Spirit Airlines Inc (SAVE) 2014 Q1 法說會逐字稿

Welcome to the first quarter 2014 earnings release conference call. My name is Angela, 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, Director of Investor Relations. DeAnne, you may begin.

Thank you, Angela. Welcome to Spirit Airlines' first quarter 2014 earnings conference call. Presenting today will be Ben Baldanza, Spirit's Chief Executive Officer, and Ted Christie, our Chief Financial Officer. Also joining us are Thomas Canfield, our General Counsel; John Bendoraitis, our Chief Operating Officer; and Jim Lynde, our Senior VP of Human Resources.

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 and are based on information currently available and/or management's belief as of today, April 29, 2014, and are subject to significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements, including the information under the caption Risk Factors included in our annual report on Form 10-K and quarterly reports on Form 10-Q. We undertake no duty to update any forward-looking statements.

In comparing results today we will be adjusting all periods to exclude unrealized hedge gains and losses and special items. Please refer to our first quarter 2014 earnings press release for further details regarding our assumptions for the reconciliation to the most directly comparable GAAP measures. And now I'll turn the call over to Ben.

Thanks, DeAnne, and thanks to everyone for joining us. Today we reported that our first quarter 2014 profit increased 15.4% year-over-year to $37.8 million or $0.52 per diluted share. Operating income grew nearly 13% to $60.1 million, resulting in an operating margin of 13.7%.

Our team did a great job serving our customers while overcoming the challenges caused by numerous severe winter storms, as well as managing to the new crew duty and rest rules, and I thank them for their contributions. Revenue in the first quarter grew 18.2% compared to the first quarter last year. In the first quarter last year Spirit had 59 weather related flight cancellations compared to 256 in the first quarter of 2014, negatively impacting revenue for the quarter.

Total revenue per ASM declined 2.4% year-over-year. The calendar shift of Easter occurring in April this year compared to March of last year had an estimated 1.5 percentage point impact on RASM. Additionally our average stage length increased 6.3% year-over-year, resulting in an estimated 3 percentage point drag on RASM year-over-year.

Our ticket revenue per passenger segment decline of 1.6% was offset by a 3% increase in nonticket revenue per passenger segment such that our total revenue per passenger segment was about flat at just over $134. We are just fine with this trade off and actually prefer it.

We are committed to offering low base fares with lots of options that allow our customers to choose what they value. Our total fares -- that is base fare plus all the options customers select -- are on average about 40% lower than our primary competitors when adjusted for differences in length of haul. Our low fares allow us to grow the population of travelers in the destinations we serve and, when coupled with our low costs, are a recipe for profitability and create an opportunity for our customers to go more places, more often at the lowest fares possible.

Some of you may have seen the report using DOT data showing that the average industry US fare for the fourth quarter of 2013 was $381. When you look at this compared to our prices, it's not surprising why our planes are so full.

The increase in nonticket per segment for the first quarter 2014 as compared to the first quarter last year was driven in part by the run rate benefit of an adjustment we made in April of last year to our passenger usage fee. Also during the first quarter, we introduced the ability to select a seat assignment at our kiosk, which increased the component of nonticket revenue associated with seat selections.

Our network continues to perform well, and our team has done a great job improving our operational liability. Numerous weather events affected our overall completion rate for the first quarter, but our controllable completion factor was 99.8%. Given our low frequency approach to scheduling, if we are in the position of deciding between running a flight a little late or canceling it, we believe our customers are better served if we run the flight a little bit late rather than cancel it.

Last week we announced we'll begin serving Kansas City International Airport in August this year. We are pleased to welcome Kansas City to our list of destinations. We anticipate we'll add one or two more dots to our route map in 2014, but the primary focus of our growth this year will be to add new routes that make connections between destinations we currently serve.

Last week, we announced new service between Ft. Lauderdale and Houston and New Orleans; between Houston and San Diego, New Orleans and Atlanta; and between Kansas City and Chicago, Dallas/Fort Worth, Detroit, Las Vegas and Houston. We currently estimate for the full year 2014 our capacity growth will be up 17.8% year-over-year, versus our previous estimate of up about 17%. We are able to improve aircraft utilization for the ladder part of 2014 by optimizing our heavy maintenance schedule.

Before I turn it over to Ted, I know there has been some chatter in the news about Spirit's DOT complaint rate. We care about our customers and work hard to deliver what they value most -- safe, reliable transportation at a lower cost than other airlines.

The number of complaints to the DOT is very small for all airlines, including Spirit. The industry average is about two complaints for every 100,000 customers, while we currently average about five complaints per 100,000 customers. That means that 99.995% of our customers did not file a complaint, yet we're still not satisfied.

We know some customers are surprised by our a la cart model. That's why we're committed to helping all of our customers better understand Spirit while continuing to improve our operational reliability.

There's one thing we won't do. We won't add costs for things that most customers don't value just to reduce the complaints of a very few. Doing that would raise prices for everyone. We will continue working to help our customers get where they want to go safely and reliably for less money, and stay tuned to learn shortly about some of the creative ideas we've developed to help our customers understand our a la carte model better while saving money on airline travel transparently and consistently.

With that here's Ted.

Thanks, Ben. And again, thanks to all of you for joining us today. Thanks to all our team members. Your hard work and dedication is appreciated. Through your contributions we are delivering on the promises to our customers and our shareholders.

CASM ex-fuel for the first quarter 2014 came in at $0.0606, up 0.3% year-over-year. Compared to the first quarter of last year, an increased number of scheduled maintenance events resulted in higher depreciation and amortization expense, and higher maintenance, material and repairs expense per ASM. We estimate additional pilot costs as a result of FAR 117 contributed approximately 1 percentage point to our first quarter CASM ex-fuel.

These expenses were partially offset by lower passenger reaccommodation expense driven by improved operational reliability. The Company also benefited from lower aircraft rent per ASM as a result of the lease extensions we completed last summer.

We ended the year with $544 million in unrestricted cash and no debt on the balance sheet. During the first quarter we took delivery of two new A320 aircraft, bringing our total fleet as of March 31 to 56. And we have nine additional new aircraft scheduled for delivery by year end 2014. We have sale lease back financing in place for five of these deliveries and are in discussions with third parties to finance the remaining four delivering in 2014 and 11 of the aircraft delivering in 2015 under secured debt arrangements.

In our investor update to be filed after the call we will provide an update to our guidance for aircraft rent, capital expenditures, and depreciation and amortization to reflect these potential transactions. As we move forward to more definitive documents we will refine our guidance going forward. This is an important milestone for Spirit, and one that we believe will provide tremendous value to our shareholders.

In other fleet news during the quarter, we made a few changes to our fleet schedule affecting deliveries scheduled between 2015 and 2019. First, we converted five A320 ceos aircraft to A321 ceos. And converted five A320 neos to A321 neos. Second, we accelerated delivery of one converted A321 ceo from 2016 to 2015.

And third, in addition to some other tweaks, we further smoothed our delivery schedule by shifting two A320 ceos from 2017 to 2018. A copy of our revised fleet plan will be included in the investor update to be published following the call today.

Turning now to our 2014 guidance, based on the forward curve as of April 24, 2014, we estimate our fuel price per gallon for the second quarter will $3.12.

As Ben mentioned, capacity for the year in 2014 is expected to be up 17.8%, with capacity up 17.3% in the second quarter, up 14.6% in the third, and up 18.8% in the fourth. Sequentially slower growth rates for the second and third quarters as compared with the first quarter, together with the cost pressures as we ramp for growth in 2015, may create some lumpiness for the CASM ex-fuel changes each quarter.

For the second quarter 2014 we estimate our CASM ex-fuel will be up 2% to 3% as a result of the timing of some expenses pushed from the first to the second quarter. For the full year 2014 we maintain our previous guidance of up 1% to 2% year-over-year.

For the second quarter on a per ASM basis we estimate pilot costs related to FAR 117 and depreciation and amortization will again contribute 2 percentage points of increase compared to the second quarter of 2013. And as we have previously mentioned, toward the end of the second quarter we anticipate some cost pressures as we begin to ramp for growth in 2015. As for offsets, we'll have some benefit in aircraft rent per ASM related to the run rate benefit from the A319 lease extensions, which were effective in June of last year, and we expect to continue to see benefits from running a better operation.

We feel very good about our cost structure and continue to believe that with our focus on controlling our operating costs, which includes the benefit of cost-effective debt financing on our 2015 deliveries, we can manage CASM ex-fuel to be about flat over the two-year period of 2014 and 2015, and sustain or even grow our relative cost advantage.

With that I'll turn it back to Ben.

Thanks, Ted. Our solid operation on financial performance in the first quarter is a great start to the year and provides a firm foundation as we grow our business and bring our low fares to more people and more places. It's an exciting time to be part of Spirit.

We've successfully managed our growth over the last several years, and I am confident that our team has the critical thinkers necessary to continue to successfully grow our business. And as we grow we are focused on helping our customers learn how to save money when traveling by air and to appreciate how our unbundled product saves them money.

For the second quarter 2014 we are currently estimating that our operating margin will be between 17.5% and 18.5%. For the full year 2014 we are comfortable raising the low end of our operating margin target such that our new full year 2014 operating margin target range is 16.5% to 18%. Our full year target assumes the demand environment remains similar to what we experienced in 2013 and that fuel price per gallon averages $3.13.

Now back to DeAnne.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from John Godyn. Please go ahead.

Thank you for taking my question. First of all I just wanted to ask about the margin profile in 2015. The team has done a phenomenal job maintaining very robust margins while growing, but I still get a lot of questions from investors about the extent to which the significant growth in 2015 might be margin dilutive. I'm just hopeful, Ben, that you could expand on that idea.

Yes. I mean, it's certainly understandable why some might think about it that way, with a fairly hefty growth rate in 2015, 30%. That -- obviously that's a lot of new flying, and new flying has start up costs associated with it. It has slope and -- of the market building. And we know that markets in their later time do better than when they first start.

But that all said, we're very early in the growth phase for Spirit Airlines, and there are a lot of markets that can benefit from our service and that our margin can benefit from serving. And we have a slide in our investor deck that shows this.

And so we feel very confident that we have a lot of great places to fly our airplanes, and we have a lot of positive margin opportunities that -- so the high growth rate on its own doesn't necessarily suggest margin pressure, although certainly in a 30% growth year we will have more than the normal amount of start up and sloping up of new routes.

Okay, thanks. And just a follow up on a separate topic. In the past we have talked about Frontier, and I think sometimes people look at Frontier as perhaps a future competitive threat. We saw Barry's recent appointment. I'm just curious to have that conversation again. Any thoughts that you would like to share on this idea of Frontier one day emerging as a competitive threat? And as a part of that, is there -- obviously Barry didn't work at Spirit at this time, but is there any sense that there could be poaching or any concerns like that?

Well, Barry is a good friend of mine, and I wish him well, but going to Frontier doesn't materially change how we think of Frontier as a potential competitive threat to Spirit. We're very confident in our cost structure. We're very confident in our ability to maintain or even improve our cost structure over time. And they're in a different place than we are, and they're starting stated transition to be something different from a different place than Spirit started.

So we see this market as very, very large. We -- by the end of this decade we'll account for less than 5% of the traffic in the United States. Ryan Air on its own carries almost 11% of the European traffic, and they have clones. So we think there's a lot of room. But we think Frontier still has some work they have got to do before they can truly be competitive with Spirit, and we have got a lot of growth ahead of us.

Great, thanks a lot, Ben.

Our next question is from Hunter Keay. Please go ahead.

Hi, good morning. Thanks, everybody. Hey, Ben, a little bit of follow up on John's question about Frontier. I expect they're going to see the same -- use the same math you guys did about liberating 500 high fare markets with lower fares, and at a certain point you guys will presumably have the potential to bump into each other. Maybe it's five years down the road, maybe it's 10. But as you think about them long term, if you guys find yourself facing them in head to head battles, do you envision a situation where one of you guys might actually turn to product as a potential source of differentiation?

You compared yourself to Ryan air a few minutes ago. We've even seen Michael O'Leary soften up a little bit and talk about this new focus on customer service and the like. Obviously they've been around a lot longer than you have. But do you envision down road in, let's call it, the next two to three years competing with Frontier on product, or will it always be you think in your mind as far as you feel like thinking about in the future just based on low fares and price?

Well, our business model is based on offering the lowest total price to customers, and we believe we can attract new business and grow markets and attract the largest amount of new traffic with having the lowest total price. They may choose a different path.

They've got a different market in Denver. They already have TVs on their airplanes. They're in a different space. So I'm not sure what they're going to -- how they're going to choose to compete long-term. We're going to compete by having the lowest total price.

Now that said, we do think it's important that customers understand our differences and understand how our differences help them save money. And so we're just a couple of weeks away from announcing some pretty interesting things about how we're going to use creative -- a creative approach to help customers better understand what we're doing. I alluded to that -- or said that in my prepared remarks.

So we think it's important that customers understand Spirit. That's not saying that Spirit is changing its focus to be a product-centric seller. We're going to attract customers because we have today and intend to continue to have the lowest total price for them to get from A to B.

Okay. That's interesting. I'll stay tuned on that announcement, I guess. But, okay, that's good. We'll leave that one alone.

In terms of the mix of ancillary and passenger revenue, you guys are about 40/60 now. I think you've talked before about getting to 50/50. That's about a $300 million revenue difference, roughly speaking. Should I think about that gap being closed by, holding everything else equal, ancillary revenues increasing by $300 million, or would it be ancillaries increasing by $200 million and passenger revenue coming down by $100 million? How should I think about getting to that longer term 50/50 target?

Well, to be honest, you're think about it more than we are, in that we think about that as kind of an aspiration when we look outside the industry and we see other businesses that have an entry price and ways to sell things. Other people we've seen, examples, included in the cruise line business, where companies can get up to 50% of their revenues from something other than maybe the entry price.

So we think we can get there, but we're going to obviously make what we believe are the best decisions, best investor friendly decisions, on both our ticket pricing and our ancillary revenue, and the percentage that comes from which will be whatever the math ended up being. We're not going to force it to something at a higher percentage.

What we're going to do is continue to try to grow our ancillary, make as many things optional as we can, give customers as much choice as we can, and manage our ticket prices to the supply-demand dynamics of any given day or season. And then whatever that percentage is, it is.

Thanks, Ben.

Our next question is from Michael Linenberg. Please go ahead.

Yes, just a couple questions here. Ben, it looked like the cancellations -- the weather cancellations were up close to four times from a year ago. Obviously it was a tough winter for everybody. But then what I noticed, it looked like you had lower passenger reaccommodation expense. What was driving that? What -- why so much better on the reaccommodation expense, and yet you had significantly more cancellations?

We had a higher controllable completion factor. We had more cancellations, but we also just managed the whole operation a little better, and when we are faced with a decision that we can't make something work the way we had planned it to work, we're just making better decisions and have a good team that's handling it well. So it's a cost line we manage just like everything else.

Great. And then looking at all the new markets that you're adding later this year, how has the ramp up changed? The ramp up to profitability? I look at a lot of these markets, and what's interesting about them is in many cases it's just connecting the dots. These are cities that you already have service to.

Maybe not only is it just connecting the dots, but then when I think about the flow through of the aircraft, airplanes may hit some of these markets or cities and they may only be on the ground for 30 or 40 minutes before they go on to an established segment. How -- is that -- where -- how does that -- the quickness in ramping up to profitability, have you seen a noticeable impact in that as your network has become more dense, is what I'm asking.

Yes, well, basically we tend to ramp up very quickly, in part because we pick markets intelligently, a place that -- where the fares are high enough that with our lower fares we're going to generate the kind of volume we need. And since we're picking the price, we pick a price where we're going to be able to earn our target margin through that service.

In a higher fare environment, like the industry has been seeing, that's allowed us to actually reach our steady state even more quickly in recent times, because the fares are higher to start with. So lowering a higher fare is still a higher fare than you would have had otherwise.

We start selling months before the fare goes in place, and like you said, most of our connectivity, since we already fly to over 80% of the large cities in the United States as it is today, since most of our new service is connecting places we already serve, we already have customers, Free Spirit members, $9 Fare Club members [to what] in those cities, so it's a little easier to generate the traffic. So our markets spool up quite quickly, and we don't have a -- we don't expect that should change as we continue to grow.

Okay. Great. Just one last quick one, just a deferral of some of the A320 ceos to 2018, is that the last year that those airplanes are going to be built, 2018? 2019? Is that the end of the production?

I believe -- Mike, I believe it's 2018 is the last year.

Okay. Great. All right. Very good. Thank you.

Our next question is from Duane Pfennigwerth. Please go ahead.

Hey, thanks, good morning.

Good morning.

Just with respect to your EBIT margin guidance, I wonder if you could backtrack a little bit. Did you disclose what you thought adverse weather impacted your EBIT line in the first quarter?

No.

No, we didn't.

Do you care to now?

No, I don't think we would speculate, because it's difficult to arrive at a perfect number. We did provide some clarity on what at least Easter does, which should give you some idea of what to shift, at least from a unit revenue perspective and thereby translating to EBIT quarter-over-quarter.

Okay --

And we showed you the difference in number of cancellations also.

It looks like you're implying a little bit of modest expansion here, which I guess is surprising and maybe it speaks to conservatism, but given the Easter shift and what appears to be a strong fare outlook from larger legacies, can you just comment about what you're assuming in the underlying revenue environment? And if -- maybe this is a function of a lack of visibility into June as opposed to -- maybe this is a starting point.

We generally feel good about -- I mean, the second and third quarter, are good quarters for us in general, just in terms of where we fly and the type of travel we carry, and we're in a good environment right now, as the whole industry is right now. Fare discipline is strong, and capacity discipline across the industry is pretty stable.

And we, like I'm sure everyone else, is waiting to see what the new American management team is going to do with their combined network. But overall, we feel good about the crystal ball that we can see going forward. Our -- and for the second quarter, certainly.

Okay. And then just to follow up, I'm not going to ask you about Frontier, or a hypothetical competitive question five years from now. I find it hard to believe that 1% of the market and 1% of the market are going to trip all over each other. But in terms of the other 98% of the market, can you talk about the competitive environment today, maybe where it's getting better and where it may be getting a little bit worse? Thanks.

Well, overall I would say the industry is just in a better shape today. The consolidations that have happened have resulted in fewer carriers, but there also seems to be leadership at -- certainly here at Spirit and at other carriers that are interested in making money, and you hear that from other carriers as well. So we feel good generally about that environment.

We don't try to steal anybody else's traffic. When we go into a new market, we put in a lower fare point, which tends to price in people who have been priced out of that market. So the people on our airplanes are generally someone who wouldn't have been on the airplane but for our fare.

So in that sense I don't think we're naturally -- we're the kind of carrier that most of the other 98% of the industry is overly worried about, because we're not actively trying to take people out of the 98% business class cabins or their more frequent business traveler. That's not just -- that's not our market. We're in a different segment of the business, and that segment of the business doesn't really naturally compete with that other high percentage that you talked about.

Okay. I guess could you just -- maybe your planning focus -- we see competitive capacity cuts across your markets. I wonder if you could speak broad stroke about where you're seeing that, if you are. Thanks.

Basically the world right now is a world of fewer loss of flights and seats over the last couple years for the industry, and that's resulted in higher fares. And our low cost model is a really good fit in that world to be able to come in and reprice into the market some of the traffic that has been priced out.

So if you're an airline with high costs looking to think about where to profitably deploy your airplanes, in some cases that's going to be where we fly. In more cases, it's probably going to be where we're not flying, because we're picking the markets that have a lot of discretionary traffic in them.

Okay. Thanks.

Our next question is from Joe DeNardi. Please go ahead.

Hey, good morning.

Hi, Joe.

Just wondering on the growth going forward between domestic and international, obviously the focus is on domestic now. Can you just help me understand, are you seeing opportunities internationally that meet your threshold but the opportunities on the domestic side are just better, or is that not the case?

Yes, I wouldn't even really say, Joe, that it's a focus on domestic. I would say it's a focus on net income, and we forecast for each deployment of our airplanes how we can add most positively in the Company's returns, and more often than not in the current environment those are domestic opportunities, but that's different than saying we're focused on domestic as a growth point.

Wherever we can put the planes that are going to make the highest return -- or earn the highest return, is where we'll put the planes, and we certainly believe that certainly over the next few years we have both domestic and international growth opportunity, and we'll continue to exploit both on a prioritized basis of for the next deployment, what are we going to do best with. And if that's domestic, it will be domestic deployment. If it's international, it'll be international, but I would expect certainly over the next few years you're going to see growth in both domains for us.

Okay. And then on the stage length impact on RASM, when does that start to subside? It looks like the comps get a little bit better in the second half. So should we be thinking about that as a tailwind for RASM in the back half of the year?

I think the stage year over year does start to get closer in the -- as we go out two, three, four of those quarters. Second, third and fourth quarters. So I would think about it that way, yes.

Okay. Thank you.

Our next question is from Savanthi Syth. Please go ahead.

Good morning, everyone. Just on the -- I was wondering if you could elaborate a little bit on the cost puts and takes for 2014 and 2015, just on if FAR 117 -- was that just a first quarter item, or are you showing that throughout the year? And just help us think about what the ramp up costs might be this year, which we might not be seeing next year.

Sure, Savanthi. No, we don't -- FAR 117 is not just a Q1 item. It's the entire year. And our estimate of the impact of that was a percentage point on CASM for the full year, and so that being the case in every quarter. So it -- we think it estimated our unit cost ex-fuel by 1 point in Q1, and we estimate that will be the case again this quarter as well as for the full year until we lap it again beginning in 2015.

We also indicated that the depreciation and amortization expense related to heavy maintenance on the airplanes year-over-year is contributing about 1 point, as well. So -- and that would have been the case in the first quarter, as well in the second quarter, also for about the full year. So if we're saying our view on CASM ex-fuel for the full year 2014 was up 1 point to 2 points, excluding the effects of those two things, we would have said down 1 point instead of flat, right?

And so that's the way we thought about 117. And the other, bigger take, I guess, for 2014, there are clearly pressures in the latter part of this year related to the ramp up heading into 2015. No one particular item that I would call out. There is clearly some hiring related expenses, and because of the throughput we have on training, we have to bring people online sooner than the aircraft arrive.

The good news is that's partially been mitigated with some of the news we announced here, where we were able to find some additional aircraft time in the fourth quarter and increased our view on capacity guidance for the full year from 17% to 17.8%. That was good, efficient use of existing assets, and [for us] it helped defray some of the overhead related drag in building for 2015. So we were able to deploy some of the crews that we thought we weren't going to be able to deploy until later in the year.

So that's hopeful in that regard, and we're very excited about that piece heading into the latter part of the year. So there is little components throughout the cost structure. Nothing major that I would point you towards.

And then we start to hit -- in 2015 we start to lap the effect of FAR 117, and the growth really comes online. And that's why we felt very good about saying that over that two-year period, unit cost kind of in a flat range is where we think we're headed. And we have a number of things that we continually work on where we always look to improve upon that, but that's what we feel about as kind of our base case to where we're headed.

That's very helpful. Thanks, Ted.

Sure.

And a secondary question on -- if you can share some updated thoughts on the use of cash?

Sure. So I mentioned in my comments that we have been in discussions already with some secured debt financiers for four aircraft this year and 11 next year, which is a pretty dramatic change for the Company in financing the way -- financing its fleet going forward. And we'll consume some capital as we think about the -- how we would finance them the loan advance and what type of equity we would put in. And there will be some update in that in our investor update.

So that's -- as we've been talking about since I got here and even prior to that, we've been preparing ourselves for the growth that the Company is going to take, and using our cash balance as an important weapon in making sure that we attack that financing of our fleet cost-effectively and efficiently. And this is yet another rung in that ladder.

This is the first deployment of that, and we're very excited about it. We think it's going to be extremely accretive, and beneficial to both the bottom line as well as our unit costs. And so it gives you at least a view as to why we have been careful with our cash balance and what we plan to use it for. That's not the only thing we would do, but it is an example of what we've been prepping for.

All right. Helpful. Thanks, guys.

Yes.

Our next question is from David Fintzen. Please go ahead.

Good morning, everyone. Question for I guess Ben. Not to get ahead of the announcements around educating the consumer, but [if we] just take a step back, your marketing efforts historically have been very creative, but I would imagine also very inexpensive. As you're getting bigger and as you ramp into this growth, do we need to see maybe a more traditional but also more expensive kind of marketing push to get the brand out more broadly over the coming years? Has that become a cost pressure over time?

No, we don't think so at all, Dave. It's a great question actually, but no. One of the things that we have been good at over the last couple of years is being able to market our fares with a very low cost kind of approach and keep our distribution costs very low.

We believe we can apply some of that knowledge and just apply it to a different opportunity, which is educating our customers about the consumer benefits of our a la carte model. So we're not going to -- we're not a traditional advertiser in that sense. You're not going to see cost pressure along that line. And like everything we do, we're going to do this very efficiently but hopefully effectively, as well.

And, David, I'd add to that, when looking for examples of where the Company believes they can drive scale benefit, this is a perfect example of that. We do not intend on changing the way we view our cost structure from an advertising perspective. As we get bigger, it's actually going to be beneficial we believe.

Okay. That's -- I appreciate that. That's helpful. And then maybe just a quick one, with the secured -- potential secured debt financing, is four aircraft this year enough to start to materially impact the cash tax rate, presumably if you do the full four and 11 next year, you would start to have a material accelerated depreciation benefit I would imagine, right?

Yes, materiality, it would be tough for me to gauge what you mean by that, but there's -- assuming we do the transaction that I alluded to there will be a cash tax benefit in 2014, but you're right, with four aircraft at the back half of this year and 11 at least next year, next year is going to be a real -- would be when you have a real cash tax benefit.

And is that big enough to really take out the bulk of the cash taxes, or is it just too soon to know?

I don't think it would take out the bulk -- all of the cash taxes, but it is too soon for me to guide you all the way. I mean, when you see the volume we're talking about, you'll be able to arrive at the number pretty quickly, but it's not going to eliminate cash taxes.

Okay. Great. Appreciate all the color. Thanks.

Thanks.

Our next question is from Helane Becker. Please go ahead.

Thanks very much, operator. Hi, guys, thanks for the time. Just a quick question. Ben, I know you guys fly in and out of DFW, and I saw where Virgin America has announced they're moving from DFW actually to Love Field later this year. Can you talk about how you think the benefit -- or how that will benefit you as they move around?

I don't think it has any material impact on us at all. They're trying to attract a completely different customer than we are. If you read the same announcement I read about their moving to Love Field, they quoted all kinds of things about how it's better for the Dallas businessman, and it's close in to Dallas business, and things like that. And we're carrying the Dallas family that wants to get to Chicago to see a White Sox game or go to their family reunion in Oakland.

Okay. Well that's certainly very helpful. Thanks very much. Have a nice day.

Thanks, Helane.

Our next question is from David van der Keyl. Please go ahead.

Good morning.

Hey, good morning.

Ted, sounds like you're going to be financing aircraft with debt relatively soon. Can you just talk about the cost of ownership for owning versus leasing right now, and then maybe what kind of savings we can expect over the next few years?

Sure. And there will be some -- you can piece together from the information we already provided as well as the update we're going to give you afterwards as to what we view as our cost of ownership from a leasing perspective -- at least what hits the P&L -- as well as what we think will hit the P&L related to the ownership of aircraft in the form of depreciation and amortization expense and interest expense on whatever debt we might take down. So you'll be able to kind of piece that together.

But our view all along, and it remains the same, is that we would plan to take aircraft on our balance sheet or invest in airplanes only when we felt we would deliver the kind of return that was expected for us to invest in any asset. And the financing market today is very opportunistic and ripe for our type of credit. And we feel that the benefits of ownership are real from a cost of capital perspective, not just optical from a location on the income statement perspective.

And so we intend to do this and improve the Company's financials and deliver a return, which is what we've been indicating all along, or we wouldn't have done it. The leasing community is still very efficient, but we've found a place in the market where we think we can deliver real value. So that's been part of our view all along, and part of the benefits of that have contributed to our bullishness on why we feel so good about the cost structure over this two-year period.

Okay. Thanks.

Sure.

Our next question is from Kevin Crissey. Please go ahead.

Hi, thank you. Can you talk about what additions to personnel or systems or changes you're making generally to accommodate the growth? Other carriers have found that rate of growth to be challenging from an infrastructure perspective. Thank you.

Overall -- this is Ben. I'll start, and then Ted can certainly add in here. Overall we've been thinking about our growth rate for the last number of years, and we've been building the infrastructure of the Company to manage our -- to derisk that growth by building the infrastructure.

Starts with the people of the airline. We have a management team -- not just the senior team, but beyond that -- who have worked at bigger companies and who understand what it means to work at an airline with 100 or 200 airplanes, and that's important. So we've got the right mindset.

[Led] this year, we've been operating on the SAP system for our enterprise reporting system for the full year, and that was a -- that's a scalable system that can grow with us and that can certainly support companies much larger than we are today. And we have in our capital plan the next phases of that kind of IT infrastructure growth. Ted, (multiple speakers)?

To clarify on that, we -- our infrastructure is in a place today where we could -- we are in the optimization phase more than anything else. So the Company is in a good spot where we can invest in infrastructure and use that investment to deliver real return. And so there will be tweaks to our IT infrastructure to more efficiently deliver the growth. We think we can deliver it today, but this is just improvement upon that.

There's human capital that the Company has to invest in the form of crews and maintenance personnel as part of that. But we have been prepped for that for years. We knew this growth has been coming for years, and we prepped for that from a throughput perspective, meaning we have the appropriate training personnel onboard, we know how many simulators we need, what kind of sim time we need.

All of that is baked into the plan, and so I hear you on your point that there's concern about a stumble or whatever you might call it with regard to a large growth number, but we have known about this for a long time, and we feel very ramped up and ready to deliver a longer term growth profile. And when we think about that, 2015, 2016, 2017, this is a long-term play and a long-term CAGR, and we're still much in line with what our long-term growth plans were all along, 15% to 20%. Just moving within the years doesn't change our view on that at all.

Okay. Thank you very much.

Our next question is from Dan McKenzie. Please go ahead.

Hey, good morning, guys.

Hi, Dan.

Couple questions here. The first question is really just a clarification. In the past you've highlighted cost and revenue initiatives that were underway without a whole lot of clarification, and this morning we got pretty good clarification on the fleet financing opportunity. But just as investors think about all the initiatives that you have underway, should we -- is there still some initiative that could perhaps transpire that would impact 2014, or is this primarily we looking at 2015 at this point?

Well, I'll start, Dan. This is Ted. If it relates to cost, there's nothing specific that I would tell you about right now. We have a list of items that we work on all the time, and until those items reach some level of maturity that we're comfortable discussing them, then we would not speculate.

But to say we don't have anything in the works would make us a bad management team, and we're not that. So we're clearly working all the time to improve on our cost structure, and we've got some real items that we focus on. On the revenue side, I'll say a couple things and let Ben jump in too.

And we alluded to it in our comments, that an example of that is that we changed the way we sell seats. It may appear minor, to -- in the grand scheme of things, but those are the type of items that we layer in all the time. We make refinements to the way people book through our booking engine. We make refinements to the way they check in our kiosk. All of those with an intent to optimizing the revenue.

And we think that one works in that regard, and there is, I don't know, 100 or so of those on the list that we're constantly looking to improve upon. Ben?

Yes, Ted nailed that. I mean, that's exactly right. We put out guidance for full year margin, which is great to be able to do in April, and full year CASM on a year-over-year basis. And those numbers reflect what we believe we can -- what we expect to be able to deliver to you and to the investor group this year.

Understood. Thanks for that. The second question actually reverts to just your prior comment on the changes you made on selling seats, and the trend for Spirit seems to be an 87% load factor, which is a deficit to the other unbundled product out there that targets 90%. So you must be concluding that it would be margin dilutive to fill the planes slightly more.

But what's intriguing is that a key peer has reached a different conclusion. So I'm wondering if you can provide a little bit more perspective, just in general on revenue management philosophy and what the right optimal load factor really is.

I think we are much more similar to the peer you're talking about than you're putting it out, and in many ways they're not a peer. If we flew our airplanes six hours a day, then I think we would have a 90% load factor. The fact is when you weighed in -- when you weigh -- when you fly 13 hours a day, like we do, or 12.8 for the year on average, and you fly on Tuesdays, and you fly to international markets, and you fly to lots of places, being able to operate 86%, 87% on a year round basis is an astounding kind of load factor number.

And it says that you are full every time the supply-demand is in your favor. That's the math of the yield management world. And we yield manage very actively.

We try to fill our planes. Our low fares create a lot of volume and create a lot of demand, but clearly with 40% of our revenue coming from nonticket sources, empty seats are a -- have a very high opportunity cost to us, so basically when we fly in the middle of the night, our loads might not be as high as they might be during the day, but -- and so maybe that brings an average annual from 90% down to 87%, but it's still very accretive kind of flying. So on a flight by flight basis our planes are as full as we believe they can be.

Very good. Thanks, Ben. As always, good job knocking the ball out of the park here.

Thank you.

Our next question is from [Mike Gerchen]. Please go ahead.

Hi, everyone. This is my first time I'm asking a question. I wonder if you need my credit card number, or can I ask a question --

The question is free. It's the answers that cost $2.

Okay. Then maybe I'll ask two questions then, and we'll see how much you charge me. The first question relates to Kansas City. I'm curious about that as a new opportunity, because I think Southwest is I guess the largest carrier there. And I look at their cost structure, or at least their cost structure and fare structure and bags fly free and all the things they throw in. And it would seem to me that you're -- the difference between yourselves and them is a lot closer, even though you're a lot lower, but it's still a lot closer than it would be for the traditional network guys. I'm just curious about Kansas City as an opportunity.

I'll let Mark Kopczak, our route planner, respond for that.

Hi, how are you doing today? Kansas City has been [open to are]. We've seen a lot of cities out there where we're seeing overall capacity cuts that have driven fares up in many markets. And Kansas City is like many of those locations. Despite the fact that they have do the low fare service from Southwest Airlines, we saw several opportunities in [some core] markets where there was a pricing differential and a capacity --- or a passenger differential that created an opportunity for us to [come in]. So we seized the opportunity in the market that we thought made the most sense for us. For our customers.

Okay. Thank you. And I'll ask you one more. This is a little bit off the wall. I think for a while you were trying to get authorization to fly into Venezuela, and I think you're probably happy that hasn't come your way given the freeze on cash and so on. But what is your position regarding some of these Latin-American countries where the political situation is so unsettled and you could run into some major problems like the airlines are today?

Well, I know it kind of sounds like a broken record here, but we deploy our airplanes where we think we can get the highest return on that investment. And certainly flying to a country or a city that has more than the normal risks in terms of being able to repatriate the money or something like that goes into the equation of whether or not -- what that return potential is.

And so we're not in Venezuela today, and it's a big market certainly from South Florida where we're based, but we've got better opportunities for our airplanes than flying them to Venezuela right now. And we'll fly to Venezuela if and when the legal opportunity to do so creates itself, and that proves to be better than the next best opportunity we could fly an airplane. And that would certainly be weighted into what the issues are flying there.

Thanks, Ben, and the check is in the mail.

Thank you, Mike.

Our next question is from Steve O'Hara. Please go ahead.

Hi, good morning. I was just curious if you could maybe talk about why the change in terms of maybe better educating the consumer, or kind of making that push. I mean, are you seeing a detrimental impact from maybe the headlines or something like that, or -- I mean, are you better able to maybe track your return customer base, and is that underperforming or is it just kind of an evolution of the business?

No, we think it's a good evolution of the business. And in fact the business is performing great. I mean, our planes are full. We're providing good returns. We're growing. We're providing good employment to our team members. And so the business is going great.

What we see is an opportunity that when we look at customer feedback, and the customers who really like us -- and there's a lot of them, and that's why our repeat rate is actually quite high, even though we don't disclose the actual amount. When you look at the customers who like us, they like us because they can save money on us, and they know how to save money on us. They know how to use our price structure and use our optionality of a low upfront fare plus options to pay for what you want to their benefit.

And then we have other customers who buy a ticket on us but don't understand how we're different so get frustrated by some of those -- by some of the things we do that other airlines don't do. So we see an opportunity to make sure -- to help make sure that everyone who buys a ticket on Spirit understands the value of buying on Spirit, and understands the positive trade off they're making of paying a lower price to get where they're going, and the trade offs that they make -- that they're choosing to make to get that lower price.

And so we see it as an opportunity, an evolution of the model, and we think it only makes us better and stronger. We don't think it's something we have to do for risk in the enterprise or anything like that. We just think it's a good, positive, next step move as we get bigger and bigger.

Okay. And then earlier you had mentioned you're not going into markets to steal market share and so forth. And I mean, I guess -- I think that's largely true. You are obviously stealing market share [I would think], but I guess have you seen any difference -- I mean, I think you've talked about the past how airlines can determine how they react to you. Have you seen any change there recently, or do you kind of expect any change at all in the next several months?

We haven't really seen any change in the last year or so. And so we don't -- the industry -- everybody is following their business models to try to optimize their business model. And for the last year or so that's meant that we've not seen a lot of direct competitive reaction to what we do.

But again, you said -- you made the statement of course we're stealing share. I don't know that that's true. We started serving Dallas in 2011. And if you look at total traffic in and out of Dallas airport today, it's a lot larger than when we started, but it's even larger than the amount of traffic we carry.

So our single largest competitor in Dallas, if you want to call them that, American Airlines, has also grown during that same period. So I don't know it's essential -- I don't know that you'd have to say of course we're stealing share. We're putting in significantly lower fares, it's a highly elastic market at every point of the price curve, and it's more elastic at lower price points obviously than at higher price points.

But that elasticity is real. And Southwest Airlines grew for 30 years based on that elasticity. And Ryan Air has grown for the last 20 years in Europe based on that. And we're at the very beginning of that kind of cycle right now.

Okay. All right. Thank you.

Thank you. Our next question is from John Godyn. Go ahead.

Hi. Thanks for taking my follow up. Ben, when I look at the fleet plan for 2015 through 2017, you have quite a few A321s coming in. And when we think of what you've done in terms of the fleet configuration of the A320s and basically maxing out, I was just hopeful that you could talk about how accretive these aircraft are going to be. I mean, it seems like they have to be significantly accretive, and to what extent do the A321s also maybe change the mix on ancillaries? I'm not sure if you can have more big front seats. Anything you're willing to offer there would be helpful.

Sure. Well, we like the A321 obviously, and we've made a bet on that airplane in the sense of ordering both ceo and neo versions of that airplane. And in many ways I think a good way to think broadly about our fleet plan, although it's not exactly this, is we're slowly moving from an A319, A320 airline over time into a 320, 321 airline, and that larger gauge is consistent with lower costs, lower unit costs. It's also consistent with [what] we see a lot of the industry doing, is gauging up. You don't see as many 50 seaters flying now, right? This is the same kind of effect.

But the A320 is 8% to 10% more unit cost-efficient than the 319, and we see on a similar kind of ratio between 321 and the 320. So we expect it to be a lower unit cost airplane. We will certainly fly it quite dense. We have been working with Airbus on ways that we can maintain maximum density in the plane but still offer the big front seat product, and we feel -- we're very encouraged that we'll be able to offer big front seats to our A321 customers as well without sacrificing density on the airplane.

But we're excited about the plane, and if you look at our whole fleet plan, and you look at sort of the number of planes -- where we'll be in 2021 if we took delivery of everything and retire what comes off lease, we'll be 140ish airplanes with a little over 30 of them being A321s, and on a ratio of 320s to 321s we like that ratio generally.

Thanks a lot.

Thanks, John. Thanks for hanging out for another question, too.

We have no further questions at this time.

Thank you, Angela, and thank you all for joining us on the call today. This will conclude our first quarter 2014 earnings conference call.

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