Allegiant Travel Co (ALGT) 2012 Q3 法說會逐字稿

Welcome to Allegiant Travel Company's third quarter 2012 financial results conference call. We have on the call today, Maury Gallagher, the Company's CEO and Chairman, and Andrew Levy, the Company's President, and Scott Sheldon the Company's CFO. Today's comments will begin with Maury Gallagher followed by Andrew Levy, then Scott Sheldon. After their prepared remarks we'll hold a short question and answer session.

We wish to remind listeners on this web cast that the Company's comments today will contain forward-looking statements that are only predictions and involves 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 in the Securities and Exchange Commission. Any forward-looking statements are based on information available to us today and we undertake no obligation to update publicly any forward-looking statements whether as a result of future events, new information, or otherwise. The company cautions users of this presentation not to place undue reliance on forward-looking statements which may be based on assumptions and anticipated events that do not materialize. The earnings release, as well as a rebroadcast, are available at the Company's Investor Relation site, ir.allegiantair.com.

At this time I would like to turn the call over to Maury Gallager for opening remarks.

Thank you, Operator. Good afternoon, everyone. Welcome to our third quarter 2012 conference call. As the operator mentioned, joining me today are Andrew and Scott.

I am happy to announce our 39th consecutive profitable quarter, almost ten years of continuous earnings. Revenues during the quarter increased $25 million or 13% to $217 million for the quarter compared to the same period in last year in 2011. Our operating profits for the quarter were up 70% to $29 million while the associated operating margin was 13%. That also was a nice increase of 50% plus.

We had a net income $17 million, or $0.87 per share, a substantial increase from last years $9.5 million, or $0.49. This represents the 0.79 % increase in net income for the quarter, again, comparedto last year.

More over, I might add for the nine month of our operations here in 2012, we've increased net income 65% to $64 million compared to last year, and earnings per share are up corresponding 64% to $3.29. All of these numbers reflect an excellent quarter. Even with our growth of 15% in fuel costs and in excess of $3 per gal, which effectively was equal to last year's higher cost, we were able to increase our operating margins by 4.5 points, as I mentioned earlier, to over 13%.

We indicated in previous guidance, also, that our non-fuel unit cost would come in, and they have. They're down 5.6% for the quarter. The additional seats in our MD-80 program are beginning to pay their projected dividends.

We're also seeing benefits on the fuel front as well. All indicated the cost per gallon was essentially flat year over year, our fuel CASM came in 6.8% to just under $0.05. I might add, looking back through the record, this is the first time we've had fuel CASM under $0.05 with an average cost per gallon north of $3.

Corresponding our ASMs per gallon have increased over 7% to 63.3 ASMs per gallonfrom 59 ASMs last year at this time. This increase, I might add, is also indicative of 757 flying and during the quarter, 9% of our ASMs came from the 757, up from just under 3% last year.

On the revenue front we are pleased with the trends we're seeing. Overall we have had a nice increase in aircraft related ancillaries. They're up 22% from just over $30 per passenger last year to $37 this year. We have been working to maintain our lowest average fare we can for our customers while at the same time offering more products and transparency that comes with them.

Our most recent effort, charging for carry on bags, is succeeding very well. On the operational front, charging for carry on bags has reduced our cabin activity during boarding which is thereby helping increase our pace of boarding. It's been a busy year.

We, as you know, announced our Hawaii service earlier this year and began it on June 29. Essentially, most of the activity so far has been a third quarter event.

We had a excellent July and August. September acted like we had suspected it would, like a shoulder month. But all in all, we're very pleased with the results.

On the automation front, we expect to have our new website up before the end of the quarter, if not a little bit before then, even. Our limited production activity so far has gone extremely well. We are excited about the additional tools and benefits that will soon be available from these efforts.

On the aircraft front, we announced the addition of our newer generation Air Bus equipment. Our first aircraft is currently in the paint shop, being painted in our livery. It's going to be a very good looking aircraft if I do say so. We're targeting a start date in the first half of the year in 2013.

We continue to see excellent opportunities to grow our business through used, new generation aircraft. The general slow down in economies throughout most of the world continues to put pressure on after market values for single aisle equipment. That comes in addition to just the general over-production we have seen over the years and plus the change over that will happen soon with the NEO and the MAX in the next few years.

This environment with these depressed prices is similar to used aircraft market we experienced for MD-80's in the early 2000's. Namely, very good aircraft are available for extremely attractive prices. This commitment to newer generation aircraft at these prices allows us to continue our model well into the future.

We're committed to generating high returns on our capital assets through industry leading margins. The A3-19, what is it's sister ship the A-320 will allow us to continue to grow our business in a fashion we, and you, have become accustomed to.

In closing, we are very bullish on our business. While the economy has been less than robust, we have been able to weather it very nicely. The anomaly of the past six months, in many ways, has been the disconnect between poor economic news and the price of fuel. Namely, historically, when the economy weakens, oil prices follow suit. As we all know, this has not been the case over these past many months.

While we are comfortable with our prospects for the remainder of this year and 2013, should all retreat to a reasonable level reflective of the weakness that we've been seeing in the economy, we certainly wouldn't be objecting. And as you know, some of our best results have occurred during weak economic times with correspondingly weak oil prices.

Indeed, we are we're on the way to sixth straight year of double-digit operating margins. Since the beginning of 2007, or the past 23 quarters, we have earned on average a 15% operating margin while almost quadrupling the size of the company. These industry leading financial results speak well of our model, it's durability and it's sustainability, as well as this management team's ability to execute.

Lastly, it is also required the dedicated effort of our team members. Through the years, their focus, their professionalism, has allowed us to continue to excel at serving our customers safely, efficiently, and profitably. We look forward to many more years of continued excellent performance. Andrew?

Thank you, Maury. We're very pleased with our third quarter revenue performance. Total fare was up $4.00, or 3.6% year over year to just under $125 per passenger. Ancillary revenue per passenger was higher by almost $7.00 mostly driven by the introduction of our carry-on bag fee which more than offset a $2 decline in base air fare.

We are especially pleased with these results considering the 15% growth in available seat miles during the quarter. The largest contributor of third quarter ASM growth is additional seats in our growing fleet of 166 seat MD-80s, which results in lower passenger RASM, but even greater declines in unit costs. This combination is driving higher margins.

We expect this trend will continue in the fourth quarter as more of our fleet is converted into the larger density seating configuration. Despite this amount of elevated growth, total RASM was only modestly lower, down 1.7% ascompared with the third quarter of 2011. Total RASM continues to outperform passenger RASM, and the spread between total RASM and passenger RASM has been accelerating during the past couple quarters. We expect this trend to continue in the fourth quarter.

Forward demand trends appear unchanged since we last commented during the second quarter call. Adjusting for increasing capacity, we believe demand is good, and fourth quarter guidance suggests as much.

Using the mid-points of the guidance provided in the release, we've projected 23% increase in scheduled ASMs, which is several percentage points higher than the third quarter, but we expect an 8% decline in passenger RASM which is the same as what we just reported.

Our network continues to grow. We ended the third quarter with 181 routes and service and expect end of the year operating 196 routes. The growth in routes and ASMs during the fourth quarter will be mostly in Florida and Hawaii. We're pleased with the performance of our new routes, especially our new bases in Punta Gorda, FL, and HI. Hawaii service started at the end of June and we're very pleased with the results during it's first quarter of service.

It was nice and profitable during the quarter, but it's contribution is still very small. It was 1% of departures, 2.5% of passengers, and 3.8% of ASM during this third quartThe contribution during the fourth will be a little bit higher. 2.1% of departures, 2.7% of passengers, and 8% of available seat miles.

The five routes which we will begin in mid-November are all showing strength, especially during the peak, Thanksgiving and end of year holiday season, as to be expected. So far Hawaii is exceeding our expectations and we're excited to launch these five new routes as well as the three others that we have scheduled to begin during the first quarter of 2013. With that, I'll turn it over to Scott a more detailed look into our financial results for the quarter.

Thank you, Andrew. Our cost performance exceeded internal expectation for the quarter as our CASM ex fuel decreased 5.6% to $5.37 per ASM. Significantly better than our previously guided rage of down (inaudible) to flat. As mentioned during our second quarter call, we anticipated some non-recurring expenses in the third and fourth quarters in addition to decreased aircraft utilization which would be a slight drag on ex fuel unit cost production.

Excluding these non-recurring items, our third quarter CASM ex fuel would have decreased approximately 8% to 9% to $0.052 per ASM. Energy prices remain relatively flat year-over-year, and on a sequential basis. Our absolute fuel expense increased roughly 7% to $90 million dollars on a 7.1% increase in gallons consumed.

On a per-passenger basis, our fuel cost decreased 2.3 %, or $1.22 to a $52 per passenger the third quarter.

Consistent with the second quarter, we continue to make strides in the third quarter on our fuel consumption front as we now operate 40 reconfigured 160 seat MD-80's and four 757 anti-revenue service.

ASM's per gallon increased 7.2% year over year to 63.3, while our gallons per passenger decreased 2.1% to 16.7 gallons, the lowest in the company's history.

Moving on to non-fuel costs, we remain pleased with the trends can have seen year to date. The third quarter results were highlighted by the continued improvements made in labor, heavy maintenance, and sales and marketing.

Salaries and benefits per pax increase slightly by $0.33, or 1.8% to $19 during the quarter, despite a 15% increase in FTE's and 18% in aircraft.

The primary drivers for our results were increased productivity from our pilot and flight attendant work groups and a decrease in overall overtime expense. Maximizing crew efficiency during our seasonally weakest quarter can be challenging particularly due to the way we flex our schedule despite the fact our flight crew productivity, as defined by block hours to paid hours, increased 3% to 4% year over year.

Maintenance and repairs expense per passenger decreased $2.75 or 20.6% to $10.60 during the quarter. This decrease was driven by the change in the heavy maintenance expense mix year over year.

During the quarter, we experienced a $4.1 million decrease in engine overhauls and a $1.6 million increase in heavy maintenance checks. In addition, we had approximately $1.5 million in heavy checks slip into the fourth quarter, which helped our third quarter results.

On a full year basis our maintenance expense per aircraft per month is trending to $100,000, to $105,000. Sales and marketing expense per passenger decreased $0.69 or 22% to roughly $2.40 year over year despite a 13% increase in total schedule revenue.

We continue to see the trend of increase debit card usage, which has resulted in a meaningful reduction in transaction processing costs. Our debit card usage rate during the third quarter for all electronic payments was approximately 40%, up from approximately 30% in the prior quarter. Depreciation expense per passenger increased $2.33, or roughly 34%, year over year on an 18% increase in average aircraft and service.

The primary drivers for this increase were the introduction of three 757's and 8 MD-80 aircraft into revenue service, in addition to the depreciation of 36 re-configured 166 seat MD-80s year over year. Compounding this increase was approximately $1.6 million in accelerated depreciation in the quarter, related to the planned retirement of MD-87 aircraft in 2013.

Looking forward to the fourth quarter we expect to see an additional $1.7 million and accelerated depreciation related to these retirements. Over the next couple of quarters we expect to see some cost pressure in the other expense line itemdue to Air Bus pre-operating costs, and potential impairment charges for engine consignment inventory held for sale.

These items combined are expected to add an additional $4.5 million increaseyear over year during fourth quarter. That being said, we still expect our full year ex fuel costs to be down 7% to 5%.

Quick (inaudible) of the balance sheet. We ended the quarter with $371 million in unrestricted cash and marketable securities, which is down 4.7% to the second quarter. And it's consistent with reduction in our air traffic liability.

Our unrestricted cash and marketable securities represents 44% of our trailing 12-month operating revenues. Our CAPEX spend of $28 million during the quarter primarily consisted of the initial deposits for ten, Airbus A319 aircraft and the continuation of our 166-seat modification project.

At the end of the quarter we had modified 36 MD-80s from 150 seats to 166 seats, for a total spend of $32 million. As indicated in our release, we expect full year CAPEX of $125 million to $135 million due to additional capital outflow for aircraft deposits, additional parts, and spares provisioning for A319 aircraft.

We plan to address full year 2013 CAPEX guidance during our November investor day. We ended the quarter with $153 million in total debt which was down from $166 million from the prior quarter. Our leverage ratios continue to improve with our debt to equity ratio now at 36%,down from 43% in the prior year and our interest coverage is now 21 times.

Finally, our return on equity and return on capital ratio's continue to improve, and we're 19.6% and 15.5% respectively. With that, operator, we're ready for questions.

(Operator Instructions). Our first question comes from John Godyn from Morgan Stanley. Your line is open.

Hey, thanks for taking my questions. First of all, Andrew I was hoping that you could elaborate on what you're seeing in terms of demand, particularly what you're seeing with some of the holiday season travel, if you have any of that booked up already. I know there are a lot of moving parts here with PRASM, and headlines and PRASM's different than TRASM's so if you could cut it down to what you think the core trend is and how that's shaping up. I think that would put some of the headline numbers in context for us.

Sure, John. I will do my best. As you know, we have not yet guided total RASM and we hope to be able to do that as we go into the new year. We just want to make sure we're as confident being able to predict those trends as we are with the passenger number. But, obviously, the passenger number is becoming less relevant, certainly these last two quarters, because of the fact that we have been able to drive up the ancillary number significantly to a certain extent perhaps at the expense of the base air fare. Total RASM, obviously, is much more relevant for us.

What I was trying to suggest is that we're seeing a widening spread in the second quarter. The third quarter, even more so, and we expect the fourth quarter to show that same trend as far as total RASM's outperforming passenger RASM's by an increasing amount as the efforts on the ancillary side become more mature. Particularly the carry-on bag charge, but there's other things as well that are helping drive that number higher.

The holiday demand is very good. We're really pleased with what we are seeing. And we do have a very substantial amount of revenue on the books because of the long booking curve that we typically have being that we focus on the leisure market. We're pleased with what we see in the fourth quarter.

We think it's going to shape up to be really good particularly during the holiday periods. And that's despite the fact that we are obviously putting out a lot of ASM's. But the vast majority of the growth in seat miles is driven by more seats and MD-80s, by the 757 flying, some of which is mainly un-flying, but the majority of which is going to be Hawaii flying, particularly as we get into mid-November. So right now I think demand is good. It's not great, but it's good. It's solid. We think the holiday period is going to be really strong.

Okay.

The typical holiday period, basically.

Okay. That's helpful. And I don't think us, as analysts, have certainly done any better of a job here thinking of the volatility of PRASM lately but we have seem some versus some of the earlier projections. When we think of all of these puts and takes, and new aircrafts coming on line, a lot of new routes being opened up, is there an impact that we should be thinking about on some of the revenue management systems? How do we think about how much of an impact on uncertainty or maybe your ability to yield manage some of these initiatives might be having?Is there a sort of an un-foreseen or unintended consequence there that's driving some of the error?

No. I wouldn't say that there's anything un-foreseen. I think we've been very open about the fact that as we roll out these larger gauge MD-80s there is, without a doubt, we're not optimizing the revenue this year because we're not selling into those aircraft with the same amount of time that we will next year. Because we want to make sure we don't sell 166 seats in a route and then show up with a 150 seat airplane. I think we've been very open about the fact that we think just because of that, there's going on a lot of up-side to optimizing the next year. And, I think quite honestly, while we try our best to predict what those additional16 seats are going to generate, as you get out there and start selling and flying, you learn something.

So we expect that we'll continue to optimize the larger gauge airplanes. 2013 we'llcapture much of that optimization. I don't think it's a system issue or process issue. It's just something that we expect. Hawaii is a new market, just like all new markets, it takes time to learn some of the demand trends in those markets, and we will learn and we will be able to optimize and get smarter as we get more history. So, certainly adding new routes, adding more seats, there's a lot of unknowns there. We do our best to forecast and react accordingly, but there's no question that we will learn and optimize as we go forward.

It's good to know that sort of upside as we look into 2013. You mentioned Hawaii, and that's just sort of my last question. If you could just elaborate on how Hawaii is spooling versus expectations and maybe just some thoughts there, I think that would be helpful, thanks.

Sure. Hawaii, in the first full quarter, which was the third quarter, it was very profitable. The third quarter should be very profitable. But the fact that three quarter of our flights, mainly the Vegas market, it a market that has a lot of competitive capacity in there. And the fact that we had a very short booking window, 60 days approximately before our first flight, makes us feel really, really good about Hawaii. Normally we want to have that booking window open for six to nine months for Hawaii. Because typically bookings are made a good bit further in advance.

So, all things considered, we think Hawaii is off to a terrific start, and as we look into the fourth quarter, we're really pleased with how the two markets that we're currently serving are booking up. Vegas and Fresno, as well as the five new routes that are going to start up in the mid-November time frame. It's a little too soon to have a while lot of clarity on the three routes we're starting up in February, I wouldn't wand to hazard a guess there, but so far with what we have, we feel really good about it. We feel Hawaii is going to be extremely additive, and it has been so far. At the same time, we're going to learn about demand trends there, and we'll be able to adjust both capacity and pricing decisions in the future as we get smarter with experience.

Thanks, a lot, guys.

Thanks.

Thank you. Our next question comes from Michael Linenberg from Deutsche Bank. Your line is open.

Yeah, hey guys. I want to talk about where we were at the start of the quarter on guidance and where we came out. The other revenue, in the sixth fee was in the $10 to $12 million, and you upped it $14 million to $15 million. And the CASM guidance also came in a bit better. On the other revenue, was that just a much better uptake on the carry-on bag piece, was it surprisingly good, or what drove that, because that was a nice bump up.

Mike, if you're talking about other revenue, the guidance you referred to is the combination of fixed fees and other, I believe.

Yeah. That's right.

So fixed fees, those are our charter programs.

Okay.

We had a very strong quarter as it relates to what we call ad hoc charters, non long term contract charter programs.

Okay.

And the other revenue came I think right at forecast. That predominantly consists of the lease revenue from the 757's that had been out on lease for the past couple of years. Those airplanes are being returned to us as we speak, so that other revenue we will see a commensurate decline as we then are able to use those aircraft and generate the other forms of revenue; the scheduled service and the ancillary revenue. So, the carry on bag charges, you will see that in the air-related ancillary revenue line item.

It sounds like good charter. Like the charter came in better than expects maybe.

That's probably right. And, obviously, we try to be pretty conservative when we put guidance out, and sometimes ad hoc charters, especially, are a little bit hard to predict because a lot of it comes in relatively short notice.

No, no, it was a pleasant surprise. My second question is, the formation of Allegiant Systems, the press release was out in early October. It looks very interesting because it could be a platform for something bigger. Your new website, is that going to be part of this? Is that something that you're going to try to either monetize, or a service that you're going to try to sell through this business line? Can you talk about this? Because it was a small press release, but there's a lot in there and it looks like it could potentially revolutionize the company down the road, or maybe I'm making a bigger deal about something that's just going to be much smaller.

Hey, Michael, it's Maury.

Hi, Maury.

I want to back you up a little bit. The main intent of new organization is to create automation software services for inside the cabin to begin with. We think they're some of the most backward places in technology, are inside an airplane cabin, be it the cockpit or the main cabin. So we're working on things such as using iPads for buy-on board, much more modern stuff. We wanted to bring in some people who have a better ability to market and sell this stuff to third parties than us. While we'll be a customer of the company, we'll primarily want to work on developing that.

Regarding our own internal automation, we need to finish up our efforts first before we even think about something like that but to your point, we will have a platform that will be exceptional. I am not sure monetizing it is something that we will put on the table or think we'll do at this point. But it will be a good platform.

Great. Thanks, that clears that up. One last question. I saw that you guys, I believe that you had announced the Monterey/Honolulu flight, or it got pushed back, what drove that? You needed the aircraft for something else? Or it was not the right market? Can you talk on that?

Yeah, this is Andrew. We killed it because it just wasn't performing.

Okay.

It was so far off of where we expected it to be, and where it had to be that we thought the best thing to do was to simply, cut it, and do something else with the airplane. So kind of as we've many times in the past, when we see that, we try to react quickly. And obviously when you're talking about long flights over the water, you have a lot more cost there. We have probably a quicker trigger in those cases than others. No, that's not delayed. It's simply eliminated. Maybe down the road we'll try it again, but it clearly did not look like it was going to be successful for us.

Perfect. Great, thanks, guys.

Thanks, Michael.

Thanks.

Our next question comes from Hunter Keay from Wolfe Trahan & Co. Your line is open.

Hi, everyone. So I want to talk about a small route but maybe indicative of a bigger theme, and that's Scenic's Mesa to Vegas. I think Spirit is pulling out of that route if I'm not mistaken and I'm curious to know if you could give us a life cycle description of what happened there from the day they announced it to the day they announced they were leaving it. Was there some aggressive pricing going on? Did Spirit underestimate your desire to protect your turf? Was there just different customer demographics than they expected? I'm curious to see how that one went to maybe extrapolate to a bigger picture so we know, if they try this again, what to look for.

Hunter, it's hard to speculate as to why Spirit makes the decisions they make. It's impossible for us to gauge that. We price to fill airplanes and obviously try to capture as much yield as we can. Certainly, with their entry into that market, it certainly didn't help pricing. But we approach it so very differently. We fly only on what we believe are days that we can make money. And Vegas, in particular, is a market that in our view there's four days that have really strong legs and everything else is really not all that interesting. And flying daily service patterns to Vegas with multiple frequencies we don't think that's the way to be successful in this market. It's hard to know why Spirit decided to change what they did but that's our speculation.

In our case, we continue to experiment with that market by adjusting our capacity and continuing to try to learn how to better market in the larger-sized community like that. We think that's where the MD-80, in particular, and having a very low fixed capacity, or very low fixed cost, in our structure is extremely helpful. Where we can be highly selective of when we fly. Not feeling pressure to fly, 10, 11, 12, 13 hours a day on our airplanes. That's why we think that's a huge advantage we have over anyone else trying to fly into Vegas with the high-frequency model that's used by other airlines.

It was not necessarily something that you thought you were surprised maybe by how loyal your customers were so much as you just think you kind of already cracked the code on the service patterns. That's probably a better way to think about it.

It's hard to know why Spirit came in and why they left. They probably felt they could make more money on a different route. But I think, no, I think our customers, I wouldn't call our customers loyal to us versus anybody else. They're taking advantage of low price vacation travel, both air and other products. If we can offer the lowest price, then, you know, we do pretty well. We have the lowest costs, we're able to provide savings when people buy other products from us. So, the combination there offers a extremely compelling product to our customers and I think that's why we're successful.

Okay. Well, thank you, Andrew. I guess, Maury, maybe this is for you. I would like to follow up to Michael's question on the IT side. The last analyst day we were led to believe that a lot of this stuff was going to already be happening at this point, and the website included, and it's taken a little longer than we expected. Obviously, it's a complex thing. Can you give us some benchmarks to look for, outside of the website role which I know you mentioned, that we can look for in the next 6 to 12 months? Of those things, whether it's abstract or specific. And of the benchmarks that we can look for to come into the program over the next year, which ones do you think will provide the most economic value over the near term in the long run?

Hunter, good question. The pace at which we've developed has been very good. I can tell you candidly, we interrupted some of the baseline development things to do, what we thought were important revenue enhancements this year, not the least of which was our carry on bag items. If I can put revenue in front of specific generalizations where it's hard to quantify things such as bringing the website up, which we think is a positive, it's much harder to put a number on that than with the carry on bag effort which took 60 days of out of the program. But part of the results your seeing today are efforts to bring additional products on line which took the high road versus day-to-day development. Regarding specifics on what's going to happen when, let me defer that to our investor day.

Scott will be up and we'll have a pretty good overview of exactly what's going to happen when. First you've got to build the car before you can start putting some of the accessories on. The bigger carburetor, the bigger wheels, the stuff that makes you go faster, we're finishing the car right now and then we're going to have the ability to fine tune this thing and with tools for pricing and lots of little outcomes that it's hard to quantify exactly how big it will be. We just know it will be better than what we have today. In many ways we're still pretty crude, quite frankly, compared to where we we'll be in the next 12 months. You'll be out here in November. We'll give you a front-row seat.

Great. I appreciate it. Thank you very much.

Thank you.

Thank you. Our next question comes from Helane Becker from Dahlman Rose & Co. Your line is open.

Thank you for taking the question. Maury, can you jut give us an update on the flight attendant negotiations? Sometimes they come by in New York and they talk to us, and they have their view on how things are going. And I was just wondering if you could update us on what you were thinking and when you think that will get resolved?

What did they tell you?

Well, candidly, they said they would be happy to do an agreement but you were holding it up. I just kind of wondered where, they told me their side, and I kind of wondered what you were thinking.

Well, I'm sure I'm the bad guy in these situations. You always have friction when you're in these situations. I have been through original contracts before, and one of the themes that we have told our people is that we got here by being different. Everybody's job in this company is the fact that we went left when everybody else was going right. As we get successful, don't bring me all the tried and true old labor approaches or different things that may have been the way businesses has always been done.

We're not about the way business is always done, and in particular, one of the issues in this situation is over whether or not we have to terminate our employees should they not pay the union wage, or union dues that are required by being a member. And while we don't object to union dues or anything like that, we're just saying we're not going to be your agent to collect or to enforce, termination should someone say they don't want to pay. That's a major deal in this business. So it turns out here in Las Vegas many of the people in the culinary union and others, according to my good source, don't pay dues. And the casinos, for instance, aren't required to collect the dues.

The Airline Industry, that's been the de-rigger for many years and we've just said it's time to be different. While we're negotiating good faith, we spent many months and got a long way down the road with flight attendant representation about that are correct, but we do not want to go that way in this situation, and that's our policy at this point. So, flight attendants have called for mediation with the NMB and we start following the traditional negotiation rules and enter that phase in the next month or two.

Okay. Just as a point of clarification, if you didn't collect their dues or on the culinary side, how do the dues get paid? They just write a check or whatever? Whatever it is, do it online, is that it, and pay the union directly? Is that how it would work?

A lot of people belong to health clubs and it's automatically deducted, I know I've done that. We all have these automatic deductions or some sort of payment but it's usually between the seller and the buyer.

Okay. Right.

You don't have different players in the middle.

All right. That makes perfect sense. Okay. That's very helpful. And then just one other question I don't know who can answer this one, but we kind of missed the consumption line. That's kind of where our estimate was different from what you actually reported. So we usually do it based on ASM's and clearly we were off a little bit this quarter. Can you give us some guidance of how we should think about that going forward?

When you say consumption, unit consumption I assume is what you're talking about?

Fuel. We usually do ASMs per gallon andI guess we were off this quarter.

If you look at the seats per departure, it's north of 160 seats. Sequentially, ASMs per gallon, I believe, are up just over 2%.

7%.

Sequentially.

Oh, sequentially, yes.

So, as far as fourth quarter guidance, I think 2% plus or minus is a much better representation on what the fourth quarter year over year affect would be. We should be up to 45, 166 seat aircraft by the end of the year. And you'll have all seven (inaudible) in the fourth quarter. So sequentially that sort of trend would make a lot of sense.

Okay. Great. That's very helpful. Thank you very much. And have a nice day.

Thank you. Our next question comes from Jim Parker from Raymond James. Your line is open.

Yes, good afternoon. Scott, I have a question for you and then one for Andrew. Scott, you went a bit quickly in your discussion of the $4.5 million greater costs in the fourth quarter for maintenance, I believe, or other items, can you provide a little bit of detail on that again, break that down, the $4.5 million?

Yeah. You know a lot of this has to do with the training costs for the Air Bus project. In addition, there's going to be our annual impairment which takes place at the end of the year. All of our consignment engine inventory components are held by (inaudible) so we anticipate a write down similar to what we saw back in the fourth quarter of 2010.

2011.

2010.

Okay.

Last year, the write down was fairly nominal. We expect that to be a good bit better, or I should say worse, this quarter. The majority is disposition as opposed to pre-operating costs.

Okay. And how much is the train or the 319's? How much do you have budgeted for that?

If you used $1.5 million to $2 million, that's probably a good base line. That's more than just training.

The remainder of $4.5 million would bethe write down of impairment?

That's correct.

Okay. All right. Good. One for Andrew. Andrew, if we look at the third party ancillaries, and one thing in particular that's outstanding are the hotel rooms at year to year. They are down, I believe, slightly, or flattish. And then you say outside Vegas that they're up 23%. So what's going on there? Is it related to flights, seats into Vegas, or what's happening in that regard?

Yeah, Jim. So you know, Vegas is still by far very much the dominant part of that business. So while we're seeing good growth away from Vegas, Vegas still represents the vast majority of that hotel business. And what we're seeing in Vegas is we continue to discount, offer a discount on the air side for folks that buy an air hotel package product. And what we've been doing is simply ratcheted down that air discount. And, therefore, the result of it is we sell slightly fewer hotel rooms but the overall profit to the company are higher both in terms of having less air discounts but also in terms of the managing the hotel margins higher.

As you can see the overall third party business showed a 3.2% percentage increase in gross margin from (inaudible). So I think you have a couple things going on there which results in less robust growth in hotel rooms. We're more interested in the growth in profits as opposed to growth in just pure hotel room volume. But I think capacity also comes into play. We did grow Vegas slower in the third quarter, fourth quarter is a little slower as well. And so that definitely plays into the Vegas part of the hotel business.

Okay. And, Andrew, of the 166 seats on the MD-80s, those that you have, I guess, 40 so far that you've retrofitted. I believe you were selling only about 30% of the seats for seat assignment. Where are you now? What proportion of those seats are you able to put in for sale of seat assignment?

Well, I think that, the take rate, or the percentage of people buying a seat assignment, has fluctuated over time. I don't recall when that 30% number might have been accurate. Today the percentage of customers who buy a seat assignment in advance is far higher than that. That is due, I think, in part to being able to sell more seats because of the standardization of the 166 seat product. But I think it also has to do with a lot of pricing work that we've been doing, presentation on the website, so there's a lot of factors there. That's definitely been a nice part of the growth in ancillaries this year has been due to our ability to drive up the revenue per passenger that's associated with the sale of advance seat assignments.

All right, thank you.

Thanks, Jim.

Our next question comes from Duane Pfennigwerth from Evercore Partners. Your line is open.

Hey, guys good afternoon.

Hey, Duane.

Appreciate your TRASM is a more meaningful metric these days than PRASM and most of my questions have been asked here. With respect to October guidance, it seems a little weaker than we would have expected given how much easier the comparison is. I wonder how you would characterize October revenue and are you seeing any trend change here?

No, we're not seeing any trend change at all. October is pretty much behaving as October behaves. October is a shoulder month. It's actually a pretty decent month in Vegas. And it's not so good everywhere else. So I think we're, I think we're pleased with it. Maybe part of the reason that it may be lower than you expected is a couple of things. We certainly put more growth in markets away from Vegas this quarter. A lot of the new 166 seat airplanes that are rolling out, are rolling into Florida. Pretty much at the worst possible time, because this is as bad as it gets in the Florida market.

The entire west part of the U.S., for usour network, has 166 seaters. And now we're bringing them into the Florida market. So I think that maybe accentuates it a little bit. We're really comfortable with where we see revenue right now, we're comfortable on where we put our bets on capacity this quarter. The forward trends as far as demand is concerned. You guys, you and your peers and others, get really focused on this PRASM number, and I'll just be honest with you,we don't. We're looking at profitability. PRASM is just one number. Passenger RASM is just one number that if you look at it in isolation it can tell you a story that may not have any depiction in reality which is what we care about is earnings per share, and that's it, so.

That's very fair. I don't think anybody can take issue with what you just put up. You just put up a great quarter. What we're trying to deduct is the guidance points to a bit of a trend change to the fourth quarter and is it just a continuation of the sand bagging that you guys are so good at, or is something else going on.

I resemble that remark.

I wouldn't say that's sand bagging but we are cautious. I think my comments try to provide a certain amount of color and directional information there. And I think what we said is that despite a good (inaudible) in the fourth quarter, we expect the passenger RASM number to come in year over year at the same point essentially if you use the mid-point as what we saw in this third quarter. We also tried to point out that the trend of TRASM is accelerating as it relates to that versus the passenger RASM numbers if you're looking on a year over year basis. So this quarter, the total RASM number was 6.3percentage points better than the passenger RASM. And the second quarter it was 2.5 percentagepoints better.

We expect the fourth quarter to continue that trend. Albeit, I wouldn't expect to see that much of a jump. But essentially that's driven, in many respects, by the maturing of the carry-on bag charge, which we started selling in April. At the time in April, we were already selling seats, certainly a lot of seats in the third quarter, and a few in the fourth quarter. So the fourth quarter will probably capture 90% plus of the value.

And the first quarter for next year it will be every single person that booked at that point would have had the ability to choose to buy a carry-on bag fee or not. So, no, I think that we're focused more on the quarterly numbers. We gave October guidance, which obviously we have great clarity on October. More relevant as far as the world we all live in is what the quarter looks like and we try to give you our best guess as we sit here right now.

That's great. And helpful. I will sneak one more in. I realize you'll wait on the 2013 CAPEX guidance but have you made a decision on the 319s from Cebu if they will be purchased outright or you'll continue to lease them?

Our bias is to purchase when we can. You know at this point in time with the balance sheet and everything, you get better economics. So, given our negotiating deals and things like that, that's the easier track to take on the front end. Then we can redo the financing after we settle the basic purchase approach. But at this point, nothing more than just acquiring the airplanes and purchases is the way it will probably come down.

Duane, this is Andrew. Let me add one more thing. We always announced at the time that we first announced that transaction we announced we expected it would be a capital lease. Not an operating lease but a structured sale. At this point, we're still finalizing what the structure of the sale is going to look like. But they've always been airplanes that would be purchased. And the structure of that purchase may end up being a little different than what we announced initially, but they were never slated to be operating and they're still not the slated to be operating leases.

Okay. Thank you.

Thank you. (Operator Instructions). Our next question comes from David Fintzen from Barclay. Your line is open.

Good afternoon, guys. Quick question for Scott. On the $1.5 million to $2 million on the 319 start up cost? Is that the bulk, sort of the big wave of up front costs on the 19s or is that something we can expect to that magnitude over the next few quarters until the second half of next year?

Yeah. You're probably going to see something similar running into the first quarter but it will die down shortly thereafter that.

Okay. That's helpful. More of a broader network question. Obviously a lot of focus on Hawaii. How should we think about the non-Hawaii network, the bulk of the network where you have the 19's coming next year, you mentioned Punta Gorda is very strong, you've had some commentary around Vegas and competitive capacity there. How much growth potential do you see there? Is it a function of ramping up the existing bases, do you see other bases, give a little color for how you're generically thinking about the growth opportunity there.

Sure, David, we'll try. You know there's never been a shortage of opportunities to grow and grow in a very profitable way. I think we've certainly been able to prove that out over the last few years. We don't see anything that's different as we look forward. While the ASM growth as you can see in particular as you look in the first quarter is still pretty substantial. You'll note that the departure growth is pretty much flat. That's a reflection of a pretty cautious view on capacity with the combination of fuel prices that we think are kind of higher than they should be when you take into account where the macro environment is at the moment.

We think as time goes on the correlation will reestablish itself where either you'll see an improvement in demand or you'll see fuel prices continuing to decline. That's how it's always been. I don't see any reason that it won't do the same going forward. But, we think we have a lot of opportunities to continue to both ad small cities, which we've been adding a lot of, connecting the dots, taking an existing small city and connecting it to our existing destinations and then adding new destinations.

We have no plans to add new destinations at this time but I wouldn't surprised if sometime in 2013 we might do so. So, Punta Gorda is a relatively new base. It's a market we serve from a few southeastern markets. We've now established a base there with a couple airplanes and adding a bunch of Midwestern markets and we're pleased with how that's going. And Hawaii is the other new base we've brought into play this year. Oakland as well, we started it earlier thus spring. But in general, we're really pleased with what we're seeing across the network. We're constantly tweaking, trying to making sure we have the best routes and the right amount of seats at the right time and we think we'll continue to have tremendous growth opportunities in 2013 and many years beyond that.

Okay. That's helpful. One sort of schedule. I think Maury mentioned 8% of ASMs in the fourth quarter. Would that imply that December would be more like 14% or 15%? I'm trying to get a feel for stage length.

You know what, we don't have that number handy, David.

David, I said 9% of the ASMs in the third quarter were from 757s.

Oh, okay. Then I completely misheard that.

I did state that 8% of the ASMs in the fourth quarter would be attributable to Hawaii. I am not sure which number you kind of caught on to there. Either way, look, I think that we can try to provide a little more information during investor day. But we just don't have that December number handy. Certainly December is, especially in the last two weeks, is as good as it gets in Hawaii and many other markets, so we are throwing in extra sections and things like that, so it probably is in that month probably going to be greater than 8%.

At the same time, we throw a lot of capacity everywhere, so, it will grow. The Hawaii is going to grow. Clearly, we're talking about five routes out of seven that are beginning in mid-quarter. We have three more beginning mid-first quarter. You roll into the second quarter and have all these markets flying for the first quarter, then the percentage of ASMs will probably be higher than the 8% that we noted for the fourth quarter.

Okay. Great. That's helpful. Appreciate it.

Thanks.

Our next question from Kevin Crissey from UBS. Your line is open.

Hi, thanks very much. Just wanted to maybe take a look at what you thought your non-fuel operating expense per passenger as we look into maybe next year or maybe that's an investor day question. Thanks.

Yeah. If you look at full year that's likely to come in, it's going to be down. We can give additional color in the next couple of weeks.

Okay. Okay. That's it for me. Thanks.

Thanks.

Thank you. Our next question comes from Steve O'Hara from Sidoti & Company. Your line is open.

Hi, good afternoon. Could you just talk about. I don't know if you're willing to go into it in terms of what you're seeing on the ancillary per passenger side in Hawaii, if you can talk about that at all?

Yeah, hey, Steve, this is Andrew. I think you asked specifically about the third party or ancillary in general?

I guess if you have it in general, and then a break down would be great.

Sure. I'm not going to give you a break down, but I can speak in general terms. The ancillary revenue per passenger both on the air related as well as the third party side is certainly a good bit higher in Hawaii than the system averages. That much I can tell you. That's been the case. And it will probably continue to be the case as we go forward. On the third party side in particular, we think it's off to a good start. We think there's a lot of upside there. You know currently we're operating two routes, three quarters of which the capacity is coming from Vegas. Vegas to Honolulu is a very, very different market than all the other markets that we're going to serve. Las Vegas is known as the ninth island. There's a tremendous amount of VFR traffic going in each direction. Therefore, people that are not going to be buying hotel rooms either here or in Hawaii. As a result, we really have one market today that we have experience in terms of actually operating, which is Fresno, and certainly we have advanced sales for the other markets. And, we think that there's a lot of opportunity there. We think we're just beginning to tap it. And there's a lot more upside.

Additionally, there's on the new booking engine that we're rolling out, there's going to be a lot of features there that we think will enable us to enhance our ability to sell those party products in the Hawaiian market. So, in general I think the story is really, really good. It's coming in as forecast. Ancillaries, I think, from day one have come in as forecast. The mix is a little different. The (inaudible) is a little bit higher than we forecast, the is a third party is a little lower than we forecast. What's been pleasantly surprising in Hawaii is the average fare, the base airfare, has been higher than we anticipated and as a result, Hawaii is just off to a really good start for us.

Okay. Thank you. And then going back to ancillary, on a total basis per passenger. This is the biggest increase in year over year since March of 2009. It really seems like you've unlocked the growth potential there once again. Do you see, with the new system coming on line, do you see that you can unlock additional growth and maybe approach where the, like a Spirit is, or something like that?

Yeah. I think so. The reason we saw that growth is that for the first time in a while, we introduced one big important new product. We really tried to kind of put a halt on that as we were doing all the software development. Because as Maury mentioned, when you pull off the developers off of that, and you put them onto this other thing, obviously slows the overall project down. But I think once we get that behind us and we're all on one booking engine which we expect will be very shortly, in this quarter, then we can start again looking at other initiatives. I mean, we have not run out of a lot of ideas on how we can add more products and continuing to drive that number higher. So, I guess, stay tuned.

Okay. And then last question. In terms of the your ability to sell hotels after the fact or without air fare, you're still not there yet, right? We're still waiting for this new system?

That is correct. That ability, we are not there. Hopefully we'll be able to give you guidance on that during investor day. We have a really good sense as to when we'll be in a position to do that. But, no, we're not ready for that yet. Quite honestly there's far more, as much as we think that's going to be exciting, there are higher priority items that we think will have a more immediate impact that we need to get behind us before we tackle that one. We'll give you a lot more color in another three weeks or so.

Okay thank you.

Our next question comes from Bob McAdoo from Imperial Capital. Your line is open.

Thank you. Just a couple of quick ones. In terms of fuel, since you didn't give us any guidance, can you tell us what you're paying now as compared to what you paid last quarter, and you are seeing the drop down in fuel price with the drop in oil that we've seen in the last week or so?

Bob, we can give you guidance if you want us to make up a number.

I know about as much about it as you do.

Your guess is as good as ours here. No. It's not materially different. We're seeing a nice decline this week. You know we'll see what that does for next week. But.

The hard number to know is the crack spread. It's been volatile as all get out.

Yeah. The way we manage fuel when we put out capacity, Bob, and you know this as we've talked about it over the years. We look at the forward curve, we apply an appropriate crack that's based on, heating oil cracks and other cracks that we can look at. And that's what we use for planning.

Okay. I know that. I just kind of curious as to what you're paying now as compared to what you paid last quarter. You're saying roughly it's the same. We can start from there.

For now. We'll see what happens.

And back to your comment on why the Las Vegas hotel number of room nights was actually down. I read what you're saying as there's no diminution of demand in terms of Vegas, it's not slowing down, not growing like crazy, but not changing much. But the way you pricing it is such that you are turning some business away to make more money. Is that the right way to think about it?

That's exactly right. No shortage of demand in Vegas. Certainly yields right now are weak if you follow the hotels here. They've been having to cut their prices lower. But they're filling up rooms and visitors are up. There's no lack of demand into this town. I think the way you describe it is exactly spot on. We are pricing it in a way where we believe we are ultimately more profitable. We expect it to continue to grow in both hotel rooms and overall top line. And bottom line in terms of hotel sales in Vegas. But this particular quarter it, we just didn't show any substantial growth in hotel volume but we did show substantial growth in profits.

And finally, you talked about 38 dollars for your September ancillaries, in terms of the month of September, if I read it right, so I assume you're thinking that's a good place to jump off as we move forward, and the reason you gave us September was to help us along that way in terms of thinking about the fourth quarter?

You know I think that that's a fair assumption.

The logical assumption would be that fourth quarter would be a little bit stronger than that on a per passenger basis. There's no reason to think it won't especially with the arrival of more Honolulu service and whatever.

You have to make your own assumptions about that. We try to give you directionality on total RASM and you can kind of back into whatever you think is appropriate.

Okay. All right. Thanks, guys.

Thanks, Bob.

Thank you. I'd like to turn the conference back to Maury Gallager for closing remarks.

Thank you all very much for your time in this quarter. We look forward to talking to you again in the next 90 days. Everybody have a good evening. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.