Spirit Airlines Inc (SAVE) 2013 Q3 法說會逐字稿

Welcome to the Spirit Airlines third quarter 2013 earnings release conference call. My name is Ellen, and I will be your Operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. I will now turn the call over to DeAnne Gabel, Director, Investor Relations. You may begin.

Thank you, Ellen. Welcome to Spirit Airlines third quarter 2013 Earnings Conference Call. Presenting today will be Ben Baldanza, Spirit's President and CEO, Ted Christie, our CFO. Also joining us are John Bendoraitis, our COO, Thomas Ganfield, General Counsel, Jim Lynde, SVPof Human Resources, and Graham Parker, VP of Pricing and Revenue Management.

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 currently available and/or management's belief as of today, October 30, 2013, and are subject to significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements included in the information under the caption risk factors included in our 10-K for the year ending December 31, 2012, and subsequent 10-q filings.

We undertake no duty to update any forward-looking statements. In our remarks today, we will be comparing results for third quarter 2013 to third quarter 2012 adjusting all periods to exclude unrealized hedge gains and losses in special items. Please refer to our third 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. Now, I'll turn the call over to Ben Baldanza, Spirit's CEO.

Thanks, Deanne. Thanks, everyone, for joining us. Today we reported our third quarter profit increased 130% year-over-year to $57.9 million,or $0.79 per diluted share. Operating income grew 129% to $92.8 million resulting in an operating margin of 20.3% a year-over-year improvement of 8.5 percentage points.

We had a strong peak summer travel period and I thank all of our team members who contributed to our success. It is becoming increasingly clear that Spirit's customers understand that our ultra low fares plus optional services offer them a total price that's tough to beat. Revenue for the third quarter increased 33% to $457 million compared to the same period last year and a capacity increase of 22%. RASM increased 8.9% year-over-year as a result of higher load factors and higher average passenger yields due to demand strength across the entire network.

On the operational front, we announced we're transitioning our service at Mesa, Arizona, over to Phoenix Sky Harbor airport which allowed us more growth opportunity, while maintaining our cost efficiency. And we announced, we'll be expanding our service offerings at Minneapolis/St. Paul, by adding services to Los Angeles, Orlando, Phoenix and Tampa.

We've had several recent leadership changes that I want to acknowledge. Following the sale by Indigo partners of its equity interest in the company, Bill Franke, our former Chairman of the Board, and John Wilson, both of Indigo partners, resigned from the Board of Directors. We thank Bill and Jay for their support and leadership over the last seven years. The board subsequently elected H. McIntyre Gardner as Chairman of the Board. Mac has been a member of our board since July of 2010. Mac's strong leadership skills and business acumen will benefit our Company as we continue to implement our growth strategy.

Last week, John Bendoraitis joined us as our COO. John had an extensive airline career with nearly 30 years of industry experience, and we're delighted to have him join the Spirit team. In other team member news, during the quarter we reached a mutually beneficial and competitive five-year agreement with our flight dispatchers who do a great job for the company and are represented by the transport worker's union.

As we look ahead to the fourth quarter, there are few factors that will have an impact on the year-over-year, and sequential quarter comparisons. Last year's fourth quarter results were negatively impacted by hurricane Sandy, causing some noise on a year-over-year comparison basis.

In addition, over the last several years, we have diversified our network footprint in the continental US and as a result of this diversification, we're seeing a trend toward more seasonal strength in the spring/summer periods versus the fall and winter. As such, we're expecting our fourth quarter results to be more similar to our first quarter results rather than our second and third quarter seasonal peak results.

In the latter half of September, we experienced stronger than expected yield strength for close in bookings. We believe the industry as a whole saw demand strength throughout September driven by continued capacity restraint during this period, and as a result, there was less downward pressure on price in what is typically one of the weakest periods of the year.

In October, we have seen a return to more normal seasonality for the off-peak periods but there is continued strength for bookings around peak holidays in the fourth quarter. Now, here's Ted.

Thanks, Ben. Again, thanks to all of you for joining us today. I join Ben in recognizing our team for achieving these outstanding third quarter results. In addition to very strong revenue results, our team did a great job managing our non fuel related costs. Excluding fuel, our CASM decreased 2.7% year over year to $5.86 in line with our guidance of the quarter despite higher than expected revenue related costs. The decrease was primarily driven by lower aircraft rent and lower other operating expense per ASM.

In the second quarter of 2013, the Company negotiated lease extensions at reduced rates for 14 of its A-319 aircraft which was the primary driver of decrease in aircraft rent per ASM. Additionally, last year we had $1.3 million of third party aircraft lease expense which we didn't incur this year. The decrease in other operating expense per ASM was primarily driven by the insourcing of certain contract work as well as lower software consulting costs related to the company's ERP implementation. Partially offsetting the benefit of these items was higher depreciation and amortization expense related to the amortization of heavy maintenance events.

During the quarter, we took delivery of one new A-320 and ended the quarter with 51 aircraft in the fleet. We took delivery of an additional new A-320 last week and have two new A-320's scheduled for delivery before year end. We ended the quarter with $540 million in unrestricted cash and with no debt on the balance sheet.

As was earlier reported in October, we had an aircraft that experienced an engine failure shortly after takeoff. Our crew did a very professional job taking care of our customers. We are in the midst of our investigation to determine the cause of the failure and until such time, the investigation has been completed and the total costs and cause can be determined, it is difficult to assess precisely what the financial impact will be. However, based on our initial view, we have added $10 million of estimated expenses in our forecast.

This estimate includes the accelerated amortization of the heavy maintenance related to the previous overhaul on the engine as well as an estimate for additional expenses to repair the damage to the engine and the aircraft. Depending on the determination of cause, it may be that some, or all of the repair expense will be recoverable.

But even if that were to be the case, it is unlikely we'll be able to make a determination before year end. In which case the repair costs will be booked as a fourth quarter expense with the reimbursement, if any, booked in the period it is probable and estimable to be recovered. Including that assumption, we estimate fourth quarter CASM ex-fuel will be up 4% to 5% year-over-year as compared to the fourth quarter last year, and for full year 2013, we now estimate CASM fuel up about half a percent year over year.

Absent the estimated costs of this event, and the revenue related expenses due to our positive revenue results, we would have been on track to deliver our targeted CASM ex-fuel reduction of 1% for the full year in 2013. We're working diligently to return the damage to aircraft to service. To date, we have been and expect to continue to be able to cover our operating schedule.

For the fourth quarter, we estimate our economic fuel price will be $3.17 per gallon based on the Gulf Coast jet fuel curve as of October 22, 2013. This includes our estimated impact from realized fuel hedges. We have about 21% of our fourth quarter jet fuel crack volume hedged using swaps. Additional detail about our hedge positions will be included in the investor update we plan to file this afternoon.

As we begin to solidify our plan for 2014, here's how we're thinking about it. We currently have seven scheduled aircraft deliveries next year which translates to a 2014 capacity growth rate of about 15%. In 2015, we have 18 aircraft scheduled for delivery. So, we expect our average growth over the two years will be about 22% per annum.

As we're now in the midst of developing our 2014 operating plan, it is too soon to give an all in CASM estimate for 2014 but we know we'll have some advancement of expenses toward the end of 2014 as we ramp for the growth in 2015,along with continued regulatory related expenses associated with complying with FAR-117. So, looking at it over a 12-month period, we may have some modest CASM challenges but over a 24-month period, given the phasing of our growth, we remain very bullish about maintaining our long-term cost structure.

We'll be able to give you a more precise target for 2014 when we update you in February of next year. We continue to believe that by leveraging our growth, scale and efficiency benefits, fuel saving strategies and by maintaining our overall diligence to keep costs low, we can sustain and even grow our relative cost advantage. With that, I'll turn it back to Ben.

Thanks, Ted. Based on our strong year-to-date results, we're comfortable raising our operating margin guidance for the full year 2013 to 15% to 16% from our earlier guidance of 13% to 15%. We're very pleased with how well the business is doing and we remain committed to maintaining our low cost, low fare and high choice strategy. Spirit is known for doing things differently than other air carriers,and we celebrate those differences because they allow us to offer the customers the freedom to pay for only what they value while earning a return for our shareholders. Now, I'll turn it back to DeAnne.

Thank you, Ben and Ted. Ellen, we arenow 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 into the question queue and we will allow for additional questions if time permits.

Thank you. We'll now begin the question-and-answer session. (Operator Instructions). Our first question comes from John Godyn, with Morgan Stanley. Please, go ahead.

Hey, thank you for taking my questions. Ben, I wanted to following up on some revenue commentary. I thought I heard you say that fourth quarter passenger revenue, and I wasn't sure if this was a PRASM metric, is going to be similar to what it was earlier in the year. Is that the right way to think about it? Like this $0.07 per ASM number? Is that what you were getting at, or were you communicating something different there?

No. That's not what we were getting at. Basically we were talking about the general demand seasonality of the airline and the earning seasonality of the airline being stronger in sort of the higher leisure demand periods that are represented in the second and third quarter whereas the fourth and first quarters of the year looked more similar to each other and the second and third quarter look more similar to each other. That was the comment we were making. It wasn't specifically on revenue or PRASM. It was an earnings seasonality comment.

Okay. That's helpful. If I could ask another question on the general revenue trend and tie it to some of your margin commentary. This year, when we think about 2013, we were surprised the most upwardly on margins throughout the year was more on total RASM growth rather than cost,when we think about the big drivers of margin improvement this year. You mentioned some potential headwinds, slight headwinds into 2014. I think you said modest cost inflation. How do we benchmark the idea that this sort of surprising RASM strength that we've been seeing continues? If the cycle generally continues from here, should we see that RASM growth continue to exceed your cost growth significantly? It seems like that might be likely but I know there are a lot of moving parts so I was hoping you could speak to that broadly.

There are a lot of moving parts. The crystal ball isn't that clear very far out, obviously when it comes to revenue. But overall, we feel comfortable and generally bullish about the overall revenue environment and the general capacity discipline that the industry is putting out right now and that gives us a generally positive feeling about revenue as we look out over the coming quarters. Again, the further you get out, the more uncertain that becomes. On the cost side, as Ted told you, up until the engine event we had, we were tracking toward about a 1% decline in CASM year over year. But for that engine event, we would be hitting that.

So we believe that in Spirit's particular case, that while we certainly want to take any PRASM increase we can take over time, we maintain consistently focused on the cost structure and not only maintaining or improving our own cost but also increasing the relative cost gap we have to our primary competitors.

Last follow-up on this topic. In terms of the margin outlook, you gave an updated margin guidance number for this year. You used to speak to a margin guidance number for the very long-term,what you thought was multi-year guidance. Is there any update to that number?

Well, we did that once and all I can say is when we talk again in February, if we feel comfortable in providing that kind of guidance for 2014, we'll do it then.

Thanks a lot.

Thanks.

The next question comes from Hunter Keay, from Wolfe Research.

Good morning, everybody.

Hey, Hunter.

A follow-up to John's questions. Ben, you were talking about the seasonality of your demand but again, when you give the full-year margin guidance of what did you say it was,15% to 16%? So if I put the Q1 margin on the fourth quarter margin, which is 14.4%, you're basically at 17% margins for the year. So first of all, is the math is correct? I think it is. Were you not talking about margins again? Were you talking about the volume of your demand? When you talk about fourth quarter looking like first quarter? What am I missing there with the full year margin?

We were talking about the general margin performance of the airline in a 90-day period in which there are fewer high peak leisure kind of days in it. In that sense, fourth quarter looks more like first quarter.

Again, if you think about seasonality, not just by quarter but by week or by day, you look at the shape of the fourth quarter and the shape of the first quarter, they look more alike, than either of them look like the second and third quarter. But the fourth quarter doesn't look exactly like the first quarter. I think that's the right way to think of it. While I don't have the math in front of me to say whether your overall margin math was right, you're good at math.

I'd like to get more color from you on how the yield metered up toward the end of the quarter. Seemed like there was less discounting going on from some of your competitors and seems to me that would imply some trait down to Spirit from some of the other guys who might have been spilling some of the traffic because their fares were so high. If that's the case, do you find yourself taking more market share than you feel comfortable with? As I understand it, the Spirit business model is a stimulating demand, sort of. Do you find yourself in an uncomfortable position where you're taking market share from bigger competitors? Is that something you want to do? Obviously, you might incur, as irrational as it may be for them, a competitive response. Are you comfortable taking market share, if that is what's driving some of the incremental demand.

Let me comment on that first, and then I'll ask Graham Parker to comment on the general PRASM strength in the near term. Our business model is not about taking share. It's a stimulative model based on growing the volume of travel demand by allowing people who otherwise either couldn't afford to fly, or not fly as often, to be able to fly at the price points we can offer them, and they recognize in exchange for that they get a tighter seats, and they pay extra for bags and seats, and things like that. That's the whole play.

In any given quarter or period there may be stronger or weaker demand times. The key for us is that our prices stay low, we use the stimulative effect of those prices and in an overall higher price environment, when all prices are high for every airline, in some cases, the value proposition Spirit offers looks even more attractive when everything's expensive, saving more money in that environment can be more important for some folks.

Hunter, this is Graham Parker. Just to add to what Ben said, I think what we saw in third quarter was, to address your market share question, is that we were just able to get our piece of the stimulative market at a slightly higher fare because of the pricing rationality of the capacity rationality in the marketplace. Going into fourth quarter, it looks a lot more like a normal fall period but the Thanksgiving and Christmas holiday periods were particularly strong.

Okay. Thank you.

Thanks, Hunter.

Next question is from Jim Parker, with Raymond James. Please, go ahead.

Good morning to all.

Good morning, Jim.

Regarding this engine blowup, or accident, whatever it was, so that's an expense item that's going to come, all of that $10 million, will come in the fourth quarter? If insurance covers it, that is going to come in a future quarter, is that correct?

Yes, that's right, Jim. With regard to the damage incurred. It is still early in the phase here so we're estimating $10 million. We're trying to be conservative in that regard. To give us all some clarity about what we're seeing,we'll give you more information throughout the course of the quarter as we get more information on the event, but what you said is correct. We would incur the expense now and if there is a recovery, either in the form of an insurance claim or a warranty claim, whatever that might be which we don't know yet, that in all likelihood would happen in the later period.

Okay. Is there any related revenue impact? I believe you've indicated maybe there wasn't, that you've flown the schedule. Is there any related revenue impact?

No. We don't believe there will be. We continue to fly the schedule as is.

Okay. Just one more question. You have a rather large bubble in aircraft deliveries in 2015. Why would we have this bubble and exactly, best you can tell us, what are you going to do with all of those aircraft coming in one year?

Well, I can talk about why they're there. And then Ben can talk about what we plan to do with them. In smoothing out our delivery cycle, we've engaged airbus' a number of times in negotiations to change delivery positions, to add new aircraft, obviously this summer we ordered the 321 which we're excited about, we think it is the right airplane for this airline. They come sometimes when they're available,sometimes when we really want them, and we try to fit them into those slots as best we can.

So next year, we have seven airplanes. The year after that, we have 18. So that's obviously what you're referring to. But we're okay with that overall trend. We see the opportunity regardless of when they come. And we're working our way through making sure that we're thoughtful about how we build up the infrastructure as necessary and appropriate from a rational perspective to adjust for that. That's why the airplanes fall where they fall and Ben, I don't know if you want to add any more.

Ted's right. I think if we asked the guys who drive the revenue at the Company, they would want more planes next year. But they're just not coming next year in terms of the current schedule. So, we know we have to manage toward a calendar because that's what we all do but the business flows over the course of years. When we look out over the next 24 months, that 22% overall growth rate, we feel very good about. The ability for Spirit to continue to enter new markets and grow through stimulation and be able to earn the kind of returns we've earned, we feel very positive about that and we'll be a little held back from this in terms of the rate in 2014 but we'll catch up by the end of 2015. That's the way we see it.

So if you do a 20% operating margin that year with those aircraft, that will be a nice return.

That's true.

That's good. Okay, guys, thanks.

Thank you.

The next question is from Michael Linenberg, with Deutsche Bank. Please, go ahead.

Hi, everyone. It is actually (inaudible) filling in for Mike. Two quick ones. First, I notice that your average ticket revenue per passenger flight segment increased 15% this quarter. And I feel like you typically try to keep that line item low as a means to help stimulate more demand. So I was hoping you could talk to what drove that. Was it just a really strong revenue environment that you saw an opportunity to increase base fares and still stimulate strong demand, or if there was anything more to that, that would be helpful to hear.

We do think it is important that our fares are low and low fares stimulate more traffic but that's a relative figure. That's not an absolute figure. So in a very strong travel period, like the third quarter was, and with industry fares moving up higher, we saw the ability to take our ticket prices up a little bit yet keep them with the stimulative effective of still being the lowest fare possible for consumers during that high demand period.

Okay, great. Very clear. And then second, just a more high-level question on the topic of partnerships. Can you comment on the potential for you to add partnerships with other carriers? Whether it be domestic or international, in the near future. Remind us on your thoughts about interlining, co-chairing, et cetera, sometime down the road, as a means to enhance your profitability.

In general, that's not really in our game plan at least for any time in the near future. Alliances can be good for some things but they tend to be expensive. They add costs. They add distribution costs. We run a very high load factor so we don't really have a lot of extra seats on our airplanes to carry alliance traffic so we would be making a revenue play and maybe saying, would we get higher yield. But that's a different business model than we have to add certain expense, known certain expense of being able to administer the co-chair against the prospect of maybe higher yield on the plane. That's a different model than we operate. So we don't really see partnerships as consistent with the way we run the business.

Okay. Perfect. Thank you.

Thank you.

The next question comes from Helane Becker, with Cowen Securities.

Thanks very much, Operator. Hi, everybody. Thanks for the time. Just on the cost to move to Phoenix, can you just talk about which quarter is that coming in and are those costs included in your current guidance?

The move is happening this quarter, Helane. It is included and it's not material.

Okay. I don't know if I asked you this question before but have you talked about the increase in healthcare costs for 2014 and what that does, or is that included in the numbers that you're seeing for FAR-117?

Far-117 is not related to healthcare so we haven't talked about healthcare related expense. I assume you're either talking generically about healthcare inflation or are you talking specifically about the effect perhaps of the government healthcare regulation? What specifically are you talking about?

Well, I guess I'm talking about both. I guess I was figuring when you're adding up total costs, you can just kind of lump them into one category. I know SAR-117 has nothing to do with health care costs, I guess they were two separate questions. You had already given us 117 indications. Could you talk about the healthcare issues?

I can speak I guess generically about it. We see healthcare inflation like everyone does. Every year. The effect of the healthcare law, we don't believe it will have an effect on us. But nonetheless, for everyone in the country, healthcare related expenses are going nowhere but up. We work continuously to figure out ways to try to manage that either in our planned construction, or in the way we optimize the share between what the Company pays and what the employee pays. I don't think that's new for 2014. I think we saw that this year. I think we saw that in 2012. That's kind of a natural pressure.

Okay, great. Thanks for your help.

Okay, thanks.

The next question comes from Duane Pfennigwerth, from Evercore. Please, go ahead.

Can you just comment, rather than conceptually, maybe actually, on the competitive environment in fourth quarter, in the first quarter because when we look at [OA?] capacity on your routes, it actually looks much better than the industry generally.

Duane, this is Graham Parker. I think you're right. I think we have slightly less pressure on our capacity than other people. I think in general the industry is being pretty diligent about optimizing their own capacity right now. We like that environment.

How about a quick comment on the change in stage length you expect for the fourth quarter.

Basically the fourth quarter is going to be up a little bit. Up 7% in the fourth quarter on a year-over-year basis.

Okay. And then just given the cash production of the business, any new thinking on share repurchase? When do you think the Company is in a position to consider that?

Hey, Duane. No, as we've said before, for now, that's not on the table because we're still in the midst of a pretty robust growth cycle. And cash is important to us, not just as we evaluate our optionswith regard to aircraft and capital financing but it gives us a lever as we're negotiating those various options. At some point, it is entirely possible all of the things would be on the table. That might be anything that you would consider in the form of capital employment. But for now we're focused on making sure we have adequate resources to finance the growth, to take advantage of what we see as a very strong position from a financing perspective.

Okay. And I appreciate all of the qualitative commentary on the revenue environment but it just looks like your comps get a whole lot easier on a full quarter basis.

That comes and goes.

I would echo what we said before. You're right about the year-over-year effect of Sandy not being there, or we hope. But seasonality certainly muddles the waters a little bit, too. That sums up at least how we're thinking about it.

Okay, thank you.

Thanks.

The next question is from David Fintzen, with Barclays Capital.

Good morning, everyone.

Good morning, David.

To be completely clear, the 15% to 16% up margin for the full year, that is inclusive of the $10 million hit on the engines, correct?

It is. That's correct.

Okay. Then just a follow-up, Ted, on your comments around some cost pressure as you get later into 2014 as you're ramping up the growth. I'm presuming it is a function of you're going to be hiring and training so we should expect labor cost pressure as you're ramping ahead of that. Are we going to see the network spread out into a lot of new cities where maybe you're not getting airport productivity? Maybe you're not getting pilot utilization because you're away from crew bases. Are there some operational complexities kind of like we saw last year as you grew into Dallas? Is that the kind of things we should expect?

No. Like we said before, we're in most of the big we're still missing a few. We're in most of the big markets domestically. So the focus this year, as you've seen, has been more on connecting those dots rather than growing into new cities. And I would expect that to be a general trend for us in the near term. So I don't anticipate the same pressures that maybe we saw as the network expanded rapidly in 2011 and 2012.

But to address your earlier comments, if you have a stair step in growth like we experienced, remember yours are arbitrary cutoffs so it is hard to think about things that way but if you stair step from what would be 15% to a much larger number in 2015, we have to prep for that. That comes throughout the course of 2014 and some of it is hiring and some of it is infrastructure and we're going to be typical Spirit about that which is very rational and very thoughtful about making sure we stay very much in line. But nonetheless, it will be a little bit of a year-over-year bump there.

You know, Dave, we saw a little bit of that this year and it is in the numbers we presented to you as it relates to ramping up pilots for the FAR-117. We're going to need more pilots to run the airline with the new regulation next year and some of the expense in getting ready for that is being incurred right now. That's in our numbers. Same idea.

Right. Okay. That's helpful. Are there ITprojects, are there systems enhancements that you need to do to facilitate this next growth or is that pretty well nailed down?

As you know in 2012 which launched in 2013, we launched a new financial reporting system, or new ERP system. We're evaluating all of the biggest or bigger pieces of our ITinfrastructure. There may be some additional work we want to do. It would be something that we think is a good idea from a return perspective to do. With any return project, yields over time, right? But to make sure that we can deliver the kind of results we internally here expect to deliver. That may force us to do a few things on the infrastructure side, too. So there could be some of that, too.

Thank you. Appreciate it.

The next question comes from Stephen Trent, with Citigroup. Please go ahead.

Hi, good morning. This is Kevin (inaudible) filling in for Stephen Trent. A lot of very, very helpful color on the call. We were wondering what kind of trends are you guys seeing in terms of aircraft lease rates and do you see any potential that the rates could be declining over the long-term?

No. We've financed our aircraft for 2014 on sale lease back operating leases and those were negotiated earlier this year. And the environment is generally favorable for airlines and more specifically, for Spirit as our credit has improved dramatically over the last four years. So we feel that those rates were very attractive. That was the reason we decided to continue to leaseheading into 2014 as we saw that. Heading forward, I would be speculating just like you would about what lease rates look like now going forward because we're not in the market trying to price airplanes right now. I've heard rumors that they're stabilizing and maybe that means something or not. But beyond that, I couldn't comment.

Okay, thank you. Just another quick question. Now with the government shutdown not lasting long, being like the new normal in politics, a lot of posturing. Did you guys notice any nuances in demand or changes in advance booking trends over this period or just a lot of noise but not really a lot of effect on you guys?

We noticed nothing from the government shutdown related to passenger demand. No.

Okay, thank you. That's all we have.

Thanks.

The next question comes from Bob McAdoo, with Imperial Capital.

Can give us any kind of sense with how the 2015 aircraft will be spread throughout the year? Should we think about them evenly? Early in the year, late in the year?

I would think of them evenly. They're coming one or two a month every month.

So there will be some in there for the summer.

Yeah. Oh, yeah.

Roughly half of them in there for the summer.

Yeah, exactly. Some of the 2014's come late in the year also so they're effectively 2015kind of capacity.

Got it. Understood. Thank you.

The next question comes from Steve O'Hara with Sidoti & Co. Please, go ahead.

Hi. Good morning.

Hi, Steve.

Can you just talk about where you see further potential ancillary opportunities and then maybe going forward, what do you think the revenue growth comes from?It seems like it would come from I guess the flight side as opposed to the ancillary side. Just wondering if you could comment on that?

Let me start off by saying we managed to total revenue (inaudible) and that's a statistic that we measure our revenue performance against. So to some extent, our ticket prices will be a function of what we're able to generate on the ancillary side, the more we can grow ancillary, the more flexibility we get with our ticket pricing and that's good for us. But we do see continued growth in ancillary revenue as well. Principally from a couple of things. One as we've talked about before, applying revenue management techniques that are more well understood on the ticket side but applying those to the larger ancillary products like bags and seats.

Today, bags and seat pricing tend to be more statically priced than the dynamic nature of tickets, moving those products to more demand based, dynamic pricing will improve the revenue of that ancillary stream without charging for new things but being smarter about the way we charge. The other thing is we're getting better and we're continuing to grow in our packaging business and our third party business of selling more things to more customers so not just unbundling of what used to be included in the ticket but actually selling more things and getting a bigger share of that traveler's total travel wallet.

Obviously when people buy an airline ticket, they tend to buy a lot of other things as well. When we can be the sales portal for them, we can make money that way and that, in turn, helps us offer a lower fare up front. We see growth in ancillary and the way ancillary grows will affect what our ticket pricing will be.

As a follow-up, I guess it has been a recurring theme for airlines for awhile now, is getting a bigger share of the customers' wallet. What type of pushback have you seen from those who typically get that share and do you expect that to get tougher going forward? If you can answer that, that would be great.

Well, we're not a huge player in that space. We're not really seeing pushback in that. But the reality is that airlines are in a good position for that kind of business because customers tend to choose both where to go and which airline they're going to fly before they pick which hotel they're going to stay in or which car they're going to rent or even necessarily what specific things they might do when they're there. So the airline is sort of in an early mover position of knowing the behavior and desire of that customer and so in that sense, I think the airlines are a more natural place for a lot of this kind of transactions to happen. Not just at Spirit but at any airline.

Okay. I'm sorry, one last one. In terms of the change for the consumer rule and everything else, what's been the detrimental impact that you've seen and then, is there something else coming down the pike that maybe we should be concerned about as well?

Is there a particular consumer rule you're referring to? The full fare rule? Putting taxes in?

Yes.

In general, higher taxes mute economic activity in general. It is a transparency issue. Spirit's fares with or without taxes are lower than other carriers fares with out without those taxes as well. Spirit customers don't pay more tax. Since some of the tax is a percentage of the fare, they can sometimes pay less. So we don't like the rule because we think it is not transparent and we believe in transparency.

So we do a good job, I believe on our website of breaking out for consumers how much of the total price they see is going to the airline to cover their travel costs and how much is being sent to the government for their taxes and we like that transparency and will continue doing that. But in general, we'll continue to support regulation where we can that encourages transparency and to all consumers so that they know exactly what they're spending and what they're spending it on.

Okay. Thank you very much.

The next question is a follow-up from Hunter Keay, Wolfe Research. Please go ahead.

Thanks for taking my follow-up. What is the load factor like on the big front seats?

You know, I don't think we report that separately. We don't sell that product as a fare. It is sold as a seat assignment so when you buy a ticket, on the airline, you can then choose to pay to sit in specific seats on the airplane and generally, you'll pay a little more to sit in a big front seat than to sit in another seat. In general, overall, we like that cabin to be completely full and in most of the cases, that tends to be true because it is usually a pretty good value compared to sitting in a seat in the back of the plane. But managed as a seat assignment today, if you go back to the commentary I made about ancillary becoming a little bit more dynamic, I think when we can get even a little more dynamic about pricing seats, that will be even more valuable to the big front seat product maybe than the average seat product.

So, Ben, how is that sold? Do you sell most of it on the website? Most of it at the kiosk? Do you have flight attendants selling most of it on board and what sort of IT thatyou have now is holding you back from improving the take rate on those things?

We don't think there is ITholding us back on that other than the generic idea of being able to dynamically price a little more. Most of it is bought online before. Some of it is bought at the kiosk and a minority is sold on the airplane. Obviously we don't like it to be sold on the airplane because then we have an empty seat in the back. It is better than not selling it but we would rather have it sold before the plane backs out. I think you know this but it is not a first class product. It is a bigger seat in the front of the plane but there's no other product attributes to it. There's no curtain, no flight attendant, no free drinks, there's no special check in, no ability to upgrade. It is just a seat assignment and some people might like window seats or aisle seat or a wider seat up front. That's the way we position the product.

Sure. It'sjust that we found that's a better experience than sitting in coach on a lot of the network airlines and the price of that is still well below, in many cases, where the coach fares are on a network airline so it just seems like there are opportunities to raise prices on that, in particular. Even without getting into the dynamic component of pricing.

We price it today on sort of a length of haul basis and when we can find ways to add a few more of those seats without removing seats from the airplane, we would look to do that as well for the same reason you just mentioned.

Yep.

Not going to take seats out to do that but if we could find ways to put more big ones in, we would do it.

Thank you.

We have no further questions at this time.

Well, then great. Thank you all for joining us again today and that will conclude our call.

Thank you, ladies and gentlemen. This concludes Spirit Airlines third quarter 2013 earnings release conference call. Thank you for participating. You may now disconnect.