Allegiant Travel Co (ALGT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allegiant Travel Company's second-quarter 2011 financial results conference call. We have on the call today Maury Gallagher, the Company's Chief Executive Officer and Chairman; Andrew Levy, Company's President and Scott Sheldon, the Company's Chief Financial Officer. These comment 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. As a reminder this conference is being recorded.

We wish to remind listeners on 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 plan. There are many risk factors that can 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 for looking statements. These risk factors and others are more fully discussed in our filing 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 which do not materialize.

Mr. Gallagher please go ahead.

Thank you, Operator. Good afternoon everyone and again it is a pleasure to talk with you today. During the meeting, as the Operator, indicated our Andrew Levy and Scott Sheldon.

We had another profitable quarter, our 34th consecutive profitable quarter. Our 10.3% pre-tax margin represents our 11th double-digit margin quarter in a row, I'm happy to say. We had net income of $11.9 million this quarter or $0.62 per share compared to last year's $17.6 million or $0.87 per share. On the revenue front, we had excellent results this quarter. We generated $26 million more in scheduled service passenger revenue for the quarter. That is a 24% increase versus the same quarter in 2010. June in particular was up over $10 million for the quarter, or almost 40% of the increase. Total revenues for the quarter were up $32 million or 19.1%. Also, for the first time, our quarterly revenues exceeded $200 million.

I want to take a moment and pass on atta boys and girls to our revenue management group. In the past year, we have made a number of personnel changes in this area and a portion of our exceptional revenue results can be attributed to the improved management analysis in this area. We expect the year-over-year increases in unit revenue to continue during the third quarter. Andrew will have further comments on this area.

Our recent revenue results have been aided because of our capacity management. During the past 3 months, our scheduled service ASMs were down 2.6% compared to the same quarter last year. We restricted capacity because of the spiking fuel prices we were experiencing. For the quarter, fuel expense was up $24.2 million or 39%. And, I might add, we consumed less fuel this year than last, 1.6% fewer gallons, because of our lesser capacity. The cost per gallon during the past 12 months increase $0.94 to the $3.22 from $2.28 per gallon last summer. So we have demonstrated in past periods a rapidly increasing fuel cost. Restricting capacity is critical in managing appropriate increases in fares. And again the results this quarter validate this approach.

What we have limited are immediate departures inactivity because of the volatile energy environment. We've also been making substantial investments for our future. In the past 18 months we have, 1, contracted, for 6 757 aircraft for our planned trips to Hawaii. To date, we have purchased 4 of these aircraft. And 2, we have committed up to $50 million to upgrade our MD fleet to 166 seats. That's a 10% increase in capacity across the board. At the end of this exercise we will have 53 166 seat MD-83 aircraft. By the end of next year, and the -- in the then 3 years since the end of 2009, we will have added over 50% more seats to our fleet and be operating over 60 aircraft. Additionally, we will own virtually all of our aircraft and have paid for this growth primarily through internally generated funds. Our balance sheet, even after adding 50-some percent more seats, will still be among the best in the industry. As a result of these investments we will have substantially more seats per departure for our peak day flying with correspondingly lower unit cost due to more seats on each departure.

In the near-term, our limited growth has produced cost pressures in our non-fuel expenses. In addition to our capital investments in the 757 and the 166 seat program, we have been investing in our operations, particularly maintenance. As we have mentioned in previous calls, we are investing in more a engine overhauls, and given our accounting treatment, these investments creating near term expenses. Scott will have further comments on these and other non-fuel activity in his comments. We expect to have our first 166 seat aircraft available in the next month or 2. Thereafter, we are planning on converting an average of 3 or 4 per month and expect to have -- at year-end to have about 8 to 10 reconfigured aircraft available. Additionally, later this year we will complete the purchase of our fifth and sixth 757. I'm happy to report that we are operating our first 7 5. We are selling 217 seats per departure in two markets; McAllen, Texas and Rockford, Illinois to and from Las Vegas.

Our near-term focus is to develop operational knowledge of the aircraft in advance of our application for our ETOPS authority. Our plan is to apply to the FAA this fall for this authority. We are comfortable, as I said earlier, that more seats on high demand days will be a plus, both reducing the cost per passenger as well as providing more revenue potential seats on those all-important the peak travel days. And so far the initial results are good. We've been running a 90% load factor at very reasonable average fares. On the cost front, the trip fuels] within 7% to 8% of our MD-80 fuel, but with almost 70 additional seats per departure.

As many of you are aware we filed an action with the district court of Washington DC concerning DOTs recently announced Consumer Rule II. We, in conjunction with the Spirit and Southwest, are extremely concerned about the plethora of new rules from the Department. Many of these rules in our opinion are overreaches by the Department infringing on our prerogatives per the deregulation of the industry in 1978. Democratic administration then in power, recognized that government regulation of the airline industry was bad for consumers, that it limited offerings and was expensive. In fact, many of us forget that over 40 years ago in the mid-1970s, a round trip Trans-Con flight cost $2,000 or more compared to today's round-trip price, which is below $1000. While we are not terribly optimistic about our ability to reverse the DOTs new rules, we felt it important to go on the record concerning their misguided steps. Spirit and Southwest concur in our belief. I find it ironic that we, the low fare carriers, are the ones protesting the DOTs new rules. As we are children of deregulation, we want the freedom and ability to run our businesses as we believe best for our customers and our shareholders.

With that let me turn it over to Andrew for his comments.

Thanks Maury. Our revenue performance during the second quarter was very strong. As noted in the release, we increased revenue per passenger by $19 compared with 2Q of 2010, which more than offset the $15 per passenger increase in fuel expense. Being able to entirely cover the increase in fuel expense is a testament to the strength of our business. It is also evidence of our willingness and ability to move aggressively to change our capacity plans as needed to ensure we remain highly profitable. We are indeed benefiting from a very aggressive capacity plan put in place earlier this year due to the substantial fuel price volatility experienced at that time.

During Q2 of 2011, base airfare increased almost 25% to $91.17 despite a 2.3% reduction in average [stabling]. Air related ancillaries increased by 6.2% to $31.45, and third party was up 16.6% to $5.68 per passenger. Total scheduled fare per passenger was up 19.2% to a record $128.30. A slightly higher load factor of 92% helped TRASM increased by almost 22% compared with 2Q of 2010.

Strength in revenue has continued into this third quarter. In July, passenger RASM is estimated to have increased between 22% and 24% and we expect to post substantial passenger unit revenue gains of between 19% and 21% during the third quarter as compared to last year. This projected improvement is again in large part due to a very tight capacity plan. During the third quarter, we expect capacity to be lower by between 1% and 5% as compared with 3Q of 2010.

Despite our tight capacity, we continue to have a robust network of 161 routes. We have also recently announced the start of 1 new route and expect to make several additional route announcements in the coming weeks. We recently finalized our fourth quarter capacity plan, and we are now projecting growth in departures of between 1% and 5%, and growth in available seat miles of between 4% and 8%. The variance between growth in departures and ASMs is largely due to the full quarter of flying our 757 aircraft on 2 of our existing Las vegas routes, the contribution of a small number of reconfigured 166 seat MD-80 aircraft, as well as a projected 2.4% increase in fleet utilization as compared with 4Q of 2010. As always, nothing is ever final and we will react quickly to change the plan as conditions warrant. On the other hand, our 2011 fleet plan is final and we expect our current operating fleet of 51 MD-80 aircraft and one 757 aircraft to remain unchanged through the end of the year.

As indicated in the release we expect to purchase our fifth and sixth 757 aircraft in the fourth quarter and plan to have these aircraft available for service during the first quarter of 2012 in time for the spring peak vacation period. The 3 other 757s on lease with the European carriers will be returning to us in the second and third quarters of 2012, so they will not be ready for service until the second half of 2012. We hope we are able to begin service to Hawaii in time for the peak summer season of 2012, but in the meantime we'll use the 757 aircraft in our current Las Vegas network. So far we are very excited about the results from operating this aircraft.

As Maury indicated fuel burned per block hour is largely similar to the MD-80, yet we carry 67 more seats and only a slight increase in operating cost. These extra seats have already been proven to be very valuable. In fact, of the 22 flights we operated with the aircraft in July, we filled almost 80% of these incremental seats despite only beginning to sell into the extra inventory on July 1. Obviously this is a very small data range during a strong seasonal demand period, but our belief in having more seats in our aircraft will increase profits seems to be proving itself and it makes us even more excited about the MD-80 seat reconfiguration project.

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

Thank you Andrew. Turning first to our cost performance in the second quarter, we continue to see unit cost pressure in almost every expense line item as a reduced capacity, and recognize certain special expense items. During the quarter our system departure base is flat year-over-year on a nearly 7% increase in revenue service aircraft. The resulting lower fleet utilization along with approximately $4.8 million in special items, resulted in a CASM ex-fuel of $0.0592, an increase of 21.6% from the prior year. We expect to see unit cost pressure into the third quarter, typically our least active flying quarter, as we execute on our heavy maintenance engine overhaul program and reduced capacity. We are anticipating a reduction in system departures of 1% to 5% on a 2% -- 2.6% increase in average aircraft. This would translate into a nearly 7% reduction in fleet utilization during the quarter.

Rising fuel prices continue to be the story in the second quarter. Our net fuel expense increased $24.2 million, or 38.9%, to $86.5 million from the prior year due to a $0.94 increase in the average cost per gallon. Our net cost per gallon peaked in April of 2011, when we paid approximately $3.29 per gallon. This was the highest monthly cost per gallon since August 2008. Combining crude oil prices, refining, pipeline, transportation, and [into wing] costs, the Company paid the equivalent of $147 per barrel for jet fuel for the second quarter of 2011.

During the quarter we continue to experience unit cost pressure in the salaries and benefits area despite a 10.6% decrease in FTEs per aircraft to 30.6 from 34.2 year-over-year. Contributing factors to labor cost pressure year-over-year were pay increases related to our pilot, flight attendant, and mechanic workers. These increases collectively accounted for $2.3 million or 74% of the salaries and wages increase. Moving forward, salaries and wage expense should moderate as we will have reached annual milestones for both our pilot and flight attendant workers. On May 3, 2011 we transitioned our LAS station operations to airport terminal services which was the primary contributor to our FTE decrease year-over-year. This change in operations will result in lower salary and benefit expense, but will be slightly offset by increased station costs.

Unit pressure in the maintenance area continued into the second quarter as we executed on our engine repair and overhaul strategy. During the quarter, maintenance expenses increased $5.5 million or 37.2% to $20.1 million from the prior year primarily due to a $2.3 million increase in engine repairs and overhauls and a nearly 7% increase in revenue service aircraft. As indicated in our earnings release, our heavy maintenance engine budget remains unchanged and we expect to spend $20 million to $25 million in 2011 for the overhaul of 30 to 35 MD-80 engines. We now anticipate the majority of these expenses to be recognized in the third and fourth quarters.

Although scheduled service passengers were down slightly year-over-year, sales and marketing expense increased $1.3 million or 31.3% to $5.4 million during the quarter and was primarily attributable to additional credit card charges related to our nearly 20% increase in total fare. Depreciation expense increased $1.8 million, or 21.6% during the quarter due to a nearly 7% increase in revenue service aircraft and depreciation expense related to 3 leased 757 aircraft. Depreciation expense per aircraft in the second quarter was $66,000, up $12,000, or 15% from the prior year. Excluding depreciation for non-revenue service aircraft, depreciation expense per aircraft would have increased just over $3,000 per aircraft, or 5.6%, which is in line with our revenue service aircraft growth.

Other expense contained the majority of our special item expenses during the quarter. Other expenses increased $2.7 million or 33.9% driven by a write down of one MD-87 aircraft and engine dispositions and impairments related to our engine consignment program. Impairment and write down charges totaled $3.6 million for the quarter, which are slightly offset by a reduction in pre-operating and administrative costs.

Moving onto the balance sheet, we ended the second quarter with $317 million in unrestricted cash and short-term investments, up $11.5 million and 3.8% from the end of the first quarter. During the quarter, we generated operating cash of $24.6 million offset by $10.7 million in CapEx, $1.5 million in principal debt payments, and $1.6 million in share repurchases. We currently have $44.9 million remaining Board authorized authority.

And lastly let me make a few comments on our full-year 2011 CapEx projections. As reported in our earnings release, we have revised our 2011 CapEx Guidance to $140 million, up $40 million from the end of the first quarter. This change was required to support technology developments and allows us to replenish our MD-80 engine sparing levels given the change in market conditions.

The full breakdown of our 2011 CapEx are as follows -- we project capital expenditures related to our 166 seat project to be $23 million in 2011 and a total of $50 million for the project's completion. We expect $59 million in expenditures for the purchase and inductions of four 757 aircraft during 2011. The purchase price and induction cost for all six 757 aircraft remains unchanged at approximately $100 million. Secondary engine purchases and improvements for both MD-80 and 757 aircraft are expected to total $25 million in 2011. MD-80 aircraft purchases and improvements are expected total $14 million in 2011. We are not expected to add additional MD-80's to the fleet during the remainder of the year. IT expenditures related to a new data center, website, and enhanced architecture are expected to total $9 million in 2011.

And with that we are ready to take some questions.

(Operator Instructions)

Our first question comes from the line of Bill Greene from Morgan Stanley

Hi there, good afternoon. Andrew, can I ask for a little bit more granularity on the RASM commentary? If we look at what you just did in the second quarter, then we look at July numbers and then the full quarter, there's a deceleration. And yet, the capacity cut's actually pretty, pretty good, pretty substantial. So are you being conservative in your forecast for the third quarter, or you do you see in the bookings an actual deceleration?

Hello Bill, well we always try to be conservative especially on revenue which we have only a limited ability to control. So, that is I guess one point. But I would say -- I don't -- we don't view it as a deceleration at all. We view it as tougher comps.

I think that, that when you're looking at year-over-year changes you have to not only look at this year, but you have to look at last year. And last year we, we ended up putting a lot of capacity in the system and we later regretted that decision. So, we have been able to kind of have the year-over-year comps against the easiest periods for our business, and as we go further into the year the comps are going to start a little tougher. So, right now we feel really good about revenue both in July as well as through the end of the quarter and into the fourth quarter as far as we can see at this point in time.

Okay. The second question is, just looking at kind of some of the changes that we've seen at American now in their fleet, right? So one of the issues that Allegiant's always sort of addressed is at some point we will have to answer the question of what we are going to do sort of post an MD-80 world. Can you talk at all about this fleet decision at American and how it affects your strategy for flying MD-80? American sort of sited variable costs becoming a little bit of a bigger issue. You're putting a more seats on, so that'll help a bit there.

But I think they also do your maintenance. So I don't know if you have to address that, too. Can you just sort of help is think about what this does to your strategy?

Well Bill, let me first correct you about the maintenance aspect. There was a period of time when American did our heavy maintenance, but we moved over to AAR, I think actually a year and a half ago, as a matter of fact. So it's been quite some time.

So, I think that American decided to get out of the MD-80 much sooner than, obviously than before this order, is a good thing for us in terms of -- obviously it's just going to put even more downward pressure on, on availability of parts and engines and things of that nature to support the MD-80. Even if we decided tomorrow to place the MD-80, we would be expecting to fly this airplane for many years to come. We have 51 of these airplane so even if we wanted to get rid of it would take quite some time to do so. So we think we will benefit in that regard.

But we are always -- ask ourselves if we are in the right airplane to maximize the profitability of the Company and we do think that there are other aircraft that can be operated in our system, highly profitably just like the MD-80. You know, the benefit of the MD-80 is just the unique trade-off between the very low capital cost albeit with higher operating expenses and that served as really well, and it's allowed us to build a terrific business with a great balance sheet. Certainly with fuel prices being elevated and it seems as though they don't appear to be showing a lot of weakness, that may change the calculus longer-term and that is kind of particular why we are interested to see how the 757 works and we are pretty, you know, we're pretty happy with what we've seen so far even though it's only been a few weeks of operational with that airplane. You know, we will see.

We are not ready to talk about another airplane type at the moment, other than just continue to bring on the 757's. But we will continue to look at alternatives out there and at some point in time we may decide to grow with something different.

Okay. Andrew, just on the 757. Can you just help us understand the milestones to watch for ETOPS. Because we've sort of talked about this and it got delayed and so now I don't know what to expect in terms of the calendar and the milestones? Thanks.

Bill, it's Maury. There aren't a lot of milestones. You put your application in with the FAA and you get your ticket at the end of it. If you have problems along the way it just stretches you out. But there isn't kind of three steps that you have to go through specifically that we are aware of at this point.

So, it's a -- you have to use Washington DC. They are very much experts on this and will assist our [fisout] in providing the authority for this thing. So our target is, as Andrew said in his comments, to be flying next summer, which suggest we should be done by the end of first quarter or thereabouts so we have time for bookings.

Yes, Bill if I could just add, I think that our experience over a year ago I don't think should be -- I don't think that's necessarily a predictor of what we are going to run into this time. What we tried to do a year ago was different. Trying to do only the ETOPS, but also the 757 at the exact same time, and that proved to be a bit too challenging for us to try to get ETOPS authority right out-of-the-box.

And so that is why we changed our strategy, we got the 75 behind us on schedule as we had hoped. And next is to operate the airplane, get comfortable with it and then make the application to get the ETOPS 180 authority that we need to serve Hawaii. And you know, it's a bit hard to predict when that can occur but we do -- we are optimistic and we think that we have reason to be, that we will be in a position to be flying their next summer.

Okay, great thanks for the time.

Thanks Bill.

Our next question comes from the line of Duane Pfennigwerth from Evercore Partners

Hi, thanks. Good evening. Just wanted to drive a little bit further around ex-fuel costs.

It looks like you did a little bit better than your initial guidance for the quarter and I thought that most of the engine overhauls were going to be sort of a first half phenomenon. While you haven't changed guidance for the year it does sound like some of that has been pushed to the second half and the third quarter specifically. So wondering just practically what is going on? Is it an issue with a, with a supplier or re-manufacturer? What is driving the push in engine maintenance?

I think in general availability of used parts in the market in order to be used in the overhaul process I think is driving a little bit of why there is -- why these are being pushed. We anticipate upwards of 20 motors to 22 motors being repaired in the back half of the year. So, that being said, we are going to be in the market repurchasing engines from a CapEx perspective, which it'll help alleviate some of the supply issues that we are seeing.

Nothing's changed, Duane. I mean, it's just simply, it's just normal supplier chain type of issues that are pushes. In fact, after the first quarter call, we at that time did mention that this was delayed and it was being pushed more into the second quarter and third quarter and now as you noted it's more, we're going to see more of it in the third and the fourth than we had initially expected. But nothing, nothing has changed on a calendar year basis.

Okay. It looks like for the fourth quarter at least, my rough math before the call here said keeping the full-year guidance the same on ex-fuel costs implies about flat unit cost in the fourth quarter. Does that sound correct to you?

No, I think that sounds about right.

Okay.

I think that the last year's unit cost was really not very -- was pretty high. So those comps are starting to get easier as well. Although we clearly think we can do better than just simply flat going forward once we get past all this engine work.

Okay thanks. And then just, 2012, can you give us your early thoughts in terms of capacity growth and especially as the fleet mix starts to change how we should think about ex-fuel costs, either growth or decline as you guys think about it into next year? Thanks for taking the questions.

Yes, Duane, so this is Andrew, let me try and tackle that. So I think that we put out management presentations for quite some time that we expect next year's capacity growth as measured by [FM] to be approximately 20%. And that is due to the 1057 additions that we expect to see, the fleet conversion in the 166 seats from the 150. Primarily those two issues. Little bit better fleet utilization as well, as we've really ratcheted capacity down this year we expect we'll have opportunities to try to utilize the fleet a little bit better as we go forward.

As far as what does that do to unit costs? Growth tends to drive unit costs lower, and at the same time we do think these engine expenses, at least the bow wave is going to, you know, we're going to be past that as we get through this year. So next year will be a much more normalized engine maintenance run. As Scott mentioned in his comments, our labor agreements, which drove a lot of inflation in the salary line is -- we've finally lapped that, so now we are no longer seeing these large year-over-year increases and we think that that should continue going forward. So we are not ready to talk about chasm ex for 2012, but we would expect to see that number start to come in a little bit.

Okay thanks guys.

Thanks Duane.

Our next question comes from the line of Hunter Keay from Wolfe Trahan.

I'm wondering, I'd like to dig a little more on this, this appeal with the circuit court in DC, and sort of the potential outcomes here. Is it possible -- on the rule change -- is it possible maybe that we could get a partial victory here, and I'm specifically referring to the post purchase price increases, which I think is potentially, incredibly transformational if you guys are able to do that. A, if there's a part of that appeal, and B, is it possible that some of the decisions could have partial benefits?

Hunter, this is Maury -- or Wolfe, rather, this is Maury. It is hard to say, our lawyers are very conservative. The district courts are not in the habit of reversing bureaucratic departments -- government departments, historically. That's not to say they don't. I don't know if you saw 10 days ago the SEC got slapped down in one of their new rulings.

Washington DC has been active to a fault, the -- over the last year or two years with their regulatory activities both to this industry as well as many others. So, Spirit, ourselves, Southwest have substantially invested in going to the courts and suggesting this is no over-reach by the department, we think, and that's -- a number of arguments, not the least of which is it's against the Deregulation Act of 1978, among other things. So we will see. We expect it will move pretty quickly.

We have applied for a stay to stop the activity from being implemented. That is the first effort. If that is approved, that is a good sign because typically judges won't approve stays unless they think there is some real merit and possible success of the arguments. So stay tuned. That I would guess it would be available in the next 30 days, possibly 45 days.

Okay, thanks Maury. On distribution, I know that you guys obviously like to control your product and you've get a bit of a different business model, but I think some of your competitors, I think specifically Spirit actually, has had some success using GDS's simply because they have avoided a full content agreement with the GS's themselves. Is that something particularly as you invest in the IT -- is that something you could envision maybe longer-term down the road, GDS, maybe having some sort of partial content agreement where you could sort of expand your offerings, reach out to maybe potentially a wider basis as you grow the network?

Hunter, let me to take that. This is Andrew. The short answer would be no. For a couple of reasons. We have looked at that and we actually just recently again looked at it in light of the fact that Spirit is doing it and Spirit is obviously doing a terrific job. So we're trying to see if maybe there's some things they do that maybe we should consider doing and we, again, concluded that the GDS is just simply -- it doesn't make sense for our business. Principally because a big part of our businesses selling hotel packages.

If you are in the GDS now you're competing with Expedia and others for that same sale. So, we just don't see -- we see downside in that regard. The upside we don't see it. We are in the small cities where it's easy to get our brand out there, unlike the markets that Spirit targets where you're going into very large communities and the cost of advertising would be in many ways prohibitive. So, in that sense, being in the GDS is something that probably makes some sense, but that is not our model.

If we decided to pursue larger communities one day, then I guess we would have to maybe rethink our distribution strategy. But for now we are very pleased with the way in which we distribute our product and we think for our business it is absolutely the right way.

Great. Thank you so much for that. It's really helpful.

Thanks.

Jim Parker, Raymond James

Scott, a question regarding the engine maintenance. Can you quantify second quarter, then third and fourth quarters? What is the increment year-to-year? You, you were going to be much higher in the second quarter, but that's been moved out. So can you give us a number over the year-to-year change in engine maintenance expense for the second, third, and fourth quarters?

Well I will say that our engine overhaul expense last year was roughly $5 million to $6 million considering we're going to spend upwards of $20 million to $25 million. With the majority that being in the back half you can make some assumptions that it is going to be 60% to 70% of an increase.

So that's just the -- (multiple speakers) -- evenly distributed in both the third and fourth quarters?

Yes, it is probably a little higher in the third quarter than it is in the fourth.

Jim, this is Andrew. Maybe what we may consider putting a little more detail in an 8-K to put it out there. We just -- I don't think we have those numbers at our fingertips right now.

Yes, and Andrew, regarding adding the 16 seats -- I didn't hear how many you said you're going to have at the end of the year? And is that program on schedule? Are you getting as many retrofitted according to your game plan?

Jim, it's Maury. At this point, as we have commented, we'd have eight to 10 airplanes (inaudible) by the year. And then we are producing, give or take, three or four per month. So the simple math says conservatively were done by the end of next year if not just a bit sooner.

Okay, Maury, I thought you all said by the middle of next year? Now, have you moved that out to the end of next year?

We certainly are three months later anyway. Just -- it's a, it's a big project, there's a lot of very specialized requirements for producing parts and I subscribe to the half-life theory in a lot of my thinking. But, we are making good progress. We are a little, touch behind where we would've liked to have been, but still very much engaged and moving down the road is a couple months is about all we are behind at this point. We will see.

Okay, thank you.

Sure.

Our next question comes from the line of Michael Linenberg from Deutsche Bank

Hello everyone, this is actually Rita Tower filling in for Mike. Thank you for taking my question.

The first question I have is regarding the 757 you've added to service. Can you comment on what markets you'll consider using the aircraft for in future quarters? I know you mentioned that it would likely be within your Las Vegas market, but I was wondering if you could get more specific as to what cities you may consider it a good fit for until it's ready for Hawaii? And also how much we can anticipate the fifth and sixth 757 to contribute to capacity plans for the first half of 2012?

So, this is Andrew, let me see. I would say to the first question, we have no specific routes that we have kind of decided on as far as anything other than the two that we are operating. That being said, we do expect to add another one or two routes on that airplane in and out of Las Vegas at some point either later this year or early next year.

On the fifth and sixth 757's, which will be the second and third ones that we operate, at this point in time the expectation is to use those airplanes most likely for extra sections and additional capacity that we tend to want to put out there during the February, March, April, timeframe. But again we will make those decisions as we get a lot closer to, to that point in time.

As far as what percentage of the increase of capacity that those airplanes represent, I do not have a specific number I can give you right now, but there is no question that the -- we are certainly counting those airplanes being in place, in service, for the good, good amount of the year. That plus a full year of the current 757 is definitely contributing to the growth in capacity that we can expect to have next year, but I don't have a specific breakdown to give you.

Okay, great. Thank you. And my second question I'm sorry if I missed this but I believe on the last conference call you gave us a return on equity that you have achieved over the last 12 months. I was wondering if you had that number available on return on investment capital and how that compares to the weighted average cost of capital that you have?

Yes Return on Equity with 17.1% at the end of the second quarter. Debt-to-equity was 43.4%, interest coverage was 31 times well in excess of our cost of capital.

What about return on capital? Return on Capital we have that calculation as well.

Yes, 15.5%.

Yes again as Scott mentioned, we are in excess of our cost of capital so we are very focused on that metric.

Okay, perfect thank you guys.

Our next question comes from the line of Gary Chase from Barclays Capital

Good afternoon everybody.

Hi gary.

I wanted to see if I could just go back to the first question I think from Bill Green on the revenue comparisons, because I guess I kind of too understand that the guidance as a bit of deceleration. I thought that the capacity was kind of problematic, and I thought that you had implemented a set of adjustments where you kind of pointed to October as the first month that you really had an ability to touch. So, and I guess in fairness you are right about what happened a year ago, you also have to know what happened the year before that, and before that, and before that. So it's kind of a never-ending loop. But just curious for what you're, you know, what you're really seeing from a revenue perspective. Because on the surface it would feel like that was a bit of deceleration.

Gary, we feel really good about the revenue environment right now. I don't know what else to -- how else to characterize it really. We are seeing really good strength across the board in all of our markets. And we feel, as you noted, I think October was the first month that we were able to affect last year.

In reality, the first month that we were able to affect in full was probably January of this year. So the comps -- there is room there on the comps. I think that will help us through that point in time and obviously it's a better economy this year than a year ago, at least in our book it is it, even though there is a lot of talk about weakness. But we are not seeing it right now.

So, we don't really see a deceleration in our judgment. July has come in very strong. August looks very strong. September looks good as well, although, you know, September is always a weak month. And October at the moment looks very strong, particularly in Las Vegas.

Okay, and there is nothing happening year-on-year from a stage length perspective or anything that, that might distort how we would look at it?

I don't think so, but we are going to check and see if third quarter stays length. I do think we are seeing it come in a little bit. But, no, I can't think of anything, Gary.

Okay.

I think the one, the one thing I'll just mention is September there is a unique aspect to last year September which was that the Bellingham Airport was shut down for about a three-week period. And Bellingham is certainly one of ours strongest markets, and so last year there was, there was basically no operations in that market in the month of September, or very few in the month of September. This year, the reason our September capacity is going to be what it is and not material lower is because this year we will have full operations in Bellingham whereas last year we didn't. And because that is a pretty large amount of our capacity, that certainly would have the ability to influence results in the month of September and therefore for the quarter.

Okay. Could we maybe switch gears and talk a little bit about sort of the sustainability of these engine maintenance costs? And I did hear you say that things are going to be more normalized in 2012.

I'm curious, though, the way that you described some of the expense in the prepared remarks, Scott, it kind of sounded like maybe we were pulling forward some expense. Is that the way we should think about it? Or was this kind of a one-time true up to get to the right place from an operating point of view? Is there a point in time where we will see less costs as a result -- less than normal as a result of what we you spent this year?

Gary, it's Maury. Let me, let me take a shot at this. Over the years we have been arbitraging our overhaul costs against the ability to buy newer -- buy engines. And we have been in the marketplace very successfully picking up engines and we make a determination at the time an engine needs work as to whether or not to overhaul, and/or tear down and sell and part out. Additionally, our overhauls in past times have been fairly benign. We haven't been as, as deep and as wide and thorough as probably we could have been or should have been in hindsight.

But, in the summertime out here in the West with hot and high, it puts a lot of demand on engines. We are finding that is a bet penny wise and pound foolish not to have a really solid group of engines. And when you go in and do a very good overhaul, which is, you know, goes down to a couple layers lower and deeper than we have ever done historically, you end up with very strong engines that we think by the end of this year we could have more than half of our engines be nearer out of overhaul than not.

So are we pulling forward some expense? Yes, because again we don't use our fleet that much. We are only doing 80 departures per month of cycles, 1000 per year, and 2000 hours a year. So those are pretty low operating numbers. And so this investment has to run through the P&L based on accounting treatment, but we will substantially upgrade our engine capabilities and will benefit from that in the coming years.

Gary, this is Andrew. Let me add one other thing. That, that part of the increase in capital expenditures is being able to take advantage of a few opportunities to acquire very large number of engines, and that is another example of spending money this year that will benefit us for subsequent years as well.

Okay and then just one clean up one. The -- on the 166 seat configuration, have you integrated those into the schedule yet? Are you selling those seats? And at what scale do you need to be before you would, or are you doing that already?

No, we are not selling those, Gary. We are going to be really conservative about that. The last thing we want to do is sell extra seats and not have an airplane show up that can accommodate the seats. So, we are not yet ready to do that.

The 75 is another case where we literally did not sell those extra seats until the day it got on the operating certificate. I'm not sure if we will be quite as it conservative with the 166 seat, but the first couple airplanes are going to be our spares, and then we will go from there. So, we do expect to see some benefits from that in the fourth quarter. Third quarter it will be immaterial at this point, we believe. But hopefully in the fourth quarter we will start to see some benefits for selling into the seats.

Thank you very much, guys.

Thanks, Gary.

Our next question comes from the line Helane Becker from Dahlman Rose & Company

Thanks very much, Operator. Hi, gentlemen. I don't remember your policy. Do you not give fuel cost guidance, just general information?

Yes, we don't -- we don't give fuel cost guidance because you tell me what it's going to be. We tell you -- we will certainly -- what we try to do, Helane, is just tell you in our traffic release what it was in prior months. And as you know, I'm sure, we are un-hedged so we are paying, we are paying spot prices. Yes, no we do not try to predict what that's going to be.

Okay. Can you say what it was for July? This being August 1?

I don't think we have that data yet where we would be comfortable releasing it. I mean, we can give you roundabout numbers, but we will put traffic out most likely, I guess, probably later this week and we'll give you an actual number there. But I don't think it will be anything that will be out of the ordinary.

Okay, and then can I just ask you a question about bookings? Can you say what percent maybe of your seats available for August and September have been sold? So far?

Yes, we don't, we don't provide that kind of detailed information, Helane, although I will tell you that as we have spoken before we do have a very extended booking curve. And probably I believe it is a good bit more extended than any other airline that you cover just due to the nature of our business being a leisure focus. So, when we enter the month of, say August, as we do today, the vast majority of our seats have in fact already been sold. But I think we would be hesitant to provide that kind of detailed information.

Okay, then can I just ask one last question with respect to the numbers that you've already reported -- for the quarter, that just ended? And that is with respect to the third party products. Can -- you have a nice increase there, right -- 16.6%? When you were speaking last year at the Analyst Date and Investor Day, you talked about some of the changes that you were going to make going forward to improve kind of the numbers there. And I just wondered if you could comment whether or not what you thought would occur nine months or 10 months ago is actually occurring, and if there is still a lot of room to improve on that?

Helane, I think that in, I would say, we continue to be able to do a better job in that area by just blocking and tackling, and just focusing day-to-day on doing a better job there. And so in that part, I think that we are kind of meeting our own internal forecasts.

The one area that I think is going to be a step change for us in terms of being able to drive a good bit of faster pace of growth in that area is going to be tools from the investments we are making in IT. Those have not yet come, but we do expect by the end of this year to have certain capabilities that we're very excited about and we expect will be able to help us drive the sale of more in the way of third party products. So, that I think is, quite honestly, according to schedule. So, we will see. I think that the answer is kind of yes, yes -- yes and sort of, I think, to your question.

Fair enough, thank you very much. I appreciate the help.

Thanks Helane.

Our next question comes from the line of Dan McKenzie from Rodman & Renshaw

Hi, good afternoon, guys. I am generally very low to ask a modeling question, but back of the envelope the guidance appears to suggest a third quarter operating margin that is slightly worse than the third quarter of 2008 when the global economy was coming unglued. And the message that I'm hearing today seems to be that things are improving and that you feel pretty good about revenues and I'm just -- I guess I'm just trying to square that with my model.

So, first, am I missing something here? And then secondly, can you perhaps just talk a little bit more about the past to getting back to the 15% operating margins that I believe you folks are targeting? Obviously, I get the cost side, the non-fuel costs coming in, but it does suggest that revenue production would need to be strengthened further. And I guess what I'm getting at is that does Allegiant perhaps need to shrink a little further to get there?

Dan, this is Andrew. Let me take a stab at that. So not having 2008 in front of me I will trust that your math is correct.

I do remember though, in 2008 that fuel really started to break hard in the middle that quarter. Now if fuel breaks hard in the middle of this quarter our results will be far better than if it remains constant. So, I think that is one thing that perhaps is different. Our expectation is we look at the futures curve to predict our of fuel expense.

We don't think shrinking is necessarily the right approach from where we are right now. We are really tight and so I don't think that is the answer. But I think you hit the nail on the head with the other point. If you look at -- if you compare this quarter to that quarter or any other recent quarter, you have the fuel expense per passenger and then you have revenue, but then the other pieces that non-fuel cost per passenger. And as we've tried to, to mention in this call as well as last call is that we do expect that there are some certain items on the cost line that are going to affect us this year and we don't believe they are structural not to say that there isn't a higher structural cost that back in 2008 because there is. We gave our pilots and flight attendants some pretty healthy raises a year ago.

But a lot of the other increases in cost away from fuel are, we believe, more one time in nature. And we've tried to outline that in the release as well is in the prepared remarks as to why we believe that. So I think that if you factor that into the mix I'm not sure what that compares to third quarter 2008, but I'm -- my guess is that it would probably compare little better.

Okay. I guess, switching to a loyalty program here. I guess -- I wonder if you can talk about where you our at, again, with respect to the loyalty program? And I guess in the scheme of the IT initiatives you're working on, where does fall in the pecking order?

Dan, it's Maury. It's certainly on the list. It's the -- not at the top though at this point. We were not sure we want to offer loyalty points just for flying on our airline. We don't think we need to. It's a cost and an overhead items that would just be more of this overhead stuff that costs you money.

But as we go to promote other products that we want to sell that is a very interesting alternative. Hotels, third party products that we can incent people with and the reward being that they can fly on Allegiant for a reduce cost. Our main goal is to have it focused on some other products that will pay for the loyalty and the activity on our side of the wall.

As far as IT and the ability to do it. It will probably take us six months to eight months to finish up what we're doing with the basics and then we will look to more enhanced product such as loyalty, afterwards. So --.

Okay, thanks. I appreciate that.

Our next question comes from the line of Bob McAdoo from Avondale Partners

Hi guys. Just one simple question. You had -- you mentioned that you took some impairment charges on the engine -- consignment program. Could you just tell us kind of how much they were, what drove it, and is that kind of a long-time thing?

Yes, hi Bob, this is Scott. In general, we have a number of engines in our consignment program and we continually evaluate what the expected future cash flow would be versus what the remaining book value is of the piece parts.

Typically the write downs have happened in the fourth quarter over the last couple of years. We start to look at this on a quarterly basis now, so if you look what the write-downs were related to impairment and dispositions, you are probably looking upwards of maybe $1.4 million, $1.5 million that was in this quarter. So, it is a pretty big bump. I wouldn't expect to see that sort of run rate going forward.

And these are -- this is the parts that you don't use on your airplanes that you make available to other people to try to -- to try to sell them? Is that the parts were talking about here?

They are parts that we can use for our own overhaul purposes and sell to the, to the secondary market.

Okay. But you -- as, as I recall, when you get engines in, or whatever, you basically take the pieces that you need the most and you kind of make the rest of them -- give them to some other vendor to sell for you. Is that program still going?

Yes, the vendor we use is Avioserv in Southern California, and they have been our partner here for the last couple of years.

So, so -- and this is basically take a look at what they've got on their shelves and what the likelihood of some of that really being likely to turn into cash. Is that what we are really seeing here?

That's correct.

Okay just wanted to be sure I understood. Thank you

Hey Bob, this is Andrew. I think, you didn't ask this, but it is worth noting. The, the largest impairment or kind of one-time was the write-down of an aircraft, it was an MD-87 that we decided were not going to bring back into the fleet. So that one was well over $1 million. So I just want to mention that. That one truly is kind of one-time.

We don't have any other airplanes that are sitting around. We waited -- we had considered keeping that and flying it for some charter customers, but we've concluded it doesn't make sense to bring it back.

So that was $1 million, you say?

That was over $1 million. It was closer to $1.5 million as well.

What was the total impairment costs, 3.7?

Yes.

Yes.

We have a lot of one-time costs, Bob, that would've brought down the cost per passenger noticeably if they weren't there.

Got it, all right, thank you.

Thanks.

Our next question comes from the line of Steve O'Hara from Sidoti.

Hi, good afternoon. Could you just talk about the other revenue line? I believe that bumped up due to the leases. Or the sub leases for the 757. How long did that go out for?

Sure, that is correct, Steve, they are -- and I think it is more accurate to say leases, as you first did, because we do own those airplanes and we are leasing them out. Those aircraft return off the lease in next year, second and third quarter. There is three airplanes out there in Europe flying around for two different customers.

We also, by the way as Scott noted, we're taking the depreciation and amortization expense associated with those. So it's -- there is an expense we are experiencing associated with that, but there on our expense line. And so, but that is pretty good revenue.

Okay. And then can you just talk about the six seat program? It seems like the last several years it as been on the decline. I'm just wondering what you might have planned for it long-term. I'm sure it is pretty good profit-wise, but I'm just wondering if you have any plans that you think will grow the business, or maybe shrink it further, or keep the same?

This is Andrew. I think it is largely been flat and I think that has been the case for quite some time and I think that will continue to be the case going forward and that is consistent with everything we've ever said about that program. If there is opportunities, we will pursue them. We have been successful in landing some. We've had other programs over the years that have gone away. But that is really just -- that's not -- that, that's a business that we do if there is the opportunity to pursue it. But it's obviously not the core part of the business.

But, so we can't really predict the future in that area other than the fact that we have contracts in place right now that we expect will be in place through the end of this year and next year. There is opportunities out there and we will pursue them and we will see what goes on. We certainly like the business, but it is never going to be a large growth driver for us.

Right, okay. And then finally, when do you think you will start to get a little more granular in your, in maybe some of your forecasts for Hawaii? What type of answer you might be expecting from that market? Or what kind of fares and costs from that side of the flying you might be looking at?

I think, Steve, I don't know if we will ever really want to provide that kind of guidance ahead of flying the routes. Hawaii, right now unfortunately is several quarters away, we believe. So we are really focused on other things at the moment.

Certainly the, the aircraft operating expense are pretty easy to forecast. A lot of people have flown the 75 over to Hawaii. As far as revenue, I think that -- I don't know if we're going to get into that at all. Certainly not, not today. We are not going to.

No, no, no, of course. Okay. Thank you very much.

Thanks, Steve.

Our nest question is a follow up from the line of Hunter Keay from Wolfe Trahan.

Thanks. I appreciate the follow up. Just real quick again, on modeling. I guess it's kind of a piggy back on that last question.

Can you maybe help -- and I'm only asking on this call so it might be helpful for everybody's model, can you help us think about gallon consumption? And I'm asking this question because the model was so sensitive given the 19 million shares outstanding and then obviously the heightened cost of fuel. Should we think maybe on an ASM per gallon basis next year as we deploy the 75's, that there should be a pretty good uptick in ASMs per gallon, I'm going to say, on an annual basis? I mean, as much granularity as you can help would be very helpful.

I think, Hunter, I think you're right there is going to be an uptick but we don't have anything we can provide you right at this moment in time. So maybe we will be able to do that in subsequent quarters when we have a little bit more ability to predict exactly when those next airplanes are showing up and, and a better sense as to the amount of ASMs we expect to produce from those airplanes.

Okay, yes, I think anything you could run on that I think would be helpful just given the leverage and the models, I think, longer terms. Just maybe something to think about down the road. So, again, thanks for the time. Appreciate it.

Thanks.

Our final question comes from the line of Ray Neidl from The Maxim Group.

Yes, I just want to clarify your growth plans. You're talking about 20% growth next year coming mainly from the that extra seat on the MD-80s and from the 757s.

And on the second point is, your filing with the DOT about their new rules, you didn't sound very optimistic that you are going to get satisfaction out of that. And I had thought that you had said in your filing that if you didn't get some relief from the rules it may have to change your business plan going forward. You may have to cut back on growth plans or cut back on the airline. I don't know if you went quite that far. But the thing is, could the model drastically change if the DOT does keep these, what I consider, unfair rules in place?

Ray, Maury again. The big unknown in this, this whole thing is the elasticity effect of quote raising fares. The advertising, full-fare advertising rules -- state, not suggest -- state that we have to include all the segment taxes and fees in the price we advertise. So, our average fare running around $85 or thereabouts, you start putting 1070, which is the three components on top of that, you have a 12% or 13% perceived increase.

So, elasticity suggest that's, that could dampen demand noticeably. Certainly, if it was real it would definitely, I think, do it. The unknown is that will consumers become educated and understand that after a while that, oh, that used to be a $79 fare instead of a $90 fare. So, that is the big question mark I think that is out there.

But, we certainly -- there's certainly going to be a lot of cost to implement this, not the least of which are IT costs, the overhead that were going to have to put in place to monitor all these rules. And I think Mr. Keay suggested earlier, that was not allowing us to deal with the fuel in the post price purchase increase. That is a big deal to us. We think we can potentially get out of the hedging business, so to speak, and hedge -- have our customers absorb the risk of fuel changes. We are willing to let it go either way, up or down.

But as Andrew suggested, we have a big core percentage of our people that are booked many months out and we all know the volatility of fuel could move it considerably, and so we would like to be able to offload that risk in pricing. But, we will see. We certainly -- there are changes afoot if these changes are implemented. There is no doubt about that.

Yes, actually Ray if I could add on -- this is Andrew. I think the big issue is just the unknown. That is what we are trying to state in the filing is just that we are sitting here not knowing how things might change, or if they will change. And I think until we get a lot more clarity on it that we are pretty hesitant to grow at a faster clip in terms of adding additional aircraft other than the ones that we have committed to that are going to help us expanded into Hawaii. Because we just don't know what the effect is going to be.

Okay --.

And that's part of the reason, Ray, just one more comment, I'm very excited about our approach to expansion with more seats per departure. That is a lot better than just throwing more departures into the mix and trying to have to do a Wednesday trip instead of more seats on Thursday, Friday, Sunday, Monday or whatever might be. So ours is the most conservative expansion looking forward and preliminarily those more seats in the market seem to be a really good answer to increasing unit revenue -- or revenues, total revenues, and decreasing our cost.

Okay it sounds like that is your hedge against whatever the DOT decides to do here.

It's certainly going to, I think, help us.

Okay great, thank you.

Certainly.

Thank you sir, and I show no further questions in the queue at this time.

Thank you Operator. Thank you all very much a we'll look forward to talking to you in another 90 days. Have a good day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.