Spirit Airlines Inc (SAVE) 2012 Q4 法說會逐字稿

Hello, and welcome to the Spirit Airlines fourth-quarter 2012 earnings conference call. My name is Myesha 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. Please go ahead.

Thank you. And thanks to all of you for joining us today and welcome to our fourth-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 are management's beliefs as of today February 19, 2013, 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 the year ending December 31, 2011.

We undertake no duty to update any forward-looking statements. In our remarks today, we will be comparing fourth-quarter 2012 to fourth-quarter 2011 results adjusting all periods to exclude unrealized hedge gains and losses and special items. Please refer to our fourth-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, DeAnne, and thanks to everyone joining us for the call today. 2012 was a year of many accomplishments for Spirit. We added 29 new markets during the year, bringing the total markets that we have liberated from high fares to 110. Our commitment to profitably grow our business by offering low base fares resulted in a record full-year results, with an average base fare of only $75 per segment.

I want to thank all the Spirit team members that contributed to our success.

As evidenced by our results, including our continued high load factors there is an ever-increasing acceptance and awareness of the business model. In 2012 we grew our topline 23.1% to $1.3 billion and generated operating income of $166.5 million, resulting in an operating margin of 12.6%. Our fourth-quarter and full-year results include the impact of Hurricane Sandy, which we estimate had a $25 million negative impact on revenue and a $24 million negative impact on operating income.

Spirit canceled 136 flights as a result of the storm, but the largest revenue impact was from the lingering effects on demand for travel in the affected regions. Our team did a tremendous job in quickly resuming full operations following the storm. Unfortunately, the widespread damage in the New York and Atlantic City regions led to a significant decline in demand for travel following the storm.

In addition to directly impacting demand for travel to and from New York and Atlantic City, the impact spread beyond just the direct flights to the area, as these markets are among the largest Fort Lauderdale gateway flow markets in our network. We estimate our operating margin for the full-year adjusted for the storm would have been 14.2%, which is comparable to last year.

In addition to our profitable growth, we added crew and maintenance bases in Las Vegas, Nevada, and Dallas-Fort Worth, Texas, creating more than 450 new jobs. Our expansion has provided more than 10 million customers new ways to save money by offering low base fares, and the freedom to pay for only the additional products and services they value.

Now turning to our fourth-quarter details, our net income for the fourth quarter was $19.5 million or $0.27 per diluted share. Total operating revenue increased 19.8% year-over-year to $328.3 million. Total RASM increased 6.6% -- I am sorry, decreased 6.6%, driven by the negative impact of Hurricane Sandy and a 5.3% increase in our stage lights.

We continue to be pleased with the results of our focus to increase ancillary revenue while driving base fares lower. With each day we gain a better understanding of the power of letting customers choose what they value for their travel experience. Using our transparent disclosures, customers can decide if they value the extra options we have available, and if not, they don't pay to subsidize somebody else's choice, which allows them to save money. This business model continues to work very well for us and we are excited about the opportunity to liberate even more cities from high fares.

Looking ahead, we expect our first quarter capacity to increase 21.1% year-over-year and our full-year capacity to increase 21.5%. Much of our growth this year we focused on growing our network by adding new routes between our existing destinations, creating a more concentrated spider web route network. By adding new market connections to cities we already serve, we improve our ability to increase cost efficiencies by more fully utilizing our airport assets and leverage knowledge of our products and markets we already serve.

As for first-quarter revenue outlook, we aren't prepared to give a precise RASM range. But given that we are growing capacity 21% year-over-year in the first quarter, while increasing our stage lights and adding in the lingering effects of Sandy in the form of many Northeast schools canceling their winter breaks, flat would be up when all this is considered.

So while we still have over half of March left to sell, and realizing that many things could change, we feel pretty good about the demand environment. With that I will turn the call over to Ted.

Thanks, Ben, and, again, thanks to all of you for joining us today. I joined Ben in thanking all our Spirit team members for their contributions to our success.

In the fourth quarter our total operating expenses increased 25.5% to $296.4 million on a capacity increase of 28.3%. Excluding fuel, our CASM decreased 2.5% year-over-year to $0.0593, in line with our guidance for the quarter. Primary drivers of the decrease included lower labor expense per ASM year-over-year due to lower overhead unit costs and lower distribution expense per ASM as a result of a decreasing credit card fees, all along with an increase in average stage length.

These benefits were partially offset by $1.4 million of the remaining startup costs related to our seat maintenance program, and higher depreciation and amortization expense related to amortization of heavy maintenance events. We ended the year with $416.8 million in unrestricted cash and with no debt on the balance sheet.

As of December 31 we had 45 aircraft in the fleet and have nine aircraft scheduled for delivery in 2013, which includes seven new A320s and two used A319s. The two used A319s will be direct leased from a lessor.

We have negotiated sale-leaseback financing transactions for the seven new aircraft deliveries in 2013 at rates commensurate with our credit position. In addition to implied favorable financing rates, thanks to our pristine balance sheet we are now in a position to negotiate better overall terms and conditions.

I will now turn to our unit cost guidance, excluding fuel, for the first quarter and the full-year of 2013. As we discussed on our prior call, on a unit basis our largest cost driver this year will be increases in depreciation and amortization related to the amortization of heavy maintenance events. But we hope to mitigate much, if not all, of this pressure by leveraging our growth, increasing efficiencies throughout the system and improving our operational reliability.

For the first quarter of 2013 we estimate CASM ex-fuel will be about flat to plus or minus 1%. And for the full year of 2013 we are targeting our CASM ex-fuel to be down about 1% year-over-year. We feel very good about our relative cost position and believe our unit cost advantage will continue to expand over time. In 2012 on a stage length adjusted basis, the unit cost of our largest competitor was 66% higher than ours.

Despite this clear advantage, Spirit is 100% uncommitted to producing stable to declining unit costs, excluding fuel, during our growth cycle. And we are currently evaluating additional opportunities to reduce our cost structure further.

For the first quarter we estimate our economic fuel price will be $3.42 per gallon based on the Gulf Coast jet fuel curve as of February 14, 2013. This includes our estimated impact from realized fuel hedges. Fuel costs continue to remain high and we are keenly focused on improving our fuel burn efficiency.

Having a fuel-efficient fleet is our best fuel hedge, and in March of this year we will be the first US carrier to take delivery of an A320 aircraft provision with sharklets. We have approximately 20% of our first quarter 2013 projected fuel volume hedged using US Gulf Coast jet collars. Additional details about our hedge positions are included in the investor update we plan to file this afternoon.

Before I close I have a couple of housekeeping items for 2013. We estimate our aircraft rent for the full year 2013 will be $175 million, and depreciation and amortization will be approximately $40 million.

As for working capital, we estimate our cash, capital expenditures for 2013 will be about $22 million, which includes the purchase of one spare engine, which we will finance using a sale-leaseback transaction.

Pre-delivery deposits, net of refunds, will be a cash draw of about $30 million. We will pay approximately $72 million for heavy maintenance events, and our prepaid maintenance reserves net of reimbursements are estimated to be about $11 million.

In closing, while we are pleased with our relative cost advantage, we will continue to aggressively pursue opportunities to lower our cost structure, and I am confident that we will successfully leverage our growth over the next several years to drive efficiencies throughout the business. With that I will turn it back to Ben.

Thanks, Ted. Last quarter we gave a preview of our targeted EBITDA margin for 2013. Based on current fuel price projections and our current outlook, we are raising our EBITDA margin target for the full year 2013 to 25% to 27% from 24% to 26%.

2002 (sic) was a very good year for Spirit. Our traffic growth kept pace with our capacity growth. We maintained our commitment to low base fares, achieved record full-year net income and delivered a pretax return on invested capital of 26.5%, or 28.8% if you adjust for Sandy.

Our 2012 results further solidify our strong foundation for future growth and we remain committed to running this airline as a business, providing value to our customers and delivering strong returns for our shareholders. Now it is back to DeAnne.

Thank you, gentlemen. We are now ready to take questions from the analysts. We do ask that you limit yourself to one question with one follow-up. If you have additional questions you would like to ask, you are welcome to place yourself back in the question key and we will allow for additional questions if time permits.

We are ready to begin.

(Operator Instructions). Michael Linenberg, Deutsche Bank.

Just a couple questions here. Ben, I get your view on wanting to bring down your average ticket prices, and obviously you want to take up the non-ticket. You have been focused on that.

But when I look at this last quarter, your average -- if we looked at the ticket revenue per passenger flight segment -- that is down close to 9%, and yet you have a 5% longer stage length. Fuel is up 3%. You would think that you're going to stimulate by lowering that, but at the very least, you would try to offset the fact that maybe you are flying further or fuel prices are higher.

And, so, I'm looking at that. I am wondering if it is under pressure because there is a lot -- in the mix there was a lot of startup routes. Or maybe you are seeing some competition in some of the markets, maybe other carriers are responding to you more aggressively? Why should that be down as much as it is?

Wouldn't you at least want to recapture the run-up in fuel and the increase in stage length? Do you feel like maybe you are leaving too much on the table? This may be a question for Barry, however you guys want to answer it.

No, Mike, it is a good question, but I think in a way you are almost overthinking it. The answer to your whole question is Hurricane Sandy, because but for Sandy I don't think you would have seen that drop in the average fare. But we had to lower prices in order to get planes full more quickly, and to stimulate a market that wasn't in the mood to travel following Sandy. And I think but for that event, I think you would have seen exactly what you are saying.

Of course, we are going to look to keep pace with fuel changes and so on. And while we, over time, certainly want to push down average prices, and put more of the pricing decision in the consumer's hands through optional things, it is really Sandy that drove the whole issue you're talking about.

Okay, very good then. Then just my second question, when I look out at the future schedule changes, you do a lot of seasonal changes, and I understand that. When I look at the Fort Lauderdale market, it looked like that some of the cuts were a little bit deeper than what we have seen in the past.

I didn't know if that was a function of some of the new markets that you have moved into maybe performing better and you want to reallocate capacity into some of those new markets, or is some of that in response to some of the competition that we are seeing in the Fort Lauderdale market? Because it does look like both JetBlue and even American, when you look at some of the capacity that they have been adding out of Miami, if that is having any sort of effect in driving that decision.

Mike, this is Barry. When we look at our capacity deployment and we look at every schedule change when we go into the future, we take the information we have at the time, and we look for the highest return on capital. And so the reality is that South Florida yields are just not what we see in other parts of the US and other parts of our network.

So it is just a pure decision on -- we chase return on invested capital. So if other people are chasing those yields, they may have a lower hurdle in that regard.

Okay, very good. All right, thanks.

John Godyn, Morgan Stanley.

Thanks for taking my question. Ben, I just wanted to follow up on this 2013 EBITDAR margin guidance revision. I was hoping you can elaborate on the sources for that revision.

Is it because you now just feel more comfortable about cost versus what you were thinking before? Or are you seeing something on the margin in terms of demand that just makes you more comfortable on the revenue line? Or is there some -- an ancillary initiative in that number. I'm just trying to get to the bottom of the revision.

Yes, it is principally -- it is principally because we are -- we went forward with more -- with guidance for the full year on unit costs, and we feel better about the cost structure of the airline going through the full year. Obviously, we feel good about the demand environment. We said that.

But we wouldn't be basing a full year EBITDAR change based on something that is so changeable and variable this early in the year. So it really is based on our little better clarity on the cost position for the year.

Great, and when we think about the longer-term margin when we think about your earnings power, is 25% still the right number? Or should we think about it as, look, any year where you guys feel comfortable on costs, any year where you can generate down unit costs year-over-year is a year where you could get north of 25%, not unlike how you're feeling about 2013 right now.

Well, it is a good question. We have said that we are a growth Company. And we are planning to grow the Company 15% to 20% a year over the next couple of years with a fleet order that supports that. And we have said that an ability to grow while maintaining or not compressing our EBITDAR margins that are targeted around the 25% range is our target and that is where we are.

All that said, when we can find opportunities to produce more for our investors we are going to do that. But in an environment of high growth of 20%-ish kind of per year we think being able to target that high EBITDAR margin is what most investors are going to be looking for.

That is helpful, thanks. And, Barry, can I just ask a quick nit on revenue? We have seen other carriers that have leisure exposure complain about, I guess, holidays being canceled and school schedules and things like that affecting leisure demand just in the wake of Hurricane Sandy, and looking deeper, Easter.

So when we think about those two factors, just any cancellations in holidays and then how Easter impacts you, any thoughts on those two themes would be helpful. Thanks.

Obviously, the lingering Sandy effects had some challenges in Northeast, and specifically in Atlantic City, where we have a large operation there and this pretty much was the epicenter of the storm. We had some challenges. And the winter break being canceled is obviously a detriment.

We proactively removed some flying out of Atlantic City in order to navigate that environment. But, as you can expect, in moving that capacity, it went somewhere that we weren't planning on and it was loaded late, so it is not just completely fixed by moving the capacity. It is unfortunate when you have a mature part of your network that you have to reallocate, that is doing well.

But having said that, the Easter shift does improve a little bit for March, obviously, and as Ben mentioned earlier, despite our 21% growth, the lengthened stage, we feel pretty good about the quarter itself.

Thanks a lot, guys.

Helane Becker, Dahlman Rose.

Thanks for the time. Just on the latest storm, Nemo, can you just -- I don't think that affected Atlantic City at all. I didn't see any snow, and I was down in that part of the world. But did it affect the New York operation at all?

This is Tony Lefebvre. No, the overall impact was at about 20 flights that we had canceled I think, but it wasn't significant impact. New York had some and Boston had the longest closure, but nothing in Atlantic City.

Okay, and then just -- Ben, on some of your new markets, can you just comment on what's surprising you in terms of either acceptance or nonacceptance rates?

In general what we are seeing with new markets is what we have been seeing for the last three years. Consumers love low fares and they love the optionality to pay for what they want and not pay for what they don't want. And we have seen that virtually all of our new markets.

So while every market doesn't necessarily stimulate in the same way -- some stimulate a little more; some stimulate a little less -- overall we have been very happy with the performance of the new markets. And they have been performing the way new markets have been working for us for a while, which is go in with lower price point and bring back some traffic that has been priced out of the markets.

Got you. Okay, thank you very much.

Duane Pfennigwerth, Evercore Partners.

Given your cost position relative to the industry, which I think actually gets a little bit better here in 2013 and 2014 and probably 2015, we feel at least you have longer-term attractive growth prospects, whether or not there was consolidation. It looks like to some extent you have been choosing new markets assuming American and US Air were going to merge. My question is now that it is here, how does this change your growth opportunity? And to what extent does it change your thinking about where to grow?

Good question. I don't think it changes our views really at all. The latest merger announcement we see as a trend in where the industry has been going, not as a one-off new thing. And our selection of markets has been a function, as we have said before, where there is people traveling but paying very high fares and where there are likely more people who can't afford to fly that could benefit from the Spirit alternative.

And so I don't know that our deployment has been assuming that merger is going to happen. Although, I will say that merger happening in terms of overall industry stability is probably good.

Okay, thanks. Sorry if I missed it; can you offer any preliminary estimate for Sandy into the first quarter?

No, we haven't provided any specific other than just the non-RASM guidance that we gave in my comments.

Okay, fair enough. And then just, lastly, can you give us an update and where your analysis stands regarding increasing the seat density on your existing fleet?

It is ongoing.

It is ongoing; that's right.

What are the odds that you move forward with something like that this year?

Our eight 319s today are at FAA max density on the airplanes right now at 145 seats. That is the FAA maximum. On the 320s we have 178 seats. The FAA maximum on that plane is 179, and on the 321s the FAA maximum is 219 and we have 218. So while we are looking at opportunities, it is not a huge issue, because we are already almost there.

Okay, that is helpful. Thanks for taking the questions.

Jim Parker, Raymond James.

You list in your release, of course, and we see these -- the press releases pretty frequently about new markets opened. Can you tell us if you closed any new markets in the fourth quarter or even in the third, and what might have transpired in those markets to cause you to leave?

We did discontinue service in the Las Vegas to Phoenix market, and it was a simple case of -- the demand did not stimulate at the level that we had expected, and we removed the flying.

Were there any others, Barry?

That we have canceled?

Yes.

Yes, we took some routes seasonal that weren't seasonal before. But we have also in Nassau, Fort Lauderdale/Nassau, we have eliminated that route as well.

Okay. Now I noticed that several airlines are increasing capacity in the Caribbean to South Florida and to upper South America, particularly Colombia. And we see JetBlue doing some things; also, American, I guess, is increasing it. Perhaps that is longer haul, but the [LAN] is putting it in a 767 from Bogota to Fort Lauderdale, I believe. So what is your game plan for your LATAM business given that competition is increasing there?

This is Ben. I will repeat in concept what Barry said a little earlier is we don't have a game plan for LATAM that is distinct from our game plan for our domestic US or anything else. We have a game plan to return -- to create high return for shareholders and we are going to deploy capacity consistent with that strategy.

So if there is capacity or yield pressure in South Florida that is making it difficult for us to make those kind of returns, despite the fact that we have the lowest cost of any of the competitors you're talking about, all that says is that we have a different investment hurdle than they do, and I would think that our shareholders would appreciate that.

Okay, thank you.

Hunter Keay, Wolfe Trahan.

How much is stage length driving the estimated decline in [CASMX] in 2013? And if your stage length is up low mid-single digits should we assume that those longer flight carry with it higher fares?

I will take the first piece. This is Ted. Stage is contributing to some of the CASM benefit that we will see into 2013. As we mentioned before the D&A number, the depreciation number is a big number going the other way. So we have a number of leverage points that we are using to get CASM to be lower year-over-year.

Stage is one of those pieces. But so is scale and a number of other cost initiatives that we have in place. So I don't know if we have described a specific number yet, just a stage where we can certainly talk about that a little bit more later.

And then on the revenue side, obviously, the further you fly the more you expect to get paid. This is not a huge change in that regard, but you do expect a higher average fare the longer you fly.

Okay, so I am sorry, Ted, you didn't give guidance on stage length in 1Q at the very least, let alone full year, right?

We will talk about stage in 1Q in the investor update.

Investor update.

Investor update, yes.

All right, okay, thanks. And in terms of distribution expense, which was up -- I think you guys mentioned some changes in how you're selling tickets, but how should we think about that going forward in 2013? I think you have, what, a partial content agreement with the GDSs, which I think is pretty unique. But those I think were generally better quality tickets that you tended to say were more profitable than tickets that you sold on your website.

Are you planning on driving that down or up going forward as you think about 2013 and beyond? And how that would impact specifically the distribution expense line would be helpful there, too.

It is Ted again. We have -- certainly we are predisposed to having people use our distribution channels, which the vast majority of our customers do. But we also are generally encouraged by the type of traffic we book on our third-party partners as well. So I don't know that we are skewing one way or the other necessarily, and I think generally we feel it is positive to the bottom line wherever we get our bookings.

So if you're looking at trying to find a trend, I would say it is -- what we are seeing today is kind of stable, what you would expect.

Now that we have signed up Expedia, we weren't selling in Expedia for about seven years, now that we have signed up Expedia and are selling through Expedia that brings us to that stability that Ted talked about.

Okay, thanks a lot.

Dave Fintzen, Barclays.

Question for -- I guess Ben or Barry -- Ben, you mentioned demand is good. I am curious how you guys think about, or if you have done any look at income demographics as you shift into places like Dallas and Houston, and some of these other markets away from the Caribbean? You see the macro issues like payroll tax or fuel prices going higher and squeezing maybe lower income consumers.

Do you get any benefit in that network shift in terms of a different kind of consumer or -- and just in general how do you think about some of those macro pressures?

This is Barry. Absolutely, we have seen a change in the demographics. And it is related to the conversation we've had a couple of questions about why are we not in growing Florida versus Texas.

And the reality is, whether it be the oil environment, and the energy economy and so forth that is going on in Texas, you have got a really great economy. You have got really good incomes there. And that generates all better things from an airline perspective, both in absolute demand and yields themselves.

So when you think strategically about where you are deploying your assets, it is not a coincidence that we are going after the better performing parts of the economy, rather than chasing some of the ones that are more laggards like South Florida.

And do you think now that you've had enough time, obviously you have been in Dallas for a while, Houston you're starting to ramp up, do you feel like you have enough visibility to see how some of these macro issues could play through over the next few months? Or does that create a little more RASM uncertainty than maybe you have had in the past?

This is Ben. I think it is a little premature to say that, although we can say that in an environment where -- if you look over the last number of years in environments where individual consumer confidence in spending or ability to spend is constrained, we tend to do pretty well in that environment. If incomes are down or if people have a little less money to spend, our offer of the very low-fare with options to save money if you behave in certain ways like take fewer bags and things like that, becomes even more appealing.

2009 was the record example of that, with basically recessionary airline demand, but we ran very high margins in that year, as people bought down looking to save money. So I wouldn't say that we are scared or nervous about the overall macro environment, but certainly what people can pay affects how often they are going to travel.

That is helpful. And then maybe just a quick one and then, Barry, you mentioned a quicker spool up of new routes when you have got a presence in a city. Is that something -- I think in the past you have said a year to two years to spool up, maybe more like a year. Does that materially change that development cycle of the next new route into a Dallas, or is that still reasonably close?

As far as maturity and spool up that we have seen, there is not really an improvement after the 12th month. We don't measure new route performance in years; we look at it in months. And we have talked about this several times, but basically we look to be making cash in the first 60 days, and we look to be fully allocated breakeven within the 6 to 8 months timeframe with it being profitable on a run rate basis by the end of the full year.

So we haven't really seen any of that change. There is a dynamic even -- take Texas, for example, I am sure there are some persons that are squeezed by some of these things, but I will point you to Ben's comment.

In those types of environments, but like we have seen in the past in 2009 in particular, you see people -- they maybe still want to travel; they can't afford as much. So we become an even better option for them in that type of environment.

Okay, great. That is very helpful. Thanks for the time.

Stephen Trent, Citi.

Good morning everybody and thanks for the time. Just one question for me. You guys have been so good about cash generation, and I notice you are also continuing your activity on the sale and leaseback transactions. Any thoughts about potentially offering a dividend at some point down the line, even if it is a small one? Just the opportunity out there to attract some incremental investors could be an advantage, and I'm wondering how you're thinking about that.

Thanks, it is Ted. We are a growth Company, so right now we are not spending a lot of time focused on that type. We have got a good deal of growth ahead of us that is going to require investment and capital expenditure and that sort of thing. So I think that right now we are keenly focused on how do we optimize our cost of capital in deploying that growth. And that is what the balance sheet is affording us to do.

Stephen, this is Ben. As you know, there's a lot of ways you can reward shareholders, and our view is the best way to reward shareholders is keep high-growth with high returns going for a while.

Okay, fair enough. Appreciate the color, and I will let someone else ask the questions.

Bob McAdoo, Imperial Capital.

Just a couple of questions on airplanes. I see you said you're getting two used airplanes from a leasing company. Curious, are those relatively short-term leases, a year or two, or are they going to be longer-term?

And, secondly, related to that, since we are seeing the used A320, A319 market lease rates come down enough to cause guys like Allegiant and whatever to move over into that type of airplane, and we also hear other people talk about how inexpensive these airplanes are getting with the new models coming. Curious -- does that cause you to think about expanding faster and bringing on more leased airplanes in terms of used airplanes, switching with new versus used mix? Anything along that line would be helpful to know.

Sure, Bob. The three used 319s we took in were on relatively short-term financings, 40-month financings. And to your point about the attractiveness of that asset in the marketplace today, which is one of the reasons we struck the deal we did, was that we felt like we got a good opportunity for us to actually add a little bit of growth heading into 2013 at attractive financing or ownership rates. And so to the longer-term question of would we consider that going forward as well, the answer is yes. We are going to evaluate all opportunities.

But you have to remember that we today have a decent-sized order book that we have put out there that we have our growth plan for us. And so we will weigh those opportunities against that existing framework of an order that we have.

Steve O'Hara, Sidoti & Company.

I was just curious. In terms of your ability to grow, it seems the biggest risk to your story is your ability or inability to control your costs. Can you just talk about what leverage you can pull going forward other than growth in stage lengths, raising the stage length, what leverage you can pull and maybe some of the areas that you might be more concerned about in terms of a lever that might raise that ex-fuel unit cost?

I will take the first piece; I will let Ben comment as well. As we have discussed, one of the bigger drivers of unit costs into 2013 and probably beyond will be the amortization of our heavy maintenance that we're going through the cycle of right now. And so our ability to manage through that cycle and keep our costs flat to down is a pretty important and a pretty important objective for ours. And so the levers we are pulling, to your point, growth is an extremely powerful one as stage is a contributor as well.

But we are relatively small Company when compared to our competitors. And so we haven't -- we don't believe we haven't achieved even the level of scale that would be normalized, and so we are going to get benefit of that as well from a fixed cost perspective. And so there is a number of things in the works around here that we're plugging away at, that we believe will help us manage through that cycle, and deliver upon the targets we discussed in my formal comments. Ben, I don't know if you want to --?

Yes, this is Ben, and the other thing I would add is the other advantage is that most of our competitors have, that you don't see in our costs yet, is general financing efficiency. Most of the planes that we are flying for us today were financed in an environment earlier when the airline didn't have the sort of balance sheet that we have today or the cash position that we have today.

And as so as we continue to grow, we will also be bringing -- lowering our average cost of capital as we grow. And that is another piece of the cost structure that is going to not benefit strictly from scale, but strictly from having a better or stronger balance sheet and a stronger credit position as we enter the capital markets to bring in new equipment.

And I will add one further thing that is worth noting. We look at our unit costs a lot on just an absolute basis, meaning where we look versus ourselves on a year-over-year basis.

But to Ben's point, if you are looking at us compared to the rest of the industry, because of the very nature of the way we finance our assets, 100% of the costs of our financing is included in our operating expense, and for the vast majority of the airlines that is not the case. And so there is a different comparison for us as well.

Okay, and then just as a follow-up. I know it is very early, but in terms of depreciation and amortization for 2014, is this a reasonable -- we shouldn't be expecting this to double or triple again in 2014, right? Is this something that slows down?

Yes, I think what we said was for 2013, this is definitely a step function year because of the number of aircraft heading through that cycle. As the fleet grows, you are always adding more aircraft and you are depreciating as well, so there will be movements in those numbers. I don't think you will see a step function we saw this year, but there could still be an increase in some of the out years, yes, on that.

Okay, thank you.

Glenn Engel, Bank of America.

First question on new routes. Was the percentage of new routes much larger than normal in the fourth quarter and how has that tended to range over time?

The percentage of new routes is almost equal to our growth rate. For the most part, when we are entering new routes we're flying on average one daily flight, so we are growing at that rate. So if we add 20% capacity, we have got 20% in new routes (multiple speakers) and that has kind of been our average.

Okay, so the percentage of new routes versus adding to existing routes didn't really change very much this year?

(multiple speakers) no.

Fuel gallons per ASM were down about 5% in the fourth quarter. What drove that? And is that something I should continue to see looking good in 2013?

There is a couple of contributing factors to that. One is the gauge -- we are gauging up, so more 320s are delivering. That is helping your ASM measure there on a fuel burn basis.

In addition to that, for the older aircraft in our fleet, the 319s are actually going through their engine overhaul cycle. And when you put in engine through an overhaul, though expensive, it also helps you from a fuel burn perspective. So we will see some of that benefit, too.

Your aircraft utilization, at what point does growing make it harder to keep utilization as high as it is?

For the next few years we don't see that. Again, we feel pretty bullish about our growth opportunities, and flying high utilization is a feature of what this airline -- how this airline works and what we do to help produce the kind of returns we produce. So as we grow, certainly, over the next couple years, we don't see any meaningful change in our utilization on the downside, for sure.

And, finally, you're taking a couple of used A319s. Can you talk about the trade-off between new and used and what would cause you to do more used?

The three airplanes that we are taking, the two that are coming this year and one that can last year, are planes that Spirit used to fly. If you remember back in -- well, maybe you don't, but some of you will on the call, remember back in 2008 we reacted more quickly and more deeply than most of the industry to the rapid increase in fuel prices. And we returned seven airplanes prematurely to one of our lessors.

The three airplanes we are bringing back our three of those seven, so they are in Spirit configurations and they are airplanes that were originally brought in under -- by Spirit. So while that doesn't -- they flew with other carriers and there are still issues in terms of re-conforming them to our maintenance program, and things like that, it is a smaller issue than just going out and getting an airplane that had been used and that we have never seen before. So we were comfortable with those particular airplanes.

Beyond that I will go to what Ted said earlier. We also see the pricing in the used airplane market and that is encouraging, but we do have a growth plan with airplanes, new airplanes coming. And we have got good ability to finance those airplanes, so we are going to have to balance all that to manage growth going forward. And we're sticking with our 15% to 20% per year growth rate over the next couple of years.

Thank you.

Operator, we have time for one more question.

John Godyn, Morgan Stanley.

Thanks for taking my follow-up here. Ben, and maybe, Barry, I think investors, of course, see how successful you have been with your unbundling strategy. And as a result it is pretty rare to have a meeting with one of your large competitors without somebody in the meeting pushing them to get more aggressive on ancillaries.

Just hypothetically for large airline started to mimic your aggressiveness on ancillaries and fees, is that a negative, a neutral to you just from a competitive perspective? Or is there some silver lining that actually might make it a positive? And does it matter if it is a large legacy airline or a large low cost carrier moving in that direction?

I think it generally would be a positive if they did that, because what they would -- while they may be encouraged by the revenue generation from the fees, I don't -- we don't think that we have the discipline to also lower the fare at the same time. And so if you are charging high fares, and then you are adding a lot of fees, the whole problem of nickel and diming and bait and switch becomes a real issue.

With Spirit, since we have every time we have added an unbundled option or charged for an unbundled option, we have correspondingly lowered the base fare, which is why in the fourth quarter we had $75 average segment fare, and so without offsetting the incremental fee with a lower price structure, I think that is a risky kind of strategy for another airline.

The other thing is that the more other airlines charge for things, the more, though, that becomes in the vernacular and people just understand that those things all have price points to them. So for every reason, I think it would be positive if someone did what you suggested.

Got it. Thank you.

Great. Well, that concludes our call today. Thank you all for joining us.

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