Allegiant Travel Co (ALGT) 2011 Q1 法說會逐字稿

Welcome to Allegiant Travel Company's first quarter 2011 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 Andrew Levy then Scott Sheldon. 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 performances and any comments or strategic plans. There are many risk factors that could prevent us from achieving our goals and cause the underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed in or implied by our forward-looking statements. These risk factors and others are more fully discussed in our filings with the Securities and Exchange Commission.

Any forward-looking statements are based on information available to us today and we undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. The Company cautions users of this presentation not to place undue reliance on forward-looking statements which may be based on assumptions and anticipated events that do not materialize.

The 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. It's a pleasure again to be with you and visit about a nice quarter. Joining me today are Andrew Levy, our President and Scott Sheldon, Chief Financial Officer.

We had another excellent quarter. Our 33rd consecutive profitable quarter. Our 13.1% pretax margin represented our tenth double-digit margin quarter in a row. We had net income of $17.2 million this quarter or $0.89 per share, which compares to $22.6 million in last year's first quarter or $1.12 per share. The decrease in our results year-over-year is primarily tied to the run-up in fuel costs. During the first quarter the cost per gallon increased $0.70 compared to the price in Q1 of 2010. Total fuel costs increased almost $22 million year-over-year or 38%. Over [95%] of this increase in fuel cost was due to the increase in the cost per gallon.

Sequentially the price increased $0.37 this quarter or 29% versus the fourth quarter of 2010. Fuel expense for the quarter increased $17.6 million compared to the Q4 2010 amount and again, 88% of this increase was the result of rising costs per gallon.

(Inaudible) increased the revenues this quarter to offset the run-up in fuel prices. Recovering economy of the past quarter has been one of the drivers of our increased fuel cost, but this recovery has also increased the demand side as well. In particular, March's scheduled passenger RASM was up 18% while total RASM increased just short of 17%. March was indeed the strongest month in an otherwise strong quarter, a 13.3% increase in passenger RASM and an 11.4% increase in our total RASM. We are pleased with these.

Last year Q1 2010 was a reasonably strong quarter, however, last year's second and third quarter were not nearly as strong. Coming off of April 2010, we thought we would be experiencing nice recovery in unit revenues, but to the contrary, we saw the second and third quarters 2010 passenger RASM decline 6% and 11% respectively compared to our Q1 results of last year. But we also grew considerably in Q2 and Q3 last year; 9% and 24% respectively which had a dampening affect on the RASM results.

(Inaudible) we have indicated in our last call, given the escalating fuel environment we have restrained our growth. This restraint plus the solid increase in demand in recent months suggests year-over-year comps will be good. On the cost side we are going to see pressures in the coming quarters; unit costs will be ticking up because of the slowdown in our routes certainly but we will also have pressures from maintenance as well. We have mentioned in recent months we will be investing in our engine fleet. We will recognize this cost as an expense in the coming quarters; however, the benefit of these repairs will be with us for a number of years. Scott will have further comments on our engine overhaul plans in the near-term costs.

We continue to be pleased with the state of our balance sheet (inaudible) particularly with fuel prices moving quickly and often, having minimal debt and a large backlog (inaudible) ensuring. We had a net debt of a negative 51%, mainly $143 million of debt against $306 million of cash at the end of the March quarter. Included in these totals are proceeds from our first bank loan, a $125 million transaction which closed is March. Even with this debt, our debt to equity is still below 50%.

I'm very pleased with our return on equity as well; 19% for the previous 12 months. Our strong balance sheet is a strategic asset that allows us to achieve the best economics when we look at or for investments and it protects us during difficult financial times from uncertainties in the market. Lastly, the rating agencies have recognized this strength. Per the agencies we--.

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Good afternoon again! I'm trying to think of a good description of reliability here. I apologize for that; I'm not quite sure what happened, but we're here to pick up where we think we left off. This is Maury again.

The place I'm going to start; I continue to be pleased with the state of our balance sheet in these volatile times, particularly with fuel prices moving up, having minimal debt and a large cash balance is indeed reassuring. We have net debt of a negative 51% or $143 million of debt against $306 million of cash at the end of the first quarter. Included in these totals are the proceeds from our first bank loan; $125 million transaction which closed in March. Even with this debt, our debt to equity ratio is still below 50%.

I'm very pleased as well with our return on equity; 19% for the previous 12 months. Our balance sheet is indeed a strategic asset; it allows us to achieve the best economics when we look at or for investments and it protects us during difficult financial times from uncertainties in the market.

Lastly I might add, the rating agencies recognize this strength. Per the agencies, we have the second highest rating in this sector. Additionally, our debt has been trading above par. Lastly I want to thank our team members for all their efforts during the first quarter. Once again they continue to be critical to our success, working hard for all the right reasons, taking care to make sure our customers are delivered to their destinations safely, reliably and on time. Andrew?

Thanks Maury. Our revenue performance during the first quarter was very strong, increases in yield and load resulted in year-over-year passenger RASM growth only exceeded in the third and fourth quarters of 2008. Our third party ancillary business also continues to grow very quickly. Our total sales for passenger including ancillaries was $125 which is the highest we have recorded.

We believe the strong revenue performance was due to an improving economy, very positive changes we made in our pricing approach and our aggressive micromanagement of capacity. We expect to post very strong unit revenue growth in the second quarter, as the strength we saw during the first quarter has carried over into April and beyond.

The timing of Easter this year will result in a much stronger than normal April and May unit revenue will be substantially better than last year, due to targeted capacity cuts which will result in less flying in selected markets during this shoulder period. As indicted in the release, we expect year-over-year passenger RASM growth of between 22 and 24% in April and the same range for the full quarter.

We expect capacity to be lower on a year-over-year basis in the second and third quarters, despite reduced capacity, however, our network has grown to 162 routes, up from 134 at the end of the first quarter of 2010 and we have 2 additional new routes scheduled to start in May. We have not yet determined the capacity plan for the fourth quarter but we expect to have some growth due to the addition of seats in some of our reconfigured MD80s and we expect to be operating our first 757 by that time. Assuming fuel prices remain in a fairly tight range, we will likely also add more flights in fourth quarter 2011.

Our current internal assumption is full year 2011 scheduled capacity will be up slightly compared with 2010. When fuel prices increase quickly, we moderate our capacity growth to protect our high profit margins; however, in a stable fuel price environment we can manage our system to drive very strong profits, regardless of fuel price. The velocity of change is a tough issue to manage, not the price point.

I'll turn it over to Scott to discuss in more detail our financial results.

Thanks Andrew. As Maury indicated earlier, we remain very pleased with the strength of our balance sheet. We ended the first quarter with $305 million in unrestricted cash and short-term investments, up $155 million or 103.5% from year-end. This resulted in nearly $16 of unrestricted cash per fully diluted share.

During the quarter the company executed its first capital market and debt transaction which was very well received by the market. Our syndicated six-year term loan generated proceeds of $125 million and is secured by effectively all assets of the company, excluding our 757 aircraft. In addition to our $125 million term loan, the company secured $7 million in additional financing on our third 757 aircraft purchased in the first quarter. Total principle payments and early debt retirement totaled $16.2 million during the quarter. We ended the quarter with total debt of $143.8 million which resulted in a debt to equity ratio of 45.6% and a debt to EBITDA ratio of 1.1.

Capital expenditures during the quarter totaled $40.5 million, primarily driven by the purchase of our third and fourth 757 aircraft, including aircraft improvements. In addition the company purchased six teardown aircraft to be used to harvest engines and parts for operational use.

Moving on to expenses, we continued to see unit cost pressure as a result of decreased aircraft utilization and a reduction in stage length. During the first quarter, aircraft utilization was down nearly 6% year-over-year on a 10.5% increase in operating aircraft. This resulted in a CASM ex-fuel of $0.533, an increase of 9.2% from the prior year. We expect this CASM ex-fuel trend to accelerate into the second and third quarters as we make significant improvements in the engine repairs and overhauls while constraining capacity to combat elevated fuel prices.

We are projecting the CASM ex-fuel increase of 23 to 25% in the second quarter on a nearly 8% reduction in aircraft utilization and a 10 to 12% increase in CASM ex-fuel on a full year basis.

Sharply rising fuel prices were the primary reason for a reduction in our operating margin in the first quarter. Fuel expense increased $21.8 million or 38% in the first quarter from prior year due to a $0.70 increase in the average cost per gallon and a 4.3% increase in gallons consumed. On average we paid $2.87 per gallon in the first quarter, a $0.37 increase from the average cost per gallon in the fourth quarter.

Fuel prices escalated very quickly during the quarter. The majority of the cost per gallon increase during the quarter was realized in March, historically our best month, where the combination of rising crude oil prices and the expansion of crack spreads pushed our average price per gallon from $2.73 in February to $3.14 in March, more than a $0.41 per gallon increase.

During the first quarter we continued to see unit cost pressure in the salaries and benefits area, despite an 8.4% decrease in FTEs per aircraft, to 31.7 from 34.6 in the prior year. Unit cost pressure continues to be driven by a pilot agreement which took effect in May of 2010. Year-over-year increases related to this agreement should moderate after this coming quarter as we reach the agreement's anniversary date. This quarter marked the first look back period to determine future pilot pay scales as defined in our agreement. Our 14% operating margin for the trailing 12 months will result in no changes in the pilot pay under their variable compensation pay agreement. The next look back period will be the end of the third quarter.

Engine repairs and overhauls will continue to put most of the unit cost pressure in the maintenance and repairs expense area in 2011. In recent years we overhauled very few of our engines and instead sourced engine replacements in the secondary market. This approach resulted in lower operating expenses and higher capital expenditures. In late 2010 we amended our approach and now expect to manage our engine needs through a combination of performing more service overhauls and purchasing fewer engines for replacement purposes.

Based on our amended strategy we expect maintenance and repairs expense per aircraft to be between $140,000 and $150,000 during the second quarter and between $135,000 and $145,000 during the third quarter. On an annual basis we expect our 2011 maintenance and repairs expense per aircraft to be between $120,000 and $125,000, which would include the repair and overhaul of 30 to 35 engines.

Although we anticipated a majority of these events to take place within the first half of the year, there were delays in executing our new engine overhaul services agreement which will push the majority of these events into the second and third quarters. Looking forward to 2012, we expect total engine cash outlay and maintenance expense per aircraft per month to return to normalized levels as the number of engines requiring extensive overhaul and/or replacement should be reduced.

Moving on to taxes very quickly, our effective tax rate for the first quarter increased 37 basis points to 37.2% from the prior year. The increased [apportionate] factor and higher tax states such as California was a primary driver in the increase in our (inaudible) state tax rate year-over-year. For 2011 we now estimate our effective annual tax rate to be approximately 37.2%.

And with that, moderator we're ready for questions.

(Operator instructions) Our first question is from Duane Pfennigwerth with Evercore Partners.

Just wondering if you can give us some metrics around the overhauls on the 30 to 35 that you need this year; what triggers an event and why won't you need a similar level next year?

This year is somewhat of an anomaly. There are a couple of engine manufacturers that we use for repair purposes. We had about 15 stockpiled engines that were ready to be overhauled and the extensiveness of these overhauls were on the severe side, so these would be the most comprehensive (inaudible) that needed overhaul. Moving forward 2012, although we will overhaul more engines, just the work skill there is going to be (inaudible).

Okay. Then on ancillary you had a nice bump sort of sequentially. Can you talk about what drove that and then as we look to the rest of the year, what may not have hit that line that could potentially grow it from here?

I think that's the release really. I'm not sure I can give you a lot more detail than that. We are doing a great job of getting more yield. (Technical difficulty)

It was coming from Duane's line.

Well, let me continue to try to answer the question I guess. Duane, I think the driver of improved revenue on the third party line is a combination of selling more volume, in other words increasing the take rate among our customers and additionally doing a better job of managing margins through a combination of just doing a better job of extracting yield and at the same time reducing the expense of hotel supply that we sell.

As far as on a go-forward basis, we did expect that we'll continue to be successful driving up the take rate among our customers so we expect that will result in continued improvement in that area. And at some point down the road we do think we'll have some new automation enhancements that will enable us to further enhance that line.

Your next question is from William Greene with Morgan Stanley.

There may be some background noise; don't cut me off. So the first question, when I look at your RASM and particularly the guidance that you've given for the second quarter, it actually is very good and your capacity growth rate is not outside of the industry norm and you would think that you guys actually having a much larger percentage of leisure travelers wouldn't have the same level pricing power that perhaps some guys that focus more on business travel would have, so do you have any sense for kind of what is actually driving that? Is it folks moving to you and trying you because they're looking for cheaper fares, a trade-down concept or what's sort of driving that strength when you would think that you'd actually have a more price sensitive customer?

In chatting with our pricing group, I think you hit some of the trend, the nail on the head as they say. Fares have been going up what, eight, nine fare increases here in recent months and while we've been going up, we're not as visible and/or certainly on the absolute basis not as much, so we've seen some looking around I think that people are willing to give us a try, so to speak and overall the marketplace has just been strong in the first quarter. Just as a recovering economy has driven fuel, it's also driving demand. So, to be honest with you, we had a pretty good comp coming off of last year. Our second and third quarters last year were not as good as we would have liked, in hindsight and we knew it at the time, so we're benefiting from a number of different things.

Then the second question is just when we think about the Allegiant model sort of broadly and you think about what fuel is doing, one of the things that happened in 2008 and it seems to be happening again this year is we had a little bit more challenged on the growth rate obviously given the higher fuel, so how do you manage the business if we're in a period where it's a multiyear rise in fuel; how do you think about driving growth? I understand if we have stability you can get there, but what do you do if we're in a period of volatility that's generally up?

Bill, that's obviously a tough question. I think what we tried to make clear in my comments are that the challenge isn't sustained high fuel prices; that's not a concern. The challenge is dealing with a rapidly increasing fuel price like we experienced especially in the month of March, quite honestly. We saw a huge increase in not just us, the entire industry. And of course the vast majority of our revenue because of the leisure nature of our business we have a very extended booking curve so when we enter March we have approximately 80% of the revenue on the books and that's the case for any month, yet in that month when we see a move like we saw in March, it certainly is going to take down your earnings.

But when do you know if we're in a stable pricing environment? I don't know. That's a good question. Hopefully we'll know it when we see it, you know, a stable fuel environment. We've been trading at the current levels for a while and if that continues then we'll start to feel much more comfortable in adding capacity. Obviously we look at the futures curve; it's flattened a lot versus where it was a few months ago. But no, we believe that we can adjust our business to do well at any price point and I think we've proven that again and we do expect that we can grow as long as there's a little bit less volatility on fuel prices, at least as it concerns fuel prices screaming higher like we've seen recently.

We have some natural growth go into the system regardless with the 166-seat program going on and certainly we can reduce airplanes theoretically to balance that out and the 757 is coming on-stream. So that's already been bought and paid for and will be coming down line.

Your next question is from Michael Linenberg of Deutsche Bank.

Actually a few questions here. Andrew or Maury, when you went through some of the background you highlighted your PRASM and TRASM for the month of March the gains were right on top of each other; I think one out beats the other by about a point. When we sort of think about the second quarter, is there anything seasonal that we have to be mindful of that may either provide for convergence or divergence like when you sell the bulk of your hotel rooms, etc? How should we think about that?

Mike, I think we will not see our total RASM increase at the same rate as our passenger RASM in the next couple of quarters. We don't believe we'll see that. The comps are starting to get tougher on the third party. This was up 33% on a capacity basis this past quarter. Quite honestly, we started to see a real acceleration in that line item in the second quarter last year, so the comps are going to get a little bit tougher. There related ancillary side we have a couple initiatives that we hope will continue to drive it higher but I wouldn't expect to see our total RASM increase by the 22 to 24% range that we're suggesting we're going to see on the passenger side. Nonetheless we do think we can continue to drive it higher at a little bit of a lower pace, a slower pace, excuse me.

That's helpful. And then my second question, you have Vision Airlines trying to sort of do what you guys are doing, at least that's how it's been reported. They're sort of focused on the Ft. Walton Beach area. Now they've indicated that they're looking [totally] at Las Vegas and that they may actually be doing some expansion out of Las Vegas. You guys are pretty close to people around the airport; any sense or scuttlebutt that you're hearing on maybe markets that they may choose to serve from Las Vegas; any color on that?

I'll be honest with you; we know what's out there in the public domain. They've been very effective at getting a lot of publicity, but we're not really concerned about what they're doing or anybody else is doing; we're going to go about our business. We have a lot of routes on the list that we're going to go after at the right time and if they're in there, we'll go in there too. If they're on our list. If they're not on our list then we won't. Honestly, I can tell you, we haven't even bothered to ask the airport anything about that because it just doesn't register on our radar as anything we need to be focused on.

Your next question is from Helane Becker with Dahlman Rose.

Can you just give us an update on where you stand with respect to the C program, how far along you are just relative to where you were and what you reported the last quarter numbers?

The C program you mean our overhaul of the interiors?

Yes, adding the seats to the aircraft.

It's moving along. It's a very large project. It's got a lot of issues relative to engineering and standardization. It turns out the MD-80 is not a terribly uniform -- wasn't made on a more uniform basis. I think you'll see a lot more uniformity in the way manufacturers and/or purchasers today take airplanes, so we have to go into each airplane and do the detail work. Having said that, we are underway with the first four airplanes, two in particular going through the preliminary work and hopefully we'll have some activity or availability as soon as this summer sometime. After we do the first couple, hopefully we will pick up in the pace we can do things.

Okay, but in terms of the cost, is the fact that it's more intense -- well, let me ask the question this way, is it turning out to be more intense than you thought it was going to be and is that driving a higher cost?

Not particularly, no. The activity is mostly labor, just figuring this and that out and the like, so no, the labor just isn't where your big dollars are at so we've got a little bit of extra rate. We're on budget where we think we should be and haven't had any material surprises.

Okay. Did you say or did someone say you took delivery of the third and fourth 757? So where do you stand with the certification program and weren't you leasing some of those out?

We now are owners of four 757s. We have one that's being prepared, which will be the airplane that we use to operate and we'll do our proving runs with the FAA, which we hope to be in a position to do later this summer. No specific updates to provide you at this point other than that the process is ongoing and we're on schedule, at least the expected schedule that we have internally that we discussed with the FAA and we hope to have that airplane flying around for us sometime later this summer. The other three airplanes are currently on lease in Europe with a couple of different operators and we're starting to see rent and reserve payments which will help generate some return on the capital that we put out for those assets.

Great. And then I know Andrew you said the fourth quarter you haven't determined yet, will that be an update when you file the Q or is that just going to come later this year?

(Inaudible) selling through November so we have part of the quarter up out for sale and whenever we put something out, especially that far in advance we really skinny it up a little bit and certainly expect to revise what's for sale at the moment. But no, we want to have a fairly tight selling window, especially with the uncertainty in fuel prices so at some point in the next few months -- and by the way, we just extended the schedule from mid August to mid November, so that's fairly recent.

At some point in another couple of months or so we'll probably look to extend the schedule through the holiday period and when we do that, that will be the time we have to make some decisions about capacity. And so until we get closer to that time, there's really nothing further to add.

We did give you in my comments at least an indication as to what we're assuming for capacity for the year, especially to help with modeling purposes and taking into context the forecast Scott gave on CASM ex-fuel for the overall year. Obviously if you were to add more capacity in the fourth quarter then CASM ex goes one direction and if you were to further constrain it, then it'll go a different direction. But we at least want to give you some baseline there.

Your next question is from Gary Chase with Barclays Capital.

Can you maybe walk us through the philosophical underpinnings of the decision to just overhaul more engines; is that about just having more consistent standards within the fleet? Why not continue to do things the way you have been?

I'll give you my observations. We have combined both the financial approach and an operational approach to our engine management over the past three or four years and the financial decision drove us towards buying engines and putting them on the balance sheet, capitalizing them and then depreciating them but not doing a lot of overhaul work because the arbitrage of the price of engines that were coming in was a much better approach. The issue you have with that though is that the average age of your engine fleet is going to deteriorate.

So when you get to a certain point, we felt that we needed to go back in and bring that age, if you will, of overhaul standards and time to repair up and that's what the overhaul activity will do for us. It's unfortunate the lumpiness that comes in the one and two quarters here, but we'll have the benefit of that for a couple of years, obviously as we go through and improve the overall quality of the fleet's engines.

And that's presumably, Maury, just going to give you more reliability and more consistency?

No, it's not that we were totally unreliable by any means. The engines, it's kind of on or off, they work or they don't. What they do have though is issues in the summer time here in the last with hot and high exhaust gas temperatures and performance really at their peak during those months here in the summer. So we'll be able to -- a tighter engine, a better engine or an average overhaul will certainly help us with some of those issues, but more reliable, I'm not sure I'd go quite that far. But certainly a higher degree of engine life that we'll have on lane at that point.

Okay. Can you maybe give us a little flavor, as you contemplate this slight growth for the year and we can kind of walk through what that implies in terms of capacity for the fourth quarter, could you just remind us how significant the contribution from the incremental seats could be out that far? Could that be material?

Could it be material? We are assuming very conservatively in our internal projections the number of MD-80s that will actually have the additional seats by that time and we certainly are going to move as fast as we can because we think the financial results are very very strong if we have those additional seats in the airplane. But, we're being very conservative in terms of how many we assume will be out there at that time. Whether it's material or not, I think I'll let others judge that. Clearly, we think having those additional seats for sale, in and of itself is going to be very material for the results that we generate on an airplane by airplane basis.

I guess I was just asking you from a capacity point of view.

I know what you're asking and I just don't think we're prepared to tell you okay, we expect this many airplanes on average in the fourth quarter. I think I just really would prefer not to go there. We still hope that the project will be done next summer and we think that there will be an acceleration of the pace at which we're able to get those airplanes into modification and back out again. But put it this way, we'd expect to have well under half of our operating fleet by year-end with the additional seats. It'll be a good bit south of half of the fleet size.

I'm not sure we can take advantage of all of the seats, just because they are available to fly. As we transition moving from 150 to 166 and given the profile of our flights and no overbooking and the like, our ability to back up a 166-seat airplane with a 150-seat airplane could be difficult, so transitioning we're probably going to be less than efficient as we will be when the whole fleet is there.

To further answer that, I think the effect in the third quarter will be very small. The effect in the fourth quarter will obviously be larger. And that effect will continue to grow as each quarter continues. Obviously the effect next year will be greater than this year and in 2013 we'll have the full year effect of it. So that's not as precise as you're looking for to be able to model it but I think that's really all we want -- we want to be really cautious because as Maury mentioned, this is a very complicated project and we open up an airplane and we see things that you might not expect and that's going to delay things. And so we do expect this to be very difficult, very complex, but also very worthwhile.

One of the main reasons that I'm pushing a little bit on it is just if I look at the CASM projections and if I'm not mistaken, I thought I heard Scott say the CASM ex-fuel would accelerate in the second and third quarter and that obviously implies a CASM number in the fourth quarter that I haven't had time to fully do the math, but it's going to imply a pretty significant change in the CASM dynamic as you hit the fourth quarter. So I'm just curious, is there additional color beyond the change in capacity that's causing that to happen?

I think the fourth quarter you're going to see a slight increase in capacity, driven by the 757 flying around as well as some MD-80s with the additional seats and so you'll have your utilization won't be quite as tight as we have now or at least the seats won't be quite as tight. In addition to that we have this kind of burst of expense that will recede by then. Our pilot contract year-over-year comps are going to start to minimize. We're not going to see the dramatic increases year-over-year as we have seen as we get to a one year anniversary of that deal. And as Scott indicated, we expect the vast majority of the maintenance expense associated with these engines to be recognized in the second and third quarter. So, I think that's what's driving a much better cost performance year-over-year in the fourth quarter than what we expect to see in the second and third, due to the reasons that Scott outlined.

Your next question is from Jim Parker with Raymond James.

A couple of things. First Scott, you mentioned the engine overhaul expense would be between $20 and $25 million; would you break that down by quarter? I guess we can do the second and third, but if you've got it handy, how much was in the first and then how's that going to be spread over the year?

Jim, I don't have that breakdown here with me. We're saying 20 to 25 in overhauls and up to 35 -- that would be total cash outlay for the year. That would include CapEx and OpEx. But I don't have the break out here with me.

What about the startup costs on the 757 program; was there anything in the first quarter and what does it look like in the next few quarters as far as getting that Hawaii service in place to start out next year?

There were some costs in the first quarter, albeit they weren't extensive. Q2 is going to be a lot higher as we start to put pilots and flight attendants in training, there's going to be CapEx related to storage provisioning. So the expectation that the majority of the pre-operating expenses related to 75s [in proving the range] would be in the second quarter. As far as the dollar amount, I think we've indicated before, like we see about $1 million in the second quarter related to that effort.

Another deal that's worth noting, we haven't mentioned this but we are depreciating and taking that expense for the three 757s that are on lease and obviously those aren't producing any ASMs but we are recognizing the depreciation in our expense line. Starting this quarter we'll also see a nice increase in revenue associated with that, but we do have some cost pressure there for assets that today are not generating any ASMs for us and nor will they until we start to operate those assets sometime next year.

Great. Andrew, one more just quickly, in some of these markets where you've took out a flight so you had three flights and you took out one and it's two, just some thinking on how much of a RASM improvement came from that in that market?

Jim, I think across the board our RASM was up and that's in markets where we added capacity, markets where capacity is flat, markets where we reduced capacity. Not surprisingly on a global basis the markets where we reduced capacity year-over-year showed greater RASM improvement year-over-year than did the other two categories of markets. But we saw really RASM strength everywhere; competitive markets, noncompetitive markets, all different, long-haul, short-haul, medium-haul, we really are seeing strength across the board.

But certainly we do believe that how we manage our network in terms of just better allocating our assets in many cases meaning fewer flights than we had a year ago, in other cases meaning moving capacity from one market that underperformed to another one that we thought would perform better, the result of all that we think has been very significant and a very big reason for why we had such a good unit revenue performance this past quarter.

Your next question is from Stephen O'Hara with Sidoti & Company.

My question is, in terms of the routes to Hawaii, are you planning on hedging any of that fuel need, because as far as I can tell, it's more of a calendar type item and if you have an increase in fuel I would suspect you'd want some sort of protection against a rapidly rising environment which we saw in the first quarter?

We expect to be able to fly to Hawaii hopefully next summer. So we've got a long way to go before we have to make that kind of a decision. The profile is a little different. People book further in advance, so it's certainly something we're going to think about and consider. At the moment we have taken the position that hedging by using derivatives is not something we think makes sense. It's very expensive and we are willing to endure short-term pain like we did in the first quarter as an example, when we have a very rapidly moving fuel price that outpaces the rising revenue.

We're not trying to run the company for a quarter to quarter earnings result and we have a balance sheet that permits us to not be concerned at all about a shock from fuel that would be somehow substantial in terms of our liquidity position. So, I don't think we're going to change our position but we'll look at it again as we always look at things and we'll have to make that decision when we're a lot closer to the time that we would look to start flying to Hawaii.

Then second, you mentioned I think in the last press release that you were talking to the SEC about maybe a different way to treat the expense related to these engines; any news on that front?

There's been an update since our 8-K which was released on April 15th, so we're still working through issues with the SEC, so we'll keep you posted.

Just so I'm clear, that was more of a capitalization rather than expense; is that correct?

That's correct.

Your next question is from Bob McAdoo with Avondale Partners.

A couple of quick questions. What are you paying for fuel now?

$3.30 Scott said per gallon, approximately. Not very different than what we paid in March.

Trying to get a sense, taking a snapshot here. This far into the quarter take a snapshot relative to Scott to see kind of where we are with that. In terms of the accounting for the 757s that you've got leased out, where will that revenue show up on what line? You had none of it really in the first quarter or not a material amount yet in the first quarter? What's the status of that?

The revenue would hit in other revenue line item. These things were contracted late in March so there was relatively no revenue associated with it in the first quarter. There was some slight depreciation expense but we should see revenue associated with the three leased aircraft in the second.

So the line that's at 371 is something we ought to see grow as we go forward for a while?

That's correct.

What else is on that line?

We do some outsource ground handling, it's numerous stuff, nothing real material, nothing to speak about.

One other little accounting kind of thing. The $50 million which you kind of allocated for replacing the seats or the interiors of the airplanes, how much of that is capitalized and how much of that is going to start flowing through with the P&L? Is it all capitalized?

It's all capitalized. We spent about $2.6 million related to the refurbishment program in the first quarter.

And the labor will be capitalized as well?

That's correct.

One final quick little thing. I noticed the sales and marketing line is up quite a bit versus the last couple of quarters. What happened there?

Sales and marketing is really key major components; one is the actual cost of advertising and things of that nature. That number continues to go down on per passenger basis. The other larger component of this line item is the cost associated with payments, credit card fees and that area was particularly high this quarter due to the fact that we were selling more of our seats further in advance as we very consciously extended our booking curve and with the better pricing environment the combination of those two things is driving the very significant increase in air traffic liability that we indicated in our release and also payment costs that are commensurate with that revenue stream.

And you book that when you sell the ticket, not when the passenger travels?

It's booked when it's traveled.

It's expensed when it's traveled. So (inaudible) revenue wouldn't have done anything.

I stand corrected Bob. You are correct, but it does take into account the strong revenue performance (inaudible).

Because basically the fact that the revenues went from 104-104 up to 128 that kind of 20-plus percent growth in that line drives that piece of the marketing line.

That's correct.

Well, you have to take into account the third party products are shown in a net -- the GAAP treatment is net and you show elsewhere in the release what the gross sales associated so you have to add the gross revenue for that particular--.

The gross revenue for the ancillary stuff as well into that. Okay. That makes sense.

Your next question is from Dan McKenzie with Rodman & Renshaw.

Just a few questions here. Did the FAA directive on 737s prompt the slower pace on the reseating initiative relative to original plans?

No.

And with respect to the $46 million remaining share repurchase authority, it looks like Allegiant decided not to purchase any shares in the quarter, which is a little different than what we've seen from prior quarters and I'm wondering what prompted the caution this quarter? And then related to that, given the 125 million raise, is the thought process that a portion of that would be used perhaps for buybacks later this year?

We took a very conservative view on everything this last quarter, including our capacity, with the uncertainties that we saw in the demand environment, looking back 90 days ago and in addition the fuel price curve suggesting it was going to go up, we wanted to be very conservative there. And so yes, I wouldn't take that as we've taken a different view as to the value of our stock. That's not it.

As far as going forward, we have under the term loan agreement we have the ability to purchase up to -- at least at this point in time up to $50 million. That gets measured once a year over time and that will go up as we continue to generate net income. But for now we do have the 46 million authorized, the term loan permits us to go up to 50. And so will we take advantage of that throughout the year? Yes, I think that we're going to certainly continue to look at it and we have the authority to do so and we'll act accordingly if we think it makes sense for the business.

I understand. One final question, I appreciate the PRASM guidance that you guys gave and I know others were trying to get at demand elasticity. That's always the $64 question. But the revenue guidance does differ essentially from what we've heard from others and I guess what I'm wondering is given some bullish commentary we've gotten on leisure travel from other carriers, why Allegiant's revenues wouldn't track a little bit more closely with others in the industry.

And I guess what I'm getting at is April was somewhat a weaker month for everybody and then in May and June we have this accelerated of demand but yet your PRASM guidance doesn't suggest that there'd be this acceleration demand that we're hearing from other carriers. I'm just wondering why? Do you feel like your PRASM -- I realize you guys are always sticking your neck out when you give PRASM guidance but perhaps is there a little conservative in how you're thinking about that?

Dan, when we're putting out things that we can't completely control like revenue, we certainly want to be conservative. There's no question about that. I was puzzled by the commentary about April and May that maybe other airlines provided; that's not what we've seen at all. We've seen April be incredibly strong. So I think maybe that's the difference is that I think most other commentary has suggested that April has been a little weaker and then they start to see strength in May.

We're seeing strength across the board right now. Our April was very very strong. We don't believe we lost anything by having the extended peak period in our leisure business. We think that having an extended period where Easter is based on the calendar has actually been a very big benefit to us. So that's what we're seeing.

As far as going further out in the future, we're very optimistic about June and beyond that things look pretty good but we'll see. We're certainly concerned like many others as to what might happen as a result of the rise in fuel prices at the pump and how that might affect consumer behavior. To date we have not seen any drop off but we're certainly very much looking for that and if we see any sign of it, we'll react accordingly.

We put the PRASM estimate in the release for April. I assume you saw that?

Yes. I guess what I was looking for was the step function and it seems like there's no real step function in your revenue thoughts for the quarter whereas we are hearing a step function for other airlines. I was just trying to reconcile why the rest of the industry would anticipate a step function, but Allegiant would not.

This concludes our Q&A session. I would now like to turn the call over to Maury Gallagher for final comments.

Thank you all very much. Appreciate your interest and your time. We'll be talking to you in another 90 days and in the mean time have a good day. Thank you.

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