Spirit Airlines Inc (SAVE) 2013 Q1 法說會逐字稿

Welcome to the first-quarter 2013 earnings release conference call. My name is John, 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 DeAnne Gabel. You may begin, DeAnne.

Thank you, John. And thanks to all of you for joining us this afternoon. 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 represents 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, April 30, 2013, and are subject to significant risks and uncertainties that could cause actual results or performance to deliver 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, 2012. We undertake no duty to update any forward-looking statements.

In our remarks today, we will be comparing first-quarter 2013 to first-quarter 2012 results, adjusting all periods to exclude unrealized hedge gains and losses and special items. Please refer to our first-quarter 2013 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.

We are pleased to report that our first-quarter profit increased 37.4% year-over-year, to $32.8 million, or $0.45 per diluted share. Operating income grew 40.6% to $53.2 million, resulting in an operating margin of 14.4%, and that's a year-over-year improvement of 1.8 percentage points. I want to thank all of our team members who contributed to achieving these strong results.

Revenue grew 22.9% to $370.4 million on a capacity increase of 20.8%. We have continued to grow our network over the last year, and we are pleased to continue to have one of the highest new route successes in the industry. Mature markets, coupled with the new route success enabled us to grow our first-quarter unit revenue 1.7% year-over-year. We estimate that the calendar shift of Easter occurring in March this year, as compared to in April last year, contributed about 1.5% points to our first-quarter 2013 year-over-year improvement in RASM.

Our low-cost, low-fare, high-choice strategy continues to be successful in providing value to our customers and our shareholders. Spirit's average base fare per passenger segment in the first quarter 2013 was just $79.09. We are pleased to offer extremely low base fares, so that even when adding in the optional extras, the total price our customers pay is almost always less than they would pay on other airlines.

During the first quarter, our ancillary revenue as a percent of our total revenue grew to 41%, and our ancillary revenue per passenger segment in the first quarter increased $3.07 year-over-year to $54.75, driven by the implementation of applying revenue management strategies to ancillaries, such as advanced purchase restrictions on bags. As with many of our add-on options, we offer customers the opportunity to save money when they behave in a manner that helps us save money.

In addition to growing our network, maximizing revenue, and managing the day-to-day business in the first quarter, we focused our attention on strengthening the building blocks that will provide for long-term sustainable profitability. On the operational front, by the end of the first quarter, we achieved our targeted aircraft sparing ratio, and in the last few weeks, we've seen a marked improvement in our operational reliability, which we will measure by percent of flights completed. We also started work on another initiative that we think will greatly benefit our operational performance, and we hope to have more information on that front to share with you in the coming weeks.

On the finance side, in addition to maintaining our vigilance to our lower cost structure, we completed the implementation of our new ERP system, which streamlines our Business processes, allowing for more efficient use of our resources. And on the employee front, we have been busy communicating our Company goals to our team members throughout the system, needing their input on how to improve our Business. We have set some aggressive targets for ourselves, and I'm confident that our team possesses the drive and ingenuity to achieve them.

Looking ahead, we expect our second-quarter capacity to increase 21.8% year-over-year, and for the full year, we expect our capacity to increase 21.1%. As we grow our network this year, we're primarily focused on adding new connections among our existing destinations. For example, we previously served Latrobe, Pennsylvania from Fort Lauderdale and we serve Dallas from several destinations, but until this year, we did not serve Latrobe to Dallas on a nonstop basis.

We believe that over time, by creating a more concentrated spiderweb route network, we will able to gain scale benefits and drive other cost efficiencies. As for the second quarter, the Easter shift, along with a 4% increase in stage length, makes year-over-year comparisons difficult, but not inconsistent with similar patterns in the past, on a stage-adjusted basis when Easter fell in March. From a monthly perspective, we estimate capacity will increase 17% in April, 26.5% in May, and 24.5% in June.

Demand trends in May are stable but the pricing environment is a bit softer than we had anticipated at the beginning of the quarter, so we pulled our revenue forecast for May down a bit, but June bookings are tracking to our expectations. On a stage-neutral basis and adjusting for the Easter shift, we would expect a flattish RASM environment for second quarter. We have not witnessed any direct sequestration impact to revenues, and while forward bookings are stable, we are closely monitoring pricing volatility in the marketplace, created by carriers dependent on business traffic. Overall, it is very early in the quarter from a visibility perspective, and we will update you if we see any major changes in demand.

Before I turn it over to Ted to discuss our cost performance, as you may have read yesterday, Tony Lefebvre has announced he's leaving Spirit to pursue other opportunities. I have worked with Tony for many years, including the last seven here at Spirit, I want to thank Tony for his many contributions over the years, and for helping to develop a strong team of leaders within our operations division. We will miss him and wish him the best in his new endeavors.

And now, here is Ted.

Thanks, Ben. Again, thanks for all of you for joining us today.

A special thanks goes out to all of our Spirit team members for their contributions to our first-quarter results. In the first quarter, our total operating expenses increased 20.3% to $317.2 million, primarily due to fuel and other direct expenses, related to a capacity increase of 20.8%.

Excluding fuel, our CASM increased 0.8% year-over-year to $0.0604, in line with our guidance for the quarter. The primary driver of the increase in CASM ex-fuel was depreciation and amortization expense, related to the amortization of heavy maintenance events. Due to an increased number of severe winter storms during the quarter, the Company experienced a higher number of weather-related flight cancellations, as compared to the same period last year. The CASM pressure associated with the resulting decrease in ASMs, as well as other weather-related expenses, such as higher de-icing expense, also contributed to the increase in adjusted CASM ex-fuel.

These pressures were partially asset by lower labor expense per ASM, as a result of improved efficiencies, lower distribution expense per ASM, as a result of reduced credit card fees, and a longer stage length. We ended the quarter with $483.5 million in unrestricted cash, and with no debt on our balance sheet. During the quarter, we had capital expenditures of $10.6 million, including the purchase of a spare engine, which we've financed through a sale-leaseback transaction after it was delivered. Net of reimbursements, we paid $15.1 million in predelivery deposits for aircraft. Net cash from operating activities includes $15.3 million paid for heavy maintenance events, and paid $6.8 million in maintenance reserves, net of reimbursements.

During the quarter, we took delivery of two used A319s and two new A320s, ending the quarter with 49 aircraft in the fleet. Our March A320 aircraft delivery was our first aircraft to be delivered with Sharklets. We have five additional new A320s with Sharklets scheduled for delivery before the end of the year. Looking ahead to the second quarter, we estimate CASM ex-fuel will be flat to down 1% year-over-year. We expect to see the trend of lower distribution expense per ASM continue through the second quarter, and believe we will see benefits throughout the cost structure of running a better operation.

By the end of the first quarter, after we had integrated the two used A319s into the operational fleet, we began to see the operational benefits of an increased aircraft sparing ratio, and that, along with now having the additional maintenance bases in Chicago, Las Vegas, and Dallas, gives us confidence we have the resources in place to improve our operational reliability. Partially offsetting these benefits will be the continued pressures related to the amortization of heavy maintenance events. We remain on target to achieve our projected for CASM ex-fuel, down about 1% year-over-year.

Over the last couple of months, we have experienced a fall in fuel prices, which is a welcome relief. However, on a historical basis, they are still very high, and we remain keenly focused on increasing our fuel efficiency. As we continue to grow with the A320, which in our configuration produces a fuel burn that's about 14% more efficient on a per-unit basis than our A319s, we expect to see continued efficiency gains. In addition, all our new A320s starting with the delivery in March of this year, will be delivered with Sharklets, which decreases fuel burn at cruising altitudes.

For the second quarter, we estimate our economic fuel price will be $3.04 per gallon, based on Gulf Coast jet fuel curve as of April 24, 2013. This includes our estimated impact from realized fuel hedges. We have approximately 21% of our second-quarter 2013, and 17% of our third-quarter 2013 projected fuel volume hedged, using US Gulf Coast jet collars. In addition, we have put in place with our annual hurricane hedge program for the period from August through October. Additional details about our hedge positions are included in the investor update we plan to file this afternoon.

In closing, we are pleased with our first-quarter performance. We maintained our position as the lowest-cost producer in our markets versus our primary competitors, and we are aggressively working to lower our cost structure further. In so doing, we believe our relative cost advantage will continue to expand over time. Our growth gives us tremendous leverage to realize scale benefits. In addition, we've only just begun to realize the benefits for increasing our aircraft sparing ratio, while maintaining high utilization, and from having additional maintenance bases to support the growth of our network, both of which should drive operational improvements and additional efficiencies throughout the system.

Before we move on back to Ben, just let me circle back. We forecast, or we targeted our CASM ex-fuel down 1% for the full year, and we remain on target to achieve that goal.

And with that, I will turn it back to Ben.

Thanks, Ted.

In summary, we are pleased with our first-quarter results, and with how our business model keeps delivering among the best margins in the industry. And while the current pricing environment is a bit softer than we had anticipated at the beginning of the quarter, demand remains strong, and in conjunction with the lower fuel prices leads us to reiterate our EBITDAR margin target for the full-year 2013, of between 25% to 27%.

As you have heard us say before, we believe that we have plenty of opportunities to profitably grow our Business. We expect that consumers' demand for value will continue to grow, and with our low base fares, Spirit is uniquely positioned in the Americas to take advantage of this continuing trend. In addition to having a vision of where we went to grow, we have the infrastructure and the capital to make it happen, and the team in place to successfully execute our plan for the long-term benefit of our shareholders.

Now back to DeAnne.

Thank you, gentlemen.

We are now ready to take questions. 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 queue, and we will allow for additional questions as time permits. With that, John, we're ready to begin.

John Godyn.

Ben, I just wanted to follow-up on the margin guidance. You reiterated the 25% to 27%, but at the same time, we are seeing falling fuel, you've reiterated the down CASM ex-fuel guidance number, and for the second quarter, you were talking about flat RASM comps, and if anything, RASM comps get easier throughout the year from the second quarter. It just seems like the 26% margin guidance for the full year is pretty conservative, unless we are really missing a big moving part somewhere. So, I was hoping you could elaborate on putting all of that together.

Let me just repeat what we said, in that the -- what we said is that if you adjust for the fact that Easter moved, and the fact that we had a 4% greater stage length, the second quarter would be little flattish in revenue. But those things did not happen so you got to adjust for those. And that's why we -- that's why we're thinking the full-year 25% to 27% EBITDAR still makes sense, and again, while we're encouraged by current fuel, we still budget based on the curve and such, and there is still not a lot of visibility obviously from the second half of the year in fuel. We don't want to be overly optimistic on that.

Got it. Okay. So using higher than current fuel and thinking with some conservatism, that's how you get to 26%?

Basically, we just don't see enough in the current environment that we are confident to extrapolate through the next seven months of the year to say that we should change the annual guidance on margin.

Okay. Fair enough. If I could just ask another question on margins. When I think about the history of Spirit, your biggest EBITDAR margin year was actually 2009, when fuel prices fell as much as they did. If you could just help us think about how you participate in falling fuel? And what I'm getting at is, when fuel falls, of course we always think that the airlines are going to give some back on the RASM side. But just looking at your history, and perhaps this is because of where you are in the market with low fares and a price setter in most of the markets, you are not in a position where you have to necessarily give us much back on the RASM side when fuel falls. Can you help us think about that, if fuel were to fall further, how should we be translating that, how should we think about your sensitivity on the RASM line?

Let me give you some high-level thoughts and then I will ask Ted to also comment on this. Basically, in a lower fuel price environment, that obviously means, that's going to have an effect on the revenue environment, where absolute fares are likely to be a little lower. That can be good for us on the margin side, of course. Fuel is our largest single expense, and if we spent less money on fuel, that's good for the overall margin.

But in 2009, we did very well in a falling fuel price environment, in part because -- again, we don't carry a lot of business traffic, and so we did not see the downgrade in RASM that most of the industry saw in 2009, as a result of a shortfall in business traffic. We tend to be a little more resilient, and because we are dependent on the lower end of the RASM spectrum for our revenue performance, we don't tend to swing with the industry that way as much. Ted, do you want to?

I don't know that I would add a lot other than to say, and we're speaking historically only, it is not all that inconsistent to have on a macro basis, to have revenue environments and fuel somewhat track together so you have seen in the past where fuel has fallen and the revenue environment has gotten softer. I'm not speaking specifically to what we expect over the next 90 days, for example, but there is certainly history there too.

Great. And, Ben, I think you answered this, but what I'm getting at here is just when I think about your exposure to segments that you appeal to, it sounds like you're positioned to give less revenue back, so to speak, in a falling fuel environment. Is that fair to just put a point to it?

Yes. I think that's fair. And we look to try to make the highest margins we can with the lowest fares possible. That's basically the core of the business model.

Perfect. Thanks, guys.

Hunter Keay, Wolfe Research.

When you make route decisions, do you think more -- maybe, categorize this for me into three buckets, Ben, or whoever. Do you look at the average fare -- the prevailing average fare in the market? Or do you look at what the cost structure is of the airlines that serve that market? Or do you factor in what kind of competitive response you might get when you enter that market. What's the breakdown if you had to force it into those three buckets?

Hunter, this is Barry Biffle, I'll take this one. The answer is we look at all these things. We look at the average fares, we look at the cost structures of the prevailing competitors that would be in that market. But again we look first and foremost at what we believe the overall demand would be in passengers, then we look at what they pay, on average today. And then we look at what we can do from a discount perspective and meet our target margins and how much that would mean in terms of a discount. We like, obviously, we look for places that we can drop the fare 30% to 50%, and get the biggest simulation, if you will.

And then from a competitive response, we believe that our model contrasted to like a Ryanair or a Southwest is less abrasive if you will from a competitive perspective, because we don't go in with 5, 6, 10 flights a day, and try to take the whole market. We are only going to stimulate the market, and we'll put in that amount of capacity or even less, so that we don't disrupt the marketplace.

As I look at some of the growth you guys have had over the last year or two, I saw that originally, you added redeye service and off-peak flights in busy markets, but I feel like I've noticed, maybe just anecdotally, but I feel like I've noticed more that you're adding flights for frequencies that are usually pretty high-yielding type departure times. Have there been any kind of competitive responses that have caught you off-guard. Like you said, you are careful not to irritate these guys too much, but have there been any instances where you think maybe you pushed a little bit too hard, or you added a flight at a time that somebody had to respond to, that you had to respond in turn to that? You know what I mean? (multiple speakers). Have you pushed too far?

No, not really. We have not deviated at all. This is has been the strategy for some time now. And we're not bumping up the frequency. Yes, there are flights that are at off-peak times and red eyes and so forth. The reality is that planes fly all day, so there's going to be some desirable times as well, just as much as undesirable times.

Obviously, if you are in a big competitive market, and the airplane kicks off in the morning, which might be considered a prime time, yes, you would have a prime time departure. Then, unfortunately sometimes though, the return is as soon as the airplane gets to City B, where it went to, so if you want to go for the day, that's impossible in that city, but you could go for a full day and come back tomorrow. It's still not a business schedule, if you will.

I think that's the really important point that Barry is making is almost no matter what time the plane leaves, a trip that is thought of as well-timed for a corporate business traveler is a pattern of services that allow flexibility in their travel, multiple options, if their meeting runs late or they want to come home early or something like that. And that's not the product that we are offering, which is what many other airlines -- not all airlines, but many other airlines do offer. So when we are one or maybe two trips a day in a market, when you take that level of frequency combined with the physical product set of features that we offer, none of that is geared to naturally attract the frequent corporate business traveler.

Great. Thanks everybody, appreciate it.

Jim Parker.

I have a question regarding JetBlue's planned expansion out of Fort Lauderdale to LatAm largely, and of course you are on opposite ends of the spectrum in terms of customer service and fares. I am curious about, one, the opportunity for another airline to expand substantially out of Fort Lauderdale, and does that infringe upon your growth opportunities? And then secondly, LatAm, is it a market that you all want to defend aggressively? Or maybe you will continue to do what you have been doing but domestically there are better opportunities. Can you address those two issues?

This is Ben; I will start and then if Barry wants to add something, of course he can. In general, we have, Fort Lauderdale has been an important piece of the Spirit network, and remains that, and likely will stay that way. Although as a percentage of the total, it has become smaller, not because it has shrunk but because other pieces of the network have grown some. And so we think about Fort Lauderdale the way we think about everywhere else we fly. Which is, where can we deploy our assets to produce the highest return for our shareholders? And as the market changes or may change in Fort Lauderdale, just like any other place, we will continue to re-evaluate the best deployment of our assets, in order to produce high margins and return a high positive return for shareholders.

JetBlue's specific growth in Fort Lauderdale may or may not be consistent with what they're trying to do, but we maintain a large cost advantage versus JetBlue. I would argue with your point that they are at a different end of the spectrum of both customer service and price. On price yes, but on customer service, the single most important thing for most customers is the price they pay. So, I would not argue that we have a lower customer service, we just serve the customer in a different way. We give them the number-one thing they care about. JetBlue gives them the eighth or ninth thing they care about most, which is leg room and TVs. Barry do you want to add anything?

I would have to agree with that, definitely, South Florida already has a high-cost, high-touch airline, and it already has a high-quality, low-cost, low-fare airline so they are third one at the party, and we already have the marketplace served. It's not going to impact us, but I would question it for them. They have a different ROIC that we have. And if you look at where we have been growing in the last few years, clearly the margins domestic US are a better opportunity for growth, if you want to grow your ROIC, and maintain it at a high level. Five years ago, that was not true, but it's a little late for those dynamics, at least in the current environment. But as far as defending it, we believe that the lowest price leader is going to be the best defense you can have, and our costs are going to allow us to continue to do that.

Barry, I have one more question for you. You mentioned that the market potential there are like 400 markets that you can get into, it seems like about every other day we get a press release from Spirit with about 5 or 10 new markets. I'm serious, do you keep a tally? Is that 400 diminishing or there are just more opening up as you put new -- as you add service?

That's a good question. We had around 200 when we first started looking at it that way, and what has happened -- and that was probably two to three years ago, and that increased to 300. And then in the last year -- remember, we are a little lagged on, because we are using public data, it's over 400. So, even though we've been adding over 20 new destinations per year -- 20 new routes for the last few years, the dynamics in the market have been increasing faster. The high fares that are starting to happen through consolidation and the capacity constraint that you have seen across the industry is actually increasing the opportunity faster than we can actually grow.

Great. Okay. Thanks.

Helane Becker.

Ben, I saw some remarks attributed to you about a week or so ago. Regarding your views on the model you operate, versus the model other airlines operate, and that the government wants to push everybody into one model that may not be the most attractive for passengers. Can you talk about your thoughts with respect to that?

Well sure. And what you might be referring to is some comments I made where I said, the DOT regulation which, in the areas of consumer protection, started to get into product delivery. And we think that is a somewhat dangerous thing, only in that it starts to force airlines to look more like each other, and we think it's better for consumers when they have a lot of choices. If McDonald's were regulatorily forced to offer filet mignon on their menu, for example, that would not be not as good as McDonald's being able to do what they do and Morton's do what they do. Because that gives more options to consumers.

Our general view, and we have pushed this with the DOT directly. At one point, we and Southwest and Allegiant had sued the DOT on these issues, on the grounds that we should provide the most -- the best possible choices to consumers among competing different models, and let consumers vote with their feet about the types of airlines they want to support and those that they don't.

And I feel like it's falling on deaf ears.

Well, I'm not sure that it is or it isn't. We have seen, we have seen some things change in a couple of different ways.

Helane, this is Barry. Let me give you an example. Over the last year, there been a lot of discussion about pushing the DOT to require airlines to put all the ancillaries through the GDSs and so forth, and have all of this homogenous distribution across all channels. And we spent a decent amount of time last year in discussions with the DOT, and we attended hearings and so forth. And there's a lot of misinformation that has been put out in the marketplace, suggesting for example that airlines have hidden fees and so forth. And that is simply just not true.

I think we have debunked a lot of those myths and you see a lot of the stories that are very on the other side of this discussion, but we have seen the DOT be very reasonable about it, once they understand the situations. And we feel very positive about the current environment and where we are and where we think the DOT is headed.

Okay. All right. And then just one other follow-up on Atlantic City, specifically. Do you anticipate any change with the Port Authority taking that over?

We have spoken with the Port Authority on an informal basis, and we will be having more formal discussions with the Port Authority on that. But in general, no, the Port Authority understands what Atlantic City is, how it works, and what its unique benefits to consumers and South New Jersey are. The Port Authority manages Stewart Airport north of New York as well, and they don't manage it in the exact same way they manage JFK or Newark or LaGuardia. So, I think they are a very professional organization that understands when they have a diverse set of airports, they will manage each one to provide the best service they can at the appropriate cost structures for what the airport does.

Okay. Great. Thank you.

Mike Linenberg.

A couple questions here. A quick clarification, I think, I don't know, if Ben, you had made the comment about the A320s as they come in and replace A319s, that they were 14% more maybe it was cost-effective or maybe more fuel-efficient on a per-seat basis and I didn't know if that included the Sharklets or not?

Mike, this is Ted. What we said was exactly to reiterate what your answer was. It was 14% more fuel-efficient on a per unit basis, and that assumes our current run rate. So, there is additional upside with Sharklets.

Great, and then just my second question, when we look at your RASM performance for the quarter it was good, and we know some of that is obviously the shift in Easter. How should we think about unit revenue performance when we compare same-store sales versus ramp up, because in this quarter, you had a lot of new city-pairs that you were ramping up in and yet, the overall performance was quite strong. I'm just curious if you could give us any color between the core versus the new business?

This is Barry Biffle, I'll take it. In terms of new markets versus existing mature markets, we've been growing pretty steady for the last several years now -- and as Jim Parker mentioned a little while ago, we continue to do new routes, and as a general rule, most of our -- every new flight, as a general rule, is a new route. And so we've added at the same rate, so -- and there are seasonal dips and there's a month or two here and there that can be good for one quarter or bad for another. Because they don't hit exactly the same, because the planes don't come in.

We generally operate with 20% to 25% of our capacity at any given moment has been in new versus mature and that has been our run rate. So to be honest, it's been the same, so your comp year-over-year was the same and so forth. If we were to see a dip in new route performance, obviously, we would have a challenge, but we haven't seen that over the last several years, and we continue to deploy our assets very well. Yes, there was the shift of Easter, but I think, if you factor in the stage adjustment as well, we would have been positive even without Easter in the first quarter on this capacity increase.

Just one quick last one, you know you look at some of the taxes that are proposed under the new budget, it's not going to kick in until 2014, assuming we are able to get to some form of agreement. But when I look at what is out there, it does seem to disproportionately hurt airlines like yourselves, that rely a lot more on a lower-fare product. Your stage length is roughly average of the industry. That said, you may want to consider flying longer haul. Ben, you historically always been very adaptable. You change very quickly. If this level of taxes or some portion of it comes in, how do you respond to that, and do you change the product, do you focus on more international versus domestic? What are your thoughts on some of these potential changes that we could see, and how it would impact Spirit?

High taxes raise fares and higher fares depress economic activity, and that's just economic reality. As taxes change or more specifically to your question, as taxes may increase, that obviously is one piece of the overall cost structure that affects the price point and the price point determines how much stimulation we'll see. So it certainly will affect our operation to some extent. In Spirit's case, higher taxes are almost always a terribly regressive tax, since we tend to carry customers at an economic level that aren't the average for the industry -- lower total income level versus the standard traveler in the industry. So, higher taxes on that group is a very regressive thing, and we don't like that, and we think that is generally unfair.

But in terms of how we manage the airline, higher taxes are like any cost that goes up. You think about what that does and how that changes the hurdle performance of any one route or any one deployment of an asset. And you continue to manage the network and redeploy the network to be as profitable as it can be for the highest margins it can be and we will look at that. But at this point, it's all speculation, because we don't know what budget is going to be approved, and we don't know what taxes, if any new taxes would be levied on the industry and as many others have pointed out, the industry is already very heavily taxed.

Okay. Very good quarter; thanks for the comprehensive response. Thanks.

Duane Pfennigwerth.

Just a follow-up to Mike's first question. Can you tell us what unit revenue growth was in markets you had served for at least a year?

No. We don't give the revenue information on that kind of detail. Sorry.

Maybe just qualitatively? I guess what I'm getting at is, if you look at the new markets that you're adding, is your unit revenue growth coming from entering those higher fare markets, or are you seeing unit revenue growth across new and existing markets?

Across both. The composition, mature markets didn't over perform on a year-over-year basis versus new, and vice versa. We are seeing a very stable growth pattern of the Company, and we continue to see -- what improvements we have seen were across the system.

Okay. And then on the sequential improvement in non-ticket per passenger, can you just give a little more color on what is really driving that improvement. And if it's just generally revenue management of fees, how far we are along in that process.

Most of it is just doing the same things we were already doing, trying to do it better. Changing pricing policy, the bags is a great example, where we put in, or instituted, if you will, advance payment -- different levels, depending upon where you are in the travel process and so forth. I think we are definitely in the first inning of that because the systems were not really created to provide dynamic pricing of ancillary products. So, it's going to take a while from a technology perspective to institute those types of things from a delivery and from a management operationally, and so forth, and then ultimately to merchandising and so forth.

As a general rule, airlines are not as strong a retailer as many other industries. And so the support infrastructure for that just does not exist. It's going to be a while before we can really, really extrapolate the benefits in time. But we hit $54, and we are still growing. It just at a slower pace. Our next goal will obviously be how do we get to $60. But it will take a little more time.

Okay, Barry. Thank you.

[David Simpson.]

This is actually Isaac for David. Just had a quick question on ancillaries. I'm wondering maybe Barry or Ben, if you can just give us a sense of what the take rates and the customer behavior has looked like, if it has changed at all with the new revenue management approach that you have?

Sure, this is Barry. I will take it, Isaac. The take rates have not changed a lot. We are obviously, as we do this, not only looking to increase revenue but also make it cheaper for us to operate. If you take the bag example, in particular, what those changes did, is we are trying to move all of the operational challenges to first, in advance of arriving at the airport, and number two, preferably online, which is the cheapest way to operate, sell it, and so forth. We have not seen a major change necessarily in their behavior but how -- when and where they buy it. Incentives do matter and what you incentivize, what you get. We test a lot of different things in that regard but we are very pleased with it.

Have you seen any change with the take rates, given the stage length increasing over the last couple of quarters? I think schedules show that is going to be increasing over the next two quarters?

There is increases in some, and then some are static. Some of the charges we have are static, so to your point, you're saying, do I get more bags on the longer stage, and will that benefit the dollars per passenger, if you will? There are some changes to that. It stands to reason that the further you go, the longer you stay, the longer you stay, you need more stuff when you are there. The itineraries are generally a little longer stay, so there is some, but it's not huge. 3% on the macro is not going to move it a lot.

But yes, you see a big difference between a one-hour haul versus a five-hour haul. It's materially different. Seat assignments, for example. The longer you are on an aircraft, the more you care about where you're sitting. The longer you are on a plane, the more likely you're going to want to sit with the people that you're traveling with.

The longer you're on a plane, the more likely you're going to want to buy something to eat or drink.

Exactly. So there's a relationship and if you look at it, and we don't report it this way, but on a yield basis, if you look at a non-ticket yield, it definitely does increase the dollars, but the yield itself goes down, just like on a fare. But it's not huge when you're talking a couple percent moves in stage.

Okay, that's helpful, and maybe a quick one for Ted, I realize that the CASM guidance for the full-year hasn't changed, still down 1%. Has anything changed specifically within certain line items, like D&A maybe, or maintenance, because I knew you gave guidance for that in the prior earnings call.

There's no change, we will be putting out our investor update here after the call, and you will get the information in there. But there's no real change.

Okay. Perfect. Thanks very much.

Stephen Trent.

I'm just curious, there's been a great deal of flux these days with respect to what the FAA is doing, the on-again, off-again cuts. You've got San Juan Luis Munoz Airport recently privatized, and there also seems to be at least some speculation that they want to do the same thing with Midway Airport. Outside of the US, or let's say the US mainland, are you seeing any of these facilities dangling extra incentives in front of you in order to launch service, or perhaps increase service?

This is Ben. As we grow, cities and municipalities want more volume, because that creates economic activity, and low fares help do that. There are a number of places who have offered economic incentives for us to expand, and that's been true in the industry for a long time, obviously. Many airlines that have benefited from those sorts of things.

We take advantage of those things when it makes sense for us. On its own, an incentive from an airport to be a great thing, but it usually doesn't justify us adding service, if we don't think in the long term it's going to produce high returns for investors without that incentive. It might lower the risk of starting it or help offset some start-up cost or things like that. And that tends to be the way we look at them.

This is Barry. I would add this. If you look at the airport environment and you go back 10 to 15 years, there has definitely been swings of incentives and so forth, and the dynamics changed in the mid 2000s to even late 2000s. Things were great for them. Especially with the RJs, they had a lot of departures and it looked like a lot of activity, and a lot of airports unfortunately made long-term plans that were detrimental when you look at their costs. They have now seen the consolidation being bad for them in many places, and as the yields have gone up, it's great for the airlines, but the volume is what the airports need.

We are starting to see that change, the environment as an airline that is growing like ourselves, we are seeing a lot more hands out, welcoming us, like incentives like you're talking about. But we've only recently started to see -- what we're really looking for, is the recognition of -- okay, we're going to have to modify the way that we look at the cost structure, because airlines aren't just going to pay for everything. And if they've incurred too much debt at their airport, that's unfortunately not our problem at the airline.

Okay. That's very helpful. I will let somebody else ask the questions. Thanks a lot and congrats on the quarter.

Stephen O'Hara.

I just had a quick question, first about the next-generation aircraft. As you take delivery of them over the next decade, and the industry does as well, my guess is you would see a -- because you have a smaller fleet, you're going to see a bigger impact on your overall CASM. That should increase your competitiveness versus the industry, is that fair to say?

I think you are right, but there is more around that. The newer generation airplanes, both the Sharklets on the 320s which make it a little more efficient, and ultimately the A320neo, which will start be delivering in the second half of the decade. Those will be good for us, just like they will be good for everybody who flies them, and we have the case in Spirit, where a large percentage of our fleet comes off lease at the same time the neos are delivering. So we are probably ahead of this curve versus other airlines. And essentially being able to, by the end of the decade, convert a much higher percentage of our fleet to the newer technology -- at least Sharklet, either Sharklet or with neo engine airplanes, because we got a lot of the more classic planes without the Sharklets or without the new engines coming off lease in that same window. So that's good for us.

There's a lot of reasons that we believe our costs are going to come down over the next five years. Some of it is fleet efficiency, some of it is financing efficiency, some of it is scale efficiency and so on. So we feel optimistic about our relative cost position improving over time, and what you identified as one piece of it but not the only piece.

Okay. Thank you. And then going to the maintenance expense, depreciation line. How do you see, in terms of, the way I understand it, do you amortize the heavy maintenance expense over the expected life of that event? Or is it through the end of the lease term, and what happens if you decide to extend or shorten lease terms, and what does that do to the D&A line?

Yes, Steve, this is Ted. The amortization would be through, up until the next scheduled maintenance event or the next maintenance event, relative to that event, or the end of the lease, whichever occurs sooner. And then if you choose to change the term of the lease, at the time you would change the term of the lease, you would recalculate what that would do to your amortization profile.

Okay. So in terms of -- the timing of the maintenance events, are there some maintenance events that you know are scheduled for close in to the end of the lease term -- or you anticipate close to the end of the lease term, that could lead to a bubble up in terms of maintenance? That's a little more detrimental to the bottom line later on at the end of the term? Or do you have enough new aircraft coming in throughout that time to smooth that out?

There are some events that happen later in the life of the lease that may or may not create that type of effect. But to your point, we are also in the process, at that same time, I think Ben mentioned it earlier, we're going to be going through a transitional phase as the neo technology comes in, where a lot of our older aircraft will be potentially rolling off their lease. So we will have new airplanes coming in that will contribute to the dilutive effect of that. So it's a mix of both issues, of what you said.

Okay. Thank you.

John, we have time for one more question.

Hunter Keay.

Thanks for the follow-up. Can we talk about cash a little bit here? I mean you guys have a huge stockpile of cash and it looks like it's going to be another really good year of free cash flow for you. What are your options here? First of all, what is the earliest plane that you have in the delivery schedule that you can actually buy with cash, how many leases are you committed to? And I know this is very uncommon for a high-growth company like you guys, but would you actually really consider deploying this back, in the form of -- one form or another, back to equity holders, is that something that is even on the radar screen, given your growth rate right now?

Hunter, I know we've talked about this in the past, but we'll reiterate what we said before. You are right in that we are a very high-growth company and our cash balance is critical and important to us for that reason, so we have a lot of airplanes coming between now and the end of the decade that -- to answer your question were financed through the end of this year on operating lease. So the remainder of that delivery stream is yet unfinanced, and so we maintain that liquidity balance to give us options as to how we want to finance those airplanes and tackle our growth going forward.

For a high-growth company, it would be very unusual for us to be thinking about the types of cash deployment strategies you're suggesting, and I think, although all of those list of options are always on the table, we are clearly focused on maintaining our cash balance to fund the growth we have coming.

So then Ted, do think about using your cash balance, maybe instead of deploying it back to equity holders, as a tool to manage your cost of capital down, again, by maybe adding some debt to the balance sheet or something like that? Is there a way that you could create more economic value, or should we just think about this cash running, at that kind of a [bad] metric, but a mid to high 30s percentage [built-in] revenue just indefinitely?

Yes. I think you're exactly correct. We would think about, we're constantly thinking about ways to not just lower our unit cost, but to your point to, on a cost of capital basis and a return basis, to deliver where we are, or exceed that for our shareholders and you mentioned one tool that is available to us. Right? So using that cash as a weapon in that arsenal is clearly on the table, as one of the reasons we're keeping it around.

And, Hunter, this is Ben. Ted said something very important there, which is on a return basis. If we choose to use our cash to maybe buy an airplane, instead of lease an airplane, it would only be because we believe that cash, use of cash provides a better return for our shareholders than other uses of that cash. That may prove to be the case at some point versus other options for that cash, or it may not. So we don't have a, we don't have an objective for a capital structure of the fleet, for example, or for a percentage of cash that is anything separate from our objective of provide the most positive rate -- the highest return for shareholders we can provide.

Okay, and just to round it out, should I just assume that if you are going to entertain a concept of deploying cash back to equity holders, should we think of you guys as almost like a tech company in the sense that, if you're paying a dividend or buying back stock that you have basically just acknowledged that the growth is to some extent over? Is it really going to be that far off in the future that it's that endgame for the cash? Where there is just really nowhere else to grow, but what it's come down to, that's the best use the cash for you?

I would not deal in absolutes like that. (laughter)

Okay. That's good. I appreciate it. Thanks a lot.

That concludes our call today. Thank you, everyone for joining us. If you have any follow-up questions, I am available. You can give me a call later today. Thank you again.

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