Spirit Airlines Inc (SAVE) 2012 Q2 法說會逐字稿

Welcome to the Spirit Airlines second quarter 2012 earnings conference call. My name is Sandra and I will be your operator 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 will now turn the call over to Ms. DeAnne Gabel. Ms. Gabel, you may begin.

Thank you, Sandra, and thanks to all of you for joining us this afternoon and welcome to the Spirit Airlines second 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 Ted will discuss our second quarter results and current business trends. We'll then open the call to 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 are management's beliefs as of today, July 24, 2012 and are subject to significant risks and uncertainties that could cause actual results and performance to differ materially from those reflected in the forward-looking statements, including the information under the caption risk factors included in our 10-K 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 second quarter 2012 to second quarter 2011 results, adjusting all periods for pro forma items and excluding unrealized hedge gains and losses and special items. Please refer to our second-quarter 2012 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 our non-GAAP measures discussed. Unless otherwise noted, when we discuss our results, we will be excluding special charges, loss on disposal of assets and unrealized mark-to-market losses on fuel hedges. These items, as well as our pro forma adjustment for the second quarter of 2011 are detailed in our earnings release. And with that, I'll turn the call over to Ben Baldanza, Spirit's President and Chief Executive Officer.

Thank you, DeAnne, and thanks to everyone joining us for the call today. We are pleased to report a second-quarter profit of $35.3 million. This 35.4% year-over-year increase in adjusted net income was achieved while lowering our base fare per segment to just $81.06. Offering low base fares is a key highlight of our business model as it gives consumers more pricing power and grows the traveling market.

We increased our operating margin by 1.5 points year-over-year to 16.3% and achieved an EBITDAR margin of 27.6% for the second quarter. Over the last six quarters, we have achieved our target of growing the business 15% to 20% per year without depressing our margin, and we are confident we can continue to do so for the next several years. I want to thank the hard-working Spirit team for their contributions to this success. Thanks to the efforts of everyone from the front line to the flight and maintenance crews to our back-office, Spirit is a profitable, successful airline and I'm pleased to be part of your team.

Total operating revenue increased 25.5% year-over-year to $346.3 million on a capacity increase of 16.5% and a total operating yield increase of 9.1% year-over-year. Our ancillary revenue per passenger in the second quarter was $51.47, up 18.6% year over year, primarily due to per-segment increases in passenger convenience fee and bag fees. We believe there are many opportunities ahead to expand this source of revenue.

During the second quarter 2012, we launched nonstop service on 10 new routes, and last week we announced even more new city pairs that we plan to liberate from i-fares, including 11 new routes out of Dallas-Fort Worth Airport, bringing our total cities to be served from DFW to 26. We continue to see smart, value conscious consumers respond favorably to our low fares as evidenced by both our new and mature markets performing well. This ongoing expansion of the network is proving excellent for our margins, but us also creating some cost pressures that Ted will comment on in his remarks.

Looking ahead, we expect capacity to be up 22% year-over-year in the third quarter with our average stage length down about 2% year-over-year to 190 miles. Fourth quarter capacity is expected to be up 30.2% with full-year 2012 capacity up 21.6%.

Overall, we are pleased with how the third quarter is shaping up. Our booking curve is fairly short, so we don't have visibility post-Labor Day, but July and August booking levels look stable. While we aren't prepared to give a forward-looking outlook for RASM, it should be noted that our year-over-year RASM comp gets much more difficult quarter to quarter. In the third quarter last year, our total RASM was up 28.4% year over year, largely driven by our network reorientation last summer where we added capacity to Dallas-Fort Worth, Chicago and Las Vegas along with a one-time benefit of our decision to pass along federal excise tax holiday savings to our customers. With that, I'll turn the call over to Ted.

Thanks, Ben. In the second quarter, our total operating expenses increased 23.3% to $290 million, primarily due to expenses associated with increased capacity, including a 14.6% increase in fuel block. Other drivers included higher average airport and crew-related costs related to network scope changes.

Excluding fuel, our CASM increased 11.8% year-over-year to $0.0605. Stage length decreased 3.2% year over year, which contributed 1.8 points to the year-over-year increase. Another primary driver of CASM ex-fuel in the quarter were start-up costs related to our seat maintenance program, which contributed approximately 2 percentage points to CASM ex-fuel.

We incurred approximately $3 million of start-up costs related to our seat maintenance program in the second quarter and estimate we will incur $4.5 million in the third quarter 2012, bringing the total start-up costs related to this program to an estimated $7.5 million. It is possible that some of the work will slide into the fourth quarter, but we are working towards completing the program by the end of the third quarter and have fully burdened our third quarter cost guidance accordingly.

We believe proceeding with this program is the right long-term decision as it will improve our product standards and lead to better managed seat maintenance costs in the future.

Providing reliable transportation is among our top priorities, and our second-quarter performance was not up to our usual standards. We're implementing the necessary changes to improve our operational reliability. Passenger re-accommodation expense related to irregular operations in the second quarter contributed about 2 percentage points to the year-over-year variance in CASM ex-fuel. Other expense drivers in the quarter included maintenance expense related to the maturing of our fleet, hailstorm damage repairs to the aircraft damaged in April and additional rent expense for the aircraft leased for the summer months for a third-party provider.

Our outlook for the third quarter of 2012 is for CASM ex-fuel to be up 5.2% to 6.1% year-over-year, driven by cost pressures similar to what we experienced in the second quarter. For fourth quarter 2012, we estimate CASM ex-fuel will be down mid-single-digit year-over-year as we get beyond the one-time in nature costs impacting the second and third quarter.

Turning now to fuel, for the third quarter we estimate our economic fuel price will be $3.15 per gallon based on Gulf Coast jet fuel curve as of July 19. This includes our estimated impact from realized fuel hedges. We have approximately 19% of our third quarter 2012 projected fuel volume hedged 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 $415 million in unrestricted cash.

In closing, while pleased with our overall second-quarter results, we are disappointed with our cost performance for the quarter. Even on a comparison basis to our peers, we're likely to look very competitive. Our cost advantage is one of our most powerful tools in being able to continue to offer low base fares, stimulate growth, achieve high returns and deliver value to our shareholders. We intend to keep his advantage. There are a number of things that we know are true. One, we are amongst the lowest-cost operators in North America. Two, our annual growth rate over the next 5 to 7 years gives us tremendous leverage from a unit cost perspective. And three, our growth is driven not only by shell count, but also by larger gauge aircraft, which will further supplement our cost improvement. Therefore, it is clear to me that our CASM ex-fuel will be lower over time, as illustrated by our fourth-quarter expectation, and it is our mission to accelerate that reduction with aggressive management of the tools available to us.

With that, I'll turn it back to Ben.

Thanks, Ted. Whether the measure be our second-quarter EBITDAR margin of 27.6%, or our second-quarter operating margin of 16.3%, or our last 12-month pre-tax return on invested capital of 30.3%, the business model is clearly working and we are excited about our future growth prospects. And just like we have done for the last six quarters, we are confident we can achieve that growth without compromising our margins.

Now back to DeAnne.

Thank you, Ben and Ted. Sandra, with that, we are ready to begin the question-and-answer session.

(Operator instructions) Michael Linenberg, Deutsche Bank

I guess two questions here. One, when I look at your capacity plan for the year, Ben, you provided it just over 21%. It seems like that that's come down a little bit. I want to say maybe 3-6 months ago, maybe we were as high as 25 and then maybe 23, and now 21. Is some of that just intentional, given the fact that energy prices -- yes, they've come down, but they're still very volatile? Is it maybe thoughts on the economy, or is it just more the vagaries of the schedule?

I think it's closest to the latter, Mike. I think it's just scheduled tweaking. We've got -- at the beginning of the year, everything was perspective. We've now got almost seven months behind us and we have that actual to put into the full year. Just about the rest of the year, it's just trimming the schedule here and there, making tweaks to the right routing and things like that. It's not a systemic approach or things -- we want to fly less or things like that, just kind of the way the numbers worked for the year.

Perfect, and then just my second question is, when you go to your website and you have the map where we fly -- and it's fascinating because if I think back about six months, there was a lot of white space on that map. And now I look at that map and I realize that, while I think in the past you really haven't focused on connectivity, there's got to be a time where maybe it does make some sense. And I realize from some of the VFR markets coming up from whether it's Mexico or South America, there may be some connectivity there. But is that something that, as you think about the model as it matures, that we're going to see more and more connections? And it may be by accident rather than by design. What are your thoughts on that?

Well, we're principally a point-to-point airline, and we still have -- less than 10% of our itineraries connect, but the expansion has been very good for us. Let me let Barry Biffle, our chief route planner, give you his thoughts of activity.

Good, hey Barry.

We've announced a lot of new cities recently and we've started it a lot this year. And I think what's important to note is, if you take the top 25 metros in the US, we now service over 80% of the population of those top metros. So as you see from here on out, and Ted alluded to this for the infrastructure, now that we have those bases, yes, we can collect a lot of dots and we've begun to do that. And you've seen both in the things we've started this year as well as some of the recent announcements. So, yes, you're starting to see less white or gray space on the map as a result. And it's just driven by the popularity of the brand, and we're really being accepted in the new markets very well.

Okay, very good, thank you.

Jim Parker, Raymond James.

Barry, I guess this question is for you. When you did your IPO and for several months thereafter, you all talked about the 300 overpriced markets where Spirit could go in and cut the fares 25% and realize a real nice profit margin. Recently, I guess a month or so ago, you increased that to 400. So I'm curious where the additional 100 came from, and was the original analysis flawed? And how many aircraft? I think on the 300, you said 100 to 130 additional aircraft, now into the 400s. What is that, 150?

Well, I think on the data, just let's start with if you refer back to the roadshow for the IPO, that data -- it's lagged. It's DOT data. And at the time, we were operating on effectively 2010 average fares for the industry. So as we've now seen 2011 fares for the industry, as we've noted, RASMs have gone up across the industry. That just makes more opportunities for Spirit. And even though we've added a lot of new routes, we haven't put a dent in 400 new route opportunities. So it's just that the opportunities are getting better even than they were a year ago.

So, Barry, how many aircraft will you need to serve these 400?

Well, if you do the math that we did before on the roughly 130 equals 300, assuming similar stages, you know that's going to be a lot closer to 200.

And the important thing, Jim, is it's more airplanes than we have committed on order right now, which means the order book is -- has pretty low risk to it.

Yes, so in the quarter, these scope-related expenses, meaning scope of the operating system, you are now kind of nationwide. And I'm curious about spare aircraft to cover maintenance and weather cancellations and putting these people up in the hotels, if you have people base there. How long are these expenses? And unusual weather-related maintenance cancellations -- how long is that going to go on?

Well, you know, our expansion has created some cost pressures, as both me and Ted alluded to, but some of that has been station start-up costs. We've opened a number of new cities, as Barry mentioned. We are then in a lot of places right now. But as we start to -- as we are building out both the maintenance and crew infrastructure in other locations outside of our traditional East Coast bases, that gives the ability to react a little bit more quickly.

In terms of spare aircraft, they way we think of it is not necessarily the number of dedicated airplanes sitting around waiting to fly something if something else isn't working. It's more the available time in the schedule and how much available aircraft time is available to our operators throughout the day and throughout the week to be available. And we work to ensure industry standard for a low-cost carrier of around the 4% range of spare capability. And we build that into the schedule, not necessarily a plane just -- a plane and crew sitting around waiting to fly, but with enough schedule flexibility to make that happen.

So as we continue to grow and move into the next year, even, as Barry suggested, as we build density in a lot of the cities we're already in, that's just going to make all those sort of costs that were sort of start-up for 2012 get a little lower and be able to deal with things even a little bit more efficiently as we move through and are opening fewer cities on a percentage basis but connecting more dots. And that's why we've set by the fourth-quarter, you'll start to see our year-over-year CASM dropping again.

Okay. Ben, just quickly, your non-ticket usually rises from the first quarter to the second quarter over the past several years, but this year it didn't. It was essentially flattened out a little bit in the second quarter. Is there something going on there about seasonality, or where you've moved capacity? What is causing it?

Jim, this is Barry. I think it's just coincidence maybe if you look in the past that of when initiatives have been launched, and maybe we messed that up and launched some things earlier last year, which caused it. There wasn't a lot of change. There was no change to our business from the first to the second quarter. What did change is, if we look at what caused it, there's a little bit of a stage reflective in there, not a lot, but a little bit. Also, we had the credit card, we launched a new program with Bank of America last year in April. And we double dipped, if you will, on the last year of the Barclays program. It had a tail where we were getting revenues from both banks, and so we had that in the first quarter but not in the second. Again, these are measured in pennies, but the three of them add up.

And then the third thing was the 24-hour rule by the DOT did hurt change fee revenues. So those three things combined together did hurt the non-ticket. But in general and as you see, our total revenue, that's how we generally manage it. So we look at the revenue per flight segment and so we feel really good about it. But there was just now new initiatives launched in the second quarter that would've changed it.

Okay, thank you.

Duane Pfennigwerth, Evercore Partners.

Just on your CASM guidance for the fourth quarter, can you talk about -- I guess we haven't seen your revised capacity schedule, so some of that is capacity growth acceleration. I think the last update was up 23, 3Q; up 27, 4Q. But I guess more importantly, I'm interested if you can give us, is that a better indicator? Is that how we should be thinking about next year?

Hey, Duane, it's Ted. As I alluded to in my comments, that's our view. We don't want to overstate and put you on a trend, but the truth of the matter is that there have been a lot of items that have been part of our growth in the recent quarters as well as the one-time stuff that we've been talking about, the seat maintenance related expenses being the most notable to penalize the CASM here in the near-term that should start to spin off as we head into the fourth quarter and into next year. As Barry alluded to, once we start getting to that scale at these various locations, then we can start to really reap the benefit on a unit cost perspective. So I think that's certainly going to be -- that's our view, that's our objective is to start seeing that type of trend that we've see in the fourth quarter more into 2013.

And then I just wanted to ask you one on changes in your network, because it feels like that has at least as big of an impact on your revenue trends as changes in the economy. We can dig through the DOT data, but frankly it's pretty noisy. So Barry, wonder if you could comment on the implied fare increase year-to-year that should result in your new routes. I guess from a different perspective, how much higher are the fares in the markets you are entering versus your system average today?

Well, are you talking about the industry average fares before we enter them or what they are once we start?

Well, there's a reason you're entering these markets, I assume, and your growth at DFW specifically. So I guess what do you think is a better read on your forward revenue trends, the general economy or fare trends in the markets that you're entering?

I would say the fare trends in the markets we're entering have played a bigger factor. Obviously, if you look at the last, call it five quarters, you can see the changes that we made to our network far outstripped anything that was happening in the industry from a fare perspective. So we see and have seen in the past and continue to see the best ways to improve your RASM are a better, well-managed network. And so we continue to focus on above-average fare routes to deploy our new capacity. But we don't actually target date a -- is this going to be an 18% higher, is this 10% higher. But, yes, we look for the top quartile of average fare markets, and that's where we look to grow.

Thanks. I guess the general point there is, given your limited scale today and higher fare markets that you're entering, should we assume by default that capacity growth acceleration will be dilutive to RASM? This fourth-quarter down 5 in ex-fuel CASM, should we by default be assuming negative RASM in line?

I think that would be premature to make that conclusion.

Okay, thank you.

Ray Neidl, Maxim Group.

A couple of quick things here. It just came out not too long ago that your appeal to the court about concerning the ads with the total cost of your pricing has been rejected. Is that any big thing, or was that just a minor annoyance that you were addressing there?

This is Thomas Canfield. First of all, we've been in compliance with these rules, which have been in effect for quite a number of months now. Obviously, we disagree with the decision. But I don't expect this will change in any great way what we are doing.

Okay, great, that's what I thought. The second thing is you are really building up DFW airport. You're kind of going into the den of the lion there, American Airlines as they restructure. Basically, is there any danger there that when American comes out of bankruptcy as a stronger entity with what you're trying to do in DFW? Secondly, even though the cultures are entirely different, American is looking for a low-cost partner. Is there any way you could partner up with American?

Well, I can't really comment on the second piece. They've got a lot of things to work through. We have competed with America for a long time here in South Florida, so we know what American is about, they know what we're about. They know we're not chasing their business customers. They're all about choosing business customers. So our growth in Dallas has just been -- it's a -- there's high fares there and there's a good market for us to expand in. We fly basically once a day, and in a couple of cases twice a day to most of the markets, and that's giving -- creating a bigger market in Dallas than would otherwise be there. It's not directly related to American's bankruptcy; it's related to the sort of market opportunity.

Okay, great. And then finally, it looks like the economy is slowing further. We may be going into recession with the tax cliff in January. I know that your model is different. How would you react to a recession, a big economic slowdown or a recession? Would that potentially slow your growth, or do you see that as an opportunity to grow even more?

Well, if you look back to 2009, there was a pretty major recession for travel. And that's the year that Spirit had its highest earnings from a margin standpoint, had our highest margin operation. Like McDonald's or like Wal-Mart or like other commodity kind of players in their space, in a recessionary environment, more -- a larger percentage of the traveling population or the buying population looks for the value play. So we actually believe our model is somewhat countercyclical in that sense, and while we're not certainly wishing for a recession, for lots of the reasons we wouldn't wish that, we don't think it changes the view of the business model and in fact shouldn't change our view that we can continue to grow and not compress our margins.

Great, thanks, guys.

Hunter Keay, Wolfe Trahan.

Ben, I'm wondering if I -- first of all, I appreciate all the color on the non-fuel CASM stuff. I think that's really important and I appreciate it. But I'd love to flush out a little more color from you, if you could. Is there some sort of longer-term target that you think about maybe on an absolute basis? And I realize that the absolute number is going to change based on capacity changes. But, as you think about the delivery schedule over the next few years and you have a reasonable idea what capacity growth is going to be, should we -- you're going to be coming in around $0.06 on CASM ex-fuel in all likelihood this year. Is that a reasonable target to think about? How do you guys think about driving your costs down to some sort of target level on an absolute basis? Is there something you think about, Ben, like longer-term that maybe you want to share?

We think of lower than fixed, certainly. And we aspirationally would think to like to get $0.005 to $0.01 off that, right, at least (inaudible). But let me see if Ted has any more color on it (multiple speakers) but we're not satisfied with the current ex-fuel CASM performance of the airline. And, as Ted said, we've got a lot of reasons we believe that number should come down.

That's what I was going to say, too, Hunter. As I mentioned in my comments, we're reporting the numbers we are reporting, but we're not happy about it. We need to start seeing the benefits of some of the things that we've been going through recently that are actually have been inflaters to that cost, which we expect to start to realize in the fourth quarter. And so Ben is right; we certainly are going to set a target for ourselves that I don't know that we would share with you. But it's not going to be a number that's got a 6 on it, and we feel like we have the tools we need to make sure and go after that.

That's great, thank you, Ted. And maybe (inaudible) Ted, too, as you think about the cash stockpile you're sitting on, obviously you're in a high-growth mode. We can appreciate that. You're reinvesting it back in the business. But is there any of it for any -- for maybe buying back a lot of the stock that's held by private equity right now to remove any potential overhang on the shares, anything like that, anything that would be prohibitive that we should be aware of?

No, we -- and I've talked about this before. We have that -- we went and raised that capital for a lot of good reasons. We have a lot of growth coming for the airline that we have to be thoughtful about how we plan to finance that and digest all of that. And having the capital available to us gives us a lot of flexibility in that regard. So we're going to be focused on deploying that the right way and the smart way for now.

Okay, thank you.

[John Gudden], Morgan Stanley.

I was hoping to dig a little deeper into the comments that July and August booking levels remain stable. Can you just give us a sense of how much of July and August is booked a month or so in advance, and specifically what you are seeing in close-in bookings? I guess the bigger picture question is just, is there anything in your demand trends that reflects the bearish macro environment we're seeing in other industries?

This is Barry. As far as July, at this point there's not much left, so the majority of that is booked. August is -- we've got not quite half a picture of August yet. But we've seen nothing that suggests some major economic downturn. There is a lot of noise. Ben mentioned last year, we did have the changes to the network, and of course that's in the base this year. There is a little bit of a question on the FET tax holiday we had last year. And so it was difficult at the time to isolate that because we had so many other changes to the revenue side of the business, and it's still difficult at this point. That does make the comps more difficult, but as far as a downturn in the economy, we haven't seen anything like that. And we're pretty close in, so maybe there's something out in the future that we're not seeing. But in terms of real demand and people going on vacations and traveling for leisure this summer, we just haven't seen it.

Okay, thanks. And I was hoping we could just put a finer point on the answer to Duane's question on CASM ex-fuel. I'm not looking for precise guidance, but if I understand the comments correctly, in the fourth quarter CASM ex-fuel is down considerably. As we look into early 2013, comps stay really easy from a cost perspective. Should we be thinking about CASM ex-fuel to be down year-over-year in 2013, just to put some boundaries around it? Is that the right way to think about it?

We're getting real close to starting to give guidance there, and we're not going to do that. But I think we've been pretty clear about what our goals and our -- we feel good about those goals going to both 2013 and beyond. And Ben threw some numbers out there, I threw some numbers out there, and that's management's job. We're going to go and tackle those things. We think we've got what we need from a growth perspective to go after that stuff.

Okay, thanks. And just sort of a last quick nit, can you just give a general update on financing of aircraft deliveries going forward? Have you made any more decisions on any financings?

Sure. So we've been in the market to finance the remaining 2012 and all of our 2013 deliveries and we're in the process of awarding that business as we speak.

Thanks a lot.

Bob McAdoo, Imperial Capital.

Just a couple quick things. You've given us a whole list of cities that you anticipate opening up out into next year. And I assume that -- making the assumption that everything that you have open now continues to function okay, does this use up all the capacity that you've got, or are there still more airplanes that need to be scheduled? Or, is this the list of cities that would be flown if everything else continues to work, these are those, are that's what we're looking at for the first part of next year?

This is Barry. Yes, this is about as far out as we have scheduled the airline and announced new services. But we've done that in order to make sure that we have the infrastructure in place and have the customers in place to buy those tickets. But in terms of do we have any aircraft left, we have the ability through the front half of next year, through June, to add a couple more routes, but the majority of the new service through the front half of next year has been announced. Obviously, there will be more capacity in the back half of 2013. But, again, the majority of everything new that we're going to do has been announced.

Okay. One last thing -- we talk about the re-accommodation issues. What kind of -- maybe I missed it, but I didn't see specifically cancellation or completion factors. How bad was it? Could you go back through that a little bit again for us in terms of what was it that drove all the disclosures about flight cancellations and whatever? How bad did it get, or what was it that you dealt with that you don't anticipate continuing?

It's just basically that, because of the maintenance program that we've talked about, we've had two airplanes going through that. That's given us a little bit less free time of nonflying airplanes to be able to recover more quickly. And that has generated some new -- some incremental irregular operations costs, one-time costs that we believe, for the second and third quarter. Also at the same time as we're opening new cities, we're still sort of -- we have maintenance and crews in Las Vegas now, but we're still in the process of building up infrastructure in Dallas and Chicago. And so the airline is spread out and the infrastructure is catching up with that. With a [feeing] schedule and without as much spare airplane availability because of the seat maintenance program, it's just put us in a position where, when we've had some irregular operations, we expect a little more money than we would expect. But we see that as part of the one-time second- and third-quarter costs of that old program, and by the fourth quarter that should be back in a steady state level that we're comfortable operating at.

I understand all that. That wasn't the question. The question was, did your completion factor get down to 98, 97 -- what kind of number was it?

The completion factor for the quarter was 98.5%, and it was 99.4% the year before. So down a little less than a point.

All right, that was what I was really trying to get at, thanks a lot.

David Simpson, Barclays Capital.

Just a question on the ancillary side. You mentioned, I think it was Ben or Barry mentioned that you thought you had more to go on the passenger and bag fees. But I'm curious, in the past you've talked about taking more wallet share in travel. And I'm just curious what kind of initiatives you think could fit into that bucket. And how does the network evolution and building out the bigger footprint -- does that lead to more opportunities to get into cars, hotels, etc.? Is that how we should be thinking about it?

So, Las Vegas and our growth there obviously enabled our ability to sell hotels and so forth, and we just really started that this year. There's been a number of functionality improvements that we had to launch in phase 2, 3, 4 of that. And we're very close to completing the packaging, so that's obviously a growth opportunity for the Company. But the network, the scope service for the network, really feeds two things that we don't talk a lot about. But the FREE SPIRIT MasterCard as well as the $9 Fare Club -- those are more about the population that we reach than it is the routes we fly from a given city. So for example, when I mentioned earlier that we're now in over 80% of the population-weighted top 25 metros, that is going to enable us to sell a lot more credit cards and a lot more $9 Fare Club memberships, whereas before -- I'm not saying we have everybody in Fort Lauderdale, but we have pretty much everybody that is going to get a Fare Club membership or a credit card. So the growth in DFW, the growth into even in Chicago where we had limited service a year ago, those things are now enabled where we didn't have the ability. We were talking about earlier, last week I flew from DFW to Phoenix, Phoenix to Las Vegas and Las Vegas to Denver all on Spirit, and none of those routes were there six months ago. And of course Phoenix and DFW and Denver weren't even there as cities we served a year ago. So all of those new credit cards and new $9 Fare Club memberships will be incremental. The one thing I would caution is that the revenues from those things are spread out over a year. So, for example, the way we book the $59.95 is we divide by 12, so it will take time for those things to materialize and impact the number.

Okay. And then obviously, I understand you get the scale in DFW, but how does that work in -- that's not the right way to call them -- but spoke markets, like, I don't know, Portland springs to mind. If it's a smaller city and now you have three, four destinations, is that enough to then begin to drive that on the other side as well outside of the big DFW, Chicago type markets?

I think that's a good example. Denver is probably one where we just launched that in May. We started it day one with 6 flights and 4 nonstop routes. So that is the minimum you need to get to. You need to fill out basically a gate, so we'd like to have 6 to 8 flights as a minimum base in an operation to feel like we're getting any kind of scale benefit.

All right, great. And then just one last, on the cost, in terms of the crew overnights, is there something from our vantage point we should be looking for? And I'm thinking you have a big crew base in Vegas. But should we be watching for a crew base in Dallas or something or a change in that base that would begin to facilitate reducing those overnights or optimizing the crew pairings? Or is that something that just evolves over time that we won't have any visibility from the outside?

Crew overnights are one aspect of the overall pilot scheduling, cost optimization and flying the operation efficiently operation; it's one piece of it. It's not the only thing. So as the network grows and as the network has gotten geographically broader, we're working through the best ways to serve that network from both a crew and maintenance standpoint to be able to fly reliably and with a low-cost position. And we're not commenting on where there may be future bases of anything going forward, but we're going to do it right and we're going to make sure that we have planes well-maintained and crews ready to fly then wherever we fly.

Okay, great, I appreciate all the color, guys.

Glenn Engel, Bank of America.

If you look at markets that are new, that means within less than 12 months, what percent were those in the second quarter? Where has that been in the past few quarters? Where is that going in the next several quarters? And if I looked at the established markets, how did they perform year-over-year relative to the overall system?

This is Barry. So in any given quarter, if we have 15% growth or 20% growth, from here on out with a few exceptions, we expect that most of that will be all new capacity in new markets. Last year was a little bit of an anomaly in that we reduced our non-growth flying -- our mature, if you will -- we reduced some of that capacity to improve the margins and right-size the network, if you will. And so that caused an abnormally high -- you know, we were in the 30 percentile in new markets in the back half of last year, but we've pretty much lapped that now. And so most of -- if you see our growth, unless we decide to redeploy something, it will closely mirror our overall capacity growth.

And the new markets, I mean the established markets, how did they perform year-over-year relative to the -- did they perform better or worse than the average RASM gain that you have?

We don't actually disclose that, but I think you can -- we do talk about our target margins, and if our existing markets aren't hitting that, we'll remove capacity.

And, finally, you mentioned the stage was down a little bit in the third quarter. In the fourth quarter, what does stage look like?

It's up slightly. I don't have (inaudible).

That's good enough, okay, thank you very much.

Steve O'Hara, Sidoti & Company.

You guys talk about some of your qualifications for looking at markets and see whether it makes sense to talk about something where I think you can lower the fare by 25% or more. Do you have a sense for, in order to stay in a market and stay relevant and maybe grow market share or stay as competitive (technical difficulty), how far below the legacy carriers or the dominant carrier in the market do you have to be in terms of average fare?

That's different by every market, but we expect to be the lowest-price option for the traveler anywhere that we fly. And so, as a general rule, we like to pick where we fly based on our ability to make our target margins with fares that are 25% less than the prevailing fare. That doesn't mean that forever that we use that as a benchmark to price, whether or not the market is making money or not. We expect every market to make money, we expect every airplane to make money, and we're going to manage the markets to where that happens. In some cases, that will be adding more capacity; in some cases, it will mean reducing capacity. But we use that as an overall guideline, but it really depends market by market where the fares are. And the deployment of capacity, as we've said a number of times publicly, is set to carry the growth that we expect to create with the lower fares. So when we enter a new market, we lower the prevailing fares, that grows the market and we size the number of frequencies we put in to carry that growth, not to carry the existing market.

Okay, thank you. In terms of your non-ticket revenues, I guess on a unit basis, does the inability or ability to grow that on a unit basis have a big impact on your ability to lower fares?

Well, certainly, the higher our ancillary revenue is, the more that can act as a subsidy against our base fare. So in an ideal world for us, we would continue to grow, make more of the fare optional and let customers choose whether they pay it or not based on whether they want the services or not, and have a lower and lower entry point. But we manage the airline to total unit revenue and total revenue per airplane. And so what's going to happen is that as ancillary revenues change and evolve, that will give us either more or less flexibility in the base fares. But the ideal world for us is that you pay a very, very low base fare, you pay your actual fuel price and then you buy whatever options are important to you. That's our pricing long-term.

And last question, quickly, you mentioned the start-up cost. Can you just define what those are exactly?

In general, it's -- when we go into a new city, it's wiring up the airport so that we can check people in and meet all the security requirements and other things there. It's whatever sort of commitments we have to make in terms of gate and ticket counters and things like that, whatever contracts we have to make with a provider in most cases to do our ramp handling or ticket counting, handling. It's sort of setting all those things up in advance of actually creating revenue there that become the start-up costs for the operation. But in many cases, we choose where to go based on where that start-up cost is going to be proportionate to what we think the market opportunity is. And sometimes, we get support in helping lower those costs or mitigating those costs in some way. So they are one-time costs, but they're part of the whole decision as to whether we add service to XYZ city or not.

Okay, thank you.

Stephen Trent, Citi.

Just the first question, actually to some extent a follow-up on my friend Ray Neidl's question, looking at 2009, when you saw this downward migration to people looking for cheaper fares. To what extent have you seen a similar trend over 2012 so far? Is it maybe a small portion of traffic coming from that, or have you not noticed that trend versus what had occurred three years ago?

This is Barry. We haven't seen that; and again, we're not warranting that there's not a recession coming, but we just haven't seen those leading indicators yet to say that we are entering that phase. I will echo what Ben said, though. While we're not excited about a recession, we wouldn't wish that on the economy, we're not afraid of it at all, given our track record in that type of environment.

Great, great, terrific. Just one more question from me -- when you think about the potential medium-term competitive challenge, not just Spirit Airlines, I mean the whole US airline industry, coming from some of these ex -- regional carriers like Republic that are out there that have orders for bigger planes and have LOIs for essentially mainline aircraft, to what extent do you think about the potential threat coming from those carriers? Do you think it's something that you're going to face in the future, or do you think this is more a problem for an Allegiant that has a penchant for secondary airports versus the way you guys operate?

Yes, we don't really think about it too much, to be honest. We evaluate our growth opportunity and our aircraft deployment opportunity based on where we think the market can be bigger than it is today with a lower fare proposition. We don't really -- as we look out over the landscape, we don't see in any meaningful [blunt] the other airlines making their planning decisions on that basis. And so the order books of a Republic or whatever, pick your favorite smaller airline in the US and what they're doing, doesn't really affect our view of the world.

Okay, exactly what was looking for. Thank you very much.

Helane Becker, Dahlman Rose.

I'm feeling really bad, because most of my questions have been asked and answered, but I noticed that there was a fare increase yesterday that went into effect by some of the other airlines. Is that something you would have matched, or can you offer any comments on fare trends?

We don't line up with every fare increase. Lots of times, those fare increases get a lot of people excited. I remember a conversation last year when there was a series of 7 or 8 $5 increases. And I said, oh, well so, if that's great news, does that mean everybody's fares will be up $40? And the answer is no; they are designed for people that raise their full fares and they have a lot of business customers and so forth. And what we generally watch are what the promotional fares are in the marketplace because that's what leisure customers are buying. And so we tend to watch what happens, kind of the knock-on effect. If that has an increase on the promotional fares, then that will change things. But if you're just talking about what they call core fares or structural fares, that's not really meaningful, I would argue, to us or the industry. So we don't really follow those.

So, should we think about $81 as being your base fare going forward?

Actually, you should look at the total revenue per passenger. That's what matters. Look at the total revenue per passenger. We'll say it again; we continue to talk about it. You can't talk about non-ticket without talking about the total, and you can't talk about the fare without talking about the total. So the best way to model us is to think about the total revenue per flight segment.

With our (inaudible) $51.47 of ancillary, we wouldn't have had the $81 fare. And so as ancillary change, base fares change.

Okay, all right, that's great, thanks very much, then.

Thank you, all.

Thank you. That concludes our call. Ladies and gentlemen, thank you for participating. This concludes today's conference. You may now disconnect.