Allegiant Travel Co (ALGT) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to Allegiant Travel Company's second-quarter 2014 financial results conference call.

We have on the call today, Andrew Levy, the Company's President; and Scott Sheldon, the Company's Chief Financial Officer. Andrew Levy will provide us with some brief comments and then we'll begin our question-and-answer session.

First 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 to differ materially from those expressed in or implied by our forward-looking statements.

These risk factors and others are more fully disclosed 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 events that do not materialize. These earnings release, as well as the rebroadcast of the call, are available at the Company's investor relations site Irallegiant.air.com.

At this time, I will now turn the conference over to Andrew Levy. Please proceed.

Good afternoon. Maury is unfortunately traveling today on Allegiant business and is unable to join us on the call. I wanted to make a couple intro comments and just jump into Q&A.

I wanted to first say thanks to our team members for delivering another outstanding quarter. Very proud of the numbers we were able to put up this quarter. But I do want to make a couple of comments about our second-quarter cost performance, as well as the updated cost guidance we've provided for the full year of 2014.

Second-quarter CASM ex fuel came in below our initial forecast. Mainly due to some maintenance expenses being pushed into the third quarter. So the second quarter was a bit lower and the third will be a bit higher for this line item. But the full year, for the maintenance line item in general, remains unchanged.

The lower maintenance expenses that we did experience in the second quarter more than offset some higher than anticipated expenses associated with the continued crew availability delays. We expect these crew related expenses to decline again in the third quarter and we do not expect any continuing expense to be seen in the fourth quarter.

Even with those elevated expenses, we did expect to be inside the range for the full-year CASM ex guidance that we had previously forecast and communicated to you all. However, we are now increasing our full-year CASM ex guidance, due to the recently announced acquisition of 12 A319 aircraft, which are on lease with another carrier.

The transaction will increase depreciation and amortization expense, without the benefit, however, of ASM production since the aircraft are on lease for the next few years. However, and most importantly, we will recognize substantial lease income from the deal and it is immediately accretive as a result.

And with that said, we are ready to answer any questions. We have a number of folks in the room besides Scott and myself. Jude Bricker, our Senior Vice President of Planning is with us to help tackle any revenue related questions you might have.

So we're ready to talk about whatever you all want to talk about.

(Operator Instructions)

Joe DeNardi, Stifel.

Scott, it seems like the cost guidance here kind of got narrowed towards the higher end of the range, if you exclude the D&A impact from the extra planes. So can you just maybe talk about what's changed there relative to previously?

Yes, as Andrew mentioned, the lion's share of that is the 12 airplanes -- the non-ASM-producing depreciation. In addition, the crew training delays. If you look back to the first quarter, and accumulate the cost associated with a restricted pipeline, the costs are pretty extensive over the full-year basis.

We expect the third quarter -- there's going to be an effect, probably not to the extent that there was in the second quarter. So I think we mentioned $3.4 million in ex-fuel costs related expenses. I would expect that to be down in the third quarter, and relatively minor, if zero, in the fourth quarter.

Okay. If we look into 2015, I know there are a lot of moving parts with the aircraft transaction, but it would seem like you're going to see some pretty nice comps next year, and at the very least CASM should be flat. I would think it should be down. Can you just put into context how you think about that next year?

No, I think you're spot on. There are some pretty easy comps going into next year. We'll be flying a larger component of the Airbus fleet, which will help in overall CASM. Obviously, there's some pretty substantial ex-fuel costs related to [uniques] in 2014. So, I think what you said is spot on.

That being said -- this is Andrew. I just want to clarify: We are not in any way prepared to address any forecast, in any specific terms, about 2015 costs. We'll be ready to talk about that as the year progresses and we have more clarity about our plans for next year.

Okay, appreciate it.

Hunter Keay, Wolfe Research.

Hi, everybody. So I noticed that you have an expense associated with an early-out program, Andrew. It just seems a little strange to see that from you guys, given how much you're growing and a still relatively young work force.

So can you give me some color on what that is? Is this an effort to sort of take out some seniority? Do you expect there to be any kind of cost savings associated with that? And can you quantify it?

Yes, clearly, we thought it was financially prudent to do. So, yes, we do expect there to be cost savings over a reasonable period of time where we felt that we were getting an acceptable return. And it was kind of a one-time opportunity for some folks who'd been here for a very, very long time. Yes, we have a relatively young work force, but keep in mind that we've been at this for 13.5 years. And before we got involved, there was an airline there that was operating a couple of years prior.

So, we gave the opportunity for some folks to decide if they wanted to do something else. And we think it was a successful program, and we're happy with the results. But it did elevate the expenses in this second quarter. And that's why we wanted to just call it out because it is another non-recurring type of expense that will include, as you indicated, some benefits over time in terms of cost savings with a more junior workforce in that group.

Okay. And can you give us just sort of an update on where you stand with Mexico? And just a little bit of a broader update on some of the changes that you made to Hawaii, and how you expect that market to trend for you guys over the next year to two years? I see you have the 75s obviously in a fleet plan still through 2016. Thanks.

Yes, and really, I'll answer the first one, and Jude can handle the Hawaii question. But I think the 75s are in the fleet plan at the moment, until we decide they're not. So we're only showing through 2016. But if we went out further, you'd still see those 75s in there.

As far as Mexico is concerned, we are thinking that that's going to be a 2015 event. We view Mexico as an exciting opportunity. But it's merely an expansion of our route network.

So while it's valuable, while we're excited about it, and we will go into Mexico, we don't feel like it's an urgent need to do. And we have a lot of other competing priorities in the information technology area. And it's just a matter of putting Mexico in the right order in that priority queue. And it has slipped from 2014 into 2015. I think that that's something that was known for a while now. But at this point, I'm still hopeful that, back half of 2015, we'll be able to launch something, and we'll keep you posted.

And as far as Hawaii goes, yes, Jude's here.

Hey, Hunter, it's Jude. So I'd characterize what we're doing in Hawaii is that it's been productive, and that we don't intend to grow it much beyond where we are today. But that we're satisfied with the production we're getting out of the airplane and the revenue that we're achieving and the returns that we're getting in those markets.

So the airplanes today -- we have two year-round markets to Hawaii, which are out of Honolulu to Vegas and LA. And then we have five seasonal markets, and then the airplanes fly some continental US service year-round as well.

So we're getting the utilization on the airplanes to about where we need it to be. We're getting the revenue that we need to achieve an acceptable return. And now this is our third summer there, so this is just more of the same I think from us in Hawaii.

Yes, I think one thing I'll add is that we have seen, this summer, a very nice improvement in the performance of Hawaii, which I think can be attributable in large measure to some of the changes we have made to the route network. So we're pleased with the trends, and optimistic we'll continue to be able to see improvement over time.

All right, thanks a lot.

Savi Syth, Raymond James.

Hey, good afternoon. Just a quick question on the A320 issue: Can you help me understand just kind of what's taking so long? And am I right that the full rent cost in the second quarter was just all related to sublease?

I don't think that's correct, right? We had a couple of months of rents of aircraft rental expense on the leased aircraft, correct?

Yes, there's a lot of moving parts in that line item. There's supplemental rents; there's rents associated with two of the 319s for April and May. But probably more importantly was the reversal of some supplemental rents related to return conditions.

So it's not as easy as just looking at the number. There's a lot of moving parts there.

But as far as what takes so long, that's a long discussion we could have, and get into all kinds of nuances and details. But when you get behind in your crew training and you're growing, and especially when you're moving from one aircraft to another, it's just a very complicated situation.

And we're working our way through it -- continuing to make progress. It's taking longer than expected, but we're well on our way to getting this behind us, as I indicated in my opening comments.

Got it, Andrew. And so, I mean, I understand that when you get to the fleet low -- seasonal low that you'll be able to be caught up. But when the peak picks up, do you think that you'd be in a good position at that point? Or there might be in the peaks some -- ?

Well, it's interesting because the fact that we are in an off-peak period, and the fact that we're going to get caught up during that period, in some ways one doesn't have anything to do with the other. Although I know you would think perhaps they'd be related, but they're really not.

It's more about just getting the pipeline open, and doing all of the different training events that need to be done. And it's not just simply going out and hiring folks and training them. There's a lot of movement from one, either an upgrade, from a right seat to a left seat, or moving from an MD80 into an Airbus. And it's just a very complicated event to manage. And we're on our way to getting that behind us, and looking forward to putting that in the past.

Okay, understood. And then, you talked about maybe potentially introducing -- doing a credit card and a frequent flyer program. I was wondering if you could provide an update on that, and kind of the thinking on when that might have an impact on revenue or earnings?

First of all, let me correct you. I think we have very clearly stated that we will not have a frequent flyer program, but we do anticipate building a loyalty program. I think that is very different. And I think our program is going to look different than anything else that you would think of as a kind of, quote unquote, airline frequent flyer type program.

And the IT platform and infrastructure has been constructed. Where we are in the co-branded card, which will be the very first thing that we do, is that we have all of the IT work done, tested, ready to go.

We're working on a couple kind of arcane legal issues with the bank, which relates to some kind of changes in the regulatory atmosphere. And we expect to be able to put that to bed and get that launched later in the quarter.

I think as far as an impact to revenue, I think we will see that as soon as we launch it. But I would caution you to not expect there to be some material impact. This is just the very beginning of building a business that we think, when it's mature in several years, will be very meaningful. But it's going to be a slow ramp, but we're excited to get going on it, that's for sure.

Got it. All right, thanks so much.

Helane Becker, Cowen Securities.

Thanks very much. Hi, guys, thanks for the time. Just a couple of questions -- assuming that there was very little, if any, impact from the computer outage the other day, and if there was, is that included in your guidance?

Helane, there was very little impact from that unfortunate event, but it is included in our guidance. So we have, we believe, circled what the impact was, and that is there. So, at least the full-year, of course, and the third quarter.

Right, got you. And then, just on the third-party ancillaries -- those sort of continue to trend lower year on year. I think you talked about it in the last quarter. Any changes relative to what you have previously said about that?

No, I think that we have tried to explain where we see the primary reasons for the decline, particularly in the Las Vegas hotel market, which, the Las Vegas market is still the dominant portion of the hotel revenue. So I think you have a combination of declines here associated with just a less favorable contract than what we entered into back in the really bad times, when the hotels had a little less leverage. And in addition to that, just a continued shifting of the network so that a greater percentage of our capacity is away from Las Vegas, which is helpful on the car side.

There's no new updates as far as how we plan to reverse the trend. Obviously, the lapping effect of this will certainly help as far as the year-over-year comps. But more importantly is some of the IT tools that are coming; some of which we have at our disposal now, and a few more that are coming. And we hope to be able to use some of those tools to be able to help kind of get a new trajectory going on that business line.

Okay. And then, could I just ask one balance sheet-related question? You guys raised a bunch of debt in the quarter. And historically, or at least when you guys first started, you were mostly debt free. I don't disagree with the idea of putting some leverage on the balance sheet; I think it's a good idea.

But you've raised a pretty -- I guess, a significant amount -- $85 million collateralized by most of your existing fleet. Obviously, not the A320 or the 20s and 19s, but all of the MD80s and 757s. So can you just update us on how you're thinking about leverage, and how you're thinking about the balance sheet going forward? And maybe how we should think about it?

Yes, I think we're very comfortable with the leverage that's on the balance sheet. We're continuing to generate a lot of cash. And a lot of that debt, in fact -- well, the notes obviously is a bullet, but the rest of it is amortizing very quickly -- over the next few years. So we expect to kind of delever, all things being equal, just by operating the Business.

When we have the ability to obtain debt capital at the rates that we're able to get in the marketplace, we think that's a great investment, and well worth doing. And it gives us great flexibility to either continue invest in the Business by acquiring more aircraft, which we are definitely in the market to do. Or alternatively, opportunistically continuing to utilize the authority under the share repurchase program we have to make investments by taking out shares of our stock.

So we like the flexibility it gives us. It was a moment in time where we thought we had a great opportunity to do a good-sized transaction in the high-yield space, which is the bulk of the debt you're referring to. And we're excited about the opportunities it gives us.

Great, okay. Well, thank you so much. I appreciate your help.

Thanks.

Michael Linenberg, Deutsche Bank.

Good afternoon, this is actually Catherine O'Brien filling in for Mike. Just one follow-up to Helane's question on ancillary revenue going forward. It looks like your guidance is implying a similar year-over-year decline in ancillary per passenger in the September quarter, to what you saw in the June quarter. Should we expect that trend to continue into year end? Or are we going to see maybe a rebound now that we'll have lapped the end of that original Las Vegas contract in the September quarter -- so maybe a rebound in the December quarter.

We'll see. I think that that's true as far as third-party goes. As far as ancillary as a whole, third party is an important part, without a doubt. But if you look at total ancillary, it's a relatively smaller percentage of the overall revenue per passenger on ancillaries.

And we never like to forecast any kind of changes in ancillary going forward, at least anything about new products or the benefits we might get from different pricing tools or things of that nature. So we're hopeful, and we believe that we will continue to grow that line item. Whether it's the third quarter, the fourth quarter, beyond, we'll see.

We have a number of things we're working on. One thing that is out there is we are starting, on September 1, to charge people that choose to print their boarding pass at the airport ticket counter. That is new. And it goes into effect on September 1, so we'll see what the effect of that is.

And there's quite a few others that are coming down the pipe, and we'll see. But we're obviously focused on trying to grow the ancillary line item, both the air related, as well as reversing the declines that we've seen in the third-party business. And the lapping effect on that one will help, but more importantly, we think we have some other ways to start to drive performance there. And we're optimistic we'll be able to do that by year end.

Okay, great. And then, just one on the used aircraft market. I was just wondering if you have noticed any changes in pricing the aircraft market? Several of your US peers have also taken the view over the past year or so that buying used makes a lot of sense from a return standpoint.

Of course, it's not really a view shared globally. So just wondering if a couple of US peers were enough to make any difference in kind of firming up some pricing in the used aircraft market? Or just overall global desire for new aircraft kind of overwhelms that trend in the US?

This is Jude. I'm not qualified really to speak on the entirety of the used aircraft market. We trade specifically in the A320s, clearly. And we're finding opportunities to buy the airplanes that we want at the prices that we need them to be. And that's been consistent since we entered into this fleet.

I think we've seen some firming certainly in newer airplanes than the ones that we typically acquire. And we've seen a lot of financial-driven investors move into used airplanes, and sometimes compete and drive up prices. But the planes that we're buying remain available and at prices we need them to be.

And that being said, they're also not widely available, and that's why we're very selective about the transactions we enter into. But we certainly believe that we will be able to continue to acquire high-quality aircraft at attractive prices to fill out our fleet needs for the next few years.

The 12-aircraft transaction fills in 2018, which will provide a lot of growth for 2019. And at the moment, we're really targeting fleet additions in the back half of 2016 and 2017. And we're very confident we'll be able to continue to acquire those types of assets at attractive prices.

Okay, great. Thanks for the time.

Duane Pfennigwerth, Evercore Partners.

Hey, guys, good afternoon. I just wanted to follow up on these fleet transactions. Can you talk a little bit about why this specific deal made sense? I mean, if you're making a bet on the current generation technologies going down in price, why does it make sense to bring these on your balance sheet if you can't take them until 2018?

And then, I just wanted to ask you all about this leasing revenue. It's pretty material, and obviously, there's some accretion there as well. I'm wondering: Is this something that you'll look to grow over time? Could we see Allegiant have more of a leasing segment within the Business? Thanks for taking the questions.

Yes, Duane, let me start, and Jude's going to give you most of the answer. Let me point out first though, that the main motivation is to acquire aircraft to meet our growth desires. And Jude can get into why this particular deal. But I will point out that this deal, apart from being very accretive in terms of net income, it also has a very high return on capital. And we're not motivated to generate financial returns by trading in aircraft; that's of secondary value because, quite honestly, we'll make a lot more money with those airplanes when we operate them.

But I just want to make sure that that's out there, that the return on capital for these aircraft are a little lower than the corporate return over the last 12 months, but it's extremely high. So we think it's a great use of capital.

But, Jude, do you want to jump in on the rest?

I think a couple things. First, these airplanes are very similar to the ones that we operate today. There's a chunk of them that we could buy altogether at the same time. We recognize that we're going to be in need of these kind of airplanes for the foreseeable future.

Not that we're planning a retirement of the MD80, but we someday will. And so our need for used A320s sort of extends many, many years into the future. So we're not concerned so much about the tenor of the leases. And so, it's a single transaction -- many airplanes of the same type, and then finally at prices where it works in our fleet, when they come into our fleet.

As far as growing lease revenue, I'd look at buying an airplane with the lease attached, as just another way of buying an airplane. That's all. So if those deals happen, and they do, I think, as Andrew said, we'd rather be operators.

Okay, that's helpful. And then, as you mentioned, sort of second half of 2016 -- as we think about the next couple years and your preliminary CapEx guidance for 2015 -- high level, if everything sort of runs through the way you'd hope or expect it to, how many aircraft per year would you be looking to add in 2015 and 2016?

Duane, we don't have a specific target. We've always kind of run the Business completely the opposite way, which is: We view ourselves first as, even before we're operators, we're asset managers. And when we find high-quality assets at good prices that make sense long term, then we'll execute on the transaction.

So, I mean, if there was an unlimited supply of those deals out there, we'd probably be looking to grow anywhere from, call it, 8 to 10 airplanes a year for the next several years. But we'll see what's in the market.

We have -- 2015 is a pretty big growth year. 2016 right now, we're definitely looking at, and 2017 we have no delivery scheduled as of yet, and then 2018 we have a slog of them coming. So we'll see.

The number of aircraft -- we don't start out with a number and then go get them. We start out with the deals that make sense, long term, and then we execute on the deals, and then we figure out the best use of those assets, knowing that we have lots of uses and we're confident we can drive a very high return on capital.

Okay, thank you.

Thanks.

John Godyn, Morgan Stanley

Hey, guys, thank you for taking my questions. Andrew, one of the peers out there, Spirit, talks a lot about how the rising price umbrella in the industry keeps opening up new market opportunities. They have this framework where they thought there were 300 great markets that wouldn't dilute their margins, and that's gone up to 500.

I am just curious if you could speak to this theme broadly. I'm not sure if you have similar numbers or sound bites in your back pocket, but are you seeing a similar dynamic where, as you look at the marketplace, you just see more and more domestic growth opportunities for Allegiant?

Yes, John, I think the short answer is yes. As this all has come from, first high fuel prices, which drove consolidation, which has resulted in obviously less capacity out in the markets. And particularly beneficial to us is the fewer hubs and fewer RJs serving the remaining hubs because the 50-seater really doesn't work in today's market with fuel prices where they are.

So it has created enormous opportunity for us, especially with our strategy, which, as you know, is very different than Spirit's in that we're continuing to target these secondary and tertiary markets where most often we're kind of the only game in town. And we can offer a really unique and valuable product.

Those market opportunities have just continued to expand. And we share Spirit's optimism of the future. And we think there's just enormous opportunity that seems to continue to get better. So we'll see.

And bringing that to a little bit more of a modeling metric, there was a time where we used to think about Allegiant as a 20% ASM grower. We've kind of come back from that a little bit. I wonder, as you think about the next five years or so, what's the right long-term ASM growth rate? And if the cycle keeps heating up, should we be revising that number upward?

Well, I think the answer is probably not on a five-year basis. I mean, we will grow at times a little bit lumpy because of how we approach aircraft. We don't order multi-year new aircraft deals with a stream that comes in; because we're in the spot market, it's going to fluctuate a little bit more. I think that in the current operating condition, if we can continue to grow in, let's call it, the 15% to 20% a year range, that that's a range we're very comfortable with.

Certainly from a financial return standpoint, we should grow much, much faster. But we're very conscious of the fact that we are also operators, and we do not want to grow at a pace that's too fast for us to maintain the appropriate control over the growth of the Business. So we're somewhat limited by just considering those types of issues, and not merely chasing the financial returns, which I think we justify much faster growth.

So I think 15% to 20% going forward is a good number over the next few years in today's market. And we'll see. But it won't be a straight line, as you know; it'll vary a little bit year by year.

And as we bring it to the debate on international versus domestic, and it's old news that you pushed Mexico to the right a bit. But I wonder, maybe part of that, or part of the deep prioritization there is just the fact that the domestic marketplace is still so attractive to you.

Yes, it really is. And we've had our eye on Mexico for probably 10 years now. The reason that we hadn't gotten serious about it until the last year is for that exact reason, that the risk reward is just higher in the domestic US. You don't have to tackle all of the complexities of international, which are very manageable, but there is an incremental amount of complexity that goes along with it.

We're much closer to launching that now than we were years ago because we still think the financial returns are going to be very attractive. And we're getting to the point where we can put the focus and priority in the IT area to enable us to launch service. And it's not anything overly complex. It's really just kind of basic things: calculating taxes and things of that nature. But it takes time and effort. And it's just simply a matter of putting it in the right priority order amongst all the other different IT-related projects we have going on, all of which are very important.

So, the interest in Mexico is not because there's no more growth available in the US domestic market. But it will be a nice ability to grow a little bit more. And if it's as successful as we think it will be, we think there is opportunities that go beyond Mexico, into markets specifically like Las Vegas in particular.

Got it, very helpful. Thanks a lot.

Dan McKenzie, Buckingham Research Group.

Hey, good afternoon, guys. Thanks for the time here. I guess just following up on that last question, Andrew, I'm wondering: Are you guiding to 15% to 20% growth for 2015 then? Because I think the last commentary or at least the last thought that I had about growth next year would sort of be in the low-teens rate. But please correct me on that.

No, Dan, I'm not guiding anything. I think that conversation in my mind was a theoretical growth rate over a five-year period. And I think that if you looked over a five-year period, 15% to 20% I think is a reasonable assumption.

But I'm certainly not -- I think I made that clear in the first question. We are not giving guidance on 2015 today. And the question initially was about CASM, but obviously CASM-ex is largely tied to ASM growth and utilization, and we're just not ready to go there right now.

Understood, okay. And I guess with respect to the fee for printing a boarding pass at the airport -- just a question as you think about it. Obviously, in ancillary revenue, but does a change in the behavior of passengers drive a change in the headcount need for front-line employees at the airport? Is there some kind of cost ramification with this particular ancillary revenue initiative as well?

Yes, there certainly is. Although it's a little bit of -- I think you'd have to look at it in two different ways for us. I think that in our destination markets where we have a lot of scale, that is certainly the motivation, is to hopefully have lower labor expense and maybe lower ticket-counter expense in some of the airports where we actually have to lease ticket counter. In some cases, you pay on a per-passenger basis, so it kind of doesn't matter as much.

In the smaller cities, it's probably a little bit harder to see cost savings because you still need a certain number of folks to turn the airplane, whether you're printing boarding passes or not. But we do think overall there is some cost savings to be had.

There certainly will be some incremental revenue. And we've been looking to impose this charge for quite some time to modify behavior of our customers. And we really wanted to wait until we had an alternative means of doing business with us for printing your boarding card or for getting a boarding card. And we, not too long ago, rolled out readers at TSA checkpoints in every single one of our markets. And we're going to continue to encourage our customers to either print their boarding card at home, or to download our mobile app and check in on the app and go through security that way.

And we think that that'll certainly be a result of this -- will be that more people will, in fact, do that. We do think that that creates even more opportunities to leverage the app that we've developed, in terms of incremental revenue and things of that nature. So we think it's going to be helpful in a number of ways.

Very good. And then, if I could, just one final question here. In a former life I was -- I worked pretty closely in the aircraft leasing industry. And so I am a fan of that industry. So I think the move to lease aircraft is very interesting.

But if I could just point out, obviously, the wrinkle to that is the credit risk associated with the lessees. So I'm wondering if you could address -- what kind of cash collateral you might have collected as a result of these leasing? If you can speak to some of the credit risk of the lessees? And if for some reason you got these aircraft back, it seems like you would have a home for them, but perhaps if you could just address that as well?

Let me make -- this is Jude -- let me make three brief points. The first one is that for these leases, we have a really good credit on the other side.

The second one is we assume debt as part of the purchase of the aircraft, and the lender and the lessee are the same entity. And that provides some additional level of credit protection. And the third point is that we can operate them ourselves. So we have a home for the airplane if they come early. So we're not too concerned about it.

Okay. Thanks very much, guys.

Thanks.

Glenn Engel, Bank of America Merrill Lynch.

Good afternoon. Sticking with the aircraft leases, can I assume that all of the insurance, maintenance, all the expenses are being covered by the person operating the plane, and you're just -- depreciation and interest expense is the only thing you have to worry about?

That's true. There'll be some administrative costs associated with the leases themselves, but other than that, yes.

Are there maintenance reserves as well?

There are not maintenance reserves, no.

But are they expected to give the plane back in a certain condition?

They are, yes, absolutely. The airplanes will not require much work on them other than transition-related cost when they come back to us.

You mentioned $4.9-million benefit to operating income, but if I included the interest expense, would it be closer to $3 million a quarter?

Good question.

And do you have a third quarter -- can I just take the second quarter and add $5 million for the $300 million debt issued to get what interest expense is in the third quarter?

On your first question, Glenn, let us get back to you on the interest expense associated with the assumed debt on that transaction because we don't have a number handy to give to you. Your number is probably in the right ZIP code.

As far as coming up with a number to use for the overall incremental debt expense, the interest associated with the increment debt that we've raised, is that what you were asking? Is that the second part?

Is that the only -- when I look at the second quarter to the third quarter, I should just take the $300 million at 5.5%, and that is what the third-quarter expense -- interest expense will be?

Yes, I think that that's generally right. I mean, there's puts and takes. We paid down the term loan. We replaced it with less debt at a lower rate. The collateralized MD80s and 757 transaction is a little lower. And then the big one is, of course, the $300 million. So that's going to get you in the right ZIP code.

Your RASM guidance up 2% to 4% in July, but 0% to 2% for the quarter as a whole -- is it just comparisons are tougher as the quarter progresses?

Say the question again, please? This is Jude.

Your guidance in the third quarter was July up 2% to 4% in PRASM, and full quarter up 0% to 2%. Is that just things softer or is it just the comparisons were unusually tough in July?

Well, July -- there's a couple things going on. The first is that the third quarter, as it stands capacity-wise, is so heavily weighted in July, mainly the way that the quarter goes is dictated by how July goes. And we're trying to grow some of the shoulder months. So you're going to see a higher percentage of growth and traffic in August year over year than the other three months of the quarter. So we're focused on growing more of the shoulder period, which is going to put some pressure on unit revenues.

The other thing that hadn't been mentioned is that we, on the 21st of July, instituted the increased segment fee, taking it from $2.50 per segment to $5.60 per O&D. As we don't have any direct competition in many of our markets, and all of our travelers, for the most part, are non-stop travelers, that's going to put some downward pressure also on fares for us.

Yes, that's one that, Glenn, we're going to monitor it very closely, but we want to be conservative. I think we can't -- we're not assuming that you can just simply pass that increase on with no revenue effect. So we're perhaps being a little bit conservative, knowing that that's there. And we've had to adjust our fare structure a little bit, and hopefully we can pass it all through. But we're, at the moment, not prepared to forecast that we're able to do so.

(multiple speakers) Maintaining revenue with the growth rate is pretty good. The revenue environment is positive, no doubt.

Final question on the international side, getting the computers ready to implement the international strategy, what are the mile posts that are left?

Right now it's on hold, Glenn. We have spent a lot of time spec-ing out what we need to do, and understanding all of the different things that have to be done into the system to be able to serve any international destination, but obviously we're first focused on Mexico, as you know.

So the project is sitting on hold, and it's just ready to be kicked in once we think it's the right time, in terms of just fitting into the other corporate priorities we have. So I am still hopeful that this time next year, we'll be getting ready to launch. And we'll keep you posted.

And when -- if you decided to kick it in today, which you're saying you're not, would it be three or six months before it's implemented? How much lead time do you have to give yourself?

Well, it all comes down to the level of resource investment, but if we made, let's say, a full-court press from day one until the date that everything is ready and we're ready to actually go live and start selling, I think that's probably at least -- it's probably about a six-month window, realistically. So we'd have to make that decision sometime in the first quarter of next year if we want to try to be in the market by the end of next year.

Thank you very much.

Thanks.

Bob McAdoo, Imperial Capital.

Hi, guys. Most of my questions have been asked and answered, but a couple of things, just on the guidance for the third quarter. When you have total RASM of 0% to 2% for third quarter, does that include the rental income on the 12 airplanes?

No, I don't think so, Bob.

No, it doesn't. That's a scheduled service unit revenue.

That's scheduled service. And then (multiple speakers) Go ahead?

No, go ahead, Bob. I was just going to say: That's not a corporate kind of RASM; it's a scheduled service number.

Good. And then, down on CASM, where you get the same 3% to 5%, again, that does not include the interest -- that does not include interest period, because that's an operating cost? And then it would-- (multiple speakers)

That's correct.

And then it would -- that's correct. And would not include depreciation then on the 12 aircraft because, again, that's a corporate kind of deal, as opposed to scheduled service kind of deal?

No, that one is not correct. The D&A expense is part of the CASM calculation. So that does include the depreciation and amortization expense associated with the aircraft transaction. And that's part of the reason we went to kind of a big effort to show as much detail there as we could. And if you look right underneath the guidance, there's a nice little table there where we're trying to provide, hopefully --

No, I saw that.

As much information as we can, and not to say maybe there's not more we can provide. So the bottom line is: There is lease income, revenue that we started to recognize to some degree in this quarter, and it'll be greater as time goes on. And that is not captured in any of the unit revenue metrics.

The depreciation and amortization expense is captured in the unit metrics of cost per ASM. But obviously, there are no ASMs associated with it. And then, as you noted, anything that's an interest expense is obviously below the line and not part of the CASM calculation. But of course, there is interest expense. And, anyway, so that's what we've got.

Good. That's what I needed. Thanks a lot.

Stephen O'Hara, Sidoti & Company.

Hi, good afternoon. I was wondering -- and I don't know if you've addressed this yet or not, but in terms of the guidance that you gave for CapEx for full-year 2014, it looks like it shifted from 2015 to 2014; is that essentially correct? Or is there anything else in there that has maybe changed since the update on the guidance back when you guys did the aircraft purchase?

A lot of shaking heads saying yes, so I think your assumption is correct.

Okay, that's about it. Thank you.

David Fintzen, Barclays Capital.

Hey, good morning, everyone. Just to quickly follow up on the TSA fee, you mentioned you're going to monitor it. What did you put into the guidance in terms of your ability to recapture it upfront, if you're willing to say?

I don't think we want to give you anything that is too specific. But we certainly do not expect that we can simply pass on that increased tax and have no effect on revenue. I think that would be a very aggressive assumption to take, and we're not making that assumption.

So we do expect there will be dilution caused by the fact that travelers now have to pay more money to travel in the airline business, in the networks. And this particular fee is a little more impactful on us than others because, as Jude mentioned, all of our traffic is O&D. We do not have any connects. And so our customers are all going to see a three-dollar-and-change increase in total expense on every segment that they travel. So we are trying to be very conservative about that, and assume that it will be dilutive. And that is part of the calculation that led to the third-quarter unit revenue guidance that we've provided.

That's helpful. In terms of thinking of that impact on the road, I mean, the [price of] oil has kind of moved around. You've used distance to kind of tweak your network and take advantage of your flexibility. Does the TSA fee potentially, at the margin, kind of change the distance of routes, push you into some longer distance routes that you wouldn't necessarily have been as interested in before?

I think it's too early to say, David. We'll see. I don't think it's -- obviously, the effect of it. Look, we think we will recapture some of -- that we will maintain some of our fare. We're not just going to have to lower our prices by the $3 or thereabouts per segment. So we're not assuming that.

So the materiality of it is not anything like the old days when fuel ran up to $150 a barrel. But we're cautiously watching it. And we'll see what happens, and it very well might do exactly what you described, perhaps. So we'll just have to see what the customer behavior is.

Okay. Appreciate the color, thanks.

We have no further questions. I would now turn the call back over to management for closing remarks. Please proceed.

Well, thank you, everybody, and we'll talk to you again in 90 days' time. Have a good day.

This concludes today's conference. You may now disconnect. Have a great day.