Allegiant Travel Co (ALGT) 2012 Q4 法說會逐字稿

Welcome to the Allegiant Travel Company's fourth quarter full-year 2012 financial results conference call. We have on the call today, Maury Gallagher, the Company's Chief Executive Officer and Chairman, and 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, and 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 overlooking 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 their actual results to differ materially from those expressed in or implied by our forward-looking statements. These risk factors and others are more fully discussed in our filings with the Securities and Exchange Commission. Any forward-looking statements are based on information available to us today, and we undertake no obligation to update publicly any forward-looking statements whether as a result of future events, new information or otherwise. The Company cautions users of this presentation not to place undue reliance on forward-looking statements which maybe 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 at ir.allegiantair.com.

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

Thank you, operator. Good afternoon, everyone. Thank you for joining us again today for our fourth quarter 2012 conference call. It is a pleasure to be with you. Joining me as the operator indicated are Andrew and Scott. I am proud to announce our 40th consecutive profitable quarter,10 years of continuous earnings. We had a 36% increase this quarter in net income compared to last year. Moreover, during 2012 we increased net income 59% to $79 million, and EPS, 58% to $4.06. Our operating margin for the year was just short of 15%, up nicely from 11% last year. As you have heard us say our continuing goal is to maximize our profitability. We are pleased with the results, as a result of that.

On the aircraft front, we recently told you of our contract to purchase 9-A320 aircraft. We are excited about this transaction, it is right in our wheelhouse. These aircraft will have a 177 seats, and we will have improve economics compared to our MD's, mainly lower fuel burn and more seats. They will be fresh from their 12 year checks, with most engine work updated. And we expect they will require a limited amount of investment in heavy maintenance in the coming years. We expect to take seven this year, and two of them, the final two will come in 2014. Initially, we will purchase the aircraft for cash, and then look for alternative financing that is available. We are in a good place, with respect to aircraft availability as well.

During the next few years, the 9-A320s combined with our 9 leased GECAS 319 aircraft should provide us sufficient lift to take us through the end of 2014 and into 2015. The airbus adds over the next two to three years will be used primarily for growth. While we will be retiring up to seven MDs this year, we do not have any planned retirements for this airplane in the near-term. This aircraft has been, and will continue to be a solid performer. It will be a key part of our fleet for the foreseeable future.

Lastly, we continue to be pleased with the state of the used aircraft market. There are sufficient aircraft at prices appropriate for our business model. And as you saw with our Cebu transaction, we work hard to achieve what we believe are the appropriate economics, if not, we move on. Our ample balance sheet and the ability to transact for cash is critical in this space, and we will continue to use this asset to our advantage. Speaking of a strong balance sheet and available cash, how about that EBITDA this past year? We generated $190 million, for a 21% margin. This represents, I might add a 49% increase year-over-year in EBITDA, during -- and during the past five years we have had this total increase of over 200% from $62 million to this year's $190 million. I might add this is EBITDA, not EBITDAR.

Looking forward, assuming a reasonable growth and continuity in our margins, we expect this cash flow generation to continue to grow. Our cash position combined with our minimal levels of debt put us in an enviable position. Historically, one does not think of aviation-related companies as cash generating machines, but we are. Today we have $400 million plus in cash. Indeed, we have managed to increase our cash balances in recent years, while purchasing our new fleet of six 757s, and increasing our MD-80 fleet and associated engines. Additionally, as you all are aware, we paid our shareholders a one-time dividend this past quarter of $2, or almost $40 million. Our return on equity this past year as a measurement was 21%, up 15% from 2011. Our return on invested capital was just short of 16% at 15.7%

I might add, this return, already one of the highest in the industry was more impressive in my mind, given the makeup of our balance sheet. Last year we owned all our aircraft. As such, the assets values of these owned aircraft were carried on our balance sheet and are included in this calculation. However, off balance sheet leased aircraft, magnify returns on capital by allowing greater earnings from assets not including -- included on one's balance sheet. As soon as the next three or five years, according to our information, leased assets could be included on a Company's balance sheet. And this conclusion, will reflect more -- much more closely the true assets available to a Company. As a result, today's ROIC for May, will not be tomorrow's ROIC. Comparably, if we were to eliminate our aircraft from total assets, our ROIC could increase over 30%, a substantial change.

I am excited about our opportunities as we look forward. We continue to make great progress with our automation enhancements. In particular, during the past quarter we turned on our new booking engine. This was a result of 18 months of development efforts, including overhauling the architecture supporting our sales engine. While we still have a number projects in front of us, the pace of implementation is proceeding very nicely. Going forward, we will continue to follow our model, as we have these many past -- many years past. Working towards the success with our three stakeholders, our customers, our shareholders, and our team members.

And once again, let me recognize our team members. Since we began this effort almost 12 years ago, these folks have been critical to our successful growth and prosperity. We all enjoy being part of a growing, successful enterprise, and what is arguably one of the toughest industries in the country. However, we need to be mindful that yesterday's successes are just those, yesterdays. Long-term is my strong belief that only the paranoid survive and prosper, a famous quote by Mr. Andy Grove of Intel fame. We, as a result of that, will continue to be ever vigilant.

Andrew?

Thanks, Maury. Our fourth quarter revenue performance was very solid. Total fare was up over $5 or 4.4% year-over-year, so over $133 per passenger. Air-related ancillary revenue per passenger was higher by more than $8 or almost 27%, mostly attributable to the introduction of our carry-on bag fee and a higher contribution from checked bags. Third-party ancillary revenue per passenger was up $0.31 or 6.4% to $5.19 per passenger, our 11th consecutive quarter showing year-over-year increases. In combination, year-over-year ancillary revenue per passenger growth of almost 24%, more than offset a $3 decline in the base airfare. Trading a lower base airfare with higher ancillaries is one we very much like. Since customers continue to be drawn to the lowest base airfare possible, before determining whether to continue through the booking flow on their way toward making a purchase decision.

Once again, we are especially pleased with these results considering the 22% growth in scheduled service available seat miles we had during the quarter. The largest contributor to third, excuse me, fourth quarter ASM growth was a larger fleet of higher gauge MD-80s. We now have 47 of the planned 51 in the 166 seat configuration. ASM growth was also driven by our growing fleet of 757 aircraft, primarily to support our fledgling Hawaii network. We ended the quarter with five in service, and now have all six 757s in our operating fleet. More seats per aircraft, as well as a 3% increase in scheduled service -- or an averaged service stage length, mostly due to the introduction of our Hawaii service contributed to an over 10% decline in passenger RASM, and a 3% in total RASM. The increased gauge was the largest contributor to a 3 percentage point drop in load factor, 86.5%, which added pressure to unit revenue.

Additionally, new routes as expected under-performed the rest of the system. Same-store markets, however, in which we operated the full fourth-quarter in both 2012 and 2013, produced a 1.3 percentage point improvement in total RASM, despite ASM growth of 5.2% in these markets. As new routes mature, we will continue to invest in those which show good profitability trends, and eliminate those that continue to under-perform. Same as we have always done. Part of the decline in unit revenue is due to the introduction of larger gauge MD-80 aircraft in the Florida market during a traditionally soft demand period which exacerbated our ability to fill seats. We expect load factors to begin to trend higher again, and hope to approach the 90% load factor we have historically been able to post, now that the vast majority of our MD-80 fleet has been reconfigured, and we have a full selling cycle available in which to maximize revenue production for the additional seats. That being said, we expect reaching 90% month-in and month-out will be tougher to achieve with higher gauge aircraft, and may no longer be a realistic expectation. But we do believe we can drive higher loads, than the 86.5% load factor we have produced this past quarter.

During the quarter, the combination of larger gauge aircraft and year-over-year fleet growth of almost eight units drove capacity growth, but a decline in aircraft utilization of over 5% to 5.3 block per day muted the potential for even higher growth rates. Lower utilization also dampened our unit cost performance, but we are pleased with the year-over-year 4.4% reduction in cost per ASM excluding fuel. Of course, as we always like to emphasize, we do not manage the business to optimize RASM or CASM, but instead to maximize operating margin and earnings per share. We are very pleased with the 1 percentage point year-over-year increase in operating margin, and even more so with our 36% improvement in diluted earnings per share.

When we reported our November traffic, we shared our observation of a slower than normal booking trend for closer-in bookings within the month. This trend continued into December, which is why our passenger RASM declined greater than forecast, during our last earnings release. This same trend continued in January, however, at a reduced rate. We attributed most of the softness to fiscal cliff concerns, although it is difficult to prove this. However, with yesterday's poor consumer confidence numbers, and today's report of GDP contraction during the fourth quarter, we are more persuaded that macro issues contributed to the weaker than expected demand we experienced. Despite these macro issues, as we look out do the balance of the first quarter, which is historically our strongest, bookings are very strong, and we expect to have a very good quarter. In part, our optimism results from aggressively managing our capacity, which will result in another sizable decline in aircraft utilization in the first quarter of '13, as compared to the first quarter of '12.

During the first quarter of '12, we had too many seats in the market during off-peak days as well as at off-peak times, which is particularly challenging with the continued high fuel prices we have experienced during the last several quarters. This is particularly true in the Las Vegas market. As a result this first quarter we have focused a much higher percentage of our flights to operate only during peak windows, and expect our profitability to improve as a result. Las Vegas available seat miles are expected to be flat year-over-year, with an almost 16% decline in departures, due to this shift of flying in the first quarter.

Our network continues to grow. We ended the fourth quarter with a 195 routes in service and expect to end the first quarter of 2013 operating 198 routes. The largest increase in year-over-year capacity during the first quarter will be in Hawaii, which we did not operate last year. But it will still only represent 8% of scheduled ASMs and 2.3% of departures. The second largest increase will be in Orlando, where we will grow ASMs by almost 28%, and departures by almost 18%. As a result, during the first quarter, Orlando will represent approximately 21% of scheduled service ASMs, and 23% of scheduled service departures. St. Petersburg will also experience sizable ASM and departure growth, along with our expanded base in Punta Gorda. We are placing a lot of bets this quarter on Florida. As our network continues to evolve, it will have an impact on our third-party products mix. We expect to see a higher rate of growth in the sale of rental cars, with slower growth in our hotel business due to the larger mix of seats in markets where demand for cars are stronger than hotels. However, we continue to be pleased with our performance in this important business area, where we can drive substantial incremental profits, while offering our customers -- excuse me -- meaningful savings when they choose to purchase these products from us in an air package transaction.

With that, I will turn it over to Scott for a more detailed look at our financial results for the fourth quarter and [on].

Thank you, Andrew. Our fourth quarter cost performance exceeded internal expectations, as our CASM ex-fuel decreased 4.4% to $0.0563, slightly better than our previously guided range of down 4%, to down 2%. On a full-year basis, our ex-fuel cost decreased 6.7% to $0.0532 with trends continuing towards pre-2011 levels. As mentioned during our third quarter call, we anticipated some nonrecurring charges in the fourth quarter, in addition to decreased aircraft utilization which had a meaningful impact on our ex fuel cost results. Non-recurring expenses during the quarter totaled $4.7 million, and $8.7 million on a full-year basis. In addition, our aircraft utilization decreased 5.4% to 5.3 block hours per aircraft per day, which placed additional stress on our cost structure.

Energy prices slightly increased year-over-year and on a sequential basis. Absolute fuel expense increased 13.3% to $92 million on a 9.3% increase in gallons consumed. On a per passenger basis, our fuel costs increased 1.8% or $0.95 to $55 during the fourth quarter. Consistent throughout 2012, our fuel consumption efficiency improved both on a ASM and per [PAC] basis. At year-end we operated 45 reconfigured 166 seat MD-80s, which was up 36 -- up from 36 aircraft sequentially, and 7 aircraft year-over-year. Our ASMs per gallon increased 9.1% year-over-year to 65.6, and our gallons per passenger decreased 1.8% to 17.2.

Moving onto labor, we continue to employ one of the most productive work forces in the industry with an FTE per aircraft now under just 30. Despite a 14.2% increase in FTEs during the quarter, our salaries and benefits per PAC increased just $0.59, or 3% to $20. Our key driver of cost control in this area continues to be crew efficiency. Consistent with prior quarters, we continue to drive increased productivity from our pilot and flight attendant work crews. On a full-year basis, our pilot and flight attendant productivity as defined as block hours to paid hours, increased 3% to 4%. An additional item to note in this area was on our last third quarter call, our [mark to measurement] period for potential changes to our pilot pay scales. As a result of our 14.6% trailing 12-month operating margin, our pilots received a pay increase which took effect November 1. We expect the full-year '13 effect to drive incremental costs of approximately $6 million, if we continue to produce a trailing 12 month operating margin of 14%.

We experienced a significant increase in station expenses in the quarter, which is driven by rate increases in Las Vegas. Station expenses increased 25% or $4.1 million year-over-year to $16.5 million or $12.40 per passenger. Effective July 1 of last year, McCarran T3 terminal which is their international terminal came on line, which increased our cost structure, which is our largest base. Assuming we operate with the same operational footprint in 2013, we expect our Las Vegas cost to increase approximately $3 million to $3.5 million year-over-year. We are currently working with the airport, and evaluating different options, in an effort to reduce the effect of these rate changes.

2012 marked a return to historical expense trends in the maintenance and repair area. Maintenance and repair expense per PACs for the fourth quarter decreased $4.48 or 20.2% to 15.9 -- excuse me, to $15.90 year-over-year, which is primarily due to a mix in heavy maintenance. During the quarter we experienced a $7.1 million decrease in engine overhauls, which was offset by a $2.1 million increase in heavy structural checks. Looking forward to 2014, we expect to see our maintenance per aircraft per month fall within our historical range of $100,000 to $110,000 per month, with the first and second quarters trending towards the higher side of this range. We continue to see the cost pressure in the depreciation expense line, which is driven by our 166 seat aim modification program, incremental 757s, and 13.8% increase in average aircraft growth year-over-year. On a per passenger basis, depreciation increased $2.48 or 33% to $7.52 year-over-year.

At year-end we had successfully modified 48 MD-80s to 166 seats, up from 7 aircraft in the prior-year. Compounding this increase was approximately $1.5 million in accelerated depreciation during the quarter related to planned MD-80 retirements in 2013. Looking forward to the first quarter, we expect to see an additional $1.1 million in accelerated depreciation related to these planned retirements. As discussed during our third quarter call, we expect to see cost pressure in the other expense line item during the fourth and first quarters. Expenses related to Airbus training, pre-operating costs, and engine impairment charges drove an additional $4.2 million in expense year-over-year which was as expected. Looking forward to the first quarter, we expect to see an additional $1.5 million in Airbus pre-op costs as we complete the certification process.

Quickly moving to the balance sheet, we ended the quarter with $353 million in unrestricted cash and marketable securities which was up 10.4% from the third quarter. This is despite a $43 million capital deployment for a special dividend and share repurchase's during the quarter. The Company paid a special $2 per share dividend totaling $39 million, in addition to repurchasing approximately 55,000 shares for $4 million. The Company currently has $41 million in remaining authority to be used throughout 2013. Our unrestricted cash and marketable securities currently represents 39% of our trailing 12-month operating revenues. Our CapEx spend of $16 million during the quarter primarily consisted of deposits for seven Airbus A320 aircraft and the continuation of our 166 seat modification. At the end of the quarter, we had modified 45 MD-80 aircraft from 150 to 166 seats for a total spend of $40 million.

Looking forward to 2013, we are projecting total CapEx of a $150 million to $160 million, primarily driven by the purchase of seven A320 aircraft. We ended the quarter with $150 million in total debt, which was down from $153 million at the end of the third quarter. Our leverage ratios continue to improve, with our debt to equity ratio is now 37%, which was down from 41% in the prior-year period. Our interest coverage is now 21 times. And finally, our return on equity and return on capital ratios improved and were 20.9% and 15.7%, respectively.

And with that, we are ready to take some questions.

(Operator Instructions)

Our first question comes from the line of David Fintzen with Barclay. Your line is open.

Hello, this is actually Isaac Husseini in for David. Good afternoon, everyone. Scott, I had a question for you. I appreciate the color that you gave us on the 1Q cost trends. But I was wondering, just a cleanup, does that -- does the guidance that you gave for the full year still hold? Of down [1.6%]?

Yes, we are not updating that. That is -- I think we put that out during our November investor day. So that is correct.

Okay. And then maybe just a quick one for Andrew. If you could give us a quick update on Hawaii. I know during Investor Day you talked about the seasonality and how strong the difference between the peaks and troughs were. Is there anything that you have been doing that's different to management and any results you can share with us on that?

I think, look, I think this quarter we had two routes that operated during the full quarter, and then we had I think another five routes that started mid-November. With the start of service, especially just the nature of it, the first flight out might be full, but the one coming back right away is empty. It really doesn't give a good indication as to what those routes are going to look like. So I mean, I think the start up expenses and things of that nature, just kind of pollute the numbers at this point. I don't think anything has really changed. I think that maybe one thing that has changed since we visited in November is that we have made some capacity adjustments, trying to do what we do for the rest of our network.

And make sure that we fly the right amount of seats, and in good times and in poor demand periods. So we have one route where we had a suspension of service for several week period in the January, February time frame. I think you will continue to see us do things like that as we go forward, as we better understand the seasonality, which is in general, it is the same across all markets. But some markets can better support the off peak demand periods than others. So I think maybe the only change is that we are getting a little more aggressive how we allocate capacity there. But we are very early stages, we will learn a lot as we continue to go forward. And just like every other network, every other base that we have started service, we learn and then we adjust accordingly.

Okay. Thank you so much.

Our next question is from the line of Michael Linenberg with Deutsche Bank. Your line is open.

Hi, everyone. This is actually [Richa Talwar] filling in for Mike. I was hoping first that you can comment on your experience of listing on Kayak. I believe you plan listing on that site in December, and I was hoping you can share whether or not that move was accretive in terms of bringing on new customers? And if we could expect the websites and other OTAs to be an important source of revenue in the future?

Yes, hi, this is Andrew. I think the answer to the second part is no. We have no intention whatsoever of listing our inventory in other channels where you can transact. Absolutely no plans, at all, to list through any of the large OTA's out there, or any of the [GBF] systems et cetera Kayak is a very, very small limited experiment that we did begin in late-December, and so far the results, I think are generally mixed. It appears to be helping in a couple of routes, and in others I haven't seen much impacted all. So, we will continue to experiment with that, and perhaps continue to use it in certain markets. And maybe not in others. But we remain committed long-term to the strategy of distributing our product directly to the end user, avoiding intermediaries, and we think owning the customer is strategically really important for us. And so, that hasn't really changed. But we will continue to experiment a little bit like we are doing right now with Kayak.

Okay. Thanks. One just more follow-up on the Hawaiian question. Yesterday we heard on Hawaii's conference call about the competitive capacity between North America and Hawaii, particularly between the West coast and Hawaii, and that weighing down on results in the December quarter. Can you comment on that? And maybe just looking out, how the competitive landscape is shaping up and how that might be impacting results?

Well, I think it is hard for us to be able to say how it is impacting us, since we really don't have a history in these markets. This was our second-quarter, serving Hawaii at all. Keep in mind, there is only, there is really, well there is two routes where we are competing. One is Honolulu-Las Vegas and the other one is Bellingham. Bellingham is a different kind of market than Las Vegas. So Hawaii's exposure is really geared toward larger cities in the Western US, whereas ours is exactly the opposite. We are in markets nobody else is in. So I think we are probably a lot more immune to the capacity issues that affected them, because of the nature of the markets that we serve. So, I can't really offer a lot of commentary there.

I think that certainly less capacity is always better than more, even if it only affects us indirectly. But we are off to a pretty good start in Hawaii. We saw great demand in the summer during the peak period. And then we saw a very soft demand in the fall which is historically normal. And holiday season is a real busy time, and it was for us as well. And between now and kind of the spring break travel period, things get a little soft again. So it is hard to know what the results would have been, had there been fewer seats in the Western US. But again, very few of those seats are really competing head-to-head with this. So, we are just very different than Hawaiian in that regard.

This is Maury. One other kind of general comment. We continue to be bullish about our advantage on the cost side. We are substantially more efficient than most of the competition, moving to and from Hawaii from the West Coast in general. Secondly, we are on a learning curve on how to market and sell this. This is a different product in many ways. And our usual experience is as we have gone into smaller cities, to a more traditional destination that are here on the mainland. So we need to get a little better on how to sell, and to how market and package. And that will be a learned skill over the next coming months, that we are engaging in as we speak. But it's -- Hawaii is a long-term place for us, we think. It fits very well into what we want to do and how we want to grow the Company.

All right. Thank you.

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

Hello. Good afternoon. Just wondering how much of your '13 CapEx do you plan to finance, and what sort of rates are you seeing for used A320s?

We have got the number of offers out there that are very good, loan to advance ratios for at least 50%, maybe 60% type of thing. The rates are very attractive, certainly sub 5 -- 500 basis points, 5% is available to us. In general, just a basic secured program. We will take a look at the market when we start taking deliveries and see what makes sense for us.

That is helpful. Thanks Maury. And then just on the ancillary line, can you give us an update on new initiatives in the pipe this year? When should we be thinking about your Travel club and branded credit card offerings? Thanks.

Duane, I think the timing on both of those hasn't really changed. I'm not sure that we shared that, but I think we did in Investor day. The credit card is likely to be a kind of middle of the year rollout, and Travel club is something we are looking at, approximately the same time frame. It might flip into the third quarter, we need to do a lot of development work to build the foundation to be able to offer that type, actually both of those types of products. So we are excited about that and we have some other things we are working on as well. We will roll things out, when we they are -- when we are good and ready to do so.

Thanks.

Our next question comes from Helane Becker from Dahlman Rose. Your line is open.

Thanks, operator. Hello. Just a couple of small things. One is, do you have a charter business still, and can you update us on how that is going?

Helane, we certainly continue to seek out opportunities to do charter flying. As we describe it as fixed fee flying. But it is definitely on the smaller scale as we go into the start of the year. We still have one long-term contract in place with one aircraft dedicated to that flying for a casino company up in northern Nevada. We did have for many, many years aircraft with Caesars, and that contract finished at the end of this past year. So that flying is being done by a different operator now. But we do continue to seek out opportunities, and we also continue to fly, we call ad hoc charter. So whenever we have the capacity available, doing different trips. March usually represents a lot of opportunity with the men's and women's NCAA basketball championship, and we will be very active in that again. But the charter business has been a very small piece of the business for many, many years, and this year it will likely be smaller than it was last year.

Okay. And I noticed Apple Vacations is doing a Rockford-Jamaica charter. That is not you, right then?

That is correct. We are not working at the moment with Apple vacations.

Okay. And the other update, so I haven't heard from those flight attendants in a while. Is there anything new going on there with their contract negotiations?

We continue to discuss things with our flight attendants. We are under mediation if you will with the NMB mediator at impasse at this point. I am not sure if I am using all the proper jargon. But that is moving along as expected. And stay tuned, when something happens or breaks, we will be putting releases out and talking about it. We search and look for positive, good outcome to this, for both our flight attendants and the Company. We are married for the long-term between the two of us.

Okay. That's great. Yes, they haven't contacted me in a while, so I just kind of wondered. I guess it is -- that is because of the NMB thing is going on. So that would explain that. Okay. Thank you.

Thanks, Helane.

Our next question comes from the line of Jim Parker with Raymond James. Your line is open.

Good afternoon everyone. A couple of questions on this Hawaii thing. It looks like of course, you are not the only airline that has had some problems with peak and off peak, and what you do with that capacity off-peak. So you are not going to need all of your 6 757s to fly to Hawaii -- (Multiple Speakers).

How do you know that?

Well, that would be my guess. Just hold on. That is my guess. If you do need them, all of them, you are going to fly them year round, and I don't need to ask this question. But in the event that you don't, and you need to fly them on the mainland, will you give us some idea if you're using one currently on the mainland. So what would you do with those aircraft other than flying them to Hawaii, and would the profitability be similar to your other domestic operations?

That is a loaded question. I think that would be foretelling the future if we answer that. That airplane, it is just way too early to make speculative statements about -- we will do this or do that. Hawaii will work for us. We -- if you remember back in '04 or '05, when we started Sanford, we had a miserable outcome with Sanford. In fact, I think we relaunched in November of '05 after the May launch in '06-- of that year, and we literally started with new markets. So Hawaii is going to work. We may not need 6 airplanes. We will see. But we will certainly are going to need our fleet, and we can utilize them to do different things. During the off-peaks we are pretty creative, there is charter work that perhaps may make more sense than doing Hawaii in September, or something like that. But stay tuned. We will be glad to update you when we have kind of normalized environment. Once we get a lot of knowledge under us to further understand what is best for the marketplace.

And, Jim, let me add, this is Andrew. Keep in mind the ownership cost of these assets is very similar to the MD-80, at least -- if you want to adjust for gauge. So we don't feel any increased pressure to utilize these aircraft at a higher rate than we do with MD-80's. It's just -- we see no reasons that we can't operate these aircraft's just like we do with 80s. Fly them more when the demand is there, and fly them less or maybe even not at certain types of year, and that just does not trouble us at all.

Okay. I have one for Scott. Scott, would you give us an update on the cost comparisons of the 319's and the 320s versus the MD80s in terms of fuel burn and maintenance costs? If those two items are certainly very much less, can you provide some specifics?

We are not flying them yet. I think the numbers I gave you for full-year maintenance per aircraft, that would include the flying of those units. Yes, but stay tuned. There's really not much we can speak to right now.

That is pretty general knowledge out there, Jim, on gas. I mean, we are 950 gallons an hour for MD-80, and you are probably in the high 7s for 320. 725 to 740 gallons an hour for the 319. Those are pretty well known industry standards that you can go see in DOT reporting. So you are getting a noticeable savings in gas at a minimum.

What about maintenance?

We think it will be good. And as Scott said, we incorporated those numbers in there. But we will have to get some experience too.

Jim, this is Andrew. I think that the presentation we put out there, that is out on our website when we announced those transactions or at least the 19. Nothing has changed since we put that out.

Okay. Andrew, that was the nature of my inquiry. Maybe I thought there was an update to that. And I was looking for -- (Multiple Speakers)

No.

(Multiple Speakers) -- pursue with you offline.

No, I don't think there's any update there. I mean the A320 will be slightly different than the 19. A slightly higher fuel burner, but lower on a per passenger or per seat basis. And the maintenance cost should be very similar to the 319. So I think if you looked at those numbers, those are good numbers to use for kind of trying to model the expenses for using those aircraft.

Okay, guys. Thanks.

Thank you.

Our next question comes from the line of Hunter Keay with Wolfe Trahan. Your line is open

Hello, everybody. So I noticed that there was a another sort of accelerated decline on a year over year basis in hotel nights. I am trying to figure out why that is, particularly given the greater mix of Hawaii flying. So what is going on there? What can you do to make it better? And when do you expect that to start to turn positive again?

Yes, Hunter, this is Andrew. the decline is really due to trying to capture more profit. It is kind of like optimizing load and yield. I mean it's -- that is what we are trying to do with the hotel side, and we feel that we are optimizing our profitability, in the sale of hotel rooms, even if the volume is slightly lower. Plus I point out that, while we do have Hawaii and Hawaii however, though has been a very, very small number of passengers on a relative basis. The Las Vegas market which is the largest driver of hotel rooms sales this year, passenger growth in Las Vegas for us is flat. But I think other thing is that historically, many times we have offered a discounted air seat to go with the purchase of a hotel.

We have been pulling that down, and recently eliminated that in its entirety. So that benefit would be seen on the air side, as having higher yields on the air side. And the end result contributes a little bit to fewer hotel volume. But we like where that business is. We think we had a terrific quarter selling hotels this year. As far as growing and going forward, I think the additional capacity in Hawaii is helpful, because it is a strong hotel market. We are trying to continue to drive hotel sales in the other markets that we serve, in Florida and Phoenix. An this year Vegas passenger growth will probably be again, flat to slightly down, which may put a little pressure on volume, not necessarily on overall profitability.

Okay. Thanks. And a quick one on bag fees. What percentage of your bags are prepaid at the airport? And how do you expect that to change over the course of the next six to nine months, particularly as the new fee structure is rolled out?

I don't have a specific number to give you. The -- certainly the majority of checked bag fees and carry-on bag fees are paid for in advance. To the extent that people choose not to do so, or forget to do so, or change their thoughts from the time they purchase to when they actually travel, we will be collecting some additional revenues at the airport when that increased fee begins later this year. And we will see what that contribution will be.

Okay. Thanks. And one more, Maury for you. I saw you bought back some stock, I think you disclosed in the fourth quarter, that's great. Can you tell me how you think about doing that? How do you value your stock? What are the triggers that you look at and say our stock is cheap now based on ex? Or do you just buy it when it goes down? I mean, are you one of these management teams that perpetually thinks your stock is undervalued, which I understand. But is there a specific metric you look at, when you make the decision to buyback stock or is it more just what your stock is doing in the market?

Good question. I think it is longer-term play rather than, it is couple bucks cheaper today, let's buy some. Hunter, we are modeling the business, just like any other management team, we are undervalued as a general statement. But we are so different in many ways with balance sheet, and this is -- as I talk about return on invested capital and things like that, that it is hard for I think for the Street to kind of break us out of the pack, if you will. Over time though, as we keep surprising people as our steadiness and our ability to continue to perform, grow and maintain margins, it suggests that we are undervalued, and we probably ought to be opportunistically buying stock back. With the full understanding, that we need to keep sufficient resources around to buy airplanes and run the business. This is the airline industry, at the end of the day that can have surprises that can be unfortunate. But, we are just going to be a cash machine going forward, and that gives us the opportunity and a lot of flexibility to do things.

Great. All right. Thanks, everybody.

Sure.

Thanks.

Our next question comes from the line of John Godyn with Morgan Stanley. Your line is open.

Hello. Thanks for taking my question. I know you don't give margin guidance. I am not asking for sort of specific numbers, but just wanted your thoughts. When we think about the margins you produced in 2012, versus your history. And of course, if I exclude 2009, as sort of an exceptional time, you are very much at the higher end of your historical range. As you think about all of the changes the business over the last handful of years, with continued growth in ancillaries, the new markets you have opened up, the newer younger aircraft types around the corner. Are we now in a period of sort of sustainably higher margins on average, compared to the historical range? Is that how we should be thinking about the multi-year business here?

I will give you my thoughts. Andrew, can comment as well. I would suggest that, yes, I hope we are on a -- and our numbers suggest that we are on the higher end, or should be able to maintain these margins, if not improve some. Just the fuel benefit alone as you begin adding these 320s and 319s is, that is a big number when you're paying $3.30 a gallon,$3.25 a gallon. And so the other beneficial thing to us, is we manage to do this with high fuel. So if fuel would ever break, we would be pushing 2009 margins. It wouldn't take much to really create that.

But our goal, John, is to definitely focus on maintaining margins. You heard Andrew talk about cutting capacity back. We are optimizing all the time on our P&L, even to the point that we probably have some cost drag from lack of utilization. But these airplanes with more density per departure give us greater ability to earn profits on those peak days, which we continue to reinforce that is when we want to fly. So I am cautiously, bullish. I do not want to be making forecasts or anything like this, but you are good with numbers, you can sit there put the sums together. And I think you will come up with an answer that kind of approximates our internal models as well.

Great. Andrew, anything to add?

No, I don't think so. I think that there is enormous leverage with the younger aircraft as Maury was talking about. And we are just replacing MD-80 flying with aircraft that are just far more efficient from a fuel burn perspective. It is going to have a very, very positive effect in terms of margin performance. So, not else much to say other than that.

Okay. Thanks. And I don't expect you to purchase a refinery or anything, but you have been pretty innovative -- just with vertically integrating. And I think your website is sort of a good historical example of that. As you look at just key costs in revenue buckets, and think about what and opportunities your ever-growing scale might create, are there any vertical integration concepts that pique your interest from here?

Oh gosh, our refinery is going be contained in these Airbuses. That is going to help our fuel burn. That will be our refinery place for the most part. That's big boy stuff. Not to say we are not reasonable size, but give Delta their kudos, as I said on the last call, that I think that is a great investment for them, the long-term. As far as other vertical integration, our kind of big picture stuff, is to try to really push the third party activities. Development of automation, which again is a unique factor for us compared to the rest of the world, pushes us more into the leisure travel space. Can we go vertical that way? Can we offer our customers kind of an all in one package that layers together, not just a hotel and a car perhaps, or an airplane seat. But if you need a limo, if you need show tickets, if you need anything that might be interesting?

You go to Hawaii, you have got what they call an Open Jaw. You go to Honolulu for a couple days, take a flight across to Maui for couple days, and come back that way. All kinds of enhancements to the product offering that certainly we can sell airline seats per week. But we can also sell more features than just airplane seats. And more importantly, our customers and maybe we can even sell away from airplane seats, if it gets to that. We have no loyalty program at this point. That will be a plus for us, we think. There's a lot of upside an opportunity in that vertical integration.

Yes, I think, John, I just want to add to that. I mean, distribution is really where we are focused. We are big admirers of companies like Priceline, and we would like to look more like them as time goes on. That is not necessarily hard assets, it is just automation, contracts, know-how and marketing.

John, for the near-term, our top line will be certainly driven by more airplanes, more revenue that way. But our margins could be enhanced greatly. This stuff that I was mentioning is not so much the top line thing, because we net stuff down for presentation purposes, but those are real bottom-line dollars without any capital investment, for the most part, once we get past the automation piece and are very powerful for margin enhancements.

Thanks. And Andrew, just to nit, I may have missed this in your prepared remarks, just as I was trying to get everything down. Last quarter I think you pointed out that the trend in TRASM was accelerating as it relates to the PRASM numbers on a year over year basis. I think you expected that to continue. There has been a little bit of a flip, and you sort of addressed that. But is that the right way to think about the models, as we model quarters throughout 2013 from here?

Well, I think, I think that is probably true at least for the next couple of quarters, just on a steady state basis. We are going to continue to get the benefit of the implementation of that carry-on bag fee, and the associated additional checked bag revenue that came along with that. So if nothing else, we should expect to see continued year over year improvement in the air-related ancillary line item. Just as that fee gets up to where it becomes, it is no longer showing the big increases, because we have reached the lapping point after a full year. As far as the passenger RASM number, we are as I mentioned, we are happy to trade that number lower and make it up in other ways. And I think that that trend is certainly, it wouldn't surprise me to see it continue for at least to a couple of quarters.

Beyond that, it is hard to say. If we are able to rollout some new products in the middle of the year, or sometime in the first half, early second half, then we will start to see again some additional improvement in ancillary. So I do think that trend will continue. At some point, we are going to start to forecast our total RASM numbers. We are just not confident enough yet to our ability to forecast that internally. That is why we continue to give you unit revenue, in terms of passenger revenue for ASM. But hopefully sometime later this year, we will feel really good about our ability to predict that. And then we will start to move over to that number, because obviously that's far more relevant to be able to forecast the profitability of the business.

Thanks a lot. That is really helpful.

Thanks, John.

Our next question comes from the line of Jeff Kauffman with Sterne Agee. Your line is open.

Hi, it is Sal Vitale on for Jeff. Just a quick question. Just looking at the other revenue line, and I apologize if you talked about this earlier. But that was $712,000 for the quarter, down pretty significantly both sequentially and year over year. Can you just describe what the impact was there?

Yes, the majority of the other revenue for the last several quarters has been attributable to leasing 757 aircraft to European operators, while we were going to the certification process. And so, as those airplanes have come off lease, and now all six of them are in our fleet, the other revenue line item has declined, and it will continue to decline. There is some additional revenue that comes in that bucket, including some other smaller pieces of equipment like engines and things of that nature. But we won't see the large numbers you saw in the first three quarters and going back into 2011. We won't see those numbers again, unless we are -- unless we announce some other large leasing transaction in the future.

Okay. And then in terms of cost, how do we think about the profitability impact of that?

I don't know. You tell me. This year we are down over $2.5 million, yet profits were up. So I mean, that is not our core business. That was a transaction we did. It was a very good transaction. We generated a return on assets by leasing them out, as opposed to operating them, because we just weren't able operate them at the time that we acquired the assets. Our business is not, we are not a leasing company. Obviously we are pleased with the results, and we will lease other assets in the future, if we have surplus equipment, and there is an attractive rate of return we can generate.

Sal, the -- just a technical thing, there is an offsetting depreciation in the D&A line. And that is how you would get -- net down to an operating income. I might add though, it also impact -- it makes less efficient our unit costs, because we don't have any ASMs that we are producing with those airplanes. So while it has certainly been a great transaction, as we have said, we don't pay so much attention to those specific cost lines. We are interested profitability. It was definitely the right move for us to make, and granted, it created nice operating profits. But we will frankly, make more money running those airplanes than we could operating them as a lessor so.

Understood, thank you. And then just one quick question on the station expenses. At what point -- I guess, maybe later in 2013, at what point do we expect that to start to abate?

You are going to see the -- you are going to have a lapping effect, really up until Q4. So you will see some pretty sizable differences year over year, up until really Q4.

Okay. Thank you very much. Thank you.

Your next question comes from the line of Steve O'Hara, Sidoti & Company. Your line is open.

Hello, good afternoon.

Hi Steve.

In terms of the rental car growth. Is that due to anything you have done or is that just Hawaii slash, maybe a higher focus on Florida, or is that something that you have done kind of internally to kind of boost that?

Steve, I think certainly, we have been able to, by working with our partner, Alamo, offer some attractive pricing and promotions to our customers. But I think the majority of the increase is really due to where we have grown the business this year. Most of the growth in passenger have been in markets where there is just a higher propensity to buy cars. So just by shifting the pass-through number so that there is more Phoenix and Florida, less Las Vegas on a relative basis. Hawaii, it's -- we have just carried so few passengers in Hawaii this calendar year. I mean it is just like, it is such a small percentage of the total pass-throughs that, I don't think Hawaii have an impact one way or the other. But Hawaii is a good car market also. So but I think it is just a mix of the network and where our passengers are flying to. And that is why we expect to see that rate of growth continue as we put more and more seats into the Florida market as I indicated. Certainly Hawaii as well. And less in Vegas, and Vegas is not a car market, but that is why you will see a faster rate of growth in cars, and a little slower rate of growth in hotels. At least that is what we expect at this time.

Okay. And then I noticed on the press release, you have the 6 757s operating. Maybe you addressed this. But does that imply that you are kind of up to the -- and I think it was kind of 2.4 departures per day on average to Hawaii or no?

Steve, I don't know what our forecast is going forward or what it was this past period. I mean the -- but we have 5 run at the end of the year, 3 of them are really kind of dedicated to Hawaii. I would say 1.5 are mainland US, and one is and call it a 0.5, a spare. The 6 airplanes will be largely Hawaii focused, with the start of three new markets in February. That will chew up essentially another, the sixth airplane. But as far as departures per day per aircraft, I really don't have that number handy. And I am not sure I wouldn't even feel comfortable giving it to you right now. Because it is pretty fluid, and we are making changes to capacity. And we will see how it shakes out. I think you will certainly see us fly less in off-peak periods and fly more during peak periods. I am pretty confident in making that statement though.

And then finally, just in terms of the Travel Club. I mean is this just more of a revenue driver, or do you think about it as a way to boost take rates on something, that is just kind of a sunk cost for people generally? Or do people spend for this travel club and maybe get more interested in -- they have something in -- they have some skin in the game already, and they are more interested flying again?

Well, Steve, I think that detail is to come on the Travel Club concept. We have had an interest in offering something like a Travel club that has a recurring revenue stream attached to it for many years. Spirit Airlines has one, and our belief is that it is a very accretive product. There is another European carrier that is doing something similar. And so we like everybody else, looks around the industry and see things that look interesting, and might have an application in our business. So as far as what that looks like, and what the rules would be in things of that nature, I think it is just a bit premature. We will provide those details once we are ready to roll something out. But we do think there's a lot of potential there, and we are excited to be able put something like that out there. Hopefully right around the middle of the year.

Okay. Thanks a lot.

Our next question comes from the line of Glenn Engel with Bank of America. Your line is open.

Good afternoon. Can you go through, in the first quarter you have guidance of down12 roughly in January, and down 7 in March. Is there a big Easter impact helping you? Does it improve as the quarter progress, and is are any payback in the second quarter as a result of the Easter effect?

Glenn, I think first of all, typically that is exactly what you see year in and year out. March is really the single best month of the year for our business. I think there is definitely the Easter shift, will definitely add to March, take from April. There is no question about that. So I think that it is -- certainly, that we will see some of that this year. I think the fact that Easter is at the very end of March, you will still see some bleed across into the first part of April. But certainly the peak demand period is more compressed in terms of calendar range than it was last year as an example, when Easter was closer to the middle of April. So, yes, I think it is fair to say that March will be a little better as a result, and April will probably be a little bit weaker.

But the seasonality from January to March is always the same excluding Easter. So that would affect the absolute numbers, but your year over year comparisons would not necessarily get better just because you get to peak season.

Well, I think, generally, I think you are right. Although, that I think as we have discussed the Easter effect, should make March a little better on a month over month basis. So this March, relative to February should be a little bit stronger than last March, relative to February. Just because of the fact that Easter is in there, and there is that much more demand in that timeframe. But, yes, I mean look, in general, the seasonality, it hasn't changed. It is just a matter of where does Easter fall, and that just affects the margin, March versus April or vice versa.

And could you go through some of the cost items that paid after the first and fourth quarter. You talk about the Airbus -- and some accelerated depreciation. What are some of the things that drop off after the first quarter, in terms of cost that your are incurring right now, and how -- what is the magnitude?

This is Scott, this is -- those are the primary drivers, accelerated depreciation, pre-start up costs, training costs and everything that goes into getting the aircraft on our certificate are really the only ones that I am referring to. (Multiple Speakers).

Glenn, just to add on to that, that is going to -- that drops off at the time of the retirement of each individual aircraft. And the fleet plan that we have provided should give you an indication as to when, in which quarter we would expect to see those retirements. So that -- the accelerated appreciation headwind will continue, but as more aircraft are retired that number gets a little smaller, obviously.

And the Airbus one, is that going to be more abrupt?

Yes.

Thank you very much.

Thank you.

(Operator Instructions)

And our next question is a follow-up from the line of Duane Pfennigwerth. Your line is open.

Thanks for taking the question. Sorry to delay the call here. Just on the fixed fee line. Can you repeat, sorry, if I missed it. What is driving that reduction sequentially to sort of a $5 million level, and how should we expect to be thinking about that beyond the first quarter?

Duane, the majority, by far and away is the Caesars agreement, having expired at the end of calendar year '12. That agreement represented 3 airplanes or two airplanes -- two airplanes are flying that we do not have going into '13. And that is actually why the two MD-87s are being retired. There is no real suitable application for that aircraft. That aircraft just doesn't work in today's high fuel cost environment. So that is why we are retiring those two airplanes. One, in fact, has been retired already, and the second one will retire later this year. So, I think that -- without that contract, there is no placement charter contract out there that we think is imminent. So, I think the first quarter numbers that we have given you are going to be rough quarter magnitude, a pretty good number to use throughout the year on a quarterly basis.

Okay. That's great. Just on your fuel efficiency, obviously, that has been turning in the right direction. It ticked up a bit more than expected in the fourth quarter here Anything specific about the fourth quarter, the little higher utilization that we shouldn't turn that out, or is that a reasonable run rate to assume going forward?

Yes, it is certainly utilization driven. It is just a larger number of higher gauge airplanes, and both the 166 MD80s which, we are not done yet. Those will be done in February. And then, obviously the 757s that comes in. And once we start bringing in the Airbus aircraft, then obviously, you will -- we will continue to see improvements in the fuel efficiency.

Okay, great. Thanks, Andrew.

Thanks, Duane.

Thank you. This concludes our question and answer session. I would now like to turn the call back over to Maury Gallagher for final comments.

Thank you all very much. Appreciate your interest. We will talk to you, at the end of this first quarter. Have a good day.

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