Spirit Airlines Inc (SAVE) 2012 Q3 法說會逐字稿

Welcome to the third-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. Misty Pinson, Director of Corporate Communications. Ms. Pinson, you may begin.

Thank you, Sandra, and thanks to you all for joining us this morning, and welcome to Spirit Airlines' third-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.

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 beliefs as of today, October 31, 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 10-K for year ending December 31, 2011. We undertake no duty to update any forward-looking statement.

In our remarks today, we will be comparing third-quarter 2012 to third-quarter 2011 results, adjusting all periods to exclude unrealized hedge gains and losses and special items. Please refer to our third-quarter 2012 earnings press release for further details regarding our assumptions for the reconciliation to the most directly comparable GAAP measure for non-GAAP measures discussed.

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

Thank you, Misty, and thanks everyone joining us for the call today. Before I begin, I would just like to say that our hearts go out to everyone who has been affected by Hurricane Sandy and the terrible damage that storm has created. All of the airports that Spirit serves with the exception of LaGuardia are operational as of this morning, and so once La Guardia eventually opens, we hope to have our operation totally back to normal, hopefully soon.

Earlier today, we reported a third-quarter profit of $25.2 million. We grew our top-line revenue 18.6% year-over-year, while lowering our base fare per segment to just $71.85. During the quarter, we grew our passenger segments 23.2%, keeping pace with pour set growth, demonstrating once again the stimulative effect of being the low-fare leader in the markets we serve.

Total revenue for the third quarter 2012 was down 3.4% year-over-year against a very strong third quarter last year. As we mentioned in the third quarter last year, Spirit elected to pass along to our customers the benefit associated with the federal excise tax holiday, which created significant incremental demand. This allowed us to discount less last year in what is seasonally a weaker period. But for this unusual item, we estimate our third-quarter 2012 RASM would have been up slightly year-over-year.

Our ticket revenue per passenger segment for the third quarter 2012 decreased 12.1% to $71.85, due in part to the FET benefits from last year, as well as our continued strategy to offer low base fares while increasing revenue from optional non-ticket revenue sources. Our ancillary revenue per passenger segment in the third quarter was $49.80, up 11.5% year over year, primarily due to per-segment increases in passenger convenience fees.

As compared to the second quarter 2012, ancillary per-passenger decreased slightly driven by the revenue benefits from our previous credit card partner steadily decreasing as we lapped the period in which we ended that partnership. In addition, we continue to collect less change fee revenue as a result of the DOT 24-hour hold rule implemented in January of this year. As a reminder, we account for our $2.00 Department of Transportation unintended consequences fee, which helps offset the negative impact from the DOT rule changes, as passenger revenue rather than as non-ticket revenue.

Our total revenue per passenger segment for the third quarter was $121.65. I believe that in most cases, our total fares are less than the traveler's next best option at the time of purchase. This is by design, as our goal is to stimulate new demand by offering low base fares that appeal to the segment of the population that has been priced out of the market.

Our ancillary revenue model allows us to do this by letting customers pay only for the extras they value, rather than having all customers subsidize the cost of providing extra products and services. We believe a large part of our success with this model is tied to our goal of being the transparency leader.

Some might say we've taken a pounding in the press over our announcement of $100 carry-on bag fee, but we are pleased with the publicity about this change, as it assists us making customers aware of it, and more importantly, how to avoid paying it. We don't want anyone to pay this fee, but believe this fee will be an incentive for customers to pay for their bag before they get to the gate, which in turn helps us to achieve our goal of a speedy boarding process. We've talked a lot about this coming change and feel that our being very transparent on this and on all of our fees will allow for our customers to make an informed purchasing choice.

We added Houston to our route map during the third quarter 2012, and we transitioned our service at Reagan National over to Baltimore, Washington. We are excited about both of these opportunities. The move to Baltimore, Washington allows us to continue to provide services to the Greater Washington Metro area while, gaining more schedule flexibility than DCA allowed. And with the launch of Houston, we have liberated 80% of the population in the top 25 U.S. metro areas in the US from high fares.

In addition, we announced that we will be opening a flight attendant and pilot crew base in the Dallas-Fort Worth area in early December. This new base will be home to over 250 crewmembers by summer of 2013. We'll also be growing our DFW maintenance base which we opened earlier this year. It is important to expand our infrastructure to support our growth at DFW, and we are pleased to be creating jobs while stimulating new economic activity.

Looking ahead, our fourth-quarter capacity is expected to increase 29.2% year-over-year. Full-year 2012 capacity is expected to be up 21.5%. And for the full year 2013, we are targeting capacity growth of 18% to 22%.

Over the last couple of years, Spirit has added a lot of new destinations and we are pleased with the performance of our new routes. On routes we served less than two years, our average load factor is 84%, and many times we see this level of load factor within just the first few weeks of service.

Our mature routes, those we've served for five or more years, also continue to do well, as evidenced by our average load factor of 86%. Our loyal, smart, value-oriented customers continue to return to take advantage of the low fares we offer, and when we enter a market, our low fares helped our new routes to mature quickly.

Turning to our outlook for the fourth-quarter revenue, as a reminder, our October results last year also benefited from the FET holiday, contributing a couple of percentage points to our fourth-quarter 2011 RASM. In addition our stage length this year increases 5.6% year over year to 934 miles in the fourth quarter, which negatively impacts RASM by 2.6%.

Prior to Hurricane Sandy, we were forecasting that on a stage-length-adjusted basis, RASM would have been up slightly or down year-over-year on an absolute basis. Unfortunately, Hurricane Sandy is expected to have a significant negative impact on the quarter. We started seeing an impact on sales as the storm moved through the Caribbean, and as the storm moved north, the impact was exacerbated by customers rebooking travel plans to avoid the storm.

We are allowing customers affected by the storm to rebook without a fee and without a change in fare through November 14. It will take us several weeks or more to handle all the passenger re-accommodations and to assess the revenue impact to the fourth quarter, but we do believe it will be significant and we will update you as we move through the quarter.

With that, I will turn the call over to Ted.

Thanks, Ben. In the third quarter, our total operating expenses increased 24.4% to $301.8 million, primarily due to expenses associated with increased flight volume, including a 19.3% increase in fuel volume. Excluding fuel, our CASM increased 4.9% year-over-year to $0.0602, which is in line with our revised guidance, but slightly below the low end of our initial guidance for the quarter, primarily due to about $1.5 million of costs associated with our seat maintenance program being deferred to the fourth quarter.

The year-over-year increase in CASM ex was primarily driven by higher passenger re-accommodation costs related to flight cancellations. Other drivers included $1.3 million of rent related to the aircraft we wet-leased during the summer and $2.3 million of startup costs associated with our seat maintenance program. In addition, we are in the process of implementing an Enterprise Resource Planning system, and the cost associated with that implementation also contributed to the CASM ex-fuel increase. Stage length decreased year-over-year in the third quarter by 1.9%, contributing a point to the year-over-year increase in CASM ex.

As Ben mentioned, we have not fully assessed the impact from Hurricane Sandy, but adjusting capacity for the 136 flights canceled through today, our outlook for the fourth quarter 2012 is for CASM ex-fuel to be down 2% to 3% year over year, including the previously-discussed $1.5 million of seat maintenance expense that was deferred to the fourth quarter, which is a noted change from our prior guidance.

Turning now to fuel, for the fourth quarter, we estimate our economic fuel price will be $3.28 per gallon based on the Gulf Coast Jet Fuel Curve as of October 30. This includes our estimated impact from realized fuel hedges. We have approximately 20% of our fourth-quarter 2012 projected fuel volume hedged using West Texas Intermediate fuel collars. We also have hurricane protection hedges in place for the remainder of the 2012 hurricane season, designed to shield [refining] exposures. 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 $399 million in unrestricted cash.

As we've discussed previously, over the next few years, we expect to perform a greater number of heavy and routine maintenance events that have an effect on our aircraft utilization. In order to achieve our targeted capacity growth of 18% to 22% next year and improve schedule reliability, we have signed a letter of intent to lease an additional three used A-319 aircraft. We plan to take delivery of the first of these aircraft in mid-December of this year and the other two in January of 2013.

In addition, the LOI contemplates that we will lease five A320neo aircraft from ILFC. These are in addition to the 45 neos we currently have on order with Airbus. Our selection of an engine type for the neo will drive our delivery slot positions for the aircraft to be leased from ILFC. We are still working on final documentation, but we are excited about increasing the number of A320neo's in our fleet, which will allow us to further improve the efficiency of our fleet.

We ended the third quarter with 42 aircraft in service. Including the announced 319 additions, we have three aircraft deliveries scheduled for the fourth quarter and nine aircraft scheduled for delivery in 2013. As a side note, we have committed financing for the two new A320s delivering in the fourth quarter of this year and for the seven new A320s delivering next year. We estimate our aircraft rent for the full year of 2012 will be $144 million, and for 2013 to be approximately $175 million.

We estimate depreciation and amortization expense will be $15 million for the full year 2012 and approximately $40 million to $45 million for 2013.

In closing, I want to remind everyone that we are working aggressively to lower our cost structure. Our annual growth rate over the next five to seven years gives us tremendous leverage from a unit cost perspective. I am confident this leverage, along with our continued focus to be more efficient and to increase productivity and cut costs, will allow us to offset the CASM ex-fuel pressures we face, primarily from increasing depreciation and amortization expense related to the amortization of heavy maintenance.

Fuel remains unpredictable, but on a per-seat basis, we have the most fuel-efficient fleet in the US, which gives us a natural built-in hedge against volatility, and we are keenly focused on reducing our fuel burn rate.

With that, I will turn it back to Ben.

Thanks, Ted. Over the last couple of quarters, we've observed some unexpected cost pressures which have impacted our operating margin, but the core business continues to produce very strong results. Despite these one-time in nature conflicts, we were still able to achieve a pretax return on invested capital of 27.7%. We also delivered on our annualized EBITDAR margin target of 24% to 26%, and we remain on target to achieve this goal for the [further] year 2012. This is also our annual EBITDA margin target for 2013.

I'd like to thank all the hard-working Spirit team members who serve our customers every day, making our business successful. With that, I will turn it back to Misty.

Thank you, gentlemen. We are now ready to take questions. Sandra, we are ready to begin.

(Operator Instructions) Jim Parker, Raymond James.

Good morning, Ben and Ted. Just a couple of questions. One, I know that you don't reveal specifics regarding your $9 Fare Club numbers, but can you talk about how this is growing? Is it growing in line with passenger volume?

We just don't release information about the $9.00 Fare Club. It is a proprietary club that today we continue to be very satisfied with the results of the club. But beyond that, we just don't say anything about it.

So you're not inclined to say whether or not it is growing?

We are not inclined to say that or not say it.

Okay.

Or not say it.

Okay, and regarding your trip length, of course, with fuel prices rising sharply, you had, I think, pulled back, and the stage length has been decreasing. What does it look like in 2013? Are we going to be flat or decline or up? What is happening there?

Jim, this is Barry. If you look at the fourth quarter -- and we mentioned it just a moment ago -- but we are going to be up slightly in the fourth quarter, and we expect that will continue into next year on a year-over-year basis.

Okay, all right. Fine. Thank you.

Duane Pfennigwerth, Evercore Partners.

So you gave some detail in the release about -- I guess about $3 million in the quarter related to the seat maintenance program in terms of incremental cost. My question is what was the revenue impact related to this program? It seems like -- and granted, it's not much of your capacity, but with taking steps like wet-leasing an aircraft with a different configuration, it seems like there would have been some top-line impact as well. So as we think about next year, what do you think the full impact of this program has been?

Obviously, we haven't disclosed anything about any kind of a revenue impact, and it would be difficult for us to give you guidance on what the estimate of that would be year-over-year. Obviously, we upgraded with that wet-lease aircraft our intended schedule through the summer. The notable impacts we had with regard to the operation were more on the cost side, regarding interrupted trip-related expense or cancellation-related expenses.

And the cost of that wet lease.

That's right, and the cost of that wet lease. So beyond that, we haven't provided any formal estimate as to whether or not the seat program impacted revenue.

Okay. And then I guess just a competitive question. As you look across the set of usual suspects, did you notice any change in pricing strategy in terms of how folks respond to you in the third quarter? I guess a general question. And then specific to Southwest -- Southwest specifically. Thanks.

On competitive pricing, we have not seen any material change in the way people behave, plus or minus against us, and we consider the marketplace continuing as it has been.

Okay, thanks.

John Godyn, Morgan Stanley.

Thanks a lot for taking my questions. I just wanted to follow up on some of the 2013 commentary first. Ted, I think last quarter, if I remember correctly, there was a little bit of sort of a debate in a sense that CASM ex-fuel for the full year in 2013 could be flattish or even down. It sounds like with some of the commentary you gave on aircraft rents and D&A, that would be very difficult. Am I missing a moving part, or should we be thinking about 2013 CASM ex-fuel growth as sort of more consistent with normal inflationary levels?

I think -- thanks for the question, John. I think what we talked about last quarter we are consistent with, meaning we still -- even with those items that we mentioned, we still feel reasonably optimistic about our ability to manage the pressures associated with that on our CASM ex-fuel.

I think what we said last quarter was we would target (technical difficulty) goal to have our CASM ex-fuel decrease. I think that is still our goal, but we don't see it being a massive pressure on our CASM going forward into 2013.

Okay. But is it fair to say that it is a goal, it is a target, but that is not your guidance for 2013, to see CASM ex-fuel fall?

We haven't officially guided yet for 2013, so we can probably give more visibility of that after we've -- after the fourth-quarter call.

Okay, got it. Thank you. And Ben, if we could just talk about the margin and the capacity guidance that you gave for 2013, and the sensitivity to macro assumptions. When we think about, I guess, the capacity guidance first, is there a situation where the high end is what we see if macro improves and the low end is what we see if macro gets worse? Or is that not really -- is the capacity side not really sensitive to macro? And then similarly, how do we think about the margin guidance range versus whatever your macro view is as we go into 2013?

I think the range is what we think the airline can reasonably produce and what we have actually been producing for the last number of years. So there is not sort of a big assumption about what is going to happen in the macro economy to drive whether 24% versus 25% or 26% on the EBITDAR side.

You know, we look at -- probably the biggest thing that is in that overall number is fuel price, and we are just looking at the fuel curve as it exists today to predict what fuel might be for next year. Fuel curve is just a forecast, and we know that is not going to be the actual fuel price for next year. But if the fuel is decidedly more or less expensive, that could move us up or down within that range or even beyond the range a bit.

But in terms of the macro economy, in terms of capacity and such, we've made no specific assumptions. We are not assuming that there is further rationalization of capacity or that there is more mergers or anything like that. It is just sort of as we see the world going forward, this airline has been very consistent about producing a mid-20s EBITDA margin for the last couple of years. And as we grow, we believe we can keep that going.

Okay, that's great. And just last one really quick, have you noticed any change in Americans' behavior, just sort of as they get farther along in their process of moving towards [the merchants]?

We've see no change in their competitive behavior, and we've competed with American Airlines, I guess, in our history more than any other airline with -- obviously with Fort Lauderdale near Miami, and now obviously with our growth in DFW. but we've seen no change in their behavior.

Okay, thanks a lot, guys.

Hunter Keay, Wolfe Trahan.

Thanks a lot. Can you guys give us some of your baseline assumptions for -- I don't know if you want to call it pay grade or not, but what you are expecting from the amount of passengers that are being subject to the new $100 carry-on bag fee structure? Do you think -- I'm not [seeing] any guidance on how to model it per se, but what do you expect to happen maybe more qualitatively with the amount of people that are impacted initially and kind of how it meters through 2013, and where do you expect to be in the longer term for that?

We don't want anybody to pay that fee, and we are working hard to ensure the people don't pay it. This is -- the $100 carry-on bag fee is an operational issue for Spirit; it's not a revenue issue for Spirit. We are trying to clear the gate, make our departures go quickly, make the boarding happen really quickly, decrease our turn times, which allow more utilization of the fleet through higher utilization. And it is all about taking that transaction away from the gate and making it happen before it ever gets to the gate. So it is an incentive essentially for customers to say, buy your carry-on bag online, buy it at the kiosk or buy it from a ticket agent, but before you go through security.

So if we do this right and we inform -- and we maintain our transparency leadership on this and signage at the airport and e-mails to customers and things, we hope nobody actually pays this fee.

So do you not expect a big increase in -- to that end, do you expect a little bit of a pop in non-ticket revenue in the fourth quarter, or is it -- how are you thinking about that?

There's been a lot of talk about the $100 bag, but let's talk about all the changes to the bag fees that take place on November 6. So we actually have talked over the last year or so about how we would be incorporating revenue management principles, and in this case, we are putting in effectively advanced purchase requirements on the bag. So Ben mentioned, for example, we prefer you buy it when you buy your ticket, buy it online. Worst case, buy it 24 hours before when you check-in online. It becomes more expensive once you go to the airport, just at the ticket counter. And then again, it goes up even more once you get to the gate.

So we have less than 1%. It is not a significant number of actual people that pay at the gate today, but those few instances do cause us operational challenges, so we want to avoid that. But there will be an increase in the ticket counter as well, and again, this is aligned with making our costs lower. So it's cheaper for us for you to do it online. It's cheaper for you to do it in advance. If you want to choose the ticket counter, it is more expensive for us, and so we are charging appropriately for that, and that incentivizes the customer.

So there will be an uptick, principally in the ticket counter revenue. But the gate revenue, we won't see it because there wasn't a lot to begin with. We are trying to provide the incentive that there will be no one do that.

Thanks, Barry. And maybe Ted or Ben, a little more on the CASM ex, because I think this is just such a critical defining characteristic of your Company, not to mention your stock price. I'm having trouble figuring out how I can model CASM ex down next year or even flat. Based on what you said about D&A and landing fees and given the changes in your distribution channels, you can see you are shifting more to the GESs.

If you are going to keep this flat or even bring it down on 20% capacity growth, how is that going to happen? Which line items of the P&L are we talking about? Because if you just model everything pretty much even a little bit less than capacity growth rate, you're probably looking at another year of year-over-year growth in CASM ex. So how should I think about you guys keeping that CASM ex down? Where specifically is it going to come from?

I'll talk a little bit -- Ted -- and then maybe Ben wants to jump in. But you made a couple of comments where we should flesh it out. We do have -- we've said already we plan to grow 18% to 22% next year, which will provide us with a lot of momentum heading into next year from a unit cost perspective.

We will be taking new aircraft, additional new aircraft into our fleet next year, which obviously helps leverage down maintenance expense as part of that growth, which is going to help us in addition to that. And I think as Barry already mentioned, our stage, we plan that to get a little bit longer on a year-over-year basis as well. All of which from a structural perspective is contributory to keeping CASM low and managing those pressures we expect.

In addition to that, we are going to be doing the same diligent behavior the Company has always been engaged in, looking at ways to both optimize our cost structure from a management perspective, as well as incentivize our customers to help us optimize our cost structure. So I think the combination of all those things kind of spread across the entire cost structure will help us to manage that cost pressure that I talked about earlier, such that our goal of keeping costs at or below where we are today we think is achievable.

That is exactly right. The other two sort of points I would add to the whole thing is that we are growing again with the larger-gauge airplane. And we've said before that the A320 is about 8% more unit cost efficient than the A319s for us. And since most of our growth into next year is going to be with the 320, that the mix, the ratio of A320 to 319 and is improving through 2013, which is a unit cost good guy for us.

And the last thing, as I mentioned in my printed remarks or my scripted remarks, we are now serving 80% of the population in the top 25 US Metro areas, which means that in the last year, we've opened -- the last year and a half we've opened a lot of new cities. That activity will probably slow down a little bit. Since we are already in most of the places we want to be, it will be more connecting those somewhat. So you see all those kind of effects more than offsetting, we believe, the D&A and some of the other pressures.

Okay. Thanks a lot.

David Fintzen, Barclays Capital.

This is actually Isaac standing in for David. Good morning, guys. Just had a quick question maybe for Ben and then perhaps Barry. Ben, you mentioned in your prepared remarks that adjusted for the FAA tax holiday from last year, CASM would have been up slightly. Wondering how that compares to your initial plan starting in the beginning of 3Q. Just trying to get a sense of what has changed during the quarter in terms of weakness in certain regions or certain months in the quarter.

When we started -- when we planned the year and when we looked at the third quarter, and we're looking at sort of what happened year-over-year, a couple of things happened in 2011. We knew the FET holiday was big for us, but we really didn't understand how much of last year's 2011 performance was related uniquely to the FET until we could look at the booking information this year leading up into when the FET holiday started through the period what it was active and after it had ceased last year.

And what we saw, with perfect hindsight, basically, was that booking behavior prior to the FET was kind of what we expected; during the FET, not nearly as much as we might have thought; and after the FET, went right back to what we had sort of expected. And that made us realize that the FET had an even bigger impact uniquely than we had thought. And once we were able to do that year-over-year comparison, that is when we gave -- that is when we were able to quantify the fact that, hey, without this, our RASM would have been a little lower last year than it was, but year-over-year, we would have been a little better.

So we think that was really a one-time thing. And quite honestly, we are not sure how the rest of the industry saw the FET benefit. We reacted to it in a way that was more unique than most of the industry in the fact that we gave it back to the customers and that created more demand and less discounting.

Okay. I guess the follow-up that I had maybe for Ted -- on cost guidance for 4Q, does that cost guidance -- and I know maybe it is a bit early, but does that have any cost baked into it that is associated with Hurricane Sandy? And if not, is that something that is material or immaterial, in your mind?

What we assumed in the cost guidance was, as I mentioned in my comments, was more about how the capacity reduction would affect the existing cost structures. So just on a unit basis, we pulled the capacity out to reflect it.

And what else is specifically included in there is the seat maintenance costs that kind of lift over the third quarter into the fourth quarter, which is different than our previous guidance.

So the effect of both the capacity pullout related to our cancellations and that seat maintenance not previously being in our guidance would have changed the number back in line with what we were previously saying, which was kind of mid-single digits.

So as it relates specifically to the storm, we haven't -- like we said earlier, we haven't fully evaluated what is happening on both the revenue and cost side, but we don't anticipate there being material kind of costs in addition to what we've already discussed.

Okay. Thank you so much.

Helane Becker, Dahlman Rose.

Thank you very much, operator. Hi, everybody. So just two questions. One, so assuming that LaGuardia opens tomorrow, which maybe a big assumption, are you going to have issues getting jet fuel, or are there issues getting jet fuel at the other airports that have been closed?

Hi, Helene. This is Tony Lefebvre, the COO. From what we understand right now at LaGuardia they have enough fuel for four days of normal operations. So I would say there is going to be plenty of jet fuel. And if we -- for operating to LaGuardia. And all of our other markets that we operate in the Northeast are not anticipating fuel issues.

Okay. All right, that was one question. And just the other question I had with respect to, as you are looking at your forward bookings for the holidays and kind of into the -- I don't know how far in advance you can look to see -- are you seeing kind of the same load factors that you were referring to earlier, kind of mid-80s? Or has there been any weakness around the holidays? What can you say about what you are seeing with respect to bookings?

As far as the holiday bookings, leading up to Sandy, we had been seeing very stable, looked very similar to last year, and I'm speaking specifically to Thanksgiving as well as the Christmas/New Year's holiday period, and we felt very, very good about it.

Obviously, when people don't have power or they've been distracted over the last few weeks, they may still be planning on traveling, but you will have a slowdown. But we don't see a major change in the holiday at this time, even with the storm.

Okay, thank you.

Bob McAdoo, Imperial Capital.

Just a quick cost question. A couple places you mentioned passenger re-accommodation expenses. That normally isn't something that's a big enough number that people spotlight it. Can you talk a little more about what it was that caused that, and was there -- what line does that show up on?

It is shown up in other operating. And as we discussed in the previous call, I think on our second-quarter earnings call, we had some operational disruption throughout the summer, so it kind of persisted from beyond just the second quarter into the beginnings of this quarter as well. That caused the number of cancellations to be higher than what we would have traditionally experienced, and that is why the expense associated with that re-accommodation was noteworthy. That is why we called it out.

What kinds of things do you do for people -- is it -- when you have these kind of situations? Just trying to understand your product and how you define what it is you guys do for somebody thinking about it relative to a traditional airline.

I'll make a comment and I'll let Tony, our COO, also comment. But obviously, we are looking to maximize re-accommodation on our existing network, so we always look to try to re-accommodate our passengers within the existing network. And then under some circumstances, obviously, we are forced to put them on other carriers, which is where we would incur the vast majority of our expense.

So Tony, I don't know if you have anything more to add. But that's generally the way our policy works. We are trying to push people obviously through our network, but given the way our network exists, there are going to be some times where that's next to impossibility, and so at that point then we are pushing people on other carriers.

And because you don't have interline relationships with everybody else, it means it is kind of -- you go buy a walk-up ticket typically?

We have some limited relationships with a few carriers, but yes, in those instances where we don't, then we are buying a ticket.

Okay. Very good. Thanks.

Robert Pickels, Manning & Napier.

Good morning. Thank you for taking my question. If I look at a lot of the airlines are in negotiations with their unions, it looks like costs are moving higher at most of your competitors. And yet you are talking about unit costs being flat to down. How do you think about taking advantage of that situation? That is sort of the first question.

My second question is I know you don't have a new labor contract until 2015, but what sort of inflationary costs are built into that, if you can comment?

And the third question is on the wet lease of the aircraft. Is that just -- is it more expensive or less expensive than -- or the same expense as some existing plan that is in your fleet?

Having low costs is a principal feature of the business model, and we are at a point in our growth and our size of our airline that, through growth, we can continue to lower unit costs, we believe, over the next coming years as we get the scale efficiencies that all of our competitors already have in their costs, but we don't yet have in our cost structure.

So our ability to hopefully lower CASM next year versus this year, as Ted talked about and I did a little earlier on the call, is consistent with the business model. And the combination of low cost and making more of the revenue stream optional for the customers to only pay for what they use will continue to allow us to push fares down and have lower fares, which will create more stimulation, bring more people into the travel marketplace, and that is what the business model is all about. So that is how we will sort of use the cost structure.

Ted, do you want to talk about sort of the wet lease (multiple speakers)?

Yes, as it relates to the aircraft, obviously, when you third-party wet lease an airplane, it is going to be more expensive than if you had one in your fleet. The third party has obviously got a margin involved there, so it's not an optimal set of circumstances. And we only used that in a very limited set during the summer to kind of offset some of the pressures we were seeing during that difficult operating period.

I guess what I'm getting at, with the cost advantage and it appears that your cost advantage is widening, do you -- would you prefer to grow faster or have better margins? If there is a managerial preference for how to manage a widening cost advantage, what would it be? Maybe you don't want to comment. I don't know.

We have commented publicly before, and we'll do it again now, Rob, which is that we expect over the next few years to be able to grow the airline 15% to 20% a year, while maintaining or sustaining our relatively high margin position that we've been operating in for the last few years. And that is because we will be able to continue to exploit both low cost, the high ancillary revenue and the growing fleet to make that happen.

Okay. Thank you.

Steve O'Hara, Sidoti & Company.

Just quickly on the depreciation expense, it sounded like you said $40 million to $45 million, so if I have that wrong, just correct me. And I'm just wondering about the mechanics of that. Is there any estimate changes in there on your part in that number, and how does the maintenance depreciation work? Is it a straight-line basis or is this kind of something we should kind of expect to increase at this rate into the future? Thanks.

This is Ted. Your number is correct. It is what I said. And the mechanics of it, there is no change in our estimate, by the way. That is all kind of a known part of the business.

The mechanics of the way maintenance depreciation works is that when we have a heavy event and we book it to the balance sheet, we do straight-line the amortization of that expense until the next scheduled heavy maintenance event relative to that particular -- so if it is an engine that comes off, it gets amortized until that engine is scheduled to come off the next time. That is the mechanics of the way it works.

Okay, thank you. And then lastly, I guess, in terms of your growth, I think most of your recent growth has been domestic. And again, correct me if I'm wrong on that. And what opportunities do you -- do you see that kind of a growth platform -- where do you see the better growth opportunities, international or domestic?

On the growth opportunities, we literally just look at where the yield environment is the most favorable when you compare that to competitive cost structures flying those routes. And if you look back over the last few years, the domestic marketplace, through consolidations and mergers, has created a much more favorable domestic yield environment, and we don't see that changing anytime in the near future.

If at a time that it does change, what we like is the fact that our footprint across the Caribbean and Latin America allows us to exploit that just as easily when the times change. But right now, we are principally focused on domestic because of the yields and that is where you've seen our growth deployed.

Okay, thank you.

Mike Linenberg, Deutsche Bank.

I have just a couple questions here. The sale of the slots, the DCA slots, when I look at the special credit that you got, the $8.3 million, how much of that is attributable to the DCA slots? And then what were those slots on your books for?

We obviously, because of the nature of the pickup, we didn't have it on our books, so that should tell you that. I don't know that we've discussed publicly anything about this particular sale yet, other than we recognized the gain, and what we disclosed within our financial statement is kind of the extent of what we've discussed.

Fair enough. But it sounds like that $8.3 million, is the majority of that tied to the gain on the sale of the four slots?

Yes.

And was that four slot pairs or is that just four slots in total?

Two pairs, so --

Perfect. Okay, so that -- yes, that sounds like that is in range where we had a couple sales recently. So that is basically in synch, which is good.

Then my second question -- you went through -- I mean, it's interesting how for many of the carriers, they got the RASM hit from a year ago, the difficult comps. You guys had the difficult comps as well. You are predominantly discretionary, so it does make sense that you saw a lot of stimulation a year ago.

If we look across your network, though, were there any sectors or any regions where some part of your business maybe underperformed? I thought it was helpful that you give us the load factors for the new stuff and also the core. But is there anything you can say about RASM performance or profitability? Because when I look at your year-over-year change in margins, I know some of it is the seats, and some of it you were out there leasing some airplanes, so that accounts for some of it. But it feels like there maybe something -- maybe it's new markets versus old markets. Any additional color you can give on that, that would be great. Thanks, guys.

On the RASM side, last year, we were up 28% year-over-year in the third quarter. And as Ben mentioned, because of the fact we had obviously an environment that was good across the industry -- the industry was up not in the 28% range, but they were up, and that was one component.

Another component was we had made a pretty big network shift. So when you couple the shift plus the growth, roughly one third of the airline was in brand-new markets last year, and those markets did perform very well. And at the same time, we had the FET. So it was difficult of those three big components to isolate each one's share. In hindsight, as Ben mentioned, we were able to isolate it and it was a few points different. But that is the difference year over year.

When you look at the new route performance, we continue to be very pleased and have not seen a change in new route performance being better or worse. They seem to be very much in line. And so when we look at the year-over-year change, at least on the revenue line, it was all due to the FET holiday and not having that benefit to stimulate. I don't know if Ted wants to talk about the cost.

I think we've kind of hit that pretty hard, so I don't have any more to add.

Okay, very good. Thanks, guys.

Hunter Keay, Wolfe Trahan.

Thanks a lot. Just a couple quick follow-ups. Barry, can you talk to me a little bit about what happened in Vegas-Mesa. You guys were in there and then you were out. Obviously, you went head to head with Allegiant; something didn't work out. Can you explain to me the dynamic of what you thought was going to happen and what actually did happen, and how it might serve as a template going forward and how you think about competing with guys like Allegiant?

I think it has more than just the Allegiant impact. Obviously, we started the route at the same time Allegiant did. Obviously, when we originally planned it, we didn't presume that Allegiant was going to fly that route. They did.

There was also a reaction that we haven't seen but for that route over at Sky Harbor. So we saw a lot lower yields out of Sky Harbor. So you didn't get the normal stimulation. I think the market, once we see the public data, we'll see that the market stimulated, but a lot of the simulation didn't end up out at Mesa Airport.

But we haven't seen that reaction in many of the other markets out of Mesa or anywhere else across the system, so it was kind of a unique situation. And so I wouldn't say that -- us competing against Allegiant, I wouldn't read too much into that. We've competed with them and continue to compete with them on a number of routes.

But it was just one of these things that as we've stated over and over, we have a very high success rate with our new routes, but if things don't work, we will eliminate routes that don't make money. And once we saw that it wasn't going to make money and we're not going to sit around and wait for a year or two because of something strategic, in quotes.

Right. No. Thanks, Barry. And on the three new planes that you are taking, the used aircraft that you are going to be leasing, why now? I know you are still (inaudible) your targets, but ROIC is decelerating, margins are compressing, at least on an EBITDA level, fuel is high. What are you seeing right now that makes these aircraft -- that makes you want to get your hands on these aircraft so quickly right now? Is it a competitive thing? Any kind of color of the timing of this.

Sure. As we have been doing our planning for 2013, we realize that we have more maintenance needs on the airplane. So essentially, we are going to have more airplanes not flying, going through their scheduled maintenance events in 2013 than we had in 2012. We also have a few FAA-mandated air-worthiness directives that have to start in 2013 that is going to pull some.

And frankly, we are a little disappointed with the way the airline ran in the summer operationally, and we want to have a great operational year next year. So the combination of those three things suggested that we are going to need a few more airplanes dedicated to support the infrastructure of the broader geographic network and the maintenance needs of the airplanes.

What we had in these three airplanes, if you remember back in 2008, Spirit returned seven airplanes to -- seven A319s to ILFC. And the three airplanes that are coming back to us are airplanes that used to be Spirit airplanes in 2008 and earlier. So they have a very low threshold in terms of commonality I think they've got, that it is our cockpit, it is our configuration and such.

So the ability to be able to bring in that capacity, meet the maintenance and scheduled operational infrastructure needs of the airline and still grow 18% to 22% was very appealing to us. Because, again, we are making good money. Our growth is making good money. So no reason to sort of short change the growth just because the airplanes have to be maintained.

And Hunter, let me just add one comment too. We believe -- it is a unique opportunity for us to add those airplanes, given what Ben just said, and we believe that the costs associated with those airplanes, the rent associated with those airplanes is very attractive, combined with the costs that we know we are not going to incur next year because we are going to run a better operation. We are actually excited about the opportunity as it presented itself to us, and part of the reason we jumped at that time.

You made a comment that one of the things we should be thinking about was compressing margins, and I think we've been pretty consistent in our approach in saying that the margins are consistent, not compressing. And we feel good about that being the case going forward as well.

We said not compressing. And a better way to say that would be sustaining.

Right. No, I was referring to EBIT margin. I mean, there's a lot of costs shifting under D&A, which is your EBITDAR margin, but I hear you on that. Can I ask one more? Is there still (inaudible) in the queue? Can I ask one more?

Sure, yes.

The DOT is now -- it looks like they are at it again -- they're out there writing some new rules about disclosure of ancillary fees. Two-part question. Can you give us some color on this and how it impacts you guys? And second of all, I know it might be early, but are you planning on potentially appealing this, litigating it again, like you did the last time? And thanks a lot for all the time.

On the disclosure of ancillary fees, it is very proscribed, and we are going through our first year of that. That started -- there's been a couple of phases of that, but by February, all carriers, I believe, were compliant.

Kind of the dialogue that you are referencing, we've been pretty close to that conversation in Washington. And the issue surrounds third-party distribution and disclosure of ancillary fees. And then a dovetail to that would be the potential requirement that airlines distribute ancillary products through third-party distribution. And so we will take part A.

Today, the third-party realm is not required to disclose at the same level that the airlines are. For example, on the homepage of Spirit.com, we have a large moniker at the top of the page that says optional fees. If you go through the booking process, we also (technical difficulty).

If you go to buy on an online travel agency, for example, and you see the flight opportunities there, some of them may just say other information. It may not necessarily call out the fees. You then may have to click several times to actually see that there are fees and how much they are. That environment has led to a suspicion that airlines are hiding fees. And the reality is that we just don't have the same disclosure requirements and rulemaking for all channels, what the airlines themselves are. And I think that is better understood as we sit here today versus where it was maybe even 30 days ago. So we feel very good about that.

What was the second part of your question?

I know it's early, but if it turns out that it's having more of an adverse impact than you thought, are you planning on going through the appeals process again, like you did the last time?

We don't believe it is good policy to impose higher costs for all customers in order to benefit a few customers, which is what some of these rules do. And so we are now evaluating what the next best step for the airline will be, given that some of the new DOT rules do just what I said, we believe.

Thanks, everybody. Appreciate it.

Bob McAdoo, Imperial Capital.

Just a quick one. The three used leased airplanes that you are bringing on, how long a lease term is that for?

We are keeping those relatively short-term. Those are 40-month leases.

They are essentially a bridge to the neos that we leased from ILFC.

Got it. Thanks.

Thank you. This concludes the question-and-answer session of today's call. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.