Allegiant Travel Co (ALGT) 2010 Q4 法說會逐字稿

Welcome to Allegiant Travel Company's fourth-quarter and full-year 2010 financial results conference call. We have on the call today, Maury Gallagher, the President, 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 the webcast that the Company comment's 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 performances and any comments or strategic plans. There are many risk factors that could prevent us from achieving our goals and can cause 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 other 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. We undertake no obligations 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 earning's release as well as the rebroadcast of this call are available at the Company's investor relations' site IR.Allegiant.com. At this time, I would like to turn the conference over to Maury Gallagher for opening remarks.

Thank you, operator. Good afternoon everyone, and welcome. Thank you again for joining us this afternoon. It's a pleasure to talk with you. Joining me, as the operator indicated, are Scott Sheldon, our CFO, and Andrew Levy, our President.

We had another excellent quarter. Our 32nd consecutive profitable quarter, or eight years in a row. After tax income was $12.4 million this past quarter, 17.5% ahead of last year's $10.5 million. This represents earnings per share of $0.64 or a 23% increase for this quarter on a year-over-year basis. For the year 2010, operating revenues increased 19% or just over $100 million, to $664 million, while operating income was $105 million and EBITDA, just short of $140 million. These results kept a very impressive growth run for the past five years. Since 2006, we have grown revenues on a compounded basis at 28.5% rate. Operating profits during this time have increased 46.9%, and net income 65.8%. 2010's results represent our second year in a row with operating income north of $100 million.

Our earnings per share this year of $3.32 is almost double our previous high before 2009; however, this year's operating income and net earnings did slip from 2009's level. Energy costs, once again, were the culprit. Increases in fuel, particularly in our most recent quarter in the upward bias in the market, have once again focused us on limiting capacity in the future months. Control capacity, we found, is the best weapon against sharply rising energy costs we are experiencing today. Andrew will have further comments on our capacity for 2011.

Ironically, given the performance of fuel, it appears the travel sector is better off with an economy that muddles along versus one that is aggressively recovering. As an industry, overall economic recovery is looking quite expensive. Our goals for 2011 point to a year of investment. Beyond proper management of our energy cost, our other goals include; one, strengthening and deepening our management Group. We've added a number of senior operational personnel recently, including a new VP of Stations, Gregory Rehwaldt; a new VP of Flight Ops, Greg Baden; new Director of Safety, Eric Gust; and most recently our new CIO, Scott Allard. Scott's CIO position is a new position for the Company--one necessary for future growth and investment in our IP systems. I will have some more comments in a moment on that.

The second area of focus is to add the 757 to our certificate. We are anticipating having one aircraft available this summer.

Third area is to begin the conversion of our MD-80 fleet to 166 seats. We expect the first two aircraft to be available this summer, and have four production lines in operation thereafter. Conservative estimates suggest it will take us up to 12 months to convert the fleet. Fourth area of focus for us this year is our automation. We have been and will continue to make good progress on upgrading our current systems.

Let me make some further comments on the automation area. To my knowledge, we are one of the few, and perhaps the only carrier, to operate and maintain their own comprehensive automation system. All of our operations are controlled by our automation, and 100% of our revenues are generated through our systems. We do not have any third-party suppliers for our revenues. You must come to us to purchase Allegiant Services.

Moreover, almost 90% of our revenues are generated through our website, the highest percentage that we are aware of in the US domestic market. This control provides us both a strategic and cost advantage. Control of our automation has allowed us to experiment, to develop new ideas and products over the years. Control of our automation has allowed us to create vacation packages for our customers, allowing us to offer products that combine our air offerings with hotel and other third-party products. Control of our automation has allowed us to create the un-bundling capability necessary to generate our associated ancillary revenues. This facelift we are currently undergoing with our systems will enhance our abilities to offer a more modern look and feel, and to change our systems more quickly.

When completed, we will have what is known as a services-oriented architecture. In essence, we are un-bundling our current architecture, moving away from monolithic control of the system by programmers deep in the bowels whenever changes are necessary to a system of many distinct pieces, or services that are quote, "bolted together." This approach mirrors the apps approach so prevalent in today's phone technology. As an example, if someone has a great pricing engine, or set of algorithms for pricing we want to use, we will be able to purchase it, and bolt it onto the system, not do it ourselves. Or, moreover, we won't have to redo the entire system to upgrade this particular aspect.

Lastly, we will have a customer-oriented system versus today's flight-centric systems that are dominate the industry. Our architecture will focus on customers who want flights and other travel products. This is in contrast to today's industry systems architected around flights looking for customers.

I'm pleased with the position of our Company. We've had a consistent profitable growth, as I mentioned; currently operate 51 aircraft, serve 11 leisure destinations in 62 small cities, and have 160 routes to and from these cities and, more importantly, we have minimal direct competition on our 160 routes. With our inexpensive aircraft and strong performance, we have an exceptionally short pay back period for our aircraft. [technical difficulty] in a year assuming current $3 million acquisition costs.

Looking forward, we are well positioned. We will have another investment year in 2011, as we complete the purchase of our remaining 757's by year end and begin our 166-seat program. The combination of these two programs will provide very nice growth beginning late this year, and into 2012 and beyond. Cash flow from these investments should be plentiful beginning late this year, and into the follow-on years as well.

Lastly, I want to thank our team members for all their efforts during the past year. Once again, they continue to be critical to our success, working hard for all the right reasons, taking care to make sure your customers are delivered to their destination safely, reliably and on time.

Scott?

Thank you, Maury, and good afternoon everyone. We ended the year with unrestricted cash and short-term investments of $150.3 million, up from $125.7 million at the end of the prior quarter, but down from $231.5 million, at the end of 2009. Of the $98 million in capital expenditures for the year, $36.5 million was related to the purchase and improvements of two 757 aircraft and deposits on four 757 aircraft, yet to be delivered. $43.3 million was related to acquisition of 15 MD-80 aircraft and associated induction costs, and $10.9 million for tear down aircraft and other miscellaneous items.

Looking forward, 2011 capital expenditures are estimated to be approximately $100 million and will largely consist of expenditures for the four remaining 757 aircraft, and ongoing 166-seat reconfiguration project. Capital expenditures related to the 166-seat project are expected to be $50 million for the reconfiguration of our MD-80 fleet, of which $28 million is anticipated for 2011. We ended the year with $28.2 million in total long-term debt, down from $33.8 million at the end of the prior quarter, and down from $45.8 million at the end of 2009.

Our debt to equity ratio continues to decline as we ended 2010 with a ratio of 9.4%, down from 15.7% in 2009. In addition, our interest coverage ratio at year end 2010 was 55 times. During the year we made principal repayments of $31.7 million, partially offset by $14 million in proceeds related to financing of two owned 757 aircraft. Existing aircraft related mortgage debt bears interest at 6% to 8.5%, with maturities through 2014. We ended 2010 with 34 of our 51 revenue service MD-80 aircraft unencumbered. In addition, we currently have eight unencumbered aircraft in long-term storage, which will provide future growth over the coming years.

We returned a substantial amount of capital to our shareholders in 2010. We re-purchased approximately 1.2 million shares at a cost of $53.8 million, the majority re-purchased during the third quarter. We currently have $46.4 million remaining within our authority. Since the inception of repurchase program in 2008, we have re-purchased approximately $94 million in stock, representing almost 2.4 million shares. Also, during the year the Company paid a special dividend of $0.75 per share which totaled $19.4 million.

Turning to the cost side, we continue to see some cost pressure in the fuel, salaries and benefits, and station areas. Full-year 2010 operating expenses increased $123 million, or 28.3% on a 14.6% increase in ASMs and a 9.6% increase in departures. On a CASM ex-fuel basis, our costs were slightly up 1.6% to just over $0.05. The rapid rise in crude oil prices and continued expansion of tax spreads have added significant impact on our earnings throughout 2010.

Full year 2010 fuel expense increased 47.7%, $24.7million, due to a 30.2% increase in the cost per gallon to $2.30, and a 13.4% increase in the number of gallons consumed. Our fourth-quarter 2010 cost per gallon of $2.51 was the single highest cost per gallon since third quarter 2008, and was 21.3% higher than the same period a year ago.

Excluding fuel, our fourth-quarter cost increased at a slower pace than our capacity growth with the exception of salaries and benefits, and stations. Salaries and benefits increased 30.2%, or $6.2 million in the fourth quarter 2010, compared with the same period in the prior year despite a 9.8% decrease and full time equivalence per aircraft to 31.5% for the quarter ending 2010.

We will continue to see year-over-year cost pressure in this area through the second quarter of 2011 due to the pilot and flight attendant agreements put into place in May and July of last year. Increases related to these agreements contributed to approximately 70% of the increase year-over-year. On an annual basis, we experienced significant increases in health insurance costs and 401k matching contributions. Health insurance costs increased $1.8 million or 45.4% for the full year 2010, while we accrued 401k contributions of $1.6 million, an 81.6% increase from the prior year.

Station expenses increased 15.7%, or $2.1 million, on a 10.2% increase in departures and a 5.1% increase in rate per turn in fourth quarter 2010. On average, station costs at our leisure destinations are trending 25% higher than those at our small cities, which have remained relatively constant. This is largely due to NCO operations which began in February 2010, and will end in February 2011, which on a per turn basis were approximately 25% higher than those in Sanford.

Additionally, we are seeing cost pressure in Las Vegas. Our controllable costs are down approximately 3% from the prior year while airport controlled expenses, such as aircraft parking, are up approximately 21%. Our effective tax rate for the fourth quarter 2010 was 39.7%, which was consistent with the same period in the prior year. On an annual basis, our effective tax rate was 36.4%, slightly down from 36.7% in '09, and just below our previously guided target of 36.5%. Our effective tax rate is affected by state allocation rates which, given how we aggressively manage capacity, can result in material shifts year over year. For 2011, we estimate our effective annual tax rate to be approximately 36.5%.

Looking forward to the first quarter, we expect to see an increase in CASM ex-fuel of 8% to 10%, primarily driven by a decrease in aircraft utilization. In addition, we expect our maintenance expense per aircraft per month to fall in the $114,000 to $116,000 range for the first quarter, given our current engine maintenance outlook.

Andrew?

Thanks, Scott.

Revenue in the quarter was up $27 million, or 20% year over year, driven by gains in scheduled service and both air-related and third-party ancillaries, compared with 4Q '09, scheduled service revenue increased $20.5 million, or 24.1%, air-related ancillary increased 23.9%, or $7.7 million, and third party ancillaries were up 23.5% or $1.1 million. On a per passenger basis, average fare was 7.7% higher, air-related ancillary was up 7.5%, and third party ancillary increased by 7.3% compared with 4Q '09.

We are pleased to report increase in net income despite a 14% increase in our scheduled capacity. Our growth in 4Q was driven in large part by the addition of 15 new routes. Our network now has 160 routes, including a few which are only seasonal, and we have two more routes announced and scheduled to start this quarter. Revenue continues to be strong. We expect report about a 5% increase in January passenger RASM, and we currently expect the quarter to come in at about that same level. Total RASM should be up by similar levels, which should represent -- which would represent -- a record first quarter performance. The reduced growth rate in the first quarter of 3% to 6%, down a bit from our last guidance, will help drive this improvement. Importantly, same store markets will show about a 7% reduction in ASMs.

We have made more substantial changes to the second-quarter capacity plan. Our November traffic release included 2Q '11 guidance of scheduled ASM growth of between 6% and 9%. As fuel prices continue to climb, our December traffic release guided scheduled ASM growth of 4% to 8%, slightly lower. The current guidance for second-quarter '11 scheduled ASM growth is now flat to 4% with same store capacity expected to be lower by about 11%. We do have time to continue to adjust second quarter capacity, so if jet fuel prices continue to rise our bias will be to further reduce our capacity plans.

Let me conclude with a few comments on fixed fee revenue which was down 15.2%, or $1.9 million compared with 4Q '09. Our Harrah's programs were lower due to the suspension of the Reno program, and ad hoc revenues were also down due to a more robust scheduled service offering, and therefore less capacity available for charter fine opportunities. Additionally, one scheduled track program was operated during 4Q '09, but not in this quarter. DOD flying was up substantially, but not enough to offset the reductions described above. We do expect to see solid growth in this revenue line in first quarter of '11, due largely to the addition of our newest fix fee contract for Peppermill resorts in Wendover, Nevada, which is scheduled to start in mid-February.

With that, we are ready to take your questions.

Thank you, sir. We will now begin our Q&A session.

(Operator Instructions)

Our first question in queue is Bill Greene with Morgan Stanley. Please go ahead.

Hi, there. Good afternoon. We've seen some fare increases from the industry over the last few weeks. And I think it's probably safe to say you have very little direct competition with them, so that probably doesn't have a huge impact on you. But, the first question was, is that actually a correct view? And secondly, what can you do aside from cutting capacity to address fuel? Do you feel you have too much elasticity in your demand, or could you actually raise fares or ancillaries?

Bill, it's Andrew. Well, a couple of comments. First of all, I'll take their word for it that fare increases have been pushed through. I'll be honest with you. We don't spend a lot of time looking at the fare structure of the industry outside of the very few routes where we do have direct competition. I hope they are able to raise their fares. That's always good for us because it gives the larger umbrella that we can hopefully take our fares up as well.

I think you mentioned something that's really important which is that our -- as you know, our customer base is a leisure customer. Not to say that we don't carry other customers, but we focus and target all of our efforts on leisure customers, and leisure customers are indeed much more price sensitive. So I do think that we are not able to pass on fare increases as easily as the other Legacy, Entrance, and other larger low cost carriers that do have a mix of business traffic.

We are looking at a variety of ways to drive revenue higher in terms of, number one, trying to take price increases as well. Although, for us it takes a little longer for that to ripple through because our booking curve is far more extended than the other carriers that we are thinking about. So, we are trying to get more fare on the average fare, or on the selling fare. And then we do have a few things we are working on in the air-related and third party to just try to continue to drive results.

There is no -- I don't think there is some silver bullet out there that we can just shoot, and all the sudden we're just going to get a whole bunch more money out of our customers. It's little things. And we do expect though, as you mentioned, capacity is indeed the biggest thing, the biggest tool in our arsenal. We can reduce capacity in our markets in the vast majority of them. We can have a direct affect on our economics because of the lack of a presence of another competitor. I think one thing that's worth noting this past quarter we had the highest total average fare that we've had in the Company's history with the exception of third-quarter '08 in the middle of the fuel run-up to $150 when we had to really be aggressive on capacity.

So, we feel pretty good about the revenue environment. This next quarter the comps for us are a little bit tougher because, quite honestly, we had a really strong first quarter last year in revenue. We fell off a little in the second and third quarter, but this first quarter comp is a little bit tough. But, we are working hard, trying to maximize revenues, obviously. That's the name of the game. And we have no reason to believe fuel prices are going to recede. In fact, I would predict they will continue to march upward.

Okay. That was very helpful. Thank you. The second question is there have been news reports about a company called Vision Airlines, and to be frank, I'm not familiar with them, but they seem to cite you as sort of a model on which they're basing their own business plan. And I don't know if it's a company you've come across, but if they do start this in the southeast and go after some of these markets, do you feel it diminishes your market opportunity? Or do you know much about them? How do you think about competition specifically in your niche?

Bill, we are familiar with them about the same extent that you are. They have been -- they are actually, I believe they're headquartered here, or they have a dual headquarters here and in Atlanta. They've been doing a lot of different things over the years. I think clearly we've inspired them to try to expand their business into the scheduled service arena. I don't think that it's going have any effect at all, any material effect at all on our growth plans. We obviously are interested to see how they do. But I think they are just one of, they are a recent version of another company that's inspired by what we are doing and is trying to make it work. We will see what happens.

Was it Direct Air?

Yes, there has been several others, Direct Air, Western Airlines. I mean, they're just another one of those.So, we'll pay attention to them, certainly.

Okay. Listen, thank you for the time.

Thanks, bill.

Thank you sir. Our next question in queue is Duane Pfennigwerth with Raymond James. Please go ahead.

Hi, good afternoon guys. Just wondered if you could talk a little about X fuel CASM, that progression through the year, maybe into 2Q, and if you have an expectation for the full year, that growth rate?

Duane, this is Andrew again. So, let's see, the progression, we have seen that increase. I think Scott mentioned one of the primary reasons for that increase this past year was the increase in compensation that we granted our flight operation and inflight crews. That began in May and July, respectively, of 2010. So, certainly I think we are going to continue to see some cost pressure associated with those agreements until they get to the full year and then the comps get a little easier.

Scott mentioned station operations pressure that we are seeing, primarily in two main airports but in certainly in the case of Las Vegas that's a pretty important one for us. Costs there caught up very substantially. I think that the other aspect of cost, at least looking forward, is what happens when you pull utilization down? And when you decrease utilization, you are going to see an increase in CASM X fuel. That's just simple math.

Obviously, the reason to pull down utilization is to hopefully drive more revenue to compensate for the expected increase in CASM X fuel. As far as going forward, we're not prepared to give out guidance. Although, we do expect these expenses particularly on the labor side, to moderate as we get into the third and fourth quarters, and they no longer have that very large year-over-year increase associated with the new agreement.

Thanks for that. And then, apologize, did you give second half capacity guidance, Andrew?

Duane, no, we didn't because right now we are selling through mid August. Quite honestly, until we are ready to load the schedule beyond mid August it's highly uncertain at this point. Certainly I would expect capacity growth to be pretty tight through the entire year unless we see a reason to change that posture.

Fuel has done nothing but increase, and that increase has accelerated since the mid-December time frame, all the way through the end of this month. Until we see a reason to believe that's going to stop, it's hard to believe that we're going to be very aggressive in the back half of the year. But we'll make those decisions when the time comes.

Okay, that's great. And then if I could just sneak one last one in. You had a sequential increase in ancillaries, looks like both on the air and on the third party side. Maybe I'm reading too much into our guidance, but TRASM is up in the 5% range, looks like it's another sequential increase. Can you talk about the trend in that line going forward and what's actually driving those increases?

Well, the third party is an area that we've had a lot of focus on, and as we mentioned in the release, we are seeing dividends being paid from that. And that's been fairly consistent. We expect to continue to focus in that the effort of driving more people to buy other products and services, and explaining to customers that they can save money by doing so. We have been successful with that, but there is a lot more work to be done in that area.

On the air related, that did go up for the first time in awhile. I don't think there is any one area that we could point to, with the exception perhaps of changing our seat assignment policies. Where now if you do not choose to purchase a seat assignment in advance of travel, then you have open boarding. Since I think most people really don't like open boarding, I think we have seen, what we detect to be, an increase in the sale of seat assignments as well as our priority boarding product, which has driven that number higher.

We attribute that to the change in the boarding policies. It used to be that if you didn't buy a seat assignment in advance, we would give you one when you checked in at the airport. So, now we no longer do that. But we are going to continue to try to drive all of these 3 fare components higher, very aggressively, to try to compensate as best we can for this rapid increase that we are seeing in the jet fuel prices.

Okay. Guys, thanks.

Thanks, Duane.

Thank you, sir. Our next question in queue is Michael Linenberg with Deutsche Bank. Please go ahead.

Hi, guys. Over the quarter, you had the two different union elections. One the union prevailed, the other it didn't. When you look at flight attendants, and some of the conversations that you've had, what would you say are maybe 2 to 3 hot buttons behind the election? And then just the timing when we think about bringing in a union representation, how long do you expect the process to take? I just would add, a lot of studies have indicated that usually that initial contract, usually its several years of negotiations before you have a contract in place. Is that an assessment that you share, or something that you agree with? Whatever you can say on this would be great.

Michael, it's Maury. Thanks for the question. Hot button issues with our flight attendants. I think the feedback we got that stood out was that the compensation wasn't so much the issue, as head knocking going on between our crew scheduling group and the flight attendant group. And they were frustrated and some of that has to fall back on this group sitting around the table here, and our not paying as close attention as we should have.

As you get bigger, it's always more difficult to communicate with folks. Our message to our flight attendants, and to all of our personnel in that regard, is that they shouldn't have a right the elect a third party bargaining agent, but in this industry and other industries that are heavily unionized, you end up ultimately with bankruptcy being the primary driver. Look at steel, look at autos, look at the airline business. Unionization is one of those things that clogs the arteries and makes you less quick and not as nimble as you need to be on top of your game.

So, we feel in our core values that we want to talk directly with our people. We will continue to do that I might add. We will not default to letting the union third-party representative be our spokesperson. All those are issues. Certainly, we will sit down and negotiate with the people they put across the table from us. I think there is -- the facts are that it does take a long time to do these things practically. You've seen examples going 3 and 4 years to get contracts, not saying this one will take that long, but it is not an overnight process and everything needs to be negotiated. It's business.

We have to be very mindful of what examples we are setting for not only the industry, but for ourselves. And one of our core statements to folks is don't bring us the usual union agreement. We're not the usual company. We can't be held to the same quote, standards as the Legacy Company that's been doing this for 50, 60, 80 years, or whatever it might be. There is going to be some statement of what we have to have, and what we need. And I'm sure we will hear it from the other side as well. But we've not gone through this before. Personally, I have. I've done this twice before in younger companies. This is usually what they go through. The traditional company already with contracts in place, you basically, obviously, negotiate the existing agreement and add to it. We have to negotiate the entire first agreement. So, that will take much longer.

Okay, good. Just a quick second question, when we look in 2011, just as you indicated it's a year of investment. We have fuel prices starting out at a pretty high level. Should we expect any additional new leisure destinations in 2011, or is it just more of a function of lower risk growth, and maybe just connecting the dots?

Andrew can certainly comment. My bias right now is to stay focused internally, shore up our investments, make sure we are doing things properly get the 75's on board, don't tax our operational group more than they already are between the 75's and the 166-seat project. Certainly, longer term, there are opportunities for us to look elsewhere, but fuel has a split our heads down at this point. Andrew may have other thoughts.

I don't have anything else.

Okay, very good. Thanks, guys.

Our next questioner in queue is Gary Chase with Barclays. Please go ahead.

Good afternoon, everybody. Wanted to see if I could get a little bit more color, particularly as it related to the maintenance spend for Q1, and I understand you've outlined what it is. I'm curious if we should think of that as you pulling a lot of that activity forward, where we might see a different progression through the year? I think the term you used was maintenance per aircraft per month. Or whether something more fundamental and more durable has changed in that line?

Well, Gary, over the years, we have been doing a lot of our engine work with parting out and buying of engines. It's been the best financial approach to things. Having said that, as engines get older and people aren't investing in them, your average age of your engine has deteriorated. We, in particular out here in the west, need to have hot and high performance in the summer months. And we found last year that we suffered degradation of our ability to do and run the engines appropriately as our overall fleet age of our engines has gotten up.

So, we made a conscious decision to go back and overhaul the slug of engines to give us a much newer, better life if you will, in our fleet average. So, that's the reason. Are we pulling forwards? We're certainly pulling forward expenditures that will pay benefits over the next 3, 4, years, 5 years as it takes a while to run off that engine activity that you capitalize, or invest in rather.

I think that the key is that we view this as not a permanent recurring increase in maintenance expenses. Our maintenance is lumpy because of our accounting treatment. We are scheduling a large number of very significant engine maintenance events in the first couple of quarters of this year. So, I don't know if it's pulling forward that you should expect it to average out in the back half. It is, to a certain degree, a one time in nature, at least in terms of the intensity of the work that we are planning on doing.

If you think about the pool of engines that you think really needs this kind of attention, do we get through most of those in Q1, or is this something that we're going to be seeing through the remainder of the year?

I think it's mostly Q1 and Q2.

Yes, maybe some hang over for 3, but mostly the first half of the year.

We're trying to coincide this to be in a better position during the summer months when you do have more stressful environment for the fleet because of the high temperatures we experience.

Could we talk a little bit as well, maybe Scott you could give us a sense, is there any wage pressure from some of new hires that you've been adding, sort of broadly in the operating functions? I know you referenced it to contractual agreements with the two affected work groups. Beyond that, should we expect that there are going to be additional wage pressures from some of the hires you've been making recently?

I think the only net new would be the CIO position. The rest were kind of replacements within the stations, write ups and maintenance areas.

On the general contracts too, those things are all subject to ladders and pre-prescribed numbers that we have in place, Gary. For instance, in the pilot agreement we reset the ladders. That's why you're seeing the growth in a lot of those wage pressures. Same for flight attendants. We're working with our maintenance personnel as well. We don't have contracts, but we have agreements and understandings as to what their wage rates are.

Okay, guys.Thanks very much.

Thanks Gary.

Thank you. Our next questioner in queue is Dan McKenzie with Hudson Securities. Your line is now open.

Yes, thanks. Hi, good afternoon guys. Regarding the CASM X fuel guidance, is that a scheduled or a system stat?

That's a system stat, Dan. We show our costs on a system basis. We don't try to allocate across systems, or schedule in charter, or anything like that.

Okay, thanks, appreciate that. Then with respect to the share count drop in the fourth quarter relative to the third quarter, what were the share buybacks in the quarter? And then, looking ahead, how are you thinking about those?

There was no share buybacks in the fourth quarter. Most of the share buybacks took place late in the third quarter. I think 1.2 million shares off the table.

Got it. Looking ahead, is there any firepower left at this point, or how are you thinking about that?

Right now Dan, we're balancing our capital investments against wanting to keep a basic amount of cash in place. So, we don't want to get below certain thresholds on the cash side. But are we interested in want to be active in the shareholder buyback? Yes, we still have some $40 million left in our authority. The Board and we work together to make sure that we, first and foremost, maintain our cash balances. We think this purchase price is still attractive at these levels.

Understood, thanks. One last follow up, tied to that, are you exploring potentially a debt raise again to raise some cash, extra additional cash?

All options are open there. We haven't -- I think we have $14 million of debt left on our balance sheet, 55 times interest coverage, or some ridiculous number like that. We certainly have capacity on our balance sheet to put some debt out there. Frankly, having access to the debt market over time is probably a good thing for us. While we have nothing planned instantly, but we are certainly open to the possibility.

Okay, thanks, appreciate it.

Thank you, sir. Our next questioner in queue is Steve O'Hara with Sidoti & Company. Please go ahead.

Hi, good afternoon. I was hoping -- during your investor day, you talked about the decline in X fuel costs with the addition of the seats to the MD-80s. I know that should begin mid this year, but I don't think you are going to be able to fly those planes as aggressively as maybe you would like initially. When do you think you start to see some of that benefit?

Steve, this is Andrew. We are going to see some of the benefit in, certainly in the third quarter, and the amount of that benefit will continue to grow as time goes on, as you mentioned. We'll get a partial year this year. We'll get another partial year in 2012, and then 2013 will be the first full year where the whole fleet is at that new seating capacity. You are right. We got to get them in the fleet. We got to swap them into our base locations, and then we got to start selling the inventory. And it doesn't happen overnight.

The unit cost will be the first thing that comes Steve because the issue is if you got five airplanes in a base, and you've got two that have 166 seats, you can't really sell up to the 166 seat, but you are selling -- or providing the ASM's. So, I think it's a bit of a faux drop in unit cost because you can't get the revenue associated with it. But, nevertheless it will be -- the timing will come together, hopefully, within 9 months or thereabouts, maybe a year afterwards.

Okay. Do you think you'd see a hiccup in your load factors due to this phenomena?

Yes. You'll probably see us drop off of 90%, conservatively, if we can't sell the extra 10% seats because we are uncomfortable overselling the airplane.

Okay. Thank you very much.

Thank you. Our next questioner in queue is Helane Becker with Dahlman Rose. Please go ahead.

Thanks very much operator. Hi gentlemen. To Andrew, I think you were talking about the fact that revenues were going to be up in the first quarter, and I just wanted to know if you could give us a sense about bookings. I know you might not have closed January yet. This being the last day of the month. But maybe you could give us a sense of what traffic looked like in January and what February and March look like?

You know Helane, I think that -- I don't know if I can give a lot more color than we've tried to give, which is that we expect January passenger RASM to be up around 5%, and expect the quarterly number to be similar to that. So, I don't really want to jump into the particulars of each month. But we're encouraged by the demand environment that we are seeing out there. We are feeling pretty good about that. We'd obviously like to try to figure out ways to drive those numbers even higher still. We're hard at work trying to do so.

Okay. Actually that was kind of helpful, so I appreciate it. Thank you, that was my only question.

Sure. Thanks, Helane.

Thank you. Our next questioner in queue is Bob McAdoo with Avondale Partners. Please go ahead.

Hi, guys. Can you talk about why the tax rate moves up and down as much as it does from one quarter to the next?

Yes. This is Scott. Going into a particular year, we base a lot of the state allocations on the previous year. If you look at 2010, much of our growth was in the Phoenix and California markets, which tend to have a higher blended rate. Therefore, you're going to have upward pressure as the allocations go throughout the year, particularly if fuel continues to go up and you get out of a lot of long haul markets, it can have effect as well. So, it's really just a fluid number.

So, from the third quarter to the fourth quarter moving that much? I still don't understand what you're saying there in terms of why that would happen.

Yes. Usually in the third quarter, late in the third quarter, potentially in the fourth quarter, when you file your tax returns, any discreet items or your return to provision true up would take place, which does have affect on your year-to-date effective tax rate. Unfortunately, you got three months or three quarters worth of income which is being trued up in one particular quarter, which is why you have these large swings.

Okay. Secondly, on the 166-seat program, when you crank up these 4 lines, is literally everything that happens on those lines going to be capitalized? Or are there likely to be other kinds of things that aren't capitalized to get done so that it drives your maintenance costs up during that period?

Everything should be capped, Bob.

Okay.

If we mix it in with the C-check line, which we have the possibility of, we have to segregate what's expense versus capitalize. But we should be able to do that.

Okay. You said you got the schedule out open up throughout August, and the 757 you have, you said you'll have it ready for this summer. Do you have that 757 scheduled out there? Where are you going to run it?

Bob, no we do not have the 757 scheduled. And where we are going to run it, there is a lot of different things that we're going to look at doing with that airplane. The first thing we got to do is just get it on the certificate. At this point, it would just be premature to be actually selling a schedule that depends on that airplane. At this point, it's a little bit too far out to predict exactly when we will have the ability to use the airplane.

Okay. So, having one out there by the summer is what you think you might get to, but you still got a ways to go with the FAA?

Well, you have a lag anyway, proving runs will be scheduled sometime May, June. And we expect all that to go properly, but if it doesn't and you have a date certain when you are selling schedule service, you've left yourself open for a problem.

No, I understand that. I was trying to get a sense of where you are in the whole certification process. That's good, thank you.

Thank you.

Thank you, sir.

(Operator Instructions)

Our next questioner in queue is Kevin Crissey with UBS. Please go ahead.

Good afternoon. You guys are Allegiant Travel Company, and we have been talking a lot of airline stuff here. So, what I'm wondering is if there are any businesses that you could look to buy outside of the airline business, something in hotel booking or something along those lines? And if you have given thought to that, and how close something like that might be?

Intriguing subjects no doubt. We have not gotten down that line very far other than general discussions. We certainly, with our automation upgrade, Kevin, want to emphasize more use of our current customer base. The power of being able to sell travel-related products, all of those things. And opportunities to pair up with somebody that can enhance that ability is certainly interesting on the surface. But frankly we've had our head down with all the additions in the operational side of the airline. Probably will stay there until the second half of this year at the earliest, but nothing against it.

Okay, thank you.

Sure.

Thank you. I'm showing no additional questions. So, this concludes our Q&A session for today's program. I'd like to turn the call back over to Maury Gallagher for final comments.

Thank you all very much, appreciate your interest and your time. We will be glad to take follow up calls, and have a very good day. Thank you, again.

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