Spirit Airlines Inc (SAVE) 2015 Q4 法說會逐字稿

Welcome to the Spirit Airlines fourth-quarter 2015 earnings conference call.

My name is Ellen, and I will be your operator for today's call.

(Operator Instructions)

I will now turn the call over to DeAnne Gabel.

Ms. Gabel you may begin.

Thank you, Ellen.

And thanks, everyone, for joining us today.

Presenting today will be Bob Fornaro, 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.

This call is being recorded and simultaneously webcast.

A replay of this call will be archived on our website for 60 days.

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 our Management's belief as of today, February 9, 2016, 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 fourth-quarter 2015 earnings press release for further details regarding our assumptions for the reconciliation to the most directly comparable GAAP measures.

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

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

2015 was full of new challenges, and I applaud our team members for delivering solid fourth-quarter and full-year results.

I am thrilled to have been selected to lead this innovative team.

While I only recently joined the Management Team, I have had the pleasure of serving as a Board member for a couple of years and have firsthand knowledge of our Team members overcoming challenges and adapting as the operating environment has changed.

In 2015, we grew capacity 30%, increased adjusted diluted earnings per share by 35.3%, and delivered a pretax return on invested capital of 28.2%, all while our total average revenue per passenger segment decreased by over $15, or 11.6%.

The model works.

We are able to offer our customers even lower fares and grow shareholder earnings as the mix of lower fares, lower fuel, and lower ex-fuel costs drove an increase in our margin production.

Before I share my thoughts about what we hope to accomplish together this year, here is Ted to recap the quarterly results.

Thanks, Bob, and again thanks to all of you for joining us today.

For the fourth-quarter 2015, we reported net income of $73.3 million, or $1.02 per diluted share, and a pretax margin of 22.4%.

Total revenue increased 9.6%, driven by a capacity increase of 30.5%, which was largely offset by a decline in average operating yields and slightly lower load factors.

Total revenue per passenger segment for the fourth-quarter 2015 declined $16.13, to $111.78.

This decline was driven by a $15.69 decrease in ticket revenue in per passenger segment which is a result of continued competitive pricing pressures in our markets as well as a higher percentage of our markets being under development compared to the same period last year.

Non-ticket revenue remained relatively stable, declining only $0.44, to $54.26, once again proving the value of this stream of revenue in volatile pricing environments.

As for operations, for the fourth quarter, our systemwide controllable completion factor, that is excluding weather-related cancellations, was 99.7%, and our systemwide on-time percentage averaged about 74.5%.

There were several times in 2015 where we struggled with delivering consistent operational performance.

On the whole, we improved year over year, but our goal is to deliver reliable service in any environment.

And we recognize we fell short of that mark in 2015.

As discussed last quarter, we are slightly reducing our utilization in the peak period in 2016 towards the goal of improving our operations.

And we have made a number of adjustments to our staffing and operating systems since June that have already helped us with a number of events, including the most recent storms on the East Coast.

In addition to being important to improving the customer experience, aircraft downtime and passenger re-accommodations are costly.

For these and various other reasons, we are 100% committed to improving our operational reliability.

Turning now to costs, Spirit's cost performance throughout 2015 should be a source of pride for all our team members, and I thank them for their diligence in improving our cost structure.

The fourth-quarter 2015 was no exception, as CASM ex-fuel decreased 8.2%, to $0.515.

Our full-year 2015 CASM ex-fuel decreased 6.5%, to $0.055.

Our fourth-quarter CASM ex-fuel came in 70 basis points, or about $2 million, lower than the guidance we gave in mid-January, driven by a bunch of small items that came in better than expected as well as a few items that pushed forward into 2016.

The year-over-year improvement in fourth-quarter CASM ex-fuel was driven primarily by lower aircraft rent and lower labor expense on a per-ASM basis.

The decrease in aircraft rent per ASM was driven by a change in the mix of leased and purchased aircraft.

Labor expense per ASM was lower primarily due to scale benefits from overall growth and from larger gauge aircraft.

These decreases were partially offset by higher depreciation and amortization expense related to the depreciation of owned aircraft.

In the fourth quarter, we recorded $1.6 million of interest income primarily related to our EETC funds held in escrow.

In 2016 we expect to record about $1.7 million of interest income related to the escrowed funds, with $700,000 in the first quarter which will trail off to approximately $160,000 in the fourth quarter.

During 2015, we spent approximately $99 million repurchasing approximately 1.5 million shares under our share repurchase program.

In October of 2015, our Board approved an additional $100 million repurchase authorization.

As we were with our first authorization, we will be opportunistic with this program.

We believe in the long-term investment thesis for this Company, but our growth requires diligence with our cash.

Given our significant aircraft capital requirements, there is a delicate balance between the decision to invest in the Company's equity and to investment in funding our growth.

In the fourth quarter, we took delivery of three new A321ceo aircraft, ending the year with 79 aircraft in the fleet.

Turning now to our 2016 guidance.

Capacity in the first quarter of 2016 is expected to be up approximately 27.5% year over year.

The year-over-year percent change in capacity is expected to trend sequentially down throughout the year.

We have been advised to anticipate several months' delays for one or more of the A320meos scheduled for delivery in 2016.

We are working through a couple of contingency plans, including the pacing of scheduled fleet retrofits, to cover a capacity growth shortfall should this happen.

So, we still estimate our full-year 2016 capacity will be up about 20% year over year.

The pricing environment has been fairly stable since October.

Revenue trends have been tracking to our forecast, and they indicate the pricing environment hasn't gotten worse, but it hasn't materially improved either.

Fares in our markets remain very low, and we expect them to remain very low in the first-quarter 2016 as the pricing environment remains competitive.

To the extent fuel moves lower, we anticipate our fares will see even further downward price pressure.

Our team has done a great job as the pricing environment has evolved, taking an aggressive approach to revenue management and continuing our surgical adjustments to capacity, which has benefited our unit revenue performance.

If the current pricing environment holds, year-over-year TRASM decline in the first quarter should be similar to what we experienced in the fourth quarter.

We anticipate that year-over-year TRASM declines will sequentially improve as we move through the year, as fares were lower in the second half of 2015 than they were in the first half.

But, again, with lower fuel prices, this dynamic could change.

We currently have no fuel hedges for 2016.

Based on actuals to date and the forward curve as of February 4, we estimate our fuel price per gallon for the first quarter will be $1.25.

For the first-quarter 2016, we estimate our CASM ex-fuel will be down approximately 2.5% to 3.5% year over year, with the largest driver of the decrease coming from lower aircraft rent per ASM.

And, for the full-year 2016, we are targeting CASM ex-fuel to be flat to down about 1%.

The biggest cost headwinds we expect throughout 2016 are related to aircraft return conditions recorded as supplemental rents, and higher depreciation and amortization driven by an increased number of heavy maintenance events, as well as aircraft depreciation related to our purchased aircraft.

These items will act as a partial offset to lower aircraft rent per ASM, driven by a change in the mix of leased and purchased aircraft.

For clarity, in 2015 we performed 1 engine shop visit, while in 2016 we are scheduled to perform 21 engine shop visits as we begin to do the second round of heavy-engine events on many of our older 319s.

The exact timing of each maintenance event is fluid, and that may drive some volatility in our CASM ex-performance in each quarter.

In general, we expect CASM ex will be down more in the second-quarter 2016 than the first-quarter 2016, up slightly year over year in the third quarter, and up mid-single digits in the fourth quarter.

We'll do our best to update you as we move through the year.

I would like to emphasize that the pattern in CASM ex throughout the year is not a trend but is instead a timing issue, and we expect year-over-year 2017 CASM ex-fuel to be stable to declining as well.

Our ultra-low cost structure is the foundation of our competitive advantage which provides us the platform to define our future.

We remain focused on improving our CASM ex-fuel cost.

I'm confident that we can continue to achieve stable to declining unit costs for the foreseeable future; however, in any given calendar year, this may not hold true due to timing issues.

So, when you sum this all up, you get to a first-quarter operating margin of between 19% and 20.5%.

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

Thanks, Ted.

I know many of you are anxious to hear my vision for Spirit and changes that may be forthcoming.

I do not feel I need to make sweeping changes, but I do have a few ideas on how we can further improve.

One of the primary areas we our focused on is improving the overall customer experience, and we have made this a top priority for 2016.

This includes improving our on-time performance and maintaining a high-completion factor, as well as improving our customer service metrics.

We've previously discussed some of the changes we've undertaken to improve our operational reliability and recoverability, such as slightly reducing utilization in peak periods, increasing our aircraft sparing ratios, and increasing crew management staffing levels.

In addition, we are exploring a few other changes that might prove beneficial as well, and we will be happy to discuss those once we have time to fully analyze their potential impact.

As for improving our customer service metrics, that does not mean we are changing the business model.

It is already proven a successful business model, and there is no need for a full make over.

We know that when customers understand the model, they find great value in our ultra-low fares.

Over the past year and a half, we have made good strides in increasing the transparency as to how customers can save money flying Spirit, but there is still room for improvement.

There have been rumors circulating that I will pull back on our growth plans.

We do not expect to repeat a 30% growth rate in the future, but we are very comfortable with a growth rate in the range of 15% to 20%.

As a normal course of business, we are in the midst of updating our fleet -- five-year fleet plan which begins with a detailed review of gauge and mix.

These discussions are about whether or not we -- A319s should remain, as well as evaluating the gauge and timing of future deliveries, all of which are intended to enhance the Company's flexibility in the current operating environment.

Of course, as we continue to get larger, our percentage of growth may slow -- because it's off a higher base -- but I fully expect and support Spirit being a high-growth carrier for many years to come.

Spirit is a really great airline, and it does a tremendous job serving the segment of the market that wants and needs ultra-low fares.

Some of the criticism we have received is warranted, and we know we can do better.

We also know a lot of people who love the model and don't want us to change a thing.

That said, there are areas that we can deliver -- we can smooth out some rough edges and deliver a better overall customer experience.

A good way to summarize the way I am thinking about it is to refine and improve a very successful story.

Now, back to DeAnne.

Thank you, Bob and Ted.

We are now ready to take questions from the analysts.

We do ask that you limit yourself to one question with one follow-up.

If you have additional questions you are welcome to place yourself back in the queue, and we will allow for additional questions as time permits.

Ellen?

Thank you.

We will now begin the question and answer session.

(Operator Instructions)

Rajeev Lalwani, Morgan Stanley.

Thanks for the question and congrats, Bob, on the new role.

First question I had was just on M&A -- just your thoughts there where Spirit fits in as either a buyer or a seller.

Good morning, Raj.

How are you?

There's not really much to report on that subject.

I think it is really mostly speculation that has been out in the marketplace since I joined the Company.

So there really is nothing to report, and like I said, I am certainly aware of what's going on in the marketplace, but there really is nothing for us to deal with or discuss at this point.

Great.

And another question for you, Bob, as far as being on the Board of Spirit and observing some of the pressures over the last year or so, what do you attribute it to?

What would you have done differently potentially?

I think we have talked about the underlying operation and in many ways the Company is very far-flung in its route network, and so we have roughly one flight in every market.

We cover the entire US and then when we get off schedule, it is very difficult to recover.

We need to look at our operation perhaps differently than almost any other airline in the country.

Again, over time, if we don't step in and find a way to make us more reliable and probably more recoverable, we will continue to fall behind.

So I think what we're going to focus on is ultimately, make the right moves now to get us -- again to -- become a solid operating airline with good performance metrics and make sure as the Company scales up for growth, we are making operational improvements that will allow us to continue to provide good service.

But I think that is the key.

We need to move faster, and quite frankly, we have something good going on here.

We played very good offense with the business model.

Customers only pay for what they want, and the cost structure is fantastic.

What we need to do is provide a seamless, more efficient, operating experience for the customer.

Great.

Thank you, sir.

Julie Yates, Credit Suisse.

Good morning.

Thanks for taking my question and congratulations on the new role, Bob.

Thanks, Julie.

Couple questions.

Just first, Ted referenced a stable pricing environment, and do we interpret that even with a 30% decline in crude since early December that there has not been a corresponding let down in fares?

But if there is a further declining crude we should expect one?

Julie, it's Ted.

We are basically giving you our view as of today with current prices.

So stability implied that, but there is always volatility with lower oil, and those things can change going forward, but based on what we are seeing today, that is what we would say.

And Julie, I think -- we are comfortable dealing with it.

I think for a couple of years, pricing in the industry was very stable because of, let's say, reduced capacity in the marketplace.

And so we have been dealing with this for basically 9 to 12 months, and I think the best thing that we can do is make sure we keep our costs low and improve our operation, and our ability to manage through it will be enhanced.

Okay.

And then, Bob, any varying view on how SAVE is growing?

I know you said, really the growth trajectory was unchanged but just in terms of the targeting large markets with up to two-times daily frequencies, we have seen other ULCs starting to target more of the midsize markets with perhaps less than daily frequencies.

Is there any desire to do that or -- in the future?

We don't have all the details, and one of the things that we won't do is make a dramatic schedule change for the summer.

Summer is one of our best operating periods, and quite frankly again, I see a very strong performance no matter, really what we do.

But I think going forward, we are going to be much more open to a broader view of routes, and again, over the last couple years we've focused mostly on big markets to other big markets which really put us in legacy carrier hubs.

And I think over time we would just be as interested in looking at midsized markets and small-markets to leisure routes.

I think in terms of the playbook I think we have always had the capability of doing that, but I think you will see more focus on a broader spectrum of routes going forward.

Okay.

Very helpful.

Thanks so much.

Duane Pfennigwerth, Evercore ISI.

Good morning Bob -- welcome back.

Nice to be speaking with you again.

Good morning.

Can you talk about any areas of focus you have had since joining Spirit as a board member?

In terms of areas of focus, like I said I think we've got a very good board and a board that is involved, so we have always had very good conversation and debate about strategy and performance.

Let's just talk about the performance area.

In 2015, we created actually a new committee which -- for safety and oversight, and we spent a lot of time focusing on the operation, perhaps more so than you would see at most other carriers.

So our discussion about improving the operation has been going on for some time, and I think the team even late last fall talked about a number of improvements it was making.

I think in terms of emphasis I think there is just going to be more.

I think in terms of -- we are a sizable company.

We've got a fleet plan that's going to take us into in excess of 100 airplanes in a couple years.

And with that, we need to make sure our planning, operational planning, is in sync with the fleet plan rather than perhaps being behind it.

I think again, the focus on performance again is important.

Reputation does matter, and I think if we can provide low fares with a positive reputation, it will be good for business.

I don't think it is much different at Spirit than it is at other carriers.

Reputation does matter, and if you view a more competitive environment going forward, reputation will mean a lot more.

So I think an area of focus remains the operation.

At the same time as we think about the future, the market has clearly gotten more competitive over the last year and a half versus the prior three or four years.

Larger carriers have stronger balance sheets, and there is more growth across the board.

And I think that means we need to have a more flexible approach to route planning.

Again over the last couple years we have great margins, and we expect them to continue in the future, but we are also planning -- we need to plan for a competitive environment.

If the competition wants to match our prices, we need to make sure we have got strategies that allow us to compete vigorously.

I think we have always talked about being flexible and nimble, and I think you'll see more flex -- more of that flexibility going forward because again, 2012, 2013, and 2014 were very very unique time in the post merger period.

But we're going to plan on an environment -- we're going to plan on a more competitive environment, and we think that is the best place to be.

If we are wrong and the marketplace is less competitive, we will be very happy with that outcome.

That is really helpful color.

I appreciate that.

One for Ted.

What capacity growth are you expecting in the fourth quarter underlining that mid-single CASM guidance?

And certainly appreciate one of the changes at Spirit -- I think it was more conservatism around your guidance -- your future guidance points.

But I wonder if you could comment on -- is that mid-single CASM growth in the fourth quarter consistent with internal targets?

It doesn't really feel that aggressive to us.

Thanks, Duane.

We're just taking a look at getting you some data on where Q4 capacity guide is.

I'd say, just like I've always said with our CASM targets, we are always aiming for accuracy, so I would imagine that we are consistent in that regard.

So we are focused on delivering on the kind of, flat to down one for the year, and we feel that is the appropriate trajectory for the Company in any given year.

The timing throughout the year is more around what I alluded to in my comments, associated with maintenance events and when they fall, which means that as you move through the year, you hit more and more of those pushing through your DNA line which is just penalizing the back quarters more than the front quarters.

It looks like -- by the way we are targeting capacity change in the fourth quarter kind of in the mid teens, and so with that, that CASM number feels about right to us.

Okay.

Thank you very much.

Savi Syth, Raymond James.

Good morning.

I was just wondering if you could step back and given the unique business model you have, talk about the leverage that you have in a slowdown or a recession.

And what I'm curious on is, given the cost structure, is there the right lever in a recession to use price to stimulate leisure demand?

Or are there other opportunities like -- better opportunity of kind of slowing growth or utilization?

I was just wondering if there is a slow down or a recession how the model adapts to that?

Again a couple points because you never know what a slowdown will look like.

A slowdown with say high oil prices and lower demand might be treated differently.

Certainly at -- with today's fuel prices, actually you have a lot of flexibility.

We are in a situation now where we have high utilization, and in this environment with low fuel prices, we are able to run a lot of redeyes.

In a period of time where you have fuel prices, that could change.

But I think there is always the ability to adjust utilization, but we need to be careful that we don't create inefficiencies.

I think the key thing for us in almost every situation is the relative cost advantage versus the competition.

The more we can retain it or maximize the gap between Spirit and others, it creates a unique competitive position.

It just gives us more time where perhaps others need to take more action.

We are down to $0.05 a mile.

That is a very unique place to be.

I think if we can improve the reputation on a regular basis, I think we could actually improve our business in certain periods of time again, with a low cost structure and positive feelings from customers.

But it is -- generally speaking, we are going to focus on managing the cost structure and improving the business model.

And with that we can make adjustments, but we have a young fleet.

As I have learned we have the youngest fleet in America, and that is a very unique position.

We want to be known for that, and perhaps other things, but with the youngest fleet that does not mean we're going to take our utilization down a couple of hours.

It is generally not a place that we want to go, but ultimately we do have flexibility.

We are at 13 hours of the day -- 13 hours per day, and that creates some options for us to adjust capacity in certain markets.

That's helpful, Bob, thanks.

And, Bob, if I may follow-up on your comment about maybe looking at a broader spectrum of market.

I know in your AirTran days you did well in kind of pursuing some of the smaller markets, and you are no stranger to intense competition.

Am I understanding it correctly that just the premise here is that right now the hubs are being more aggressively defended, and that is what causes maybe a potential shift in the type of market value are looking at?

I am trying to understand maybe either lessons learned or what has changed that maybe broaden the type of market where -- that you would look at.

I think the environment has again has changed again a little bit.

We were in a -- for several years we were in a very unique period of time where capacity was well below, let's say, the previous peak which was 2008.

A couple of carriers were going through post merger integration.

Another carrier was still coming out of bankruptcy, and it created perhaps a reduced competitive environment.

And so -- maybe the opportunities that we chose were in hub to hub flying, and it produced very good results.

It still produces very good results, but at the same time we have seen more aggressive matching.

Our results are still very good, and I don't see any major changes in some of those markets, but there are also other markets to focus on, and again our cost structure is portable.

It is not tied to any one particular segment, and some underserved markets exist outside of other carrier hubs.

So I think again it is a matter of focus.

Again, I am personally very comfortable with those kind of markets.

I am used to operating in an environment where costs are 50% to 60% below the competition.

It is a pretty good place to operate, and there are opportunities I think across the board.

What we're going to do is, I think we'll be less deductible going forward -- again all of this takes time, but you will see less predictability in the way we pick routes going forward.

Jamie Baker, JPMorgan.

Good morning, everybody.

Bob, you talk about not needing a full make over to the business model.

I realize your plans remain under wraps, but in the case of Ryanair, they are having pretty considerable success having softened the edge of their product to the point that they now attract a higher demographic, including corporate travelers.

That doesn't strike me as a full make over, to use your words, more of just an improvement of what was already in place.

Is this the sort of thing you can envision Spirit emulating or is what Ryanair has done actually your example of too much change, hence something you would avoid?

No.

I actually think in many ways they are very similar.

If -- with an improvement in reputation, I think you will see a lot of business flyers or corporate flyers who pay their own ticket.

I think there is a real opportunity there, and again some of it has to do with reputation.

I think that is an area where you are all familiar with a different carrier where we did make inroads, not necessarily with large global company where you have to come the with corporate contracts, but there is a high percentage of the business market where customers pay their own ticket.

And if we are offering reliable service there is going to be takers for that product.

But it really is a matter of ultimately reputation.

I think that is an area that we can fill.

That is a need that we can fill in addition to the price-sensitive customer.

Again is really -- I guess moving along the same scale.

We still like our ancillary model.

It's very, very robust.

It has allowed us to compete in a very difficult pricing environment, so I feel very comfortable with that.

But again, focusing on friendly service, making ourselves more efficient, clean airplanes, some of the things that you would say are basics, they need to be -- they need to happen every day.

And again, we want to make air travel uneventful and perhaps maybe a positive experience.

So, I think we are along the same spectrum as perhaps what Ryan is talking about.

Got it.

Thank you for that.

As part of the first-quarter guide, you talked about the potential for pricing the remaining stable.

But the fact is, Spirit sat out an industry fare increase in January.

You sat out another opportunity last week.

I believe you sat out the flurry of fare activity that occurred last June.

I know better than to ask you to comment about future pricing, but when was the last time you made any sort of substantive across the board revision to the fare structure?

Jamie, absent -- forgetting the discussion of levels of pricing -- I think one of the key objective here, because we are slightly different with our large ancillary revenue per customer, is make sure we want the planes full.

We are more load factor driven than most carriers.

But at the same time also, I think, what we are trying to do -- at least today is somewhat different.

And I think adjusting base fares a couple of dollars one way or the other really don't fit in with what we do.

I think for the most part, we are driven more by supply and demand and competitive response.

I think we are less likely to view what is going on in the industry as a guide for what we should do from a pricing perspective.

Got it.

That helps.

Bob, it is good to have you back.

Thank you very much.

Hunter Keay, Wolfe Research.

Good morning.

Bob, we did a survey with some of our clients late last year, and we asked how familiar -- a lot of people -- how familiar were they with you and a scale from 1 to 10 to came in at a 3. There's a lot of people that don't know you, don't know about your style.

So can you maybe just tell us what should we expect from you as CEO, your style of being a CEO?

What should we not expect from you from the investment community?

And then for the 3 out of 10 that do know you, have you had any opinions that have evolved or changed or philosophies that have maybe morphed a little bit since you were CEO of AirTran and we should expect something different?

I think I am going to be in New Hampshire tonight, so I would like to talk to you about those surveys and whether they are accurate or not.

(laughter) and whether they are predictive; but let's talk about style.

I would just say from my perspective, my background -- I am not new to the industry.

I generally approach the business as a planner and a strategist.

That is where I had the bulk of my training, but at the same time I ended up doing a lot of operating work.

So ultimately the way I think about the business is, how do you put together a defensible network at the lowest cost?

I think the way I approach the business is around those kind of metrics, and at the same time, a key ingredient is we have to operate a professionally run, high metric airline.

So it's network at the lowest cost with a high operating standard.

I think what we need to do is make sure that the schedule can produce something that we are proud of from an operating perspective.

So, I am not the kind of person that sits in the office and really looks at the window.

I tend to get involved.

I am very comfortable weighing into issues in detail to really make sure that we make the necessary improvements.

At the same time I am perfectly comfortable giving credit where credit is due.

I think to start with that, I think we have a great business model.

I did not invent the model, but I would say, it is hard to do what Spirit has done and I think a key goal is to protect it, but make it better.

I think probably in terms of style, what I do understand is the value of a low cost structure.

I am very familiar with it.

I know how to protect the structure, not over a year or two but over a decade.

A lot of that it's a matter of how you structure the business, but also there is a lot of elbow grease in terms of making sure there is a need or a justification for every cost.

And I personally plan on spending a lot of time making sure I understand the cost structure and ultimately will manage towards a reduced cost structure wherever possible.

But I understand the competitive business is very -- like I say there is very little that I haven't seen.

I have been away for a few years, but I have watched the environment.

I have worked and competed with all the CEOs, so I know who is sitting in the other chairs.

I know how they, largely think, and I know how they compete.

So I am not unfamiliar with where we are right now, and I am very comfortable in a competitive environment.

And I think I understand how to make sure that we can manage in a competitive environment.

That is going to be our goal going forward.

We're going to plan for every contingency and ultimately decide, if the environment gets better, that is a high-class problem.

But if the industry is competitive, we are going to meet those challenges.

You won't hear us debate what other airlines should do or not do.

We are going to plan for every contingency, and if somebody believes that we are a competitive threat, they will act accordingly, and so will we.

So I think our focus will be just to take care of Spirit and make sure we have a robust plan going forward.

Okay and then that's actually a good segue way, as you think about managing to these contingencies, there has been some debate with the investment community about the impact of the big three rolling out their own basic economy concept, and as to whether or not -- I've literally heard this is either good for Spirit, it is bad for Spirit or it's neutral Spirit.

And I've had very robust debates on all three.

What is your thought on that?

Is this going to be in opportunity on a net basis or threat for you guys?

And then maybe a little bit to follow up to Jamie question -- as you think about competing against the basic economy product, is there investment that you may have to make to bring your product up a little bit as they sort of, for lack of a better term, bring their product down a little bit?

So, really it's a two part question.

Is it an opportunity or threat?

And how will you guys respond to it?

Are there investments you have to make?

I think -- and I'll ask others on the Spirit team to comment, but it is not clear whether it is the threat.

I think if you are looking at it from a legacy carrier, if you want to compete with us today, you are getting hammered trying to match our fares because you don't have the cost structure.

It is a very, very expensive proposition just to match by opening up all your buckets and trying to match our prices.

So I think ultimately it is from -- by definition, if carriers move to basic economy, there's probably going to be a little less price competition.

You need to look at it from their perspective rather than ours.

Rather than let's say dilute half the airplane, they are going to try to limit it to a certain percentage of the market.

And from our perspective, we have to see whether we can manage against it.

I think the key thing for us is to make sure our reputation improves.

I think it is a matter -- we have a lot of complaints for a number of reasons -- we have again the issues of recoverability.

We've had two out of the last three summers some very difficult times.

We need to make sure we can recover better, and if we don't fulfill our promise with the consumer, we need to step up to it.

But I think -- and make sure again we have the proper spares, the proper block times, whatever the proper tools will be.

So as those carriers come down to let's say, match us, I think what you're going to see is a corresponding improvement in our operation.

I think in that environment, we will do fine.

I don't believe that anybody can take all our customers, especially when we have got a seat mile cost of $0.05 a mile.

That is a pretty tough proposition, but -- and for us we are just not going to continue to focus just on large carrier hubs.

We are going to focus on a broader array of routes as well.

I'm not sure I got the second question in there, but --

That's helpful.

I appreciate it.

That's good.

Mike Linenberg, Deutsche Bank.

Hello, Bob, welcome back.

Just a couple here.

Back to your point where you talked about competing against the majors and how they get hammered competing against you.

You called them out.

But how does that differ when say competing against other low-cost carriers not -- or even ultra-low-cost carriers -- but low cost carriers like a Southwest or Spirit -- we have seen some examples of where you have been in head-to-head competition and then over time you have ended up moving out of the markets.

And in the past, it may be just there are better alternative for the airplane, but some of these markets are pretty viable.

And I am curious if it's a function of whether or not the JetBlue or the Southwest either have more heft or a better service product and if Spirit maybe had a better product that wouldn't have been the end game there or the outcome there.

Just thoughts in competing against those carriers rather than just the big three.

In terms of products and reputation, today, both those carriers, Southwest and JetBlue, have stronger reputations with the customer.

That could be extra leg room, it could be no bag fee.

There are certain parameters that we have to consider.

But I think if we explore markets -- I think the last year or the year before, we went into Kansas City and those markets were not exceptionally tailored to really what we do.

Kansas City is not an exceptionally strong leisure market to let's say, Florida.

And we were basically competing in business routes.

It was really not a good place to be for us.

But perhaps in Baltimore, it might be a different situation.

There is a lot more leisure business, much more suited towards price.

So I think there can be certain markets -- again we will contrast Baltimore, where we are growing, versus some small Midwestern market that perhaps isn't as strong from a leisure basis.

Again in terms of the product, economics are really very, very important.

The -- taking seats out of the airplane and trying to provide more comfort is a real big risk for an airline that has 20 plus percent margins.

And not clear to me that there is any benefit at all.

We are sitting here with about the highest margins in the business and equally as good as them.

So to make a change on the product which could take years, and you may or may not be successful -- that is not the first place that I would look.

That is really more down on the list.

I think in terms of the real basics which may sound kind of trite, but if the airplanes are clean, we're more on-time, we are taking care of customers, it really does go a long way towards creating a good experience.

Because that is ultimately what we need.

That is a part of the bargain that we really have not fulfilled.

If you have a low price with a good experience, I think we can be in really good shape.

Again, you get on a Spirit airplane, someone may have an issue with our reputation, when you walk on the airplane that changes right away.

You have the newest fleet and the biggest fins, all those things, that is an opportunity for us to retain a customer.

If we can just deliver that service.

I think the best place to look is really in the basics, which we could argue -- maybe they should have been here, but we are going to take the opportunity to make sure they are here.

We are not going to win in every route situation, but I think our cost structure will allow us to go into markets head to head with these carriers, perhaps not necessarily in their hubs, but in more markets where let's say their -- what's the right word -- exposure is less.

But Midwest to Florida, other leisure markets, good service and low prices is -- really wins in that environment.

I think we are going to stay in that area over the next couple of years

Just one more on the strategic front or along those lines you had mentioned about being less predictable in your route selection going forward.

With that also include maybe a rethink of frequencies in markets?

Historically you have been one or two.

Would you consider that more?

I am asking that also -- you said something about gauge and also rethinking sort of the gauge of the aircraft that you are considering taking delivery of, and in sort of one breath you said, that maybe you will need less A319s on the one hand but on the other to go into some of mid-sized or smaller markets.

It would seem like you would want airplanes with less seats maybe not more.

So maybe that argues more for the A320 versus the A321.

So it is sort of a combination of gauge and frequency; how you think about that?

Yes, and I may not have been clear, because I think I tripped over my notes a little bit on the -- when I was reading, but I think that if we're going to participate in more midsize routes or smaller routes to leisure destinations, we would need to keep or retain 319s and focus on smaller airplanes (multiple speakers).

As the fleet size -- airplane size gets bigger, and we are not a carrier that is really focused on turf, it naturally keeps us in this one flight a day environment.

But if we dial that back and start focusing on other markets, perhaps shorter-haul markets, you may see a corresponding increase in frequencies.

But again, as bigger gauge takes us away from that.

So again I want to create -- again as part of our fleet review -- which we've been working on for the last four or five weeks and we are moving very fast on it because I think we have a good team here.

We are fast on our feet.

We have a pretty good idea what is going on in the marketplace, and I hope in the next couple weeks we will actually have some answers and some direction on some of these items.

Great.

Thanks, Bob.

Take care buddy.

Joseph DeNardi, Stifel.

Bob, I'm just trying to understand your comments on trying to improve the customer experience.

It sounds like operational improvement is the first area you are looking at.

You don't really want to change the product.

You mentioned it would seem like one of the other areas of complaints would be the fee structure so I am wondering if that is an area that you are looking at to change.

Let's go back to the fee structure.

We need to break it into the pieces.

Bag fees are a key component of our ancillary business, and so we are going to continue to charge them.

This may mean we may end up with more complaints because someone says: well, they made me pay for the bag.

Well, that is actually a complaint that we can accept.

Because that is part of our business structure.

The kind of complaints we want to remove is when we lose the bag, and we don't recover it.

Or when we have a four hour delay, and we don't get the customer where they need to go -- something like that.

We have -- there are going to be again complaints that in effect come with the territory, because right now many customers believe airlines are one-size-fits-all.

From that perspective, we are at a disadvantage.

But there is a whole array of other complaints of things that we just need to be good on.

They have nothing to do with the structure.

If for some reason we have done wrong to the customer, we need to correct it.

And we're going to correct it.

And we should be no different than any other airline in the US whose goal is to provide good service, so I think there is going to be a differential there.

But fundamentally, the basic model of ancillary fares, it's served us very, very well.

We are exceptionally hard to compete with.

So it doesn't make sense for us to drift away off the core strategy.

We just want to make it operate better.

Okay?

Yes.

Thank you.

As I look back at fourth quarter, you guys were able to obviously, beat the RASM guide that was given, and part of that was I think you guys regaining some control over your own destiny by reallocating some capacity pretty effectively.

I'm just wondering if that is an opportunity going forward.

Is that an area of upside for first quarter guidance, or how should we think about that?

I can start off and go to -- have Ted and others chime in, but right now the route plan doesn't change obviously, until April.

So whatever we are out there selling is going to take us through the Easter period, and then we will begin to make changes.

Then again I can't necessarily comment on what we would change or not in the past, but I think as far as I'm concerned, and I believe the team is the same way, everything is on the table.

I think we are going to be very flexible.

I know there has been conversation about whether in the past we haven't been nimble enough by getting in and out of routes.

To some degree we have not had to.

Generally speaking the numbers have been very, very good.

That's typically not the situation where you are canceling routes, but I think the number for last year was eight, and maybe in 2014 it was more than that, but when you are ending up having pretty good margins, that is less inducive to taking action.

What we will be honest about is -- and when we go into a route and we miscalculate, and we think a certain number is going to appear and it does not, which will happen from time to time.

So when we make a mistake and or misjudge a market, we won't stay there for pride's sake.

Really going forward, we are moving into the strong season.

Our focus is going to be primarily on making operational improvements, and as we move into the fall, we can take a greater focus on the type of routes that we fly.

But the summer is -- summer travel is very predictable.

It is fairly strong East/West, and I don't think this summer we want less East/East/West capacity based on what we see.

But once we move past late August, I think some of the other opportunities will get a closer look.

The only thing I would add, this is Ted, is in the quarter we did take control over our revenue production to a greater extent because being the size that we are at today affords a certain luxury.

We have the ability to be more interactive with the way that we manage our inventory and we manage our routes.

That is an advantage that Spirit has today.

We plan to exercise that advantage aggressively going forward while the views -- the benefits associated with what we saw in the fourth quarter are baked in right now, we are fluidly managing in this environment.

And that will continue into the first quarter, and I think our team has done a great job doing just that.

That's our view as to what is baked in anyway.

Thanks, very helpful.

Helane Becker, Cowen &=and Company.

Thanks very much, operator.

Hi, team and Bob, welcome back.

I am sort of sorry retirement did not agree with you, but I get it.

Here's my question.

A couple of years ago, Spirit focused very aggressively on improving operations and really did a good job for a while there and then things seem to have back slid last year.

I don't know if you were involved with the Company then, but what changed in the past year that things kind of got off track?

I think there was a period of time where there was some improvement, but I can't say, and I will let anybody speak but I don't think we felt we made consistent improvement.

As the Company begins to scale up, I actually think if you are growing, that creates a rhythm.

It should be relatively easy with the fleet plan, I won't say easy, but the process should be one where we need to get ahead of things.

We are in a situation where as we go into airports, we are generally the last person in the airport with the worst gate.

That creates some unique situations for us.

What we need to do is if we're going to decide to operate in those environments, we have to create some cushion for us to operate in those environments, or we are going to get difficult results.

We have a tendency to kind of get squeezed in, and what we need to do is we need to push the process out.

We're going to have a pretty good idea what we are going to be doing two or three years down the road, and what we need to do is be putting together our options than our plans before the fact rather than after the fact.

That is just a general comment, but I think in terms of, companies can go through ups and downs -- I can't say whether we have had sustained focus.

Perhaps we thought we did, but again as I sit here and I have a pretty good understanding of what it takes to run a good airline, even though we are small, we have some very unique complexities that we have to manage.

Because again, the way we structured the airline with high utilization and one flight a day in a lot of cities, it does create some complexities for us that we need to step up to.

Until we do that, what we will do is, we will have good months and bad months, and so what we need to do sure that we plan for those more difficult months with more resources.

But I would say again there has always been a focus, but I think the focus has been a matter of degree, and I would say today it is going to get a high degree of focus.

Okay.

That is very helpful.

Thank you and then I know you guys have a pilot contract that's open.

Have you engaged with them?

Perhaps they don't -- perhaps they are not in a rush given the industry contacts that are open elsewhere, but I am kind of wondering what their response to you has been?

In terms of answering the question, and I may have someone else comment.

But first of all, I have met with the pilot leadership and just discussed -- familiarization, but we have had an open agreement since July, and we are in negotiations.

It is a complex period, because we are in unique times, and there is a lot of agreements that have been voted down which is perhaps surprising, but -- Bendo, do you want to add anything?

I would just add that we have been in discussions with the pilots for about a year.

The contract became amendable at the end of July.

We are scheduled to meet again this month.

It is an ongoing process, and I would say both parties are at the table with the desire to come to a completed deal, but these things take time, and we will continue to meet and work toward an agreement.

Great.

Thanks for your help.

David Vincent, Barclays.

Good morning everyone.

Bob, a question -- you mentioned sort of having a defensible network.

When I got Spirit historically it has been very wide, very thin, being a 5% or 10% player in a lot of routes in a given city.

Do you -- when you think about that model, obviously it's very -- fairly different than AirTran, do you think of that as a defensible network, or does it have to evolve over time?

If defensible -- our current network is defensible to the degree we manage our cost structure.

I think -- then you can decide whether it is a bottomless pit and whether you want to continue to focus down this path.

I actually, again, I believe there is no one style that works forever.

I think ultimately there is -- we are capable of flying less than daily operations.

We have the ability to set those up.

We have the capability -- or should have the capability to fly two round-trips in the market from somewhere in the Midwest to Florida and do well at all.

I think for us we would like to create the ability to compete really in all those areas.

That is not to say we will walk away from what we are doing, because it is pretty good.

But like I said, the marketplace will evolve over time.

The competitors we speak against are stronger, and I think what it calls for us is to, again, have a more varied way of looking at our routes.

But again, it's $0.05 a mile and actually in long routes even less than that.

It is a good place to start, but I think we can make it more defensible by being able to participate in a wider variety of routes

When you say capability, do you think you have the capability to be a four or five a day frequency in a business market?

Or is that where the things change?

I think that is less likely.

That could be really a unique change in strategy for us.

That is not to say there is not a single route where you can have very high multiple frequencies.

We have a handful today, but we are unlikely to be focused on turf the way a traditional carrier would focus on turf or even the way AirTran focused on turf.

I think the marketplace is different.

It has evolved, but there are still pockets of opportunity.

I think certainly, what we are doing in the long-haul markets makes a lot of sense, but there is also a lot of opportunity in the under 1000 miles where our cost structure is still very, very relevant and that should become part of the playbook as well.

If I could just sneak in one little tactical one -- I'm obviously talking about pricing stability in the first quarter.

Is there anything you are seeing just in terms of the very dynamic economy, lots of puts and takes geographically?

Are there cities like maybe even, I'm thinking like a Houston, where you are just seeing a macro need to make some changes and shift some things around?

Or what are you seeing in the short term in terms of capacity changes that may need to be made it from a pure macro standpoint?

It really is hard to say because -- I read the same stories.

I can remember back in 2008, 2009 Houston was in a very unique situation because it was booming.

It was probably the only city in the country that was.

But there again, we are not a big business planner.

We have a number of redeyes to South America, and we have a very diverse set of routes where we are mostly focused on leisure traffic.

We haven't seen any fundamental changes in our business other than the competitive pricing that we saw last year.

That's perhaps different than what some of the larger incumbents might experience.

This is all -- that's all very helpful.

I appreciate it.

And welcome back.

Thank you.

Dan McKenzie, Buckingham Research.

Good morning, guys.

Thanks for squeezing me in.

Bob, welcome back and congratulations on answering the call of duty here.

Thanks, Dan.

With respect to growth over the coming years, the commentary sounded pretty confident.

Is the implication that Spirit believes it can consistently earn a return on invested capital over the same timeframe, and what I am really getting at here is how you are balancing growth with returns.

Is there a minimum target return level that will guide say, Spirit's growth, whether it be 15% or 20% as we look out over the next few years?

In terms again of philosophy, obviously you have the opportunity to adapt the current philosophy or change it, but I think what Spirit has talked about -- and if you go look at our deck we've talked about 15% returns over a prolonged period of time.

And we are above that today so I think in terms of a target -- I don't think the Company has ever changed the target.

And perhaps many might have thought we were heading well above that, but in terms of the target, I think that's a nice target to keep.

I don't see any read or right now even have the capability to even say it should be different other than, it makes a lot of sense to me about how to create discipline for an airline going forward and use that as a basis to make capital decisions.

And I can also tell you, the culture here -- we will assure that we stay there.

The culture is very strong.

People are very bottom-line focused.

And so -- it would be very difficult for one guy to change that because people expect high returns.

I think that is a real good byproduct of restructuring 8 or 10 years ago at Spirit.

The IPO, the mindset is still very, very positive, so I don't feel any need at this point to say it should be something other than that.

It is a very, very good target to have, and I think all the things that we are looking at right now are consistent with that target.

Very good.

Go ahead, was there another comment?

No.

That is all.

Bob in your prior life you were a fan of first-class service so just following up on the opportunity in business class markets, is there a possibility that you would consider replacing a couple of rows with the bucket or business class seat that Spirit has used in the past, or is the thought that the strategy should be less complexity and more Ryanair-like longer term.

We do have the big front seat which is a pretty good product, and if we felt the need to have a few more seats, I think we would consider it.

Again, it is certainly part of what we do, and if we improved our reputation and made inroads, more inroads with that small business flyer, it might be an option for us.

What we do with the big front fee isn't that much different than perhaps what AirTran did with the business class.

We were basically selling space with that product, and if we feel that we can leverage that by taking a couple seats out of the airplane we might consider it.

But again I think the default position is, maintain the high cost per seat mile -- the low cost per seat mile.

(laughter) But if we felt there was a need, we would certainly consider it.

But again we like the $0.05 a mile as our going in proposition.

Very good.

Thanks Bob.

Ellen, we have time for one more question.

Steve O'Hara, Sidoti.

Go ahead -- is there another question after Steven O'Hara?

Stephen Trent, Citigroup.

Good morning, guys.

This is actually Kevin Kasnika filling in for Steve and thanks for squeezing us in at the end there.

Pretty comprehensive call, but we were wondering as to your views on capacity to Latin America considering the strong dollar and now any implications from the Zika virus, I know you guys are mainly focused on the Caribbean.

Just wondering what your take on that is?

In terms of -- I can make my comments because I have not been focused that much here, but I don't think from a currency perspective there's really any impact for us.

Most of our sales are in dollars, and our primary focus in Latin America is really the ethnic travel which has stayed very strong.

In terms of our exposure to the virus, I think it's in theory it is 3% to 4% of our capacity but beyond that we haven't seen any impact.

For the most part again we are not dealing with deep South America in the currency impacted markets.

Again, most of our business is in dollars.

Okay.

Thank you very much.

Ladies and gentlemen, thank you.

This concludes today's conference.

Thank you for participating in you may now disconnect.