Spirit Airlines Inc (SAVE) 2014 Q3 法說會逐字稿

Welcome to the third-quarter 2014 earnings release conference call. My name is Vivian and I will be your operator for today's call.

(Operator Instructions)

I will now turn the call over to Deanne Gabel. Please go ahead.

Thank you, Vivian.

Welcome to Spirit Airline's third-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 for the Q&A session today are Thomas Canfield, our General Counsel, and John Bendoraitis, our Chief Operating Officer, and other members of our senior leadership team.

Today's discussion contains forward-looking statements that 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, October 28, 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 our report 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 third-quarter 2014 earnings press release for further details regarding our assumptions for the reconciliation to the most directly comparable GAAP measure.

And with that, here is Ben.

Thanks, Deanne, and thanks to everyone for joining us.

Today, we reported record third-quarter results, and did so while maintaining our commitment to low fares. Other airlines say they have low fares, but at Spirit, we deliver. Our average ticket revenue per passenger flight segment for the third quarter 2014 was just $84.50, and our total revenue per flight segment was $138.54. The customers we seek to attract overwhelmingly ranked total price as the most important variable when choosing an airline. Our low fares offer on average up to 40% lower than other airlines.

Third-quarter net income increased 27.6% year over year to $73.9 million, or $1.01 per diluted share. Operating income grew 19.2% to $110.6 million, resulting in an operating margin of 21.3%, and our pre-tax return on invested capital for the 12 months ended September 30 was 31.6%. A stellar quarter any way you slice it, and I want to say all our team members who contributed to this strong performance.

Top-line revenue grew 13.6% compared to the third quarter last year on a capacity increase of 14.7%, resulting in a total revenue per ASM decrease of 0.8% year over year, in part due to an increase in average stage length year over year and a slight load factor decline. The decline in load factor was driven in part to lapping a very strong third-quarter load factor last year of 89%, and in part due to increased flying on Tuesdays and Wednesday this year, which we felt comfortable would be margin accretive given the strong demand environment.

We've also increased flying on Tuesdays and Wednesdays for the month of October and estimate our load factor for October 2014 will be down about 1.5 points year over year, a trade off we are comfortable with given the expected margin benefit of such flying. Our ticket revenue per passenger segment for the third quarter 2014 increased 2% to $84.50, driven by demand in pricing strength in the peak summer travel period.

Non-ticket revenue per passenger segment increased 2.9% to $54.04. The year-over-year increase in non-ticket was primarily driven by a higher volume of passengers selecting to purchase seat assignments. Earlier this year, we put through a software update that enables us to sell seat assignments at our kiosks. In addition, we have been taking a more rigorous approach to revenue, managing our seat inventory.

Our team did a great job delivering improved operational performance and a high completion factor for the quarter. At the end of September, our operations were impacted by the fire at the Chicago air traffic control facility, but our team did such an excellent job working through the event that we were able to limit the impact to 43 flight cancellations. Systemwide, we have completion rate of 99.3% for the third quarter and the benefits of running a good airline are evident throughout our cost structure.

It is big, it is yellow, it flies, and yes, it is our new livery. Some have called it a highlighter in the sky, some others have described it as disorienting, but everyone has to admit that it is different. And that is the point of new livery, to show that we are not like the others. If you have not seen it yet, you can find pictures online at our website. Our customers are finding it fun and friendly, and if you haven't already, we hope you will take the time to check it out.

We have been busy making lots of new route announcements. In August, we launched service from Kansas City to Chicago, Dallas-Fort Worth, Detroit, Las Vegas, and Houston. Also, in August, we launched Houston to New Orleans and Atlanta and Fort Lauderdale to New Orleans, and in September, we added Houston to Fort Lauderdale and San Diego.

During the third quarter, we announced that beginning in 2015, we will rock Cleveland with our low fares to Orlando, Tampa, Fort Myers, Fort Lauderdale, Dallas-Fort Worth, Las Vegas, Los Angeles, and Myrtle Beach. We've been talking with Cleveland Airport representing us for many years, and I am pleased we now have the opportunity to liberate Cleveland from high fares with Bare Fares plus Frill Control.

With that, here is 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 for the excellent financial and operational results produced.

Our CASM ex-fuel for the third quarter 2014 came in at $0.0592, and increase of 1% year over year. This was better than our initial guidance for the quarter, in part due to the benefits of our improved operational reliability.

Based on second-quarter trends we baked in some operational improvement in our guidance, but the team delivered even better than we estimated. In addition, depreciation and amortization was slightly better due to changes in individual aircraft utilization affecting the amortization of some heavy maintenance events.

On a year-over-year basis, per ASM increases were driven primarily by higher salaries, wages, and benefits, and landing fees and other rents. The per ASM increase in salaries, wages, and benefits was primarily due to an increase in group health care costs, the additional pilots to effectively implement the new crude duty and rest rules under FAR 117, and hiring and training costs to fund our fourth quarter growth.

These increases were almost entirely offset by lower passenger reaccommodation expense as a result of improved operational reliability. We ended the quarter with $588 million in unrestricted cash.

During the third quarter, we took delivery of one new A320 aircraft, bringing our total fleet as of September 30 to 58. We took delivery of our first debt-financed aircraft earlier this month and have six additional new aircraft scheduled for delivery by year-end 2014, for which we have sale lease back financing in place for three and secured debt financing for the remainder. We plan to take delivery of 15 aircraft in 2015 and have secured debt commitments in place for the first 11 deliveries and a direct lease arrangement for our first A320neo scheduled for delivery in the fourth quarter of 2015.

Turning now to 2014 guidance, based on the forward curve as of October 22, 2014, we estimate our fuel price per gallon for the fourth quarter will be $2.71. We have approximately 50% of our fourth quarter 2014 and 10% of our first quarter 2015 fuel volume hedged using out of the money jet fuel call options, which allow us participate 100% in the movement down in fuel price. Capacity for the fourth quarter is expected to be up 19% year over year.

For the fourth quarter 2014, we estimate our CASM ex-fuel will be flat to up 1%. In the fourth quarter, we expect CASM pressure from higher landing fees and other rents driven by increased rates and higher flight volume at higher cost airports, and from depreciation and amortization driven by the amortization of a higher number of heavy maintenance events. As we take delivery of debt financed aircraft, we will see a benefit in aircraft rent per ASM, and anticipate continued benefit from the improved operational reliability.

We estimate that buy versus lease is a pre-tax benefit of $800,000 annually per aircraft, which includes estimated interest expense. However, based on our current balance of pre-delivery deposits, we estimate we will be able to capitalize the first $12 million of interest expense for the next several years. Thus, for the fourth quarter of 2014, we estimate our interest expense, net of capitalized interest, will be $0.

I know many of you are hoping to hear some guidance pertaining to 2015. In addition to leveraging our growth, we remain focused on improving efficiencies throughout the business. We are still finalizing our 2015 plan, but we feel comfortable giving a preliminary target for the first quarter of 2015 CASM ex-fuel of down about 4% on a year-over-year capacity increase of 26%.

Our continued focus on improving our operational reliability and overall good cost control, including the benefit of cost effective debt financing, will benefit us in the first quarter and throughout all of 2015. And together with our growth, will provide us with a notable CASM tailwind that should provide us with a good opportunity on the margin side.

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

Thanks, Ted.

Overall, it was a very strong third quarter and we are well positioned to finish the year with record earnings. The demand environment continues to remain strong and together with a lower fuel outlook, I would say we feel pretty, pretty good.

We are currently estimating that operating margin for the fourth quarter 2014 will be 18.5% and 19.5%, assuming a $2.71 per gallon fuel price. As Ted mentioned, we are still finalizing our 2015 plan.

At a high level, our strategy remains based on the same four principles we used in 2014: profitably grow our business, have all customers understand our business model, improve operational performance, and improve our cost structure. In 2015, we plan to deliver on all four of these objectives again.

We plan the grow our capacity about 30%. Our continued focus on operational success, along with our growth, gives us great leverage on the cost side. While the growth may create a near-term drag on RASM as markets spool to maturity, lower cost plus greater customer engagement should allow us to fully meet or beat our aggressive margin targets in every quarter next year, assuming the demand environment remains strong and fuel remains near current levels.

In closing, our preliminary estimate for the first quarter 2015 operating margin is about 20%, which implies an increase of more than 6 percentage points year over year. This target assumes fuel at $2.60 per gallon and CASM ex year over year about 4% down, as Ted mentioned.

We will share our full 2015 targets with you when we discuss our full 2014 results in February of 2015. Our Bare Fare plus Frill Control business model continues to perform very well, and we are excited about the new markets we have planned for next year and are committed to successfully execute on our growth plans.

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 question queue and we will allow for additional questions as time permits.

Vivian?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Savi Syth.

Hey, good morning. I was just curious, maybe with the 20% operating margin in 1Q that this might be answering my question, but how has your thinking on capacity and pricing changed with the decline in fuel prices?

Well, Savi, this is Ben. In general, the right price for us is the price that fills the airplane. Obviously, with a high percentage of our revenue coming from non-ticket revenue, having full planes is important for us to drive the best total revenue we can.

So, it's really going to be a demand-based pricing environment, as it has always been. Lower fuel prices create a little bit of tailwind in the margin right now, which is good for us and probably good for the industry. But as long as demand stays strong, as we see it right now, we believe that will -- we will take good advantage of that in the pricing environment, as well.

Got it. Are you seeing your competitors change their behavior as a result?

As a result of?

Low fuel prices? Has there been any change in what you are seeing in the industry?

We haven't noticed anything that we can tie specifically to changes in fuel price, no.

Got it. And then just one last question if I may ask, with the new markets opening, the new routes that you are adding next year, just how do you expect that to happen across the year? Is there one quarter that you have more new routes opening than any of the others?

Well, it is really tied to delivery of airplanes. As you know, we are taking six more airplanes this year and then we're taking 15 next year, but they don't evenly space throughout the year. It is really a function of as the airplanes come in.

We have got some growth in each quarter next year, but it is not evenly spread throughout the year. We will be making new route announcements as they make sense. We've already announced our Cleveland starts, for example, which don't start until January, and we will be making some other announcements shortly as we get into the sales cycle for those.

Understood. All right, great. Thanks, Ben.

Thank you, Savi.

Hunter Keay.

Hey, everybody, good morning. So, if you are CASM ex-fuel is going to be down 4% on 26% capacity growth in Q1, why should I not think that it's going to be down at least 4% on 30% capacity growth next year? Is there some timing issue where you have a cost holiday in 1Q of 2015, or is there any noise in that quarter?

No. I wouldn't describe any particular noise, Hunter, to the first quarter. And so, as I said, we will be more clear with full year 2015 at the next call, but at least the first quarter does give you some indication about how we are thinking about the year.

Well, that is really big news then. Okay, good. And then, as it pertains to, Ben, something you said. You said you are going to be, you're going to hope to beat your aggressive margin targets next year.

Let's talk about a whole bunch of moving parts. You've got this long-term margin range of 15% to 17%, which appears to be further and further in the rearview mirror as we move on here. Presumably, when you talk about your aggressive margin targets next year, you are talking about something above and beyond that long-term 15% to 17%.

And if we've got CASM ex-fuel down into the low- to mid-single-digit range, it is very hard for me to not model a pretty nice margin accretion next year. So, I guess, the question is what do you mean when you say your aggressive margin targets next year as it relates to that 15% to 17% prior long-term guide that you guys have discussed before?

Well, thanks, Hunter. As you know, we are margin-driven airline. And we try to drive high margin at the airline and we are in an environment today where the capacity, pricing, and fuel environment all allow a greater than what we might think is long-term sustainable margin for the Company. And we will certainly take advantage of that as long as we can.

We put that 15% to 17% long-term margin guidance out there, but that is just math. That is a three-year historical average. If we dropped off the oldest of those three years and added in the most recent of the last three years, that 15% to 17% on its own would move to 16% to 18%, for example.

We'll always look at the last year as history, but we are going to manage the current year and forward bookings to drive the highest margin possible. When we talk about meeting aggressive margin targets, we talk about the way we have been performing recently, not necessarily a three-year historical look back.

Great. Thanks a lot.

Thanks.

John Godyn.

Hey, thank you for taking my question. Ben, really appreciate the first-quarter margin guidance. When I think about the business and the seasonality in the business, without debating whether first or fourth quarter is traditionally lower, I mean, the first quarter tends to be lower on average than the second and the third quarter.

And to set the market 20%, I mean, it feels like we could see some quarters next year that are considerably higher than 20% operating margin just based on normal seasonality. Is there any reason why seasonality is not the right framework for next year?

We try to drive good earnings in every quarter of the year. As I've stated on these call a couple of times, one reasonable way to think about a quarter is for the roughly 90 days in every quarter, how many of those days are strong demand days versus weaker demand days. And the reason the second quarter and third quarter have been stronger for us in the last few years is because there are more strong days in those quarters than weak days.

The strong days in every quarter of the year have been very good for us over the last year and we expect will be good for us next year. The weak days are where the change happens, and so the question will be what the capacity and pricing and fuel environment will be in those weaker demand days through next year.

So, overall, I think the seasonality approach is a good way to think of it. There are more good days, or more demand to the airline favorable days, in the second and third quarter. So if we are able to drive 20% in the first quarter, that suggests fairly good things for the second and third quarter, assuming consistency in the pricing, competitive, and fuel environments.

Got it. Very helpful. I can't help but detect a lot of excitement in your voice right now and the guidance certainly reinforces that.

I just wonder, I've certainly heard a lot of questions from investors right now about this reaccelerating capacity growth and any operating issues that might be occurring. We had a little bit of what was perceived as a guidance split. So, I understand there were unique circumstances there.

Could you just speak to that in general? Are you seeing now as we are very close to reaccelerating capacity growth, are you seeing anything operationally that is surprising? Anything that should give investors pause? Or is it really just firing on all cylinders?

We think we are well prepared for the growth that is coming up. I mean, we have known the airplanes that are coming for a while now. And so, we have backed up from those delivery dates and have planned our training and our route development and our sales efforts and things like that all toward that.

John Bendoraitis, our COO, is here with us. I will ask him to just give a couple comments on how he feels about the Company's preparedness for six airplanes coming in the next two months and 15 next year.

Yes, thanks, Ben, and good morning. Yes, the team has done a great job. We certainly are very well prepared well in advance of the aircraft arriving. As you might imagine, we have made a lot of investments, be that in software or resource, adding people to the team, and being ready for this growth.

The airline, as you might expect, is really a lesson in how to work together as a team and we've got a great one here. And looking forward, we are pretty excited and we are ready.

John, this is Ted. If I could just add one thing for fun. You mentioned in there a little bit of a guidance flip. And we are always pretty protective about our ability to make sure we are keeping you guys informed.

And we felt like we still hit the mark this quarter. Admittedly, there were unusual items on the tax side that kind of reversed things around, but we always try to do our best to make sure that we are disclosing to you guys exactly what we are seeing when we can and when it is appropriate.

And as we've said, and as Bendo referenced, we have invested a lot of time, but also money, getting ready to deliver the airplanes that we see happening in the fourth quarter and the first quarter and beyond. And so, for those reasons and based on the expertise we have in-house, we all felt reasonable comfortable that we're going to be able to deliver these airplanes and we are in the middle of it right now. So they are starting to come and we feel very good about what we are seeing.

Thanks a lot.

Duane Pfennigwerth.

Hey, guys. Good morning. Can you, Ted, just walk us through how to think about the capitalized interest? How much, as you bring on this debt, how much should we pulling through the P&L into 2015 and how long the capitalized interest flows?

Yes. We anticipate, as I said in the comments, we anticipate about, and this is intentionally an about number, $12 million a year for the next few years, Duane. Based on our PDP balance, basically.

As we are heading into a period where we are taking, going to be delivering quite a few airplanes, our pre-delivery deposit balance has increased which has allowed that number to get to that point. But when the delivery stream starts to round, then it goes the other way. So, we are feeling like it is somewhere in the neighborhood of $12 million for the next few years.

Okay. And then, just as we think about the debt financed aircraft that you have booked for 2015, how much of the interest related to that debt will be capitalized, if any, and should we assume something like an 80% loan to value? Can you give us any help there?

As for the first question, again, it's going to be in the neighborhood of $12 million of that interest expense. And you would have to model out based on, because we haven't disclosed yet for all those airplanes.

We have given a range, I think, in one of the disclosures about some of them, the interest rate would be, but you can approximate how much of the interest rate will be capped if we say that it's around 12%. But as far as specifics on debt financing, I would say assume market these days is around 80% to 85% advance, and that is generally what we have been seeing for 12-year mortgages, so that is probably a good number for you to use as well.

Okay. Thanks. And then, just wonder if you could put some numbers to the pilot recruiting?

Can you talk about historically given attrition and growth of maybe seven aircraft a year, how many pilots you recruit in a given year and how that compares to 2015? And if you would be willing, I guess how far along you are in that process? And thanks for taking the questions.

Yes, good morning. This is John Bendoraitis again. As a growing company, Spirit represents one of the best opportunities in the airline business today for pilots and for all our team members. And we are seeing, literally, thousands of applicants for all of the jobs that we have. We are on a track for 2015 to add approximately 250 additional pilots to our roster for next year and we're not having any trouble in recruiting right now.

So, how does that compare to an average year historically?

This past year we added approximately about 170 pilots for the growth that we had. Prior to that, I'd have to ask Ted for the history.

Yes. And, Duane, I think last year -- or excuse me, this year, we remember at the tail end of 2013 and the beginning of this year, we were hiring all sort of staff for FAR 117. We were approaching 200 a year anyway.

And clearly, as we took less airplanes it was fewer and fewer pilots back into the history. But the 250 that we plan to hire in 2015 is not stratospherically different than what we have been doing.

And our view is that, at it exists today, the line is kind of out the door for guys wanting to come and fly here. So, it has generally been a good environment for us.

Okay, thank you.

Mike Vettinberg.

Good morning. This is actually Catherine O'Brien filling in for Mike. I was just hoping you could put some context around the utilization flying?

You mentioned in the press release that negatively impact RASM but was margin accretive. Without these additions, do you think you would have seen margins flat year over year or maybe even down?

This is Ben. I am not sure of the math and it just doesn't say whether margins will be flat or down. What I am saying, what we were talking about was that last September was a particularly strong month for us.

When we were planning capacity for this year, we sort of took the view of, let's take a little more risk and put a little higher utilization flying in a lower peak month like a September is. We saw a little bit of load factorate from that, but we feel that it was very helpful for the margin to actually fly those flights. And if we had felt that wouldn't have been the case, we might have made some changes and adjusted appropriately on those.

We're going to run a high utilization airline because that is consistent with our business model. It helps us keep our costs lower and it is just consistent with having the lowest price for our customers.

And so, we are going to look for opportunities to drive utilization, whether that is using back hours of the clock or whether it is flying on what might be little lower peak average days, if we can drive margin from that. We're not going to fly just to fly if that's going to hurt the margin, but when we can push the airplanes a little bit more while continue to keeping them fully maintained and such, we're going to do that. And so, this was a -- 2014 will close as a pretty high utilization year and we are planning the same for next year.

That makes sense. And just one more if I can. You have announced service to several more cities out of Houston Intercontinental, but it doesn't look like you have any international service out of the airport at this point.

Wouldn't international service make sense in the future? Or do you think Southwest's plan to add international service out of Hobby late next or 2016 makes that a less attractive for you guys?

Well, we are looking at all opportunities for everywhere we fly. And obviously, there is, Houston is an logical international gateway point just because of its geography.

So, as we've been, Houston is still a relatively small station for us. We've applied for service to three Mexican cities from Houston and we have been granted that authority by the DOT, so that is at least indicative of some of our thinking of the future of what might happen.

All right, great. Thanks for the time.

David Fintzen.

Hey, good morning, everyone. When I look at the Cleveland start up, the little more of -- I guess, maybe it feels more of a foot race between you and Frontier to launch service there.

Is that just a little bit of a hint of what is to come in 2015? In foot races between low-cost carriers, or was Cleveland a little bit of a one off?

We can't comment on what other airlines are thinking of doing on their capacity. We have been looking at Cleveland for quite a while actually, we've been negotiating with a couple of cities in that region.

Worked out a good deal with Cleveland and we loaded Cleveland when it made sense for us, so our launch into Cleveland has not been driven by what we have seen anyone else do. And our belief in our success of Cleveland is based on our belief at how our model works and how successful it has been in cities like Cleveland, like Detroit, or a Latrobe or something like that.

Does that the fact that there are other carriers out there, does that slow down some of those airport conversations in general? Or just any color on how the pace of those conversations and how motivated airports are to get you guys in there?

Well, as I am sure you can appreciate, Dave, airports are generally thirsty for more volume right now. The generally strong for the industry capacity and pricing environment has created space at most airports in the US.

There are, obviously, some exceptions of airports that are still facility constrained, but most airports, and especially if you look at a place like Cleveland, have a lot of space in them. And so, I think, they've got an open to all comers kind of signs at most airports today.

Whenever Mark Kopczak, our Network Planner, shows up at any of the events where airports are, his dance card is always fully booked with people who are saying when are you going to fly here? So, we are not having a problem at most places.

All right. That makes a lot of sense. I appreciate all the color. Thanks.

Thanks.

Joe DeNardi.

Hey, good morning. So, I've got a -- I feel like in the past, there was some degree of uncertainty around what the capacity growth would mean for demand and the resident environment going into 2015. And it seems like with the 20% margin guidance, there is less uncertainty.

Can you just help us understand what has improved and what gives you the confidence that the demand is going to stay strong? And are you expecting maybe a tailwind from lower fuel costs to benefit demand?

Well, Joe, that uncertainty, I don't think we ever felt that here in our building. We realize that there was some uncertainty in your world or the analyst's world to some extent. We've always felt good about our growth for 2015.

The point that we have tried to make, and we have said it in a couple of different ways, is that a high growth year, like next year, will be for us with 30% growth, may have some pushback on the RASM side. But also, as Ted said in multiple earnings calls, creates really good opportunity on the CASM side.

Since we are margin-driven airline, if we can drive higher margins with a little lower RASM and an even greater lower CASM, that is a great thing for us. And that's a great thing for our model and that means even lower fares for customers and a good thing for investors, so that is the way we have always been thinking about 2015.

I think early on there was some apprehension, not here at Spirit, but outside, about in a 30% growth year, what might that not pressure your revenues because you will have so much new flying. We were always internally saying, yes, but our costs are going to be great because of all that, so margins might actually improve. And I think now what we are doing is, as we are finalizing our 2015 plan and actually running the map on all this, that idea is exactly what is showing up, which is why we feel confident about putting out those first-quarter numbers.

Okay. And maybe another concern on our side, at least, is if you look at the domestic capacity of the environment next year with Southwest starting to grow again and Delta adding capacity, not necessarily in the markets you serve, but can you just talk about does that matter at all to you when you see Southwest starting to grow? I mean, do you see any changes meaningfully to the competitive capacity environment?

Well, we are taring different customers than either Delta or Southwest carries. We are actively seeking customers who care about price above all. And because of that, we size our capacity for what we think we are going to stimulate with a lower fare in the markets we add.

I am not going to be so naive as to say we are not affected by growth at other carriers, but in general, our decision about where to fly and where to deploy our capacity is based on how much new traffic we think we can generate with our lower fares. Rather than how much traffic can we take from X, Y or Z, because that is not what we are trying to do.

So, to some extent, what Delta and Southwest are doing for their business models may have made perfect sense in May, but are probably based on different parameters than the reasons we are choosing to grow.

Okay. And then, I think in your prepared remarks you mentioned being more aggressive with seat management. Can you just explain what that is exactly and how much that benefited the quarter?

Well, I mean, it helped our non-ticket revenue in the quarter. And we continually had sort of an approach toward improving non-ticket revenue, and one of the ways we've tried to do that, or are doing that, is by becoming a little bit more dynamic in our pricing of non-ticket products.

So, if you go back in time, bags were all one price and seats were all one price. And as we've evolved, we started to vary the pricing of both bags and seats for things like when you buy the bag, where you buy the bag, and things like that.

For our seat inventory, we are now selling at our kiosks in the airports, which is great. Because if you bought your ticket on Expedia, for example, but you check it at a kiosk at the airport, now you can still buy your seat at the kiosk. Whereas before, you would have needed to come to our website beforehand to do that and some of our customers may not have done that, so it just creates more opportunity to merchandise the product.

And on the pricing side, like we have done with bags, we started to be a little bit more flexible in how we price seat assignments to better reflect the supply/demand for any given airplane when we can do that.

Okay. Thanks.

Dan McKenzie.

Hey, good morning, guys. Ben, circling back on some of your earlier commentary on margins and the limitations that competitive capacity can have, what is interesting is the very constructing operating margin outlook you are giving us, even if I adjust for fuel, and despite competitive capacity that picks up in the fourth quarter and it actually picks up a lot in the first quarter.

I also get your enthusiasm this morning. So I guess a couple questions here. First, to what extent do you factor in the competitive dynamic as you sort through your revenue outlook?

And then, secondly, we all get how the Spirit brand differs from legacy airlines and Southwest, of course, but Frontier, just circling back on that airline, is a new competitor from someone you know pretty well. And you are going after some of the same markets. And I'm just wondering how we should think about that dynamic looking ahead?

Well, we decide where to fly based on where we think we can generate new traffic with a lower price. And when we believe we can generate enough traffic to fill an airplane, we will add a flight, I will add a daily flight. That is basically how it works.

Clearly, what other airlines are doing and how many seats they have deployed in the market can affect how many neutral passengers we think we can generate based on the current pricing in a city or things like that. So I am not going to say that we're not affected by what other airlines do, but what I will say is that, generally, because we are living, or we built a business on the traffic that other airlines are rejecting in their yield management processes, we are not as dependant on what other airlines are doing in terms of where we'll choose to fly.

In terms of the ULCC space, we don't really see any meaningful competition right now in the ULCC space, other than sort of Allegiant. But as we said before, Allegiant is serving different sized cities than we are, so in many ways our business model and Allegiant's are more synergistic than they are competitive. We don't see a real threat right now in the ULCC space.

Okay, so very helpful. And I guess if I could just clarify. So it does sound like you are looking at the competitive landscape and adjusting your revenue outlook accordingly, just to bring that to a conclusion?

That is right.

Okay, thanks so much, guys.

Stephen O'Hara.

Hello, good morning. If I look at the operating margin guidance, it appears that most of the benefit comes from fuel. I mean, if I adjust 1Q 2014 for $2.60 fuel, most of that appears to be coming from fuel. Is that fair, or no?

I think, Steve, that is lot of it does come from fuel. I think we do anticipate seeing a tradeoff between what happens on the revenue side and the benefits we're going to experience on the ex-fuel cost side.

Our view is that there is still benefit to the margin, excluding the effect of fuel. But fuel, clearly, is contributing in the first quarter as well.

Okay. And then, secondly, in terms of the capacity that you are adding in, my guess is most of it goes into new markets? And then, if you could just maybe talk about how much is getting -- how much do you think will be layered into existing markets?

And then, maybe talk about the framework of the routes that you have available and maybe what that number has done over the last maybe six months or so? I mean, you guys used to have that chart, and maybe you still do, in recent presentations, I am just wondering where that is today?

Yes. We do still use that chart. We like it.

But in general, most of our growth will come in new non-stop city pairs because we size our capacity initially for the traffic we think we can create with lower fares. Unless something changes about the marketplace itself, it generally it is more accretive for us to start doing what we do in a new place than to do things more in the places we already are.

That said, a small bit of our growth next year will be in existing markets. Some of that will be from gauge. We start to take the 321, we take six A321s toward the back half of 2015.

So every place the 321 flies where our 320 used to fly, that's 40 more seats in that market. So there is some growth that will come in same market.

Some things that are less than daily might become daily and things like that. But most of the growth is going to come in doing what we do in more places rather than just doing it more where we already are.

Okay. Thank you. And then just on a different note.

I had the opportunity to fly you guys recently. And I would say it was a pretty good experience overall. The one complaint I had was it seemed a little bit confusing in terms of what I am going to pay when, if my bag was -- I actually measured my bag to make sure it would fit. And it looked too big and at the gate they said it was okay.

And I know you guys have tried to be maybe a little bit friendlier in terms of the Spirit 101 policy. And I am just wondering, as you continue to unbundle and continue to maybe bucket things differently, do you see any pushback or negative impact from making it a little more complex for the average somebody that doesn't travel all the time?

Well, part of our whole effort that started last year and is continuing and we are seeing really good results from is just by being fully transparent about the business model and helping customers, no matter where you buy your ticket, whether you buy from us or whether you buy from an online travel agent, that you know what you are buying and you know how to make it work.

So, we're you doing signage at our airports. We are training our own team members. The way we talk to our customers and the language we're using is all increasingly toward a better understanding of what it means to fly Spirit airlines to try to make it easy for customers.

At the end, the customers who fly us pay less than they pay on other airlines. Yes, you have to do some things a little bit differently, but we want it to be understandable and clear to them. Sorry that you were surprised by a couple things, but part of our effort is to eliminate business model related surprises, and we have good traction at the way we started that process through 2014.

Okay. Thank you very much.

Thanks. And thanks for flying on Spirit.

David Van Der Keyl.

David?

David, if you are on mute, can you please unmute? All right, should we go ahead and take the next question?

Yes. Please.

Fred Lowrance.

Hey, good morning, everybody, and thanks for taking the time to take my question. My question focuses on comparing/contrasting growth via connecting existing dots on the map versus a brand new city like, say, a Kansas City that you have got now or Cleveland coming up.

Just wondered if you could give us some insight into any differences in trend between base fares and ancillary take rates on new service at an O'Hare, somewhere where you already are. Have a presence, have some brand recognition, versus growing at a place like Kansas City where you are brand new to the market? Can you do any comparing/contrasting on how those two pieces of the revenue picture move?

Well, Kansas City was the first market that we -- first city we've entered after we've launched our brand education initiatives. So, as the first city that got introduced to Spirit using all of the language and all of the education parameters that we are using today, like Bare Fare and Frill Control and things like that.

So in some sense, we are seeing a much better understanding of who and what Spirit is and how our low fare comes with some differences and how that tradeoff can be really good for you as a consumer. We have seen that happen a little bit quicker in a Kansas City.

Now, when we are adding -- in the last few years, we've only added one or two new cities to the map in each of those years, and more of our growth is coming from connecting existing dots. That is because we are already flying to most of the larger places where most people in the United States live.

There is a couple of big population centers we don't yet serve, but most of the places we're already serving. Connecting those in and among those places is going to create more opportunity than adding new cities for the most part. I think that rate of one to three cities per year is going to be a more likely kind of add with more of the crew of coming from connectivity.

Now, the advantage of growing in a city where we already are, like a Chicago or a Houston or some place like that, is we already have a customer base. We become more relevant to the customer base because we go to more places, makes them more interested in joining our $9 Fare Club and our frequent flyer program and things like that.

There is advantage both to adding mass in an individual city and adding new cities to the network. Although if you characterize all the growth, most of it's going to be in new places and most of it's going to be connecting in and among cities we already serve with a relatively small number of new cities added each year.

All right. And just if I could, a separate question. If I look back to first quarter of 2014, obviously a ton of winter storm that affected you guys and everybody else. Can you talk about, just remind us what sort of noise there might be in those year-over-year comps as we look into first quarter of 2015 on the RASM and CASM side?

Sure. Regarding RASM and CASM, you are right. There was a good deal of weather activity in the front part, in the very beginning of January in 2014, that created -- wreaked havoc throughout the airline business. And in addition to that, as you may recall, we transitioned as a business at that point to new crew duty and rest rules for the pilots of FAR 117 took effect on January 4. And so, all the airlines were dealing with not just irregular operations, but dealing with it with new FARs to deal with, with their pilot group.

The good news was that we ended up operating very well during that period. I think our -- I mean, the numbers would back that up that generally our operating performance, as you measure it in the form of completion factor or whatever, was pretty good compared to the rest of the industry. And so, lapping that year over year for us doesn't create a tremendous amount of noise, I guess.

There is going to be weather-related noise in the first quarter that we certainly hope doesn't repeat. It might, but which would be to take -- would be in the form of like de-icing expense and interrupted trip and that kind of thing. But generally, we operated okay, which meant the revenue was being produced and we expect that to be the case as well this year.

All right. Thank you.

Bob McAdoo.

Hello, guys. When we talk and think about percentage change and CASM ex-fuel and whatever, are we going to have, and you also at the same time talk about reduced aircraft rent because you are going into actually buying airplanes. Is there any kind of distortion in our comparison because some of this now flows is now below the line and is not up above the line, whether we are talking about operating margin or CASM ex-fuel?

How do we think about in terms of trying to understand the comparisons and realizing that some of those numbers are not going to be quite comparable? Or are we not into enough of the owned aircraft to have that actually show up yet?

We are not, yet. And by the time we get to the end of this year, we will have four. So it is still a minority portion of the fleet, but we are buying another 11 next year and we will see what happens beyond that.

But your point is correct that part of what benefits operating cost on a unit basis is that when you remove rent and you take on an owned airplane, there is interest expense that happens in the non-up line. But as we've said, and we have been, and I actually reiterated again today, including interest expense, the pickup to pretax income is still positive ownership versus lease, which is the way we look at it and the way we would expect everyone would look at it. So, what is happening overall to profitability.

I understand it's overall. I am trying to think about the comparison of using operating margin versus pretax margin, I guess, is what I am thinking about.

Yes, look, we've always used op margin and I understand what you are getting at, Bob. As I mentioned in my comments, we expect, of course, next year to cap at least $12 million or the vast majority of our interest expense, too, so that number is going to be a de minimis amount.

Okay.

So, but nonetheless, even if you exclude that, I understand what you want to be looking at is what is happening to overall margin including the interest expense, and we believe that ownership is accretive to that.

And overall cost per seat mile, not just operating cost per seat mile is the other piece of that?

Yes. That is right. And we still feel that is dilutive to that.

Okay. Very good. Thank you, that's all I got.

Yes, thanks, Bob.

David Van Der Keyl.

Hey, good morning. Sorry about that, guys.

Glad we got you back, David.

Thanks. A couple of follow ups to a prior analyst questions. First, could you quantify the RASM impact from the higher Tuesday-Wednesday flying in the third quarter?

No. We wouldn't get that granular with you other than to reiterate, again, we felt it was the right move for the bottom line.

Okay. On Frontier competition, I believe you guys compete with Frontier already on a fair amount of routes. So, I'm just wondering if you can give us an update on what percentage of your routes currently overlap with Frontier and how Spirit's yields compared to the corporate average on those routes?

We are looking up -- do we know our overlap with Frontier?

We don't have it.

We don't have our actual overlap with them right now, but it is probably 15%.

Okay.

It's in that range, so we don't have a significant overlap with them right now. We look at our yields and our performance on every route we fly and we evaluate our performance, whether we add flying, whether we subtract flying, whether we maintain what we are doing based on the returns we are able to get out of our flying.

And we see changes in flying from a lot of carriers in our network and we continue to react accordingly to drive high margins for the airline. So, as new competitors change or move around, that won't change our approach to the business.

Okay. And then, just last question on hedging. Ted, I guess you moved out of the money calls, fuel has dropped, obviously significantly. Just have you given any thought to layering in more hedging to kind of lock in prices at low levels, or is that just not part of strategy?

No. We have a dynamic strategy. We are always evaluating what is happening in the marketplace.

Your point of having it move in this direction, clearly the product we bought was the right product, so we are pleased about that. And then we will be evaluating whether or not we think it is smart for the quarter or the year or whatever to layer in any additional production other than what we have. And that will be, like I said, that's an ongoing evaluation.

Okay. Thanks for the time.

Thanks.

Helane Becker.

Thank you very much, operator. Hello, everybody. Thank you very much for the questions.

Ben, this could be too early to think about it, but I think your pilots come up for negotiation next year. So just two questions with respect to that.

Will you wait until the contract actually becomes amendable before you open? And you have been so successful for the length of the existing contract. How do you temper their enthusiasm to understand the business model and offset they don't overreach?

Helane, our contract does become amendable in the summer next year, in 2015. And beyond that we can't comment on talks with them and what we are doing.

I will say that, in general, our pilot does a terrific job for the airline. And they like working at the airline, as John Bendo said earlier in the call, we're a great place for pilots come to work because we are the fastest upgrade in the business.

It's funny, when I meet first officers of the airline, I always ask them, do you know when you're becoming a captain? And they always know like to the month, yes, in 2 years and 4 months I'm going to be a captain, and I think that's great, actually. I feel really good when they say that because we want our guys to know as a growing airline, this is a great place to work.

I think we have a good group that works really hard. As we move toward a new deal with them in the next phase, I am sure we will work together to find a good win-win for both of us.

Okay.

So that they can get what they need and we can keep growing the Company.

Great. Thanks very much for your help. Thank you.

Thanks.

Steve Trent.

Hello. Good morning, Ben, Ted, Deanne, and everybody. And thanks for taking my question.

Just one quick question and I will stick with your one question rule. You mentioned the fire at Chicago Airport resulted in the cancellation of 43 some odd flights.

I also recognize that you guys rerouted some of your capacity with hurricane delays hitting Los Cabos Airport in September, as well. Any sort of broad ballpark idea as to what the economic impact of those events may have been on 3Q?

No, hey, Steve, it's Ted. We didn't bother to bring it up because it wasn't really material because as we mentioned, although we did have 43 cancellations, we were able to kind of work around beyond that. And quite frankly, some of the issues created by the fire, I am talking about specifically about the fire in Chicago, sorry, lapped over into the fourth quarter because although the disruption started in September, we really didn't get, or the FAA didn't get fully back online until mid-October.

But nonetheless, I would not say there was a really a material impact for either one of those events. We had did have to cancel some of our activity into Cabo, but it's really a inconsequential amount to the total.

Stephen, one way to think about that in not specifically those two particular issues, but in general, is that we operate a very thin network and we are not that large in any city that we operate in. Even our larger cities might be 40 or 50 flight a day, they are not hundreds of flights a day.

The reality of our growth, as we've grown geographically and now serve across the United States as well as many markets internationally as well, is that the likelihood of things like those happening is probably greater than it has been in our past because we are in a lot of places now. But also, the probability that any one of those are going to be particularly material to the financial impact of the Company is also probable a little bit less, just because there is no one place that the profitability of the airline is disproportionately centered.

Got it. That is very helpful. I will leave it there and thanks very much for the color.

Hey, thanks.

Mike Derchin.

Hello, everybody. I was just wondering, recently a number of your peers raised fairs despite falling oil prices because, I guess, because of the new government security fee that was put on. Did you go along with that? I was just wondering about that?

We did not follow along with that particular fare increase. As we've said before, the right price for Spirit is the price that fills our airplanes and we will look for price opportunity when the supply demand allows that for us. But in that particular case, no, we did not follow along with that.

Yes. I didn't think so. Can I ask one more question?

Sure.

On the neo, I am just wondering, do you have to do anything since it is a new plane type? Do you have to do anything special to prepare for that? And what is the status on that plane?

Yes, this is John Bendoraitis. Certainly, there is a little bit of work that we have to do internally, but by and large, other than the engine, the aircraft is really the same aircraft.

But yes, you're right, there are some things we have to do operationally. But we started meetings with Airbus now and we've got just about a year ahead of us, so we will be well prepared when that airplane comes.

While not the exact same thing, a little while ago when we took our shark-lidded airplane, we had the exact same issue. That sharp-lidded airplane required some changes in manuals and other things like that in terms of how that plane was going to be different than in non-shark-lidded planes. This is a little more with different engines, but it is the same kind of process.

Great. Thanks very much, guys.

Hunter Keay.

Hey, thanks everybody. Two follow-ups. Hey, Ted, real quick, did you say that was $12 million per year in capitalized interest or $12 million over the next three years spread out?

No, $12 million per.

Okay. And then, another question maybe for you, Ted, as well, as you think about the return on invested capital metric, is it really fair that you guys back out cash? Because it, obviously, it makes the number almost double, especially considering you are holding onto such an enormous cash balance.

It almost seems like you trying to have it both ways in the sense that you can say you're being conservative by holding onto cash for growth, but then you back it out. You don't really penalize your ROIC because of it.

So, given the returns that you generate right now, isn't it time to maybe think about working that cash balance down and investing it back into the business? And also eliminating it from how you calculate that?

Well, to answer the question about using the cash, which really is about return. We feel, as I said before, Hunter, we feel like we are making the right decisions in deployment of that capital.

We are a growth airline. We have a lot of growth coming and we are reinvesting in the business everyday, every time we plan to take a new airplane.

And so, having that cash balance available to us makes sure that we can deliver upon the return that we think that we are very proud of. And we want to make sure that is a stable environment going forward.

So, now, when those metrics and parameters shift, which as we mature will eventually happen, as I said before, we will always consider what the appropriate level of cash is based on our size. And that may change how we deploy that cash and provide a return to our shareholders. But for now, we feel like we are doing the right things with that cash.

Okay. Thanks a lot.

Thanks, Hunter.

And we have time for one more question. John Godyn.

Hey, thank you for taking my follow up. Ben, one of things that we've chatted about on prior calls is the importance of the A321s versus A320s and this favorable gauge mix effect going on as we look at 2015 and 2016.

Just in the context of that, I was hoping that you could speak to a little bit of how important the A321s that you are getting in 2015 are in driving the CASM ex-fuel guidance that you are describing? And given that there are even more being delivered in 2016, what are the chances that we could be actually be seeing multiple years in a row of falling CASM ex-fuel? Thanks.

Thanks. We are very excited about the 321 as an airplane. It is a great economic airplane. We are excited about how will it be deployed profitably in our system.

For 2015, while we are taking delivery of six of the airplanes, they are all in the back half of the year. So, the 2015 impact of the A321s is really pretty small for the 2015 economics. It will be a bigger issue in 2016 because, obviously, the six we take in 2015 will be full-year deployed in 2016, plus we will take more in 2016.

So, I would say that it is just a really small, couple percentage per point impact, meaning not on the CASM itself, but of the total economics for 2015. It is almost a rounding error.

If every one of the planes were a 320, it wouldn't be that different for 2015. That said, we are really excited about the plane, but 2015 is not the big year for seeing the leverage points of that plane.

Great. Thanks a lot.

Well, thank you all for joining us today.

And I'm not showing --

Thanks, Victoria, thanks everyone for joining us today. And we will seek here from talking to you in a couple of months.

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