Spirit Airlines Inc (SAVE) 2015 Q1 法說會逐字稿

Welcome to the first-quarter 2015 earnings release conference call. My name is Christine, and I will be your operator for today's call.

(Operator Instructions)

I will now turn the call over to DeAnne Gabel. You may begin.

Thank you, Christine.

Welcome to Spirit Airlines first-quarter 2015 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; John Bendoraitis, our Chief Operating Officer; Ted Botimer, our Senior Vice President of Network and Revenue Management; and other members of our senior leadership team.

A webcast of this call will be archived on the website.

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, April 29, 2015, 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 on our annual quarter 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. Please refer to our first-quarter 2015 earnings press release for further details regarding our assumptions for the reconciliation to the most comparable GAAP measure.

With that, I'll turn the call over to Ben.

Thanks, DeAnne. Thanks to everyone for joining us.

Today we reported strong first-quarter results. Compared to the first quarter last year, net income increased 87.1%, operating income grew 86.3%, and our operating margin expanded 900 basis points to a record first-quarter operating margin of 22.7%.

In addition to thanking our team for this strong financial performance, I want to thank our contributors for doing a great job keeping the operation running smoothly while growing our network. We've announced 38 of the new routes to begin in 2015 and, over the next two fiscal quarters, we have added 12 new aircraft to our fleet, all while improving our on-time performance and maintaining our high degree of reliability.

Top-line revenue for the first quarter of 2015 grew 12.6% year over year, with total revenue per ASM decreasing 9.9% on a capacity increase of 25%. About 40% of the RASM decline was attributable to the ramp up of our growth in new and mature markets, about 35% driven by price structure compression in many of our markets, and the remainder of the decline was specifically driven by what we have seen in the Dallas market as it adjusts to the capacity increases there.

These same factors resulted in first-quarter ticket revenue per passenger flight segment decreasing 11.7% or $9.08 year over year. We've always maintained that we manage to operating margin, and we believe our high-margin performance during a period when our base fairs decline validates that. Lower fuel coinciding with lower fairs is not an alien concept for us, and clearly, our business model is built to make strong profits with low fairs.

Non-ticket revenue per passenger flight segment was down 2.1% or $1.16 year over year. As fair levels have come down, we've seen some slight behavior changes in the take rates for bags, which contributed to the decline year over year.

And as we mentioned on our last call, in the fourth quarter of 2014, we outsourced our onboard catering to a third-party provider under a revenue-share agreement, resulting in both non-ticket revenue and associated costs being lower than they would've been otherwise with a slight positive effect on margin. We believe we will continue to see similar non-ticket trends through the second quarter.

Non-ticket remains a very important part of our business strategy, and we have several initiatives planned for the back half of the year designed to either drive more revenue or change behavior to lower our cost structure. The importance of our non-ticket strategy is never more apparent than it is during a period of yield pressure, as demand for the non-ticket component is much less elastic than ticket, which we see as a huge benefit long term.

On the operational side in the first quarter this year, we had over 400 flight cancellations due to severe winter weather, nearly double the weather client cancellations we had in the first quarter of last year, which was a drag on our overall completion factor. However, our controllable completion factor remained very high at 99.6% and our system on-time performance improved over 5 percentage points.

2015 is the first year that Spirit operational performance is being reported with other major carriers. We're happy to say that in the first month's reports we have finished near the top in completion factor and approaching the middle of the pack in on time.

In addition to keeping the existing operation running smoothly in the first quarter, our team launched service on nine new routes, six of which were from Cleveland, the newest destination in our network. In the second quarter, we will launch service on 24 new routes, including 8 new nonstop destinations from Houston George Bush Intercontinental, 7 of which are to Latin America destinations. The new routes are booking well and are spooling in line with our expectations.

With that, here's Ted.

Thanks, Ben.

Again, thanks to all of you for joining us today. Congratulations to the Spirit team for delivering strong first-quarter performance.

Despite very disruptive winter weather, which caused a number of cancellations, and nearly a 1% shorter stage length, our first-quarter 2015 adjusted CASM ex-fuel decreased 5.6% year over year to $0.0572. Compared to the first quarter last year, the decrease was driven primarily by lower labor expense per ASM and lower aircraft rent per ASM.

Labor expense per ASM in the first quarter of 2015 was lower primarily due to scale benefits from overall growth and from larger gauge aircraft. The decrease in aircraft rent per ASM was driven by a change in the mix of leased and purchased aircraft.

During the first quarter, we were not active with our share repurchase program. Through yesterday, we have repurchased approximately 160,000 shares during the second quarter, which equates to about $12 million of our $100 million authorization. As we indicated previously, we plan to opportunistically repurchase shares when we see a value disconnect.

We ended the quarter with $742 million in unrestricted cash. During the first quarter, we took delivery of 5 new A320 aircraft, bringing our total fleet count to 70. We have 10 more deliveries before year end, including 1 this week.

We have secured debt financing for 11 of the deliveries expected in 2015; 5 of which are already in service. And a direct-lease arrangement for one additional aircraft. This leaves three aircraft delivering in 2015 that are not yet financed. We anticipate updating that status in the near future.

Turning now to 2015 cost guidance. Based on the forward curve as of April 22, we estimate our fuel price per gallon for the second quarter will be $2.04.

We have protected approximately 70% of our second-quarter 2015 fuel volume, 20% of our third-quarter volume, and 17% of our fourth-quarter volume using out-of-the-money jet fuel call options, which allow us to participate 100% in the movement down in fuel price. More details will be provided in our investor update filed later today, but this strategy has served us well as the cost of the competitively priced options has been more than offset by the downward price in oil and the savings in jet fuel cost per gallon.

Capacity is expected to be up 32.2% in the second quarter, up 34.5% in the third, and up 30.6% in the fourth for a full-year increase of about 30.7%. For the second-quarter 2015, we estimate our CASM ex-fuel will be down 7% to 9% year over year. Our full-year view of CASM ex-fuel down 6% to 8% year over year remains very much intact. And the successes realized by our team in the first quarter give us a high degree of confidence in our ability to continue to execute successfully throughout 2015.

The Spirit story is one of a low-cost and low-fare model, and I am very pleased and impressed to report that the team is executing very well to both sides of this strategy. With our ability to produce earnings growth and cash generation, we expect to deliver a very high returns to our shareholders throughout our growth deployment period and will leverage that growth and our capital mix to ensure we maximize those returns.

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

Thanks, Ted.

Our consistent, reliable operational performance, solid track record in successfully launching new markets, and our continued focus to improve our financial performance through lowering our cost structure, position us well for the year ahead.

With April mostly in the bag, based on the current fuel and pricing environment, we estimate our second-quarter 2015 operating margin will be between 24.5% and 26.5%, which represents a year-over-year improvement of approximately 300 to 500 basis points. The implied RASM decline in this guidance is between 14% to 15%, which is very similar to the first quarter if you neutralize for the much more difficult year-over-year comparison. Much like we experienced in the first quarter, we estimate about 40% of the RASM decline is driven by our growth in new and mature markets and 35% is attributable to compressed fare levels in markets other than Dallas.

In the second quarter, Dallas accounts for about 12% of our capacity and an estimated 25% of the second-quarter RASM decline. Demand remains strong in Dallas, as our load factors in those markets are now reaching, and in some cases surpassing, our system average. However, while fare levels have stabilized, we haven't yet seen any significant price improvements in Dallas.

Due to the ambiguity in the revenue environment at the time we gave our initial 2015 margin guidance, we included a wide range of revenue outcomes. As we move past the first quarter, we have a bit more visibility into the booking trends for the peak summer period.

In addition, US Gulf Coast jet is now trading $0.04 to $0.05 per gallon higher. Therefore, we now believe our full-year operating margin will be between 24% and 27%.

We very much like the position we are in. Demand remains strong, our new and mature markets continue to produce high margins, and we are confident we can continue to drive our non-fuel cost structure lower. The robustness of our model is proven by the fact that our growth-driven RASM decline is outpaced by our growth related ex-fuel CASM benefit.

Our business model continues to work very well, and once again has shown its resilience to changing conditions as our favorable cost position enables us to continually offering low fares at attractive margins. Our price-conscious customers understand and appreciate our choice-driven approach, which is driving loyalty and repeat business.

Now, back to DeAnne.

Thanks, 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're welcome to place yourself back in the question queue, and we will allow for additional questions as time permits.

Christine, we are ready to begin.

(Operator Instructions)

Julie Yates.

Good morning, thanks for the question. On the full-year margin guide reduction, is that all driven by the increase in fuel, or is there a component from the revenue environment as well?

Hey, Julie, it's Ted. It's partially driven by fuel but also partially driven by the fact that we just more clarity on what's happening in the revenue side of things. We didn't move really the lower end of the range, we just -- the fuel doesn't help the top end. Then, a little bit more clarity on what we see in revenue going forward helps us refine it a little more.

Okay. And just on that, so going back to the comment on the fare compression, has the level of fare compression or the number of markets in which you're experiencing this dynamic changed over the last quarter?

No, Julie, this is Ben. No, it hasn't changed, but it hasn't improved either, It's sort of stable. What we see in the second quarter, or what we can see on the second quarter is largely similar to what we've seen in the first quarter, but we have a more difficult year-over-year comp. And that's what we pointed out, that the guidance that we have announced today is really very similar to what we saw in the first quarter, but what the difficult comp is just makes the number look different.

Okay, but are you still -- is it only confined to the off-peak periods, or are you seeing fare compression in the peak periods as well?

It's principally in the off-peak periods, yes. We're seeing the same kind of behavior, that lower fares in off-peak period. As we've said, the shape of peak and off-peak changes at different seasons of the year, and that's reflected in our outlook as well.

Thank you very much.

Thanks, Julie.

Hunter Keay.

Good morning, everybody. Just to follow up on Julie's line of questioning a little bit there. Why not make the assumption that, if there's this correlation between fares and fuel and fuel is causing some of the compression of the high end of the guide, why not make the assumption that it would be natural to assume that fares would follow that, Ben?

Is there a change that you're seeing in the competitive landscape, specific to maybe how other airlines are reacting to your presence that maybe keeps the markets that you are participating in uber competitive, regardless of what's happening if fuel is going higher? Is that's what changed as you've gotten, as you say, more clarity?

Actually, Hunter, I'm going to have Ted Botimer comment in a minute here, too. We don't think anything has changed, actually. We think that what's happening in the first quarter is just continuing through the second quarter. We don't see any major changes in the competitive environment or changes in how people are either reacting to us or our consumers are reacting to us. What we have more clarity on, though, is earlier in the year, we weren't sure how quickly the revenue environment might improve. Ted, do you want to comment?

Right, and I think that to Ben's point, we really are seeing it go up and down with seasonality. The overriding fare environment has remained very stable for the last couple of months, and there really are no major changes that we're seeing to the good or the bad in terms of the fare environment. There's a lot of stability going on right now in the fare environment.

We're very encouraged, Hunter, by the fact that volumes have recovered completely, or virtually completely, now, which suggest the only other improvement would be on the fare side.

Okay, I got you, thanks, Ben and Ted. In your proxy filed yesterday, we noticed that you changed some of the executive comp drivers. You changed the 10% completion factor to 10% on-time performance. You mentioned on-time performance twice in your prepared remarks.

So I would like some color on what went behind the change? At the risk of over reading it, are you finding it maybe harder for you guys to stimulate repeat business because of the on-time performance?

Absolutely not, Hunter. What the reality is, is that we have been on a couple-of-year mission in continuing to improve the Company operationally. Our first step was getting the completion factor near or at the top of the industry, and we've successfully done that. The next step was then to bring our on-time into the middle of the pack in the industry, and we set very specific goals for the year in terms of our aircraft sparing, in terms of our return times, in terms of things without compromising utilization.

What we don't do, is we don't pad our block time like every other airline just to look good on on-time, and we don't penalize our cost structure by putting ridiculous block. You know if you fly any other airline, if you take off on-time, you always land early. That just makes everybody's ticket prices higher.

This had nothing to do with our customer relationship. It had to do with the fact that we were becoming a more and more operationally efficient company, and the first step was completion, the next step is on-time, and we are executing well to that strategy.

Got you. So you don't expect any kind of associated cost pressures with this increased focus on on-time then?

Actually, if I could comment on that, Hunter? This is Ted. We actually see cost benefit associated with that because on-time performance, in our network, middle-of-the-pack on-time performance, which is really the objective, a poor on-time airline does cost money. We do not anticipate adding costs to drive the airline into a better position from on-time. We anticipate that actually improving our cost structure.

Okay, thanks, guys.

Thanks, Hunter.

Duane Pfennigwerth.

Thanks, good morning. I wonder if you could just comment on comps for the rest of the year? I know some airlines, maybe with a little bit of an international revenue dynamic, have suggested that this is probably the worst that we will see for the year and the comps get easier 3Q versus 2Q, 4Q versus 3Q. Do you agree?

Yes, that's consistent with our expectations, Duane. The year-over-year comp does get easier in the third quarter. But, we're growing capacity a little more in the third than we are in the second. When you think about those two things, overall, we believe that the general trend is good in that sense.

Okay. Then, Ben, any early thoughts on a 2016 growth rate at this point? As we get closer to thinking about 2016, expect some moderation, but given the opportunity set that you see, are you locked from a fleet-plan perspective? Any color you can provide there would be appreciated?

We have an order book and that order book would suggest growth of about 20% to 22% next year at current utilization and things like that. That's probably a good number to plan on for now. We can -- we never say we're locked, but at that point, we know what airplanes are coming next year.

Certainly, something could happen later in the year that would create more airplanes next year, something like that, maybe modify that somewhat. Where we're sitting now, 20% to 22% looks like the right number based on the fleet growth.

Thanks, and if I could just sneak in a last one? Appreciate your detail on the attribution on the RASM pressure in the first quarter. Wonder if you could highlight any bright spots regionally? Specifically, your capacity that touches the Northeast, are you seeing any difference in trend there?

This is Ted Botimer. We are happy, again, with our spool up in Cleveland. I think that the growth in the markets that we've introduced has been going like we have anticipated, so I think the there are bright spots.

When you have a lot of new markets growing in, you are definitely going to see that. And Latin America, we are absolutely seeing good spool up in those markets as well. Internationally, we're happy, and we are happy with the introduction of our new markets.

Thank you.

David Fintzen.

Good morning, everyone. Just going back to that parsing out of the different factors in to TRASM, can you just talk through a little bit of the geography? I know in the past you talked, obviously, you separated out the Dallas.

Where are the geographies? Are there any geographies like a Texas or more Southwest competitive or different competitors that stand out as being particularly noticeable? Or is this something you're seeing broadly across the network, in terms of the fare compression, the development of it?

Based on what we're seeing is we're seeing Dallas, which we've talked about in the past. But the loads, again, are improving there. Overall, there really are not trends that are identifiable in terms of what's happening.

There are some markets that are under fare compression, other markets that are not. Some of it's related to capacity increases from competitors, and some of it just making sure that we are rightsized in the markets that we are serving.

I will say, Dave, this is Ben, again. We don't see increases or overly aggressive or irrational behavior by the industry. We see people doing things, reacting to the environment in appropriate ways, and that's created lower fares in off-peak periods, which is generally good for consumers, and we're better at making money with that than anybody.

Okay. Then, if we're going to be in this lower fuel environment and fare compression is going to stay with us, does it start to change a bit of the route selection? Not necessarily -- you obviously have a large list of opportunities, but is it going to start to change and evolve how you work through opportunity? Does it make a certain set of routes better, bring them up the list? How do you think about that?

Over the last number of years, I think we've done a really good job with capacity deployment, where we have downsized capacity that is not meeting the kind of margin hurdles we put and growing in places that we believe can absorb more at the margin hurdles we expect. The environment we see now is no different than that.

There are some things working better, some things that are maybe a little behind, and overall we will continue to manage our overall capacity in a very aggressive way to deploy our airplanes in the highest-margin opportunities available to us. Certainly, that might mean what we end up doing between now and next summer is a little bit different than if fuel prices were high, but I can't tell you exactly what we would have done in that environment without seeing what the prices were and what the overall industry capacity was either.

We feel really good about the rest of the year. We feel great about the growth. We feel great about the way the growth is spooling. And we're just reacting to this environment like we've reacted to every different environment over the last five years.

Okay, all right, that helps. Maybe quickly on -- just to make sure I completely understand the Dallas comment. It doesn't look like you've made much, if any, change in the schedules. Is that because you're waiting to see -- you said volume is back, you're waiting to see the pricing? Or have you seen enough that you feel like Dallas is as a from a schedule and capacity standpoint where it needs to be in the bigger sense?

We love Dallas. Dallas has returned back to system average load factors and what the volumes we expect. The first step after a big capacity increase in a big metro market was bringing demand -- the market has absorbed its capacity increase, now essentially, because loads are back to normal.

That's a really good position. So that's not the time to be pulling capacity at that point. That's time to say, okay, there's plenty of people here. There's plenty of -- the planes are full, so now the next step is what we do to, over time, move the pricing up where we can?

Okay, that's helpful. Thanks for all that.

Joe DeNardi.

Thanks, good morning. Ben, I'm wondering if we could just focus a little bit on the guidance and what's included or what your assumptions are in that? I think the initial guidance that you gave for 2015 assumed that pricing got better, particularly in Dallas, beyond first quarter, as the off-peak started to wear off.

I'm wondering if that assumption has changed at all since you haven't really seen that improvement? Or are you still assuming that, that gets better? Maybe, how does the two new gates that Southwest has out of Love affect that view?

Overall, I think the change in the guidance is just related to just more visibility. We put a 5 point range, 24% to 29%, early in the year because we really -- we knew that there were a lot of -- there was fare compression in the off-peak in a lot of markets, and we knew Dallas was a particularly pressured area because of the big capacity increase there.

And we just didn't know what was going to happen. It's not like we know perfectly what's going to happen now either, but it's more -- we've gone through three full months of the year, almost four. We have bookings a few months beyond that, so we've got pretty good visibility on a much bigger chunk of the year now.

And the encouraging thing to us is we're not taking the downside any further down. What we're doing is just refining the upside to say, well, things are going to get better at a pace that we can't perfectly predict, and now we can see that pace a little better. So, 24% to 27% makes more sense to us now.

But it's not specifically related to Dallas or the non-Dallas markets, it's all the overall revenue environment. Like I said, in Dallas, we like the trend there, that the volumes are back to normal. That's really good.

Okay. I'm just trying to understand, is there still the assumption that pricing there gets better throughout the year?

Well, when every plane is full and you practice revenue management, that tells you that there is opportunity for revenues to get better, right?

Okay. Then, on the behavior change you're seeing on the take rate on some of your bag fees, how does that affect the plan for you guys to incorporate seasonal pricing into the bag fee?

It doesn't change. The take-rate change we mentioned on bags is a really pretty minor thing. It might even be temporary, we're not sure. It's a very small thing. We felt the need to call it out only because it was a change other than just the onboard catering thing. But we don't see that as a structural change in consumer behavior or anything.

The peak-season surcharges on bags are very specifically tying supply to demand. The reality is, when there's higher demand and there's peak-season times, there's more demand for everything. When there's more demand, prices should go up. That's what we're doing with the bag surcharge.

Okay. Thanks, Ben.

Savi Syth.

Good morning. Just on the cost side, how much of the unit cost declines is being driven by gauge versus this ownership change or how you're financing the aircraft?

Hey, Savi. It's Ted. We haven't -- I don't think we've specifically called out all the different components because there is more than just those two. There were quite a few things I mentioned on the call in February that we start to realize the benefit of in this quarter and beyond the remainder of this year, that are either contractual or structural changes to the business beyond just ownership and gauge.

But, I think ownership and gauge are clearly the two largest drivers. You may think about them as equals maybe, just for a landscape-type setting thing, but there's a lot of other things that help unit cost going forward, too. Some of those things we called out before.

Got it. Then just on the campaign of, the Spirit 101 campaign that was launched last year, just to help people understand the product better, how is that progressing? Are you seeing less complaints or better repeat customers or anything from that campaign?

It's working fantastically, Savi. We hear from our airports all the time that they're dealing with less conflicts at the airport because more and more customers come to the airport understanding the business model, understanding the unbundled structure and how that benefits them for the lower total price. We are seeing more balanced media on the airline.

We are seeing it in our overall feedback, including our complaint rates and our positive feedback, in terms of what people are talking about. Overall, we're really happy with the way that's going, and we're going to keep pushing it more and more. We think the more people know about what we do and how that results in the lower total price for them, the more they understand and appreciate what the business model does for them.

Got it. That's good. If I may quickly ask, and maybe you're not ready to talk about this. In the beginning of the call, I think you mentioned some ancillary initiatives towards the end of the year, is that something we need to stay tuned for or have you already rolled those out?

Stay tuned for now. The point is that we manage ancillary like we manage every part of the business. We are very active. We watch trends closely, and we continue to try to innovate to make things better. So we see what's happening in the market. We see how consumers reacting.

We see what's working and what isn't, and we will do more of what works well and less of what doesn't work so well. That's true in all parts of our business and it's true on the ancillary side as well. If we see a little ancillary pressure because, especially because we outsource catering and don't get that revenue anymore in the ancillary, we will find ways to mitigate that.

Got it, helpful. All right, thanks, guys.

Helane Becker.

Thank you very much, Operator. Hi, guys, thanks for the time. Ben, just a couple questions about your decision to expand more into Latin America.

I know in response to one of the questions you said that those markets were -- or you were pleased with those markets or something like that. Can you just, given the currency issues and maybe the lack of GDP growth in those markets, talk about where you're seeing specific strengths, maybe?

As you know, Helane, where our international might be a little bit different than industry when they talk about international. Our international is all relatively near US, in Caribbean, Central America, northern South America. Overall, we sell virtually all of our tickets in US dollars, so we don't have any material FX issues at all. That doesn't affect our business right now, so that's not an issue for us. The GDP growth in those markets doesn't really drive it so much, and if anything, what does is it creates more demand for a lower-fare product.

In the case of our growth out of Houston, with the seven international markets, those are all to cities we already were flying to, either from Fort Lauderdale or Dallas or San Diego. And so what it does is it makes those stations even more efficient, gives us a little more affinity to the customer bases in those markets, because now we can take them not only to Florida or not only to Dallas, but also to Houston as well. Overall, we see it is very accretive growth, very consistent with our cost structure and consistent with our overall growth. Very excited about it.

Okay. Thank you. That's really great, and thanks for that explanation. I appreciate it.

I just have a follow up on Savi's question about Spirit 101. I know one of the issues was that the GDSs were not very good about explaining to their customers Spirit 101. So are you seeing -- is all is what you're talking about in response to her question, are you seeing that, them do a better job, as well, in driving better understanding of the product?

Yes. In fact, we've been partnering with our GDS partners on this to try to fix this side of it. They are doing a little bit better job. They're also sharing emails with us, so that if a customer buys us on an Expedia or an Orbitz or something, we can contact the customer just after their purchase and send them the education that they would have gotten had they bought on Spirit.com.

What we're finding is, while there still is a little gap between customers who buy on Spirit.com and customers who buy through the GDS, we're seeing that gap close pretty quickly. A lot of that is because of the partnership that we are having with those groups, because they don't want to disappoint their customers either. So we're working together to make that happen well. And we want all of our customers educated, and they support us in that effort.

Great, thank you. Thanks, Ben. Thanks for the time.

Thanks.

Mike Linenberg.

Good morning, everybody. Ben, you may have said this earlier, and I apologize if I missed it, but when we look at the percentage of your markets or the percentage of your capacity that is under development, whether it's the March or the June quarter, I guess under development would be anything less than 12 months. How does that compare, for June-quarter 2015, how does that compare or how will that compare to what it was in June quarter of 2014?

I don't have the exact numbers in front of me, but there will be more in development in June of this year than June of last year, because it's an overall bigger growth year for us. I'm not sure if we can get the numbers really quickly for you right here, but around 15% to 20% of the markets in development or growth. I mean difference, 15% higher that's what I meant.

It's just a lot bigger growth and more growth in the second and third quarters than in the first quarter. So a lot of stuff is relatively new, and some of that newness is more capacity in existing markets and some of that newness is brand-new nonstop markets. For all of that, the we feel very good about how it's booking, how it's meeting its expectations.

We set tough hurdles for the things we do. We expect things to do well out of the gate, and we have understandings of what is acceptable and not acceptable performance. We're very encouraged by the growth.

We understand the RASM pressure that, that creates, but as I said in my prepared remarks, that the CASM benefit is greater than the RASM hit for that set of markets. That suggests we should be doing even more of that, because if we can take a RASM decline but lower our CASM even more than that, that's really good for margin. That's really good for earnings. Therefore, we should do more of that, and that's exactly what we are doing.

Great. Then just -- oh, sorry, Ted.

I just want to clarify for Ben, too. This is Ted. It's not a perfect -- capacity growth isn't the perfect indicator of markets under development, but it's good enough and I think his WAG was pretty close. In 2014, we grew about 17% in the second quarter. This year, we're looking at 32%, so 15-ish more percentage points makes sense.

Okay, great. Then just my second is that you have been very disciplined about getting out of markets that don't work. And in the past -- we can always come up with a list of what you started and backed away from.

I'm just curious, over the last couple of years, as your network has become larger and more dense and moving into a new market, maybe has been less risky because that market may be connected to some of your other cities, have you seen a meaningful reduction in markets that you withdraw from because they just don't ramp up at the rate at which you had originally expected?

Yes, I think that's fair. In general, it is not common for us to have to pull out of a market that we started. We often have to make changes. We will change frequency or we'll change gauge, sometimes up or sometimes down.

So it's, we're never perfect in our forecasting about what's going to happen, and we usually can make more money by reacting in some way. It's not that common that, that extends to the point of we just can't fly this anymore. More often than not, it's just a capacity or a frequency change.

Okay, great. If I could just squeeze one last one in? Just on the GDP print out this morning, 0.2% in March quarter, it was low. If you just strip out the larger than expected inventory build, effectively the US economy contracted 0.5%.

I think there's some concern that some of that's carrying into the June quarter. I heard all the commentary about pricing in Dallas and competitive capacity, I didn't really hear anything on the GDP front. I was just curious, any metrics out there that you look out at, or even booking out beyond two or three months, where maybe you're just not getting the uptake?

I would say this within the context that, historically, although you do depend highly on the price-sensitive passenger, historically you tend to do well in weak GDP environment. Anything on the macro front? Anything that you can give us that maybe you're seeing out there that's actually reconciling with some of the GDP data that we are seeing come out from the feds?

No, it's an interesting point. We don't see anything that you're not seeing. What I will say is that we have not, for the last five years, I don't think we've seen any correlation really to GDP and our revenue performance other than like you said. We've tended to do quite well in periods of tepid GDP growth. Overall, we're playing -- we're not an index fund at Spirit.

As a sector, GDP may affect things somewhat. But at our end of the business, at the low end of the demand curve, that commodity price-driven end of the sector is not a GDP driven sector. That's much more of a business driver, a business travel driver, and that's not the business we are in.

So we can't look at a macro statistic like that and glean any real, any accurate assessment as to what that's going to mean for our revenues. We're just looking at our bookings and our overall demands, and like we said, demand looks very strong. That's encouraging to us.

Great. Thanks, Ben.

Stephen O'Hara.

Good morning. I'm just curious about just -- last time you talked about those three issues with the unit revenue. Just wondering what is the general -- is there a good rule of thumb, or what's your expectations for that to right itself and then potentially improve over time?

What's the general timeframe for these types of situations in these markets? I, obviously, understand that all situations are different, but I mean -- can you just talk about that a little bit, how you think about that?

We said that about 40% of the RASM decline was basically our own doing, our own growth and in our growth markets. We understand how RASM evolves in our markets, how the markets spool, and we understand how that changes.

For that 40% of the RASM decline that's relating to things we're doing, I think we can have a better sense as to how that will change, and we are very comfortable with the pace of that change. If you look at our investor deck, for example, you can see the green line that shows new markets and the red lines that show mature markets and how that margin tends to improve in the second year of flying. Overall, we feel really good about that.

For the 60% that is not our own stuff, we just -- we're learning as we go, and we will see what happens. Like we said, in Dallas we feel really good about the fact that loads are back to normal and the market has essentially absorbed all of its capacity increase. And that suggests very encouraging things to us for Dallas going forward.

For other markets, we think it's just -- it's kind of rational to have lower prices in off-peak when fuel prices is lower and you can make money filling empty seats. I think that a lot of the RASM decline in off-peak that we're seeing is tied to fuel. Not because anybody is doing anything wrong, but because they are doing things right. Certainly, if fuel price were going to go up, we'd see RASM improvements I think. Overall, we are okay with where things are.

I think how well much things improve is specifically a RASM-related comment. Since we're margin focused, our margins are getting better and our margins are improving and our guidance this year is for higher margins than last year, so all of that suggests this is a pretty good year. For RASM to improve, that would be good and that would help all of us and help the industry going forward, but de facto, it's not the one thing we're all here hoping for.

Okay, thank you.

Bob McAdoo.

Some more on Dallas. What I've typically done for the last few months has been to watch Dallas-Washington fares on your major competitor there, the Love Field guy, as a sense of how fares are building, or how much they're throwing out there in terms of $59 and $79 and $99 tickets. And I see that on that one, it's getting harder and harder to find the really cheap seat. If you want to get a $55 ticket, you have got to go 6:30 in the morning and buy it out a ways.

That's, obviously, a nice development. I guess that's what you're saying when you see the loads are filling up, because they're not offering as much junk out there. I guess the real question is, is what you're seeing in the Dallas-Washington market, is that really going on throughout all the new Dallas markets that they are in or is that an aberration?

This is Ted Botimer, again. What we're seeing in the Dallas-Washington market is pretty similar to the trend that we're seeing overall in Dallas. The great thing about Dallas right now is the capacity seems to be getting absorbed. That is the first step to everything rising back up, because in order to get rates, you need to have a full aircraft in most cases.

That is similar to what we're seeing, so we are looking at Dallas right now and seeing some the similar trends that you're seeing is that things are improving. The major measure that we are looking at there is that the capacity in Dallas is being absorbed now, and that's the beginnings, generally, of an upward trend for rate. It's a necessary condition for rate to improve in a marketplace, is the rational absorption of the capacity that's been thrown at a market. Again, we feel pretty good about Dallas from that perspective.

One other piece about that is, what you seeing now, as to compared to a month or two or three ago, you're seeing that on the weekends, the next weekend or two or three or four out, your seeing $200 and some fares, where it wasn't that long ago you were seeing $89 fares on a Saturday even or Friday night. Does that change the booking curve that you get, or is that with more confidence that their close-in fares are going to be $200 and some? Does that make it easier for you to hang back and maybe try to fill your flights up later, at a higher fair, does that work?

Bob, that's pretty much how revenue management working. What we try to do at Spirit is offer the highest fare where we can fill up our aircraft. That something that we've talked about a decent amount before.

As we, as the environment is more conducive to slightly higher rates, again, when capacity has been absorbed overall, we're going to see that kind of behavior across the board. That's just the ebb and flow of revenue management and how we do it, and how everyone does it, to a large degree.

Bob, this is Ben. Let me point out, also, that the traffic base that Spirit carries is -- may overlap some, but not much with other airlines, including the carrier you are talking about. So the reality is, is that different airlines to various degrees have the ability to attract higher-fare paying customers. At Spirit's end, we don't have much ability at all to attract any high-fare paying customers, but that's what our business model is, is to have a cost structure that can make money only on the low fares.

As other airlines behave rationally, which we believe they have been doing since fuel dropped, probably since before then too, but we haven't seen irrational activity. We expect that rationality will continue at other places, just like we expect it to continue here, and that's why we all feel encouraged here, basically.

I was just reacting to some comments that you made, maybe it was Ted made a couple three months ago, where he was commenting that if they have $59, $69 fares with all the bags and everything else thrown in, it's tougher an tougher to get people to focus on you guys where you have the extra fees. If people are moving to the $200 -- if people buying up their $200 seats, it seems it like, obviously, people are less -- your people are less likely to be able to find a Southwest seat that works for them. I'm just trying to make sure I understood, I'm seeing it right?

That might be true. I think your thinking about it right, Bob. Again, we feel pretty good about the margin guide that we've put out there and how that compares on a relative basis too.

Okay. Thanks.

Dan McKenzie.

Good morning, guys, thanks. Following up on the non-ticket revenue opportunities, I know you're not ready to share a lot. I'm wondering if you can tell us if they're already factored into the full-year guide? Then, just on timing, should we think of them as third-quarter or perhaps fourth-quarter events?

In general, we should think about them as back half of the year. We can't tie it to third or fourth quarter yet. And yes, they're sort of in the guide.

One of the reasons we put a range is we try to put a 50/50 look at out there where things might get a little worse or might get a little better. That's weighs all that in place. Our guidance includes everything we're thinking about in terms of what the airline could be by the end of the year.

Understood. Okay. I guess, Ben, with respect to the capacity under development, I appreciate the commentary you have shared previously that there's not really a lot of pricing difference between new and mature markets, just given Spirit's pricing strategy.

But I don't believe we've seen a year where Spirit's RASM drops 10%, even during the financial crisis, when I think RASM was down maybe 2%. I guess what I'm wondering is based on what we're seeing this year is whether that trend between developmental markets and mature markets perhaps changes looking ahead?

We don't think so. You're right that we've not seen our RASM drop 10% in other times, but those were also higher fuel times and those were in lower growth times. So with higher growth and lower fuel prices, we think what we're seeing on the RASM side is consistent with the environment we are in.

Again, we think we're better prepared to deal with this kind of environment than most, because we're getting a huge ex-fuel CASM good guy that most of our competitors are not getting on top of this. Again, I've said this couple of times, but the revenue hit from our growth is more than offset by the cost good guy from our growth. And so that's a really good ratio to have, would suggest that more growth is a really good thing.

Okay. If I could just squeeze in a final one here. Ted, I'm just wondering what balance sheet metrics, if any, you're managing the business to, so leverage or debt to capitalization or perhaps a target liquidity position as you look ahead?

Hey, Dan. We think about liquidity, obviously, being an important piece of the business when you're a gross carrier like us and you've got our objectives with regard to CapEx and financing in there, so liquidity is clearly an important measure. That then ties to the leverage position of the business, which we think a lot about as well.

That's clearly where we are focused, is we're managing how we finance the growth, how we use our -- I alluded to it in my comments, about how we use our capital mix to enhance the return to our shareholder, and it is tied to really those primary metrics.

Understood, but not metrics that you're willing to share at least at this point?

No, although I think we've said before that, clearly, our liquidity position is amongst the best in the industry when you think about it on a metric basis. And we've done that on purpose, because, A, we're little bit smaller than everyone else. And B, we have a lot of CapEx to finance and so that gives us a lot of leverage when we're talking to third parties. I wouldn't expect that our liquidity position is going to dramatically drop from where it is today on a metric basis.

Then, as it relates to leverage, we've -- when you capitalize our leases, using some appropriate measure, we anticipate that our leverage position remains pretty stable, actually, over a period of time. In some cases -- and we expect it to maybe gently even decline or improve is what I mean by that on a metric basis, because the vast majority of the leverage that we take is related to the growth.

So we anticipate that, that will be more efficient leverage, going forward, because of how we plan to finance. And because of the very way that, that lease leverage is measured, we believe that, that will also benefit, going forward, because it's a fixed amount rather than an amortizing amount.

Okay, very good. Thanks, guys.

Hunter Keay.

Thanks for the follow up. I'm having some trouble just reconciling some of the commentary to the margin guide, and I think people I have been emailing with during this call have been too. Let's talk through some things here.

You guys are seeing reasonably good things about Dallas loads. I'm hearing that off-peak pricing is causing a lot of the issues, but 1Q is behind us, and that's the most off-peak quarter you have. You're saying fare compression is not getting worse. I'm hearing good things about CASM as it relates to some of the initiatives that you have.

Just trying to figure out, now, why if the new high end of the margin guide is not the actual new margin guide itself? Is keeping the low end intact just an absolute worst-case scenario that assumes some sort of leg down in the demand environment or like an irrational fuel spike or something? Because it just feels like you guys should still be able to do at least the high end of the guide, just based on the way you're categorizing the rest of the business right now.

Hunter, this is Ben. Then, Ted might want to comment as well. It really is just more visibility. It was -- we struggled a bit early in the year with what to say about the full-year margin, given the really large ambiguity we saw in the overall revenue environment, not knowing what was going to happen in Dallas, not knowing how other airlines were going to react to lower fuel in peak-year periods, and all that was yet to come.

So we put this very wide range out there that said, look, if everything gets better tomorrow, we could hit a really good numbers close to 30%. But if nothing gets better, maybe we'll be at the 24%. Now, we're a few more months in. We've got bookings in to almost the middle of the year, so we can just refine that a little bit. I don't think our margin guide is at all inconsistent with any of the commentary we've made.

What we've said is we have a little bit better understanding, but we also know that things didn't happen in February and March that might have happened at the time we put out that guide. So we're just taking what happened, what we see right now, and what we expect to come, and that changes what was 24% to 29% to 24% to 27%. Doesn't suggest anything is getting worse, it suggests that we're learning as we go on how quickly things are getting better.

Okay, presuming that the high end was more of a best case than the low end was a worst case?

Yes, I think that's absolutely fair.

All right. Then another quick follow up. Can you talk about Fort Lauderdale, Ben, how you've seen it trend over the last -- how was it, first of all, the last couple of quarters? How is it trending going forward? Thanks.

Fort Lauderdale is going great. Right now, the airport is going through a pretty major -- some major construction. The new runway is operating now, but now there's lots of terminal construction that is making overall capacity adds a little bit tougher. Fort Lauderdale continues to operate above our system average margins and is a very strong contributor.

It's still our largest place where our largest concentration of capacity, and it operates above the system average margin. So we couldn't be happier with Fort Lauderdale right now. As they clean up the airport, meaning get the construction done and things like that, that will create opportunity for more growth here for us.

All right. Thanks, guys.

Christine, we have time for one more question.

Our last question is from Joe DeNardi.

Thank you. Ben, I just wanted to follow up on the capacity outlook a little bit, just given how you've been able to digest all these aircraft over the past quarter. What's the bias, does that give you more confidence that you can grow at this rate going forward? Do you view it as -- you're guiding to, call it a 25% operating margin for the year, do you view it as you're leaving money on the table by not growing more?

As we've said before, 2015 is a bigger growth year for us in percentage terms than any year we've had since the business model changed. So going forward, we're not going to have successive 30% growth years, so we're not going to grow as much, although we'll be growing from a bigger base and we'll still be having very healthy growth, 20% to 22% next year, for example. So, we'll still be a high-growth carrier, but not necessarily at the same rates now.

We've said for a while that between now and 2021, a growth rate of around 20% is what the airline is seeing, that's 30% this year. Certainly, our growth is accretive this year. We're happy with the growth. It's going great.

We probably could make more money if we were growing even faster. There's practical realities to that. We have to hire and train pilots. We've got to negotiate with the airports. We've got to get the planes deployed. So this was an aggressive growth year at the start, now that we're part way through it and actually more than halfway through the year, when it comes to actually planning the growth for the year, we feel really great about our ability to execute spectacularly to the growth plan.

Okay, thank you.

Okay, we have no further questions.

Thank you.

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