Spirit Airlines Inc (SAVE) 2012 Q1 法說會逐字稿

Welcome to the Spirit Airlines first quarter 2012 results conference call. My name is Monica, and I will be the moderator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I'll now turn the call over to DeAnne Gabel. Gabel, you may begin.

Thank you, Monica, and thanks to all of you for joining us this afternoon and welcome to Spirit Airlines first-quarter 2012 earnings conference call. Presenting today will be Ben Baldanza, Spirit's President and Chief Executive Officer, and Ted Christie, our Chief Financial Officer.

Also joining us are Chief Marketing Officer, Barry Biffle; Chief Operating Officer, Tony Lefebvre; General Counsel, Thomas Canfield; and Senior VP of Human Resources, Jim Lynde. Ben and David will discuss our first quarter results and current business trends. We will then open the call for questions.

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 with respect to future events are based on information available at the time those statements are made and/or Management's belief as of today, May 1, 2012, and are subject to 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 our 10K for the year ending December 31, 2011.

We undertake no duty to update any forward-looking statements. In our remarks today we will be comparing first quarter 2012 to first quarter 2011 results adjusting all periods for pro forma items and excluding unrealized hedge gains and losses and special items. Please refer to our first-quarter 2012 earnings press release for further details regarding our assumptions for pro forma results and for the reconciliation to the most are directly comparable GAAP measure for the non-GAAP measures discussed.

Unless otherwise noted, when we discuss our results for the first quarter, we will be excluding special items such as restructuring and termination fees, loss and disposable 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 earnings release. And now, I'll turn it over to Ben.

Thank you, DeAnne, and thanks to everyone for joining us on the call today. We're very pleased to report a first quarter profit of $23.8 million or $0.33 per diluted share. Compared to the first quarter last year we increased our operating margin by 1.3 points to 12.6%, despite a 14.5% increase in fuel prices. My thanks to the Spirit team for this great achievement.

Total operating revenue increased 29.6% year-over-year to $301.5 million driven by increased capacity and our network reorientation last summer whereby we added capacity to Dallas-Fort Worth, Chicago, and Las Vegas.

Robust demand during in the quarter resulted in load factor increase of point -- 0.8 points to 84.8%, which also contributed to our revenue growth continuing to outpace our capacity growth. I'm pleased with how well our team continues to execute on our growth plan. During the quarter, we inaugurated service between six new city pairs. Later this week, we will launch service between Denver and our four largest bases Fort Lauderdale, Las Vegas, Dallas Fort Worth and Chicago.

We continue to see a growing number of consumers responding favorably to our introduction of low fares to even more places. Our ancillary revenue per passenger segment in the first quarter was $51.68, up 21.3% year-over-year. As we've expanded into new markets we broaden the base for ancillary offerings such as our $9 Fare Club and our FREE SPIRIT affinity card program which is contributing to this growth.

In addition, we continue to look for innovative ways to increase ancillary revenues, which will allow us the opportunity to further reduce base fares which in turn stimulates even more growth. Breaking the $50 per passenger mark is something we believe that no other airline has accomplished, and we're proud of the fact that, by doing this, we've been able to lower our base fares even further. Giving customers the power to save by choosing only the options they value, is a key piece of our customer strategy.

And we believe there is still room to grow. Ancillary revenue has many favorable characteristics compared with passenger revenue such as less elasticity to price changes, it's less subject to price wars, and, when coupled with low base fares, it helps stimulate demand. Ancillary revenue represented 40.3% of total revenue in the first quarter of 2012 compared to 34.1% in the first quarter of 2011.

We believe there are still opportunities ahead to expand our ancillary revenue. A couple of the ideas we are currently exploring include applying revenue management philosophies to ancillary revenue items which have historically been tied to static pricing points as well as from new innovative ways to increase our portion of consumers' total travel budget. We'll have more details to share with you as these initiatives mature but are confident that, over time, we can continue to grow our ancillary revenue base.

Moving on to a few housekeeping items regarding the second quarter of 2012, we expect capacity to be up 18.8% year-over-year in the second quarter with our average stage length down about 3.3% to 902 miles. For the full-year we expect capacity to be up 23.7% year-over-year with stage length down about 3%.

Our network continues to grow, and many times the changes can be very dynamic as we seek to optimize the network for maximum profitability. We are constantly shifting our capacity deployment from less accretive line to where it can earn higher potential margins. Interestingly, another airline has commented that by our during this, it creates growth opportunity for them. And we're okay if they think back-filling our capacity works for them.

Our focus on investor return remains our priority. We realize that these proactive changes to the network can make it somewhat difficult to estimate our revenue growth. We think the best way to think about modeling our revenue is to model our total RASM rather than separately modeling passenger RASM and non-ticket revenue per flight segment which can lead to double counting the positive or negative movements.

Remember, all things being equal, we will happily trade one dollar of passenger revenue for dollar of non-ticket revenue when we can. Thus from a trend perspective, you should apply whatever correlation you think Spirit has to the industry to our total RASM much like you would our competitors' passenger RASM.

We've continued believe we can grow capacity 15% to 20% per year for the next several years and not compress our margins. We are proud to have among the highest margins in the industry with the lowest fares. Spirit's year-over-year total RASM comp gets much tougher in the second quarter as we lap the network re-orientation last summer where we added capacity to Dallas-Fort Worth, Chicago and Las Vegas. As a reminder our RASM during the second quarter last year was up 22%.

During the quarter we announced a change in our CFO position, and I'm delighted to welcome Ted Christie to the Spirit team. I will now turn the call over to Ted to discuss our cost performance for the first quarter and what we expect for the second quarter.

Thanks, Ben. In the first quarter our total operating expense increased 27.8% to $263.6 million, primarily due to increased flight volumes and higher fuel expense. Capacity increased 17.7%, and economic fuel cost per gallon in the first quarter increased 14.5% year-over-year. Excluding fuel, our CASM increased 5.6% year-over-year to $0.599. Stage length decreased by about 5.1% year-over-year which contributed 2.7 points to the year-over-year increase.

As we have changed the scope of our network including adding service in some higher cost airports, we've experienced increase in average ground handling rates as well as higher crew hotel rates and volumes. We selected these markets for growth specifically because we believe their high margin potential more than offsets the associated higher costs.

In addition, we absorbed additional training costs in the first quarter as we ramped up our crew and airport personnel in anticipation of our planned growth. Looking ahead, we expect continued cost pressure from higher depreciation and amortization expense related to heavy maintenance as well as increased routine and unscheduled maintenance expense as the result of an aging fleet.

We have 28 aircraft in our fleet that were delivered in a three-year period, and they all began to reverse their heavy maintenance check cycle in the fall of last year. As a result we expect to see continued sequential increase of a depreciation and amortization line through year-end 2014.

We estimate that for the second quarter D&A will be approximately $4 million and, for the year, about $20 million. As a reminder, we use the deferral method of accounting for heavy maintenance which means we book heavy maintenance expense for the balance sheet and then amortize these events over the life cycle of the event.

In April the Dallas-Fort Worth airport was hit with a hailstorm. At a system level we experienced no material operational impact, but we did have one aircraft that suffered some damage. The cost of those repairs, including the cost of temporarily leasing parts until the repairs can be made, is estimated to be about $1 million. And our initial review indicates that these expenses will not be covered by insurance.

In addition, we have recently introduced an enhanced preventative seat maintenance program. This program is designed to meet certain maintenance standards for seats on all our aircraft. We think this program will help us to better control long-term seat maintenance costs.

We're still in the early stages of determining the full scope of the program but currently estimate the one-time startup costs will be in the range of $4 million to $6 million which will be spread over the second and third quarters. We are currently reviewing the accounting treatment for the program startup costs and we will update our CASM guidance accordingly once we make that determination.

For the second quarter we estimate our CASM, excluding fuel and the one-time startup costs related to the seat maintenance program, will be up 6% to 7% year-over-year as compared to the second quarter of 2011. A decrease in stage length year-over-year accounts for 40% to 45% of the increase. The balance of the increase is driven by the same cost pressures we faced in the first quarter including increased depreciation related to heavy maintenance events and higher rents and landing fees.

As we consider new markets, we will target those that we believe can meet or beat our current margin level after applying fully allocated costs. This strategy helped us to outperform our competition on a margin basis. That said, our cost advantage is one of our most powerful tools for growth, and we will remain vigilant in finding incremental efficiencies and cost reduction strategies that, along with our growth, will help us offset cost headwinds created by the fuel and circumstances of maturing business.

Turning now to fuel -- for the second quarter we estimate our economic fuel price will be $3.41 per gallon. The density of seats on our aircraft versus our competition functions as a built-in fuel hedge. We have the lowest fuel burn per seat than our competitors so our fares have to go up less than theirs is to cover increases in fuel costs. In addition, we do from time to time, enter into financial hedges to cover our exposure during the booking window.

We have approximately 19% of our second quarter 2012 projected fuel volume hedge using jet fuel collars. We also have hurricane protection hedges in place for the 2012 hurricane season designed to shield refining exposure. Additional details are included in the investor update we plan to file this afternoon.

Our cash position remains strong, and we ended the quarter with $420.8 million in unrestricted cash. In the first quarter of 2012 we generated $79.7 million of free cash flow from operations largely driven by a $43 million increase in our air traffic liability related to forward booking volumes as we head into the busy summer travel season. Additional cash flow and balance sheet details can be found in our 10-Q which we filed this morning.

CapEx for the first quarter was $9.8 million, which includes the purchase of a spare engine that was financed as a sale lease-back upon delivery. Our prepaid maintenance reserves net of refunds were $4.7 million and aircraft pre-delivery deposits returned net of pre-delivery deposits paid were $1.4 million.

For the second quarter we anticipate CapEx and working capital requirements, including net aircraft pre-delivery deposits and maintenance reserves, will be approximately $15 million. In addition, during the second quarter we expect to make payments of approximately $27 million to our pre-IPO shareholders under our tax receivable agreement.

In closing, I'm excited to be joining the Spirit team. Spirit is uniquely positioned to take advantage of being the only ultra-low-cost carrier in the Americas, and I look forward to contributing to the continued success. With that, I'll turn it back to Ben.

Thanks Ted. I want to again thank our employees for delivering these strong first-quarter results. Together we were able to grow our network, expand our operating margins despite a large increase in fuel prices, and achieve a return on invested capital before taxes and excluding special items of 36.4%. All in, a great start to the year for us to build upon. There is always more to do, and as we go out of business we will remain dedicated to improve upon our success. Now back to DeAnne.

Thank you Ben. Monica, we are ready to begin with our question-and-answer session.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions).

Hunter Keay, Wolfe Trahan.

So the increase in ancillary per passenger up to north of $50 -- how much of that do you think was shorter stage length driven versus actual more adoption of opting into the optional services? Is it possible to break that down into volume adjusting it or utilization adjusting it somehow?

Hunter, this is Barry Biffle. Actually the move downward in stage actually pressures non-ticket on a dollars per segment basis because, on a shorter flight, you tend to not buy as many drinks, you tend to go on a shorter trip so you would not have as many bags. So in fact it's not a huge deal. It was only couple percent change, as Ted outlined earlier. It actually pressured it the other way. It didn't actually help increase it.

Oh, okay. And I guess, Ben, I'd like to -- you touched on -- or Barry -- you touched on some of the other initiatives you had in the hopper in terms of ancillary. Are there any policies or fees out there that you've seen in other airlines in the world or other industries in the world that you think are exciting, interesting to you but you think this would work here because of cultural barriers?

We look around the world both at other airlines and other businesses for inspiration on how we can both lower fares for people and provide better service through having more options for people. We recently in January implemented the boarding pass charge fee at the airport which is something that Ryanair and some others in Europe do.

And they do it a little differently there. The charge much higher rate than we charge here, and it's affected the way they operate at the airports. Were not sure whether there is a model that matches what Ryan does here for that.

Beyond that I can't say specific anything. We've heard people talk about charging for bathrooms elsewhere in the world. That's not something we're interested in doing since, as we said a couple times, we believe that's not an optional thing. So beyond that there's nothing in particular I can point to do that says we would like to do this because we see somebody elsewhere in the world doing it but we don't that would work here.

Okay. Thanks, Ben. I will get back in the queue. Appreciated it.

Bill Greene, Morgan Stanley.

I know that you don't tend to offer guidance or anything on RASM, but how about how April shaped up? Can you offer any color there?

Basically, we don't do that Bill. I'm sorry. We put our traffic release following the month and talk about our traffic and then that's basically the way we give -- talk about the business.

Okay. Fair enough. Can we also talk a little bit then about competitive response to some of these new markets you are announcing? Obviously, these are some important markets to some peers of yours. And I'm just curious if you see -- you mentioned you don't care so much if they want to backfill and I certainly understand your cost advantage there. But if they do backfill, maybe it take longer to see some of these markets ramp up in profitability. How does that play out for you regardless of whether it's a good thing for them to do or not in the long run?

Well as we said before, Bill, when we enter a new market we expect to grow our own demand through stimulative new low fares. And we estimate our entry to the market is based on what the current pricing dynamics and demand in that market are. We look at, if we lower the fares, how many more people are likely to come out and fly given those lower affairs. And then we size our capacity in that market to carry the growth and not carry the base traffic that was flying.

So, generally, what that means, although certainly not every market works exactly the same, what that means in general is we're not really -- we're not attempting to nor in actuality are we stealing traffic from existing carriers. So in most cases our growth in what would -- might be considered their market isn't really threatening in the sense it is not going after their business.

And secondly they tend to ramp up fairly quickly because again it's the low fare that creates the demand -- is a low-fare that create the demand in the stimulation and so that's allows it to ramp up really quite quickly.

Okay. Some of the markets that you have put in the press release here today if we look at where they are targeting, it certainly appears that there's more than a fair share in Dallas-Fort Worth. When American exits, is that something that you need to consider in the plan here because they will presumably come out either as a bigger carrier though a potential merger or certainly a lower-cost carrier than they might of been in the past. How would that affect your plans?

We don't believe it would affect the plans in any meaningful way. Again, American is going to their process, and, at the end of the day, if they are very successful in that process, we don't believe that they are even attempting to achieve a cost structure anything close to ours. And we've not heard anything from American that would suggest that they are changing their business strategy to attract the corporate business traveler as their base, which, of course, is not what we are trying to do.

So, at the end of the day, assuming American is going to exit the bankruptcy at some point, which we assume they will, we see that no differently as in terms of how we might think about Dallas versus other growth as with American, and the way they are today.

There is nothing about American being in bankruptcy that has driven our Dallas expansion. It's been about the size of the Dallas market, and the ability to stimulate that market with lower affairs and create a new flying basis for travel in and out of Dallas at a lower rate than we can uniquely serve with our price points.

And, Bill, this is Barry. Let me just add, too, we're up to 15 routes from DFW, and, while that looks really big, what you have to think about from a reaction perspective, we are only in these routes one to two times a day. So, compared to what a Southwest or even a JetBlue has done when they have entered markets and gotten into friction with competitors, we're not after their customer, and I think our actions have shown that American recognizes that.

And I think Americans recognizes it is much better to have us as the low-price option which is not after their business customers than you had something like Jeff blue that, if they went into Dallas, they would be in all these markets seven times a day. And they would be after the business, and we see that American is rationally focused on us in that light.

Yes, I think they are going to Dallas. So we'll see if there's a response that maybe you get caught up in as well. Thank you so much for the time.

Jim Parker, Raymond James.

Maybe one for Ted, since he's new. (laughter) Ted, you stepped into a nice cash position for the size of this company. And you don't own any aircrafts so you're probably not getting much of a return on your cash. What is the -- what are the pros and cons of perhaps owning some aircraft and spending a bit of that cash on aircraft?

Well, the pros and cons are pretty obvious. Obviously, you can gain some decent advantages from a cost perspective as well as from a tax perspective. We are going to evaluate that the way this Company has evaluated all decisions which is are we going to drive the kind of return we would expect on that investment? And those are the evaluations we will go through now that I'm here so I can't comment what they have looked at before. But that's the way we're approaching it going forward.

Okay -- one for Barry.

Yes, sir.

Barry, you -- and these new markets you're adding in most of your markets you have two or three flights per day. And you do very well. Any inclination to increase frequency in some of these markets?

Generally, no. And usually it's just one to two. We don't have really any that doing three so much. The reason for that, as we have outlined in our most recent investor presentation, is the way we look at our network growth is we take a market, and we go in and we lower the prices. That stimulates traffic, and we are only looking to grow into the stimulated portion, and that's what we believe makes us less threatening to incumbent carriers. If we were to deviate from that we think it would be a strategic error in our part on how we relate with our competitors.

That's great, Barry. That was the answer I wanted to hear.

Glad I stumbled on it then. (laughter)

Duane Pfennigwerth, Evercore Partners.

Just to follow-up on Jim's question -- with respect to your fleet this year and next. Are there any -- I think you had two this year unfinanced. Is that still the case and can you talk about your preferences on those two and deliveries into next year?

Yes we've still -- that's correct, Duane. We still have two that are unfinanced at the tail of the year, but we've been in a pretty exhaustive R&P process, and we're looking at our options on those, and the responses have been very good. So we're excited about what we're seeing from a response perspective as well as a cost perspective.

I guess that implies at least in the near term more operating leases?

Like I said when Jim sprung one on me, we are taking a look at how we finance airplanes. I've been in both positions in the past where owning airplanes has been seen as favorable and also caught you whipsawed. So it's not the panacea, but we're looking at all of our options, and, in the near-term -- including in the near-term and the long-term.

Okay. Just on your ex-fuel cost growth guidance, I wonder if you could talk about the second quarter of last year where you were down10. Optically it looks like a tougher comp, and it looks like the comps get easier in the back half, and I guess your capacity growth is actually accelerating as well. So any comments you could offer about ex-fuel comps in the back half.

So you are saying -- okay -- so just for the second half of the year. We don't really look that far out from a CASM perspective, but I guess we did give guidance for you at least in Q2. So you have a good feel for what we're thinking about there.

Duane, we will talk to you more about the second half CASM as we get closer to the second half, but, obviously, as the airline gets bigger and as we are growing against the headwinds of the maintenance and depreciation that we talked about and the one-time costs of the seat maintenance program, we expect that we will be able to hold the line on cost through the year. But in terms of how that's going to look year-over-year were not quite ready to talk about that yet.

Okay fair enough. It looks like you go from a down 10 in Q2 of last year to a plus 6 so to me it looks like they are easier. Lastly on the boarding pass fee or online check-in. Are you seeing any change in customer behavior? Any metrics you can offer around that fee?

Don't have any metrics yet. It's a new program. Didn't start until the end of January. And it totally certainly people are more people are checking in online in coming to the airport with boarding passes, and that program was much more about changing consumer behavior to take advantage of the online check-in. Come to the airport and ready to fly already and just check your bag and fly rather than have to be checked in.

And so, over time, we expect that to be more of a cost saving initiative through consumer behavior that supports that cost improvement rather than a pure revenue initiative. But again it's still very early so we don't have any data to share yet on the specific passenger change or anything.

Okay. Thank you.

Mike Linenberg, Deutsche Bank.

Just a couple questions here. You've had a pretty decent ramp of new markets over the last 12 months, and I even see just in the last quarter the number markets in the number that are coming on. When I think about your RASM of 10% year-over-year, how would look if we broke it out on a same-store basis and then markets that have matured over the last -- markets that have been added over the last 12 months? Are they similar? Or is there some meaningful gap between the mature and the new markets?

If you look at any new route performance and within about six to nine months depending upon of its international or domestic, you will be able to see it for yourself in public data. But what you will find is that, through the course of the first year, within our market, the market begins to mature. It's usually mature within a year. If you go look at the last five years, you'll find that most of our markets are mature within -- like I said, within a year, within six months, you will find that we're making money. And if you back up to -- call it 69 days -- they are making cash.

As we've announced -- actually I think last year -- we've seen a lot of our new routes in the last 12 months to 18 months have done much better than our last five-year average. And we believe that's due to a of couple things. Number one, the popularity of our model is much stronger, and our ability to compete in the marketplace is much stronger than it was years ago. And so that is why we've seen much more stellar performance of new routes.

But again there is still a ramp-up even in the best of markets. And that may be measured in weeks and months where it was measured closer to a year in the past, but there's still a ramp up. If that helps your thinking on it.

Mike, does that answer your question?

Yes, it does. Sorry. And then my second question. When you look at -- you mentioned some of the reasons why the ramp-up is faster. You talked about the popularity of the model and the ability to compete. Are you starting to get a benefit, call it a tailwind from the fact that as you fill in the map of, for example, Denver you start up new service?

It's a new station for you, but the first four markets are cities where you already have a presence. Are you getting a bit of a tailwind from that? Is that helping on the profitability or is it still not all that meaningful since your frequency is still low?

That's really hard to prove, but we think about it a lot. And there is anecdotal evidence that suggests that growing from places we already have critical mass is much easier because you have an organic base to build from. And I think one of the other things that we are doing is, as you see, that is a little different than maybe our past, is that, when we go into a city, we tend to serve two, three, four, up to five markets at least from that city. So we have more options.

So, where before, if you were in a city, maybe you could fly us to Lauderdale or you could fly us to Myrtle Beach, or you could fly on to the Caribbean or Latin America, but that's what we offered you. Now if you go to Chicago, I'm in many of the top markets. You go to DFW -- I'm in 15 of the top 30 markets. So they build on themselves. Of course our execution is getting better. Kind of like the last question. We are getting better at delivering our mousetrap.

Okay. Very good. Thanks, everyone.

Ray Neidl, Maxim Group.

Yes, just as a macro type of question -- you're growing your route system going west now as new opportunities. But it's going to be increasing I think as you said your length of haul and so forth. And that's going to affect your PRASM and your TRASM and CASM and so forth. It might give you a chance to sell some extra drinks and so forth on board. But, basically, is that going to have long-term effects on your model do you think? It will be a different type of airline. You will have greater aircraft utilization -- maybe higher maintenance. Have you thought about that?

Ray I don't really think that's the case. In fact, as we're growing out west our stage length is actually shrinking a bit because it's not that we're necessarily -- it may go up in the future again, but again it's not like we are connecting the East Coast to the West Coast by flying to the West Coast. We're flying to Portland and Oakland and San Diego, for example, all from Las Vegas, which are not long-haul flights. Dallas and Chicago are in the center of the country. So there is not trans-con operations from there.

So our models are the sweet spot in the two- to four-hour time range, and that is where we will continue to move it. Basically, bouncing in and around 900 miles is where this airline works well, and that is how the network has been growing even as we been moving west. And, as we look at growth going forward, we think we can keep it in that range.

One of the things we like about our growth is that we think we can grow without having to change what we do. As we have said a couple of times, we don't need to join a worldwide alliance. We don't need a merger. We don't need to change our distribution. We don't need to think about the business differently than the way we think about it now to successfully execute on the growth that we have planned.

Okay. And then you said that there are still more opportunities to generate ancillary type of revenues, but you're not going to charge for the bathroom. Have you thought about charging for vacant seats? Your base fare is so cheap -- sell one person two seats. I do not know if that's legal or not, but if they wanted a seat next to them vacant, get the extra fare there, although you wouldn't be able to generate additional revenues off of that.

Reasonable idea -- they can do that now. Our fares are so low they can just buy two seats.

Do people do it?

No.

No?

No.

Ray, this is Barry. We've actually spent time on that concept. The challenge we come into is that we think where actually customers who want to just pay for the seat, but the truth is that I've still got this opportunity cost of all the other things that seat should have bought. So the truth is what we should do is just sell all the seats.

That's what I was thinking. One last thing, though. You've had some negative publicity about not refunding a passenger his spare. What's the reason for that? Is it bad publicity, or are you afraid if you do that you open up the floodgates for anybody with an excuse.

Ray, the reason is pretty simple. We offer the lowest fares in the industry right now. And a core principle of our model is that we can offer very low base fares and customers only pay for what they actually use, and they don't pay for what other people use. So to refund a non-refundable fare, and we get literally hundreds of requests a week to refund a non-refundable fares. The recent media case -- the media is talking about, but there are many, many, many others of people were asking for refunds of non-refundable fares.

We have an insurance product that many people buy. For to offer refunds to those -- to offer refunds to those who don't purchase that product, cheapens that product a bit and cheats those people. There's an accountability aspect there of if you are going to change your mind, there are products you can buy to protect yourself. And so we just think it's fairer to be -- treat everyone consistently. Only pay for what you use. Don't pay for what your neighbors decisions are.

And, at the end of the day, we believe that policy will allow us to continue to offer the lowest fares in the United States. And, while and once in a while, it may disenfranchise a certain customer because we didn't bend the rules for them, at the same time we think that, overall, having the lowest-fare product is going to be what most customers in the United States appreciate.

That's a good point with the insurance. Thank you guys.

David Simpson, Barclays Capital.

Just wanted to follow up on Bill's question on the competitive response. You talked a little bit about America preferring you say over JetBlue. I'm curious how, as you move into more into Chicago and particularly Denver obviously -- curious how Frontier and United doesn't know you as well -- how they react? But I'm also curious how Southwest or Frontier, where arguably you're after a little bit more of their customer -- at least a portion of their customer base. Do you see a different reaction out of them?

Not materially, no.

On the United side do you see -- does the United response differ from American or is it pretty consistent as you are harvesting these opportunities?

Again I don't know that -- we're pretty small so I'm not sure I can't speak for the head of marketing for each one of these airlines, and what they think about us But I think in some cases the decisions are made at much lower levels and they don't give as much thought as we're having the conversation about.

But I think, specifically, in the case of last summer when we entered Chicago's markets in late August, we did see an initial reaction from United that was possibly different than what we've seen from American in the past. But not so dissimilar from what we saw from American in say circa 2007. So since then they have behaved very similar to American, and I think again they probably concluded the same thing as American has. That we are not threatening their business.

I think it Southwest's cases very similar thing. They're all about frequency and the business customer and so forth. So why would they chase us? We are clearly not after their customer base. And in Frontier's case, it is just really early. That service actually doesn't start until Thursday. But we haven't seen any changes, and we wouldn't expect there to be a whole lot of changes. They're after a different customer than we are.

Okay, great. Appreciate that color.

Stephen O'Hara, Sidoti & Co.

In terms of the Allegiant adopting the carry-on bag fee. Do you see a competitor or the industry adopting higher levels of ancillary revenue as a good thing? Giving you maybe a little room to push the envelope, or do you see it maybe as a possible risk in that it could possibly draw an unfavorable action for the government?

Well, as you know imitation is the sincerest form of flattery, right? So we thank Allegiant for that. In general, the industry has adopted a number of ancillary things starting in 2008 when the industry more broadly adopted bag fees. But you see things like bag fees and seat fees and that a lot of things that create the bulk of our ancillary the rest of the industry doing to various degrees. We think that's actually very good thing.

What it does is number one it's good for consumers. We think it gives more consumers choice in terms of only paying for what they use. But also the more people understand that they're going to be charged for bags wherever they go, for example, they can just look at our fare versus the other carriers and see that our fare is lower and be okay.

So, in general, when we see other carriers adopting ancillary things that have maybe uniquely been working for us at Spirit, we see that is generally a good thing, and, as you said, maybe gives us more leeway to think about even newer things.

Okay. And then a follow-up to the previous question. But, in general, has there been a change in the response from competitors from maybe from when you were first starting the ULCC model to something more recent now?

I think the answer to that is, yes. If you go back to the 2007 time frame -- the first full year of this model. And when we first started going to Airbus. It was an unproven model. We were an unproven airline. Liquidity was very constrained and on a lag basis that was reported through the DMV and so on. I think that clearly, early on, it was unclear what we were doing and whether we were trying -- what traffic base we were trying to attract? Were we really threatening to other carriers or not?

Over the last years I think what's been clearly established is that we do have a discernible cost advantage and that we believe will increase over time. We are clearly not going after the core demographic that most of the industry is chasing. And we've been very disciplined about our capacity deployment. To keep it thin and spread out. So, as a result of that, I think you've seen people who under -- competitors who understand us better react more rationally to us.

I would say one other thing. I think it's been clear probably the last two years at least that we are not after most of these other carriers' business. And addition to that going back now just a year when we look at cash balance you're left with two choices. One you either get it and you get the rational response which is you should ignore us. Or two you are forced to ignore us because our cash position -- it's futile to fight us. Not to be arrogant but that's really having been on the other side of this before I come to that rational conclusion.

Okay. Thank you very much.

Stephen Trent, Citi.

I was just curious. Just one broad strategic question with respect to your growth. I noticed fairly recently that you were doing some flying into Toluca and it seems 20% to 25% some odd of your capacity is Latin America and the Caribbean. As you think about future growth capacities, I'm with you with respect to your choosing routes based primarily on profitability. But do you think maybe four to five years down the road that 20% to 25% LatAm/Caribbean balance on the capacity basis will be intact, or could it be a little bit higher?

That depends, if you say five years, that depends upon other market forces and competitors and so forth and what they do. The truth is, if you go back five years, the opportunities were very much US to the Caribbean/Latin America in terms of the yield performance differences versus domestic. That dynamic due to consolidation and what's happened and a lot of carrier brands moving away as well as aircraft themselves leaving the market in the US. Those dynamics have flipped and in the near term the domestic opportunities have been our primary focus.

In addition to that we haven't had platforms beyond really Fort Lauderdale so we didn't really have the ability to fly a lot of trans-border to Mexico like we do now with our growth outlast. I think the thing is that we will be where we can maximize the most return on our assets. What's nice about Spirit, the way we view it, is the flexibility that our model has and that we can exploit it if that's where the best place that we can get the most return is. But I wouldn't -- I'm not going to draw a line in the sand and that has to be 20%, or it's got to be 40%.

Steve, this is Ben. We will say that, as we look out at our growth, just as Barry said, and we look at all the opportunities where we believe we can deploy our model today given the fare environment and the capacity environment, those include both international and domestic growth. But, as Barry said, the domestic environment is a little more appealing in the very near term.

Understood. Thanks gentlemen and just one super quick follow-up to that. I'm going to guess that and be very in my view unlikely event that we see Mexicana Airlines resuscitated. I'm guessing that's probably irrelevant for you guys given that are different business model.

We think that's probably right.

Perfect.

Steve, let me also say that we're very happy that you picked up coverage on us after Citi dropped coverage. When Will Randow's coverage dropped, we were happy to see you come on board.

Appreciate it, and I'm trying to fill Will's very big shoes. Thanks for your time.

Hunter Keay, Wolfe Trahan.

Thanks for taking my follow up. Hey, Barry, what can you tell us about the typical profile of your average customer? And how do you track if they come back -- if they are repeat buyers?

The typical customer would have $80,000 to $100,000 a year in household income. Not a whole lot different than you would find other leisure customers. They do tend to skew. We have seen data that suggest that they tend to skew more value-oriented.

For example, we have seen evidence that our customers are much more likely than your average $100,000 household income to shop at Sam's Club, BJ's, Costco. So, again, they have money, but they are more frugal and they are making rational decisions about value oriented purchases.

And so in terms of repeat, that's really difficult to gauge at this point. Just because of our growth profile. What you have to do is look at isolated cases talking about like in Atlantic City/Orlando where maybe we've flown for 10-plus years. And the repeat is very, very high. Obvious -- I know there's this rumor that someone percolated recently that -- yes you know the repeat's not that great, and they'll eventually run out of customers.

Well, I think over 10 years we would've already run out of the Atlantic City/Orlando customers because it's just not that big of a marketplace. So the reality is, again, we are very preferred there. We see a very strong relationship with our $9 Fare Club. We see very strong relationship with our FREE SPIRIT MasterCard, which shows that they are tied to the brand. And so we feel really good about our repeat business. Again, people don't go to Costco and just a shop once. Same thing. We don't search out a value-oriented -- value for money airline and just to it once.

Yes, that's interesting. Thanks, Barry. And I had another quick one for you. Can you give me a little color on what's driving that fuel price so much higher than competitors? Is this a timing issue when you price that out? Are you paying more for any particular reason because hedges working against you? What's going on there?

No. We looked at the curve on or about April 19 and 20, and I don't think we have a hedge issue working against us. In fact, I think our hedges gently (inaudible) the money. So I'm not sure if it's different locations -- different competitors have different hedging activity. Who knows?

Hunter, I also don't know if that the differential for -- like our differential you would take the jet fuel and add $0.20. I don't know what my competitors on that -- I know one competitor is only at $0.10. I'm not sure where everyone else is at.

Yes, I think it generally floats somewhere between $0.10 and $0.15, DeAnne. That's helpful, though. Thanks for that both of you guys. Alright. I'm squared away. Thanks a lot.

We have no further questions in queue. We will now conclude the call.

Thank you all.

Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.