Spirit Airlines Inc (SAVE) 2014 Q2 法說會逐字稿

Welcome to the second quarter 2014 earnings release conference call. My name is Hilda, and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a Q&A session. I will now turn the call over to Ms. Deanne Gable, Senior Director, Investor Relations. Ms. Gable, you may begin.

Thank you Hilda. Thank you. Welcome to Spirit Airlines second 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 John Bendoraitis, our Chief Operating Officer, and Thomas Canfield, our General Counsel.

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 made with information currently available, and/or management's belief as of today July 29th, 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 special items and non-operating special charges. Please refer to our second quarter 2014 earnings press release for further details regarding our assumptions for the reconciliation to the most directly comparable GAAP measure. With that here's Ben Baldanza.

Thank you Deanne. And thanks to everyone for joining us. Today we reported that our second quarter 2014 profit increased 45.2% year-over-year to $66.5 million, or $0.91 per diluted share. Operating income grew nearly 46.4% to $106.3 million resulting in an operating margin of 21.3%. Our team delivered these results while offering low fares, while maintaining our commitment to deliver value to our customers and our shareholders. I want to thank all of our team members that contributed to these excellent results.

Top line revenue grew 22.6% compared to the second quarter last year. Total revenue per ASM increased 4.6% year-over-year, in addition to a strong demand environment, the calendar shift of Easter occurring in April this year compared to March of last year created a nice tailwind in the second quarter. Offsetting these benefits was a 4.4% increase in our average stage length, which created a 2.3 percentage point drag point on RASM. Our ticket revenue per passenger segment increased 9.3% to $84.75 driven by the strong demand environment.

Non-ticket revenue per passenger segment increased 3.2% to $55.15. The year-over-year increase in non-ticket was primarily driven by a higher volume of passengers selecting to purchase seat assignments. Our recent software update that enable us to sell seat assignments at our kiosks, along with taking a more rigorous approach to revenue managing our seat inventory contributed to higher revenue from seat assignments. During the second quarter we experienced very high load factors across the network, with our average load factor for the quarter increasing 1.8 points to 87.5%. We continue to be pleased with the performance of both our new and mature markets.

The mystery of the Bare Fare crop circle in Kansas City has been solved, as announced in the second quarter beginning in early August customers will enjoy our low fares to and from Kansas City International Airport, with service to Chicago, Dallas/Fort Worth, Detroit, Las Vegas, and Houston. Also beginning in August we will launch service from Houston to New Orleans and Atlanta, and from Ft. Lauderdale to New Orleans. Beginning in early September we will add routes from Houston to Ft. Lauderdale and San Diego. During the second quarter we announced new seasonal routes starting in the early winter between Boston and West Palm Beach, and between Latrobe and Ft. Myers in Tampa.

Last quarter I mentioned that we had developed some creative ideas aimed at better aligning our customers' expectations with Spirit's a la carte business model, all while saving money on airline travel transparently and consistently. This campaign includes a rebranding of our website, and dedicating a Spirit 101 page with videos and tips to help educate our customers on how to save on Spirit. We will be targeting messaging via many additional touchpoints as the campaign matures. We are very encouraged at the early results of this effort, and the Bare Fare plus Frill Control messaging is resonating well with customers, as they see the benefit of only paying for what they truly value. As we continue down this path we expect ever increasing alignment to a business model that provides the lowest total fares coupled with high consumer choice and high returns for our shareholders. With that, here's Ted.

Thanks, Ben. And again thanks to all of you for joining us today. Let me express our sincere thanks and congratulations to our team members across the Spirit system. Their dedication and commitment allowed us to deliver on our promises to our customers and our shareholders. During the second quarter our team delivered excellent results and produced material improvements in controllable components of our cost structure, which contributed to the year-over-year increase of 3.5 percentage point to our adjusted operating margin. CASM ex fuel for the second quarter of 2014 came in at $0.0595, a reflection of 0.8% year-over-year.

The benefits of improved operational reliability cascaded throughout the cost structure but are most noticeable on a per ASM basis, in lower passenger reaccomodation expense, crew lodging expense, call center expense, and overtime. We also benefited from lower aircraft rent per ASM as a result of the 14 A319 lease extensions we completed last summer. These benefits were partially offset by higher depreciation and amortization expense, and higher maintenance, materials and repairs on a unit basis. Salary, wages and benefits per ASM were also higher year-over-year, with the largest driver being higher group healthcare costs. We entered the quarter with $567 million in unrestricted cash. During the second quarter we took delivery of one new A320 aircraft, bringing our total fleet as of June 30th to [57]. We took delivery of one aircraft last week under a sale-lease back financing, and have seven additional new aircrafts scheduled for delivery by year-end 2014. We have sale-lease back financing in place for three of those aircraft. As we have previously discussed, we have been negotiating secured debt financing for the remaining four 2014 deliveries, and the first 11 2015 deliveries, and have reached preliminary agreement with lenders on the material terms of this financing subject to final document negotiation.

Turning now to our 2014 guidance, based on the forward curve as of July 24th, 2014, we estimate our fuel price per gallon for the third quarter will be $3.09. We have layered on some hurricane protection hedges for approximately 50% of our third and fourth quarter fuel volume using out of the money jet fuel call options. Capacity for the full year 2014 is expected to be up 17.8% with capacity of 14.7% in the third quarter, and up 18.7% in the fourth. For the third quarter 2014 we estimate our CASM ex fuel will be up 1.7% to 2.7%. Primary drivers of this increase include costs related to the hiring and training of flight crews, as we prepare to take delivery of seven aircraft in the fourth quarter, and continued pressure from increased depreciation and amortization, and additional pilot costs related to FAR 117. In addition, a sequentially slower growth rate compared to the first and second quarter put some pressure on third quarter CASM ex fuel.

Nonetheless our strong CASM results for Q2 gave us confidence in our recent Investor Update to improve the full year 2014 estimate for CASM ex-fuel by 50 basis points, such that we now expect it to be up 0.5% to 1.5% year-over-year. We feel very good about our cost structure, and continue to believe that with our focus on improving our operational reliability and over overall focus on cost control including the benefit of cost-effective debt financing on our 2015 deliveries, we can manage CASM ex fuel to be up slightly this year, and down slightly next year. With that, I will turn it back to Ben. Thanks Ted. We had a great second quarter. Our team delivered strong top line growth and maintained their focus on cost control, achieving a pre-tax return on invested capital for the 12 months ended June 30th of 32%, and we expect to deliver a strong third quarter 2014, despite lapping an unusually strong third quarter RASM last year, driven in part by an exceptionally strong September 2013. For the third quarter, we are currently estimating that our operating margin will be between 20.5% and 22%, and for the full year 2014 our operating margin target range is 17.5% to 18.5%. Our full-year target assumes the demand environment remains similar to what we experienced in 2013, and that fuel price per gallon averages $3.11. Now back to Deanne.

Thank you, Ben and Ted. We are now ready to take questions from the analysts. We do ask that you limit yourself to one question with one follow-up. If you have additional questions, you are welcome to place yourself back in the queue, and we will allow for additional questions as time permits. Hilda, back to you.

Thank you. (Operator Instructions). The first question comes from Michael Linenberg. Please go ahead.

Hey everyone. This is actually [Bridget Tower] filling in for Mike. Just a couple of questions here. First, Ben, I appreciated the comments you gave on mature versus new markets, but I was hoping you could elaborate a little bit more on the difference between domestic versus international? We have heard from some of your competitors that they're seeing some softening yields to and from Latin America, and I was wondering if that was something you experienced as well, or if that's mainly a function of maybe softer business demand in leisure trends are holding up?

Thanks very much. Actually, our growth over the last year or so has been more focused domestically than internationally. so international as a percentage of our total has become a smaller part of the network, not because it itself is shrinking, but because the rest of the domestic system is growing. We certainly see different pressures in different parts of, and whether it's international, domestic, or even by lane within certain areas, but we have a very good process in place, and are very nimble about deploying our assets to make the highest possible return, so we move capacity as necessary in and among different routings, and in that sense we tend to be pretty agnostic between international and domestic flying. We look to deploy the airplanes where they are going to make the highest return. So we are encouraged and feel positive about our international flying and our domestic flying, and we manage the network to feel good about everything we do basically.

Okay. Got it. And then sort of a broader question. Regarding Southwest's plan to start international flying soon, can you talk about any concerns you have if at all about them potentially entering markets you serve? I realize that you two have very different business models, but just wanted to get your general thoughts around that?

I mean to us that seems pretty natural that at some point they're going to do that, and they've been talking about that for a while. We serve a market as you stated that is a little different than most of the other airlines do. In general we're living on demand that other airlines revenue management systems are rejecting, and so to some extent more seats in a market can certainly maybe destabilize for some period of time the marketplace, but overall we think our product for our customer is nicely well-suited, and that the volume of traffic that likes what we offer, which is the lowest total price, will keep us doing just fine.

Alright. Thanks for that color.

The next question comes from Hunter Keay. Please go ahead.

Hey. Thank you. Good morning.

Morning, Hunter.

Hey. So you guys are talking about CASM ex fuel being slightly down next year. And you've also talked about sustaining margins next year too. So should we imply, therefore, that you're thinking about at this point in time there's no way you can guide to this I realize it's too far ahead, but your TRASM being slightly down too, or is the goal to sort of keep TRASM flat next year, are you there thinking it about from a TRASM perspective or from a margin perspective? I guess would you be comfortable with a little bit of TRASM decline if your CASM is down too if your margins are flat, or is the goal to be better than that? Is the goal to keep TRASM flat?

Thanks, Hunter. We have no specific TRASM goal, other than what is necessary to earn the margin goals that we use. So we manage the Company toward margin, and to return on invested capital, and so there are, if we can grow more and earn our target margins, and that in and of itself might have a depressing effect on RASM for some period of time or something, we would absolutely accept that if that was going to be more accretive to our shareholders. So in general we manage the Company to RASM, I mean to net income and margin, and RASM tends to be sort of an output more than a set goal. We wouldn't for example, intentionally run a lower load factor to drive yields up. If we could make more money by filling more seats with a lower yield.

Yes. Okay. Perfect, Ben. Thank you. And sort of a two-part question. As I look at the fleet plan for the A319s, you have got I think three that are planning on being retired in 2016. Do you have the flexibility, or should I think about you maybe considering extending those operating leases, or are those gone no matter what, because they don't really fit the evolving mission of what you guys are trying to do on the fleet side? And so that would take your fleet plan from sort of 13 planes to 16 planes if you were to extend those leases all else equal. How should I think about that in the context of sort of a preliminary capacity range for 2016? Thanks.

Thanks, Hunter. Ted. One of the things we've always said is we enjoy the flexibility as the fleet plan moves through the tail part of this decade to consider those retiring aircraft, and whether or not we view them as shells that just needs to expire as the lease expires, or perhaps extend them opportunistically to either enhance the growth, or to take advantage of certain market conditions, and we've already done some of that. I alluded to that earlier that we extended some airplanes last summer. So as it relates specifically to those three airplanes, I think we would take that on a real-time basis. We may evaluate whether or not those aircraft can be specifically those aircraft that would retire in 2016 can be part of a long-term or a longer term part of the fleet. For now, as it is laid out for you, they roll-off in 2016, and should be assumed that way from a capacity standpoint, but if our view were to change specifically on those airplanes for any reason, we would of course update you.

Great. Thanks a lot.

Yes.

The next question comes from Savi Syth. Please go ahead.

Hey. Good morning. Just on the obviously a big part of your ancillary revenue, and I know that you have talked in the past about the opportunity to dynamically price specs, based on high season or stimulate the demand in the low season, and I know you made some technology investments. I was just wondering how close are you to being able to implement that, and maybe what the challenges might be?

We are still not to a point where we can dynamically price bags the way tickets are priced, but we have done a lot in this area, and we have implemented some higher bag charges for peak summer period times, and based on that have rolled some of that out to other holiday times and things. We have changed over the last year as you know some parameters on bag pricing, based on where you buy, when you buy and so on, so all of those things are directionally in the line of a more dynamic way to price bags, or a better way to say that might be to better tie bag demand to bag pricing for the individual route or time periods we are talking about. So bags aren't where tickets are yet, and I don't know that they ever get exactly there, but we have moved a long way in that direction, and we have seen good positive benefit from that in our bag revenue line.

And then when did you implement the higher bag fees during peak season?

It was in the second quarter.

Yes. The summer, the increase to summer related bags started at the tail end of June.

That is right.

Okay.

It was announced earlier but.

Yes.

Helpful. And then just very quickly I mean, if you can give any color on I think last year third quarter was very strong, and I think especially September, so are you thinking that you have much tougher comparisons here into this third quarter?

Yes. September is going to be a touch comp to lap. September 2013 it was a very, very strong September. This September we expect the third quarter to be good for us, but we have to recognize the fact that we have seven airplanes coming in the fourth quarter, and some of that capacity is coming at what would be a traditionally weaker time of the annual seasonality. We feel great about that capacity in terms of margin, in terms of long-term fit for the airline. We are not concerned about that growth in that sense, but it affects a specific one or two months period, it can certainly make a difference. So yes, we expect to do fine this third quarter, but last third quarter 2013 is a tough comp because September was so strong last year.

Alright. Thanks. Very helpful color. Thank you.

The next question comes from Joe DeNardi. Please go ahead.

Hey. Good morning.

Hey Joe.

Ted, I'm wondering if you could provide some color or maybe quantify as you guys start to finance some of these deliveries, maybe what the net impact to operating margins is expected to be, or I guess how that, what the breakdown between kind of rent and D&A, or below the line are going to be, if that's included in your outlook for CASM next year?

Sure. So our view is there are optical geography benefits to owning airplanes versus leasing them that we've talked about before. That would be the sum of depreciation and amortization interest expense, even if you assume them to be neutral with rent, just the physical move of interest of below the operating line makes that a CASM tailwind, but more important to Spirit, is can we drive cost of capital improvement by financing aircraft in the debt markets, rather than the at leased markets, and we have answered that question yes, because we have entered into some of these arrangements to do just that. So we believe that the net effect of the sum of depreciation of the known assets plus the interest expense is going to provide EPS improvement and operating income improvement in both cases. And we have said in the neighborhood on the kind of pre-tax line, somewhere in the neighborhoods of $800,000 or so per shell, so once you figure in interest expense, and all of that other sort of thing, that's kind of the improvement we expect to see going forward as these airplanes roll in.

Okay. Do you have a sense for on the CASM line, I guess you could back into it, what the benefit to CASM next year is going to be?

We haven't fully kind of given you our detailed view on CASM for 2015 yet, but as we're thinking about our objective to driving CASM down next year, that's factored in to part of our view, to keep offsetting some of the pressures we see, as we have talked about, this is one of the better opportunities we have to get cost improvement.

Okay. And then on the salaries and wages line you mentioned, it's up on a unit basis with healthcare costs a driver. I mean how big a piece of the increase is healthcare? I mean do you think at some point you can start to get some better leverage there?

We hope so. Healthcare costs I think this is not an airline specific problem. It has been a problem across-the-board for a lot of folks, and I would say in looking at that line it's the biggest driver of the year-over-year increase, but our hope is that begins to mitigate some once we all digest what's happening in our society from a healthcare related expense perspective, and quite frankly, although we talk about this a lot, we do expect that scale is another way for us to get some benefit there also, so as the airline grows, that will hopefully mitigate some of the pressures that everyone sees in healthcare.

Okay. Thanks.

Yes.

The next question comes from John Godyn. Please go ahead.

Hey. Thank you for taking my question. Ben, we've heard you in the past talk about 500-plus markets where you could hit your margin target. If we just sort of think about that number, I mean it doesn't seem like a stretch to think that there might be 100, 200 markets that are much, much higher than your margin target today, and it would take years even to open up that many markets. Why wouldn't we see the Company continue to exceed margin targets for years to come if there's just so much low-hanging fruit out there?

Thanks, John. We obviously do feel very bullish about our growth, and we are disciplined about our growth. We try to quantify where the best opportunities will be. I think that we recognize that the current environment that the industry is operating right now in is terrific. Right? There is lots of capacity discipline. There is a lot of fare stability, and in that kind of environment the ability for us to grow and maybe outperform what we think of as a long-term target margin, that is not an unrealistic sort of thing, but we can control what we can control, and what that is, is deploying our planes in the right markets, maintaining our own cost control, driving the airline to what we believe are high target returns, and whether or not the industry around us maintains the kind of capacity discipline and price discipline, that allows us to achieve maybe a little higher than average margins, well, we can't quite exactly control that. So that's why we can sort of see the next quarter, or the next half year a little more clearly than we can see years out. We feel very good about this airline's ability to produce what we think of as high margins in the 15% to 17% range, long term from our growth. Operating above that takes something beyond just something ourselves can do.

Got it. When we think about the long-term target for ancillaries, if I remember correctly the last thing we heard is that it could go above $60 per passenger. I'm just curious, Ben, if there's anything you can tell us to help us understand kind of the cadence of that over the next few years. Is there anything on the horizon worth mentioning that might get us there a little bit faster?

Well, John, another good question. we've talked about a couple of things as it relates to ancillary. We have said $60 is the next target because we're in the mid-50s. When we were in the mid-$40s, $50 was the next target, so to some extent that's where the $60 number came from. We've also talked about ancillary revenues that at some point may asymptotically approaching 50% of total revenues. Both of those things are sort of aspirations for what we think of as an important part of the revenue structure of the airline. But as we have said multiple times, we're managing the Company to total revenue, so what our ancillary revenues do give us more flexibility what we can do with our base fares, but the total price that the customer paid of the base fare plus the ancillaries they actually buy, is what drives our revenue performance, and that's what we sort of manage the airline to.

So all that said, we want to increase ancillary revenues, we're looking for ways to increase ancillary revenues. Some of that is a little smarter pricing like we talked about a little earlier in the bags and such. Some of it is adding new products and services for customers to buy. Some of it might be more pass throughs when we can create that somewhat. So we are looking at lots of ways and have a good creative team pushing that, we continue to see good results from that, but naturally as you would expect, we are on just a flatter part of the curve. We have gone over the last seven years from $5 to $55, so the next moves are going to come in $0.25 to $0.50 kind of increments realistically as we move forward.

Great. And then just last question. We are in a phase here where you're upgauging for the next few years into larger aircraft types. Just given the market opportunity out there, kind of what we talked about how many new markets there are to open, it does seem that just based on the cost profile of those new aircraft types, those should be margin mix positive as we think of the next few years. Isn't that a tailwind?

Well, I mean it's a bit of a tailwind. In general we are gauging up. Today we're a 319, 320 airline essentially, and over time we're going a 320, 321 airplane, and in all cases trying to put even more seats on all of the airplanes. So in that sense we are gauging up and that certainly has positive CASM benefit to the airline. On the RASM side, it's not necessarily RASM accretive to add more seats. we have a much smaller difference between our lowest and highest fares than most airlines do, so the concept of adding marginal seats isn't as big a deal for us, as it might be for a more traditional airline, but the reality is as we add more seats, we're adding more low fares plus ancillary, and we can make money on that. That's good, but total unit revenue isn't necessarily going to be higher as we gauge up, but we think margins should do very well as we gauge up.

Great. Thanks a lot.

The next question comes from Helane Becker. Please go ahead.

Hey, guys. It's actually Conor in for Helane. To just piggyback off of a previous question, with higher bag fees in the seasonal peak and the acceptance of the seat assignments, should we actually expect the non-ticket to actually grow sequentially in 3Q?

We haven't put out guidance on that, but in general we're encouraged about sort of our initiatives in ancillary, and we have continued to see good growth in that.

And, again, I would reiterate what Ben said before, that we are a total RASM, total revenue management group.

Okay.

As we think about our margin going forward we think about that mix that way, too, so it's important, but we want our customers to pay the lowest total price.

Okay. And just a follow-up. You talked a little bit about the investments that you will need to make to accommodate the growth in 2015. Can you just talk about how many pilots you may need to acquire, or maybe further investments that you may need to have to kind of accommodate the 29% capacity growth that you're expecting? Any color here would be great. Thanks.

John Bendo, our COO is on the call, so John I would ask you to.

Hey Conor. This is John Bendoraitis. So the way to think about that is today we have about 960 pilots at Spirit, and for every aircraft shell that we add, you can think of it kind of rough back of the envelope math, about 15 pilots per aircraft shell.

Any and the other thing I would add, this is Ted, that the good thing that we have always said about our Company, is that the growth that we add doesn't require massive changes to the infrastructure. Doesn't require massive changes to the way we do business. And that continues at 10% growth, 20% growth, and 30% growth. The type of infrastructure that we need to add are the routine things that Bendo was just mentioning, that was add pilots, we have got to add flight attendants, we have got to have mechanics to work on the airplanes, but we don't have to change our technology necessarily, we don't have to change our distribution network, we don't have to change we don't have to add massive facilities, and so there are lag related costs as we grow because we have to bring people in maybe a little sooner than they can actually physically be deployed, but still very unit cost efficient, scale driven, growth rather than the opposite.

Great. Thank you.

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

Hey. Thanks. Good morning.

Hey Duane.

I just wanted to ask a little bit about the growth. I mean if we just go back since the time we followed you in the IPO, you've had a very constrained conservative growth rate, seven to eight aircraft per year, one to two aircraft per quarter, and obviously this model is working so well. As you described capacity discipline in the industry which you have been a part of, fare stability, and my comment competitors largely ignoring you today, so why does it make sense to change what you have historically done that has worked so well? Why does it make since to push the pedal down on growth when the existing plan works so well?

I can see why you night think of it that way, Duane, but I guess we don't really see it that way. We have said consistently for the last couple of years that the Company plans to grow between 15% to 20% per year between from 2012 we were saying that through the end of the decade, and that's exactly what we're doing. The reality is that we have an airplane order with Airbus that has certain delivery times, and we've worked with Airbus multiple times to try to refine that, to ensure that it has the right mix of 321 and 320s, and the right timing of those deliveries, but that said, if you look at any one quarter or any one 12 month period, there is going to be being some lumpiness in that 15% to 20% growth rate, but that said, overall the growth rate of sort of in that 20% range is holding from 2012 through 2021.

So we don't see this as being particularly problematic for the airline. Yes, in 2015 a higher percentage of our routes will be what we classify as new flying, which means flying that started in that year, and that will have some effect on all of our metrics, but we only add things if we believe they're going to make money and earn our target return or better, and we believe that's true with this growth as well. So we don't see this as changing, or putting the pedal to the metal in any meaningful way at all. We see it as executing against what we have been saying consistently for the last three to four years since the IPO, and just the timing of aircraft deliveries creates what looks like a little bubble that if you look at it over a couple year period is no bubble at all.

Okay. Thanks for that response, Ben. And then, Ted, could you just help us, and I apologize if you already disclosed this, think about and economic or gross CapEx number for 2015? Is $35 million to $40 million a shell the right way to think abut it, to get us to like the $550 million to $600 in CapEx?

In just aircraft related CapEx?

Yes.

Yes. I think somewhere in that kind of $40 million to $45 million per shell sort of range.

Okay. Thank you.

Yes.

Thanks, Duane.

The next question comes from Stephen Trent. Please go ahead.

Hi. Good morning everybody, and thanks for taking my question.

Thanks, Steve.

Hi. Just a quick question for me. Kind of a follow-up to some extent to Mike Linenberg's team's question. Looking at the Latin America side, I know you guys have been very helpful and very clear about the broad strategy, and you have seen more opportunities on the US side. I recall if I am not mistaken, some time ago you had some fifth freedom traffic rights through Bogota, which I don't think you've done much with. You also have Mexican airport authorities at least also pushing a potential pilot program to do a fifth freedom traffic rights through Toluca Airport. And I'm just wondering what your thoughts are on those opportunities, if you have problems with the infrastructure, or if guys like Viva Columbia are maybe being a little more aggressive than you previously anticipated? Just if you could comment on that, that would be great.

Sure. Well, one of the great things about Spirit is that we've got a lot of growth opportunity and that includes a fairly robust domestic market, where fares are still generally higher, and lots of good places for us to fly, and international markets that are performing well today, and more international opportunity. That includes more flying internationally from cities in the US that we currently fly to, and it also could include some fifth freedom kind of flying, and we know what's available to us, and so our route planning process, and our network design process contemplates what the aircraft routing issues would be, what the sort of marketing issues, both positive and negative could be of selling local traffic from Columbia to Peru for example, or something like that, and we have to think about what the total return of that opportunity would be against other opportunities for that same capacity deployment, or that deployment elsewhere.

So we believe that if you look at us now, and you look at us a few years from now we think we'll be flying more internationally a few years from now, we will also be flying more domestically than we are flying now, and whether or not the freedom authorities are a parts of that, is really going to be a function of whether we can prove to ourself that is a better return opportunity than just doing non-stop US to foreign point flying.

Okay. Very helpful. I will let somebody else ask a question. Thanks for the color.

Thank you, Stephen.

The next question comes from David Fintzen. Please go ahead.

Hey. Good morning everyone. A follow-up from an earlier question. You had mentioned to your ability to be nimble in reacting to weakness. Can you help us a bit with the process there? Do you react when you see the weakness show up in the RASM, or are you actively looking at capacity for it and reacting before it shows up in RASM? Just a little help there on how you manage that?

Well to be clarify that we think we are nimble in weakness or strength, but what we do is when we decide we're going to fly something, we set very firm targets on returns for that, and we get information very quickly. We see how that books, we see the kind of fares that books at. We estimate we can measure costs pretty effective, so we can estimate what decline, what an individual route is going to perform, long before the plane actually takes off, and we have lots of levers to pull to react.

We can change price, we can change capacity, we gauge, we can change capacity with frequency. We can promote, we can raise fares, we can do lots of things in the cycle up to the months before up to leading to a flight. So the reality is by the time a flight flies, it flies because we believe that it's going to be successful in that flight, and so we tend to react very early on in the process. We don't wait until something happens, and then look with hindsight and say oh, that worked or that didn't work. Our business model wouldn't really work if we did that way. We've very dynamic and reactive, I would say revenue planning process which includes the network planning, and the price of the revenue management function, to sort of on a real-time basis watch everything we're doing, and with lots of levers to pull we manage the business on a very grassroots active level basis.

Okay. That's very helpful. Appreciate it. And then maybe just a quick one for Ted on the cost side. Now that you're kind of six months through the payroll 117, is that cost that just becomes permanent cost in the cost structure, or was there a little bit more cost up front that kind of winds down a little bit going forward, once we overlap the impact?

There was some lag, Dave, going into the tail end of 2013 building into it, but then it just becomes a permanent part of the structure, to support the new regulations going forward. Now again, with scale we hope that gets mitigated because you're basically reserving the airline different than you used to. So there's hope that we can management that effect down over time but it's not material. The base part of the cost of that regulation is kind of just like a permanent PC or cost structure.

Okay. Alright. That helps. Appreciate it. Thank you.

Thank you.

Thanks.

The next question comes from Dan McKenzie. Please go ahead.

Oh, hey good morning guys. Ben, one of the things that jumps out at me when I look at Spirit's schedule data, is that roughly 30% of the departures occur in peak time channels, and so call it 6 AM to 8.30 AM, and 4.30 PM to 7.30 PM, and I know you have shared in the past that it's not intentional. We all know you don't go after the business traveler, but the potential for last minute bookings does have the potential to boost your revenues, just given the percent of flights during these time channels. So I guess I'm am wondering, first off what kind of perspective you can share on this segment of flying, and perhaps last minute bookings this year versus a year ago, or if not that, what kind of pricing actions at least you're seeing from legacy airlines during these time channels, versus say the off-peak time channels?

Well, it's an insightful comment you make. The reality is, is it would be very hard to run a high utilization airline if we said that we are just not going to fly in those channels, so we don't fly in those channels necessarily for the same reason that other airlines fly in those channels, to try to attract what we think might be a higher paying demographic that flies at those times. We fly in those channels because the plane is at the airport, and if it doesn't take off it doesn't make any money. So we have to fly in peak business time channels, in order to fly 13 hours a day or 12.8 hours a day, just like we have to fly at 1.00 AM as well to make that happen. So if even though the flight might appear to look like a time for business travel because it leaves a big city at 7 AM, and arrives in another big city at 9 AM, that doesn't mean that flight changes the orientation of the airline to say, for that flight we're going to try to attract business travelers.

There's nothing about what the airline does in terms of its physical configuration of the airplane, the way we distribute the product, the way the type of airport conveniences we offer or don't, our service onboard and our level of frequency. None of those things are naturally attracting to the business traveler. We don't even have a sales force that knows where these people are, or to talk to them. So the reality is just because we departs at 7AM or depart at 6 PM, what is on our plane is still discretionary traffic that bought our tickets because we were the lowest total price.

I understand. I guess my question was a little bit different though. I was wondering if you can comment perhaps on any pricing actions that you might be seeing during this segment from legacy competitors, or perhaps last minute bookings. Is there any kind of as it pertains to the revenue system. I guess I'm just trying to get some insights how that segment has the to boost your RASM here?

As you would expect we generate higher TRASM in daylight than on the back side of the clock, and that's just generally true I think for everyone in the industry. But overall I mean we're encouraged by the current competitive environment with things, but that said as we have said all along, we deploy capacity equal to what we think we create through stimulation with our fares. So if we believe we're going to stimulate a couple hundred people, we will add one trip in a market. If think we are going to stimulate 400 people, because of the number who start flying and what our fares can be, then we will and two trips in a market.

It's really that simple. So we're not actively out trying to create, we're not actually out trying to steal anybody else's traffic, and what we're trying to do is just carry what we carry. How others react to that is really more a question you have to ask them. Over the last year or so, most of those reactions have been generally benign, because like us, we think most other airlines are searching for economic return not necessarily emotion based scheduling.

Okay. Understood. Appreciate that. I guess second question here, what kind of IT investments are you guys making today to implement longer-term ancillary revenue initiatives? I know you've circled some big long-term revenue initiatives and just wondering where you are, what inning you are at, with respect to some of these longer-term goals?

Sure. We do quite a bit of activity mostly in-house that our team works onto support our very creative marketing department in thinking about how we deploy our ancillary strategy. And an example of that we eluded to in the script about how we can now sell seat assignments at our kiosks. That type of work is happening behind the scenes with routine, and to Ben's point the changes that we see in our ancillary revenue on a per passenger basis will come now in the $0.05, $0.10, $0.15, $0.20 per passenger range, rather than the $5 or $10 per passenger, and the reasons that those things would happen are all of the little things that our guys are working on to refine both the way they price, and when they price the different products.

Okay. Thanks for the time, guys.

Thanks.

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Okay.

Alright. Well, thank you everyone for joining us today.

Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.

Thank you everyone.