Allegiant Travel Co (ALGT) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allegiant Travel Company's third-quarter 2015 financial results conference call. We have on the call today Maury Gallagher, the Company's Chairman and Chief Executive Officer; Scott Sheldon, the Company's Chief Financial Officer; and Jude Bricker, the Company's Senior Vice President of Planning. We ask that you begin to queue up for questions now, as we will have a very brief commentary and will shortly begin our question-and-answer session. (Operator Instructions)

First, we wish to remind listeners that the Company's comments today will contain forward-looking statements, and they are only predictions and involve risks and uncertainties. Forward-looking statements made today may include, among others, references to future performance and any other comments about our strategic plan. There are many risk factors that could prevent us from achieving our goals and causing the underlining assumptions of these forward-looking statements, and our actual results to differ materially from those expressed 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 are undertaking 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 releases as well as the rebroadcast of the call are available on the Company's investor relations site at irallegiantair.com.

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

Thank you, operator, and good afternoon, everyone. I would like to let Jude make a few comments on revenue just to anticipate some of your questions. Jude?

Thanks, Marty. Today we are announcing 3Q decline, and the TRASM was down 8.2% and a 4Q TRASM guide of down 10.5% to 8.5%. And we just wanted to kind of go over some color on those numbers and what we're seeing. And as we've expressed in past quarters, we believe the majority of those declines are things that we do to ourselves and our earnings-accretive initiative.

So specifically, we're growing really rapidly in the third quarter. We grew ASMs 24.2%, and we're guiding similar growth in the fourth quarter. And growth always put pressure on unit revenues. But particularly because of our model of low utilization, we are able to grow off-peak opportunities more rapidly.

So some characteristics of that growth, which are particularly negatively affecting revenues, is our rapid expansion into new cities -- rapid relative to what we've done in the past. The last two quarters of last year, we had about 4.5% of our ASMs generated in new markets -- new cities, cities that we have been in for less than 12 months. In the third and fourth quarters of this year, we will have 9% and 12%, respectively, of our scheduled service ASMs generated from new cities.

Also, we're growing off-peak more rapidly. This is in response to lower fuel prices. Off-peak day of week are Tuesdays, Wednesdays and Saturdays. Flying on those days has grown in the third quarter 66%. And in the fourth quarter, that number will be about 50%. So for both of the third and fourth quarters of this year, about 23% of our capacity will now be generated on off-peak days of week.

Also, we are growing off-peak seasons more rapidly than we are our peak periods, which puts pressure on average TRASM. In December, we're going to grow ASMs about 21.9% versus 27.5% growth in October and November in aggregate. December has the highest unit revenues.

So as we look forward, December being the highest revenues for the fourth quarter, March being the highest revenues for the first quarter, in June for the second quarter of next year, we're going to continue to disproportionately grow the other months and quarters, which will continue to put downward pressure on our unit revenues.

Also, as we talked about in the past, we implemented credit card surcharge in December of 2014. That adds about a 2-percentage-point negative effect on unit revenues. Recall that before we charged a higher fare for a credit card transaction through what we call the debit card discount, and that put the revenue -- the fees generated from that in our revenue line item. Today, credit card surcharges are treated as a contra expense in our marketing expenses.

Looking forward, we will continue to have 2-percentage-point impact this quarter -- the third quarter, the fourth quarter. And then those impacts will start to decline in the first quarter and won't be effective on a comp basis beginning in the second quarter next year.

Also, as we have talked about in the past, we have the continued effect of the increase in 9/11 security fee. Went into effect in July of last year. So for the third quarter of this year, we are having about a one-percentage-point downward impact in unit revenue as a result. And fourth quarter looking onward, we don't have any comp issues anymore.

So adjusting for these factors, the ones we control and the 9/11 security fee as well, we think adjusted downward unit revenues -- or adjusted unit revenues would be down about 2.5%. So I would consider that to be unit revenues in same stores, markets with the same capacity allocation, same day week, same seasonality. And we think that's really good considering where the fuel environment has gone. So going forward, we're going to continue to do the same kind of initiative that pushed down TRASM as we adjusted the schedule to the current fuel environment.

As you know, we operate largely without competition. So we are out there without consideration of what other airlines are doing, trying to find incremental flying when at a higher fuel price, those assets would be left idle.

So the TRASM trend will continue through probably the second quarter of next year. In other words, the downward TRASM trend will continue, but that's accretive to earnings. It's the right thing to do, and it's the right thing to right-size our business in response to the fuel environment.

That's all I wanted to add, Maury.

Okay, thank you. Operator, we'll take questions at this point.

(Operator Instructions) Savi Syth, Raymond James.

Just wanted to talk a little bit more about how you think about growth especially into 2016. Appreciate the color, Jude, on growing more in off-peak months. But just how do you think about it from a -- with so much of it done this month with flying more in the off-peak this year, just how much more opportunity is there next year, and how might that change with the fuel environment?

Traditionally, September capacity was about half of July capacity. So we've always been a very peaked carrier. And particularly if you look at day of week, Tuesdays we have almost no operations as compared to a fully allocated fleet on Sundays. There's a long way to go, and we are really talking about just changing capacity allocation at the margin. So when you think about growth, we will always be a carrier that responds to demand patterns, and that means flying more on Sundays than on Tuesdays. So there's no condition whereby we are a flat carrier if fuel goes low enough for that to happen. We are always going to be a peak airline, and that's in responding to the demand environment of our customers.

So I think really what you're asking is when are we going to see these unit revenue declines lap themselves? And I would consider that to be in the third quarter of next year where we have had sufficient time to adjust the current schedule to the current fuel price. We launch schedules about nine months in advance. It takes us about a year, maybe more, to adjust as we respond to the conditions. Does that answer your question?

It does. The second part of that was just how do you think about fuel and growth?

Well, so --

In the sense that what level of fuel -- how far does fuel have to go before maybe you slow down your growth plans?

Sure. We would slow to -- if fuel rose, we would slow down our growth plan immediately. The issue, though, really is that -- in periods of time where it's really good, the back two weeks of December, of March, June, and July, we are fully allocated. And that wouldn't change even if fuel rose. Now, as you think about other periods of the year, the first two weeks of December, we get very granular on this. January and February, April and May, we would slow growth significantly if fuel was at a higher point.

That make sense. And just a follow-up on the growth question, I did notice that some of the MD-80 retirements -- I think there was one extra retirement this year than you had talked about in July, and then maybe four more in 2016. And I'm guessing one is because of the additional aircraft that you got. But just any kind of additional color on the thinking on the MD-80 retirements?

Yes, we're growing overall capacity as fast as we can operationally manage. And -- we kind of plug for retirements in the sense that we're going to go out there and buy the A320s that are in the right spec and at the right price. We're going to add flying into the schedule to the extent that we can manage it in March, June and July. And then as a result of those two inputs, we're going to retire the resulting MD-80s that we no longer need.

So you are going to continue to see from us as we go forward retirements of our older airplanes as a result of deductions, but also just what we can manage in terms of total network growth.

Got it, all right. Thanks for the color, and I'll get back into queue. Thanks.

Michael Linenberg, Deutsche Bank.

Jude, on some of the -- you talked about some of the TRASM weakness being self-inflicted. But, again, you are obviously -- it's all about maximizing margins here. Anything on TRASM that was due to maybe weaker demand in some of the regions? I look at your roadmap, and I count close to a dozen cities in the Dakotas and Montana. I think Delta is pulling out of Dickinson. Are you seeing any sort of demand weakness in that part of the country or maybe in other oil patch states like Oklahoma?

Yes, sure. Firstly, we're managing the business to earnings, so not margins as you said. But yes, let me just -- geographically, we've always had shifts in our network, and we are still growing the East Coast much more rapidly than we are the West. And that's the result of the expansion that we've had over more than a year now in the Ohio River Valley, which remains a strong point for us.

But your question about -- in all dependent economies and the Bakken area and Dakotas and Eastern Montana; in particular, those that depend on also cross-border traffic. We have -- yes, we have seen a slowdown in those markets with those characteristics. So our Dakota markets, our Western Montana -- our Eastern Montana markets, all our markets that depend on Canadians crossing the border because that value proposition has declined with the decline of the Canadian dollar have been negatively impacted recently. Yes.

Okay, great. And then just a question for Maury. I know that the pilots had made an appeal to the NMB to declare an impasse. Have we heard back? And where are we with the flight attendants?

Yes, the pilots -- Teamsters sent a letter to the NMB -- they call it a proffer -- asking for relief that there was an impasse. It's our belief that there is -- it's not an appropriate request, that we are making good progress. We definitely have a lot of issues to -- not a lot, but we have issues that we have to deal with, and we are making forward efforts on that. In fact, we will be meeting on Monday, Tuesday this coming week.

Typically it's been -- I'm not an expert, but usually the -- you don't hear back from the NMB. They won't say it's been rejected in particular. If they don't do anything, you just keep doing business as usual. So that's what happened on the last one. We never heard anything back on the March, April request in February, whenever it was. And we continued our efforts at the table. And we will do that.

On the flight attendants, we've been working with them and the NMB intermediation based on their request. So that's a work in progress as well.

Okay, great. Thanks for the update, Maury.

Rajeev Lalwani, Morgan Stanley.

Two quick ones for you. I guess the first, you talked about how by the, I guess, second half of next year, you're going to pull up a lot of the pressures from the off-peak line. But does that take into account just the change in the fleet also since you are going to be doing a lot more on the Airbus side? Obviously there's some off-peak flying that comes with that.

Yes, that's a good point, Rajeev. We will naturally be at a higher off-peak utilization based on the transition of our fleet into an Airbus product. So this is -- I understand the Allegiant model is very important. I understand the concept of how we choose to dispatch airplanes, how we choose to schedule airplanes. And we're making very granular decisions, particular days a week, particular times of day, seasons, for what the returns of that particular flight would be.

So as the input costs drop, either because of that plane that's available is now an A320 whereas before it was an MD-80 or fuel costs drop or whatever, we will make the decision based on that. So then more often than not, we will have opportunities during off-peak, yes. But the main impact remains that the fuel price is down substantially, and that is the biggest impact that we are seeing.

But, yes, you're right. We will have higher utilization just because of the transition to the Airbus; it's true.

Great. Thanks Jude. And just the other question. As it relates to aircraft financing, you have that $30 million or so in September. Can you talk about more opportunity there and what you're likely to do with those funds given strong cash flow?

Sure. We manage the balance sheet towards a liquidity target of about $400 million in today's environment. And I buy airplanes and Scott buys shares. And between the two of us, if we need more capital, we will pledge some assets to a debt facility that's secured with aircraft. The market is open to us -- the debt market is open to us. We have deals like the one we did in the third quarter that we can replicate as needed. And we have by the end of the year 13 unencumbered aircraft on the balance sheet. That's $150 million to a $200 million of debt capacity at 2%. So that's how we run.

Great. Thanks, Jude.

Joseph DeNardi, Stifel.

It's Sam McKelvey on for Joe DeNardi. When we think about the next phase of growth for you guys into some of these more medium-sized markets, can you help us understand the size of this opportunity maybe in terms of thinking about annual ASM growth in the 10% to 15% range? How many years worth of these medium-sized markets are there out there for you guys?

It's not necessarily the number of medium-sized cities that there are. It's more the capabilities for us to expand those cities once we are in that I think I'm most excited about. So as we sit today -- as we look back in the third-quarter results, Jacksonville could be considered midsize to midsize. But let's take that market out of it for a second. We really have only results from one mid-size to mid-size city to look at as being completed, and that would be Austin to Cincinnati. And based on that market, I'm really excited about the opportunity to expand in these mid-size communities. The number of cities there, maybe 50 cities as we classify as mid-size markets. Everything from the 26th biggest city down to, say, the 70th, 60th, 70th, 75th biggest city. And connecting -- not all those markets between themselves can generate sufficient route, but there's potentially quite a few that do.

And we don't know how big that opportunity is that substantiates us growing the business and maintaining the current business strategy, which has closed distribution and low frequency into non-competitive markets that don't necessarily have a leisure destination on either side of the route. This is something we haven't really considered two or three years ago. But today, I think it's a big, big, big part of our growth strategy for the next five years.

Great. And then one for Scott -- excuse me.

Luke, do you have anything to add? Lucas is here with me; he runs our network.

Yes, no, I think Jude summarized that pretty well, that it's more about saturation of multiple markets out of these midsize and growing them quicker.

Great. And then one for Scott. When you look at next year from a cost standpoint, you talked about seeing pretty favorable trends with D&A. Can you provide some more detail there, maybe an initial expectation for what CASM could look like or what the major moving pieces are?

Yes, we should be finalizing our full-year 2016 plan here in the next month and a half. We're still going through some of the network iterations. Specifically as it relates to D&A, that should be a good guy next year. If you look at the aggressiveness in how we're depreciating our MD-80 fleets -- for those of you that remember, our AIM project which increased our seats from 150 to 166 seats, basically we would have depreciated those improvements. So basically the book-value fleet of our -- excuse me, the book value of our MD-80 fleet is roughly about $45 million at the end of next year. So we continue to chew through it at a pretty high pace.

In general, there are still some -- obviously some big-ticket items out there that may or may not hit. Labor obviously can influence what next year looks like as well. So stay tuned; we should be putting out some color here in the next month, month and a half.

Great. Thank you.

Duane Pfennigwerth, Evercore.

Maury, you've seen a lot in this industry over a long period of time. I wonder if you could comment on industry revenue trends more broadly. Not necessarily in your own markets, but are you seeing any pricing out there that is surprising to you? And is there any period like before where basically we are not in a recession but you have one legacy carrier that is discounting walk-up fares so aggressively in some markets? Have you seen this before? And how do you think it plays out over time?

Candidly, I'm surprised it hasn't happened sooner. If you go back 10, 20 years ago, you didn't go into a guy's marketplace and not face a 2-by-4 across your forehead. I remember when Northwest -- I think Reno Air went from Reno to Minneapolis. Not only did Northwest respond to that, they took some old 72s and put them in Reno and started running a hub out of Reno. So I'm -- candidly, one of the great benefits I think that we see today is you don't have the response that you've historically had.

So I'm not surprised at American's approach in particular. They seem to be the most aggressive at this. It comes down to when the good times are rolling, you can afford to do some of this more so than you might do when things are tighter. That's -- the high oil prices, I think, were a bit of the discipline that way. But each management team has got their peccadilloes where they want to be and what they think is important. And when you've got this much cash running around, everybody's chest falls out a little bit and we all feel real good, real smart and real tough in many cases.

So -- but having said that, the notorious events going on between Spirit and American and others -- Spirit is making -- what? -- 25% operating margin in their, quote, battle? That's a pretty good place to be.

Really appreciate those comments, Maury, and that history. Just with respect to Allegiant, and I apologize for asking a general industry question. With respect to Allegiant -- and maybe you covered it in your prepared remarks -- how should we think about the trend relative to the 1Q capacity guidance that you put out there? Is there any range you could give us for full-year 2016 capacity and cost structure at this point? Thanks for taking the questions.

On the revenue side, we were trying to prepare expectations that we're going to continue to face downward pressure. But in my view, that's because of things that we're doing to ourselves, and they are earnings accretive. And capacity wise, we're going to continue to push the outer limits of growth in the off-peak periods where we have surplus pilots and crews. And then when the operation becomes challenged, we're going to try to go easy on those periods. So that's going to be the continued unit revenue story as we go into the first and second quarters of next year.

This is Scott. Just basic themes out there, if you look at the percent of ASMs that will be produced by Airbus flying, you should start to see a noticeable uptick in ASMs per gallon. Looks like we stalled basically about 70, so you should see a nice benefit there.

Labor, that's probably the hardest one to tie down. Maintenance looks like it's going to be a lighter year, so you should start to see those costs in. And Jude mentioned the credit card surcharge, which is a contra expense, so that will be the full-year effect. So that line item will show a benefit. Thematically, it's shaping up to be a fairly good year as it looks right now. But like I said, we're still going through iterations of the network and some big-ticket items we still need to nail down.

Okay. So just at this point, a full-year growth projection of mid-teens feels reasonable? Or should we be thinking about something more than that?

Sounds reasonable.

Thank you, guys.

Hunter Keay, Wolfe Research.

Hey Jude, you talked about -- obviously just a follow-up on Duane's question and your comment, these revenue initiatives being earnings accretive. Are you saying that, all else equal, it's fuel that margins are going to be sustainable? Or are you talking about the stuff that just drives profits and drives EPS, albeit maybe it's accretive to their earnings in EPS, but it's dilutive to margins. Are you making a comment on sustained margins and earnings growth from these initiatives even with negative TRASM?

No, we're going to try to bring down our margins.

You are. Okay.

We're going to find opportunities to fly airplanes that add returns but that are at lower margins than what we would otherwise schedule in a high-fuel environment. So as the fuel comes down, we find these incremental opportunities to dispatch airplanes, and that's going to bring down our margins and increase our earnings.

Okay. That's cool. I just wanted to clarify. And then real quick, just clarify the TRASM comment. When you said the downward trend will continue -- just to wordsmith for a second, are you talking about the --

Yes, I'm sorry. No, I should be -- I know. I should be more precise. Thank you.

Yes, yes, yes, no, it's cool.

We're going to continue to have year-over-year decline in unit revenue in the first and second quarters of next year.

I got you. All right.

And we're not prepared to comment on scale, but what we are trying to say is that the unit revenue environment is healthy enough that same-store, same-capacity, et cetera, were roughly flat. We think it's down about 2.5%. Over and above that, we're going to go out and find these low-fare opportunities to fly airplanes that are accretive, and that's going to lower unit revenue. But it's going to be self-inflicted, we think, as we look into the first and second quarter. So, we will have year-over-year declines, great results --

Yes, no, I just wanted to make sure you weren't talking about an acceleration of the decline. I (multiple speakers) yes, yes, no, you got it. And then Jude or Maury, can you give us a progress on where you stand with the credit card? Orders for the current pacing items, albeit from either a negotiation perspective or IT? And can you give us maybe if you feel comfortable a potential sense of timing? Could it happen this year?

And then can you help us -- I know you don't want to give us an accretion estimate here, but can you maybe help us think about framing the magnitude so we can take a shot of doing it ourselves in terms of how it can impact the P&L? If you want to use another airline credit card as a guide, if you're familiar with that, be my guest. But anyway you can help us think about it.

I would use mature production from the credit card program at Allegiant. And judging the potential there, I would use Spirit, which is about $2.5 a passenger segment. Now, that's mature, and how long we take to get there is really the variable we can't speak to.

And as far as the launch of the program, we're still talking about second-quarter 2016. Now, there are some fairly significant challenges with that date, and we will bring them to you when we are ready to talk about them. But in the meantime, we have some negotiations with both -- with some vendors that we have to work through. And we're not ready to commit to a date, but the current plan is, as we talked about last time, second-quarter 2016.

Okay. Thanks a lot.

Andrew Didora, Bank of America.

Most of my questions were actually just answered. But, Maury, I wanted to ask you a bigger-picture question here. Allegiant has clearly done a great job in growing in markets where there is limited competition. At this point, with oil continuing to stay low here, do you worry that others may catch on and try to operate a similar type of model, particularly as maybe some of their aircraft age a little bit more here? And if so, what would be your -- how would you think about responding? That's it. Thanks.

There's always the possibility someone can come into -- and airplanes are very fungible that way. You pick them up and you start flying them, and we act accordingly. The last big company we had that was active in this area was AirTran. They have adopted a lot of our approach on the East Coast. Southwest, after the purchase didn't feel that was appropriate and backed away from some of those things.

We're not seeing anything to date from certainly the ULCC level at this point. Candidly, operationally, it's hard to make our business model work when you fly weekly approaches versus daily approaches. If you need to have 12, 13 hours a day, you don't want to be going to -- taking one airplane and putting three or four cities at the end of that airplane. That's just a lot of overhead and management problems as compared to trying to do it at 5.5, six hours a day, which we do.

So I think that's a barrier to entry. I don't think you see the big guys coming back. Certainly they would be using their feeder companies to do the smaller cities. Mid-size cities, perhaps they can do some things.

But, once again, we're only doing things twice a week. If the market supports it, we will go up to three or four times a week. But we still have 50% of our markets or thereabouts with twice-a-week frequency. No one else can point to that kind of approach that I'm aware of, and we almost 300 markets.

So, yes, if we all fly airplanes. But philosophically, cost structure-wise, approach is just cultural. It's going to be tougher. Incumbents can do it. Startup? Who knows? We haven't seen any startups. I don't know of any that are close. There's some people that have certificates recently, but we're not seeing anything that I'm aware of that's of any size or scope that would we be concerned.

Jude, any other further comments?

I don't worry about it so much. I think as long as we can maintain low costs at low utilization, then we're going to be protected for most of that. And the key there is that we have low utilization on average, but all our customers typically want to travel at the same time. So we have high utilization when people want to fly and zero utilization when people don't. And that's very difficult for anybody else to do operationally and at low cost as we have. So I think we have a pretty significant barrier to our business.

That's great color, guys. Thanks so much.

Helane Becker, Cowen and Company.

I just -- Jude, I think you mentioned that if oil prices were to go up, you would pull out of markets. And we've seen you guys reduce capacity before. Can you just remind us how quickly you can make this adjustment?

Well, let me be more precise there as well, which is to say that we would just change capacity allocation, which doesn't necessarily mean we are dropping market. Our seasonality would change, our number of flights a week to particular markets might change as a response to higher fuel price. And there is -- in every shade in between from a high fuel price to a low fuel price, anywhere in between, there's some incremental flights that are going to fall out of our hurdle rate.

And so as we look at the schedule going forward, we have limited ability to add the last-minute add flights to the schedule because the schedule is kind of a puzzle that is difficult to build upon when it's been loaded and it's selling.

But in response to a rapid rise in fuel price, if we needed to on the other hand go into the schedule and start whacking flights, as we have shown in, say, 2008 when we were going through that process, we can be very responsive. We would like to not cancel anything within 90 days. But 90 days out, I think we can be very, very impactful in shaving capacity out of the schedule. I don't have any percentages to give you, but it depends on how extreme the conditions are. I think we can be very responsive.

No, I think that's very helpful. The other thing is I know you guys don't guide to jet fuel, but is there any way you can say what you are currently paying for just fuel? And how accretive maybe on a -- is your off-peak flying? Is there any way you can parse out for us accretive -- the off-peak flying versus the peak flying in terms of margin to our profits? I guess if you are not guiding to margins anymore, you have to do it a different way.

We are paying low 180s right now, so $1.80, $1.82, $1.83.

Okay.

Yes, we're not going to schedule anything that we don't think has a gross margin, which is all the variable costs over -- under 30%. So because the existing flight has already paid for the overhead -- well, I guess that number is more like 20%. So we will continue to add incremental flights. And I think on an operating margin basis, that's going to draw the operating margin closer to 20% to more of those incremental flights we have.

Okay, all right. That is usually helpful. And then my last question is actually for Maury. It's something you said in the press release. You said that you were -- I think you said you are hiring additional people to support operations. We continue to enhance our management to support operations. So does that mean you have brought on additional people in that role recently?

Well, I think, Helane, we are in the process -- the continual process of evaluating management and systems and processes. And it's a -- when we have 29%, 30% operating margins, the Company's focus this year -- I would push this to really go in and make sure we have the resources and ability to grow this Company to that 120-airplane business that we think -- we have talked about we can get to. We're at 75%, 80% now. So I would like to put the systems and the management and the resources in place to get there ahead of time. So, some focus -- continual focus on just doing a proper job and running a safe, reliable Company.

Awesome. Thank you. Thanks for your help, guys.

Dan McKenzie, Buckingham Research.

Yes, that was actually my question as well. And I guess -- I'm just wondering if you might be able -- willing to elaborate a little bit further. And when you say new systems, how long would it take to put the new systems in, and I guess what does that entail exactly? And then with respect to that, I'm wondering if you might be willing to talk about where you are operationally relative to internal growth. So where are you today and where do you want to be?

Well, regarding new systems, we will add this in that system, Dan. We are mainly enhancing our existing systems -- automation, information management, things of that nature. We're just behind the power curve in a few areas, and we want to catch up and get ahead.

As far as new systems and things like that, we're taking a look at this and that. Tools from the outside -- we develop our own stuff as well. So those are critical for us on a go-forward basis. But I'm excited about the opportunity as Jude has laid out, the market aspects that look real promising. So we just need to be able to perform and do a good, proper job to get there.

Got it. And then operationally, where are you relative to your goals? Where are you at today? We do you want to be?

Right now our operations -- for instance, we had a great September. We had a poor June, a poor July. And some of that is -- goes to this evolution that I was chatting about and our ability to handle growth and to be there ahead of it. We are also -- we have a complexity factor that -- dealing with three fleet types. And our goal is, we talked about it in the release, is to simplify ourselves over time. That will help us to be able to better react and do things -- with older airplanes, I like to comment that we're a bit in the maintenance business more so than I would like to be. The newer aircraft with the -- Airbus will be a just better technology, better engines, for instance, as compared to the JT8s. All those things will be enhancements to our ability to keep the operation top-notch, which is important.

Understood. My second question here, I guess, Jude, is following up on the weakness in the Canadian demand, I'm just wondering if you can help us understand what part of the demand picture does this comprise exactly either maybe on a revenue or traffic perspective? And then I guess related to that, there's obviously an energy component. But is it possible to separ out -- just to separate out sort of a regular or an FX component tied to that Canadian part of the picture?

I think it's too convoluted to draw any very clear comparison between Canadian dollar and unit revenue effect. The decline in the Canadian dollar would've been really bad for us five, six years ago when we were much more dependent on Bellingham. But as we sit today, Bellingham is a much smaller portion of the capacity that we fly.

So, honestly, I don't worry about it too much for us. It just becomes a free distribution challenge. So we had a lot of capacity in Bellingham, and that capacity needs to be reallocated to other markets in response to the conditions in that marketplace.

I think, Dan, it's also fair to say over the years we've always had strengths and weaknesses in our system, and we are very responsive to those. I applaud Jude, Lukas and their teams. We sit there and we -- every month, every quarter -- look at the profitability by route. And if stuff is not holding up, we back capacity out of it up to and including going out of the market. If other things are working well, we move towards it.

And to Jude's point, we have seen the East Coast come on. And, candidly, when we started the East Coast in 2005, we had to relaunch. It was a pretty tough opening in May of 2005. But it's really come along real nicely, and we are building it right out of the box -- was a very, very big market for us, big percentage-wise, and it's cooled off. But other places have picked up the slack. So the nice thing about our model is the United States is never totally in one place at any one time economically, say maybe a 9/11. And as a result, we can react and move accordingly.

Very good. Thanks, guys.

Steve O'Hara, Sidoti and Company.

Hi. I was just curious, I just seems unlikely that it happens anytime in the near future here. But I'm just thinking about if fuel prices do rise, do you think -- given the fact that you don't have as much direct competitive competition, at least nonstop, do you see maybe more pull -- pushback from customers in your attempt to raise fares? Or do you see it -- just the industry kind of has maybe a fare problem that they have to solve and you guys have the same issue later on?

No, I would consider our markets to be isolated to the extent that we are charging fares sufficient to fill airplanes. And if those fares get too high such that, in a long-term view, we have too-high margin we will add extra capacity and drive those fares down. So if you think about higher fuel as an input, there's just less marginal flying to do. And we will cut back on flying and raise the average fare by doing that and maintain our margins.

What we have seen is a short-term effect on margins. So when fuel prices fell really rapidly, we had an expansion of our margins. It will take us a while to adjust the network and reduce margins as a result. And on the other side, when we have rapid growth in fuel prices, it takes us a little bit of time while we react to the new fuel prices to adjust the network and then stabilize margins as a result.

Okay. And then maybe (multiple speakers) -- I'm sorry.

I was just going to say we really are operating in isolation here. I don't think many of the carriers look at it that way. And they are just trying to find utilization that they can fill airplanes at any price. We were reactive in that sense. So we allocate capacity where we have margin opportunities based on the inputs is all.

Right. Okay. Just -- maybe longer-term, maybe what is your margin goal? Or is there a longer-term margin assuming -- if fuel stays at current levels, would you be -- you wouldn't expect to do anything less than the current margin, I would assume. But then if fuel goes back -- rises -- how do you think about margins may be in a -- maybe normal fuel doesn't make sense anymore, but what do you think about your long-term margin profile in a normal fuel environment?

I think I would like to get down to 20% operating margin based on incremental opportunity to fly. So we like to think about really long-term Allegiant, 15% annual growth, 20% operating margin, and that we'll be up in the 30s when -- if fuel price falls like it has and we may be down in the mid-teens for operating margin if fuel price rises really rapidly like it did in 2008. But over time, I think in a stable fuel price environment, we can build a network that is going to produce those margins consistently.

Okay. And just on the Airbus that you own and I think you lease out, can you just tell me when those come off lease and come into the fleet? Is it 2018?

It's 2018. Those airplanes are on lease to EasyJet. There's 12 A319s. Those on our balance sheet, and you see the revenue that those leases generate in other revenue line items.

Okay. And then I'm sorry, just one more. Delta made some comments about bubbles and aircraft values. I would think that -- and maybe that is spreading to the narrow bodies. I would think that would be very good for you guys. Maybe you could just comment what you see and how you feel today versus maybe a year ago or so.

I'm not ready to, like Delta did, give any price points. But we are very confident in our ability to buy the airplanes we need at the prices that we have been buying them at thus far. The strategy is pretty simple. We're going to buy CFM-powered A320s to the extent we can find those. And if we can't find those, there's probably a price point that we will be willing to look at A319s. And to the extent we can't find either of those, we're going to keep the MD-80s on, all else equal, a little bit longer.

Okay. All right. Thank you very much.

Savi Syth, Raymond James.

Just had two quick follow-up questions. One, on the ancillary air related convenience fee, is much of the growth this year related to the convenience fee, so that gets fully lapped as we go into 2016?

Yes, we raised the convenience fee by $3, and that has an almost 100% corresponding decline in the airfare. And that should be lapping in December.

Got it. And then just the second question I had is now with having gone into some of these mid-sized markets a little bit more where you do have more competitors, have you seen any change in competitive behavior, either maybe adding competitors who haven't been in your markets historically or just a change in behavior since you've gone into these markets?

We just need to be careful commenting on that. The competitive environment is shaping up very nicely for us. One of the things that we would have talked about two to three years ago would have been what Frontier is going to end up doing for their business plan. And they've been very open about their desire to find markets that are daily operations. They have a focus on utilization. They have focus on operational consistency. So we sit here today much less worried about what they are going to do than we were in the past.

Also, we see a continued decline in regional capacity, which often in some of our small cities is the only alternative air service for customers. So those two conditions, I think, are really, really positive.

The big fare pressure that's going on throughout the domestic network like Chicago, Dallas, Philadelphia, Orlando, Kansas City largely don't impact us because of our location that we are in -- Kansas City and Orlando. But for the most part, we are flying to places that don't have those kind of pressures.

So I would consider us just over here in Vegas doing our own thing. And we haven't seen -- and a lot of the crises that are happening on the -- with fare wars all over the country.

Very helpful. Thanks, guys.

Hunter Keay, Wolfe Research.

One follow-up and one back-into-queue type question. Jude, as a follow-up to the comment you made about the margins -- and I just want to be clear, I thought that was a fantastic answer, so I'm not finding any fault in it. I just want to hash it out a little bit more about the 20% comment you made. I know that's not what you are saying you're going to do next year.

Should we think about Allegiant as, like you said, a 15% to 20% margin airline going forward? When you said in sort of like a normal fuel price environment, are you saying jet fuel prices right now are not what you guys considered to be normal? Because you said you were going to be adding some growth, which is a little bit dilutive to the margin next year. I guess I'm trying to figure out how dilutive this off-peak stuff is going to be in the context of providing still obviously positive earnings growth. But when you give that 20% margin bogey, is that like a $2.25 jet fuel number? What's the thought process behind that?

No, that's not what I'm saying. I'm saying that if it's over 20% for the system -- if the operating margin is over 20%, there's a good -- we feel very confident that there are flying opportunities that we did not take advantage of. So as we reschedule the airline in the same period the following year, we will have those flying opportunities in driving down the margin. Okay?

I got you. Yes, okay. Thank you.

Going below 20%, we would like to see a bigger buffer in our business. And so if it's below 20% for the system -- operating margin below 20%, then there's probably incremental flying that we would cut, raising the margin by raising the average fare. But that process takes a pretty long time and fuel is a moving target, so we're up and down on our margins. But I think if you would look at us over an average margin over a really long time period, I think it's going to be pretty close to 20%.

That's interesting. Okay, thanks. And then maybe a question for Maury, given the run that we've had in your earnings multiple, which maybe makes the buyback a little bit less accretive here in the high chance that the cash you're going to generate in the operation is going to cover the money you need to grow organically, would you consider maybe spending any excess cash you may have on -- I don't know if you want to call it -- non-traditional things that maybe are indirectly related to the airline like real estate or hotels or anything that we would consider the -- an adjacent type business investment? Anything like that?

Not at this point, Hunter. We are very focused on our opportunities at hand. We have lots of good stuff to do with our capital. And we certainly dabble in alternative products besides just carrying somebody from A to B and package stuff up. But, there are a lot better people out there that know how to run these things than we do. We'll just be an agent for them and put together a good package for our customers.

Nice try, Hunter.

I heard someone laugh. All right. Thank you very much.

Thank you, ladies and gentlemen. This does conclude the question-and-answer session of today's program. I would like to turn the call back over to Mr. Gallagher for closing remarks.

Thank you all very much. Appreciate your time and questions. We'll see you in 90 days. Have a good day.

Ladies and gentlemen, this concludes the program for today. You may now disconnect. Have a wonderful day.