Spirit Airlines Inc (SAVE) 2013 Q4 法說會逐字稿

Welcome to the fourth quarter 2013 earnings release conference call. My name is Clifford, and I'll be your operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. I'll now like to turn the call over to Ms. DeAnne Gabel, Director of Investor Relations. Ms. Gabel, you may begin.

Thank you Clifford. Welcome to Spirit Airlines fourth quarter 2013 earnings conference call. Presenting today will be Ben Baldanza, Spirit's President and Chief Executive Officer, Ted Christie, our Chief Financial Officer, also joining us are Thomas Canfield, our General Counsel, John Bendoraitis, our Chief Operating Officer, Jim Lynde, our Senior VP of Human Resources, and Graham Parker, our Vice President 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 of financial permanence. Forward-looking statements are not a guarantee of future performance or results, and are based on information currently available, and/or management's belief as of today, February 19th, 2014, and are subject to significant risks and uncertainties that could cause actual results to differ materially from those requested 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, and subsequent 10-Q filings. We undertake no duty to update any forward-looking statements.

In comparing results today, we'll be adjusting all periods to exclude unrealized hedge gains and losses and special items. Please refer to our fourth quarter and full-year 2013 earnings press release for further details regarding our assumptions for the reconciliations to the most directly comparable GAAP measure.

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

Thanks DeAnne. And thanks to everyone for joining us. 2013 was a remarkable year for the Company, as we produced record profitability and returns. For the full year, we grew our capacity 22.2%, increased net income by 71% year-over-year to $178 million, achieved an operating margin of 17.1% on revenues of $1.7 billion, and delivered pre-tax return on invested capital of 31.8%.

I am delighted to thank all of the Spirit team members that contributed to our success. In 2013, we added New Orleans and Philadelphia as new destinations, launched service on 25 new routes, maintained our vigilance on cost discipline, and kept our commitment to our customers to offer lows fare with our average ticket revenue per segment coming in at just under $80, and average total revenue per passenger segment of only $133.27.

We continue to be pleased with our performance in the diverse markets we serve. When discussing market performance, we tend to classify routes by whether they are core, utilization, mature, or new. A core route operates during peak daytime hours, if a route is operated during the off-peak hours or during slight gaps in our normal schedule, we classify it as a utilization flight. We consider any route that is operated more than 12 months as mature. In all four of these categories, we experienced increased profitability and margin expansion. This broad-base of profitability is a core strength of our unique business model. We can schedule our routes for optimal returns without the constraints faced by many, such as long ground times to wait for connecting passengers, fixed time channels to accommodate the corporate business traveler, or contracts that mandate minimum frequency levels. As we continue to grow, we see no need to adopt any of these behaviors that would be profit-busting for our business model.

Turning now to our fourth quarter results. Our net income was $41 million, or $0.56 per diluted share. Total operating revenue increased 27.9% year-over-year to $420 million, and total RASM increased 3% to $0.1143, driven by higher average operating yields and higher load factor.

On the operational front, in addition to fewer weather-related cancellations in the fourth quarter this year compared to last year, our tech ops and operations teams did a great job of getting our customers where they wanted to go. We had an average completion factor of 99.5% for the fourth quarter of 2013, compared to 98.4% in the fourth quarter of 2012, which is the result of all of the hard work and investments that the Company has made to increase operational reliability.

Before I turn it over to Ted, I want to give a brief update on the status of our negotiations with our flight attendants. With guidance from the National Mediation Board, in December 2013, we and the Association of Flight Attendants reached a tentative agreement for a new five-year flight attendant contract. As reported, our flight attendants did not ratify the tentative agreement. We remain committed to working with the AFA and the NMB to reach a balanced and mutually acceptable agreement. Although we are disappointed with this result, we want to stress that we appreciate the work that our flight attendants do everyday for our customers and for Spirit.

With that, here is Ted.

Thanks Ben. Again, thanks to all of you for joining us today. I join Ben in thanking our team for their contributions to our success in 2013. Our entire team did an outstanding job maintaining cost discipline, and delivered CASM ex fuel for the full year 2013 of $0.0591, down 1.5% year-over-year, exceeding the target for the year that we set in February of last year. For the fourth quarter of2013 excluding fuel, our CASM decreased 2.5% year-over-year to $0.0578. This was better than indicated in our recent guidance, which included approximately $8 million of expenses, related to the engine failure experienced in October of 2013. We now believe it is probable that it will be deemed a covered event under our insurance policy, and that we will be reimbursed for all incurred expenses in excess of a $750,000 deductible, which was expensed in the fourth quarter of 2013. There may be some additional expense at the time the engine is placed back in service, but we cannot estimate that amount, and at this time we do not believe it to be material.

Better operational performance during the fourth quarter of 2013 compared to the fourth quarter of 2012, helped to drive lower wage expense and lower passenger reaccommodation expense. These decreases were partially offset by higher maintenance expense and depreciation and amortization expense related to an increased number of heavy maintenance events. We ended the year with $531 million in unrestricted cash, and with no debt on the balance sheet. As of 12/31 we had 54 aircraft in the fleet, and have 11 aircraft scheduled for delivery in 2014, with one already having been delivered in January. We have sale lease back financing in place for 7 of thedeliveries, and are working to secure financing for the other four.

Turning now to our 2014 guidance. At this time we have no fuel hedges in place. Based on the forward curve as of February, 13, 2014,we estimated our fuel price per gallon for the first quarter will be $3.17, and for the full-year, $3.12. Capacity is expected to be up approximately 21% year-over-year in the first quarter, up 17% in the second quarter, up 13% in the third, and up 16.5% in the fourth, for a full-year increase of about 17%.

For 2014, our largest inflationary cost drivers on a unit basis will be depreciation and amortization related to the amortization of heavy maintenance events, and increases in pilot costs as a result of FAR 117. Together, these items increase our first quarter and full year 2014 CASM ex fuel by about 2 percentage points compared to 2013. Throughout the year, we will also have unit cost pressure from higher maintenance expense driven by more regularly scheduled checks as the fleet ages, and as discussed on our prior call, we'll have some advancement of expenses towards the end of 2014 as we ramp for the growth in 2015. However, our capacity growth, scale and efficiency benefits, and the investments we have made to improve our operations, will help mitigate some of these cost pressures.

Along with these benefits, we have several initiatives we are working towards to lower our cost structure, that could benefit us in 2014 and beyond, and we'll keep you updated on these initiatives as they progress. Taking into account all of the puts and takes, including the weather-related effect of canceling about 230 flights or 32 million ASMs quarter-to-date, along with the additional weather-related expenses, we estimate that CASM ex fuel will be up 1% to 2% year-over-year for the first quarter of 2014. For the full year of 2014, we are targeting CASM ex fuel to be up 1% to 2%.

As we head into 2015, we estimate our capacity will grow around 29% compared with 2014, given the run rate effect from the eleven aircraft delivering in 2014, seven of which delivered in the fourth quarter, along with 14 new aircraft delivering during 2015. Ramping for this growth does cause some cost pressure in 2014, but it provides a nice tailwind to costs in 2015. That along with some of the potential benefits I alluded to earlier, produce very stable costs over the two year period. As we realize this trend, we believe we can manage our cost structure and sustain or even grow our relative cost advantage.

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

Thanks Ted. As you know, in the first quarter, the industry has been plagued with one severe winter storm after another. Our team is doing a great job of managing the operational challenges that these storms have presented. In addition to the CASM ex fuel impact that Ted mentioned, there is also a RASM effect as a result of the canceled flights. Unlike other airline who have reported a positive impact on RASM due to flight cancellations, do not expect to see a RASM benefit from the multitude of weather-related cancellations in the first quarter. Other airlines don't typically run load factors as high as Spirit does, and they offer more frequencies per day to each destination.

As a result, when they cancel a flight, they can more easily reaccommodate affected customers more sooner, and thus are more likely to keep the revenue. Given our high load factors and that we serve most routes only once per day, together with a customer base of primarily leisure versus business travelers, there's a greater chance that our reaccommodation window will not work for their travel plans, and they opt instead for a refund.

As a reminder, the first quarter this year is impacted by Easter occurring in April versus in March of last year. We estimate this shift negatively impacts first quarter year-over-year RASM comparison by about 1.5 percentage points. For the first quarter of 2014, we are currently estimating that our operating margin will be between 13 and 14.5%. For the full year of 2014, we are targeting an operating margin of between 16% to 18%. Our full year target assumes the demand environment remains similar to what we experienced in 2013, and an average fuel price per gallon of $3.12.

Our team made 2013 an excellent year for Spirit, as we improved our operations, grew our earnings, maintained our commitment to offer our customers the lowest possible total price, and delivered strong returns for our shareholders. We look forward to delivering on these comments again in 2014. Now back to DeAnne.

Thank you, Ben and Ted. We are now ready to take questions from the analysts. We do ask that you to limit yourself for 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 if time permits. Clifford, with that, we are ready to begin.

Thank you. (Operator Instructions). Our first question comes from John Godyn. You may go ahead.

Thank you for taking my question. I wanted to focus on the growth a little bit. 29% ASM growth next year, these aren't numbers we haven't heard before, but it's an awfully large number. Ben, I was hoping you could give us some confidence that as we think about the growth this year and then what's to come next year and the CAGR there, that there are plenty of opportunity there's to grow without seeing margin dilution?

Hey John, thank you very much. Yes, we feel extremely confident that fact is true. We continue to believe that not only through this year and 2015, but in years beyond that as well, that we're able to maintain kind of that average annual growth rate of 15% to 20%, and be able do that without compressing margins, because as we've said and as you've seen in some of our presentations, we've identified a number of markets beyond our aircraft order that we could serve that we believe would produce that kind of target margin. The 29% in 2015 versus the under-20% in year is really just a function of aircraft delivery timing. We have got seven airlines coming in the fourth quarter of this year. Most of the ASM production for that will be in next year, even though the planes are coming this year. When you think about it over that two-year time frame, we're sticking exactly to the 15% to 20% growth rate per year that we've been talking about for a while. We feel very good about it.

And of course, Ted mentioned some of these sort of costs that have been pushed forward and again, that's not a surprise either. We've heard about that before. Operationally as you think about digesting the aircraft behind 29% ASM growth, it's quite a lot of aircraft in the year. What can you tell us to make us more comfortable that digesting that much growth won't have unforeseen operational issues?

Well what I can tell you is that we know when the planes are coming, and we can back up from that and know when the pilots will need to be trained, and the flight attendants will need to be trained, and the routes that they fly will start selling months before the planes show up, so we will know where those planes are going to get their overnight maintenance, and such. It's part of running the day-to-day basis. We've built our fleet plan, we've built our growth plan, and we have built our infrastructure in the Company, and that includes both people, and systems and processes to be able to handle that type of growth path that we have in front. We're on top of it, and we feel very good about it.

Okay. That's very helpful. If I could ask one more. I get the sense that investors are getting spooked a little bit as to whether some of this softer RASM that we have been seeing is really weather, or whether it's a slower booking pattern, or what have you. If you could speak to it qualitatively, has there been any slowdown in bookings as far as you can tell doing your best to adjust out a lot of this strangeness from weather? Any thought there's would be helpful. Thanks a lot.

We don't see a weaker, overall environment or sort of reduced consumer spending or things like that now versus sort of the strong 2013 that we delivered on. Certainly the weather is affecting some things, and the timing of Easter affects the year in terms of when people travel and such, but when you net all of that out, we feel it's a very strong environment right now that's continuing from last year. We feel very positive about the general revenue environment, and that's why we were confident in putting out that margin guidance of 16% to 18% for the full year.

Our next question comes from Michael Linenberg. You may go ahead.

Two questions here. Ben, have you guys expressed any interest in the DCA slots, I think that there are another five pairs left, and/or maybe some of the gates out there, like maybe the two gates at Dallas Love Field, or some of these other constrained airports? Anything there you're looking at?

We had some interest in the DCA slots, it is our understanding that those have all been resolved by the way, we don't think that there are five left, not that we know of. We put in a bid at a price that we thought we could keep our target margin returns in place of, and we did not win with that bid and we're okay with that, because we wouldn't want to overpay at the expense of our investors, and in terms of the gates that are available in Chicago, LA, and Boston, we have expressed interest in getting some of those assets in some cases to secure our position at an airport we already serve, and in some cases to grow a position, and that process is still underway, and we don't know what the results of that will be.

Okay, great. My second question. I think Ted talked about some of the impact in the March quarter due to escalating costs related to FAR 117, maybe the weather, maybe a few other things, likes depreciation. You did indicate that the unit costs ex fuel to be up 1% to 2%. What would that have been ex some of the adverse costs impacts, or costs headwinds? Trying to get a feel for the impact of some of the higher costs items that we saw, or that we're seeing right now?

Sure. Hey, Mike, it's Ted.

Hey, Ted.

As I said, we estimate that FAR 117 and the year-over-year increase in depreciation and amortization alone is worth 2 points. Then when you factor in the effect of the weather, it's not a perfect analysis by the way because you're taking out the denominator, because ASMs are coming out as we're canceling flights, and in addition to that there are incremental expenses that we incur when that happens, or the weather happens, such as the de-icing volume has been higher this year than what we experience in a normalized year. We think that could be worth as much as a point as well. So that gives you at least some landscape as to how we would have viewed things without these kinds of pressures.

That's perfect. Thanks, thanks very much.

Our next question comes from Helane Becker. You may go ahead.

Thanks very much operator. Hi, guys.

Good morning.

I just have one question with respect to one of the comments you made on some of the new routes that you're talking about. How are you thinking about that for 2014? Will there be more connecting dots, more new routes open, A? And B, can you maybe talk a little bit about what you're see in Fort Lauderdale in terms of expansion of other airlines, and how you're thinking about that market going forward? Thank you.

Sure. We have spent the last few years opening a number of cities in the US, and now serve a large number of big metro areas in the United States. There are still a few that we're not in yet and can you look at our route map and figure out what those are, but for the most part, our scheduled growth is going to come from connecting, adding nonstop services incities that we already service, rather than adding a lot of new dots to the map. Although, we likely will still add a few every year as we move forward, but more of the growth is going to coming from connecting places that we already serve, since we're in the majority of places we will serve right now.

In terms of Fort Lauderdale, we continue to be very happy with our performance in Fort Lauderdale. Fort Lauderdale operates at above our system average margins despite the fact that the system has high margins. While others have continued to grow in Fort Lauderdale, we have not really seen the big effect of that growth because again we think that our market, or I should say our business model aligns very nicely with the highly discretionary price sensitive nature of much of the travel to and from Fort Lauderdale, and so because of that, we feel great about Fort Lauderdale. Fort Lauderdale is going to be a little bit bigger for us this year than it was last year, and the ball keeps rolling.

Great. Thank you very much.

Our next question comes from Hunter Keay. You may go ahead.

Hi, thank you. Thank you for providing full-year margin guidance, I think it's great, it's differentiated. Oh my gosh, you guys stopped hedging fuel. That's the best thing I've heard all week. You know that I was going to bring that up because that's official. That's the policy going forward?

No, it's not official. We have no hedges in place. We still, what we will actively evaluate Hunter is whether or not it makes sense for us to buy risk insurance in that regard, or to continue do it on our own, and that will be more of an active discussion between ourselves and the Board.

Got you. I don't think that it makes sense. Thank you for not doing so. Hey. I'll give you some pushback, Ben, it's not really a question, more like a statement, it is a pushback on your business model, and you tell me why it's wrong. When you guys, I believe your November traffic release, I think you said you saw some weakness and some trough period pricing, but the peak was very strong so you had no problem driving revenue in the peaks. If it's getting harder for you to stimulate demands in the trough periods, and you don't have the flexibility to pull back on capacity if demand is not there because of the utilization-driven low cost business model, why should we not be concerned about the capacity that you're adding, as it relates to your ability to stimulate traffic in your trough periods, assuming that you can't pull back on capacity?

Here is the answer and here is why you're wrong, Hunter, since you asked me to tell you why you're wrong.

Of course.

The weaker periods are not weaker than they have been. What's happened is the stronger periods are stronger, so if you compare strong to weak, the weak periods, it's a bigger gap but that gap comes on the fact that the stronger periods are stronger, not because the weaker periods are not weaker. We also have a pretty big dial in terms often capacity with utilization, and while our annual utilization is very high, you can just look at our schedules and see that in a month like September, we don't fly 13 hours a day, even though our average for the full-year is around 12.8, or 13 or so, and so we dial the capacity in any given time of year in terms of peak or off-peak with utilization of the fleet.

The difference is that we see in strong and weak times don't suggest that we want a different sized fleet dramatically at different times of year than others. We have good levers with which to manage it and in the very short-term, that leverage is price, and in the medium term, it's utilization within the week or within the month. When we talked about this year being a generally, our outlook being a generally strong revenue year, we're comparing it to last year, and thinking that the macro environment that exists in terms of the general industry capacity, and the general fare environment, and the discipline that the whole industry has shown about things, we're encouraged about this year, so we have no reason to think that it will be meaningfully worse than last year at all.

Okay, one more quick one. Thanks, Ben, for that. The new bag fee structure. Do you expect it to move the needle on the ancillary revenue per passenger, and what have you seen so far? Thanks a lot.

A little bit, but those changes were more about channel shift rather than actual price increase, and so what it does is it moves some of those bags to a lower cost distribution for us on the web, and it's a little bit more about that, but we think it will help. We've not seen any pushback at all in the consumer base with that at all. People understand that people who fly us are increasingly understanding the model, and what they understand most is that the total price that they pay after they pay for the bags and the fees and whatever else, is still in almost every case significantly less than their next best option on another airline. Our planes continue to be full because our customers are saving money, and what the incremental charges for things like bags and fees do, is allow the customers to customize their price better than they can at another airline.

Our next question comes from Duane Pfenningwerth. You may go ahead.

Good morning.

Good morning.

Just tracking back to last year. If I recall, you lost basically the opportunity to yield up during February break and spring break due to Sandy, and how would you compare the magnitude of the Easter shift versus basically that lost opportunity last year?

Hi, Duane, it's Graham Parker. We did see a little impact from Sandy, but it was more noise than anything when it came to the February time frame were there than when Sandy happened in the prior year, but the Easter shift is a more significant than that because it takes a big period out of March. So as Ben said in his remarks earlier, we expect that to be about a 1.5 percentage point change in Q1 revenue due to that.

Okay. And then one of the questions we've been getting more recently is from new investors, is the level of cash on your balance sheet, and kind of the Company's plans for deploying that back to shareholders. Appreciate your recent comments, suggest you're not quite ready to do that yet. I wonder if you could just expand on that a little? What do you need to see? What analysis have you done, and what would you need to see to being to buying back your stock, or at least getting a program in place? Thanks for taking the questions.

Sure Duane, it is Ted. The answer is it's a little bit redundant so I apologize for that. With the level of growth and we've talked a lot about it on the call, the high growth that we have coming over the next five or so years, the cash balance is important to us as we evaluate alternatives and financing that growth, which is actively underway by the way. Because of our returns, we still think it's smart, the investment in the business is the right answer for our shareholders. If that were to change, then we would change our view on where we would provide that return to our shareholders in the form of what you alluded to, or a dividend, or whatever. But for now, because of the growth level that we have and because of the returns that we are generating, we still think that investing in that growth is the right answer, and driving the benefit of that cash through our income statement, quite frankly, and leveraging down expenses that we have today, we see a lot of opportunity with. That's why we're protective and careful with that balance, but still think it's the right answer for us to maintain it.

Our next question comes from Savanthi Syth. Go ahead.

Good morning. Wondering, you have shared what your new market potential has been in the past. Wondering where it is today?

It hasn't changed significantly. It's around 500 and we'll certainly sort of kick off some of those this year as we grow and more next year, but that number continues to change as a function of our own cost structure, or I should say our own relative cost structure even, and as industry fares as well change, so you could see that number getting bigger or smaller, not even as a function of how Spirit goes, based on the macro environment as well. It's been around 500 for the last six or seven months, and we see that's where it is right now, and again, that would take more planes to serve than what we have on order between now and 2021, which is why we feel particularly good about the next couple of years of deployment.

Yes. In the past obviously the Caribbean was a big growth driver and then with the fare increases in the domestic market, the growth has been focused more in the US. I'm curious as you look forward. Is it still going to be mostly domestic market growth, and how does the Caribbean play into that, especially given commentary by Jet Blue and Southwest of growing the Caribbean out of Fort Lauderdale?

I don't think their capacity changes our view that much. It's just a function of just market sizes. There are a lot more people an a lot more money in the US than in the Caribbean, that's just the reality of it. So when you look at the sizes of the markets and the opportunity to fly, there are just more of those opportunities in the domestic US. It doesn't mean that we won't grow more in the Caribbean or other Latin markets, but we tend to look at deployments in a very agnostic economic sense, which is we look at the return potential of flying the plane from X to Y, and if we can make more money for our investors by flying to an international point than a domestic point, we'll add an international point. If we think we can make more money to another domestic point, we will add the domestic point, As you think about the next couple of years of growth, we're likely to grow both domestically and internationally, but more domestically because that's where more of the opportunity is.

Understood. A follow-up on the cost side. What does the unit D&A look like in 2014?

You mean the component of CASM?

Yes.

In basis points? I think we mentioned in our update that we expect the D&A to be about $50 million, so rough numbers, that's kind of worth--

I can get it from there.

Yes, you can do to the math, but it's probably about 30 some odd basis points, something like that.

Got it. Thanks, Ted, thanks guys.

Our next question comes from David Fintzen. You may go ahead.

Good morning everyone. Question for Ted, you mentioned sort of the benefits on the cost side of scaling up in terms of offsetting some of the labor costs and D&A pressures. Can you give us a feel for where you are in terms of airport infrastructure utilization? Maybe how many turns per gate you're getting, and how much slabbing is there out there in your airports that you can grow into over the next two years?

Sure, I can add some comment to that, then Ben can jump in, too. When we select a new market, we do so because we believe that market will develop into a market that has the opportunity to optimize gate utilization. So we think about gate utilization as maximizing, that might be eight to ten flights per day on a gate, that when we launch the market, it may not have that many in the beginning. So we do grow into it over time in some cases, and we optimize that over time, so there's some benefit to that.

In addition to that, as we connect the dots from a network perspective more, the fixed infrastructure of having a manager at the airports, and the ticket counter space that we have at the airport, doesn't necessarily have to grow with that scale, too. So you get the benefit too, of connecting the dots is getting some optimization as well. Trust me when I say we're careful about that. We're optimizing it as we speak, but I think that there is a lag effect that rolls out as the airline grows.

It's sort of eight to ten of the optimal, are you six or seven, are you in that eight to ten range now? Just at the overall system level, just where you sit relative to that?

It would be hard for me to answer that perfectly. I think it's fair to say that we optimize in pretty much every airport that we operate in.

I would also say that when we enter into a new city, we enter with an idea as to where we believe that city could get to, in terms of total efficiency, even though we may not be there on the first six months of operation, but we wouldn't, if I could take you back a year and a half ago. We pulled out of the DCA airport. One of the reasons why we did, we had three flights a day and we couldn't grow it. It was hard to reach our target margins at DCA without the ability to grow it to a critical mass that would fill out a gate, and that's one of the reasons we left and went to Baltimore, because there wasn't an ability there.

That helps. A slightly different subject. In terms of some of the weather impact, how much of a snap back could we see in the sense, obviously, trips being postponed, but also the idea of sitting on a beach right now with a couple of feet of snow in front of my house seems pretty appealing. In the spring, could we see a bit of a snap back in demand and sort of people come out of their houses again?

This is Graham Parker again. Yes, you could, but it's not something that creates a big blip for us in demand, but yes, if you're sitting in Chicago, Detroit or New York right now, you're probably thinking about Fort Lauderdale, it's 84 degrees down here by the way.

Don't tell me that.

Yes, you could see it, and I expect because of that, we'll probably have a pretty strong spring break this year.

I think you could genericize that to say that in colder, nastier winters up North, we tend to do pretty well, better than if it's a mild winter, that's true.

I appreciate that color.

Thanks.

Our next question comes from Stephen Trent. You may go ahead.

Hi, good morning, guys, and thanks for taking my questions.

Thanks, Stephen.

Hi. I'm curious. My question is, kind of a follow-up to Helane's and I believe Debbie's question, just looking at the competition picture. At least in Mexico, it seems like we're seeing in the domestic market a lot more aggressive fares coming from some of the carriers there, which I know you guys don't serve Mexico domestic. Any color on what you're seeing on international routes by would-be competition?

Graham Parker again. We're seeing sort of business as usual to be honest. We're see some nice rationality in capacity and inthe fares in the markets, and we are seeing a very similar environment to 2013.

Okay, terrific. And just my one follow-up question and I didn't perfectly appreciate that you can't answer, just on the flight attendants agreement that you're trying to reach. Have you kind of program into that 2% CASM, sort of roughly a tentative deal looked like into the 2014 CASM expectation?

We modeled out the effect of the tentative agreement and included that in our plan. What happens now depends on our reengagement with them, and working that through, so the answer is yes.

Okay, that's great. Well, gentlemen, looking forward to the next set of data from you guys, and double looking forward to the next marketing campaign.

Thanks, Stephen.

Our next question comes from Dan McKenzie. You may go ahead.

Hey, good morning guys. A couple of questions here. I appreciate the breakout of the flying based on the four categories, and just wondering if you can peel back the onion a little bit further for us?What percent of the ASMs in 2014 would be in markets less than 12 months old, and how would that compare to the percent in 2013?Then just tied to that. We've all been conditioned to believe that new markets hurt unit revenues, and that certainly hasn't been the case for Spirit, so I get your economic philosophy on new markets, but tied to those questions on ASMs, how are you getting there?Are you backfilling routes by others or going into other markets unserved by others? I'm curious how you've been able to crack that nut when others haven't been able to?

On a year-over-year basis, I don't have the ASMs in front of me right now. DeAnne could maybe get you that detail later. But in terms of the number of new markets that we added, we added about 25 which is about the same as the year before, so the timing in the year might have been a little different, but it wasn't meaningful different in terms of 2013 and the year before, in terms of the what the percentage of new or under 12 months was. That's as good as I can give you on the call right now. In terms of new routes coming in at average margin or accretive to margin, or whatever. We pick our markets based on being able to generate our target returns. We start selling those markets before they fly. We tend to be the price setter in the market since we tend to lower the prevailing fare from what was there. So in general, our planes are pretty full from day one. They certainly ramp-up a bit in margin over time because there's maybe less promotional fares up front, but the difference between our promotional fares and our average fares just isn't that large, like it might be at a typical airline. So the reality is that our markets tend to reach margin maturity quite quickly, well before a year, and we look at new as under a yea, simply because that's the first year that they're flying. In most cases, we tend to see load factor improvement and margin stability by the time that the thing has been flying for a, year and we'll make changes in capacity or price as necessary to help make sure that happens. That's one of the disciplined approaches that we have to route deployment.

Okay, good. The second question is I guess for Ted. I'm wondering if you can help us understand what the moving pieces are to capital expenditures?And then somewhat related to that,you have talked in the past about the opportunity to lower some of your aircraft lease expense, given Spirit's improving credit, where are we at that part of the cost story? In particular, if you were to pull that cost saving delivery, how much aircraft could potentially be affected by lower lease rates this year, or potentially next year?

Okay, sure. As it relates to CapEx, we'll give some detail in the investor update that we'll file of what we're seeing for the year. There are some drivers year-over-year that are investments that we're making in the business that are not material on an aggregate number basis. For example, we announced last year that we expanded and renewed the lease on our facility here in Miramar, our headquarter facility, which will require us as we optimize the size of that facility to renovate some of it, so that we can maximize the number of people that we can have in the building, so there's some investment in that. We've talked a little bit about IT infrastructure that we've invested in, in the past, but we can give you some more clarity in the investor update as well on CapEx.

Then thinking about our lease expense or ownership is the right way to talk about it, the ownership expense of the aircraft and we're seeing the benefit today of a better improved balance sheet, and an improved overall operational structure such that the aircraft that we're delivering now are more attractive than the aircraft that we delivered three, four, five, six years ago, but we're still leasing those airplanes, so the levers that we think about pulling would be driven by whether or not we think we can improve the cost of that capital. So we understand pretty well about what our partners in the op lease community can do for us from a cost of capital perspective, but what we have the ability to evaluate is can we do better, and other alternatives. So we're spending some time thinking through that and looking at our future deliveries as to how we might finance those aircrafts, and if there are opportunities there, we think they could be notable, and looking at that.

Then, as a side discussion is the existing aircraft in the fleet, are there ways for us to improve the cost of those. An example of that is what we did last year. We looked at some of the existing airplanes we had in the fleet, and we extended those leases over a period of time to provide us with some more streamline exits of a particular fleet of aircraft, but at the same time it drove down our expense because we were able to secure those extensions at very attractive financing costs. So we're taking the aircraft trader mentality in that regard, spending more time on it, and we do think there's opportunity there.

Terrific. Thanks so much. Appreciate it.

Our next question comes from Steve O'Hara, you may go ahead.

Hi, good morning.

Hey, Steve.

Could you just talk about in terms of your relative cost advantage? I'm just wondering, how much of your ability or your goal of maintaining your margin depends on the industry maybe not maintaining their cost structure? If none of it, does that add upside or maybe improve your margins going forward beyond your stated goal as they have to raise prices as their cost structures deteriorate?

I think it's more of the latter. I think we think about our cost structure first and absolute, then in comparative terms, so we're focused on maintaining our cost structure inline with what we experience today. We do believe and I think you would agree, that there are pressures in the industry driving up unit costs. So we know that's going to be a contributing factor to our cost advantage, but that's not the way we focus on our cost structure, meaning we're not okay with letting our costs move because everyone else is moving. We're very focused on maintaining our cost structure, and we're very disciplined about that.

Okay. And then next in terms of the non-ticket kind of per passenger flight segment. I think that's maybe the right way to look at it. Maybe it's not, you can correct me, but it seems like it was at an all-time high in 4Q, low to modest improvement from the quarter before. Can you talk about what's driving that and what other opportunities you see out there to drive that number higher?

Yes, this is Ben again. We've said some of these things before, but basically, obviously, it's harder to move from 54 to 60 than it was to move from 10 to 16, so we're in a shallower part of the curve for sure. But that said, we still feel optimistic and bullish about the ability to grow our ancillary revenue per passenger, in part by being a little bit smarter about the way we price ancillaries, the biggest components of that $54 today, our bags, and seats, and change fees, and convenience fees, what we call the passenger usage fees, are those are the biggest chunks. Some of those clearly have the ability to be more scaled to supply and demand, which create some revenue upside in the same way that ticket prices have been managed for the last number of years.

There are also good benchmarks out there in carriers like Allegiant and others, who have generated a lot more than we do, in terms of selling more things along with the ticket, like shows and hotels, and cars, rental cars. We're new in that game so it would be just reaching benchmarks that others have hit or getting close to that is going to be very accretive to our number. We've got a lot of ideas in the pipeline, and we aspirationally can see our ancillary revenue getting up to hopefully at some point 50% of total revenues. It's in the low 40s today, but we want to keep pushing it, we manage the Company to total revenue. We don't manage ticket prices independently from non-ticket sources, so higher ancillary revenue gives us the ability to charge even lower fares to customers, and that creates more stimulation, more opportunity, so we like that interplay.

Okay. Just one more follow-up, if I can. It seems like the industry is adding a lot more, let's say passenger amenities, and I know you guys are fairly adamant that you want to get paid for those amenities, but do you see a point where the industry becomes so upscale that your price advantage has to get wider in terms of what the passenger is willing to accept?

Those passenger amenities that get added raise costs for those airlines, so to make those things work for them in an economic sense, they will ultimately need to charge higher fares over time. I think that there is a market for our product among the most price sensitive customers. The airline business is in many ways what economists call an intermediate good. People fly on airplanes to go do something else to. Go on vacations, to go on a business trip, to see family, to get home, whatever it is. There's a group of people out there, and I don't know how big it is as a percentage of the flying public. There's a group of people who are always going to want to spend as little as they can getting there, and spend more money actually being where they want to go. I think our model is well attuned to what most customers when surveyed actually care about when they pick the airline that they're going fly, is how do I get there for the lowest price. Now if price equal, someone might choose an airline with more leg room, or that gives them entertainment or gives them food on board when we don't, but in most cases, prices aren't equal, and price tends to be the winner when it comes to the majority of the volume of the flying public.

Okay. Thank you.

Our next question comes from Bob McAdoo. You may go ahead.

Hi, Bob.

Could you go back to the route selection and whatever and twist a little bit to talk about route deselection? I know there's been from time to time routes that you've pulled out of. I guess the question is, as the network has gotten more complex and you're get into some of the lesser and lesser markets, or maybe they are lesser and lesser markets, are you finding that the number of times that you have a miss is starting to build? I guess the other thing is, obviously, one of the good things about you, the way your model works is that you do when something isn't working, you stop doing it, which is unlike some carriers, but I guess the question is, what is it that constitutes something that's not going to work? Is it something that's two or three points below the system average margins? How do you think about that whole process?

Good set of questions, Bob. First of all, actually it's kind of the opposite from what you said. We're actually seeing a higher batting average now than from a couple of years ago, which if you want to think of it in that terms, of things that work versus having to be pulled back from. We are not going into smaller places, we are in big places and there's a lot of big places we are not in yet. We're very early on the growth curve for our Company, not unlike Southwest was in the early1980s where they were able to use their cost advantage to grow through stimulation for 20 year, before they had the problems they have now, 20 or 30 years. So we're very early on that illusion curve.

That concept of marginal returns on growth would make much more sense for an airline that is already 10% of the economy, or the air economy, and a couple of hundred airplanes. We are 50 airplanes and 1.5%, it's just too early to be talking like that for us. In terms of new marking, in terms of us changing, we know a lot about our market even before we fly it, we see how it's booking. We compare that to a plan of what we thought would happen. We have a lot of levers that are short of actually stopping flying it. We would fly different gauges of the Airbus family, so we could get a little bit bigger or smaller by putting an A319 up through an A321 on a route. We can change the level of frequency, and we're not shy about flying less than daily, or ten times a week, or something like that.

As seasons change, we understand how the capacity to be different as pricing changes, we can be more aggressive or less aggressive on the price point. We've got a lot of levers and we use all of those levers to try to maintain the kind of target margin that we've been able to deliver to investors over the last couple of years, and we have got a very disciplined approach, in our route deployment and pricing revenue management team to make that true. In the extreme cases where all of those levers don't work, and the best answer is to stop flying to a city, we will do that, but that hasn't happened very much, and it's happened less in recent years.

How low does it have to go before you decide? If you have got an average margin of 20% or something, what is it that's not acceptable?

Well, we've canceled things that make money because we can make more money doing something else, so we don't wait for it to start losing money, that's way too late.

Okay. That is good. I appreciate it.

Our next question comes from Hunter Keay. You may go ahead.

Thank you for take my follow-up. A little more on the cash. You guys are generating clearly shareholder value right now. The margins you're generating are fantastic, the returns that you're generating are fantastic. I think that begs for you to invest cash back into the business. I guess it's hard to accept why you're not using some of the cash on hand or the free cash flow you'll generate this year to buy some of these planes? I assume with your investor update, we'll see a very low CapEx number, and that would imply that these four planes you haven't financed yet are probably going to be leased. Sure maybe you will start talking about buying back stock and paying a dividend, but why aren't you investing this money back into the business through buying planes? You're carrying so much cash.

Great question, Hunter. We haven't financed the four aircraft that remain yet in 2014, nor have we financed 13 of our 14 deliveries in 2015. We are in the market right now with an RFP evaluating all financing alternatives, which includes debt, various debt structures and purchasing airplane along with lease, and for the very reasons you outlined. We're evaluating those types of opportunities to drive further value to our shareholders, and that's the discussion that's happening at a management level and a Board level in the near term, and we'll be able to give you more feedback once we decide on how we'll finance those airplanes, for this near term, and then that will give you clear guidance as to how we think about things going forward, too.

How does that conversation go? Is that a rate-driven conversation? Do you say we can get this note at this rate? Or do you say, if we debt finance this, we can add 50 basis points to our EBIT margin? What are the components that go into how you, is it a capital structure discussion, what do you discuss when you talk about it?

Those are all contributing factors to the analysis that we do, but at end of the day, we've said this before, we would invest in an asset because we think we can deliver the return that's expected of us.

Thanks a lot.

That's the answer.

Okay, thank you.

Right now we have no further questions in queue.

Thank you all for joining us today, and this will conclude our fourth quarter full-year 2013 conference call.

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