Allegiant Travel Co (ALGT) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q1 2023 Allegiant Travel Company Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

And I would now like to hand the conference over to your speaker today, Ms. Sherry Wilson. Ms. Wilson, Please go ahead.

Thank you, Chris. Welcome to the Allegiant Travel Company's First Quarter 2023 Earnings Call. On the call with me today are John Redmond, the Company's Chief Executive Officer; Greg Anderson, President; Scott DeAngelo, our EVP and Chief Marketing Officer; Drew Wells, our SVP and Chief Revenue Officer; Robert Neal, SVP and Chief Financial Officer; and a handful of others to help answer questions. We will start the call with commentary, and then open it up to questions. (Operator Instructions)

The company's comments today will contain forward-looking statements concerning our future performance and strategic plans. Various risk factors could cause the underlying assumptions of these 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 SEC.

Any forward-looking statements are based on information available to us today. 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 investors not to place undue reliance on forward-looking statements, which may be based on assumptions and events that do not materialize. To view this earnings release as well as the rebroadcast of the call, feel free to visit the Company's Investor Relations site at ir.allegiantair.com.

And with that, I'll turn it over to John.

Well, thank you very much, Sherry, and good afternoon, everyone. We've hit the ground running in 2023 and continued operational strength leading to financial results. We reported earnings per share of $3.09, which compares favorably to our initial expectation and provides us confidence to raise the midpoint of our full year EPS guidance to roughly $9.75 per share. The leisure customer remains exceptionally strong, as evidenced by total revenue growth of 29% as compared to Q1 prior year, coupled with recent company history best Q1 load factors approaching 86%. These results exceeded expectations and were underpinned by a stellar operational performance with an impressive controllable completion during the quarter of 99.9%.

We delivered this operational performance, while growing departures 2.3% on a load factor of 85.8% during the quarter. More than 4.1 million guests traveled on our airline helping fuel a record quarter for Allways credit card acquisitions of 46,000 cardholders, as we ended the quarter with 435,000 active cardholders. The key focus of this management team is improving the experience of our guests, and strengthening of our brand. This is a critical tool for us in expanding our powerful customer database of 16.5 million customers, which is growing on average by 225,000 per month. The continued demand of our product by our customers is key to us, to support the 1,400 incremental routes [of] airline growth our team has identified.

Being the employer of choice for our team members is one of our top priorities. We strive to make a positive impact on our employees, thus I was very pleased to see Allegiant named one of Forbes' America's Best Midsize Employers for 2023 and Newsweek's America's Greatest Workplaces for Diversity in 2023. In addition, prioritizing our team members also includes reaching collective bargaining agreements with our flight attendants and pilots. Getting these respective deals done is number one on my priority list. I remain optimistic about reaching agreements with these team members, that these team members deserve and are proud to support. Great progress has been made with both CBAs, and we would expect these to be finalized in the not-too-distant future.

Turning to Sunseeker Resort Charlotte Harbor, I'm pleased to report, we are currently on track for official opening date of October 16. The Sunseeker team and construction crews have been working around the clock and the remediation work related to our hurricane and other events, is just about finalized. As we work through construction delays and repair work related to the hurricane, we have clear line of sight to a final budget. We've updated the capital expenditure budget, which is inclusive of the Aileron Golf Club, including both the golf course renovation and construction of a new clubhouse and an entry gate to $695 million. We are well outside of the normal hotel booking curve, yet we remain encouraged by early booking indicators. To-date, we have booked roughly 2,000 transient room nights at an ADR of $407 with minimal advertising efforts.

More importantly, the ADR has been accelerating over the last 2 months coming in at $540 and $460 for business booked in the month of March and April, respectively. In addition, we have over 6 million Sunseeker Resort e-mails and expect the number to grow to closer to 7 million e-mails by opening date. We continue to attract high-quality group bookings as well with over 40 different groups currently contracted for rooms, food and beverage totaling $12.7 million. There are another 4 groups, we are in advanced conversations with on 3, 000 and $1.9 million in rooms, food and beverage. Last month, we unveiled 20 original world-class food and beverage concepts. These unique offerings will truly be one of a kind [in] the area. Furthermore, we have always looked at the resort as an incubator to launch all the IP being created, so we are excited to reveal these incredible concepts.

Touching briefly on Sunseeker financials. Total operating expense during Q1 '23 came in right below our estimated $5 million for the quarter. We continue to expect a similar run rate in the second quarter before jumping to roughly $15 million during the third quarter related to preopening expenses. All in, we currently anticipate $1.25 loss per share for 2023 attributable to Sunseeker Resort. This amount does not include insurance recoveries related to business interruption coverage. In closing, I want to thank our employees for a tremendous quarter. Your efforts drove an exceptional operation, which is paramount for our guests, for you, our employees and for a long-term vision of this company. Many of you I recently visited on my travels to several of our bases and your enthusiasm, dedication and passion is infectious. Thank you.

With that, I'll turn it over to Greg.

John, thank you. And thank you, everyone, for joining today's call. 2023 is off to a great start as reported in our first quarter results. The team delivered meaningful improvements in operational areas across the board, most notably a terrific 99.9% controllable completion factor with an industry-leading 99.1% completion factor. This operational excellence was evident in our financial performance as our total irregular operational costs came in just below $9 million, that's down $57 million compared to the same period in 2022.

I couldn't be prouder of this team's performance, and I'm happy to report an update on our C-Suite, and that's that Kenny Wilford, who has served as our interim COO since January has been appointed as our permanent Chief Operating Officer. Congrats, Kenny, you have our full support and confidence. This is one of the most exciting times I've experienced in my history with Allegiant. Our leadership team is strongly aligned and our team members are dedicated to executing and stride in rethinking processes to become more productive and to strengthen this organization. For example, our planning, finance and operational teams continue to work together shoulder-to-shoulder on a multi-disciplined approach to drive operational excellence while expertly matching capacity with demand.

Recently, and to preserve operational reliability, the team trimmed full year capacity, 2.5 points, now guiding 0% to 3% ASM growth. This is a result of MRO delays for aircraft and heavy maintenance, pilot constraints, but along with airport construction disruption and ATC delays in some key markets, particularly during peak travel days. Even with this reduction in guided capacity, we expect improvement in full year airline earnings to $11 per share, an increase in our full year guide of EPS of $4 per share. We believe our measured approach, coupled with our differentiated model, sets us up well to deliver industry-leading results regardless of the broader macro environment.

I mentioned last quarter, we have incorporated within our EPS guide the expected cost increase for our open labor agreements. The actual increases in compensation will vary depending upon economic terms reached and the timing of these agreements. This increased compensation was initially incorporated into our full year EPS guide, beginning in July. However, we have now moved this data up to May 1 as we fully expect to be paying higher rates in the near future once agreements are finalized and approved. In fact, I'm happy to announce we reached a tentative agreement on a contract extension with our dispatchers, represented by the IBT. This agreement will modify the final pay rate increases in the CBA and provide a 2-year extension on their current CBA. I think, it's important to note that this contract did not even become amendable until May 31 of next year, but the parties work together to bring this meaningful improvements to our dispatchers today.

And as John mentioned, we are still in active negotiations with our flight attendants represented by TWU and our pilots represented by IBT. Resolving our open labor agreements is our highest priority. Negotiations with our flight attendants opened 8 months ago, and we are quickly closing in on the outstanding open items. Both sides are very pleased with the progress that has been made, and we look forward to announcing a tentative agreement very soon. On the pilot front, we had our first mediation sessions with the IBT, last week, with another session taking place next week. After working to highlight and identify the gaps in each side's proposals, all parties left the first session is encouraged by the possibility of finding a path to an expedited deal. As a result, the mediators have already provided numerous additional dates to continue to work together towards resolution.

Touching briefly on our current pilot staffing, our net headcount for the year remains roughly flat and consistent with the trends messaged last quarter. However, within our school house, the number of new hire pilots are outpacing our initial expectations. With the strong recruiting team and pathway programs in the works, we remain confident in our ability to attract, train and grow pilots. Allegiant is uniquely set up to be the destination airline for our team members. Our "out-and-back" model is built around our flight crews having the opportunity to be home every night, and that is something they highly value. We look forward to reaching agreement with our flight attendants and pilots and provide compensation in work roles that they can be proud of, and most importantly, they deserve.

Turning briefly to our systems transformation. We continue to make significant progress on our 4 core system integrations: Navitaire, SAP, Trax and NAVBLUE. First up will be Navitaire, which we expect to go live this quarter. Its enhanced functionality and our commercial platform is expected to unlock additional features to drive higher ancillaries and bundles. In addition, Navitaire provides the necessary functionality for us to expand internationally into Mexico through our joint venture with Viva Aerobus. While we are still awaiting DOT antitrust immunity, we are confident in this outcome. We are fired up about this partnership and its unique ability to provide incredible value to our guests and more growth opportunities for our team members.

And in closing, these results cannot be accomplished without the efforts of Team Allegiant. Over the past 90 days, I've had the amazing opportunity to immerse myself more broadly throughout the organization, and in particular with our frontline team members. Each visit has been exceptional for me. I have the privilege of meeting the best team members in the industry, a learning experience that provides me with the insights to continue to assist and help those in the field that every day provide our guests with a safe, reliable and convenient product. I want to thank each and every one of them.

And with that, I'll turn the call over to Scott DeAngelo, our Chief Marketing Officer.

Thanks, Greg. First quarter saw unprecedented demand generation and capture that enabled Drew and his industry-leading revenue management team to maximize both load and yield resulting in record-setting revenue results. What's more, our nearly 30% year-over-year increase in revenue was driven by advertising spend that was 10% lower than prior year. This greater marketing efficacy was driven by leveraging data science and enabling technologies, including beginning to leverage artificial intelligence to create more targeted, more personalized and higher impact execution. For example, our major sales events in January and February were executed purely via digital advertising and our owned media assets, and they drove 4 of the top 8 book revenue days in our history.

In addition to the historic overall base fare and air ancillary revenue performance in Q1, we also, as John mentioned, continue to outperform expectations with our Allways Rewards credit card program. Q1 was the strongest to-date, both in terms of new card sign-ups with March being our single best month ever for new card sign-ups, and in terms of program compensation. We are closing in on 500,000 cardholders, and for the year expect to generate more than $100 million in recognized revenue from the Allways Rewards credit card, which, as you know, has an EBITDA margin of more than 90%, and about $500 million in [flown] revenue from cardholders who still represent fewer than 3% of total customers. So plenty of upside there as we continue to generate new card sign-ups at an ever-increasing rate.

Beyond that, our Allways Rewards non-credit card program, which has more than 15 million total members, saw 1 million members booked during Q1, that's up 44% versus last year. And these rewards program members exhibited spend that was 32% higher than non-members, driven by greater air ancillary take rates and greater third-party hotel and rental car attachment. Our active customer base continues to be a healthy balance of repeat and first-time customers. Like last quarter, we surveyed a representative sample from both these most frequent flying rewards program members as well as those who flew us for the first time ever this past quarter to understand why they traveled with us and what their future travel intentions were. And the results were virtually identical to what they were in January. For these most frequent flyers, nearly 80% traveled for leisure-only and nearly 20% travel for both business and leisure.

More than 40% said they stayed with family or friends, and nearly 40% said they stayed at their second vacation home, that means around 80% following the types of travel that are the most resilient during negative economic climate. To further validate this, we again asked these customers the extent to which they expected their travel plans with Allegiant to be impacted given the prospect of worsening economic conditions, and they told us the same thing they did a quarter ago. Nearly 50% said that the economic considerations would have no impact on their flying behavior with Allegiant in the next 12 months and more than 30% said that economic considerations would actually make them more likely to fly with Allegiant in the next 12 months.

In addition to this core and growing base of loyal frequent flyers who drive a majority of our revenue, we continue to add new customers that are defecting from traditional higher fare airlines to Allegiant at record levels. And these customers expressed similar future travel intention with more than 40% of these first-time customers saying that the macroeconomic climate will have no impact and more than 40% saying it will make them more likely to fly again with Allegiant in this upcoming year. The only meaningful change this past quarter among first-time customers was that a significantly larger portion versus 3 months ago said that they last flew or regularly flew one of the top 4 largest traditional higher fare carriers.

All that said, while some customers are expressing concern about the economy and a portion, say, they do plan to take fewer leisure travel trips than they did last year, we view this simply as a return to normalized pre-pandemic peak and nonpeak seasonal travel patterns, and the fact that any downward pressure that might come from macroeconomic factors appears to be only reinforcing our existing customers' decision to keep flying Allegiant as well as driving more new customers to Allegiant has us remaining bullish from a forward-look demand perspective.

Allegiant is not only fully capable of maximizing peak travel demand capture, we're unique in our ability to capture a greater slide, should there be any temporary shrinking of the leisure travel pie during off-peak leisure travel periods through our direct-to-consumer marketing approach that appeals to those seeking relief from sky high fares for flights that connect to crowded hubs and make them aware of Allegiant's low fare and all nonstop flights brand.

And as our customer research points do, we continue to grow our addressable customer audience by capturing a greater share of those who have usually flown traditional higher fare carriers, but given the current environment are choosing to buy into the ULCC category with Allegiant. As such, we believe Allegiant is well-positioned to weather any challenging macroeconomic conditions just as we have always done historically.

And with that, I'll turn it over to our Chief Revenue Officer, Drew Wells.

Thank you, Scott, and thanks everyone, for joining us this morning. I am extremely pleased with the first quarter performance of $650 million in total revenue, a growth of nearly 30% on system ASM growth of just 1.2%. This combination produced a TRASM of 13.89 (sic) [13.89 cents], which beat any previous first quarter by a full cent and grew year-over-year by 28.8%. Further, 4 March weeks landed in the top 12 from an all-time TRASM perspective, could not be happier with the peak spring break season and the quarter as a whole, both financially and operationally.

The strength in the quarter was well balanced as both yields and core air ancillary products each contributed 1 to 1.5 points of outperformance against the expectation of the previous call, providing lift from the expected mid-20%. Encouragingly, the Allegiant Extra rollout, while still early, has continued to exceed expectations, and we're thrilled to make this option available to more guests on more routes soon. Additionally, our charters group worked incredibly hard to set a first quarter record revenue performance as well. They were opportunistic in filling in scheduled service gaps through high-fuel January and February with new fixed fee business giving us the incremental lift. As I mentioned 3 months ago, we're looking at forward indicators, they have not seen anything that causes us to incorporate a downturn into our models. While we continue to read and hear the same headlines, we have not seen booking impact from our leisure customer base and have forecasted as such.

In the event, macroeconomic pressures become real, our business model is well positioned to adapt and overcome. Building on Scott's commentary, many of the pieces that have made us resilient to macroeconomic pressures have strengthened over time. Our total ancillary performance of $75 per passenger in the first quarter provides a very healthy base from which we can optimize airfare to maximize total revenue and historically has shown resilience in all environments. We accomplished that milestone without the expected benefits of Navitaire coming later this year after the upcoming deployment Greg mentioned. Our trip cost has reduced and will continue to reduce drastically since the last non-COVID economic downturn. Thanks to the addition of first used Airbus A320 family aircraft and soon new Boeing MAX technology that continue to lower the threshold required to achieve profitability.

On the whole, we still expect TRASM over the last 9 months to be up mid-single digits in aggregate, even in the face of more challenging comps, with the most challenging coming in the fourth quarter. Continued operational stability, and historically mature network, expanded Allegiant Extra product and the Navitaire integration provide tailwinds that support the revenue story through the year. As we continue to work hand-in-hand with our operational groups to best align the future schedule, we made the decision to trim about 2.5 points of capacity out of our summer schedule, which will push the next 2 quarters to around flat year-over-year and the full year ASM story a bit lower than originally thought.

While our original plan schedule already [hit dial back] Vegas as a percent of the overall system, an outsized portion of the recent summer trends also came here in Vegas as construction work impacts operations. We remain bullish on the demand environment, though factors like completion, operational reliability, both controllable and uncontrollable to Allegiant as well as fuel will continue to play a role in the planning process.

And with that, I'd like to turn it over to Robert Neal.

Thanks, Drew, and thank you to everyone for joining us today. We're pleased to report today first quarter consolidated net income of $56.1 million, yielding a consolidated adjusted earnings per share of $3.04. And when excluding Sunseeker, we reported airline-only EPS of $3.30, well ahead of our expectations. Drew mentioned that unit revenues increased 28.8% versus the same quarter last year. This was on the back of ex-fuel airline unit costs of $0.0775, which were up 9.8% as compared to the same quarter last year on 1.2% more capacity. Unit cost headwinds in the quarter included elevated airport costs, lower aircraft productivity and higher credit card fees from higher revenue, along with a onetime employee retention credit that we had in the 2022 comp. Additionally, fuel costs were elevated through much of the quarter, coming in 11.4% higher per gallon versus the first quarter of 2022, but improved operational performance provided a nice tailwind to our unit costs.

As noted, we've reduced our full year 2023 capacity outlook by roughly 2.5 percentage points. So we expect this will leave continued pressure on unit cost metrics throughout the year. However, since our last guidance update, we've seen improvements in our fuel cost outlook, driven primarily by a steep reduction in the crack spread of nearly $1 per gallon from the high point in late January, allowing us to reduce our estimated full year cost per gallon to be $3 down from $3.60. The reduced fuel forecast, coupled with continued strength in peak leisure demand [drive] an increase to our full year airline estimated earnings per share, up $4 at the midpoint to a new range of $9 to $13.

Our full year earnings guidance incorporates increased costs associated with pilot, flight attendant, and dispatcher agreements, as well as wage increases for our maintenance technicians all beginning in May. While, of course, actual increases in these costs will vary depending on the final terms reached, completing these CBAs with major work groups is a top priority for us. We are built to be a larger airline than the one we're running today, and we believe the efficiencies gained from better utilizing our existing infrastructure and fleet will outweigh costs associated with new labor rates.

In looking at the balance sheet, we finished the quarter with total available liquidity of $1.5 billion, that includes approximately $400 million in undrawn credit facilities and $1.1 billion in cash and cash equivalents. The business produced roughly $215 million in cash from operations during the quarter, a first quarter company high for Allegiant. Other capital expenditure commitments remain elevated, throughout 2023, we will continue to take a conservative approach to liquidity and expect to finance most of this year's CapEx with debt.

Now turning to fleet. We inducted 3 Airbus A320ceo aircraft during the first quarter, bringing the total operating fleet to 124 aircraft with 2 additional A320 aircraft owned, and on property at the end of the quarter, which we expect in operation in the coming weeks. For the remainder of 2023, we expect to take delivery of 3 mid-life A320 series and 2 737 MAX 8-200 aircraft. As mentioned on our last call, our first 737 8-200 aircraft are scheduled for delivery to Allegiant, very late in the fourth quarter. And so for capacity planning purposes, we are not relying on these airplanes for revenue service until early 2024.

We remain in very active dialogue with Boeing regarding the remainder of our 737 MAX delivery schedule, and as of today, still expect to take delivery of all aircraft in the firm order book by late 2025. 2023 is an investment year for Allegiant with approximately $1 billion in CapEx, and most of this is for assets with earnings potential coming in 2024. And so notwithstanding our expected earnings production this year, we would expect to exit 2023 with net debt to EBITDA similar to current levels.

In regard to Sunseeker CapEx, our current capitalized expenditures and updated budget in today's release would indicate $124 million remaining to complete the project. The deposit account for our Sunseeker financing facility holds $118 million in cash allocated for completion of resort construction. So to clarify, for the remaining $124 million, we do not expect meaningful use of liquidity sources to cover remaining construction costs.

In closing, I'd like to add my thanks to all of our hardworking team members, their strong execution during the first quarter, and in particular, improved operational metrics gives me great confidence in our ability to scale this unique business model.

With that, Chris, we're ready to take questions.

(Operator Instructions) Our first question will come from Savi Syth of Raymond James.

This is Matt on for Savi. You've provided some color on the capacity and CASMx impact. So wondering if you could provide maybe a little detail on each one of those buckets and how you're thinking of the contribution there and the cadence for the second quarter and the second half as well?

Yes, Matt, it's B.J. I think in the 9.8% increase year-over-year, you can think about 4 points of that being related to the retention credit. That's largely offset by the benefit from reduced irregular ops costs. And then, you've got a couple of points for reduced asset utilization, a couple of points for credit card fees. And then, let's call it 3 for stations and airport-related costs. I think that covers it, the rest of it should kind of fall on to the other bucket there.

Okay. Appreciate that there. And then also, you all spoke on the pilot situation and your net hires for the year. Does that imply that attrition has gotten worse to your prior plan? Or how are you thinking about attrition relative to [when you spoke about it] last quarter?

Matt, it's Greg. No, I mean, attrition is in line with what the plan is, but where we're -- we've seen a lot of upside, particularly as of late as within the school house, so the new hires coming in. The team there, and I think I mentioned this on the last call, have some terrific pathway programs with the military, with the universities called [alleviate] pilot pathway and also with Spartan.

So to put that into perspective, we were planning on new pilots per class. We're roughly running in May '20 and in the summer as well, 20 per class. So we're encouraged in that regard. I think in my opening comments, so I mentioned that just overall, it's in line with what we're expecting and basically net pilot is flat.

The next question will come from Michael Linenberg of Deutsche Bank.

A question for Scott DeAngelo. Scott, you do a lot of survey work. It seems to be very fairly granular. I was intrigued by the answer of first time flyers, who the last time they had flown, they had flown one of the legacy carriers, do you also ask some of these customers first time or even current customers who flown the bigger carriers what was the reason, and whether it's the reason had to do with a loss of service?

I think, we've seen the big 3 pull out of about 70 or 80 airports over the last year or so. And some of those airports are airports that you serve. And I'm just curious if that you're picking up some of that traffic? And I have a second question.

Thanks, Michael. Yes, absolutely. Thanks, Michael, for that question. The answer is yes. The winning reasons still tend to be price and nonstop flight followed by schedule. But indeed, in places where they pulled out as has been kind of our history of growing up market, that certainly is a tailwind as well. But I would say largely, these are people actively choosing us versus other options because of price and because of nonstop flights.

Okay. Great. And then just in the revised guidance, I guess, this is probably for Greg and B.J., you can back into it, and see kind of the impact from the reduced fuel price, what sort of assumption are you building in for revenue that you're able to hold on to? I assume you're building in sort of loss of revenue as fuel prices decline, just given the historical correlation. What's the stickiness? I don't know if you have some sort of correlation or percentage fuel down by a certain amount, you cut revenue by a certain amount to reflect maybe macro weakness and/or pass-through in the fare structure. How do you think about that?

Mike, Drew here. I'll take this one. There is definitely -- yes, definitely, a relationship between the 2. But if you think about how Allegiant has historically handled the price -- fuel price changes, it's been through capacity. And we've kind of become our own work setting, if you will, towards unitized metrics as we add capacity and to take advantage of lower fuel, but is a massive benefit to the bottom line.

We're probably a bit more constrained than we have been historically to be able to fully take advantage of fuel price declines here in the short-term. So I would expect our revenue to remain more intact. It will probably won't be nonimpacted, but I wouldn't run away with any sort of materiality on decreases to the rest [of it].

Our next question will come from the line of Duane Pfennigwerth of Evercore ISI.

So just with respect to the guidance, I think, you said, the next couple of quarters is flat, which I assume 2Q is one of those quarters. So if you can hit 2Q, flat in 2Q, it is your biggest quarter of the year in terms of absolute ASMs. I assume, you feel like you're undersized a bit relative to demand in 2Q.

So just bear with me here, if you can hit flat in 2Q, just mathematically it feels like you could hit low-teens growth in 3Q and mid-teens growth in 4Q, just mathematically. So what is holding you back? Or just practically, how would you push back on that math?

Yes, Duane, I think, the way I would talk about is break down the quarters into the different periods, right? So we think about third quarter will be mostly constrained obviously, in our peaks. And so, there is a ceiling on what we can do in July, which will impact the quarter as a whole. And there probably is room if we wanted to increase September, but I don't think that's something that we're looking to do today.

If -- I think, Brent is down 3%, again this morning. If that continues to run down, I think you will see some additions in the September. So, it's a lot about breaking out where we're constrained. September being fuel versus demand, if we get goodness there, then you're right, I would expect some run. But otherwise, it's going to be dictated by the peak flying in each of those quarters and where that ceiling hits.

Duane, this is Greg. Maybe let me just add one other comment to that. And at the end of the year, we start to take our Boeing aircraft. So we're going to pull crews, we want to be ready to make sure that we could support that order. And so, that's another element to kind of limit the capacity growth in the back half of the year.

Just to follow up there, why would ramping on Boeing impact growth on Airbus?

We have to pull the crews to get them trained to be able to fly on the Boeing MAX, so we'll have a number of pilots that are offline for that training unable to fly on the Airbus during that time.

Okay. And maybe just relatedly, just -- because I wanted to ask you about that. What are the sort of second fleet type costs that you're expecting in the back half of the year that you're not incurring now? I guess I would have thought of that as sort of net new fresh recruiting of Boeing pilots, but maybe we're thinking about that the wrong way?

Yes. The way we have it planned, Duane, is we -- the way I think about it is from a pilot inefficiency perspective in terms of pulling pilots to Drew's point, the train on the new aircraft, we think probably this year in '23, it will be roughly a $5 million headwind. And then as we go into '24 and '25, that gets up to 15%, but it then normalizes kind of back in '25.

So from a D&A perspective, there will be a headwind, we think in the back half of this year with the limited productivity from a CASM perspective. But I think that's probably $0.002 thereabouts is what we're expecting. But is that -- maybe let me pause there is that kind of where you're going. You just wanted to understand the headwinds from the DNA and a labor perspective.

And we lost you, Duane.

It looks like we have technical difficulties.

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The next question will come from Conor Cunningham of Melius Research.

So historically, I think you've done like 60% of your net income in the first half, and this year is going to be a little bit different with labor and some of the Sunseeker stuff. But just curious on how you get to the high-end and the low-end in the back-half, if just -- this is all unit revenue base? Just curious on the swing factors there.

Yes. Yes. Sorry, Conor, we're discussing with each other. Yes, I think the revenue environment is a pretty big impact there. I would also, as we'd like to caution pretty much every quarter, remember, our share count is relatively low. So a $4 swing in EPS is not a lot in absolute terms of bottom line. So you are able to be a big one fuel, we'll swing a little bit too. I don't know if there is anything else you guys want to talk about.

Yes. I mean I think -- Conor, this is Greg. Just to hit on that point, and there is kind of like 3 -- the way I think about it, 3 periods in the year that really drive the bottom line. That's March that's the summer and that's the holiday period. So first quarter, I thought we put out some really good numbers. I think the second quarter will do the same, and that will continue to catapult us into a really strong year as we see it.

Okay. That's helpful. And then just on the MAX, I'm just curious on if there is any language in the contract that can allow you to get out of the 7, if the certification continues to be delayed. Have you thought about that at all as you start to think about like getting back to this double-digit growth rate, I think that you've historically spoke during '24 and beyond?

Conor, I mean, we can't talk about language in the contract. I think we have adequate protection for the company in that agreement with respect to the certification on the MAX 7. We've been close to Boeing throughout all of this year as they've been working on getting that aircraft certified. I don't know that at this point, we have any interest in getting out of those commitments, just given we think those delivery positions are extremely valuable, and we're really looking forward to the earnings that those aircraft are going to produce as compared to those that they will replace.

Conor, this is Greg. I might just add a couple of quick comments to that as well. As we think about longer term over the next 5 to 6 years at Allegiant, we're planning to be an airline with 200 aircraft. This order with Boeing, this is a big foundational piece to be part of that. And as B.J. has talked about in the past, when you get to an airline of our size having a new order is really important to support those long-term fleet plan targets. But as you said, the economics on the Boeing aircraft, they are 20% more fuel efficient. That's like we talked a lot about EBITDA per aircraft, $6 million in 2019.

Now if you think about the MAX aircraft, those on average, earn $2 million more in EBITDA per aircraft than our current fleet. So terrific operating metrics there, or numbers. There is some inefficiencies that we talked about with having a dual fleet type. But obviously, those operating economics, we believe greatly outweigh those inefficiencies. And also we're able to mitigate some of the complexities, giving our unique base strategy where we base the different aircraft in various bases on an all Airbus [fleet in one] base, and all-Boeing fleet in another. So all in all, we're still really fired up about the order. We think it could be a game changer long term for us bringing that fleet type in, and the team has done a really good job of getting ready to bring it on.

The next question will come from Daniel McKenzie of Seaport Global.

Hopefully, you guys can hear me okay. A couple of questions here. To put a finer point on the full year guide, does it embed margin expansion in each of the remaining quarters? And if not, would it tie to revenue conservatism, cost conservatism? Or would it be tied more to?

Dan, I'm sorry. We can't hear again.

(technical difficulty)

Okay, if Mr. McKenzie ask his question again?

Yes, please.

Okay. So a couple of questions here. One, I was just trying to put a finer point on the full year guide. And my question really was just whether it embeds margin expansion in each of the remaining quarters. And if not, if it would tie to revenue conservatism, possibly some cost conservatism or perhaps more tied to suboptimal aircraft utilization. I just -- whatever you can share would be great.

Dan, it's B.J. If you can hear me okay. Look, I mean, we really tried to stay away from any guidance on the quarterly cadence in particular. Really proud of the op margin that we produced in the first quarter, I will say that. And I think you can kind of back into the op margin on a full year basis and see about what we produce in the remaining 3 quarters.

To answer your question, we're not expecting continued expansion throughout the year. On the cost side, I think we feel pretty good about our cost story, a lot of our costs are in, definitely keeping an eye on fleet utilization and just the drag on asset productivity, but that's in our guide already. And then on the revenue side, Drew, if you have anything to add there?

I mean we have a pretty good insight to the second quarter and then we're kind of a bit more blind as we go into the back half of the year. So there's certainly some variability that could be there.

Yes. Understood. Okay. Fair enough. Second question here just follows up on that last point, kind of a question on the cost of a good operation and just getting at unpacking the upside from here operationally. So I guess what I'm trying to get at is the buffer that you guys have built into the schedule versus whatever year it makes sense to benchmark against. So reserves, soft time, spares today versus where you'd like to be once past ATC understaffing. And then just related to the cost of this good operation how can we think about the cost and revenue penalty that eventually goes away once we get back to the environment where you can operate a little bit more efficiently?

Hey Dan, why don't I start with it and just I think the quick takeaway is if you look at our IROP numbers from last year, I think full year 2022 is roughly like $136 million IROP. The first quarter of 2022 was like $66 million. We were well below that this quarter, $8 million or $9 million, $8 million. So you can see that when you're not completing flights and you're running an operation that's not doing that, it gets really expensive really quickly. And so that's why a shout-out to John Redmond and Drew and Kenny and team to make sure that we're putting up an operational reliability focus, and then we'll build on that.

And then once you have that in place, you start seeing things across the board improve, for example, like unplanned absences with our flight crews just much better now trending in the right direction because there's better operations out there. So you get that stability and then you start strengthening on top of that. So I think that gives a good indication on what the upside is and how important it is, particularly for us, we believe, to run a good ops. I think on the revenue side, Drew did you want to follow up with anything on that?

No. I mean you're right. We built in a fair amount in the schedule in terms of slack through the day to be able to catch up for be it ATC or things even out of our control. Spare capital a little bit higher. I would say we probably were under spared earlier, and we're probably at a healthier number now. We'll continue to run heavy maintenance lines through the entire year, which is something that we weren't doing as a smaller airline.

So there are some kind of unique things that will persist in terms of lack of productivity but the right thing overall for the company. So there's a little bit for us to recapture as we get into the next couple of years, particularly taking advantage of the reliability of the Boeing MAX aircraft as that rolls out. But I would say there's a fair amount of those companies that will remain in place.

When you look at all that, we obviously -- we provide annual guidance because we are long-term thinkers not short term. And when you have a bad operation, if you will, you denigrate your brand. And so our brand, as you heard me make a comment about is extremely important to us today and long term. And that's why the operational integrity of the airline is paramount to what we want to do.

And Dan, this is Greg. I might just add one more quick point. Sorry to jump back in. But we talked about this, I think, on the last call, but just like what an extra half hour productivity does to the bottom line, just an extra half hour of flying and today's environment towards like $50 million to the bottom line -- an extra half hour is worth $0.25 and CASMx as well. So right now, we're running about 6 hours, a little over 6 hours per day, that's for reasons we talked about some of the constraints. But as you're able to take that up with productivity, you can see some meaningful upside to the numbers that we provided.

Our next question will come from the line of Helane Becker of TD Cowen.

On second quarter RASM, just wanting to know, is -- are you implying 10% year-over-year? And then for second and third quarter and then fourth quarter down a little bit?

I don't think we've implied anything at a quarter level. I think you could probably read between the lines a little bit over the last 9 months in aggregate where the comparisons came in from last year and maybe run with it from there, but like Robert mentioned earlier, we're not going to dive too much into quarterly specifics.

Okay. Did you give a full year CASM guidance number?

No, we didn't.

Can you?

No. I think we decided that we were going to just guide full year EPS Helane and then the other numbers that are there in the guidance table that you can kind of back into what's happening with CASMx throughout the year, [excluding] fuel price.

Okay. That's fair enough. And then I just have one unrelated question. On your -- is the DOT approval of the Viva codeshare contingent on Mexico re cooping CAT 1 status? And do you anticipate -- I know the Mexicans are thinking they should have it by the fourth quarter. But given that FAA has to be authorized this year, are you anticipating any delays?

Helane, this is Greg. Why don't I take that real quick? The audits take place here in May and the expectation -- this is for -- I'm sorry, the Category 1 status [we maintained that] tend to take place in May and our counterparts down at Viva expect a great outcome there and would expect the Category 1 status to be reestablished in the summer.

That's kind of the timing in that regard. In terms of our antitrust immunity approval with the DOT, the application is substantially complete. And so we're waiting for the DOT to come back with a ruling on that. There's not a set timeline per se, but we -- I think we have all the information in. And as they get to it, then we will look forward to hearing where we're at with that, but we're optimistic that it will get -- will be approved.

Our next question will come from Catherine O'Brien with Goldman Sachs.

Really helpful to have the Sunseeker outlook that you gave us this quarter, but I was just hoping you could help us parse that out a bit further. As we think about the fourth quarter, which is almost a full operating quarter, does that get closer to breakeven or how do we think about a typical ramp up for a new hotel opening to get to breakeven?

Catherine, I think a best number we're going to provide at this point in time is the $1.25 negative in the quarter. There's a lot of moving parts we're going to still run into in Q4. We believe the opening date is pretty solid, but anything can happen, including another hurricane. And you also have BI interruption insurance. So there's a lot of things that can happen there that I wouldn't want to mislead anyone in that regard. So I think as we stand today, I think we'll just stick with the guidance that we gave on the negative EPS of $1.25 for Sunseeker and leave it at that.

Okay. Fair enough. And then I apologize, I do want to come back to CASM for this year. I know you're not providing any formal guidance, but you gave a lot of detail last quarter on puts and takes -- that got me personally to a high single-digit airline-only CASMx increase over year-over-year and understanding comps won't be throughout the year, but now capacity is expected to be 2.5 points lower, and we're now assuming the labor step up in May versus July.

So versus where you were 3 months ago, is that a couple of extra points or given the capacity cut was a little further out, we shouldn't be doing a one-for-one capacity versus CASMx increase. Just on my own high-single digit number, that would get me to low-double digits. Is any of that math like in the right ZIP code?

Yes, it's B.J. Thanks. Yes, I think that with the guidance that we have put out there, that's about what you would imply or what you could take away on CASMx for the full year. We've got the -- we took the labor costs, which were previously baked in beginning July 1 and brought them up to May 1. And then you take out a little bit of capacity to slightly above where you were when we spoke last quarter.

Our next question will come from Chris Stathoulopoulos of Susquehanna International Group.

So sorry to beat a dead horse here, but in the absence of some of the kind of more core explicit guidance items here, I just want to understand this. So in your prepared remarks, you talk about EPS growth despite lower capacity. It would seem that this is mostly TRASM-led, but you're really not giving kind of really much color on the cadence of that.

The last question implied, it was sort of a low double digit, if I got that for airline-only for full year. So in absence of hard numbers here qualitatively here could you kind of put a fuller point here? Is this TRASM and better utilization and productivity-led? And also, if I caught you right, it sounded like the base case or midpoint of your guide the economic scenario underpinning that is sort of a steady state and want to make sure that that's correct?

Yes, I'll start and others can jump in here. I think the raise on the guide, of course, taking into account the benefit of the reduced full year fuel price. And then you're adding in some of the labor costs that we talked about for a couple of additional months there and then continued revenue strength in particular in the peak periods (inaudible).

Yes, definitely on the TRASM front outperformance in the first quarter relative to what we had communicated, but a reiteration of what we were expecting for the last 9 months. So [that] comment is accurate from that front.

And we're not at the moment not forecasting a significant increase in asset utilization between now and the end of the year, and that's just because we still have additional A320 aircraft coming on between now and.

Okay, got it. And my follow-up, so when I talk about the trade down, which you referenced in your prepared remarks in a recession scenario with clients, it's generally perceived as sort of an academic view and perhaps let's wait and see how that plays out. So -- and your customers are generally thought of as different versus the big 3 and the LCCs.

I don't think you gave much color in terms of demographics and your survey work, but there is the perception that it's a different bucket, if you will, given really kind of how you run the airline and more bearable flying, etcetera. So if you could give us some more detail on why you believe that in a slowdown, I realize that it's perhaps ultimately going to just come down to lower fares there but if you could put a finer point on why you feel so strongly about this trade down effect into cyclical slowing.

You bet. So this is Scott, and I'm happy to start there. So first off, the demographic profile of our customers -- and let's use CVG as a prime example -- formerly a Delta Hub, they largely reduced flying. We move in, it's one of our largest origin cities, and we share a bunch of customers with them. And from an income perspective, specifically discretionary from a summer second home ownership perspective, they're virtually the same customers. They often fly Delta when they're doing it on a corporate card.

And when they're on their own dime, they don't want to stop. They [want Atlantic enroute] to their second home in Florida, so they fly us. So I know that's one airport-specific example, a big one for us. But we see that play over and over again in the Indianapolis, in the Pittsburgh’s, think about places that network carriers traditionally had strong presence, but do consolidation pulled out or as I like to say, orphaning these markets. And what is left now is a former U.S. there -- a former Delta and/or our shared customers that we have.

So while I know the market likes to classify us next to the other ULCCs, the customers don't see it their way. All they know is why airports fly nonstop at low cost from their airport and the cities we serve that's us. Drew -- the only other thing I would tell you we've even -- and this is complete back to the envelope, fuzzy math. But as we extrapolate from the mini surveys we do to our customer base, it suggests anywhere from a 1.5 to 2:1 kind of trade down, if you will, meaning for every one customer who goes out of the market decides to drive or not fly, we're seeing 1.5 to 2 come from another carrier as part of the buy-down.

And so we triangulate a bunch of different ways, but as a rule of thumb, that's what we've seen in the last several quarters. And that's why we believe that if and as macroeconomic environment shows deterioration people are still going to go see grandma for the holidays. They're still going to do a summer vacation as we saw, they went on spring break. They're just going to be a little more deliberate about the price they're paying and how quickly they can get there.

I think what it comes down to -- this is John, is the carrier selection is not indicative of someone's net worth or demographics. The carrier selection is indicative of what someone's willing to pay on the travel as opposed to what they're willing to pay on the experience. So people who want to pay more in the experience and less on travel, they're selecting a lower cost carrier like us because that's the decision they make. So the mistake a lot of people make is associating legion with a different demographic. And that's a large mistake. And it's really indicative of a customer deciding to spend less on travel and more on the experience when they arrive.

Our next question will come from the line of Scott Group of Wolfe Research.

This is [Brian] on for Scott. Just one here. Some of your peers have discussed sort of weaker than normal trough periods given less spill of peak demand. Just wondering if this is something Allegiant is seeing as well.

No, I think, Drew here, I think what a lot of carriers are experiencing is what the leisure seasonality looks like. What we saw in January and February was very typical of what we'd expect. It is still elevated relative to pre-pandemic kind of performance. But the leisure customer generally needs that [catalyst] travel at spring break that summer holidays, a lot of things that Scott DeAngelo just mentioned in the last response.

And I think maybe as [instinct] got carried away with how good September was and I think folks got priced out of the summer and we're able to re-accommodate into September. But I don't think that -- a forward run rate we should expect through the January, February through September, through the early December that are traditionally quite poor in the leisure space. So everything is elevated, but there's still going to be the peaks and values that are associated with leisure travel.

This will end the Q&A session for today's call. I would now like to turn the conference back to John Redmond for closing remarks.

Thank you, operator. I recently had read an analyst report and it kind of reminds me of a comment I made several years ago in an Investor Day, which was don't bet against Allegiant. This Allegiant team has only gotten better with each negative issue raised in the past from fleet transition risk to management change and of course to more recent events even such as pandemics and hurricanes. So we've only gotten significantly better as a team with a model that has been refined and transformed for an incredible future. So stay tuned. And again, I look forward to hosting many of you next week in Florida -- should be a lot of fun and very informative as well. So thank you all for your time, and take care.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.