Allegiant Travel Co (ALGT) 2012 Q1 法說會逐字稿

Welcome to Allegiant Travel Company's Allegiant first-quarter 2012 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 that this webcast -- that the Company's comments today will contain forward-looking statements that are only predictions and involve risks and uncertainties. Forward-looking statements made today may include, among others, references to future performance and any comments about our strategic plans. There are many 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 obligations to update publicly any forward-looking statements, whether as a result of future events, new information, or otherwise. The Company cautions users of this presentation not to place undue reliance on forward-looking statements, which may be based on assumptions and anticipated events that do not materialize. The earnings release, as well as a rebroadcast of this call, are available at the Company's Investor Relations site, ir.allegiant.com.

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

Thank you, Operator. Good afternoon, everyone. It's a pleasure to talk with you again this afternoon. Joining me today, as usual, are Andrew Levy and Scott Sheldon.

We had another very good profitable quarter, our 37th consecutive profitable quarter. We had net income of $21.7 million, or $1.12 per share. That compares to last year's $17.2 million, or $0.89 per share. Revenues during the quarter increased 23%, to $238 million, while year-over-year operating profits increased 30%, to $36.3 million. This represents a 15.3% operating margin, and our first year-over-year margin increase since the last quarter of 2009. Lastly, even with this growth, we were able to move our PRASM up 3% during the quarter, and TRASM up 2.4%.

On the expense front, fuel has continued to dominate the news. Year-over-year, our cost per gallon increased $0.40 during the quarter, or 14%. In the past 18 months, our fuel cost has increased over $1 per gallon, and as a result, our fuel cost per passenger has jumped 48%, from $40 to almost $59. But having said this, recent activities in the marketplace suggest upcoming year-over-year fuel comps should be more favorable.

I'm pleased we have increased our operating margin this quarter, from 14.4% last year to the 15.3% I mentioned just a moment ago, and perhaps more importantly, accomplished this increase while growing 22% during the quarter. As I mentioned, since the fourth quarter of 2009, year-over-year operating margin comparisons have been trending the wrong way. Clearly, fuel expenses have been the biggest weight on the margins during this time. Our fuel costs per ASM shot up 72% during 2010 and 2011. But non fuel costs have also been a bit of a drag, as our cost per ASM increased 15% during these two years. While we can't control unit fuel costs, we do have some say in the non fuel area. Going forward, we have suggested our non fuel costs will decline as much as 10% in the upcoming quarter.

We also expect PRASM to decline 7% as well during this quarter. This decline has to be understood in the context of last year's second-quarter unit revenues. Q2 last year we managed up the average fare 25%, or $18, from $73 to $91, compared to Q2 2010. This increase has set up a very difficult comp for the upcoming quarter. Non fuel costs should be declining as well in the upcoming quarter, as we have noted in our release, given the completion of our one-time investment in engines, the benefits of our 166-seat program, and the increase in flying, all of these are adding to our decreasing unit costs away from fuel.

Overall, the numbers point to another profitable quarter, including increasing year-over-year operating margins. As we have said many times, solid margins are our main goal. Supporting casts may vary, but the outcome is what we focus on. Andrew and Scott will have more comments shortly on these areas.

It has been a busy quarter, with a great deal of activity. Earlier this month, we announced our service to Hawaii from Las Vegas and Fresno. Obviously, we needed E-tops authority from the FAA to operate this service. I'm happy to report we completed all the flying requirements necessary for our authority. We have one final inspection requirement, which will be completed well before our June 29 start up.

In addition to our over water authority, we will also be adding flag status. This is a necessary requirement to operate scheduled service outside the lower 48. We will be able to fly scheduled service internationally now, and, where necessary, over water. I want to thank our team members for all the hard work over the past months that it took to put this program together. It takes a great deal of effort and coordination to accomplish this hallmark event. Well done.

We also announced charging for carry-on bags during the quarter. We believe this product will be additive to our passengers' traveling experience. Since we began charging for checked bags a number of years ago, we've seen a normal reaction; namely, customers are bringing more bags into the cabin. As a result, operational challenges have increased. So we pushed our load factors to 90% since 2008, and will continue to increase additional loads as we introduce our 166-seat configuration. We need to react to the baggage issues. The additional seats in the MD-80 aircraft are a great thing, but we are unable to provide a like kind increase for bags in the overhead. Charging for access to overhead storage is the logical method to ration this important space.

Progress on the automation front continues to move ahead nicely. We expect to introduce our new website during this quarter. We decided to slow the implementation a bit to accommodate our carry-on bag programming. This introduction of the new website, however, will be a major step in the overhaul of our front-end sales platform. Additional features will be forthcoming during the back half of the year.

As you know, Consumer Rule II was implemented earlier this year. We spent a great deal of time and money adjusting our systems to comply. Overall, there was not any significant impact from the changes, primarily due to our aggressive management of the changes induced by the compliance. That is not to say there wasn't a cost associated with this effort. It took substantial time, very valuable time, I might add, from our programming staff and other management to make this happen.

We pride ourselves on managing our business. We've done this now for over ten years. Having superfluous dictates from the federal government on supposedly protective measures for the consumer are clearly costly and bothersome. At the end of the day, as the song says, we are management. That's what we do. We are focused on the business of performing well and will adjust accordingly to maintain our profitability and our margins.

Andrew?

Thanks, Maury.

We had another successful quarter, raising fares to offset the increase in fuel. In Q1 our fuel costs per passenger increased $5.53, but our average air fare increased $5.95, and total fare, including ancillaries, increased by $7.48. This is particularly noteworthy in light of the 22% increase in scheduled service ASMs. This is also the fourth consecutive quarter where we have been able to fully offset the growth in fuel cost per passenger with increases in revenue.

We continue to see strength in our third party products business. Third party products increased 31%, or $2.1 million, to $5.36 per passenger. Our fixed fee revenue declined 20%, due to fewer ad hoc charters flown. This was as a result of our decision to dedicate more of our fleet and crew resources to scheduled service activity. Other revenue primarily consists of lease revenue from three 757 aircraft leased to European carriers. We expect this contribution to be lower in the coming quarters, since we now have only two aircraft on lease. These two aircraft return to us in the first few days of October, so they will contribute to other revenue in 2Q and 3Q.

On January 25, we became compliant with DOT Consumer Role II, as Maury indicated. Compliance with this unnecessary rule cost us a lot of time and money, and we still believe it has no appreciable benefit for our customers before Consumer Rule II and now after its implementation. Our customers have always known what the cost of their air travel is before they agree to pay. We believe compliance with this new rule has resulted in a bunch of busy work for no customer benefit.

That being said, through many changes to the booking presentation, we have been able to minimize, if not totally eliminate, revenue degradation we had been concerned about experiencing. The requirement for customers to opt-in for certain items has had a very small negative effect for the sale of certain products, but we have been able to mitigate this effect through increases in take rates on other products, due to a more effective sales presentation. Most importantly, we have seen no change in overall demand resulting from displaying a higher fare, which includes government taxes and fees during the initial search process on our website.

Now as Maury indicated, we recently introduced a new air-related ancillary product charging for carry-on bags. We introduced this charge in early April, so it is too early to forecast the overall revenue effect. But we believe it will be accretive, despite the potential for a reduced air fare. So far, about a third of our customers are purchasing this product which, when purchased in advance, is priced between $10 and $25, depending on the route. We have also seen a slight uptick in checked bag take rate, as more customers are choosing to check bags, despite it being slightly more expensive than paying for a carry-on. Since our customers typically book many weeks in advance, the full effect of this new charge will not be seen until late third quarter.

Two weeks ago we announced service to Honolulu from Las Vegas and Fresno, beginning in late June. With the relatively short booking window, as well as higher fuel prices, we decided it was prudent to begin service from only two markets. We are, however, planning announcements over the coming weeks for several more markets which would start up in the fourth quarter. Advance bookings are very strong from both markets, particularly Fresno. We are especially pleased with the air-related ancillary revenue that we are generating. Perhaps not surprisingly, people value seat assignments, checked bags, et cetera, to a higher degree on these longer flights than those in our mainland network.

Other network highlights include the establishment of aircraft bases in Oakland and Punta Gorda, which is our version of southwest Florida. We have served two routes to Oakland for the past few years, using Bellingham-based aircraft. The establishment of a two-aircraft base, however, in Oakland will enable us to serve another seven routes, all of which will begin in the next few days. We are pleased with bookings and expect the summer will be particularly strong in the Oakland market. We have served a few southeastern markets to Punta Gorda for the past few years with success. By setting up a Punta Gorda base, we will now be able to offer service to many of our Midwestern cities. The additional service begins in late June and advance bookings look very good. The base will start with one aircraft and we expect to add a second sometime in the fourth quarter.

We now have 19 166-seat MD-80s in service, and we have fully transitioned our bases in Bellingham, Los Angeles, Phoenix and Oakland to being served by these larger gauge aircraft. As more aircraft are reconfigured, we will place them into our Las Vegas network and we expect Las Vegas to be fully transitioned by the end of 3Q. The returns from the larger gauge MD-80s continue to be very strong, matching our forecasts. Of course, the benefit on the cost side is realized faster than the revenue benefit, since we have not had an optimal booking window to sell these additional seats. In time that will normalize, but there has been and will continue to be a lag on optimizing revenue. This is upside we expect to capture more fully in 2013. We will have four modification lines running continuously that will periodically reduce the aircraft in modification as we get into some of our busier traffic months, as we did in March.

Our greatest lever to combat high fuel prices is our ability and willingness to aggressively adjust our capacity. In 2Q, scheduled ASMs are now forecast to be seven percentage points lower than the guidance provided in the February traffic release. By the way, this is not a change to the forecast provided in the March traffic release, which was sent out just a couple weeks ago. Much of the reduction that we are seeing is going to be in our Las Vegas network. Our second quarter capacity plan is now set, but we do continue to review our third quarter plans and will make necessary adjustments over the course of the next several weeks, if any.

Finally, we announced April PRASM, passenger RASM, is forecast to be lower on a year-over-year basis by 4% to 6%, and we are forecasting the second quarter passenger RASM to be lower between a range of 5% and 7% versus 2011. April will suffer this year from the shift of Easter from late in the month during 2011 to very early April in 2012. May will also lose a bit due to the Easter shift, as some demand bled into May last year, but it's also due to an unusually tough comp. May 2011 passenger RASM growth was 35%, compared with May, 2010. Also weighing down May is too much capacity in Las Vegas, which has been fixed by eliminating marginal flights and a few nonperforming routes. These fixes will have limited benefit during the second quarter, but will result in improved PRASM in our Las Vegas network during the third quarter.

With that, I'll turn it over to Scott for a more detailed look into our financial results.

Thanks, Andrew.

Our cash flow production during the quarter was strong. We generated $83 million in cash flows from operations that resulted in nearly $50 million in free cash flow, net of our capital spending, during the quarter of $32 million. Our unrestricted cash, which includes investments in marketable securities, at the end of the quarter were at $369 million, up 16% from the end of the fourth quarter, and represented nearly 45% of our trailing 12-month operating revenues. Our CapEx spend of $32 million during the quarter primarily consisted of the purchase of our fifth Boeing 757 aircraft, the purchase of two aircraft on operating lease, and the continuation of our 166-seat modification program.

Subsequent to the quarter end, we closed on our sixth and final 757 aircraft, and look forward to placing it in revenue service in the third quarter. At the end of the quarter, we had modified 17 MD-80 aircraft from 150 to 166 seats, for a total capital spend of $16.8 million. The number of reconfigured aircraft now stands at 19 and the overall program is coming in on budget. On a full year basis, we still anticipate capital expenditures of $105 million to $115 million.

Although we had a very successful quarter and drove the highest operating margins since 2Q of 2010, fuel costs continued to have a significant impact on our financial performance. During the quarter, our fuel cost per gallon was $3.28, up $0.41 or 14% year-over-year, and up nearly $0.20 per gallon since the end of the fourth quarter. This increase, in combination with a 13.4% increase in gallons, drove a system fuel expense of $102 million, or nearly $57 per passenger.

On the non fuel cost front, we were pleased with our first-quarter performance and are expecting to see a significant decrease in our unit costs throughout 2012. During the first quarter, our cost per passenger ex-fuel decreased $0.86, or 1.5%, to $55.10. With the exception of a couple unique expenses hitting in the first quarter, we are starting to see some nice cost reduction trends. Salaries and benefits decreased $1.54, or 7.7% per passenger, despite a 5.3% increase in FTEs from the prior year. The primary drivers of this reduction were the outsourcing of our Las Vegas base back in the second quarter 2011 and increased efficiency from our pilot and flight attendant work groups.

During quarter, we flew over 33,000 block hours, nearly 14% higher than the first quarter of 2011. We accomplished this additional flying at a nominal increase in head count. Flexible flight crews and having the ability to flex our schedule up and down to match leisure demand remains a key factor in maximizing profitability. Sales and marketing decreased $0.37, or 10.9% per passenger, to just over $3.00 during the quarter. This reduction was on a nearly 25% increase in scheduled service and ancillary revenues, to $226 million.

We continue to see a high debit card usage rate, which substantially reduces our processing costs. As a result, our credit card transaction costs decreased $0.30 per passenger from the first quarter 2011. Maintenance and repairs expense increased $1.41, or 13.4%, to $11.93 per passenger during the quarter. As indicated in our release, the primary reason for this increase was due to the completion of our planned 2011 engine overhaul program. Throughout 2011, we made a substantial investment to increase the reliability and reduce the overall age of our engine portfolio. During the first quarter, we had approximately $3.5 million related to that effort. Excluding these costs, our maintenance costs per passenger would have decreased $0.54, or 5.1%, to just under $10 per passenger.

And lastly, let me reiterate our cost guidance for the quarter. As previously mentioned, we are excited about the cost trends we are seeing, as investments we have made in 2011 are starting to be realized in 2012. We anticipate CASM, ex-fuel, to be down minus 10 to minus 8 for the second quarter. In addition, despite the recent capacity cuts to the second and third quarters, we reaffirm our full-year CASM, ex-fuel, to be down 10% to 5%.

And with that, we are ready for some questions.

(Operator instructions) Bill Greene, Morgan Stanley.

Hello. It is actually John Godden filling in for Bill. Thanks for taking my question.

I wanted to, Andrew, I wanted to follow-up on the PRASM guidance a little bit. You know, tough comps aren't going away in sort of the months to come after the second quarter. You know, when we think about some of these changes and impacts on PRASM, from up gauging with the 757s and length of haul changes, it seems like those forces are going to be kind of difficult to forecast through the end of the year. Just thinking about these things, it seems like PRASM could be negative for quite some time. If you could just sort of help us think about where core demand is trending, and just any thoughts on maybe how some of these factors evolve throughout the year. Maybe we should just have a negative PRASM number for the full year. I'm not sure, but I was hoping that you could just offer some thoughts.

Sure, John. You know, I don't have a forecast handy through the end of the year for PRASM, but there is certainly some factors there that you indicated that will put pressure on PRASM. I mean, the additional seats on the MD-80s is certainly not going to be accretive. It is going to be profitable. So I should say it is going to be accretive in terms of earnings. It's not necessarily going to result in higher PRASM. But you know, we are not really all that concerned about PRASM as much as we are about earnings. So I think that you are right, there is going to be some pressure from that.

Certainly the flying on 757s to Hawaii is not going to result in higher RASM relative to the rest of the system. Longer haul flights, of course, are going to be lower. So there is pressure. As I indicated though, we are more interested in focusing on profit. And we are happy that we are able to increase earnings, increase margins, and we hope to be able to do so in the next several quarters. And I do think that you are right, the comps are tough because of the improvements we saw last year.

However, I think May is just worth noting because it is particularly out sized, and that made that much more of a difficult comp for this year. And I think lastly, we did mention that there is some capacity that we wish we didn't have in Las Vegas that's being eliminated. It will be out of the system in the next several weeks. And we think that, that will be helpful as we go forward.

Okay. That's helpful. And I know it's early, but can you just talk about any kind of customer reaction you've seen from the carry-on bag fees? Could that be weighing on fares a little bit as well? And I know that you don't have a lot of competitors on many of your routes, but is there anything to note from the customer reaction on routes where you do have competition versus routes where you don't, that is sort of evidence of any kind of customer response?

John, I think that we have not really seen any negative customer reaction at all. We have seen -- well, when we implemented the carry-on charge we also, at the same time, had a fare sale. And you know, over time, we hope to be able to march up our fares back to what they would have otherwise been. It's possible we may not completely be able to just take the carry-on charge as pure incremental additional revenue. But we do think that whatever decline that we might experience in fare would be more than offset by the carry-on charges. So we do think it is going to be accretive, certainly. It is a bit hard to forecast though, you are right. And so our forecasts on passenger RASM are perhaps even maybe a little bit more cautious than normal, because of us not understanding what the effect is going to be yet of this new charge.

As far as competitive routes, no, we haven't seen anything at all that is notable. We make money in all the routes we compete with others, and that hasn't changed. You know, customers care about the total price before they agree to pay. And the value that we offer, even in the routes where we compete with others, is extremely material and relevant. And customers vote with their wallets and they keep coming back. And we see no change in demand on a go forward basis, from any of these new fees that we've imposed -- or the new fee that we've imposed.

John, this is Maury. A little anecdote. The day we put out our notice, the next day two of our cities put out press releases, one on the east coast suggested that they shop fares, and we were half the price of the usual suspects, even with our increased baggage fees. Another one put out the same thing, and we were not quite half but substantially less than the competition. So to Andrew's point, people are going to shop fares at the end of the day. That's just been our experience all the years we have been doing this.

Okay. That is super helpful. And Maury, just last question. You mentioned that there was, I think, one more check, sort of final approval check ahead of the Hawaii flying. If you could just kind of elaborate on that, and kind of give us a sense of the difficulty of that check or what that entails, just so that we can have some comfort that there isn't much that could derail the first flight.

Yes, you know, it's not done until it is done, I'll say that. But this is a non-event in our mind. We have completed all the flying, all those things are done, signed off. We had an inspection required on our parts facility in Honolulu that we have to turn into "a permanent facility" instead of the temporary one we had. So this is a couple of minutes looking inside and seeing we have the proper environment to store our parts and the like, and it's very de rigour for what we do.

Okay. Thanks a ton, guys.

Sure.

Thanks.

Hunter Keay, Wolfe Trahan.

Thanks. Hello, everybody.

Hello, Hunter.

Good. Maury, can you give us an update on where you stand with that suit with, I guess, the Rule II. Do you have any color on the judges that were appointed to the panel in terms of maybe party makeup, and maybe and updated expectation on are you still skeptical of the outcome or do you maybe have a little bit of incremental optimism from last time?

Well, I think it is just not appropriate, given what our lawyers have told us, to think we are going to win. It is always a less than 50-50 chance. The experts in the room are usually the wrong experts, but nevertheless they are given the deference as being experts. The party makeup, as I understand it, is two Republican appointees and one Democratic appointee. And the only other kind of glimmer of-- I shouldn't say it that way -- another positive is, I think the head judge of the three wrote the opinion in favor of Republic in their win here six months ago or so when they sued the DOT over some slot rights a couple of years ago. So those are positives. We think we have a good case. We think that the DOT is just exceeding their authority and the standards that are being put forth by them are not within the defined standards of what Congress had in mind back when they wrote this rule 25 years ago, 30 years ago.

Sure. And to be clear, if you prevail on the suit, you would be able to experiment with post-purchase price increases, right?

Not -- Well, possibly yes.

Not saying you would, but you could.

Yes. The main thrust on this is the display, the 24-hour cancellation, and then post-purchase is some of it. But we'll have to see where it comes out. They could find on one and not on the other. So we'll just have to wait and see.

Got you. Okay. Thanks. And --

By the way, the oral argument is scheduled for a week from Monday.

Okay. That is good to know. Is the case -- probably going to you know, take I would think, maybe what, a couple of months after that?

That is typical. If you want some entertainment value, those of you in Washington, DC, you can do 9.30 Circuit Court and listen in to our learned government officials as they argue their case.

That actually sounds great. And in terms of the incremental margins, the 166-seat reconfigured aircraft. I think last quarter you told us they were contributing about 60%. Now that you've got some more in the system, is that number still holding up?

You know, we don't try to replicate the analysis that we did last time. So I guess I would honesty tell you, I don't know. It's continued to do really well. I think that we expect that it will continue to drive substantial amounts of profits. And as I mentioned, even more so in the future as we have the ability to sell into those additional seats on a more normalized, you know, booking window as opposed to the kind of accelerated one that we have as we introduce each aircraft and we then start selling into it. So we are really excited about that project. It continues to be, I think, maybe the most material project that we have going on this year, in terms of adding to earnings.

That is great. All right. Thanks to you both.

Thank you.

Jim Parker, Raymond James.

Good afternoon, guys. Just, Andrew, the fare sale that you mentioned might be muddying the picture a little bit in terms of the impact of the carry-on bag charge. So I'm curious, did you initiate the fare sale to perhaps counter the impact of the carry-on bag fee? Or was that some separate activity, and did you do the same fare sale on a year-to-year basis? Or, why did you do the fare sale?

Jim, I think it is really what you just described. We wanted to mitigate the impact initially and be able to mark up the fares over time. It's also -- look, it's a seasonally weak period. This is a shorter period. So it is not unusual to offer some fare initiatives at this time of year to fill in the post-Easter to summer period. Look, there is a lot of moving parts. There's no question about it. And that is why we are not prepared in any way to provide a forecast as to what is the effect overall will be on overall passenger revenue from the implementation of this new charge. We are very confident that it will drive higher revenue, but we are not willing, at this point, to make a prediction as to what the value of that is.

Andrew, how much of your revenue comes out of Las Vegas currently?

You know, I don't have a revenue number, Jim. But Las Vegas represents about a third of the business, and that number has held pretty firm for a while. And you know, as we continue forward, it will decline as you know, with the initiation of Hawaii and Oakland and Punta Gorda, Vegas will become slightly less than a third, as time goes on.

Jim --

I'm curious, it looks like capacity, total airline seats in Las Vegas in the first quarter look essentially flat year to year. What's going on in Las Vegas that's causing you all to say that may be a difficult revenue environment currently?

I don't want you to think it is a difficult revenue environment, because that's certainly -- I'm glad you asked the question. We are not seeing any softness in demand to Las Vegas. What we do have is we have a number of routes that have under performed, and so we are eliminating service to those routes. And additionally, we put in additional seats in the market, in many of the markets this past first quarter that, quite honestly, we look back on and regret. And it is just simply additional seats on marginal flying days. And as we look forward, we realize that we are better off to cut back some of those additional flights. And that's what we've done, beginning in the May time frame.

So I mean, there is nothing wrong with Vegas demand. Vegas demand is very strong. Hotel statistics are very good, both ours as well as the city's hotel statistics. Visitors are up. So the Vegas market continues to be very good. I think, quite honestly, in Vegas we hurt ourselves a little bit by being a little overaggressive on additions in capacity. And we have reversed that and we should expect to see a material improvement.

Just a quick question for Scott. You may have given this number. The engine maintenance expense in the first quarter of this year versus a year ago?

I didn't give that. I just gave the spillage from 2011 into '12. So, $3.5 million was related to the 2011 program.

Okay, now are we at the end of that program?

Right.

So we won't see that in the second quarter, any unusual engine maintenance expense?

That's correct.

Okay. Thanks.

Jim, it is Maury. One other thing, just a note. You know, our average fare since January of '05 through March of this year, you know how much it is up? 6%. We were charging $89 back in January of '05. So you know, Spirit has also brought this point forward that our goal is to keep our selling fare as low as possible. So some of the things that we did here with the introduction of the bags and things like that, we certainly want to let the world know that we are still the lowest fare out there. And while you may have some ancillary charges, that it is still substantially below what you can get elsewhere. We're very pleased --The ancillary products during that time were up 339%. So we find it very essential to keep that average fare as low as possible.

Thanks, Maury.

Sure.

Duane Pfennigwerth of Evercore Partners.

Thanks. Good afternoon. Just on the fuel, it looks like that bumped up quite a bit. And just wanted to ask you, was there anything one time in nature in the first quarter? I assume it is due to the changing fleet mix, more seats on your 80s and adding the75s. Where can that go, relative to what we saw in the first quarter?

You are correct about that, Duane, that is exactly what it is. And it will continue to improve as we have more of the larger gauge MD-80s in the mix of the fleet, as well as more flying by 757s. You know, I think that I would be hesitant to try to even forecast what that looks like in subsequent quarters from now. But certainly, that helps. There is no question about it.

I guess the biggest bump sequentially from 4 Q to 1Q was what? Is it 166? Or is it 75s?

166.

Okay. Sorry. And I'm sure you mentioned it, but where are you in that process? How many do you have done?

We have 19 today. And we have four lines, in other words, four aircraft being modified simultaneously. And we expect that pace to continue through the balance of the program, with exceptions during particular strong demand periods where we will have fewer than four out of service. At this point, the airplanes that are in modification are airplanes that were previously in service that we are pulling out of service in order to add the seats. So you know, we continue to chug along, get them out as fast as we can. Wish we could get it faster. It is a little delayed from what we initially thought it would be, but we are making progress.

Thank you. And then just a general question on the seasonality of your earnings. You know, we have been chasing fuel a fair amount over the last couple of years, and that is probably going to continue to vary here. But if there is such a thing as steady state, is the March quarter still your big quarter, or is Hawaii and 166 likely to change that?

I don't think 166 will have any bearing at all on it. But I think Hawaii certainly has historically been stronger in the third quarter. I think Oakland, same thing. So as the network composition shifts, I think there is a possibility to see some changes there. Although I think March is still March and March everywhere is pretty much as good as it gets. So -- but you know, I think that we have had some pretty good performance, really first, second, and fourth quarter. Third historically has been the weakest. In part, because we pull a lot of capacity out, put some pressure on costs, and we take advantage of that time to do a lot of maintenance work, which puts additional pressure on the cost side. But you know, we'll see. We aim to obviously generate really high returns every quarter. And with a few exceptions, I think we have been able to do that.

Okay. Thanks very much. Nice quarter.

Michael Linenberg, Deutsche Bank.

Hello, guys. Just a couple questions here. With the new service to Hawaii, the flights out of Vegas, are you attempting -- is there going to be connections into your network? Or is that really being sold as a local market?

Mike, that is being sold as a local. At this point, no plans to offer through connections, anything like that. I guess you never say never, but we just think the complexity that comes with changing so fundamentally the system that the revenue benefits are outweighed by the cost of complexity and the actual hard costs associated with that kind of a service. I think what you'll see us do is we have the new website roll-out and certainly offer customers, some of the locals, including maybe hotel stays in Vegas and in Hawaii if they wish to self-connect. At this point, that is the extent of any thoughts we have about what you just mentioned.

Okay. And then you know, when you mentioned the Fresno piece, you had some positive commentary. I think you specifically said that you were pleased with the air piece. I guess that at start up, what's the hotel penetration like? You know, what you are offering relative to maybe some of the other markets, is it a dozen properties in Hawaii? At this point, how much are you selling? And I'm talking about the third party-type stuff out of Hawaii, and I realize it is very early on. Sort of what are the plans as we roll out over the next year? Will you have a much broader offering? Can you just give us some color on that?

Yes, Mike. We have contracts with 50 properties in Oahu. So we have a very broad product offering.

Okay.

And the early returns are pretty good. There's a lot of room for improvement. But I'll tell you that the take rate today is materially higher than any of our destination markets, with the exception of Las Vegas. And we expect that will continue to drive higher. We do not expect significant -- or we do not expect the Vegas market, which is three quarters of the capacity this summer, to show the same characteristics as the other markets that we target. And that is because Vegas and Oahu have a lot of VFR traffic. So we don't expect that presents the same opportunity. If we peel back and just look solely at Fresno, it is more representative and we are really pleased with what we are selling.

It is just too early to really tell where that trend is going to go. We feel really good about it. We think we have the right inventory at the right price, and that goes for not only hotel, but car. We are selling a few attractions. I think that the breadth of that offering will increase over time. You know, we went in there this summer, even though it is a short booking window, because we really want to get in the market and get some experience and hit the peak summer period. Clearly, the performance this summer will not be as strong as it will be next summer when we have a more normalized selling opportunity. And we will learn a lot from our experience this summer that we'll use to optimize the network and the offerings as we go forward. But as indicated, we are really pleased with the early returns, especially Fresno, which has one flight a week, and so any concerns about limited frequency at this point in time seem to be misplaced. So we are happy with the first couple of weeks of bookings.

That's great. Then if I could just add one last in on Hawaii. As we think about it, and I realize people look at the unit revenue impact; obviously, there is a unit cost impact. If we sort of take it from a different perspective and think about impact to your margin to sort of the historical legacy Allegiant system and you bring in Hawaii, given there is always start up costs and there's always teething pains early on and it takes some time maybe for the market to get to know you. And I know you have been pretty good at ramping up pretty quickly in other markets. This is a bigger deal. When we think about you know, early returns and you know, out over the next 6 to 12 months, is it your view at this point that it looks like that thee overall profitability of Hawaii is as profitable as the Allegiant system? Or are you getting the sense that you could actually be -- very quickly you could get to a point where it is running margins that are higher than the Allegiant system?

How should we think about it? Any color on that would be great.

Mike, I can tell you the early returns would be of no use at this point in terms of forecasting my opinion. We just don't have enough data. I can tell you that before we made the decision to invest in the 757 aircraft, which was done in order to serve Hawaii, the forecasting we did at that time indicated that the returns, in terms of margin, would actually be higher than the network that we currently operate on the mainland. And that is why we felt comfortable making the investment in the complexity of having a second type and the more capital intensive aircraft that we brought on. So there is no reason at this point to think that our forecast going forward would be different than that. But time will tell, you know, as we gain experience in the markets. It is off to a good start, but is certainly way too early, I think, to be able to predict what margins are going to look like in Hawaii.

Okay. Fair enough. Thanks, good quarter. Appreciate it.

Jeff Kauffman, Sterne Agee.

Hello. Sal Vitale on for Jeff Kauffman. Just a quick question on the cost side. Specifically looking at the labor cost per available seat model. That declined nicely year-over-year, about 9%. How should we look at that going forward into the out quarters?

This is Scott. I think when you look, starting in Q2 going forward, that's when you have the lapping effect of when we outsourced the Las Vegas station. Hopefully, we can continue the trend of really good crew efficiency. So you know, I would be hesitant to say you would see this sort of decrease year-over-year, subsequent to the first quarter.

This is Andrew. Let me jump in. I think that the other thing that's going to be potentially a head wind is just simply as we roll out more of the 166-seat airplanes, while we'll get the benefit on the ASM side of the house, in terms of costs, they do require four flight attendants. There is a few moving parts right now. But the trend is, you know, we feel like we are on top of that expense line.

Let me ask you a different way. How should we think about head count -- and I'm not sure if you commented on this earlier in the call, but how should we think about head count for the rest of the year?

I would say relatively flat. You know, we have been real consistent, 30 to 34 FTEs per aircraft. And even with the addition of the four flight attendants, we continue to outsource more of station operations, so that they are somewhat offsetting.

Yes, we are just not providing a forecast on that right now. But again, as Scott indicated, we just don't see any reason to think that the trend is going to be any different on a go forward. I think you could look at the last several quarters, the last years, and get a handle on that number that you just asked about. That is really all we have to say about that right now.

Okay, sure. Thank you. That is helpful.

David Vincent, Barclays.

Hello, guys. Good afternoon. I don't know, just following up on the Vegas - Honolulu market, it feels a little out of character in terms of how you started a lot of other bases, connecting two destinations. You mentioned the VFR traffic, is that just something unique to Vegas that you saw? Or is there maybe an operational reason or some other reason that you would do Vegas - Honolulu to start?

David, this is Maury. Operations certainly had a play in it. It is a big undertaking and we want to make sure we can support the system, and we have our main resources here in Las Vegas to do those types of things. So I'm not going to say -- we didn't think the market would be a bad market by any means. Honolulu, Hawaii and Las Vegas are somewhat like sister cities. We felt that there was certainly room for demand. And again, with pricing that we felt would be underneath Hawaiian, so we would be able to stimulate our traffic share, per se, as well. So it is a little bit of everything. But long-term it is, we think, a good market for us.

Okay. As we start to see these announcements for fourth quarter, we shouldn't be thinking a different strategy in terms of market selection? Than your historical strategy?

No. I think the initial pointer is Fresno and how well that's done. And that is a good, if you will, endorsement of our thought process.

Okay. All right. Good. On the third party ancillary, obviously you mentioned Hawaii and Vegas are maybe a little bit different than the norm, just to help us, how should we think of spool up outside of those two bases? Is this something that takes two, three years to mature? I'm thinking, as you're adding Punta Gorda and Oakland and Myrtle, some of these other destinations, what is the time frame on sort of getting that business to maturity?

David, I think -- this is Andrew. I think, put it this way. We continue to see outsized growth in Orlando, where we have been serving since 2005. So I don't know if we know the answer to that. You know, we have obviously made a big investment in this area with management. We have a big investment on the automation side with some tools that we don't yet quite have ready but we think will help us. And then of course, in due time, with those these new tools we expect to be able to offer a land-only product, whereas today everything has to be sold with an air seats. We do think that we have opportunity to grow the business on the hotel side.

I think what is interesting in the first quarter is you saw the growth in cars exceeded that of hotel in terms of units. Hotel is still more valuable because it is a higher purchase transaction. But we think that there is a lot of upside in this area and we are working hard to be able to slowly capture it. And we'll see. Maybe in a few years we'll be able to better answer that questions.

Great. And then one little bit. When you roll out the new website, will you be able to sell international?

Sure. We just have to set it up and put your taxes and fees. It will take some work, but the structures will all be there to put it together. It's just another market.

Okay, all right. Great. Appreciate it. Thanks, guys.

Helane Becker, Dahlman Rose.

Thank you very much, Operator. Hello, everybody. Most of my questions have been cleverly asked already. So I just have one little one. And I think it's related to -- somebody, I think, said that you had bought two aircraft off lease during the quarter, so is that it for aircraft lease rentals then going forward? Everything shows up in depreciation?

That's correct.

All right. Really, that was it. Thank you very much.

Dan McKenzie, Rodman and Renshaw.

Good afternoon, guys. Scott, just a couple of balance sheet questions. I got pulled away from the call here, so I'm not sure if you might have mentioned this. But I was wondering, Allegiant's cash flow from operations in the first quarter? And then related to that, as you generate cash, would you be inclined to essentially accelerate the pay down of debt throughout the year, or is it just be given the CapEx applications, is the plan really just to hoard cash as we look ahead?

Hoard is a vile word, Dan. It implies bad market ju ju.

We still have north of $70 million in CapEx. Fuel, on a sched basis, is still right around $3.50 a gallon. I think having a little extra cash isn't going to hurt.

Got it. Can you share what the cash flow from operations were?

Yes. I think I mention that in my script. It was roughly $85 million.

Got it. Okay. I appreciate that. And then, you know, as you transition to longer haul flying to Hawaii you know, I think one of the, I think, product attributes that's a little bit different from Allegiant is the seats don't recline. Did you do market research on that before implementing that? Or is that essentially sort of the key to extracting kind of a seat assignment premium?

We did market research. Maury and I talked about it a few years ago and we decided that made a lot of sense, so we did it. No, we don't really believe in that kind of stuff, Dan. We roll-out things and let the customers decide. If for some reason we get a huge amount of feedback that says, oh my gosh, I can't fly on this Hawaii trip because the seat doesn't recline, despite the fact that I'm saving hundreds of dollars, then I guess we'll consider reclining the seats. But we don't expect that is going to happen.

Dan, we made a conscious decision, gosh five years ago, to -- seats are an ultimate pain in the butt for management to -- or maintenance to stay on top of. Put those recliner's in there, and big guys like you get in there and thrash your way back, and the next thing you know the seat's broken, it won't come up. And now we have to take it out of service until we can make sure it stays up. So what we did is we took the middle road. We ordered our own seats and we reclined them halfway. We actually get a lot of positives about them. They are comfortable and they feel good. All in all, it's been a pretty good program for us, and seat maintenance is way down.

Yes. Well thanks, I appreciate that. I guess what I was really getting at with respect to the market research was potentially the premium that you may be able to get from selling the seats. So if the market research was very positive, it would suggest perhaps that you wouldn't have to discount fares as much to fill the seats. I guess that's what I was really trying to get at.

Dan, we -- I think our market research is experienced. And right now, the seat assignment take thing on Hawaii has been exceptional, which you know, as I mentioned in my comments, it is perhaps not surprising.

The treks are long haul.

People are more interested in knowing where they are going to sit and assuring themselves of a particular seat on that kind of a mission. But you know, we try to look at data after the fact, and what our customers actually do and behave, as opposed to try to ask questions ahead of time. We prefer to just experiment and learn from there.

Very good. Thanks. Appreciate it, you guys.

Glenn Engel, Bank of America Merrill Lynch.

Good afternoon. Two quick questions. One is you mentioned the 24-hour refund rule, Maury. I was curious whether many people took that up? Or has that not been as bad as feared?

There was a slight increase. I wouldn't say we would expect it to go down, but we just haven't seen anything that's kind of we have to get after and meaningful. We believe strongly that, that, really of all the issues with the DOT, that one is clearly outside their purview. But you know, it wasn't a material item and we just didn't see it jump through the hoop.

Then why really fight it if it doesn't seem to be that big of a deal?

It's personal. You have a crotchety old guy here that's been around too long to have these guys telling us how to run our airline.

Last question is on CapEx. Can I assume that it drops considerably next year? Can you give us a general range for 2013?

That is a fair assumption. We don't have anything in the pipeline at this point to -- all the stuff is there.

Only thing would be engines and stuff, I guess?

Glenn, this is Andrew. I think we are not prepared to really give a range for 2013. Certainly, the seat program will be done this year. The 757s will have been purchased this year. Those are probably the two largest contributors to CapEx during 2012.

Thank you.

Thank you.

Steve O'Hara, Sidoti and Company.

Hello. Good afternoon. In terms of the revenue growth going forward, with the new IT system and carry-on bags and so forth, do you see more revenue growth coming from the ancillary side of the house or from, just you know, PRASM?

That is a tough question to answer, Steve. We are definitely trying to roll out some new ancillary products like the carry-on bag, and there is a few others that we hope to roll out in the next few quarters. So I think perhaps, you know, if I had to guess, I would say maybe that would be where we would see more of the growth. As Maury indicated, we think it is really important to keep the passenger base air fare as low as we can, and instead drive revenue by offering other services and other options that customers can choose from. And that's proved to be a much more effective way to maximize revenue, in our experience.

Kind of as a follow-up, in terms of you know, there is a decent gap, I think, in terms of ancillary between you and Spirit. I mean, do you think the IT system you had in place was something that kind of tied your hands in terms of being able to grow that piece of the business? And do you think this new IT system will help you, you know, kind of get those handcuffs off a little bit?

That's, in part, a fair description. I'm not sure I would say the old system handcuffed us, as we had limited resources to develop. And when we chose to dive into the bowels of the system with the resources we had, rather than -- every time you fix the old system, that's more work you have got to do on the new system as well. We fought that battle, Steve, for the last year and a half. And we are at the point now where we have essentially frozen all work on the old system so we can get the new one launched. And once there, then we can make those improvements. And yes, there will be enhanced offerings as a result.

Okay. And then finally, did I hear you correctly in terms of the take rate for carry-on. Did you say a third of the passengers were buying that product?

Yes. I said it's approximately a third, yes.

Okay. Thank you very much.

Thanks.

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

Thanks for squeezing me in again. Two more quick ones. Maury, another policy, regulatory question for you. I'm sure you probably saw Senator Schumer sent a letter to the DOT asking them to require airlines now to disclose the price of carry-on's in the total price. In your experience with these letters, which we've all seen before, do you think this one has any potential traction given what just happened with Rule II?

You know, we answered the Senator's letter and we've suggested that -- I think he quoted a stat in there that United Continental had 87% of their customers with carry-on's, and we respectfully suggested that our customers are a bit different and that we didn't see that kind of statistic. One of the beauties of the marketplace is it lets customers decide for themselves. And again, the issue for us isn't that we're not letting you bring a carry-on. It is just we like to ration the space. As I mentioned earlier in my comments, with 166 seats with 90% load factors, the one thing we can't make more of is overhead space. To my mind, it is not fair that the first person that gets on gets baggage space, because of their luck of the draw. We want to manage it according to value and what people place on it, and that comes back to dollars and cents. Could it have traction with DOT? Perhaps. There is new rules being written, I understand, as we sit here today. So we'll see.

But, Hunter, this is Andrew. I think that's what is really important is that, again, before anybody agrees to buy travel they know what the total cost is. And so you know, there is this notion this somehow customers should be able to get the total price that much earlier in the transaction as opposed to waiting another minute or two later. And we just think that is kind of silly and makes no sense. We just don't understand it at all, quite honestly.

-- outdated rules and approaches that go back to a system that was the same for many, many years. And they want it to be the same. But it is not going to be.

Yes, no. And the other quick one I have is your expectations, kind of a follow up on the Hawaii dynamic. You said before you're going to come in at a lower price point and stimulate traffic against Hawaiian. But do you have different points of sale expectations? Because I'm thinking that maybe you guys take a share of Vegas to Hawaii, they take a share from Hawaii to Vegas, given the local recognition plans and whatnot, the mileage plans over there. Are you targeting more Vegas-based to Hawaii, or are you targeting more Hawaii-based to Vegas? What is your point of sale expectations for both and Hawaiian in that market?

I think you summarized it very well. They certainly have the presence over in their part of the world and we are known here. Not to say Hawaiian isn't known here, but typically our destinations -- we book the traffic away from the destination to the destination. So given Honolulu is our destination, that is not an unreasonable place we'll start and go at it.

Hunter, that being said -- this is Andrew. We have seen a you know, the market as a whole I believe it's about 70% point of sale or origination in Hawaii. And we are seeing numbers that are not -- we're not at 70%, but we are pretty substantial. It is the same thing that happens in all of our other destination markets. We haven't put a lot of effort into marketing in Honolulu. We have put our effort into marketing Vegas. Friends and family and acquaintances let people know on the other side that we are offering service. And we have seen that time and again in Phoenix and LA and the Florida markets, where we end up with a very large percentage of traffic originating in those cities, despite minimal to no marketing effort. So I think we'll see that in this route as well.

Great. Really helpful. Thank a lot. Very much.

Thank you, sir. And this concludes our question-and-answer session. I would like to turn the conference back to Maury Gallagher for any final comments.

Thank you all very much. Appreciate the inputs and we'll see you in 90 days. Thank you.

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