Allegiant Travel Co (ALGT) 2013 Q2 法說會逐字稿

Welcome to the Allegiant Travel Company second quarter 2013 financial results conference call. We have on the call today Maury Gallagher, the Company's Chief Executive Officer and chairman; Andrew Levy, the Company's President; and Scott Sheldon, the Company's Chief Financial Officer. Maury Gallagher and Andrew Levy will provide some brief commentary, and then we will begin our question-and-answer session.

We wish to remind listeners that the Company's comments today will contain forward-looking statements that are only predictions and involve risks and uncertainties. Forward-looking statements made today may include, among others, references to future performance and any comments about our strategic plans.

There are many risk factors that could prevent us from achieving our goals and cause the underlying assumptions of these forward-looking statements, and our actual results could 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 publicly update any forward-looking statements whether as a result of future events, new information, or otherwise.

The Company cautions users of this presentation not to place undue reliance on forward-looking statements which may be based on assumptions and anticipated events that do not materialize. The earnings release as well as a rebroadcast of the call are available at the company's investor relations site, www.IR. AllegiantAir.com.

At this time, I would like to turn the call over to Maury Gallagher. Please proceed.

Good morning everyone. Thank you for joining us today. Per our new approach, we're going to go directly to questions. Operator, do you have questions available?

Yes, sir. John Godyn, Morgan Stanley. Please proceed.

I have a couple here. First on the TRASM outlook. If I remember correctly, your last comments were that you might have a credit card and fare club kick in, in the third quarter. I was wondering if that's in the third quarter TRASM guidance.

John, it's Andrew. Good morning. No, it is not. At this point, I think it's more likely we will see those rollout in the fourth quarter, but no, there's no new product assumptions in our revenue guidance at all.

Okay. And is there a reason why it got delayed a little bit?

Just automation. It's just an enormous queue of work that is being done, and we're just waiting on the automation capability to roll those things out that are being worked on as we speak. I don't ever recall committing to the third quarter. I've always said second half, but regardless, we do expect to roll that out before the end of the year, and hopefully it will be towards the earlier part of the fourth quarter.

Fair enough. And if that occurs on schedule, we would expect to -- TRASM to re-accelerate in the fourth quarter, maybe even more than it's done in the third quarter. Is that a fair understanding of the trajectory?

To put it this way, it is not in any of our models. I think that new products like those in particular, it's really hard to forecast what the impact would be and whether the impact would be felt immediately or further on down the road as bookings increase and more people take it. We roll out a credit card, there's no revenue on day one. You have to get people to sign up for it, and that's how you start to see some contribution.

Fare club, we will see. We are still finalizing what that looks like. So I think that there may be a contribution in the fourth quarter. I wouldn't want to forecast how material it would be, but we clearly are working on adding new products that could drive more revenue. So right now the TRASM increase and the faster RASM, that's all just existing products based on our view of revenues, advanced bookings and how we are managing our network.

Thanks a lot. And if I could ask a couple questions about capital returns. First of all, we have seen you guys show a willingness to buy back stock at increasingly higher levels. I know you're not going to give us a framework for sort of thinking about how you price the stock, but is it fair to assume on a go forward basis that we should expect a consistent buyback process quarter to quarter that is a little bit less sensitive to what the stock has done even if the stock continues to go higher. Is that a fair way to think about it?

John, it's Maury. We are committed to buying our stock back. I think we announced last quarter a $100 million authority. And so the Board has endorsed that. Certainly we need to be mindful of buying at a reasonable price, but given the trajectory of the stock -- we debate that internally, certainly, but we are going to be buying our stock back as we go forward.

That's helpful. And Maury, at times in the past, and I know this is related to certain kind of tax issues, we have seen you guys pursue special dividend. Is there any chance that something like that could be on the horizon too? Is that something that is being debated?

Never say never. We certainly have not committed to a continuous dividend at this point, but the special dividend works very well we think in the past to return capital to shareholders, and there's no reason we would foreclose it going forward, either.

Got it. That's great. I will let some other people ask questions. Thanks a lot, guys.

Thanks, John.

Hunter Keay, Wolfe Research.

Thanks, everybody. I guess, Andrew, there's been some lessons learned in Hawaii --obviously I think in terms of the capacity being a little more seasonal, the demands of that market being a little more seasonal than you guys originally anticipated -- and I appreciate there's a learning curve for this stuff, but what have you learned in terms of demand for hotel nights? What is the difference between a one-year consumers flying to Vegas and booking a hotel for you and flying to Hawaii and booking a hotel for you? Have you found that there is more demand for more upscale hotels and you don't have the inventory that is appropriate for the types of places looking for people who are going to stay in Hawaii versus Vegas?

Or have you found that they're willing to cash in loyalty points from a Starwood or something in the Hawaii market, which is maybe why they're not booking as many hotels through your site to Hawaii as maybe originally anticipated. I guess can you tell me what has changed relative to your expectations to the hotel nights in Hawaii and how it differs from the demand to Vegas?

Hey, Hunter. Hawaii is our second highest take rate market for hotels, but it lags behind Las Vegas by a considerable amount. It is not an inventory issue. We have ample inventory at the right price. So I think it is more a variety of reasons.

I think that you hit on one, as far as loyalty, certainly there is time-share condominiums, and we have a few things that are being worked on in the automation projects to allow us to do some things that say we can't do. For instance, it's difficult for us today to sell a stay, a one-way kind of hotel stay. And a lot of our customers, just like people in general that go to Hawaii, they visit multiple islands. So that makes it a little bit tougher.

Right now we are limited to selling essentially kind of on a round-trip air basis, a hotel that starts when you arrive and ends when you leave. Those are some of the enhancements that we think are going to be very helpful in terms of driving up hotel sales, not only Hawaii, but other locations. Florida specifically would be a good example where I think that would be helpful.

We are continuing to try to figure out how to drive more hotel sales in Hawaii, and we think that there is still upside there. We will see if we can get up to the forecasted levels that we had anticipated when we made the decision to go to Hawaii. We're certainly not there yet.

How much were hotel room nights down in Vegas on a year-over-year basis?

I'm sorry. Could you repeat the question, please?

How much were hotel room nights down in Vegas on a year-over-year basis?

The hotel room nights in Vegas were down by a little bit more than the Vegas passengers, which I think were slightly down in Vegas this year. We have far fewer departures in Vegas, and as a result, that is part of what contributed to the decline in hotel rooms on a year-over-year basis is just simply the network. It's a less activity in Vegas, year over year, less activity overall on a relative basis. Compared to the rest of the network, we've been really growing a lot in Florida, which is a great rental car market, but not as attractive on the hotel side.

Okay, thanks. And a last quick one for Scott. I'm kind of curious to know what actually has changed over the last few months on CASM, because you sited a few things in your release, obviously salaries, maintenance and acceleration/ depreciation. Some of those things you probably should have foreseen, but when you adjust for capacity, your unit costs, [non-affiliated] unit cost continue to inflate as you move through the year. What has changed incremental to your original baseline plan on the cost side? Thanks a lot.

I think a couple things stand out. Within the wages area, there was a stock comp adjustment that was related to some liability equity awards. These things, which are a substantial amount of our uninvested equity out there for employees. These things are more or less revalued every quarter, but the substantial run-up in the stock in the second quarter, there was roughly about $1.5 million, more or less, unknown out there at the time, so it's kind of a high-quality problem. $1.5 million year-over-year was not modeled out.

During the second quarter, we did change the estimates for our residual values and useful lives for our MD-80 engine pool. A lot of this has to do with just change in market conditions. So reducing those are more or less going to accelerate some depreciation.

There's roughly $400,000 charge in the second quarter that would look like more or less $500,000 in the third quarter. Those are really the only two. We did have some maintenance scope creep on some of our heavy checks in the second quarter. Roughly, I want to say it was $700,000. But in general, the cost structure remains intact, and as we forecast with the exception of a couple of these things, one of the things to note, block hour utilization continues to go down year-over-year, and that puts a tremendous drag on the cost structure, as well.

Right, okay.

Given the stock price, we just got part of that stock comp back.

Lucky you.

That was in the third quarter.

Thank you, everybody.

Mike Linenberg, Deutsche Bank.

Good morning everyone. Hey, this is a question for Andrew. The announcement that you're going to go into the LAX/Honolulu market, it seems like a little bit of an experiment. And I -- it's different than when I think about the markets that you have historically focused on. Can you talk about, how do you differentiate yourself in a market like that? What do you have to offer that is currently not being offered in the marketplace today?

Sure, hey, Mike. It is a bit of an experiment. You're right. And that is something that we've always done and will continue to do. In this particular case, I think what we offer is very clear. It's by far and away the lowest price point out there, and that's because we have an enormous cost advantage over the other carriers in the market.

We've done very well out of Vegas despite having a lot of competition in that market from Hawaiian. So based on our experience in Vegas, as well as the fact that we have operated in LA for many years, we have a pretty decent size database there that we can market to. And we're getting more confident in our ability to market in larger DMAs in a cost effective way, so all those things led us to want to try this route and see how it goes.

I think the other thing too that what we've recognized in Hawaii is that some of the smaller markets that we serve, there's just not enough bodies there to support year-round service at prices that make sense. And so, we are seeking another marketer too that we can operate on a year-round basis because there is enough traffic density in the market, and that's what we think LA will do for us. So far so good. Advance bookings are great. It got off to a terrific start, and those were price-sensitive, and if they know we are in the market, I think they're going to gravitate more towards our product.

Good. And just a second question. I know Hunter brought up the hotel room nights, and you had indicated that Vegas was down a little bit. It was down reflecting the fact that you were carrying less passengers to and from Vegas as a function of having less departures. When I look at the year-over-year decline of close to 17%, if Vegas is down a little bit, what is the bigger driver there? Is it other markets? Or is that just how the math flows through? Can you give some additional color on that?

Sure. Vegas is down 19%, so it's a little bit -- of room nights, yes. And past years were down slightly. What we have done, Mike, I think this probably contributes to it is -- the other markets by the way are up in terms of hotels. Vegas is still the largest contributor of our hotel room nights production.

What we have done about a year ago -- or not even, actually, more like two quarters ago -- we really started to phase out the subsidy that we were offering to customers if they booked a hotel with us, and that subsidy was in the form of a discounted air seat. And so that doesn't show up in terms of driving up hotel room sales higher or net revenue, but what it does show up is overall greater profitability for the Company.

So when we look at the production of hotels despite the fact that volume is down, it's more profitable than it has been in absolute numbers, as well as on a per passenger basis when you take into account that we are not discounting the air seats to sell the hotel. Clearly, what we want to try to do is continue to drive, take rate higher in all of our markets, and we think with some of the e-commerce tools we're going to have by the end of the year from our IT shop, that's going to enable us to be more effective and continue to grow that business line.

Okay, great. And then just on my last one here, in your guidance for the third quarter, you talk about the depreciation per aircraft per month to be between $92,000 and $97,000, and I know that's actually in reference to a full year depreciation number. What is the average aircraft number that you are using to calculate? Just because you had so many airplanes coming in and you have airplanes going out. Can you give us a base on that?

We are talking the third quarter, correct?

It's in the third quarter guidance, but it talks about a full year depreciation per aircraft per month.

Yes. Our full-year averaging craft -- excuse me -- average aircraft in service assuming that there is none of the tail slip into 2014 would be roughly [62.5%].

Okay. Perfect. Thanks, Scott.

Helene Becker, Cowen Securities.

Thanks very much. Hi everybody, and thanks for the time. Just a couple of questions. The first question is I think you're still negotiating actually with your pilots, and it's kind of a part A and part B. Part A is, any progress on an initial contract, and part B is, are you at all concerned about the major airlines starting a pilot hiring program and your ability to keep, attract and retain pilots?

Helene, it's Maury. On part A, we're certainly negotiating as appropriate with our crews. At this point in time, we are about five or six months into the process. Everything has to be done on first contract, so it's always usually a longer period of time to do something. That's going along as expected from our side of the house.

On the shortage of pilots, we haven't seen that. I don't believe we are going to be as affected perhaps as -- in a food chain factor, the folks who are the commuters as they traditionally are known, the regionals. With the change in the hour requirement from 250 to 1500, that's going to put pressure on early applicants that historically have gone through the system by getting a job with regional, and then as openings move and come about in bigger mainline carriers, flying bigger airplanes, they move up at that point.

So, we're certainly not seen anything. You see commentary about possible pilot shortages, but in my 30 years of doing this, there's always been crews around everyplace I've been. So it's a good job, they get paid well and there will be a demand or supply of that position, as far as we can see.

Helane, it's Andrew. Let me mention one thing. We have a few former AA pilots, some of which have been recalled from furlough, and some have chosen to go. A couple have regretted that decision, and many others have chosen not to go. So, there is a little bit of a demand just in that regard, and so far, it is nothing that gives us a lot of cause for concern. We will manage through.

Another point, pilots come into the airlines at the bottom of the seniority chain. And if you are in a 7000, 8000, 9000 pilot environment such as a major, and there is little or no growth, your opportunity to move up is going to be slim and none. Carriers such as ourself, Spirit, that are growing, adding more airplanes, that's the quickest way to get to the captain side of the house and the compensation that goes with that.

I was going to ask if you knew or had a sense of how long it takes to make captain at Allegiant?

I'm guessing --

Four or five years.

Four years that would be, maybe five type of thing.

Yes, yes, so if it's 5 years for you and 10 or more for another choice, it would be -- the choice would be easy, right?

I think 10 is very aggressive for any traditional carrier that's not growing. Southwest, United, American, Delta, those guys -- 10, I don't think you would see less than 10.

Okay. All right. Well yes, that makes it even more likely they would choose Allegiant versus another choice, right?

Not a worry of ours.

That makes sense. And recently, I think jet fuel prices have increased a little bit. I was just kind of wondering if that is causing you to rethink the capacity plan for the fourth quarter? I think the third quarter's pretty much set, but the fourth quarter plan.

Helane, we always keep our options open. Jet fuel prices have gone up a little bit. It's relatively -- it still within a relatively tight range, and it's been for a while. But I think you're right, the third quarter is pretty much set, fourth quarter we have opportunities to tweak things if we think that opportunity is there.

Keep in mind, a good portion of the growth in the fourth quarter is driven by flying A320s that are going to be coming in that are larger gauge and are materially more fuel efficient. That will help us manage through any uptick in fuel prices that we see. We like that kind of capacity for growth. The 11 additional seats with a couple hundred gallons less of fuel burn, that's a good combination for us. As far as network adds or frequency adds, yes, we are going to keep our options open, and we will react accordingly.

Okay. Is the program to add seats then to all the other aircraft done? Is that all in, and is the uptick on that in line with expectations?

Yes. That program is done and completed last quarter. We still have a handful or fewer at this point MD-80s that are going to be retired that are operating 150 seats. At the end of this quarter, we will only have one remaining that's 150 seat airplane, and that will go away in January of next year. So we have 51 airplanes with 166 seats, MD-80s, and we are very pleased with the results of that program. The capital investment for aircraft came in underneath what we anticipated, and the incremental seats are very powerful. It puts pressure on our RASMs, certainly, but in terms of overall profitability, it's very strong, and we're real happy that we went ahead with our project.

Okay. My last question, just on average airfare, did you have the ability, do you think, to push the average airfare higher? I think even your total fare went down a little bit. But it looks from prior years that it generally goes down from first quarter to second quarter. So, I was just kind of wondering if you have any opportunity to push the other --

Look. We, as everybody else, is always trying to maximize revenue. Second quarter this year in particular was a little weaker relative to first quarter mainly because of the Easter shift. March benefited from Easter being in March, which led to a very strong first quarter as a result of that. And without that been in the second quarter, on a rata basis, you're going to see that. And historically, that is what you always see when Easter moves around between March and April.

But we are always trying to find ways to drive more revenue, and honestly we prefer to drive more revenue in the ancillary line items as opposed to the base fare, but we're certainly trying to maximize profitability overall. And wherever we can push up the fare, we certainly try to do that.

Okay. Thank you very much for the time.

Thanks.

Jim Parker, Raymond James.

Good morning, guys. First question has to do with some commentary following your second quarter or June quarter traffic. You indicated there was perhaps some softness in demand, and of course, that would be leisure, and that is what your business is all about. It appears that we haven't seen that with other carriers. We haven't seen Southwest numbers yet or any detail about it. But is there something unusual about your customer base where you might deviate from what's going on in the industry?

Jim, this is Andrew. I don't think so. I think historically we haven't seen that be the case. I don't think this is any different. I think June was a little weaker than we anticipated. I think part of that is just a forecasting issue on our end.

I think June result we're good, they were very solid, it was a very, very profitable month. It just wasn't quite as strong as we thought it would be on the fare. We got the load; we just didn't get the fare we anticipated. As we look ahead, we are encouraged by the demand environment. This quarter looks good, the fall looks very good, although obviously it's early; but for now, we're feeling really good about the demand environment. It's not accelerating necessarily, but it's stable and I think pretty strong.

Okay. Andrew, also you've indicated that some of your markets, your small markets don't have enough bodies to support 757 to Hawaii? And you've also of course moved that -- you're opening up LA to Hawaii with that aircraft. Do you have too many 757s? And is there an opportunity to move some of them out of the fleet?

Jim, I think -- we don't know the answer to that question just yet. If we can make Hawaii work as we had forecast initially, albeit maybe with a different seasonality and mix of markets, then no, I don't think we have too many 757s. If we can't have somewhere around six airplanes running to Hawaii year-round at acceptable margins, then the answer is probably to go to zero. But I think that it's still too early to make that call. We are learning a lot about the seasonal trends there. I think the network changes we've made are going to be very accretive, and we are optimistic that a market like in LA, for instance, is something that can help us drive the returns that we anticipated when we decided to go to Hawaii.

Okay. Fine, thanks.

Thanks, Jim.

David Fintzen, Barclays Capital.

This is actually [Isaac Kostani] for Dave. I had a question for you guys on the A320 and the A319. Obviously you timed your acquisitions really well on those assets, but what we are hearing from the lessors anecdotally over the last six months or so is that those asset prices have stabilized. Is that something you are seeing in the market as you look at more A320 or A319s? And more importantly, if that does change and values become -- start recovering, does it change your view one way or the other as it relates to your fleet plan and growth plans?

David, it's Maury. Isaac, sorry. I'm not surprised you hear that market prices are stabilizing from lessors. That's important in their business model. We are opportunistic buyers, lessees, and we see long-term that the marketplace will be sufficient to supply our demand at prices that make sense just given that the changeover at a minimum that's going on between engine types over the next two or three or four years. I would say it is reasonable to say that the market price has not gone down since we probably commented a year ago when we were doing deals, but it is still attractive, and we find deals out there. We are looking, and we have got our feelers out all the time.

Okay. That's helpful. And just one for Scott, I want to follow up on the CASM question that you got earlier, and maybe get to it slightly differently. The progression as we read it between 3Q and 4Q on CASM ex-fuel looks a bit strange. Could you just help us understand what's happening sequentially between those two quarters, and maybe also if you could just give us a sense of the 7% to 9% CASM growth that you expect from 3Q, how much is the accelerated depreciation?

Yes, regarding that accelerating depreciation, I mentioned about $500,000, there is more or less was incremental. If you look on a per aircraft basis, I believe we are at $95,000 per aircraft in the second quarter. The third quarter will definitely be a little bit north of that. Regarding the full-year unit cost trends as I mentioned, I mean everything has not materially changed with the exception of a couple unique, so -- that identified.

Utilization, I feel is probably one of the biggest factors out there. As far as labor, we know there is a lapping effect in the fourth quarter. Utilization being down means you're just not as efficient with your flight crews. We know maintenance for full-year basis should be relatively flat, and then DNA is really the story, so there really is not much else out there.

Just to add onto that, third quarter we typically see a spike in our CASM ex- fuel because like Scott mentioned, we fly less because it's the seasonally weakest quarter for us. And at the same time, while we fly less, we do a lot more heavy maintenance during that period of time because the fleet is not as active.

So that is kind of normal for us. You see drop utilization, a spike in maintenance expense because we take advantage of the fleet being less utilized. And so that's why we see a little bit of a burst up in the third quarter, but it's kind of normal. And then fourth quarter, we start flying more, utilization picks up and things get a little more normalized.

Just one more thing to add, with three MD-80s being retired early in the quarter, the aircraft count is relatively flat although your infrastructure doesn't flex accordingly. So, you're going to see a spike in FTEs per aircraft in the third quarter with utilization being down. You start adding these things up, and you can get to the number fairly easily.

Okay. And just on the up to 7% to 9%, do you have the number, maybe I don't know if you don't have it, how much of that is because of the DNA, the 7% to 9% increase?

Why don't we get back to that.

Let me get back to you on that one.

Okay, thanks.

Duane Pfenningwerth, Evercore Partners.

Good morning. Just on your CapEx, can you remind us what changed? I think this is the second revision up modestly this year. What was the two changes, what have driven the two changes so far this year?

Duane, this is Scott. We did transact on a new headquarter building for roughly $12.5 million that wasn't anticipated earlier in the year. Yes, and then we were able to acquire an additional A319, that was a one-off early in the second quarter, as well. Those two transactions were not anticipated when we put out full-year guidance at the beginning of the year.

Okay. That's helpful. Any early thoughts on '14 CapEx?

No. Not at this time.

It's going to be materially lower. We are buying the nine A320s that we have committed to; seven are going to be purchased this year. I think three or four have already been purchased, and the remaining two are scheduled to be purchased in the fourth quarter of '14, and other than maintenance CapEx, that's it for 2014, as of right now.

Thank you. And then just to stick on '14, can you talk maybe broadly about the ASM mix by aircraft type?

In '14?

Yes. So, as we think about some of the efficiency factors on the A319s and the A320s, versus the MD-80, how do we think about that mix applying?

I mean, the 10 A319/A320 aircraft that we're going to go into the year with, we will start the year with -- it's in the release here, 10 Airbus 675s and 51 MD-80s. The airbus fleet will without a doubt be more highly utilized than the MD-80 fleet. So the relative benefit of having a more fuel-efficient aircraft will be greater than the percentage of aircraft in the fleet.

So, we expect that that is going to contribute really nicely to the total CASM when we take into account fuel prices or fuel expense because of how much more efficient these airplanes are when they operate. It will have a very nice impact next year.

Okay. Thanks, very much.

Glenn Engel, BofA Merrill Lynch.

When I look at your numbers, your capacity growth flattens out at the end of the third quarter, and then reaccelerates in the fourth quarter. Where's the growth coming from in the fourth quarter year-over-year?

Hey, Glenn. The fourth-quarter growth is a combination of things. The largest contributor are our new routes, so the net of subtracting discontinued routes, adding new routes, that's the bulk of the growth. A good portion of it, also smaller contributor is just larger gauge aircraft.

Certainly we have the A319s, which are slightly smaller gauge, but with the A320s and more 757s flying last year, I think we had two 75s in the quarter; this year we have six. So that's that the second biggest contributor, and the last is stage length. We expect stage length to be higher on a year-over-year basis so that will contribute to it as well.

And is Hawaii bigger or smaller in the fourth quarter versus '13 versus '12?

Fourth-quarter '13 versus '12? Yes. Hawaii is larger, certainly fourth quarter last year -- well I shouldn't say that. I think it's a little bit larger. We did announce a lot of routes in the fourth quarter of last year -- bear with me one second. I stand corrected, Glenn, I'm looking at the data right here. It's actually slightly down in Hawaii on an ASM basis year-over-year.

And internationally, where are we in terms of getting computers set. Southwest is struggling to get their computer set for international. What do you have to do? And two, it would seem like you would attract Mexican traffic, the distribution system would have to be a lot different than domestically, or maybe I'm wrong?

So, Glenn, we've applied for authorities, and we expect to get those granted. The automation project has begun. The biggest issue that needs to be managed is payments and taxes, things of that nature, so that work is being done. We do not expect to have a different distribution approach to generate traffic in Mexico. Certainly, that's not kind of the traditional -- distribution in Mexico over the years has been more of the kind of traditional GDS based distribution.

We have or believe we can be effective selling on the web, direct to consumers, and we will start that way. And if we have to modify that, then we will do so But we think we can be very effective going direct to the customer. We start next summer with one route into Vegas northbound, and then another route from Vegas to Cabo, so the northbound route into Vegas will be the only one we have. We will grow it, if it performs as we think it will, but the effective contribution from Mexico next year is going to be incredibly small on the overall system. We are going to grow conservatively, and just react accordingly, and learn as we go.

And the MD-80 fleet, is that going to be changing much in 2014?

No, the MD-80 fleet is going to remain constant. We have the last retirement of -- the 52nd airplane is going to retire at the end of January when it goes into a heavy check. And in the remainder of the year, we will operate 51 MD-80s all with all 166 seats. And there is no retirement plans at this time for any of those aircraft in '14 or '15 or even beyond. As we are able to get more Airbus aircraft at prices we like, then we will probably start looking to retire MD-80s over time when they reach big expensive heavy checks. At the moment there's no plan.

And finally going back to the international side on the automation, when do you need to complete that by, and is that a risk at all for the next summer start?

Well I think it's definitely a risk. There's no question about it. We would like to be selling by the end of the first quarter, early part of the second quarter, and so there's a lot of work that needs to be done in order to make that happen. We believe that that is very doable at this point. But we will see.

I think what we are trying to do is with our own systems. I don't know. I can't speak for Southwest issues. They clearly had some issues with automation, and the automation is really complicated and typically does take longer than you expect, but we feel confident right now with the date we put out there. Thank you.

Bob McAdoo, Imperial Capital.

A couple things. On the A319s, A320s, could you refresh my memory on are these owned airplanes that we worry about depreciation, or are they leased airplanes?

Bob, two of the A319s are leased, and that's what you see in the aircraft lease rentals line. The third A319, which is -- went in service this week is owned. So, there is depreciation on that. And then seven A320s are all going to be owned aircraft, so you have DNA on that, as well.

And when do the A320s come in relative to the start of the fourth quarter versus the end of the fourth quarter? And how to we think about -- obviously we've seen some improvement in the fuel burn, fuel for ASM or whatever. Even just going sequentially quarter to quarter, we've seen little bits. But when we see that many A320s coming in, it's probably going to make a more dramatic difference, and I'm trying to think about -- as we think about fourth quarter, are those going to be coming in early in the fourth quarter, or are they going to hang back and come in, in December?

So Bob, we think we will have all seven of them running by the end of year holiday period, and we think we will have the vast majority running by the Thanksgiving holiday period. The schedule in the fourth quarter, we start to ramp up again in places like Florida and Phoenix and really in the early to mid November timeframe. And we think that we will have most of those in the fleet at that time and the remainder before the Christmas holiday period.

One last thing. When you talk about southbound Mexico destination of Cabo, is that to bring people out of the small cities to Cabo like you would take them to Phoenix, or what is that?

Yes, Bob, initially it's going to be Vegas originating traffic, which although it's not a quote-unquote small city, it is our base and we have a very large presence there and a lot of customers there. Over time, we do expect to serve Mexican vacation destinations like Cabo, like Cancun, from many of our small city markets. So we're just kind of getting started with Vegas southbound and then [Airmasio] northbound into Vegas, and we will kind of go from there.

Okay. Thanks.

John Godyn, Morgan Stanley.

You had some good qualitative commentary around the PRASM, to, I think, Jim's question. But I just wanted to ask a couple of specific questions around it. July 4 holiday traffic just in general, how did that shape up? And September, I know it's a little bit early to comment on September, but how is September specifically shaping up as you look out, just some context would be helpful?

Sure, I think July 4th kind of was you would expect it to be. It's obviously a very busy travel period. July in general is very busy, and obviously it picks up a little bit during the vacation window. September, right now it's actually not that far -- keep in mind our booking curve is a good bit longer than probably most anybody else out there. So we actually have pretty decent visibility in September, and September looks pretty good right now. Certainly we're going to help ourselves by flying less in Hawaii this year than last year during the off-peak period. But we are encouraged by the advance bookings in September and then beyond, into the fourth quarter.

Great. And on the CASM ex-fuel guidance, you have a 2-point range for the third quarter, but you still have a 3-point range for the full-year, which just implies a pretty huge range for the fourth quarter in terms of CASM ex-fuel outcomes. I know you're taking a lot of A320s, but if you could just more specifically talk about the key points that drive the higher versus the lower end of the range for the fourth quarter, that would be helpful to just understand the variance there.

Yes. A lot of it's aircraft, but we are not trying to get too precise. We like having some room there, and hopefully to do better than what we expect to do. That is the range we are going to give you today, and we will obviously tighten it up at the end of the third quarter.

Okay. And I think you mentioned that the majority of the A320s are hitting by Thanksgiving, which is halfway through the quarter. As we roll into 2014, we think about rolling fourth-quarter costs into 2014, is it fair to think that first quarter of 2014 starts with an even better year over year CASM ex-fuel growth rate than whatever we are modeling for the fourth quarter?

I think that that's how I would model it. If you're talking specifically about the contribution of the Airbus aircraft, yes. I mean fourth quarter is kind of a tale of two quarters; the first half is pretty slow and the second half is really busy. Whereas first quarter is our best quarter and our busiest quarter, and for the entire period we expect to have 10 of these airplanes flying around and flying really hard. So, I think your assumptions are correct.

Got it. And then I think there were some these questions earlier sort of asking about hotel trends. One of the related, but slightly broader questions that I've been getting is just that ancillary revenue per passenger sequentially seems to have under-performed to people's expectations. I think by my math, it ticked down sequentially.

We have not seen too many phases for Allegiant where we've seen ancillaries per passenger tick down sequentially, and that does tend to concern investors when it happened. When it does happen, as we look forward, is there anything that you can sort of tell us to give us comfort that maybe that number is at worst going to be flat or if not start to tic up again as we look at deeper into 2013 and 2014?

You talking about the third-party specifically, right?

Ancillary revenue per passenger just as a total.

Okay. Well as a total, it was up. So, I think that if you're talking about third-party, I'm with you. Let me just comment on that. As I mentioned before, we could go back to giving air discount which would pull down our passenger RASM and fare and benefit the third-party line. We've chosen not to do that. We've chosen to change that approach because we believe that it drives overall higher revenue and higher profits to the Company.

We think that this line item will continue to grow on an absolute basis, and that's what we're really focused. As the mix of the network changes over time, if Vegas becomes a larger percentage, then that gives a little more upside there on hotels. As Vegas gets to be a smaller percentage, then it does the opposite. But in absolute terms, we drove $10.5 million of net revenue in the third-party line, and that's up 6%.

We would like to see that growth rate be much higher. We do think that the automation enhancements and some of the tools we're going to have will enable us to be more successful in doing that. But, overall we're really pleased with where we came out with revenue and in particular in this line item. We are more profitable in this area that we've been in the past, so that's what we are looking at is profits.

Got it. That's very helpful, and just last question, a follow-up on my capital returns question earlier. When we think about the idea of continued earnings growth and CapEx falling significantly in 2014, that's a year where you can build significantly more cash. Can you bigger picture address the idea of would you accelerate buybacks? How do you think about trade-offs versus a special dividend? What would you do with that cash if that turns out to be a year where you build a lot of it? Thanks.

John, we've been internally looking at all of the avenues and the ones you've just mentioned. There are three basic approaches, two of which are out of the same family. You can do a dividend, special and do dividend regular and/or buy stock back, so those are all under consideration. We've already committed to the buyback of the stock. No precise choice of one over the other at this point in time.

I think the only add on, John, is you're right, we do expect to add a very significant amount of cash next year.

I think too if you look at our overall EBITDA numbers, they've been going up as our depreciation has gone up, so our cash flow has been improving right along with our increased margins but even stronger.

That's really helpful, guys. Thanks a lot.

Hunter Keay, Wolfe Trahan.

Thanks. Just a couple quick ones here. Scott, can you just tell us what you're paying for fuel? Not the spot prices, but the interplay in costs or whatever you want to call it that is hitting your P&L right now?

Yes, it's roughly $3.20 a gallon.

Okay. That's helpful, and you may have touched on this a little bit before, but can you help us think about ASMs per gallon going forward? You're continuing to sequentially drive it higher. Maybe for the third quarter and the fourth quarter, some of the new A320 airplanes come online, can you help us think about it? Is that going to hit 70 ASMs per gallon at some point this year or 2014, or maybe if you don't want to answer that, just help me out for the third quarter in that line.

It's definitely trending towards 70. It's not likely to get there this year. But as you look at the year-over-year increase in the fuel efficiency ASMs per gallon, you could likely take what you saw in the second-quarter and the third one shouldn't be drastically different.

Okay. That's cool. So, it's possible that gallon consumption might even decline a little bit in the third quarter?

That's correct.

And maybe just one last bigger picture one for you Maury or Andrew, with fuel up here again, I'd love to hear your thoughts on sort of where you stand with regard to your appetite for post purchase price adjustments. I know there have been some DOT rulings on this area that can be, I think, open for interpretation, is one way of putting it. Where do you stand on this process, and do you think it's something that we should maybe expect at some point it this year?

Not this year. 90 % of our activity, Hunter, goes through our website, and so it's all automation driven. And to do that would be a pretty fundamental undertaking to throw out into the website at this point. While we chatted about it, I know I in particular have thought it to be an interesting approach for the industry to sell the seat ex-fuel or an option if you will and then let people choose to adjust for fuel at the time of purchase, or we sell them an insurance policy that guarantees their price at the time that they travel -- or excuse me, at the time of travel in both cases. But we are not ready to do that at this point.

The other thing too is fuel stabilizing and able to work around it, it's falling back with the volatility seating to be a more contained in it if you will in the last year, year and a half project.

Okay. Appreciate it. Thanks a lot.

Yes.

Ladies and gentlemen, that concludes the presentation -- the question-and-answer session.

Thank you very much. We appreciate the questions. We will talk to you again at the end of the third quarter. Thank you all.

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