Spirit Airlines Inc (SAVE) 2015 Q2 法說會逐字稿

Welcome to the second quarter 2015 earnings conference call. My name is Eric, and I will be your operator for today's call.

(Operator Instructions)

Later, we will conduct a question-and-answer session. I will now turn the call over to Deanne Gabel. Deanne, you may begin.

Thank you, Eric. Welcome to the Spirit Airlines second 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 VP of Network and Revenue Management, and other members of our senior leadership team. A webcast of this call will be archived on our website at ir.spirit.com.

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 beliefs, as of today, July 24, 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 our annual report on Form 10-K and quarterly reports on Form 10-Q.

We undertake no duty to update any forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items. Please refer to our second quarter 2015 earnings press release for further details regarding our assumptions for the reconciliation to the most directly comparable GAAP measure. Please note that our comments today will reference several slides that are posted to ir.spirit.com, under upcoming events or webcasts and presentations, next to the webcast link for this call. And now, I'll turn the call over to Ben.

Thanks to everyone for joining us. In addition to discussing our second-quarter results, later in my remarks, I will take the opportunity to highlight what I think are a few of Spirit's key differentiators, such as our non-ticket revenue producing -- providing the high margin, a stable source of revenue. How our low cost, low fare business model allows us to serve an underserved market and grow the population of travelers, and how our traffic overlap with traditional carriers is really very minimal.

First, I want to thank our dedicated and committed team members. We experienced several very disruptive storm systems during the second quarter that were unfortunately aligned to have a pronounced impact on our network. I want to thank our team members and business partners for their hard work and dedication in serving our customers and helping us to restore our operations to normal. For the second quarter 2015, we reported a net income of $74.8 million, or $1.03 per diluted share, and a pretax margin of 21.3%.

As outlined in our investor update last week, during the second quarter, we experienced consecutive storm systems in Dallas, Chicago, New York and Detroit, followed by tropical storm Bill that sat over Houston then moved north to Dallas. The timing and location of these storm systems produced a domino effect on our operation, resulting in over 500 flight cancellations and numerous flight delays. Due to the sheer volume of flights affected, we were unable to flex up our staffing levels enough to mitigate the impact of crews being displaced, or being unable to work due to reaching their contractual or regulatory maximums. These challenges lengthened the span of the irregular operation, and the time it took to restore our system to normal.

In our high aircraft utilization, low daily flight frequency point to point network, severe irregular operations typically create a unique set of challenges. However, we believe the unusual number and location of storms in June exacerbated the operational difficulty and made this event unlike others. We estimate the impact of the cancellations, delays, and other nonrecurring expenses during the quarter negatively impacted operating income by $20 million. Adjusting for these items, we estimate net income would have been $87.5 million, or $1.20 per diluted share, and our pretax margin would have been 24.7%, in line with our previous estimate. While we do believe that this was an unusual set of circumstances, we are tweaking a couple of our staffing ratios, and we believe these changes will improve our ability to run a smooth operation and recover more quickly when severe or irregular operations occur.

Turning now to our revenue performance, top line revenue for the second quarter 2015 grew 10.8% year over year, to $553.4 million, on a capacity increase of 30.1%. Total revenue per passenger flight segment for the second quarter 2015 decreased 12.4% year over year, to $122.59, primarily driven by a 19.4% decrease in ticket revenue per passenger segment. The declining ticket revenue per passenger segment was attributable to lower overall fares in our markets, driven by increased competitive pressures, as well as a higher percentage of our markets being under development, compared to the same period last year. However, our growth-driven ticket decline was out-paced by our growth-related ex-fuel cost benefits.

Although slightly lower year-over-year on a per segment basis, non-ticket revenue continues to provide a stable revenue stream that is increasingly important during periods of lower passenger yields. The decrease was primarily attributable to lower bag revenue per flight segment, and the outsourcing of the Company's onboard catering to a third party provider, under our revenue share agreement.

As a high growth, low cost and discretionary travel based carrier, we prefer our performance to be measured using growth in earnings and earnings per share, as well as margin performance. Although we've argued that revenue per available seat mile by itself is not a good indicator of the performance of a high growth carrier such as Spirit, we know many of you track it in an attempt to have an apples-to-apples comparison.

With that said, in the second quarter, total revenue per ASM decreased 14.8%. About 40% of the RASM decline was attributable to the ramp of our growth, about 40% driven by price structure compression in many of our markets. And the remainder of the decline was driven specifically by what we have seen in the Dallas market, as it continues to adjust to capacity increases there. In the second quarter, we launched service on 24 new routes, including eight new nonstop destinations from Houston George Bush Intercontinental, 7 of which are to Latin American destinations. With that, here's Ted.

Thanks to all of you for joining us today. The peak summer travel season is always a busy time of year, but this second quarter was made even more challenging due to the numerous storm systems that impacted our network. I want to thank our team members and business partners for their hard work and dedication during the quarter. Our second quarter 2015 adjusted CASM ex-fuel decreased 2.5% year over year, to $0.058. But for the costs associated with the unusual delays, cancellations and other nonrecurring items, we estimate our adjusted CASM ex-fuel would have been down about 9%.

Compared to the second quarter of last year, the decrease in adjusted CASM ex-fuel was driven primarily by lower aircraft rent per ASM, lower distribution expense per ASM, and lower labor expense per ASM. These benefits were partially offset by higher passenger re-accommodation expense per ASM. The decrease in aircraft rent per ASM was driven by a change in the mix of leased and purchased aircraft. As the Company increases its percentage of owned aircraft, this factor will continue to produce lower unit costs associated with out fixed aircraft expense.

Lower distribution expense per ASM was, for the most part, driven by lower credit card rates related to the modification and extension of our credit card processor agreement in late 2014. Labor expense per ASM in the second quarter 2015 was lower compared to the same period last year, primarily due to scale benefits from overall growth and from larger gauge aircraft. However, these benefits were partially offset by higher healthcare costs. Passenger re-accommodation expense per ASM was higher year over year, due to the impact from storms during the quarter.

During the second quarter and through yesterday, July 23, Spirit had repurchased approximately 1.2 million shares, which equated to approximately $78.4 million of the total $100 million authorization. As we indicated previously, we plan to opportunistically repurchase shares when we see a value disconnect, and are very happy with the investment we have made to date. We ended the second quarter with $769 million in unrestricted cash.

We took delivery of three new A320 aircraft, financed under secured debt financings. We have seven more deliveries before year end. Three of these seven deliveries have secured debt financing, and one will be under a direct lease arrangement. This leaves three aircraft delivering in 2015 that are not yet financed. We anticipate updating that status in the near future.

Turning now to our 2015 cost guidance, we estimate our fuel price per gallon for the third quarter will be $1.97. We have protected approximately 24% of our third-quarter fuel volume and 23% 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. Capacity is expected to be up 34.6% in the third quarter, and up 31.3% in the fourth, for a full-year increase of about 30.3%. For the third quarter 2015, we estimate our CASM ex-fuel to be down 6.5% to 8.5% year over year, with the largest drivers of the decrease coming from lower aircraft rent per ASM and lower wages, salaries and benefits per ASM.

Adjusted CASM ex-fuel continues to benefit from using debt financing to purchase aircraft, versus adding additional leased aircraft, including the benefit from a lower cost of capital, as well as scale benefits from growth and growing with larger gauge aircraft. As disclosed last week, our revised full-year CASM ex-fuel range is now expected to be down between 5% and 6% year over year. Despite this adjustment, we are encouraged about how the business is performing, which establishes a solid base for improved cost performance in 2016 and beyond. With that, I'll turn it back to Ben.

Last week, we previewed that in addition to lowering our full-year guidance for the impact of the flight cancellations in the second quarter, we also lowered our revenue forecast for the remainder of the year. In early June, the domestic pricing environment softened further, including for travel in the peak summer periods, due to changes in competitor pricing behavior for close-in bookings. Because of this, as indicated in our investor update last week, our estimate for the third-quarter operating margin is between 22% to 25%; for the fourth quarter, between 20% to 23%; and for the full year, between 21.5% to 23%.

Before I close, as Deanne indicated, we have posted several slides on our website at ir.spirit.com, under webcasts and presentations, that I would like to spend a few minutes reviewing. These slides may look familiar to you, as we've used them before, but I think they illustrate a couple of points worth highlighting. Slide 1 shows the stability of our non-ticket revenue, and shows how it is a very stable source of revenue, even in a volatile -- I'm sorry, slide 3 shows stability of our non-ticket revenue, and how it is -- provides a stable source of revenue in a volatile ticket pricing revenue environment. We can deal with wilder swings in ticket price, because the stability of that non-ticket revenue gives us essentially a subsidy against that price that works very well for us.

The next slide shows how the basic premise of business model, that our low-cost structure allows to us serve customers that weren't otherwise flying. This slide shows five examples of markets, and it shows the amount of people who flew each day in the local market before Spirit entered the market, and after Spirit started flying in the market. And you can see, in each case, there are more people flying. And the difference in the number of people flying is very closely correlated to the amount of capacity Spirit has added in these markets.

The last slide that we're going to show today, which we think is the most interesting, shows the traffic overlap with traditional carriers is minimal. The average revenue in all domestic US, for all carriers today, is about $180, or $178. And if you break that out into five quintiles, the lowest 20%, the next 20% to 40%, all the way up to the highest 20%, you can see that the lowest 20% of traffic pays about $52. The highest 20% pays about $308. The second highest of the 20% to 40% pays $120, more than twice the lowest level.

And then the bars show how Spirit's traffic and other airlines' traffic map against this. So over 80% of Spirit's traffic comes in that lowest 20% of revenue base, or that average $52, whereas that's a very small component of the rest of the industry's revenue base. And you have to think about the fact that that -- just that next bucket up, the 20% to 40%, is more than double the lowest end. Our model uniquely serves those customers very, very well. Other carriers are out searching for that higher revenue base, thus the overlap between us and them just is not that large.

And that underscores the fact that different airlines serve different customer bases, though of course there is some overlap. Spirit has built a model that uniquely serves the lowest-fare passengers in a profitable way, which by design does not specifically cater to higher fare-paying customers. This is a resilient space, in that our cost structure, along with a stable ancillary revenue premium, allows us to offer the lowest fares and still produce among the industry's best margins.

In 2015, we have seen a return to some pre-consolidation-type pricing behavior in the industry. We would make more money if this were not true, but we are better positioned to generate strong returns in such an environment, compared to our competitors. They may choose or need to carry more of these lowest fare-paying customers to fill near-term excess capacity. But cost structure matters, and investing heavily in business-attractive product features requires that, over time, a higher fare-paying customer fills most of their plane.

It is helpful to remember that Spirit was a higher-margin profitable carrier before the industry consolidated down to four large carriers. Versus then, our costs are now lower, and our ancillary revenue is higher. We established a clear and justifiable growth path at our IPO in 2011, and we have executed well against that plan. We will continue this growth, and continue to focus on that lowest quintile of average revenues, leaving the higher fare-paying customers to those better served to meet their demands. With that, I'll turn it back to Deanne.

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. Eric, we are ready to begin.

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

(Operator Instructions)

And our first question comes from Hunter Keay, Wolfe Research. Hunter, please go ahead.

Good morning, guys.

Good morning, Hunter.

Ben, do you see a difference between maximizing, say, margins, returns, profits, and maximizing shareholder wealth? And what do you do if they don't line up?

We think generally that our basic plan, Hunter, to continue to grow the top line of the airline, while maintaining margins, or even growing margins when we can -- and that's possible through our flat-to-down CASM that we expect over time. We think it is a plan to provide the best shareholder wealth over time.

Certainly, there's volatility in perceptions about what's happening in the industry and such. What we can do at Spirit is, we can run the best airline we can run, produce the highest margins we can produce, grow in ways that are accretive to earnings and EPS, and then we'll let the market work itself out over time.

Okay. And maybe to that, the cost stuff, you've made a couple of comments, over the last few months, about this having a fore-handle on your CASM ex-fuel. Man, I just can't -- I don't know how you do that. So can you help me understand?

Did some of this maybe involve, like, just buying out a huge number of aircraft off lease? And rather than just buying new planes that are coming in, you actually take existing leases and put those on your balance sheet? Is there a component of ownership -- aircraft ownership dynamic that's going to really, really surprise us, to help you get to that fore-handle on the CASM ex?

Hunter, we made that statement -- or I say I made that statement, and it's very much an aspirational statement here at Spirit. We set high goals for ourselves here, and we expect great performance out of the airline here. And so as we think about growth of the airline, as we think about building scale benefit that we really don't benefit from today, but many of our competitors do.

When we think about optimizing the capital structure, when we think of how we can run more efficiently, and use our network more efficiently. Build scale not only in the whole Company, but in each city and on each airplane and such, we think about ways we can challenge ourselves toward better and better cost performance.

And clearly, having a number that starts with 4 would be an awesome target, if we could hit it. At this point, it's an aspiration. It's not a guide, it's not -- there's no time commitment on that. But that's the way we think about it.

We're always going to want to continue to push our costs lower through this very long growth period we have in front of us. And that's just a big mountain out there that we hope we can hit someday.

Okay, but any specific comment on that one thing about the aircraft ownership?

Aircraft ownership certainly helps. And it certainly provides the ability to improve the overall capital structure that adds a nicely unique benefit CASM, because of essentially removing aircraft ownership cost from the CASM line, putting it on the balance sheet.

So it's a key component of the overall cost structure improvement. But it's far and away not the only improvement, or the way we think of improving the cost structure of the airline.

All right, Ben, thanks a lot.

Our next question comes from Savi Syth, Raymond James. Please go ahead.

Hey, good morning. On the markets under development, they have been clearly higher in 2015, I think to the tune of maybe 40 versus doing 20/25 in the past few years. Just wondering, one, how are these markets behaving versus historical? And two, with fleet plans indicating that you are moderating growth in 2016, what could we expect related to this mix? And maybe the tail wind that we can see in 2016?

Savi, yes, this year was a bigger growth year. And that larger growth year was really a function of the aircraft delivery cycle. Again, we're still a relatively small carrier, now with 74 airplanes. So the difference between 15 and 12 airplanes makes a huge difference for an airline our size.

So with more airplanes coming this year, and seven airplanes delivered in the fourth quarter of last year, it made this year a bigger growth year. We have said for a while that we think of our growth as sort of a 20%-ish growth kind of Company, through our growth period. And that's going to have some averages of, last year was a little less, this year was a little more.

That does put more of the flying in new flying -- in new markets this year. And overall, we're extremely happy with that growth. As I said in the script, the RASM decline that we're seeing from that growth is more than offset by the CASM improvement we're seeing from that growth.

So our growth in 2015 is absolutely margin-accretive and earnings-accretive for the airline. And we feel very, very good about that. And I think investors in the airline should want to encourage the airline to continue to grow, when we can grow earnings and margin through that growth.

So we feel great about this year's growth. It's working very well for us. Our growth is not the reason that we had to lower the revenue forecast between now and the end of the year.

Helpful. And then just, Ben, do you have any color on next year? Just new market growth, and maybe the potential tail wind there?

We haven't put out any information for 2016 yet. Certainly, this year is a challenged revenue environment overall, one in which we think we're doing white well within, by the way. That sets up a little better comp for next year than we had this year, but that doesn't say anything about what next year might be.

We're not taking net quite as many airplanes next year, because we return a few airplanes next year. So overall, the total number of new markets will be a little less next year.

The total number of new ASMs will be a little bit less next year. We'll grow with about 20 new markets. About 20% to 22% growth for the year.

Sort of more like 2013 for us. And so the overall world, you know, in that sense, allows us to do -- should allow us to do okay for next year, although we've not put any specific guidance out regarding the -- what the RASM environment will be.

Got it. And just curious if you had any thoughts on the passenger -- the bag revenue per passenger, and the declines we're seeing. You haven't necessarily seen that in the past, and I'm wondering if there's anything unique? And that's all I had. Thanks so much, Ben.

Savi, it's a small change, first of all. It's -- we're talking about big numbers, and very small changes within a big number. So I wouldn't want to overemphasize anything systemic (technical difficulty). You can imagine, in a situation like Dallas, where all of the fares are very, very low, if you are carrying bags, you are likely to choose a carrier that doesn't charge you incrementally for the bags, than a carrier that charges you incrementally for the bags.

So that's driving some change in behavior, where our customers have always carried fewer bags, and we're seeing our customers carrying even fewer bags, to a small extent. Again, we're talking about a very large number in the above $50 range changing within very, very small amounts

So I wouldn't overemphasize that as any sort of systemic issue. It's just reality of, in all, when all fares are lower, you have more of that trade-off going on.

Savi, this is Ted. I might add, as well, that, to Ben's point, we've got a big number with small movements around, so we're attempting to provide clarification on something. But we emphasized in the comments that we did outsource the catering, which moves the number, as we estimated last time, around $1.

So had that not been the case, we probably wouldn't even be talking about whether or not there was movement in non-ticket. And we manage to a bigger number all the time, and so the things tend to move around the dial a little bit here and there. So, I don't think it's anything material.

The important thing is that the non-ticket has not seen the kind of dilution that the ticket revenue has seen in 2015.

And our next question comes from Duane Pfennigwerth. Please go ahead.

Hi, thanks. Good morning.

Hi, Duane.

So the stock is back to levels where we were in, I think, March or April of last year. And I think at that time, I don't know, people thought you were going to earn $3, maybe $3.50. So my question to you is, what has the Company learned or taken away from the experience of the last six months?

Let me start, and then Ted Christie can certainly make a comment as well, Duane. I think what we've learned is, we've got to be very clear about what we're doing, and we've got to deliver what we say we're going to deliver. And in fact, we have -- we've been -- we think we've tried to do a good job of telling the market what we know, when we know it.

We got slapped a little last fall when we made comments about a weaker revenue environment in the industry, and we were proved to be right about that. And then so I think we've got to -- I think what we need to do is, tell the world what we think is going to happen, tell them why we think it's going to happen, and we've just got to run the best airline we can run.

Keep our costs low and make them lower, run a good, clean operation, and recover more quickly from irregular operations. Make sure our customers understand our business, treat them really well, and keep things going. And when we can be posting north of 20% margins on a 30% growth year, we're still pretty excited about the business we're running.

Thanks, Ben. And then just a -- maybe a longer-term question. What is so special about Dallas? It seems like there's a lot of markets in the US that could really benefit from your service, certainly as we fly around.

We're believers, right, in the long-term economic logic of your cost structure. But at what point are we just trying to prove an academic point, versus something that could much more quickly accelerate the returns of your business, from the levels that we're seeing right now?

That question, I think, has a flawed premise, Duane. That suggests that we're losing money in Dallas, and that's not true at all. The reality is, since the Wright Amendment has left -- has subsided, we have not grown Dallas. We're not the capacity problem in Dallas. Dallas has much more capacity.

We are actually a little smaller in Dallas, versus when the Wright Amendment went away. So if you compare that, we're not -- there's a big issue going on in Dallas. That issue is being worked out between the two gorillas there.

We're the small guy, carrying a couple of the percent of the market. And we're going to do what we're going to do in Dallas, just like we do in Chicago, just like we do in Houston, just like we do in LA, and other markets where there are much bigger carriers carrying the bulk of the traffic. And what we are doing is carrying the small amount of traffic that their revenue management systems don't want, and that fills our airplane.

So it's not that there's anything special about Dallas. Dallas is just going to end up looking like every other park of the country.

And for many, many years, DFW benefited from not having to compete against Love Field. It no longer has that benefit, but that doesn't make DFW an unattractive place for us to be. It just makes it look like everything else in the world.

Thank you, Ben.

Thanks, Duane.

Our next question comes from Mike Linenberg, Deutsche Bank. Go ahead.

Good morning, everyone. Hey, Ben, big picture strategy question here. Look, the last couple of quarters, you've highlighted competitor pricing actions as being a source of revenue weakness. And know just a few minutes ago, you mentioned, hey look, we're going to focus on the traffic that their revenue management systems don't want.

That probably made a lot of sense when you were somewhere between 0 and 50 airplanes. As you guys continue to get bigger, as well as other ultra low cost carriers increase in size as well, and now we're starting to see you guys run up against each other in markets such as Atlanta.

Then you have the rest of the industry, the bigger carriers, growing at growth rates that are above what we've seen historically. They're starting to fight back and become a bit more aggressive. We heard just recently from the American call how they have advantaged -- their advantaged fares are now throughout their entire network. And there are a lot more of those fares in place than maybe what there was in place a few years ago.

Where -- how does your strategy evolve? Because you're bigger, the big [visibly] stronger. They're finally getting their revenue management systems in synch, as the carriers to the mergers are on the same platform. They're just more responsive. Thoughts about that, and where do we go from here?

I think where we go from here is, we just keep growing, and while we are getting bigger, we're not getting bigger in any individual O&D. The amount of capacity we have in each O&D we fly doesn't get bigger over time. What we do is, we're getting bigger by serving more and more O&Ds.

So if you look at any city from A to B, we're not growing 30% in that city pair. What we're doing is adding D to E, and F to G, and so on. And so the overall airline is getting bigger, but our exposure in any one market is not growing. It's the total number of markets we participate in that's growing.

That means, from a competitive standpoint, we're no -- we're as much of a competitor, or as little of a competitor, however you want to view us, at 200 airplanes as we are with 50 airplanes. Because it's just a matter of where we are versus where we're not. It's not that we're bigger in the same kind of places.

We size our capacity for the traffic that is served with our fare type. And not more than that, and we've been very, very disciplined about that. And so I think that there's a lot of growth available for Spirit, again.

Again, if you look in Europe, 20% of the traffic travels on an airline that looks like Spirit. And in the US, it's a couple of percent. So there's a lot of growth ahead, and we are uniquely capable of being profitable carrying that sort of bottom quintile of traffic.

It's not that other people can't carry that traffic; of course they can. But cost structure matters. And the reality is that, I'd rather be a $0.055 carrier moving down than an $0.08 carrier, when what I'm trying to fill my plane with is $50 traffic.

Okay, good. And then -- thank you for that. And then just secondly, I think you had mentioned that you said, hey look, our growth is not a reason for our revenue being under pressure.

That type of growth, though, in a situation like we had this quarter, and even last quarter with the weather, it does make it a little bit more difficult to respond. Like I think you've mentioned in the past you are a point to point carrier and not a hub and spoke carrier. And so when you get into an irregular operation situation like what we had, it's a bit harder to recover when you are growing 30% instead of 10% or 15% or so.

So I guess some -- that growth may have been detrimental on the cost side. Is that a fair prospective review?

No I don't think so. I think when you roll up all the numbers, it will still be very clear that the growth was quite accretive for the Company this year, on both an earnings --and not overly detrimental to CASM. I think the issue is, we are a thin carrier, meaning that we don't fly high frequency.

We did get a little behind in June, when we got caught up, and the number of irregular operations sort of domino-ed on us. We've learned from that. We've thought about, now, what does that mean, as we go forward, in terms of staffing, in terms of spare aircraft ratios, in terms of overall planning, and in terms of what utilization the airline can afford to fly during different times of the year.

So we're a learning entity here, and we're not going to let what happened in June happen to us again. And we're going to learn from that. That, in and of itself, doesn't mean that we shouldn't have been growing this year, or that our growth was negative.

We'd have had a much worse year this year, had we not grown. Our CASM would have been much higher.

So the fact is, we're pushing CASM down pretty significantly with that growth, and we're generating positive earnings from the growth that are helping the earnings and the EPS of the airline. So we think overall, growth is the right thing for the airline, despite -- and I wouldn't take a one-time event in June, and say that, that changes that paradigm.

Yes, and Mike, this is Ted. I'd put a finer point on it. We do not believe the growth had any contributing factor to what we experienced in June. In fact, you could probably say that had we not grown, that same event would have had a similar marginal effect to the business.

It didn't really -- it wasn't related to the fact that the Company grew or expanded its operations. What we can learn from that, though, when we grow, is how the densification of the network will help us recover more quickly, quite frankly. And so we view that as a positive, going forward, not a negative.

Okay, great, thanks for that. Thank you.

Thanks.

Our next question comes from David Fintzen, Barclays Capital. David, please go ahead.

Good morning, everyone. Ben, maybe if you separate out the gorillas -- I like that -- in Dallas, you mentioned the pre-consolidation pricing. But are you seeing what feels like a different capacity response to either your established markets or your growth markets?

Not really. Not really. It's basically just [trashing] close-in pricing, basically.

Okay. All right. And then you mentioned sort of growth didn't contribute to June, and you talked about the tweaks. Tweaks is an interesting word. Is there something over time that's material in these staffing levels? Should we be re-thinking CASM? Does it -- or is it tweak like a literal tweak?

No, it's -- and this is Ted. No, it's a literal tweak. It may not seem like it, given the magnitude of the event.

Because of the way our network is wound, we're always -- and you know this about us -- we're always striving to continually improve the Company's margin performance, and sometimes we may overreach in limited areas. And what we're finding is that little tiny moves, in the way our network is constructed, can have an effect.

We understand that, actually, now. And we're going to go through periods in our growth cycle where we'll stretch and learn. That's just going to happen, and I think this is an example of that. So no material effect to the Company's cost structure.

Okay. And then just a last one, if I can sneak it in. Just given -- and obviously, this is well away from you, in model, but given Delta pilots voting down the TA, and the broader pilot cost pressures we've seen in the industry. How are you thinking about labor costs, going forward? And how much is that factored into a lot of your comments and aspirations around CASM?

Obviously, we're not going to comment specifically on any discussions with labor going on now. But we have said several times that the Company's growth, which is a function of growing with larger average planes, and building scale economy into the Company through absolute growth, is the primary motivator for our ability -- or primary reason we believe we can maintain unit costs flat to down through the growth period.

That comment is made inclusive of the fact that we will sign a new deal with our pilots at some point, and we will sign a new deal with our flight attendants at some point. And we -- and we're not blind to that reality. But what happens is, when labor costs get a little higher, through new deals, we have to find other ways to mitigate those costs through efficiencies in other areas of the income statement. And that's exactly what we're doing.

Okay. Appreciate all that color. Thanks.

Our next question comes from Julie Yates, Credit Suisse. Please go ahead.

Hi, Julie.

Thanks for the color on 2016 growth. A question on CASM ex next year, to further the discussion, including maybe what you are expecting in [late]. With the change in Q2 and the one-time costs from the storm, and the change to 2015 CASM, how should we think about 2016? Should it look similar to 2015, in terms of the level of decline? Or could you actually see a greater decline, even though you've got a little lower ASM growth?

Hey, Julie, it's Ted. Yes, we're not prepared to forward-guide yet on 2016. We haven't even gone through our planning process yet. But as we've said before, reiterate again, we do feel comfortable about 2015 acting as a base, going forward, not a floor.

So our objective will always be to drive costs down from there. I mentioned in my comments that it sets us up nicely for continued CASM improvement in 2016. I'm not prepared to go any further than that. But look, we feel good about the direction the Company's headed over the last couple of years.

Thanks, Ted. And then just a question on loads. So it looks like in the first half, loads fell a little under 2 points. And looking into the second half, where your growth accelerates, and there's more matching from larger carriers, would you expect load declines to be more pronounced in the second half of the year?

We run our system to run high loads. And when we have the ancillary revenue premium that we have, we're always better having a seat full, even if the ticket revenue associated with that is very low. So we actually manage toward I-load factor, and we wouldn't expect, over time, to see big drops in our load factor.

What we would do is adjust our pricing to keep the plane full. We have said continually that the right price for Spirit is the highest price that fills our airplane. And filling the airplane is important.

And Julie, all what Ben said is correct. And we wouldn't give -- we don't know that there's a number to give. But there is something unique happening to the airline structurally, between now and the back half of the year, in that we're starting to take more and more 321s, which as we deploy -- and in a new market, will take a little bit more time to build up. But that's still a smaller piece of the total fleet, but something to be aware of as we move forward.

Okay. And then just lastly, it looks like you're almost through your current share repurchase authorization. What's your appetite to authorize more?

We're certainly thrilled with what we've done thus far. And that's a fluid discussion with the management team and the Board. Considering the valuation that we see in our stock, and what we view as the potential there. So nothing to update on this call, but something we're always in discussions with them about.

Our next question comes from Dan Mackenzie, Buckingham Research Group. Dan, please go ahead.

Good morning, guys. I guess I'm wondering, if I can come back to some of the previous questions, from a slightly different angle. As I look at where Spirit is putting its capacity, obviously the large cities, Dallas and Chicago. But, based on the pricing trends we're seeing today, do you view that strategy as sustainable, looking ahead, not just over the next six months, but over a multi-year period of time?

Then secondly, can you remind us of the -- on the pros and cons of shifting to secondary markets? So what percent of the 500 new market opportunities that is in your presentation do they represent? And can you get the utilization you need by connecting those dots?

We want to make the most money we can make, and we deploy our airplanes to provide the highest return we believe we can get from that. That tends to lean us toward wanting to serve bigger cities. There's more people there, there's more affinity to other places.

There's just more room for lots of different kinds of carriers doing lots of different kinds of things. There's more restaurants in Chicago than in Latrobe, and there's going to be more airlines in Chicago than in Latrobe. (laughter) So it's for the same kind of reason.

So the reality is, our goal is to be a couple of percent of everywhere in America, not to be 50% of anywhere in America. And being that couple of percent in all the big cities makes us a pretty large carrier, but doesn't make us a meaningful share player in any place. What it does is, it allows us to carry that segment of the traffic that is the most price sensitive, that is willing to accept the compromises, the product compromises, we ask them, in exchange for that lower price.

That is a large market, but it's a small percentage of the total market. And most other airlines are going to do a better job serving all the business travelers, and all the higher yield travelers, in those cities. We're going to be uniquely there for the people who just want to get there cheaply.

Got it. So the secondary market opportunities, we really shouldn't be thinking about those at this point, if I understand the answer correctly?

If they can drive as high a return, or a higher return, then that's what we'll do. And we serve secondary markets. I mentioned Latrobe before, we fly to Latrobe. We fly to Plattsburg. But we also fly to O'Hare and LA.

So we have a nice mix in our network today, of secondary markets and main markets. And what we're going to do is choose the markets that provide the best return. If we can get the population base, and a cost structure that allows us to earn our target margins at an alternate, of course we'll do that. But we're finding more and more that big cities, and being a couple of percent of each big city, is a better way for to us grow right now.

Understood. And then a second question here. This is just more house cleaning. What is the average seniority of the pilots, 5 years, 10 years? And what has that trend line been? And how does it evolve, looking ahead?

Yes, Dan, it's around 6 years, we think, off the top of our heads here, without staring at a number. And I think that trend line has been stable to down a little bit, as we grow. We -- when you have a 30% growth year, you are bringing in a lot of juniority there. So that helps, but hopefully that answers the question.

Yes, very good, thanks, guys. Good job, as always.

Thanks.

And our next question comes from Joseph DeNardi, Stifel Nicolaus. Please go ahead.

Good morning.

Hey, Joe.

Ben, I'm just wondering, on the -- as the competitive landscape maybe changes a little bit, maybe it normalizes, maybe it doesn't. Does the view on M&A change at all as a result of that?

No.

Okay. To what extent, I guess, in the guidance that you provided, do you factor in any incremental pressure from Southwest growth in Houston? And then, what have the competitive dynamics been like in Atlanta, as your growth has picked up there?

Our guidance is based on what we see right now going on in the marketplace, and it's not based on assuming all kinds of planets align, and things like that. It's the environment we see now rolled out, and that's what it's based on.

Our next question comes from Helane Becker, Cowen and Company. Please go ahead.

Hi, everybody. Thank you so much for the time.

Hi, Helane.

Ted, as I look at your tax rate -- and maybe you said this and I missed it. As you think about taking aircraft, using debt financing versus owned aircraft, doesn't it -- to help -- sorry about that. I don't know why my voice does that. Doesn't it help your tax rate to come down if you finance more aircraft?

No, it's -- you're talking about a deferral rather than a change in the rate. When you get the accelerated depreciation benefit associated with putting the asset on the balance sheet, that's not a rate issue, that's a cash flow issue.

So how can you minimize your tax burden?

There's no silver bullet there. The government taxes us, and that's just the nature of the beast. But there are always little things that can be done.

Some of it obviously, Helane, is driven by your mix across the states. So that's why you see differentials between different companies, as to where they fly. Different tax rates affect that across the states.

We're always exploring ways to minimize that burden. Clearly, we've always been aligned in that camp, that we want to look at ways to minimize the tax burden. And we're getting more and more sophistication in that regard.

Okay, thank you. And then can I ask you a question, Ben, on your seven new markets out of Houston to Latin? Can you just talk about how they're working out? And -- because we're hearing from people that Latin markets are weak, and the economies are weak, and so on. And yet you seem to be doing fairly well in those markets. So I was just wondering if you can make any relative comments?

What they call Latin and what we call Latin may be different things. We're not buying wide-bodies, you know, 10 hours to Latin America. (laughter) But -- so the reality is, our Latin operation is doing it very well right now, and Houston is responding terrifically to our -- to the markets we've added.

As you know, the markets we added out of Houston are cities that we were already serving out of other gateways in our system. So what it does is, it's made those stations a little bit more dense, and improved some of the efficiencies of those stations, as well. And so Houston's now the second largest international gateway in our network, after Fort Lauderdale, and we're very excited about that growth.

Great. Okay. Thank you so much for your help. Have a great day.

Thanks.

And our next question comes from Stephen O'Hara, Sidoti & Company. Stephen, please go ahead.

Hi, good morning.

Good morning, Stephen.

Yes, I was just curious. In terms of the change in behavior you've noticed, I'm just wondering, what do you think has led to that? And obviously, fuel gives them, I think, a lot more room to price down, obviously, and still crow about margin improvement and everything else. And I'm just wondering, it seems to me that, unless fuel takes another leg down -- I mean it has recently.

But unless it continues to do that, it's going to be a lot harder next year for the industry in general to highlight margin improvement and growth -- and EPS growth, unless you see a continued decline in maybe CASM, which seems unlikely, industry-wide. So I'm wondering, what you think led to the change? And then what gets us back to maybe a more normalized environment for you guys? And it doesn't seem like they believe your chart, on market stimulation.

Data don't lie, right? (laughter) The interesting thing, I guess, is that we see the environment that we're in right now, and it doesn't particularly bother us. We're posting terrific margins. We're able to grow and post those kind of margins, among the industry's best kind of margins.

So if this environment stays for a while, that's okay. Clearly, we'd make more money if the change in behavior hadn't happened, but there's a lot of new capacity in Dallas, and Dallas is reacting to that in some way. We only see our little piece of this elephant, right?

We're only carrying a small segment of the most price-sensitive travel out there. There may be all kinds of things happening in the business travel world that we don't see. Dynamics among competitors, strength or weakness in any individual markets, we don't see any of that.

So we can't pretend to know what other carriers are seeing, and what's affecting their pricing decisions. We just know we can make money at low prices, and so our prices are going to be low, and our CASM is going to get lower. And we're going to grow and drive high margins.

Okay. And just in terms of, I think at some point, you guys have compared yourself to the dollar store of the airlines, or you don't mind being the dollar store, in terms of low prices and value, and everything else. Do you think it's a -- Macy's doesn't worry about the dollar store, but maybe they are afraid they become the Wal-Mart. Do you think that's what's going on here?

No, I don't think that. I think it's simply that people are responding to things they need to do to run their airlines most efficiently. And we've got a generally smart industry today, run by smart people, and I think everyone will run their companies the way they think best. And that's exactly what we're doing at Spirit.

Okay. And then just as a follow-up. On Delta's call, they mentioned a Spirit fare. So in terms of brand quality, would you think that advertising a Spirit-like brand, does that -- in your opinion, would that dilute the brand? Someone's brand, let's say?

Then does that make it that much harder, later on to boost prices, if you now may be associated with the lower fare bands, going forward? If fuel rises, or something like that?

Then, it looks like you have a pretty good step-up in ASMs per gallon in 4Q. And is that the A320? And is that a good run rate, going forward? I would assume it would improve a little bit, actually, given the deliveries you're taking. Thank you.

I'm not sure how to respond to your first comment. Delta has their basic economy fare. They don't call it a Spirit fare, right? Publicly, they don't call it that. So Delta's doing what they think is the right thing to do, and we're fine with the basic economy fare. It works. It doesn't -- we think it's okay.

In terms of fourth-quarter capacity, yes, we're adding eight A321s in the back half of this year. I'm sorry -- six A321s in the back half of this year. And that's driving some of the incremental ASMs for the fourth quarter.

Yes, making that ASM per gallon metric --

Yes, making that ASM per gallon look a little better, that's right.

Okay. Thank you very much.

Our next question comes from Stephen Trent. Stephen, please go ahead.

This is actually Kevin [Kasnikov] stepping in for Stephen.

Hey, Kevin.

Thank you for all of the color. And I guess the only major questions we have are just on the pricing environment. Are you seeing any pullback in the aggressive fares that are being offered by some of your legacy competitors? It didn't seem like you were indicating that, but I just wanted to confirm.

No. It's a very aggressive environment right now. And that environment is why we're running 21% to 23% margins instead of higher.

Okay, okay. Great. And then, just another one. Do you have any ability -- moving -- I guess moving planes to your balance sheet. It's good for overall profitability, and your capital structure, given interest rates.

Do you have any ability to delay or defer aircraft deliveries, if the capacity growth situation continues to be an over-capacity situation? And moving planes to your balance sheet, does that reduce your flexibility at all? Are you worried about that? Is that something you guys look at, even?

I'll respond first, and then Ted Christie can respond. We don't think there's an over-capacity of $0.05 CASM airplanes. (multiple speakers) (laughter) Ted, do you want to comment on --

I was just going to say the same thing. We're not in a position to be thinking about, or even contemplating, deferral's. We're frankly pleased with the order book and the Company's growth. The market opportunity we have is large, larger than we can possibly deploy into. So I think that might be a question for other airlines, but not for us.

As it relates to our ability to take them on balance sheet, for that reason, we're excited about investing in that equipment. It's going to be a real positive to the P&L, and a positive to the return for our shareholders. So no, no impact there.

Okay, great. Thank you very much.

Thank you.

And our next question comes from Duane Pfennigwerth. Please go ahead.

Thanks for taking the question on a Friday. I just can't get enough. I don't want the weekend to start. (laughter)

Always time for you, Duane.

Thank you. I appreciate that. So just with respect to the specific commentary about a change in the close-in pricing environment, and specifically as you think about a month like June, which was supposed to be a seasonally stronger month, and really a change in close-in, right? So have you seen any change for the better, here in July?

Then more importantly, because it's close-in, it inherently has a lack of visibility. So what have you assumed for the rest of the year? Can we be open minded that we might actually see some improvement, relative to the guidance that you've put out, if the close-in environment firms?

Our guidance is based on what we see happening in the marketplace now. It's not predicated on an improvement in that environment.

And have you seen anything in July that would lead us to be a bit more optimistic here about -- versus being backwards-looking to June?

No, we haven't.

Okay, thanks for taking the follow-up, Ben.

Hey, Eric, we have time for one more question.

Okay. Our final question comes from Hunter Keay, Wolfe Research. Hunter, please go ahead.

Thanks, Deanne. Two quick follow-ups here. Ben, when you talk about the yield pressure in Dallas, how much -- are you seeing pressure on some of your local O&D traffic out of DFW, as a direct result of some of the re-banking initiatives that have occurred there?

The fact is, there are hundreds of more flights available for sale on online travel agencies because of the changing and timing of connections. Do you find that, that's having a significant impact on some of the local yields in that market?

I think that's a bit of a disconnect, Hunter. You'd have to ask American, of course, what the details of their re-banking, since we can't talk about that. But what I would think a re-banking would do is, make you more efficient at carrying connections, which would make you a little bit less exposed to the local traffic base. And all Spirit carries is local traffic.

We're (technical difficulty) action carrier. We're not building the airline to carry-connect at all. And just the term re-banking means, I'm making myself become a more efficient connector. So the reality is, it's not really driving changes in the local market.

Okay, good. And then on the buyback, I'm -- I don't know, Ted. I'm curious to know why you're talking so bullishly about it. Your stock's clearly not being rewarded for it. Your multiples compressed about 8 turns since the buyback. (technical difficulty) to support the stock. There's too much volume.

If you spent $200 million on your buyback next year, you'd maybe bump earnings by like 4% to 5%. That's not why people are buying your stock. They're buying your stock because it's a growth stock.

Bad operations cost you guys $0.17 in earnings this year so -- this quarter. So why would you not spend $100 million to $150 million, whatever it is, next year, on making the operation more reliable? When just not clear they are getting rewarded for buying back stock as a growth company?

So -- thanks, Hunter. So we evaluate all our asset purchases based on the long-term return. And that doesn't change because of a two-month or a one-month change in the Company's operation.

We're believers in the stock long-term, and always will be. And so we're fine with the purchases we made. And for that reason, I wouldn't change what I said earlier about being pleased with that.

As it relates to investing that money elsewhere, we always make value decisions around here about where to invest in the business. And we're doing what we need to do to run the efficient operation that we have in front of us. That doesn't change with whether or not we spend $70 million, $0 million or $150 million on the stock. We're going to make the right decision first, to run a productive airline.

And I'll just reemphasize what Ted just said. There's not $1 of investment in running a reliable operation that we have not spent because we chose to buy back some stock.

Yes, okay. I hear you. Thank you very much.

Thank you all for joining us today.

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