Allegiant Travel Co (ALGT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allegiant Travel Company first-quarter 2014 financial results 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 us with some brief comments, and then we will begin our question-and-answer session.

First, we wish 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 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 may be based on assumptions and anticipated events that do not materialize.

The earnings release, as well as the rebroadcast of the call, are available at the Company's investor relations site, ir.allegiantair.com.

At this time, I would like to turn the call over to Andrew Levy.

Thank you. Good afternoon, everybody.

Maury is on the line, but he is in a remote location. He is traveling today, so he is going to jump in and offer some comments and help answer some questions in a couple minutes.

I'd like to just start out by making a few brief remarks. First, I want to thank all of our team members for delivering another terrific quarter, our 45th consecutive profitable quarter. We think it's a great first quarter, despite the issues that we encountered on pilot availability and, of course, the fairly severe weather that we all experienced, particularly earlier in the quarter.

Despite that, we grew our earnings per share by almost 13%, and we saw very nice increases in all other key financial metrics -- operating income, pretax income, EBITDA, EBITDAR, and free cash flow.

I think I want to highlight a couple things from the release. The first of which is that our fiscal-year 2014 cost guidance remains the same as it was when we last commented on that. So that is unchanged.

I would like to comment on total cost per ASM, which we do expect -- and that is using, by the way, the fuel cost per gallon we had in the first quarter of this year. The curve is flat, so we think that is a reasonable assumption. And by using that, our total cost per ASM for the year we are forecasting up approximately 3%.

One-time items, which we experienced a fairly sizable amount of that in the first quarter, as detailed in our earnings release, drived about a 3 percentage point amount of those year-over-year cost increases, whether it's using total cost per ASM or the ex fuel number, so that's a material part of our increase in expense.

On the revenue side, we've enjoyed a very strong revenue environment. We were able to deliver results that were better than we had initially thought, and that was after we guided up during the quarter. The combination of March/April as compared to last year, with the Easter shift in late April, has proven to be very good for us, as it usually is when we have a more extended peak period, so we are very pleased with what we are seeing in the April time frame and you saw the guidance we presented in our earnings release for April.

Florida remains a particularly strong part of the network, and especially Punta Gorda, where we have increased our capacity substantially, yet it continues to deliver great results.

Hawaii in the first quarter represented the largest improvement on a year-over-year basis of all of our bases. However, I would caution everybody, as I like to always do, that Hawaii represents a very small piece of the overall network, but it certainly draws a lot of attention, so I only highlight it for that reason. We are very pleased with what we saw in the first quarter and very encouraged by what we are seeing in the bookings through the third quarter of this year.

In general, we have added a lot of new routes, and in general, they are exceeding our expectations as a whole, so we are pleased with how the network is performing, and we're also very excited to start a seasonal base in Myrtle Beach later this quarter, in late May. We have been in Myrtle Beach for several years, but by making it a seasonal base, we are able to add more capacity and reach more markets, so we're excited about those prospects.

And perhaps most importantly, we continue to manage our balance sheet very effectively, we believe, and very aggressively. Just a few days ago, we paid down our term loan, brought on some new debt, overall reduced debt by approximately $80 million, and are paying a lower interest rate.

Earlier this quarter, or early in the first quarter, we paid out a $42 million dividend. That was announced late in 2013. And as we noted in the earnings release, we purchased approximately $72 million of our own stock during the first quarter.

So with that, we are ready to answer any questions that you all may have. Operator?

(Operator Instructions). Hunter Keay, Wolfe Research.

So, do you have any thoughts on Mesa's decision to -- Mesa, go! Mokulele's decision to pull out of the interisland business there? I know it was only a couple planes, but I'm wondering if you think about that as an opportunity for you guys. Did you have the opportunity to acquire those planes and maybe as a way to, say, maybe run a shuttle service and a breakeven basis, would that make sense for you guys, which would enable you guys to sell a little more rental cars, hotel nights, things like that down on the interisland basis?

Sure, Hunter. You know, we really haven't given that any thought as a result of the announcement.

We have looked at that market opportunity a few times over the years, and each time we have looked at it, we have just felt that it is just simply so different from what we do. A lot of that traffic is really business and BFR. It's just not -- it's just too far afield from what we are doing.

I agree with you that you could see some strategic value, as you noted, but no, it's not anything that at the moment has any amount of interest for us. That's a good market for one player, and when you have two larger players, like you did back when Aloha was in the market, nobody does all that well.

So we're really not focused on doing that type of business. We like what we are doing, and we think we have great opportunities to continue to do more of what we are doing with the kind of unique style service that we bring to smaller cities around the country.

Okay, that's great. Thanks. And as you think about the difference between a loyalty program and a travel club, what have you guys found -- presumably you have done a lot of market research on the two of those things. What have you guys found in terms of what leisure travelers value more versus business travelers, and I know we have talked about you guys doing both, but does it even make sense for you to have a loyalty program or does the travel club concept make more sense for you guys, given your customer base, in the long run?

And also, if you could, Andrew, last -- a follow-up, can you give us a brief update on Mexico, too? Thanks a lot.

Sure, Hunter, okay. So, travel club can mean a lot of different things, and we are looking at different concepts there. I wouldn't necessarily expect if we go out and do something in that area that it would look what Spirit's looks like, which is probably the one that most people are familiar with. So, I am not saying it wouldn't, but we are looking at it a little more broadly, so stay tuned on that.

As far as loyalty, our customers value principally price, without a doubt. It's price and it's convenience, but price, I think, can also be defined as value. And we do believe that people will do things in exchange for getting something -- points, let's say -- that can be used to redeem for travel-related items. And so, we do think there's an opportunity there.

We have long thought that was the case. We have been building up the architecture in our automation to enable us to be able to manage a points program, and we are going to be ready very soon, by the end of this quarter, to begin a very slow rollout of a co-branded credit card offering, which will be the first product in the foundation of a loyalty program that we do believe can become robust over time. But I would caution you not to assume any material impact from that type of product anytime in the next several quarters.

So we do think there's an opportunity there. It would look very different from a frequent flyer style program that most people are accustomed to, but the idea of rewarding people with air transportation to leisure destinations, that's kind of the bread-and-butter and the foundation of most frequent flyer programs. We do that for a lot of communities around the country and that's why we do think we offer something of great value, so anyway, stay tuned on that.

Mexico, at this point, we are going to push that off into 2015. It is something that we feel is a very attractive opportunity and we think that attractive opportunity will be there in 2015. The issue there is just simply a matter of prioritizing IT resources. Mexico, we view as an extension of the network and we think it's a very attractive extension, but we are focused on delivering other automation products, both on the commercial side, as well as on the operational side of the business, that we feel are more of critical importance and of a higher priority as a result.

So, stay tuned on Mexico. Our interest remains intact and we are convinced it will be very good. But as you can see from our earnings, we continue to expand the network very successfully, entering into new markets and maintaining high levels of profitability, so we will get to Mexico in due time, and at this point, we believe it will be 2015.

Okay, thanks a lot.

John Godyn, Morgan Stanley.

Thank you for taking my question. I wanted to follow up on some of your ancillary revenue commentary there, Andrew, as well as the giant seats that have come out here. What I would like is generally an update on the trajectory of ancillaries as we think about them through the year, but also, specifically, Spirit likes to talk about hitting a $60 per passenger number over a long period of time. You guys actually do a lot more third-party business than Spirit does. Is there any reason structurally why we wouldn't see you move in that direction as you continue to roll out some of these ancillaries?

John, I don't see any reason that we wouldn't continue to move in that direction.

We don't have a target. We don't know where the end game is. We have seen over time that the most effective way to drive higher ancillary revenue is by introducing new products, and we do have quite a few of those that will rolling out over the next several quarters. We touched on a couple with the prior -- with Hunter's questions.

But we -- obviously, we were the first ones out there pricing our product the way we do, and obviously, many others have followed, and Spirit has done a phenomenal job at what they do. We share their philosophy as far as driving more revenue on the ancillary line and ideally even less on the base fare line, and we expect we'll continue to be successful [ingin] so as time goes on.

And the giant seats specifically, is there any initiative to expand that to other aircraft types?

No, there is no plans to do so at the present time. Never say never.

That was really giving ourselves a little more flexibility in terms of crew scheduling under the new crew and duty rules for our service into Hawaii, but we also convinced ourselves that taking out a few seats and replacing or putting in larger seats that we could generate significantly higher seat assignment revenue from was something that would be accretive.

Keep in mind, it's a big airplane, so the same trade-off would not work with an MD-80, let's say, and that being said, obviously, you could do the route that Spirit has taken. But for now, the giant seats are on six airplanes. There is 36 of them total, and I expect it will remain at that point for the foreseeable future.

Great, and then just a nit on some of the TRASM guidance. We had just thought that the second-quarter growth rate would look a bit better, given how easy the comp is and the benefit of Easter. The April number does look quite good. We just thought the quarter would be better. Are there any puts and takes that are worth mentioning in that number, just given the seasonality that one might expect around Easter here?

I think April has performed extremely well. And we are very pleased with it.

When you look further into the quarter, May is typically a shoulder month and we expect May to do well. June is -- will represent more than one-third of the total ASM production for the quarter, so it's heavily skewed toward June. And we are introducing quite a few new markets, and typically new markets tend to depress RASM results in the near term, and so we always try to be pretty cautious in terms of any guidance we give you, particularly in revenue -- in the revenue area.

We will see how the quarter develops, but at the moment, we are giving you our best guess as to how we think things are going to come in. We are very excited about the quarter, and bookings, as we look beyond June, look very, very good into July and August. So, we like the revenue environment we're in, and we are pleased with what we are seeing as far as forward-looking numbers.

Great, thanks a lot, Andrew.

Joe DeNardi, Stifel.

Andrew, it seems like the past few months have seen quite a few data points on -- whether it be regional carriers or the network guys reducing service to some of the smaller markets. It would seem like your addressable market is growing. Just curious if that's how you guys see it, that the number of markets that meet your criteria for growth is expanding.

We think that it's -- that trend has been going on for many years, and we agree that it is continuing. As the industry restructures, more markets that are in our sweet spot seem to be out there, available to us, and so we're really excited about that.

We don't think restructuring is done. There may not be another large transaction, but the integration and the changes that will come from the American transaction, how Southwest chooses to use their slots in LaGuardia and Reagan, as well as the expiration of the Wright Amendment, all those things, we believe, may create some interesting opportunities for us.

Additionally, as we become larger and have a broader scale, we are able to enter into some markets that are a little larger than we had probably would have forecast or predicted we would be in a few years ago. So, an example would include, let's say, Cincinnati. It's not one of the larger markets in the US, but it's larger than the average market that we enter into, but we have a bigger marketing reach and the ability to reach folks at a cost-effective way, and that allows us to go into some larger markets.

But the bread and butter remains the smaller cities, the secondary, tertiary markets around the country, and we definitely agree with you that the opportunities there continue to come our way, and we don't think that is going to change.

Okay, yes, that's helpful. I guess if that's the case, why not grow more than 10% to 12%? Is it the availability of aircraft that is really the limiting factor, and maybe what you are seeing in the used aircraft market now?

Our growth in this quarter, as well as the first quarter, is lower than we had initially thought it would be, due to some of the operational issues we have had to deal with, and part of the way we have dealt with it, we've had to sub service some flights to other airlines, but we have also had to eliminate some routes that we might have otherwise preferred not to and we have had to forgo some growth opportunities that we anticipated that we would have.

So our intent was actually to grow at a faster pace, but we are very comfortable with a long-term growth rate in the 15% range, as far as ASMs. We have been doing that for several years and we feel that's an appropriate level of growth going forward. This year, it will be perhaps a little less than that. As we look into next year, we have a lot of airplane showing up, beginning at the very end of this year, throughout next year.

And so, next year, we'll probably show a good bit higher amount of growth than what we are seeing this year.

We think it's also really important not to grow too fast to maintain control over the product, the culture, and the operation. We have seen that done before and that's something we're not interested in, so we will continue to grow at a nice pace. We are focused on not only growing earnings, but growing earnings per share, and you can accomplish that a couple different ways and that's what we have been successful, in doing that, and we expect we will continue to as we go forward.

Okay, and what are you seeing in the used aircraft market in terms of values there? Are they in line with what you are expecting, a little bit higher?

I think in general they are in line. And we are pursuing a number of different transactions. We are particularly focused on bringing on aircraft in 2016, 2017, and 2018 at this point in time.

We are very patient, though, and we are very firm on price, and we have always been that way and we will continue to be that way going forward. So when we have some news on that, we will make some announcements, but we like the fleet decision we have made to grow with the Airbus and we believe that will prove to be a very, very good long-term decision. I will tell you the Airbus aircraft we have in the fleet right now are performing exceptionally well, and so we are looking forward to having a lot more of them this time next year.

Okay, thanks.

Helane Becker, Cowen.

Thank you very much for your time. I have just a couple of questions. When I look at the numbers that the Department of Transportation published yesterday for domestic average airfare being $381, and I look at yours, and I am not sure if you want me to look at $146.51 or you want me to look at $99.52. But how close can you get to that $381, do you think? It seems like you would have an awful lot of room to raise your fares.

Well, Helane, we work -- our business works by stimulating demand and we stimulate demand through price. And so, there's a natural limit to the price that we can charge, because if we price too high, we will see a decline in loads, and in our business, because of the leisure nature of it, load factor and volume have more leverage than actual yield, at least at the margin.

We always try to maximize overall profitability, and that includes maximizing revenues. At the same time, our brand, we believe, represents great value and low price points. So, we are mindful of that. That's not to suggest we could magically take our prices up tomorrow and generate more profit. We don't believe we could.

I don't think we would ever want to be at $381, at least not -- maybe not today. Maybe with inflation over time, that might be the right place to be. But we want to be the value player in the market, and we want to get people off the couch and get them on airplanes and let them take trips that they otherwise wouldn't be able to afford without our service in the market.

And so, we like where we are and we are very focused on continuing to increase revenues, preferably through ancillary line items, especially third party, which is not tied to the actual transportation on an airplane, and at the same time finding ways that we can become more efficient on the cost side and, therefore, maintaining or expanding our margins as we go forward.

Okay, that's really fair. Thank you for that answer. And then, when I look at the fact that they were down about 10% in the first quarter, your third-party product revenue, is that because of the hotel room nights? Is that it?

That's certainly a contributor. I think I just want to point out one thing, though, that on an absolute basis, third-party revenue was flat. So you are referring to it on a per-passenger basis, I recognize.

I guess page two.

Sure, that's right. So $10.6 million was -- unless I am mistaken, that's the net revenue, down from $10.7 million a year ago. So on a per-passenger basis, we are down about 10.5% to $5.20 a passenger.

So there's a couple things going on there. I think a couple -- well, first of all, the hotel business is still Las Vegas-centric. As we grow ASMs in other parts of the country, then if all things remain equal, you're going to see a reduction in the contribution from hotels, and hotels in general are more valuable than cars. So that's one thing that is going on.

But secondly, as we noted in the release, we are seeing a little bit of a slowdown, in the first quarter, at least, from our Las Vegas hotel business. Partly that's due to the expiration of a contract for prepaid rooms, which was executed at a very favorable time a few years ago. The market has changed and those economics just simply aren't available for us.

We have a number of different initiatives we are taking to try to reverse the trend that we have seen this last couple quarters, and we are looking forward to seeing if we can drive this number materially higher over time.

Okay, well, that's fair. Thank you. And then, can I just ask one other question about -- really about sales and marketing expense? Did you say how come it was up so much in the quarter? Is that just a function of so many more passengers?

Certainly, to some degree, yes. But we noted in the release that there was a combination of higher credit card fees, and then also elevated marketing expense or advertising cost to support the launch of a number of new markets.

I will tell you of the $12 million incremental expense that we refer to as one time in nature or nonrecurring in nature, part of that does get -- does show up in the sales and marketing line items in the form of having to bring on additional labor to support call center operations, due to the extremely high level of call volumes that were generated from a lot of the irregular operation issues that we had to contest with during the quarter.

So you see some of it in that line item. We didn't call that one out in the release, but the other items are there.

Okay, great. Thank you.

Duane Pfennigwerth, Evercore.

First, just want to say nice job expectation setting and returning capital in the March quarter.

Thank you.

Just looking forward, actually, did you quantify the nonrecurring start-up expense and the wet lease expense here in the March quarter, and did any of that trickle into the June quarter?

We did put that in the release. It's approximately $12 million in the first quarter, and it does trickle, to a much lesser degree, in the second quarter. How much?

About half.

About half, yes. Scott is saying about half of that number in the second quarter. And we expect that will trickle throughout the quarter, and by the time we end the quarter, we will back to a more normal environment.

Okay, great. That's helpful. And then, I just wanted to come back to your revenue guidance, because you guys do have a good track record of providing an initially conservative outlook, and that's probably somewhat euphemistically that I am -- I am probably being kind there. But if I look at it, it looks like sequential passenger revenue down about 8%, which for you would be below trend, and actually, I would interpret that as weak, which is weird in the context of an Easter shift and a seasonally stronger June quarter.

So is there some dynamic that maybe we're missing about maybe sub-optimal ability to sell these higher-density aircraft at this point, or is it just you don't have visibility on June and you are just setting the bar low to start? Thanks for taking the questions.

Sure. So, look, we'll always be conservative on revenue guidance. Unlike costs, we can't control everything in the revenue arena, so we'd prefer to give something that's more conservative than aggressive.

I think that the head scratcher here is June. May is a shoulder month. I think everybody knows that. And we think May is going to do okay. But June is the one, I think, that I guess may be the most surprising. It's also the month in which we are adding the most ASMs, which naturally put some pressure on RASM, and as we noted earlier, we're adding quite a few new markets, which also carries some additional risk and uncertainty.

We will see if we can exceed the guidance we have given you today. At the moment, we are giving you the numbers we gave you, and that's what we feel comfortable with. We believe revenue right now is very good and we are very encouraged by what we are seeing.

June is not July. That's the other thing I guess I would caution you. When you look at the summer peak period, July is really the key month. It is not June. June sometimes is a little squirrely, and we will see how June performs, but we feel very good about revenue.

And just to comment on the opening question, no, we really don't see that at all. Seats for departure is up a little bit quarter over quarter or year over year, despite introduction of the larger A320 aircraft. And so, no, we don't feel uncomfortable at all with where we are on the size of those aircraft and we will see how the second quarter develops.

Okay, thanks, Andrew.

Mike Linenberg, Deutsche Bank.

Andrew, just a couple ones here. Beyond some of these new markets, obviously, LA-Cedar Rapids, LA-McAllen, I realize there is obviously some risk there. These are new markets and no one has really flown them on a nonstop basis before.

But I look at some of the markets that you have been adding over the last several months, and you referenced them when you answered John's question, markets like Columbus-Orlando or Cincinnati and Columbus-Fort Myers, Burlington-Orlando. These are all pretty -- some of these are pretty well-established markets and it looks like you're just being opportunistic as the industry restructures.

When you come into some of these markets, do they ramp up a lot more quickly? What is the response that you see from the customer base? Do they get to profitability much more quickly, given the fact that some of them are actually fairly mature? Just your thoughts on that.

Mike, I am going to ask Jude to give you a more detailed response than I might be able to.

Hi, Mike, so characteristics that would affect the speed at which a market ramps -- the larger the market, the slower it ramps, the better our presence is when we launch a new market, which we define as two cities that have service between them. So if we launch a new market from a source city that we already have a presence in, we would expect that, all things being equal, to ramp more quickly.

So we have kind of a mix as we go into the summer of markets that are large and new to us, and also markets that we are established in. So, a couple of examples that you mentioned -- Burlington, Vermont. We don't -- we have a presence in Plattsburgh for a long time, but getting the word out in Burlington is a little bit different of a story. LA to Honolulu, which provides a significant portion of ASMs in the summer months. Sourcing traffic to Hawaii out of LA basin is -- takes a bit of time and money to try to get the word out.

So, yes, I'd say there is no characteristics about the market launch suite for the summer that would make things any different from in the past, that new markets tend to underperform existing markets for the first several months as we gear up and get established in those spaces.

Okay.

There is really no -- nothing conclusive that I can say that would say that there is something different about what we are doing this summer than what you have seen from us in the past.

Okay, okay, okay, fair enough. And then, just the second, when I look at your margins on the ancillary piece and you lay out what is driving some of the pressure there, you tend to do -- historically, you have been a lot more Vegas, Vegas is more profitable than cars, but Vegas has been -- the amount of hotel nights has been declining.

Look, as maybe that market improves and the leverage maybe swings away from you towards the hotel industry, do those margins continue to decline? So for example, if we look at -- as a percent of gross or as a percent of income before taxes, should we anticipate that those could be down a few hundred more basis points? Do they stabilize? How should we think about that?

Yes, Mike, I think there is a few different things going on there. There is a lot of puts and takes here. I think on the one hand, we have a higher cost of goods sold in Vegas, on average. So that would tend to put some pressure on margin.

On the other side, we have some new automation tools that are coming very, very soon that are going to enable us to do a better job in terms of how we price that product, just some more sophisticated pricing tools, so we think that will be helpful.

So, I can tell you I don't expect to see a continued decline in margin. I think part of the margin pressure in the first quarter, at least as it relates to Las Vegas hotels, is the fact that a lot of the inventory we sold during the first quarter was sold at rates that were particularly unattractive, while we were sitting in between these two contract periods with the gaming operator here in town that we have a pre-purchase agreement with. So, we went from a very favorable agreement to no agreement to now an agreement that is better than no agreement, but not as favorable as the prior one we entered into.

So we are seeing some of that effect in the first quarter.

No. We expect to see growth in this line item over time. We have had a little bit of a change there, in part due to how we have changed our pricing philosophy in terms of no longer subsidizing the sale of hotel rooms by discounting the air, so that explains, I think, some of the decline, at least in volume, over the last year or so.

But we do expect to see this area grow over time, and we are very focused on bringing in new tools to enable that to happen. And I believe that we will be successful in doing so.

That's great. And then, just if I can squeeze in one last one, just where are we on labor? If you could just update us on the different contracts or, I guess, the negotiations?

Sure, yes. So where we are is starting from the first one to the most recent one. Our flight attendants, we're in mediation. And we will be meeting with them again in the month of May.

Okay.

Our pilots, which is the second group that unionized, we are about to begin mediation.

Okay.

A mediator has been assigned and we're going to have a meeting with the mediator next week.

And the dispatchers are the most recent group, and we just had our very first meeting with them just a few weeks ago, so we're really just at the very, very, very beginning stages with them. So that's kind of where we are on the labor front.

Great, all right. Very good. Thanks, Andrew.

Dan McKenzie, Buckingham Research.

A couple of questions here. I guess with respect to the press release, the commentary that was left out that was included in the last earnings release was just commentary tied to margin improvement going forward, and of course, that's what we all live for. You've got some ancillary revenue initiatives on the back burner. The revenue outlook seems really positive. Is there something that is causing you to be perhaps a little bit more cautious than you were, say, three months ago?

I don't know if we are more cautious than we were three months ago. We just delivered pretty much flat operating margin percentage, despite all the challenges there that I think we have been very forthcoming about. I don't feel we are more cautious now than we were back 90 days ago. We actually were able to take up our numbers during the quarter, and that was really because revenue is stronger than what we had anticipated we could see.

As we look forward, we see a business that can continue to generate margins at the highest end of the industry, generate a lot of free cash flow, grow at a pace that we are very comfortable with, which would allow us to grow earnings per share at a very nice rate; and, at the same time, be able to have excess capital that we can have conversations about how do we best deploy that.

So, we are very bullish on the balance of this year. We are looking forward to getting these one-time items behind us and getting back to a more normalized environment, and I think that, as I mentioned earlier, the introduction of the Airbus fleet of aircraft, which generated about -- almost 20% of our ASMs in the first quarter is incredibly powerful, and we are looking forward to that becoming a larger percentage of the ASM production as we are able to bring on more of these aircraft beginning late this year and then starting again throughout 2015.

Understood. I guess just with respect to ASMs and new markets in the second quarter, at least relative to the first quarter, does that -- the percent. Well, let me just re-ask the question. The percent of ASMs that you have in new markets, is that materially different in the second quarter relative to the first quarter as a percent of your overall system?

I am getting the signal that it is higher. I don't know if it is materially higher. How much higher do we think that is?

Most of the growth in the first quarter was a lot of things for peak summer -- peak spring growth, and so as it has flattened out at the summer markets under 12 months is a higher percentage.

By how much approximately? Do you have any sense?

We don't have that number handy, Dan, but that was Lukas, our VP of Pricing and Planning, and I don't know if you could hear him, but yes. To answer your question, the simple answer is yes. It is a higher percentage, but we don't have a number we can give you right now. We just don't have that at our fingertips.

I got it. I guess the reason I was asking the question is because you have expressed caution about revenues in new markets, and I'm just wondering perhaps with respect to the first quarter, would you be able to share how things panned out in the first quarter in the new markets relative to the rest of your system? Was the new markets, did they underperform roughly on a magnitude of 200, 300 basis points relative to your system average, relative to the mature system?

I think we did provide a number in here about same-store markets. The vast majority of our markets and ASMs in the first quarter were ones in which we were there the year-ago period, and we saw an increase year over year of 2% on a total RASM. So that at least gives you a -- at least it gives you some idea as to what the balance would look like.

New markets, as you mentioned, new markets come in all flavors. We have had some that have just exploded on day one, and we have had others that have never worked, and we have had everything in between. In general, right now, the new markets that we have launched and started in the first quarter and those in which we have planned launches in the second quarter, so we have some booking data, look extremely promising and we are very encouraged by what we see.

Terrific, and by the way, nice job on the quarter. I'm not trying to pick you apart on the first quarter here. You did a nice job.

That's quite all right. Thank you.

David Fintzen, Barclays.

A couple of questions or maybe just one question on the seasonal component of the Myrtle Beach base. How much flexibility do you have to flex the number of based aircraft? Does that create a lot of labor productivity problem? I'm just curious. Can Myrtle become something of a model for a series of bases maybe we wouldn't have contemplated five or seven years ago?

Yes, David, well, I can tell you we've contemplated it for five and seven years, at least. So, and we have a model that it's based off of, and that's LA.

LA used to be a year-round market, and as we learn the market better, we recognize that most of the markets that we were serving were really excellent in the summer, but really didn't perform well during the balance of the year. And so, our service now at LA, the year-round routes are just a handful and we serve them with aircraft that are originating in other locations, and we do what we call inside turns to reach those markets.

And in the summertime, however, we have a seasonal base, and we are doing the same thing in Myrtle Beach this summer. The TDY seasonal assignment for crews is something that is a bit mixed. We have had a number of people that are more than happy to spend part of their summer in another location. And on other occasions, we have had to assign that.

But particularly on the pilot side, where a number of our flight crews are people that commute in from another location to wherever they are based, we believe that seasonal assignment in particular is pretty attractive to those folks, since they are going to have to commute anyway, since they choose not to live where they are based.

So, don't expect any labor-related issues. We have to certainly work with our crews to try to make sure we are doing something that is attractive and fair and everybody feels good about it. And we have always done that and we will continue to do that going forward.

But yes, Myrtle is something we're really excited about. We have been in that market, using inside turns with aircraft based in Florida, for several years now. It has always performed very well during the summer months, and by basing an airplane there, we can go reach other markets that, using inside turns, we wouldn't be able to do with the same crew without an overnight and the expenses associated with it.

So what it does, it enables us to extend the reach of that network, and the Midwest, many of the Midwestern markets that we are targeting really like Myrtle Beach, and we think that it will perform extremely well during the summer. So we will see.

We do think there are many other locations like that. As you know, our business is highly seasonal because of the leisure nature of it, and we are just simply trying to tailor the supply to meet the demand when it's there.

Okay, that's helpful. And just one little midget, in margin terms, the shift between 1Q and 2Q on Easter, just in terms of weeding through some of the optics of 1Q and some of the things moving in on the margin, how big would you size that? In terms of late Easter?

I think that -- this year is really challenging to use any kind of a baseline. And I caution everybody to do that. We had a very unusual first quarter.

Yes.

I think we set ourselves up for a great comp for next year. That is how I look at the first quarter. We did well, but the silver lining is, boy, it's going to be really good next year in the first quarter when we don't have any of this stuff to blow it.

So I just caution people, don't forget all the unusual things that we had to deal with.

That being said, when we have Easter later, it is always better. We have seen this -- we have been doing this now for 13 years, Maury and I have, and we have seen Easter fall over the place over the years, and when Easter falls later, it is a good thing. It drives more overall revenue and profits during that peak period, and that's what we saw this quarter or this March/April period.

But I would just really caution you and everybody else to just don't lose sight of how unusual our first quarter was in terms of one-time expenses and less ASMs and less productivity than what we would have normally projected to put in there, and it is just going to be one of those quarters that will always be a little bit of an outlier, despite the fact that we produced a terrific performance during the quarter, especially considering everything thrown our way.

But if I'm understanding right, just given the prolonged period, it makes the overall holiday period better. When we are reading through and trying to understand the baseline, because like you said, it is a very unusual 1Q, really the holiday shift isn't the thing that we should be paying the least attention to. Is that what you are saying?

That is correct. I think that's a good way to put it.

Okay, all right, that's helpful of someone who's trying to read through the baseline. Thank you, appreciate it.

Glenn Engel, Bank of America.

On capacity, at the start of the quarter you were looking for up 8 to 12. Now you're looking up 7 to 9. Was that just operational issues or was just markets pushed out later in the year?

More than anything, it's the remaining issues related to our crew availability, and the results of which has been that we have had to do less flying that we would have hoped to in the second quarter. And it's really just that.

So, it doesn't necessarily get pushed necessarily -- it may get pushed later this year, but it would probably be really fourth quarter. We like to start markets and add more capacity typically at the beginning of a peak period, and once we get past mid-August timeframe, then we tend to pull back capacity pretty hard, and then bring it back up again in the mid-November timeframe in time for the end-of-year holiday period.

Why is this crew thing taking so long? It seems to be -- I wouldn't have expected it to drag out to the second quarter, yet it seems to be dragging out to the second quarter as well?

That's a really complicated issue to get into, and I don't want to get into that right now, other than to say that it's a very complicated issue. Anybody that's been in the airline business understand how crew training works and what happens when you get behind and the bottlenecks that come with it, especially when you have multiple fleet types. It's just something that is very complex.

And I think one of the challenges is that during the March and April period, especially up to Easter, we are wound pretty tight. And so, to upgrade first officers or move someone from an MD-80 to an Airbus, you're pulling them off the line and you are cutting ASMs even more than what we just talked about. And so, it is trying to juggle all those priorities.

And if this was September timeframe and we had a lot of excess capacity, we would be much further along, but we are trying to balance short-term opportunity to generate profits with getting ourselves out of this -- out of the issue we have been dealing with as fast as we can, and the result is that we are just extending that pain a little bit further, but we think it's in the name of generating higher overall profits.

Of the $12 million of incremental costs, did half of it run through the aircraft rental line?

Yes, Scott is saying $8 million ran through that line. That's the vast majority (multiple speakers)

And you are saying both those numbers will be cut in half from the first to the second quarter?

Yes, the aircraft lease of $8 million in the first quarter drops off substantially. $12 million in total incremental spend in the first quarter will be half of that in the second. So, there is much more shift in the other line items outside of aircraft rents in the second quarter.

Okay (multiple speakers)

Things like elevated training expenses and things of that nature, as we move as fast as we can to finish the training footprint.

So the rentals are dropping off quicker than the other cost items from this crew availability issue?

That's correct.

Yes.

Okay. That's all I had. Thank you.

[Kevin Chrissy], [Salline Research].

Thanks for taking the question. Andrew, what has changed? What are you guys doing, maybe Lukas, as well, doing to make Florida work? When I think back in the past, it has been a pretty spotty market, and you guys are seeming to have quite a bit of continued success in opening new markets down there. What's different about Florida or your approach to Florida now? Thanks.

Kevin, let me start, and then Jude or Lukas can add in. We heard that before we went into Florida back in 2005, that Florida would never work. We should just stay in Vegas.

Well, we obviously have had a different experience. We have done extremely well in Florida over the years.

My own opinion is, and I think we all tend to share this, is that the benefits of consolidation, we have seen perhaps more of that in the eastern part of the US. As there is less service and fewer hubs, prices tend to get a little higher, which gives us a little more opportunity both in terms of new markets, as well as being able to get a little bit more yield out of our customers.

But these things run in cycles. We have seen it over the years where Florida outperforms the west, and then the west outperforms Florida. At the moment, and it's been this way for the past -- probably the past year, Florida has just been exceptionally strong, and as a result, we are adding more ASMs and more capacity into that market.

I have no doubt that at some point, it will shift, but at the moment, we are just -- we just like what we see on the east coast.

Okay, thank you.

Savi Syth, Raymond James.

Just on the Airbus fleet, I think on a seat basis, it is probably about 19% of total seats. I was wondering if you were able to fly your Airbus fleet as much as you would have liked to, what percentage of your total ASM production would have been in the first quarter?

Savi, I just want to make sure to clarify one thing you said. 19% of our ASMs in the first quarter were generated from the Airbus. The Airbus represents less than 19% of the seats. So I just want to make sure we are talking the same language here.

So, and as a result, fewer than 19% of the total seats, yet 19% of ASMs, so you can certainly imply from that that the utilization on those aircraft was a good bit higher than the MD-80s, and that is exactly what we always said it would be and that's what we saw in the first quarter.

If we had been completely unconstrained, the percentage of ASMs likely would have been higher by maybe a few percentage points, but had we been unconstrained, we would have flown more MD-80s as well. So, it's kind of hard to answer that question. It would just require a lot of going backwards and speculating about different decisions we might have otherwise made.

But the Airbus is an airplane that is obviously very efficient, and we're certainly going to fly them as much as we can and take advantage of the significantly lower fuel burn expense, and we are very pleased, as I mentioned before, very pleased with how that airplane is performing. It has also been extremely reliable. It just shows up and we are -- we just look forward to getting more of them.

And on the hotel side, the hotels outside of Vegas, I know it's a small share, but it's growing faster, I was wondering what the margin or the rates to you are for the hotels outside of Vegas versus the hotels in Vegas?

I think that in general, the margin opportunity in Vegas is a little bit higher than elsewhere, but not appreciably different. Vegas is just a great hotel market. Always has been, always will be. It is by far the best hotel market in the US, I think maybe with the exception of a New York, at least when you're talking to the OTA arena, which targets more of the leisure customer.

And the other markets around the country are just not nearly as strong, and part of that, quite honestly, is 90% of our traffic in Vegas, approximately, originates elsewhere. And so, those are potential hotel opportunities, whereas in the other markets, Florida, Phoenix, et cetera, the percentage of folks that originate elsewhere is significantly lower. And it ranges, but it's much, much lower than 90%, which means you just -- by just looking at numbers, you just have a smaller opportunity, a little more second home, a little more of VFR in some of these other locations than you do in Vegas, as well.

But Vegas is still a pretty dominant piece of the hotel business, and so while we are focused on continuing to grow the other locations, Vegas is where the most of our focus remains as we look at this hotel business and try to find ways to start growing that again, both in volume, as well as profits.

All right, sounds good. Thanks.

It looks like there are no further questions in queue.

Okay, well, thank you all for joining us. I appreciate your time, and we will talk to you again in about 90 days or so. Thanks very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.