Spirit Airlines Inc (SAVE) 2011 Q2 法說會逐字稿

Welcome to the Spirit Airlines earnings conference call for the second quarter of 2011. My name is Kim and I will be your conference facilitator today.

Following the initial remarks from management, we will open the lines for questions from analysts and members of the media. (Operator Instructions).

This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the Company's permission. Your participation implies consent to our recording of this call. If you do not agree with these terms, simply drop off the line.

I would now like to turn the presentation over to your host for today's call, DeAnne Gabel, Director Investor Relations. Please ahead.

Thank you, Kim. And thanks to all of you for joining us this morning, and welcome to Spirit Airlines' second-quarter 2011 earnings conference call.

Presenting today will be Ben Baldanza, Spirit's President and Chief Executive Officer; and David Lancelot, our Chief Financial Officer. Also joining us are Executive Vice President and Chief Marketing Officer, Barry Biffle; Senior Vice President and Chief Operating Officer, Tony Lefebvre; and Senior Vice President and General Counsel, Thomas Canfield.

Ben and David will discuss our second-quarter results and operations and current business trends. We will then open the call for from analysts, after which we will take questions from the media.

Our remarks during this conference call will contain forward-looking statements, which represent the Company's current expectations or beliefs concerning future events and financial performance. Forward-looking statements are not a guarantee of future performance or results.

Forward-looking statements are based on information available at the time those statements are made and/or management's beliefs as of today, July 28, 2011 at 9 AM with respect to future events, and are subject to certain significant risks and uncertainties that could cause actual results or performance to differ materially from those reflected in the forward-looking statements, including the information under the caption, Risk Factors, included in the final prospectus dated May 25, 2011, filed with the SEC in connection with our initial public offering. We undertake no duty to update any forward-looking statements.

Today we will be discussing pro forma results excluding special items. Please refer to our second-quarter earnings press release for further details regarding our assumptions for pro forma results, and for the reconciliation to the most directly comparable GAAP measure for all non-GAAP measures discussed.

Unless otherwise noted, when we discuss our pro forma results for the quarter we will be excluding special items such as restructuring and termination fees, loss on disposal of assets, and unrealized mark-to-market losses on fuel hedges. Again, these special items, as well as our pro forma adjustments, are detailed in our earnings release.

And now, I will turn the call over to Ben Baldanza, Spirit's President and Chief Executive Officer.

Thank you, DeAnne. Good morning and thanks to all of you for joining us on the first earnings call for Spirit Airlines. This is an exciting time for the Company, and we are pleased you joined us today to discuss our second-quarter results. I also want to thank the entire Spirit team for successfully given getting us where we are today -- a profitable, successful public company with excellent growth opportunities.

Today we reported net income of $26.8 million, or $0.37 per diluted share. This resulted in an impressive 14.8% operating margin and an EBITDAR margin of nearly 26%.

Our average total revenue per segment increased 13.9%, while total operating revenue increased $98.5 million or approximately 56% year-over-year, primarily driven by increased traffic volume and our non-ticket revenue per segment, which increased to $43.39, up $11.75 or 37.1% year-over-year.

Our traffic increase of 37.1% far outpaced our capacity increase of 27.3%, resulting in a record second-quarter load factor of 85.9%. This demonstrates that we were able to once again successfully grow our network and stimulate demand with our low-fare model.

It also demonstrates that customers prefer the transparency and optionality we offer as compared to other airlines. Our year-over-year 6 point load factor increase illustrates the growing preference of our model by consumers.

Our ancillary revenue-per-segment improvement was partly driven by new initiatives as well as the maturing of initiatives already in place. New initiatives in the last 12 months that helped drive this performance included the introduction of our carry-on bag fee and improved checked baggage pricing.

We have a host of ancillary revenue initiatives in the pipeline, and when the time is right we will be sharing more details with you.

One of the initiatives we announced recently was that beginning in November our customers can save $5 when they check in online. About two-thirds of our customers book online, whereas less than 20% check-in online. Our goal is to encourage customers to check-in online, which is a win-win for them and us. They save money and time at the airport and we gain efficiencies that drives our costs lower.

We believe our model of unbundling our products gives customers the power to save by letting them choose to purchase only the extras they value rather than forcing all customers to pay for services they may not want or need.

This is part of the reason we are appealing certain aspects of recent rules by the DOT. We believe certain aspects of these DOT rules will significantly raise the cost of travel to consumers, which will hamper our nation's economic growth. We at Spirit at committed to finding ways for customers to save money.

We are also committed to maximizing our return to shareholders. With that in mind, we regularly review and adjust our capacity deployment based on demand, fuel prices and other factors, in an effort to maximize profits. We were pleased with the results of this strategy in the second quarter and expect it to especially benefit us through the peak summer months.

Also during the quarter we launched several new routes, as highlighted in our press release. We expect all of our new route start-ups to meet high financial hurdles in a fairly short time period. Of course, some routes mature faster than others, but we are extremely pleased with the performance of all of our new routes launched in the second quarter, with some of them being profitable on a fully allocated basis within the first month of operation.

The demand environment has remained strong throughout July, and has accelerated following the recent tax holiday. Sales for all future travel from July 1 to July 22 show our segments were up 22% year-over-year, ahead of capacity growth, while average revenue per segment, including non-ticket, was up 12% year-over-year.

But from July 23 through July 26, after the tax holiday is in place, our segments were up 43% year-over-year, with our average revenue per segment up 19% year-over-year, illustrating that giving customers their tax money back saved our customers money while increasing our revenues through higher volumes.

Turning to our growth projections, we expect to grow capacity 11.6% in the third quarter and 5.6% in the fourth quarter, with full-year 2011 capacity up about 16%. While it may appear we've pulled back on our growth plans as compared to our percentage growth in the second quarter, there are a couple of things to keep in mind.

In the third quarter we lapped the impact of the five-day pilot strike in June of last year. In addition, our newly added routes have a shorter stage length than our current average; this will result in an overall average shorter stage length. We estimate that our average stage length for the third quarter will be about 3.5% less, and fourth quarter will be about 7% less as compared to the same period last year.

In each of the next few years we expect to grow capacity 15% to 20%. And while this plan may sound aggressive, remember that this is on a base of 35 aircraft today. And we just grew by more than this amount in the second quarter and have done so over last several years, producing positive results.

We believe we can continue to grow profitably by stimulating new demand with low fares. We've been very disciplined at trimming routes that do not meet or exceed aggressive financial hurdles. This is a concept we would like to see all industry players adopt.

With that, I will turn the call over to David to discuss our cost performance.

Thanks, Ben.

As Ben mentioned, our operating margin for the second quarter was 14.8%, which was a 12.5-point year-over-year improvement. In addition to the revenue performance that Ben described, our continued vigilance towards having an ultra-low cost structure also contributed to our strong performance for the quarter.

Higher fuel prices accounted for nearly half the increase in our total operating expenses. Our average economic fuel price for the quarter was up 41.9%. CASM was only increased 6.6% year-over-year, which was driven by a 10.3% decrease in our ex-fuel CASM for the quarter, which was down to $0.0541.

If you adjust the second quarter of 2010 for the strike, we estimate that our ex-fuel costs would have been down 3% year-over-year. We are seeing the benefits from our efforts of running an efficient operation.

For the third quarter we estimate that our ex-fuel CASM will be up 2.5% to 3% as compared to the third quarter of 2010. And for the full year we expect that ex-fuel CASM to be flat to slightly down for the year.

In the third quarter of 2011 we will have a pilot rate increase per the CBA that we signed a year ago. In addition, while our capacity is expected to be about the same as it was in the second quarter, on a quarter-over-quarter basis our third-quarter departures will be up, which is what Ben alluded to on a shorter stage length of about 3.5%, driving about 1% additional block hours in the second quarter. That increased volume is going to drive some additional variable costs.

Beginning in September we also plan to take advantage of the shoulder season to accelerate some maintenance. And that's going to put some pressure on the maintenance line as we accelerate some of the -- a one-time cost for a transition maintenance on nine of the aircraft. We are going to try to push that into the third quarter, and we can explain that in more detail later.

Our maintenance cost is expected to increase significantly as our fleet ages, resulting in the need for more substantial repairs over time. And we will also see a significant increase in the number of heavy checks performed, and this will drive an increase in depreciation and amortization.

And just as a reminder, we account for our heavy maintenance under the deferral method, whereby the cost of that heavy maintenance is capitalized and amortized as a component to depreciation expense and amortization expense until the next maintenance interval.

Turning now to fuel, for the third quarter we estimate our economic fuel price to be $3.36 per gallon. And we have recently layered on some hurricane protection hedging for the refining margin on our jet fuel, using basis swaps for the near-term protection in the event of a hurricane.

For the third quarter we estimate 46% of that crack is covered for the third quarter, 17% for the fourth. And this was provided as an element of security to allow us to focus on other ex-fuel cost structures.

As for the balance sheet, as a result of the IPO it now rivals the strength of our results. We had $346 million of total cash and no debt at the end of the quarter, which significantly lowers our incremental borrowing costs. And as mentioned, we completed an IPO in June, raising $187.2 million, of which we retained $150 million for general corporate purposes.

Also included in that cash balance is $98.4 million of restricted cash related to holdbacks from our single-largest credit card processor. Prior to June, all of our credit card processors required 100% holdback on tickets sold but yet flown. And in June we successfully negotiated with our minority credit card holders more favorable terms that resulted in a zero holdback before the end of the quarter. We anticipate that our single-largest credit card processor -- we will be able to reach beneficial terms in the near future, reflecting a 0% holdback as well.

During the quarter we generated cash -- operating cash flows of $43.8 million, and we had capital expenditures of $5.8 million, primarily related to the capitalization of technology projects. Additionally, we paid PDPs of $7.4 million. We received $1 million back on a sale leaseback during the quarter. And for the remainder of 2011, we estimate that our capital expenditures will be about $3 million, and our PDP delivery will be about $20 million.

We ended the second quarter with 35 aircraft in service, and we expect to take delivery of two more later this fall. And we have seven aircraft scheduled for delivery in each of the years 2012, 2013, 2014, with 10 aircraft scheduled for delivery in 2015.

All of our current aircraft and the next seven scheduled deliveries are financed under operating leases. And given our stronger balance sheet on a go forward basis following the IPO, we believe that we are going to have flexibility to consider other, mort efficient forms of financing, you know, beyond 2012 where we are currently financed.

We will be filing our 10-Q later this afternoon for you to read all the details in the Q. And with that, I will turn it back over to Ben.

Thanks. As we leverage our ultra-low cost structure with our innovative ancillary revenue platform, we believe we will continue to grow profitably. We recognize and celebrate that our model is different than our competition, and we continue to think of ways to further differentiate Spirit.

We plan to remain focused on giving customers the power to save, and being pro-consumer by offering low fares, pro-economy by growing and creating more jobs, pro-environment by being a very efficient user of our assets, and pro-shareholder by growing profitably and delivering a return our shareholders should expect.

Now, I will turn it back to DeAnne.

Thank you. We will now take questions from analysts. After that I will turn the call over to Misty Pinson, who will host the question-and-answer session for the media. Following the call, you may contact me with investor and analyst inquiries, and for media inquiries please contact Misty Pinson.

Kim, we are ready to begin.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions)

Bill Green from Morgan Stanley.

The first question I have is just on the non-ticket revenue trends. How do we think about where that should go? I realize you've got a number of things you mentioned in the pipeline. But equally important, you've already announced a few things, and how should we think about sort of metering that into that line? How far along are we even in this process overall? What sort of inning are you in on non-ticket?

Well, thanks, Bill. This is Ben. You know, we are committed to giving customers better savings by helping to figure out how we can get our obligated ticket price lower and lower over time. And today as you think of our ticket prices, about two-thirds of our revenue comes from the ticket price and one-third comes from non-ticket. We'd like to see, over time, try to switch that ratio somehow, if we could.

And basically of the two-thirds that is paid for in the ticket price, today about half of that pays for fuel. So over time we would like to see the fuel being passed through to the consumer at whatever fuel is, and then find ways to take more and more of that non-fuel ticket price and convert that to ancillary, as we find good options available for consumers to save more money through optionality.

Is -- can you give any sense for what the printing of boarding passes or the announced changes sort of represent in revenue terms?

At this point, no. You know, every time we have announced a new sort of initiative of this type, we see consumer behavior in some ways that may be more or less than we might expect, so until that initiative is in place we certainly have expectations internally, but until that initiative is in place we can't really talk about sort of what the effects will be.

Okay, and then just one follow-up, just on -- you've announced a few new markets; some of them not just in near international but also here in some pretty big markets for some of the legacies and even Southwest. How has the competitive response been to those announcements?

Well, I mean, you can look at what has been scheduled and what hasn't. And in general, we choose our markets based on where we think we can make money and where we think our low-fare option to consumers is going to be well-received by consumers. And in some cases that's international, in some cases that's domestic, and we look for sort of the current environment as to where the best place to deploy capacity to be, and that's where we've added.

Let me ask Barry Biffle to make a comment on that as well.

Yes, thanks, Bill.

One thing I would point out is, you mentioned the legacy carriers and so forth, and there's a few markets, for example, that we started recently where you've got a legacy carrier -- the existing passengers per day each way and the market is roughly 1,000 passengers. So historically when we bring in our low fares, we are going to increase that passenger base to 30% to 40% higher.

So when we look at what we are going to do for those markets, all of the stimulated passengers will be for our aircraft. So we view it that the legacies should not -- and we believe the market has shown this -- that they don't see a big concern with us because we are not chasing the business customer, and we are simply growing our own demand by stimulating with low fares. So we just don't see the friction that I think some people had expected, and I think the marketplace has shown that over the last several months.

So there hasn't been broad-based matching on fares and trying to layer in capacity on top of you or anything like that?

No.

Okay, great; thank you for the time.

Will Randow from Citigroup.

Congratulations on the strong quarter. I just had some follow-ups in terms of revenue trends. If -- I don't know if Barry can help me on this. We saw some strength in the second quarter relative to expectations. How should we think about read-through for the third and fourth quarter, particularly given one of -- some of the weakness at JetBlue in terms of July and August trends?

And then, if you could follow up with this, how quickly you are seeing breakeven on some of the new routes you are adding?

Well, let me start and then I will turn it over to Barry.

You know, versus JetBlue's announcement, one of the things that we stated -- that I stated in my comments -- is that our demand is ahead of our capacity deployment, and that's something that we think is very important for us. We are disciplined about capacity deployment and try to grow the customer base ahead of the capacity demand. So we don't necessarily -- didn't necessarily see the kind of trends in the second quarter that JetBlue reported.

We told you on the call here sort of what we are seeing in July in terms of continued strong demand that has been accelerated in sort of this temporary period while the tax holiday is going on. And so basically that's sort of the way we see the world right now. At this point we are not giving guidance out into the third and fourth quarter beyond that.

I might just add, you know, it has been an interesting last, probably 90 to 120 days. You get all these fare increases in the marketplace in the spring. And I think initially, you know, customers didn't have a choice, but I think what we've seen -- and this goes for our new markets as well as our existing markets -- there's a lot of fatigue with the high prices that a lot of the carriers are charging, and that is causing customers to choose Spirit because they're looking for better value.

And even though our prices are up on a year-over-year basis, as they've increased their prices at the legacy carriers and the JetBlues and so forth, that just makes our relative advantage that much greater. And so for that reason we are a little bit in an anomaly, because we haven't seen -- as has been illustrated earlier, our demand and sales for all future periods in the last month are very, very strong, and they've gotten even stronger as the taxes have changed.

On the new market question specifically, we've had pretty much -- knock on wood -- the best new market launches in the history of the Company so far. In the launches we had in May, for example, we had two of those routes that actually made fully allocated money just in the first month, which is pretty much unheard of. Generally you can look for cash.

And I think that just illustrates again the preference for the Spirit brand. And it's really amazing what we are seeing from a performance perspective, and it is hitting on all cylinders.

Great. And just one last follow-up for David. When we think about working capital as a source of cash going forward, how should we think about restricted cash unwinding on [new press] agreements? And also, in terms of prepaid maintenance, [is there not] the cadence of that going into the 2012?

From a working-capital standpoint, Will, I do believe that with our single-largest credit card processor I do believe that we will be successful in negotiating more beneficial terms that get us down to a zero holdback, which at the end of the quarter was about $98 million. So I do foresee an improvement in working capital from restricted cash of about that, depending on the seasonality. That doesn't always stay at $98 million, so I do think that we will be able to improve the working capital for that piece.

The cadence on the prepaid maintenance, while not exactly cash-neutral, as we start to get into some of our heavier maintenance events beginning this year, specifically with some of the engine restorations and the heavy [seat] checks, those maintenance events start to -- we start to see the working capital benefit of all of that pre-paid maintenance beginning this year. So again, while not completely cash-neutral, they are significantly paid for already.

Okay, thanks, guys and congratulations again.

Hunter Keay from Wolfe Trahan.

I'm wondering how to -- I want to touch a little bit more on the yield situation again. I mean, we saw you guys just broke a long stretch of negative yield growth with a really sharp sequential acceleration. And I'm wondering, given the decelerating ASMs and some commentary you've already provided on the revenue environment -- you know, Ben, I know you said that you'd like to see that kind of diminish as an overall part of the revenue collected per passenger. But if we just kind of hold the current pricing environment equal and we look at the rate of deceleration on, say, ASMs, and RPMs for that matter, through the end of the year, is it even feasible to potentially model in high single digit or maybe even double digits on the yield side, given what's going on with fuel and given the deceleration on RPMs, again, just kind of holding equal what you are seeing now?

I'm a little bit confused by that, Hunter, to be honest. But let me state that yield is a term that we understand how it is calculated, but we don't track that closely here. We tend to look at total RASM -- our RASM as sort of the relevant piece. And so we see non-ticket revenue and ticket revenue as equally important in the derivation of the revenue stream for Spirit Airlines. And the fact that the non-ticket gives us a more diverse sourcing of revenue we believe is a strength and gives us some resiliency that putting it all in the ticket price may not have.

So we don't actually -- when you talk about sort of a negative trend in yield, I guess, we don't think of it in those kind of terms. We look at total RASM; total RASM is improving, it's improving on a year-over-year basis both -- and in the second quarter, both ticket revenue and non-ticket revenue saw improvement. So, I'm not sure how you want to think about this going forward in terms of the modeling beyond that. I mean -- I don't know, Barry, if you want to make a comment.

Yes, I think the main thing to keep in mind what you're looking at Spirit, is exactly what Ben said. We don't manage -- because of yield -- and that's a metric that is for other models. In our model you need to look at total revenue per passenger. That's how we manage it and that's how we look at it.

Yes, no, I understand that. I appreciate that. I'm talking from a traditionally (inaudible) perspective. When you look at sort of the passenger revenue line, that accounted for the biggest variance, at least from the beat, from my perspective. And I thought it was very strong. And I know that you guys mentioned that that's not your main priority, but if ticket prices go up I'm sure you're going to be happy to collect it.

Well, the main reason that that particular line went up -- I can't explain your estimates -- but specifically for us, is the increase in fuel prices year-over-year, because today we put fuel in the ticket revenue.

Right.

And the other thing -- another way to, I guess, maybe think about this, Hunter, is that it's important for Spirit that we have low fares to consumers for our business model. We don't necessarily think about low fares as an absolute, but rather as a relative kind of metric. And so in the environment of the second quarter when fuel prices were high and the industry generally was taking fares up, we took advantage of those raises where it made sense, but while ensuring that the relative gap between our fares and our competitors either remained the same or even increased. And that's real important for us.

So we will take ticket price increases when the fuel environment suggests that that's necessary to do, if the market allows that. But that doesn't mean that overall we are trying to gouge customers.

Sure. No, that's very helpful; I appreciate that, actually.

And one subtle nuance, I guess, may be a little bit on the FAA suspension. Is it possible that maybe a part of the strategy to not participate in the fare increases on this is because there might be a fear that the FAA might ask for -- anyone from the Feds may ask for this money back at some point?

Our understanding -- it is illegal today. The United States government no longer has the right to charge those taxes, so for them to change that would be like changing your tax rate retroactively. So we don't see the fear in that.

Okay. Well, thank you very much; I appreciate it.

And can -- if I make one more statement, Will, on that -- our view is that that tax money is the consumer's money. Spirit never had that money, and we never had it in the first place. So it should go back in the consumer's pocket.

Great. Thanks, Ben.

Kim, we are ready for our next question.

Thank you, just a moment, please.

Jim Parker from Raymond James.

Ben, I can't help but say, I think you need to be a politician. (laughter)

I don't know if that's a compliment or an insult.

Oh, it is. (laughter)

Barry, I want to follow-up on Bill Green's question and be a little more specific. And the issue has to do with American, of course, putting in flights, I believe, in November from Chicago to Fort Lauderdale, and then I think maybe some increased capacity from Chicago to DFW, and maybe there are other things.

Can you just shed a little light logic of why they are doing this? I mean, we see this against low-cost carriers and usually it doesn't last. But anyhow, what -- can you provide a little bit of insight and detail on what American is doing and what you think might take place there -- the impact on Spirit?

Sure. What we understand they are doing is they have put out a press release lately recently that announced an increase in Chicago/Fort Lauderdale, as well as Dallas/Fort Lauderdale. The interesting thing about that is, those two particular routes are routes that they increased their capacity every year on a seasonal basis in winter. So we had anticipated this capacity before they put out a release.

The one thing that was actually news in the press release was the Fort Lauderdale/LA route that they are flying with 737s. They have flown that in the past numerous times, in and out, with 757s, and so I believe this is the first time they will fly with 73.

The bottom line is, is Virgin flies this route, JetBlue flies this route, Spirit flies this route. We fly it as a red-eye utilization route. So it's not a -- you wouldn't consider it part of our core daylight flying. So the impact to us, we don't see any simply because it is a pretty large served market. They have a lot of flights from Miami anyway, so we just don't really see material impact to Spirit from that move.

Okay. And regarding your non-ticket revenue, you seem to have several things that you want to do in the future that's going to increase non-ticket revenue. And it would be nice if you told us what some of them were, but you usually don't for competitive reasons.

How about travel packages? I'm just curious the extent to which you're involved in marketing travel packages, and is this an area of significant potential for Spirit?

Jim, this is Ben. You know, we see what other people are doing. We see what effective and what isn't. And we're going to continue to look for opportunities that are best for Spirit.

Clearly, in our growth over the last couple of years, focusing on things like bags and insurance and things like that have been more valuable to us than packages. As we forward, maybe that will change.

Helane Becker from Dahlman Rose.

Has there been any pushback from the $5 boarding pass fee?

Kind of the opposite, if anything. I mean, first of all, that fee doesn't take place until November, and so with our booking curve we don't really see the effect on that so much yet. We put that out with a long lead time so that customers buying would have plenty of time to react to that.

And again, a large percentage of our customers buy online, but a small percent check-in online. If they check-in online, they will save $5 on their ticket, because we lowered the fare $5 after November 1 -- offset by that $5 fee for customers who choose to still check-in at the airport.

So we think that most customers will choose to take advantages of that savings. And we really see it more as a cost savings going forward than a unique ancillary revenue initiative.

This is Barry; I might add to that. We surveyed our customers prior to announcing this, and I think this really gets to the external perception of Spirit versus what our customers know about Spirit and why they prefer Spirit. But over 90% of our customers wanted this change and wanted lower fares in exchange for this program.

So again, I think it gets to -- I appreciate your question, but that's really driven by a lot of external perceptions, not necessarily our customers.

Okay, great.

And then my other question is really related to the changes that have to into effect, I guess, in August. Although I'm a little confused about that -- would the government all confused and shut down, I guess, with the FAA shut down, whatever -- so does that -- the rule changes on advertising effect -- are they affected at all by this or do those rule changes still take effect?

And, I know that you are in court over it, or have sued them. Could you just maybe talk a little bit about that and what you see happening there?

Yes, Helane, I'm going to ask Thomas Canfield, our General Counsel, to give an update on our status with that DOT -- with the DOT rule-making.

Yes, we did mid-June file an appeal, along with Allegiant, and since that time Southwest actually has entered into that case as well, as to the full-fare advertising proposed change, which is now a final rule, in fact.

DOT has, as expected, denied that stay and so we before the Court of Appeals. And I don't want to too much into the litigation strategy particularly, but in general we think that some of the elements of the new rule are stifling to a diversity of models in the industry, particularly unbundled ones -- ours -- really affecting all carriers negatively in terms of the way -- how much freedom they have in defining and showing new product to customers.

And we don't think that the Department necessarily gave weight to what we think are very legitimate options -- considerations for the industry to comply with these rules.

Right. So, they have to take effect then in August (multiple speakers)?

No, on the ones that we have appealed, DOT has actually extended the effective date.

Until January (multiple speakers).

The rest of -- then obviously we have a motion pending for a stay, so we will see how that comes out, but --

Okay. So then, it's correct for me to think about that you don't have to change your advertising as of this date right now?

That's correct.

Okay, perfect. That's just what I wanted to get explained. And all my other questions have, I think, been asked or answered.

Gary Chase from Barclays Capital.

I wanted to do a couple of things. I wanted to see if I could all the way back to Bill Green's question on some of the new markets. And I think the term used there was more competitive arenas. And I guess the question is, Barry, it sounds like from what you were saying, you are not seeing more than typical competitive response. Was your expectation going in that you would -- that those markets would spool as fast as some of your more traditional markets, and has that, in fact, been the case?

The markets that we've launched in the second quarter and recently have performed better than average, and that why we were pointing to it. We mentioned earlier that some of the markets, for example, made fully allocated profits in the first month. That is not our traditional average. So we are over performing and it is exceeding our expectations with the new markets so far.

And is that true of all of them, Barry, or just as a group they are exceeding the average or they are all exceeding it?

Not everyone, no, but the average of all of them are considerably higher than our former average this year. And I think a lot of that has to do, again, with what's happening with the brand and the preference of the model. And we've just seen that the take rate in new cities is greater than it has been in the past.

So even places like a Chicago/LA is --?

Well, I think what we've been most impressed with are cities that we've never served before. But sure, Chicago/LA is one that we were already in, but I'm speaking to the -- you look at the markets that we hadn't flown to before, and Dallas for example and cities that we've never flown, not necessarily routes.

But, yes, the route performance itself, I mean, is Chicago/Vegas, Chicago/LA routes that we started this year, as a group they are all doing better than historical averages.

You know, Gary, I mentioned this a bit in my comments, but we think it is very important here at Spirit to have -- to expect good financial results from every airplane we deploy. We are not interested in running an airline where half the airplanes make money and subsidize the other half that lose money.

So we've been more aggressive, we think, than a typical company in our sector in changing capacity on a very dynamic basis, whether that is day of week, whether it is gauge, whether it is frequency, or whether it is completely pulling out or adding.

And the new markets we've added will go through that same sort of review process and disciplined capacity deployment process as anything. And that's how we've gotten the Company profitable, and that's how we expect to maintain profitability of the Company through the Company's growth over the next couple of years.

Yes, and I think that has been one of the key elements. I'm just wondering if there was a different bar set for some of the (inaudible) there were more, I don't know -- Chicago/LA is more of a business-oriented market, I would think, than what you typically do.

It's a business-oriented market where the fares are only purchasable by business travelers. They are two enormous cities in the US with a lot of affinity for all kinds of travel -- business, leisure, visiting friends and relatives. And when the market is priced such that only business travelers can afford it, then it looks like the business market. When there are lower fares in the market, all kinds of people come out of the woodwork.

You know, Chicago and LA is two top-five metros, Gary. It's not just how the legacy carriers --

There are plenty of leisure, plenty of VFR in a market like that, even though traditionally the industry has priced it to exclude that traffic base.

Yes, well, it's -- you certainly would know there are two big cities, given the amount of capacity that flying between them. But it sounds like you are doing well there.

I was curious as well -- maybe, Barry, you can give us a little flavor -- my impression from some of the legacy carriers was that they got caught maybe being a little too aggressive on the inventory controls, say, going into June. And it was one of the reasons that June ended up not being as strong as they'd hoped. And a couple had indicated that they sort of shifted behavior a little bit.

I'm wondering if that is your perception in any of the markets you've seen. Did you benefit from that, and has the benefit faded as we've gone through toward the end of June and into July?

And then secondarily, have you seen any shift -- I know you're allocating towards some of these shorter haul markets. I'm wondering if there's any behavior change by the competition that makes that look better or worse than it did, say, a month or two ago?

Well, with your first question, I can't really respond to what other people are doing with their revenue management. But from our perspective, we monitor -- and you've got to be really careful when you start raising fares. I mean, there are two ways to raise a fare. You can -- in simplistic terms, when you talk about inventory, if you raise the fare and you shut down the lowest bucket, it's a double fare increase. So I can see why maybe that happens, and they maybe didn't intend to do that.

We did not manage that way. We tend to be mindful of that as we through it. And so we didn't have that challenge going into summer.

But the bottom line is, it is that our growth in passengers is exceeding our growth in capacity, and we are very, very pleased with that. We are finding that there are number of routes in the short to medium haul range that are underserved and/or overpriced. And so that seems to be where the bulk of our growth is headed, simply because it's where we believe at this moment in time we can maximize the profit on our assets.

So that is what we are focused on. And as Ben mentioned, whether it be a new route, an existing route, we are going to always continue to reevaluate a capacity, where it is and where we believe we can maximize the return for our shareholders.

Gary, let me also say, in a traditional sort of yield management structure, you may stop selling low-priced tickets under the expectation of forecasts that people will pay you more, and so you save those seats for that, right?

That's not Spirit's model. We sell low-priced tickets up to the day of departure, because our cost structure allows us to make money at low-price tickets.

Yes, I was just wondering if there had been a behavior change that was impacting you at all; in other words, competitive behavior shift?

The thing that I would actually -- I mentioned it earlier, Gary -- is that I think what we are hearing a lot from customers, is that simply the absolute dollars that a lot of the legacy and the high-fare carriers are doing, when you start looking at a family of four, what it costs to on vacation. And so, when you're talking about a 10% increase -- I'm just making this up -- a 10% increase on a $500 fare, is a whole lot different than a 10% increase on a $200 round-trip fare. And so you are talking $20 versus $50, and that relative advantage is what's driving the popularity of the Spirit brand.

And as they continue to raise their prices even more, it's not that people won't pay it; they can't afford it. It's not a -- oh, I will pay a little bit more. And so they are either staying at home or they are choosing Spirit.

And what we are finding is, maybe people are going to a destination they weren't even considering going to, because their primary or preferred destination they couldn't afford on their existing high-fare carrier. So again, it gets to the popularity of our brand in a high-fuel-price environment.

If there is a beneficial shift, it it may be in the fact that we see competitive loss increasing while we are continuing to maintain strong discipline in our cost structure. And if anything, in the second quarter we saw our cost advantage against what you might think of as major competition for us, and we saw that major cost advantage increase.

Bob McAdoo from Avondale Partners.

I want to change the nature of the question here a little bit. Could we back and talk about some of the stuff that you've recently talked about in maintenance, and talking about some kind of transition on several aircraft.

And then just separately, do you have power by the hour kind of arrangements on engines and new engines that are coming in with new aircraft, or how should we be thinking about that, too? But what was the statement about the transition on several aircraft or something you said, this fall?

Yes, and so, Bob, one of the things that we are going to do in September, kind of an off-peak month, is we've got nine aircraft that are now on a unique maintenance schedule, and we need to bridge those back to the normal baseline maintenance schedule that the rest of the fleet is on. So we are going to do a one-time catch-up on maintenance events. And we are going to use September to do that just so that they are free during the green light hours primarily for 2012.

But there are nine aircraft that have to through what this bridge -- or a bridge check to get them back on schedule. And so that's going to drive a little bit of the increased costs that we are looking at in the third quarter.

As far as power by the hour, we do have a power by the hour agreement for a lot of the component work that we do on some of the avionics and rollables with an outside provider. And we also have an FHA with the engine manufacturer, i.e, on aircraft for the entire fleet.

Okay. How big a bubble are we talking about for these nine events that you've got coming up?

It's --

I mean, is it $100,000 a plane, or --?

Well, roughly, maybe less than that.

Okay, okay.

It more of a utilization -- it's more of a utilization hit than it is a cost issue, and it is a one-time cost and one-time utilization hit.

Some airlines -- you know, some airlines make money when they don't fly their planes, or save money when they don't fly their planes. We lose opportunity when we can't fly.

Understood, understood.

One other just kind of a modeling thing. I know that the prospectus indicated that all your debt was paid for with all the other transactions that you had and as a part of the IPO.

Going forward, should we assume no interest expense in subsequent quarters? I know there is still some interest in this quarter because you hadn't done all those transactions before the quarter started. Should we assume no interest expense going forward for a while?

And in a period -- if that is the case, can you have -- is there such a thing as capitalized interest if you don't have any regular interest?

A very astute question. I think it is reasonable to assume that we are not going to have interest expense for the foreseeable future. And at any point in time that we believe we will take on any leverage, we will let you know.

As far as capitalized interest, that is true. If you don't have debt, there's no opportunity cost when you tie your funds up for a long-term project. However, we will still have a little bit of capitalized interest because we do have an arrangement with the manufacturer to finance one of the payments which we incur interest on. But it will be insignificant compared to the traditional run rate that you've seen in the past on a quarterly basis for capitalized interest.

So we should knock down this capitalized interest credit as well?

Correct.

Raymond Neidl from Maxim Group New York.

Yes, just a couple of quick things here. Can you give me a rough estimate of breakdown on your passengers? How many are visiting friends, how many is leisure, how many is business? Just a rough guess on a percentage for each category systemwide?

Well, let me say -- Barry may have -- this is Ben -- Barry may have sort of a guess on that. But a lot of airlines that look at that do sort of make that distinction, either maybe by fare type, whether you are staying a Saturday or whether you buy a certain type of fare or such.

You know, we sell a more consistently low-fare product across the booking curve. So if you pay $69 we don't know whether you are going to visit your grandma or whether you are traveling on a business trip, or whether you are meeting a cruise ship. We just know you paid $69.

So, we have anecdotal data and we can have sort of how people buy their tickets and find a sort of directional things, but we don't have sort of a clear estimate of this much business intent, this much leisure intent, this much VFR intent.

Barry, do you want to add to that?

Yes. You know, a few years ago it was the last time we actually had any data on this; we actually did a survey of our passengers. And approximately 20% had listed business as their primary purpose of travel at the time. So again, a lot of that were small-business people and so forth.

We don't chase business customers. I mean, obviously because of our schedule we are going to get some, but it's kind of related to the question earlier about competitive capacity and so forth. You know, JetBlue, Virgin, these guys are actually chasing American Airlines' and Delta's business customers. And so I think when they see us, they realize we are not chasing the business customer, and so it really gets down to that is why we are not a threat to them.

But we don't look specifically at what your intent for travel. But I can guarantee you that in the LA/Chicago example earlier that we were talking about, there is a lot more grandmothers going to see their kids.

Okay, good answer.

Just one rough thing -- I know that you and Allegiant and a few other carriers were working to try and charge futures for your tickets, depending upon what fuel prices are. Has anything developed in that area? I haven't heard of that -- anything happening there lately, or the government was frowning on that, I think.

Well, we've never made a public position -- we've never stated a public position on that issue. Allegiant, we've read where Allegiant has made a decision on that. But we don't know sort of where that is right now. We've not publically made any position about wanting to change our ticket prices after the ticket is purchased right now.

We do have -- we do for customers, break out for them how much of their ticket price is fuel price. So if you buy a $60 ticket on Spirit, you can see that $35 of that covers your fuel, and the rest doesn't. But beyond that, we haven't stated any other position on this.

No, that's a good idea. I think all airlines should break out fuel and taxes so that customers can see where their dollar is going. It is such a good idea.

We'd love to be able to break out the taxes.

And quite honestly, we think that's part of the reason why we are doing so well this year is by breaking that out and constantly monitoring what fuel is, and passing it through to the customer, we don't did out of step with revenue and fuel.

Yes, yes. One final thing -- with American putting in such a large order for aircraft, your aircraft financing is pretty well set, I think you said, through 2012 with aircraft leases. And then you're going to look at other financing vehicles beyond that.

What are you seeing developing in the financial markets, both the leasing side and the financing side? Is it pretty much being sponged up by American, or are the markets still opening up towards financing aircraft?

I think in traditional terms the financing market is still kind of lingering from the credit crunch in '08 and '09 as far as US carriers. We've seen elements of PDP financing, but they come in the form of interest club deals. We haven't seen necessarily the traditional PDP financing as far as financing that future stream prior to delivery.

But, as far as financing, there is still -- there are some attractive interest rates. And I think for the right credit, we are starting to see some very attractive financing on both the leasing and the debt side.

Okay. And you'll be going to the credit rating agencies at some point, I assume?

Yes, we will.

Okay, great. Good, thank you. Good quarter.

Glenn Engle, Bank of America-Merrill Lynch.

A question on the demographics of Spirit customers, if you can give me any sense? And in particular, when you look at the growth, is it new customers or is it existing customers flying more? What is your repeat customer type rate?

Well, in terms of the demographics, we tend to think of our customers as attracting the type of customer who buys the ticket themselves. We don't think about it in terms of age, income group, things like that in general. We think if you are buying the ticket yourself, we put out a product that we think may attract you because you are more likely to be price-sensitive, or use price as a larger determinant in your decision as to whom to fly, or which carrier to fly.

So Barry, do you know anything about the deal demographics?

Well, as far as repeat customers, it's difficult for us -- I mean again, we are appealing to a lot of customers who may only travel once or twice a year. And for that reason, our average customer flies us less than twice a year.

So we may -- we have to measure repeat over a several year period, because these customers may not fly every year, and maybe they fly once a year and maybe we get it every year. And we don't have discrete data about their other travel. So we won't have the repeat that you would see at a legacy carrier, again, because we are not targeting business customers.

As far as the demographics themselves and incomes and so forth, you don't see a huge difference in incomes versus the average leisure passenger, for example, with other carriers. But because of our geography -- specifically in South Florida and so forth -- incomes are lower than some of the Northeast cities, but it has simply to do with the geography we serve.

So you think your growth that you've seen in the volumes now has been more just new customers than existing customers flying more?

Well, obviously in cities that we didn't fly before --

They would all be new.

Yes, they are all new. I mean, in Los Angeles -- we've flown to Detroit and Fort Lauderdale, but flying Los Angeles to LA is a totally different profile of a network. So we can pretty much out on a limb and say that the majority of those are new customers.

Thank you.

Kim, we have time for one more question from the analysts.

Thank you. Michael Lindenberg from Deutsche Bank.

Two questions here. You know, Ben, you talked about basically taking your fares down to basically give your customers the benefit of the taxes not being imposed on the tickets. I mean, were you or are you still non-competitive with the rest of the industry, or has the industry matched?

Well, most of the industry has chosen to keep the fares that the consumers pay the same as it was before the tax holiday, and they are collecting the money that they otherwise would have collected and sent to the government. So that's sort of the near-term case for most of the industry.

Again, we don't know how long that situation is going to last. We don't know sort of -- where we are confident in our position is right for Spirit and our customer base. And at the end of the day we are not sure what the rest of the industry is going to do.

But in your specific markets, so is your fare at a discount relative to everyone else when you look at class by class or have they closed that gap?

And I'm just -- I'm trying to see if you've actually been able to pick up -- being at this lower rate, if you've been able to pick up any additional business.

Well, I will put you back to what Ben mentioned earlier, is that if you go through the first 22 days of the month in July, our segments were up 22% year-over-year for all future sales, and our average ticket value, including non-ticket, was up 12%.

Since Saturday, that has jumped to 43% increase in segments in year-over-year, and a 19% increase in average revenue per passenger year-over-year. So you can clearly see that Spirit is winning, our shareholders are winning. And you know that our customers are winning because they are getting lower fares.

So, in the case of other competitors in our markets, we don't perfectly line-up with them anyway, I mean -- so I can't really speak to what they are doing. But as you can expect, and as the average fares show in every route that we fly practically, you're going to always get a better deal on Spirit as a general rule versus competitors.

Okay. All right, very good; thank you.

Thank you, ladies and gentlemen. This concludes the analyst and webcast portion of our call today.