the year.

At the time, we expected this trend to continue through the strong summer months. This trend, however, abruptly stopped in May, and since that time, we have experienced a stable revenue environment. It is neither decelerating nor accelerating.

Less material, but also affecting the quarter was the shutdown of the Bellingham Airport for most of September as they made needed improvements to their runway. Bellingham is our largest small city in terms of allocated capacity, and it is one of only a few markets with strong demand during September. We believe the airport shutdown caused a reduction to our earnings-per-share of approximately $0.04.

Looking ahead, we have adjusted our capacity to account for our expectation of a continued modest economic recovery, and taking into account the futures curve for fuel prices, which implies continued, relatively stable, albeit high, jet fuel prices. Our October capacity will be up about 18% year-over-year, but the rate of growth will continue to slow during the quarter, and we expect a capacity increase of between 13% and 15% for the quarter as a whole.

In routes we have operated for a year or more, capacity will increase by only 3%, so the majority of our capacity growth in 4Q of '10 will be associated with newer routes. I'll have more comments on that in a minute.

October PRASM growth, year-over-year, will be strong, as indicated in our release, and advanced bookings suggest we will see continued strength through the quarter. All three months show stronger than seasonally normal month-over-month demand, so we appear to be building momentum. We now expect 4Q of '10 PRASM to be materially higher than both the fourth quarter of '09 and the fourth quarter of '07, and we expect it will approach the levels we generated during the fourth quarter of '08.

Our ability to directly affect our unit revenue and, therefore, our financial results, due to the very unit nature of our route network, is a key strategic advantage. As many of you know, we vary our capacity often, and, sometimes, by substantial amounts, depending on demand and fuel prices. The low fixed-cost nature of our business model enables us to exercise much greater flexibility in our capacity than other airlines, and we try to take full advantage of this asset in our efforts to attempt to maximize earnings.

We believe the changes in our capacity plan will result in materially higher unit revenues, and if fuel prices remain stable, we should drive improved financial results.

We continue to extend our route network, and we plan to start service on 15 new routes during the fourth quarter. Nine of the new routes are from existing small cities, and the remaining six routes are from five small cities we plan to enter this quarter.

Adding new routes to existing small cities has, historically, been very accretive for us, since we are tapping into our existing customer base in small cities and giving them another popular travel destination option. Adding new small cities is generally more risky, but of the (technical difficulty) cities we plan to enter, three are cities where we have a large existing customer database due to service we provide at nearby airports. Only two of these small cities, Savannah, Georgia, and Bakersfield, California, will require us to build our brand from scratch.

So far, we're very pleased with the bookings for these new routes, and we are confident that they will contribute to our profitability in this fourth quarter. Let me quickly address fixed-fee revenue, which is down 24.4%, or $2.3 million compared with the third quarter of '09, two programs we no longer operate represented $2.7 million of the reduction, and Harrah's was also down $0.4 million due to the elimination of the Reno flying program.

This was offset, in part, by more ad hoc flying. We continue to see fixed-fee as a solid book of business with limited growth potential. That being said, we were successful in acquiring a new contract with the Peppermill resorts in Wendover, Nevada, for a program which will begin in February of 2011. As indicated in the guidance section of our earnings release, we expect to see another significant reduction in the fourth quarter of '10 as compared to the fourth quarter of '09 in our fixed-fee revenue.

We expect to end the year with an in-service fleet of 51 MD-80 aircraft. We plan to add one additional 150-seat MD-80 aircraft at the end of the year, which will replace one 130-seat MD-87 which will be retired from our fleet. We have 8 more aircraft owned and parked in storage, which we can add to our fleet with a few months' advance notice, so our ability to grow the business remains completely in our control and not dependent on any new aircraft acquisitions.

With that, Operator, we are ready to take any questions.

(OPERATOR INSTRUCTIONS). The first question comes from Michael Linenberg from Deutsche Bank.

Well, hey, guys, just a couple of questions here. With respect to the-- when we look at it on a same store basis, and I appreciate you providing that color, where it's up 3% in the fourth quarter and then down 8% in the March quarter. Is there any region that maybe is underperforming that's driving that, or is that where you're just going across the system and just pulling down some weekly frequencies, essentially, across the board. Any additional color on that?

Mike, this is Andrew. I think, in general, the Las Vegas and Arizona have outperformed Florida this year, but I don't know the specific answer to your question, because we really look at that on literally a route-by-route basis. It's not kind of a top-down approach, it's really just bottoms-up driven, but I suspect, based on the experience we've had over the last couple of quarters, or maybe even beyond that, we've just seen, in general, more strength in the West than in the East.

Okay, just, and on the point about the West outperforming Florida, how much-- I mean, when you think about the change to go back to Sanford, is that cost-driven, is it revenue, is it both, which is the bigger piece? I mean, what happened there and ultimately was the driving force to get you back to a single operation rather than a split operation?

Sure. Well, I think that we always anticipated the cost would be higher at Orlando International Airport. It was a bit higher-- even a bit higher than we expected when we looked at just fuel burn consumption due to some air traffic related issues and routings and things of that nature. But we also believed that we would command a fair premium in the Orlando International Airport, and after having been there for several months, we concluded that that no longer was a good assumption, and so essentially, not-- no more revenue and higher expense was not a winning combination for us.

So, we've been looking at this for quite some time, and we've decided that it's in our best interest just to consolidate the operation back in Sanford. It will definitely be beneficial to us from a cost side of the equation, and we think it will be nothing on the revenue side that we expect.

And, of course, the simplicity of having one airport, it clearly helps drive our costs lower and makes the operation just simply better.

Our next question comes from Helane Becker, Dahlman Rose.

Thank you very much, Operator. Hi, guys. Thanks for taking the question. Two questions. One, can you quantify the costs associated with the 757s that are in the numbers in terms of training costs if you've started that, and then can you update us on where you are? I think the last time we talked you were maybe three weeks or so behind schedule, so maybe you can update us there?

We have the numbers broken out for the minimal cost on that. Helane, the-- it's just sort of an arduous process going through. We're asking our FAA to do a lot. We're-- not only are we putting a new airplane type on, we're trying to get-- what's the international flag status that you need for that, as well as ETOPS.

So, it's-- I'd like to say it's going as fast or faster than we expected, but this is not unlike doing automation. There are just half-lives you have to work your way through, so we're still slugging through things, and we still believe that midsummer next year is our timeframe to get started with the airplane.

Okay, alright. So, that's not too far off the mark. And then can I just follow up on a Sanford question? Did you break out the costs or can you say-- had all of your operations been at Sanford what the numbers would have looked like versus the split operation?

Helane, this is Andrew. I think that our costs would have been lower, but we have not bothered to calculate how much lower, what was the penalty. I think we're talking about numbers that matter, but they're not going to-- they're not material, I think, in the grand scheme of things. Certainly it was more expensive to operate there, maybe a few-- $3, $4 a passenger more, as an example, but, anyway, it was only 10 routes as well, so it's really hard to say what does that mean in terms of what would it have been otherwise.

We certainly expect to see reductions in expense, though, and we'll take advantage of that as we move the operation back to Sanford.

Our next question comes from Duane Pfennigwerth from Raymond James.

Hi, guys. Good afternoon. Just wondered if you're seeing sufficient revenue momentum in the fourth quarter here. Given the current futures curve, and who knows where fuel will be tomorrow or next week, but do you think, based on the revenue outlook that you're seeing, you can begin to grow earnings again?

Yeah, Duane, this is Andrew. I think that my comments, I think, were certainly attempting to suggest just that, that we think unit revenue growth is-- looks pretty good right now. We're really pleased with the revenue picture going into the quarter. Fuel-- we'll see what it ultimately is. It's been, obviously, in a range for quite some time. It's at the higher end of the range at the moment, but we feel pretty good about what we see in the fourth quarter, and we'll see what fuel ends up doing, but right now, we're feeling pretty bullish.

Okay, thanks, and then, just on Hawaii, any estimate at this point or preliminary, if you sort of hit the approvals the way you expect, how much would that contribute to ASM growth in the back half of the year, and I understand you're probably going to play this pretty close to the vest, but how has Alaska coming into Bellingham changed your thinking about that launch at all?

Well, you're right about playing it close to the vest, Duane. I think it's safe to say it won't be a material amount of ASMs for 2011. We'll start small and put our toe in the water, and with regard to Alaska, they're certainly welcome to try and-- that market, if they'd like, I assume you're referring to Bellingham, we think that's a good market for ourselves as well.

Our next question comes from Bill Greene with Morgan Stanley.

Hi, guys. This is actually Ned, filling in for Bill. It sounds like unit revenues have picked up significantly since the summer as you work to rebalance your capacity in the system, and based on Maury's comments earlier, it sounds like you guys are focused on getting these unit revenues higher going forward, too, so you can just talk about the lessons you learned about your market this summer, if any, and how these advise your growth strategy going forward, opening new small cities and new destinations, rather than filling out existing routes or whatever it is you learned?

Yeah, Ned, this is Andrew, I'm not sure if we can say that there were a lot of lessons learned. I think that at the end of the day, we try to build our schedules looking at the futures curve and making a reasonable estimate about demand, and obviously, the effort is to maximize overall profitability, and in this case, the data that we had when we did a lot of our planning for the second quarter was based on assumptions that proved to be incorrect.

So, I suppose if anything, I guess, lessons learned would be, if you're ever in doubt, have less. Less is more, and so that's kind of how we're approaching it going forward.

But, that being said, we also want to try to grow these markets and grow overall earnings, and there's a balance there, and sometimes you're on the right side of that and sometimes you're on the wrong side. I think the benefit that we have is the ability to continue to adjust and do things that perhaps would be harder for others to do. There have been many occasions where we've had a lot of growth and it has been the right decision, in retrospect.

This is one of those cases where hindsight is great, and had we known in the second quarter what we know today about demand in the third quarter, we would have indeed had less capacity in the marketplace, but-- so, I do think that we do get a little more sophisticated about how we go about this, but I'm not sure there's a lot more to learn other than that.

And Ned, this is Maury. Just, not unlike what-- I think we're going to share or perhaps be critiqued for perhaps using on-the-gas, off-the-gas approaches to things, but, as Andrew has indicated, it's a fairly unique ability we have, and we're not afraid to try things and stick our neck out. We were criticized in the middle of 2008 when we really cut back ASMs early on because of the growth in fuel costs, and people were following us pretty closely thereafter, so we like to have the market tell us what to do, and that flexibility to go up or down is a terrific thing to have. And maybe we're going up when we should be going down at times, but I'd rather have the flexibility than not be moving at all relative to, say, the rest of the industry and the size and what they can do.

Got it, and, in addition to flexibility, you guys have always sort of exhibited a creativity to revenue-generation and your seat-addition plan certainly fits in this category. Given your profitability, I'm sure you expect this to be earnings-positive, and Maury, you spoke to your optimism about the plan earlier in the call, but maybe in addition to taking unit costs lower, I imagine the incremental seats have to get filled to incrementally lower fares, too, so do you think this is going to be margin positive as well, or just earnings positive? Do you have sort of granularity there?

It's too early to tell, but we certainly-- we would not and have not made the assumption that we're going to get an equal dollar for that marginal seat that we're getting today, but if you assume we can manage to a 90% load factor, which we've proven to be very good at, you just put any number in there, and it's going to substantially exceed, most likely, the incremental cost, so whether or not it's both-- hopefully it's margin accretive, too, as well as EPS accretive. That's my hope, and intent, but it suits a very bullish look when you sit down and do back of the envelope math, let alone doing the full projection.

Our next question comes from Dan McKenzie with Hudson Securities.

Two questions here. My first question is a housecleaning one. Where did liquidity end for the quarter?

$125 million or thereabouts in unrestricted cash.

Got it. And then, related to liquidity, Allegiant, in the past quarter, announced two share buybacks. I am wondering if you can talk about shares repurchased-- your broader philosophy on share buybacks, and then, finally, based on your current liquidity, what does this really imply about share buybacks looking ahead?

Our approach, is we've asked the Board a number of times now to have the ability to buy shares back. We think that, like every other management team, perhaps, in recent history, thinks their stock is undervalued, so with our capital needs met, if-- when we have a heavy capital requirement this year, over $100 million, to the extent we believe we have reasonable cash on the balance sheet, we're not opposed to, assuming the numbers make sense, to buying shares back on a long-term basis.

But we've got to have the investment period going on now. In the near-term, we'll have to see, but with all of the things we're doing, we need to keep our eye on the CapEx probably for the next period of time.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS). Our next question comes from Steve O'Hara from Sidoti & Company.

Hi, good afternoon. Could you just talk about, in terms of seasonal capacity, I mean, you talked about the third quarter being your seasonally-weakest quarter and your capacity-- looks like it will be the highest for the year. When does that get back to optimal? How many years does that take, or is it a matter of bringing-- everything else catching up, or is it a matter of shrinking the third quarter a little bit next year?

Steve, this is Andrew, I don't think we have any idea what capacity will be like next year's third quarter. We'll, again, adjust to what's going on in the world. Tell me where fuel is going to be and I'll begin to give you some idea of what it will look like. I think that it's just way too premature to even think about projecting what third quarter of next year is going to look like.

If things are-- if the economy is the same as it is today and fuel prices appear to be the same in terms of what the futures market is telling us, I think you'll see very modest growth in capacity, just like we're showing in the first quarter, and we expect the second quarter, we have-- some of our second quarter is for sale at the moment. I believe that that will be fairly modest growth as well, but there's a lot that will happen between now and next year that will dictate what we actually end up doing.

Okay, I guess my question is more-- I mean, you talked about the third quarter being your seasonally-weakest quarter, but wouldn't it be more beneficial to have your strongest quarter have the most capacity?

Steven, the reason that-- we can get into some of the details off-line about that. I don't think it's quite that simple. I think part of the reason we had a bit more capacity this year in the third quarter is due to the fact that we had a larger fleet of airplanes, we made a decision about airplanes well before the third quarter. There's just a lot of assumptions that lead into that. I think if you look historically, typically, our third quarter is not our quarter that we have the most amount of capacity, but as we've been growing the fleet consistently over the years, it's at times I think a little difficult to figure that out when you look at just the numbers.

But, you know, I'm not sure if I've answered your question, but--

I think, Steven, it's Maury -- you maybe -- you've just taken a generic number-- does it reflect the, as Andrew said, for instance, we had seven more airplanes this quarter than we had last year, so there'S 16%, 17% of just more airplanes that we have to deal with. Do we up the same-store sales?

Well, we thought the marketplace was coming along nicely, and we were going to see increasing unit revenues, and we could sell into that. Well, as Andrew suggested, and as we both suggested, it's-- we just saw flat stuff. So, we got ahead of our curve on the same-store sales. I don't think we were disappointed much if at all with our new markets where we put numbers to those airplanes, so it's an involved exercise to-- this particular absolute number, 24%, was certainly big, but in the context of where we were in January, February, even last fall, when we were making airplane decisions and increasing economy and a better environment, it appeared to be the right thing to do.

Our next question comes from Kevin Crissey from UBS.

Good afternoon. Can you guys talk about maybe-- maybe it's for Andrew, talk about the hotel availability and what you're seeing there and how we should think about the growth rate? I know you're keenly interested in growing the third-party ancillary and it looked like you had a decent quarter doing that-- I kind of wanted to get a sense for how that might look going forward.

Sure, Kevin. We are, obviously, very focused on growing that, and we saw some pretty good year-over-year growth. Sequentially, it is slightly down on a per-passenger basis. That's kind of normal third and fourth-quarter when we do have a pulldown, particularly in the East Coast, and Florida, especially due to seasonal demand patterns, there's just fewer passengers and fewer opportunities to sell these third-party ancillaries, but we're showing some good growth there. We expect the momentum to continue, we're doing very well in Las Vegas, and we're seeing more substantial percentage growth in markets away from Las Vegas. That's also a much smaller number of course, but the trends are all pointing in the right direction.

We've also adopted a couple new marketing approaches, market and pricing approaches which, we believe, are already showing a dividend. One is where we're guaranteeing folks that, if they can find a package price that's less expensive than buying on us, we'll give them a free roundtrip air seat. The other one being that we automatically assign a discount to the prevailing unbundled airfare if a customer bundles up a hotel at the same time instead. Both of those are showing-- they're driving increased take rate and higher overall revenue in that category. We're also very excited about the new agreement we announced yesterday with Alamo Rent-A-Car. We're extending that relationship for another three years, and we'll now be able to sell into the other brands of the Enterprise Rent-A-Car family, so that would include the Enterprise brand as well as National.

So, we're excited about all that going forward. We're obviously highly focused on it. When we're able to get into the Hawaiian market, that's a big part of the story there, we believe, and so bottom line is, trends continue to improve, and we continue to remain very focused on that area.

Are you seeing ADRs rising, and has there been any inventory reaction to that from the hoteliers?

I think ADRs are slightly higher, to answer your question, and the second part of the question, any reaction from hoteliers, no. We're very popular with the hoteliers. We are a valued distribution channel, and have seen absolutely no signs that hoteliers are going to become tighter with their inventories, that they give to us, at least.

Our next question comes from Kim Zotter from Imperial Capital.

Hi, guys. So, just a quick housekeeping item. I don't think you've touched on this already, but it looks like your tax rate came in at around 31.5%. Normally you guys are around 36%, 38%. Is there something else that happened there, and kind of what's the good rate going forward?

Yeah, Kim, this is Scott. During the quarter, we had a couple of discreet items that affected the third-quarter effective tax rate. I think if you're using the 36.5% tax rate moving forward, that's probably a good guess. In Q3, the issue had to do with the state allocation and profitability, given our mix of flyings and certain leisure destinations that tends to fluctuate. So, we had a slight benefit in the third quarter.

Okay, alright. And then just also touching on-- you mentioned that the Bellingham Airport shut down. Now, was that expected-- meaning, were you able to adjust capacity ahead-of-time?

Yeah, Kim, that's something that had been planned well in advance, so there was several weeks there where we had zero capacity going in and out of that market, and obviously, we adjusted it on the front end and on the back end, as we thought was appropriate.

Alright, great. Thank you.

Our next question comes from Michael Linenberg from Deutsche Bank.

Just a quick follow-up on the MD-80s going from 150 to 166. What's the timeframe that that will play out, and I guess, just, when we think about what's going on there, you have to add another flight attendant? Is that the case?

Yes, to pass through 150 seats, every 50 seats, you have to add a flight attendant per the regulations. As far as the start date, we've tended-- we're in the planning stages now, it's a very involved process, engineering orders, STCs, all these technical FAA requirements to do things, but we expect to kind of put our toe in the water with these efforts sometime late Spring, so, probably mid-year, so once we get it into full swing it's probably a nine month to a year process to go through the fleet.

Okay, but when you think about this, though, the benefit on CASM and, of course, the goal here is to keep running similar load factors, just with the additional 16 seats, I mean, this could be very-- I mean, it could be a nice boost to margins, all things being equal, when we get into the latter part of the year, maybe second half of 2011, certainly 2012, I mean, is that the way to think about it?

I would lean, more conservatively, towards '12. We'll-- it's a problem integrating the airplane into the fleet when your-- some of your bases have the small airplanes and the big ones, you're probably going to sell to the small ones.

Good point, yes good point. You don't want to --

The benefits-- you really have to get them comprehensively through all of your bases before you want to release-- open them up.

So, we agree that it should be highly accretive. Those seats are going to be, we believe, very, very profitable seats for us.

That would make sense, and then is there any sort of CapEx associated with this? Is this, like, a $5 million, $10 million, project, or is that too high? Or maybe that's too low, if I sort of think--

Too low. Conservatively, you'll be a few factors times your last number.

We mentioned, Mike, in our last release, that we expected the whole project to approximately be around $50 million of capital. That's, obviously, not just to buy a bunch of extra seats. In every airplane, we're going to be eliminating galleys, moving-- eliminating closets, moving lavs, it's a very involved process, and so, I think the cost is one that is surprising to many, but that's-- moving things around inside airplanes gets very costly. Obviously, we hope to come in underneath that kind of number, but that's what we're budgeting at this point in time.

And you said $50 million, like $1 million a plane?

Well, it's $50 million to do 59 airplanes-- well, actually, 56 airplanes-- no, 57 airplanes, excuse me. Basically, all of the 150-seat airplanes will have to have substantial modification work done to them. It's a little less than $1 million an airplane.

Okay good, okay, great. Thanks.

And I'm showing no further questions at this time.

Very good. Operator, thank you, thank you all very much. We'll talk to you in a couple, three months. Thanks very much, have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.