Spirit Airlines Inc (SAVE) 2016 Q1 法說會逐字稿

Good morning, and welcome to the first-quarter 2016 earnings conference call.

My name is Brandon, and I'll be your operator for today.

(Operator Instructions)

I will now turn the meeting over to DeAnne Gabel.

DeAnne, you may begin.

Thank you, Brandon.

Welcome to Spirit Airlines' first-quarter 2016 earnings call.

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 VP 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/or Management's belief as of today, April 26, 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.

Included in the information under the caption risk factors included in our Annual Report on Form 10-K, and quarterly report on Form 10-Q.

We undertake no duty to update any forward-looking statements.

In comparing results today, we will be adjusting all periods to exclude special items.

Please refer to our first-quarter 2016 earnings press release for further details regarding our assumptions for the reconciliation to the most directly comparable GAAP measure.

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

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

I want to start by thanking our Spirit team members for delivering -- helping us deliver these solid first-quarter results.

As I've traveled around the system, meeting with various work groups, I'm happy to find a strong sense of team work, and a spoken desire to keep getting better.

It is this passion at Spirit that reinforces my belief in the strength of the business model, and makes me extremely confident in our ability to improve our operational results and customer service metrics over time.

While we expect to see some key improvements in our operational performance this summer, we are being conservative and thoughtful in our approach to finding a solution.

We could change things faster by throwing money at our issues, but we aren't willing to do that.

Instead, we have tasked ourselves with developing a solution that allows us to achieve our goals, while remaining efficient and controlling our costs.

We are also focused on improving our revenue results.

The pricing environment remains very soft, but we aren't just sitting passively by.

We have upgraded our pricing systems, made modest revisions to our schedules, and adjusted our approach to inventory management, all of which have contributed to our success in the first quarter.

We are doing a lot of work, planning out our road map, and putting the pieces in place to achieve the results we want.

Stay tuned, and we'll keep you updated as we move through this process.

With that, here's Ted with a recap of our first-quarter results.

Thanks, Bob.

I join Bob in thanking all of the Spirit team members for their contributions.

I'm pleased to part of this energetic and innovative team.

We have our work cut out for us, as we strive to find cost-neutral solutions to improve our customer service metrics and on-time performance, while maintaining a high completion factor, but thanks to our team's commitment and dedication, I am confident we can do so.

For the first quarter of 2016, we reported net income of $72.3 million, or $1.01 per diluted share, and a pretax margin of 21.3%.

This was ahead of our recent updated guidance, due to costs coming in slightly better than we expected, driven by the timing of a couple of items.

Total revenue increased 9.1% on a capacity increase of 26.5%.

Total revenue per passenger segment for the first quarter of 2016 declined approximately $16 year-over-year to $107.88, primarily driven by decline of $14 in ticket revenue per segment.

Non-ticket revenue per passenger segment declined $2 year-over-year at $53.23.

Although non-ticket revenue per passenger segment remains relatively stable, we have experienced modest pressure on take rates for certain ancillary items like bags and change fees, which we believe is correlated to low fare levels in our markets.

Nonetheless, non-ticket revenue remains an inelastic and a stable part of our revenue platform, which we believe makes us a difficult and formidable competitor.

As for operations, during the first quarter we went live with a new flight dispatch system.

Over time, we will see benefits from the new system, as it allows for automatic flight cost indexing, and dynamic flight planning.

Which will provide long-term benefit to fuel burn.

However our first-quarter operational performance took a hit, as we ramped up use of the new system.

We have seen continuous improvement since our initial rollout, and believe we are in a good position to reap benefits from the new system in the second quarter and beyond.

In March, we launched service between Seattle-Tacoma and Las Vegas and Los Angeles.

We are excited to add the Emerald City to our list of destinations, and are pleased with how the new routes are booking.

Turning now to costs, for the first-quarter of 2016, CASM ex-fuel decreased 2.3% year-over-year to $0.059.

Compared to the first last quarter last year, the decrease in CASM ex-fuel was primarily driven by lower aircraft rent per ASM.

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

This benefit was partially offset by higher depreciation and amortization expense related to the depreciation of aircraft, and higher other operating expense, related to the increased passenger re-accommodation expense, driven primarily by our difficult flight dispatch system implementation.

Additionally, during the first quarter of 2016, we reached a tentative agreement with our flight attendants, represented by the Association of Flight Attendants CWA for a five-year contract.

During the first quarter of 2016, labor expense per ASM was higher year over year, due to the accrual of one-time ratification incentive payment of $8.4 million related to this tentative agreement.

Absent the impact of this one-time accrual, CASM ex-fuel would have been down about 4.5% year-over-year, with approximately 1.5 percentage points related to the timing of costs that we'll push until later the year.

We ended the quarter with an unrestricted cash balance of $903 million.

Through yesterday April 25, we have spent approximately $25 million under the share repurchase authorization approved last October, repurchasing approximately 520,000 shares.

In the first quarter, Spirit took delivery of four new aircraft, ending the quarter with 83 aircraft in our fleet.

Last quarter, we mentioned that we were in the midst of updating our five-year fleet plan as part of the normal course of business.

As part of this review, we concluded that to enhance our gauge and deployment flexibility, it would be beneficial to have some A319s remain in our fleet.

We also took this opportunity to evaluate the gauge and timing of future deliveries, as well.

We have made some changes, which will be reflected in the fleet plan we will file with the investor update later today, but here are some of the highlights: To date, we have purchased three A319 aircraft off lease, extended the lease of one additional A319, and are in negotiations to purchase or extend the leases on 7 to 10 additional A319 aircraft currently in our fleet.

We have reached agreement with Airbus to convert 10 A321neo aircraft scheduled for delivery in 2019 to A320neos, and made slight changes to the timing of several of our other delivery positions.

In the aggregate, these changes should have little impact to our total capacity growth through 2021.

They are, however, the first step in increasing our flexibility to serve a wider array of markets, including midsize cities.

Turning now to our second-quarter and full-year 2016 guidance.

Capacity is expected to be up 23.8% in the second quarter, and we continue to target a capacity increase of about 20% for the full year of 2016.

The pricing environment remains soft.

In general, it feels very similar to what we have been experiencing since late October.

We don't have full visibility into June, but I anticipate we will see the usual seasonal strength for that period.

However, given the shift of much of the July 4 outbound travel into the third quarter, it will be muted compared to last year.

If the current pricing environment holds, based on our current booking trends, we expect year-over-year TRASM decline in the second quarter to be similar to that of the first quarter.

We currently have no fuel hedges, based on actuals to date, and the forward curve as of April 21.

We estimate our fuel price per gallon for the second quarter will be $1.45.

For the second quarter of 2016, we estimate our CASM ex-fuel will be down about 5% year-over-year, with the largest drivers of the decrease expected to come from lower aircraft rent and other operating expense per ASM, partially offset by higher maintenance-related expenses, both heavy maintenance recorded in amortization expense and non heavy maintenance, which is directly expensed.

Last quarter, we mentioned that the timing of maintenance events could drive some volatility in our CASM ex-fuel for 2016.

Since then, we have made several changes to our 2016 maintenance schedule.

Overall, our 2016 maintenance expense will still be about the same.

It will just fall in different buckets than we initially anticipated, trading off lower capitalized heavy maintenance expense for higher direct maintenance expense.

For the full-year 2016, we are now estimating CASM ex-fuel will be about flat year-over-year.

This includes the economic impact from the tentative agreement with our flight attendants, which we estimate increases CASM ex by about 1 percentage point year-over-year.

In general, we expect to see a low single-digit year-over-year increase in CASM ex for the third quarter, and a mid-single digit increase for the fourth quarter.

The timing of maintenance events may drive some variability in this cadence, and we'll update you on that as we move through the year.

Again, I want to remind everyone that the pattern in CASM ex throughout this year is not a trend, but instead a timing issue within the year.

We continue to expect full-year 2017 CASM ex-fuel to be stable to declining.

Taking into account April revenue performance, current pricing and booking trends, and our CASM ex-fuel estimate, we get to a second quarter operating margin of between 20.5% and 22%.

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

Thanks, Ted.

In the last four months, we have been busy behind the scenes laying out a path towards improving our operational integrity, enhancing flexibility, and exploring opportunities to improve our customer service metrics.

Again, we aren't talking about making sweeping changes in the near term, rather we have a successful business model that we are working to refine and improve.

As we head into the peak summer travel months, we are focusing on a continued cost and revenue execution, improving our operational reliability, and providing friendly customer service.

DeAnne?

Thank you, Bob and Ted.

We are now ready to take questions from the analysts.

(Caller Instructions)

Brandon, back to you.

(Operator Instructions)

We have Rajeev Lalwani on the line.

Bob, in your prepared remarks, you mentioned an upgraded pricing system and adjusted inventory management.

Can you just talk more about what that means, and maybe provide some examples?

That's the first question.

And then the second, as we look at the 2Q, can you just talk about how much of the pressure is coming from your growth versus competitive dynamics, and then maybe just talk about at what point of the year do you think you will start lapping a lot of these pressures you saw from the legacies, matching pricing?

Well, in terms of -- talk about revenue management.

I think probably in terms of systems, we got a new pricing system, and I will just say, it will allow us to see things better than we did in the past.

We have a lot better knowledge about what is going on around us, and in detail.

And quite frankly, I think we have a better sense of what our competitors are selling today in our markets, versus a few months back.

And really beyond that, I think it is, just again we redesigned just a few work practices, and I'd just say, we are just more fully integrated, with better visibility, in terms of what the competitors are selling, by bucket.

So in theory, I think it allows us to be more tactical.

I guess regarding the competitive dynamics, there is still a lot of pricing noise in the marketplace, and it really hasn't let up.

The pricing environment today is as competitive as it has been from the past six to nine months.

And to some degree, you can't put all of it at the feet of the ULCCs.

There is a lot of pricing, competitive actions going on between the hub carriers, as well, beyond the things that we are doing.

So again, our business model is fundamentally to stimulate fares in large markets and small markets as well, and we have the cost structure to do it.

But we are also seeing is high cost carriers need price stimulation to carry traffic out of other legacy hubs, and quite frankly, that is independent of what we are doing.

As we go forward, there are some seasonal shifts.

We did benefit from an early Easter, again, we are largely leisure, and the early Easter does pull revenue forward into the first quarter, so it did make it better than it would have otherwise have been.

We do expect to see sequential improvement, but again, we need to adjust for that Easter.

I think again, our first quarter was benefited by at least a point, in terms of TRASM improvement.

As we move into the third quarter, I think you will see -- I would say the biggest improvements in TRASM.

Our capacity begins to slow down, and a lot of the competitive environment is really embedded in the underlying efforts.

Again, most of the big pricing actions, began in earnest in the third quarter of last year.

And Rajeev, it is Ted.

Just to put a fine point on one of your questions.

When you think about the unit revenue pressure that we see, I would say that about a third of it is related to our own growth, and the remainder is due to the competitive environment.

There are some localized issues in South America, particularly in Colombia with regard to currency issues that are causing some pressure in that environment too, but I would say that is the remainder.

Great.

Ted, thank you.

We have Savi Syth on the line.

I just wondering on the non-ticket side, a little surprised by the weakness given that we are lapping the on-board sales accounting change, and also, you did have lower prices in the second half.

I am just curious is it just passengers adapting to, customers adapting to the new environment?

Or maybe some of those change fees take a while to start showing up, the declines in take rates take a while to show up?

I think again a couple things -- there is a little -- again, downward pressure on prices, I think you're going to see downward pressure on everything.

I think in the past, we have always had steady increase in other ancillary products, that would normally offset it.

For the most part, we have been in a lockdown, because we are going to be launching, I guess probably in the third quarter, maybe late in the second quarter, a brand new web redesign, and for the most part, we have slowed or almost stopped various new initiatives.

So I think it is, again, just general downward pressure, again with compression.

Some may be willing to pay less on a ticket.

There may be some resistance in some other areas, but we are not offsetting it with some of the new initiatives that we would typically be bringing on.

And I think you will begin to see some improvement as we move forward.

That is helpful, Bob.

Thanks.

And maybe for Ted, just on the new dispatch system.

Could you talk little bit more about if we should see the high re-accommodation costs into the few quarters and then tail off, or what is the timing around the benefits of that system, and have the issues been resolved?

Yes.

It was really, Savi, the cut over, we experienced some disruption around that, which was where we -- the operation got banged up in the month of February as a result of that.

But that has all been for the most part been straightened away.

And so as we head into the second quarter, we have resumed normal operations, so I wouldn't expect any pressures on customer reaccommodation expenses, as a result of that.

In fact, as the system matures, we expect that it will actually drive benefit to us, mostly in the fuel line, but it is going to be a net positive to the business over the longer term.

Got it.

All right.

Thank you.

Michael Lindenberg.

Bob, I want to get back to just on market selection.

You talked about looking at some midsize markets, and I think also, it does look like some hub to hub markets like Philly - Miami, Philly -- Chicago.

It looks like you have pared back in some of those markets, maybe even withdrawn completely.

I am not sure how much of that is just a function of the competition in that market and looking to put the aircraft in another market that will provide a better return or profit, or is some of that also a function of just the ops, where you are flying into some of these big hubs up against competitors with lots of flights, and big hubs that maybe hard to turn the aircraft and get that utilization where you need it to be.

How much is it operational versus competition?

Some thoughts on some of the pruning that we are seeing going on in real time?

Sure.

So let's just take again the primary initiative going into 2016.

The primary initiative is really development in Los Angeles.

This is an area where Spirit spent a long time trying to get additional gates, and gates tend to be so scarce, for carriers like us.

When you get the opportunity, and you are also forced into somewhat of a high utilization in order to acquire the gates and retain the gates.

Again, our big initiative, and this year, we've got six new routes in Los Angeles and I think in the second quarter, you will see an ASM growth rate of 85% to 90%.

So I think that's a key focus of, it didn't make sense to change as we head into the second quarter, and even to the third quarter.

In terms of making adjustments, there is a natural dynamic of looking at what is going on in the marketplace.

For example, in 2016, we had a drop, or intend to drop three city pairs.

Two are Fort Myers routes, Atlanta and Dallas - Fort Meyers.

They are seasonal routes, but given the performance, those routes will not be back in the 2016 - 2017 winter period.

And we made one other adjustment which is Chicago to Philadelphia, which is really tied to some of the operational changes that we're beginning to make.

For the most part, the pricing issues that we see, or the effect of pricing, it is largely through most of the system.

We have about an 85% to 90% overlap with other carriers, and the price guide is broad.

I think again the only carrier that has more competition than Spirit is probably Virgin.

I don't think they may have any single carrier routes.

I think we generally see strong competition, but just think in terms of the focus, what we are doing, because a lot of focus has been maybe on certain cities, but Fort Lauderdale is our largest entity.

It is about 13% of our ASMs, about two-thirds of that is domestic.

Las Vegas is about 9% of our ASMs, Chicago 3%, LA 4%, and Dallas, which tends to get talked about a lot, is actually our fifth producer of ASM.

So what we have done is we have actually established ourselves in many of the key airports around the country.

I think I go back to a premise.

There was really no large market in the country, that I think is going to not have ULCC pricing.

A legacy carrier cannot optimally price the large markets, and it wasn't true 20 years ago, and it is really not true today, and we have established a position in those key markets, what we are doing now.

As we go forward, and particularly as we get to November, I think you will see some more of the mid-size market initiatives.

But so again, it is really a combination of staking out the landscape.

We don't have a lot of things that we want to give up.

Our positions in these key hubs markets will play a huge role for us as we go down the road, and what we don't want to do is move away from profitable routes to again, to create, open up routes.

There is plenty of time to do all this, and we do have 20%-plus margins so there is not a lot of bare routes around our network, and if we have routes that aren't working, we generally conclude we can't fix them or we will just walk away from them.

Thanks, Bob, for that comprehensive answer.

And just a quick one, maybe over to Ted.

It looks like you took -- you had a special charge -- $16 million, related to the early termination of a couple aircraft.

I think that you mentioned that you purchased three off lease, so I don't know if the third one shows up in the June quarter.

And then you went on to say there is another 7 to 10 airplanes.

So should we anticipate other special charges tied to this?

And I was just going to ask the thought behind why this is a special, maybe it was unanticipated, that wasn't the plan?

What drove it as a special rather than just running it through the P&L?

Sure, Mike.

The third airplane that I did reference is a Q2 airplane, and would have a similar -- directionally similar special charge.

The reason we call it special is because it is one-time in nature.

It is related to the lease termination, so that, in our view, pushes through the special line.

So the way I would characterize it is, we are getting the benefit of an early lease termination, so we're terminating future rent expense, we're terminating any related lease end expense return costs, that sort of thing.

And we're getting the benefit of ownership over the longer term.

So clearly a very accretive transaction in the business over the life of the aircraft.

Very good.

So when you had mentioned that the rent expense would be down going forward, it is obviously being driven by this transaction, right?

There is not anything else in these transactions?

Yes.

Well just let me clarify.

There is -- on a unit basis, rent expense is down because of the general shift from lease to own, that is happening with new deliveries.

But absolute numbers, yes, this is a portion of why rent expense will go down, is related to these transactions.

I also mentioned that we are evaluating 7 to 10 other aircraft.

Those will be -- we don't know yet, but even if they are extensions rather than purchases, that will drive changes in the rent line as well, due to the extension of the lease at a different rate.

So you straight-line that per GAAP, and that is going to provide some benefit, too.

Great.

Thank you.

We have Duane Pfennigwerth on the line.

I just wanted to backtrack on your revenue guidance, over the last couple of quarters.

I felt like fourth quarter you said it would be similar to 3Q, it ended up about 1.5 points better.

Maybe, Bob, you don't get full credit for that, but certainly first quarter, I think the initiative guide was similar to 4Q, you ended up a little bit more than 2 points better.

So what changed over the course of maybe the March quarter, relative to your initial expectations?

Well, I think it is -- we just had a very strong -- March tended to be stronger than we were, and again, we did realize that we would have obviously Easter moving.

I think it was March 27.

It does shift some of our business forward.

And it correspondingly makes April a little bit weaker.

So I think it was just stronger than we thought.

And like I said, in terms of let's say improvement.

It did aid that first quarter, again, by at least 100 basis points.

So, I think what you make that adjustment and recognize that we had the benefit, we are still seeing a sequential improvement, recognizing that the environment really has not changed, though.

I appreciate that.

Maybe you could just push back on this.

I appreciate the environment is not changing and it's consistent, but it feels like we are going to begin to lap a sloppier pricing agreement.

I agree that most of that was more of a third-quarter phenomenon, but it feels like some of that started to show up in June.

So I wonder -- does your second-quarter guidance really contemplate comparisons relative to sloppier pricing?

Thanks for taking the question.

I think I understand.

I think initially -- there are actually two factors.

A lot of the competition, again, the focus might have been, let's say, in Dallas really late last year.

But to some degree, since the third quarter and even through the fourth quarter, it is somewhat spread throughout the industry.

And so, to some degree, there has been a broadening of price competition actually over the last year.

So, it is in most places.

It's in Chicago, it's in the West Coast.

It can be some commentary about some of these walk-up fares.

We're seeing it maybe in Charlotte and other places.

So there is -- I think you see some of that perhaps in the legacy carrier results.

It has somewhat broadened out from really the genesis around Dallas, and let's say, a couple other Spirit markets to today, it's really all Spirit markets with a few exceptions.

And it is somewhat broader in the industry.

So there is somewhat of a reason why perhaps again, the rest of the industry is not seeing some improvement.

They have extended it beyond Spirit, and to some degree it is happening between themselves.

So I think that said, as we move into the third quarter, we get to a point where it is -- we truly begin to lap what is going on.

Like I said, last year in the second quarter, we did not begin to see the price matching, until I get really early June, I would say.

June 3. We are really seeing it the full quarter right now.

Like I said, as we move into the third quarter, it is pretty much broad brush as you move going on.

So again, some of this is again not unique to Spirit -- again, we were probably at the tip of the spear in terms of the Dallas focus, first what was going on at Love Field, and then second with some of the competitive actions in DFW.

Okay?

Thanks for that Bob.

If I could sneak one more in -- as you run these fleet changes out, A321s to A320s and keeping more A319s, what fuel curve are you assuming, or what future fuel price are you assuming with these fleet changes?

Thanks again.

Yes.

Remember that we made all of our fleet decisions to date, based on a much higher fuel environment.

That remains the case.

The Company assumes higher fuel, longer term, when it will make the decisions.

That A319 aircraft in our configuration is a very fuel-efficient airplane.

The CO airplane, in our configuration, is a very fuel-efficient airplane.

That we believe is an advantage not a disadvantage, and so when you are factoring in direct expenses associated with fuel, you have to also factor in the ownership cost of the airplane, and the maintenance cost of the airplane.

So we take all of that into account when we think about our long-term fleet.

And just following up in general, I think philosophically, we believe that our cost advantages are wider at 750 miles than they are at 1,500, and again, as you look at the industry evolving, and just think about this over a couple years, stage lengths of the high cost carriers are growing and average airplane size and average seat size are growing as well.

To some degree, we are moving slowly in the other direction.

And I think it is actually a good place to be for a low-cost carrier, and we will move into a place where our advantages will be bigger.

Thanks very much.

We have Andrew Didora on the line.

Bob, I just wanted to touch on costs a little bit.

You and Ted were pretty clear in your prepared remarks, that you are looking at cost-neutral ways to improve the product.

I guess my question is -- have you identified many of these options now, or are they on the come?

And do you feel confident that you can keep your CASM flat to down, like SAVE has discussed in the past, over the next several years?

Thanks.

Again, that's a good question.

And that is why we are taking our time, and moving at a steady clip.

If we were able to in one quarter make a dramatic improvement, it would be -- let's say all pad and all gloss, so to speak.

So if you look at in the business -- first of all, I think we are, again, the way our schedule is structured, we've struggled with recoverability, and so the schedule is going to take some redesigns.

Our preference is to redesign the schedule in the shoulder period, and a lot of that redesign will come in the fall.

But in terms of disruption, I think even some commentary today and when we had some issues in the first quarter as we were installing some new systems, our [district] manager, the cost of deception to Spirit is very, very high.

We don't have the option to give our passengers to somebody else.

We end up buying tickets.

It's very expensive.

Our costs last summer because of some reliability issues were very, very expensive as well.

So what it does is, over time is, we think can spend money before the problems occur rather than on clean-up where we to get secondary issues, such as complaints as well.

But also in terms of block time, we have airlines today that are using a block standard of 75% to 80% or more, and it is simply just paying more money to show good performance without fundamentally turning the airplanes any faster.

And so we are at the very low end.

Spirit historically many years ago was probably at a 55% block target.

Today we are at 65% and our goal -- we will be somewhere between 68% to 70% -- a slight improvement.

And again, it will be a very, very, very gradual process.

Going to 80% just to produce 5 or 6 points with no real performance improvement, we think is a waste of money.

Quite frankly, we don't think we will buy as much, so therefore that is not a place that we want to invest.

There is making sure the design is improved, gradual improvements and basically day-to-day management.

If turning airplanes 55% on time and you are relying on block data, that is not fundamental improvement.

So our focus will be over time to improve our turnover performance, and we will do it with slightly higher block times than we do today, but not bloated block times.

That is the path that we have chosen, and I think over time, we want to make sure that we come out with the same price and cost advantages that we have today, and that opts for again a more metered approach to improving the operation.

Again, I think little by little, over time you will see the differences.

You will see bigger ones in the fall when you can make the redesign at a time when you are in a slightly lower load factors, and so that will be our focus.

That's great.

Thanks, Bob, and a quick follow up in terms of the fleet.

After all of the changes that you talked about earlier, going forward, how flexible is you delivery schedule?

And is there an ability to change it more, and even the ability to maybe cancel some of the new orders that you have, if you choose to do so?

Thanks.

Andrew, it is Ted.

I think have I said this before.

The Company has a firm order with its aircraft manufacturer, and we intend to deliver all those airplanes, and while that means that those aircraft are non-cancellable, there are always negotiation second happen between the operator and its vendors.

This is one indication of that, our ability to change gauge and to shift around some of the delivery positions that comes as part of that relationship.

As of now, we have no intention of changing the overall fleet order.

We feel very comfortable with the count of aircraft, and we will always work with Airbus to optimize that, over time.

Just to follow-up a little bit, in terms of capacity.

Last year, Spirit's growth rate was approximately 30%.

I think this year we will probably come out just north of 20%, maybe 20.5%, round numbers.

In 2017, I think we will be somewhere about 2 percentage points below that, or in round numbers, about 18.5%.

There have been some adjustments.

As we mentioned last quarter, somewhere in that 15% to 20% range is where we think is the right place to be, based on really what we see.

I think more importantly, again, that mix -- we want to have a more flexible mix.

The trend in the industry, as I said is bigger planes and ultimately again we have the cost structure to do that, we think there is a more optimal place for us to be in markets below 1,000 miles and that means retaining our A319s.

That's great.

Thanks guys.

We have Hunter Keay on the line.

Bob, I took a lot of these, a lot of people are extrapolating weak close-in pricing to weak corporate demand, but I don't think that's necessarily right.

So the question I have for you, Bob, you have comments, you have opinions on the domestic environment as a whole,.

So, are you still think an inverted booking curve?

And if so, do you attribute that more to the ULCC dynamic, or just generally too much capacity relative to demand.

I am afraid -- I fear that this is going to be -- if you do see that, like a new normal for the time being for quite some time.

Is that fair?

Well, I think we might express it differently.

Let's talk about the environment.

So we do not have a good view as a Company about say, what large corporate clients are doing.

That is not our target.

We don't have the scale and the size to participate in those agreements, but everything that we hear is, there is weakness there.

So what that does is that creates a buy down mentality.

So if you start trying to replace that customer.

So if someone is willing to pay $500 is not out there, that may mean that you are going to go out and put an advantage fare out a couple hundred dollars less, so there is a tendency to buy down.

Leisure booking and leisure market looks pretty strong, but what happens is, the carriers will move down the food chain.

In other words, if they can't replace a $500 customer, or if that customer disappears, they will move down to the $300 bucket, and ultimately they made move down to the $100 bucket.

I think that is probably what is going on.

And to some degree, that is why you are seeing some of the pricing go into some of the legacy hubs.

What you are seeing is, again, the typical legacy carrier, traffic is drying up where they have a connection versus a non-stop, and so we're really basically seeing discounting.

And in terms of the commentary, that says there's a couple ways to handle it.

One is to, you can either cut prices or you can put smaller airplanes in the hub to hub flying.

As another way to improve it and reduce some of the discounting.

I would say to some degree if there is a need for a high-cost carrier to discount in another carrier's hub, you can manage it with a capacity.

That's another way of doing it.

So I think arguably, you are seeing excess capacity at some level, in some of the very large mega hubs.

Some of these things can shift very, very quickly.

It is very, very possible that these things can turn in May and June.

Around the country a month like May tends to be exceptional business month.

And it is possible to see very quick and sudden turns in the marketplace, which could change some of the commentary.

But for our purposes -- again we are mostly leisure and really small business focused, and like I said, our space tends to get more crowded when we see perhaps issues on the international from the larger carriers, or with the large corporate contracts.

So I think that is generally the context.

We see no demand issues in the leisure side right now.

Okay.

All right.

Thank you.

That is helpful.

So you have -- I think you have a new yield management system, you have a new flight ops system.

How does Navitaire fit into the strategic pivot, if you want to call it that?

And have you done the work around whether or not that is the right PSS tool for you going forward?

Good question.

Hunter, in terms of the systems, Navitaire is a system that has been around the world.

We are actually in a period of time where if we were going to make a change, now would be the time we would consider it.

We really have to decide fundamentally what are the advantages or disadvantages of changing, and again, there is a lot about the simplicity of our system actually is quite good.

If we wanted to move to code share, we believe we could do it.

I believe that capabilities are there.

If that was a path we wanted to move down, I don't think it is a natural path or focus for us.

We are always concerned about cost.

But I think the key for us is being able to make sure that the ability to package and develop our ancillary products, that is a very high focus for us, and we need to make sure as we go forward, as we get bigger, that we can actually keep up with the pace of initiatives.

So we are going through that debate.

Again, I am not unfamiliar with the systems.

Ryan Europe is a Navitaire customer, so it is scalable.

We had, at AirTran, we were a Navitaire customer.

We had 150 airplanes, so the system is capable of ultimately scaling up.

We need to make sure that for a carrier like Spirit, we actually have some very unique requirements, in terms of managing our ancillaries.

That is really the big focus for us, but I think, all things considered, it is a good system, and like I said -- we are in the process of making our future decisions.

Thanks, Bob.

We have Helane Becker on the line.

Bob, I was wondering, Spirit generally falls to the bottom of the complaint list, or maybe the other way -- the top of the complaint list, and I am wondering if you are doing any customer outreach in an effort to smooth over feathers, and maybe attract some customers who tried Spirit in the past, and may have been disappointed?

That is a good question, and actually, I think the answer is yes.

Philosophically, again, it hasn't been a focus, it wasn't a focus in the past, and to some degree, we spent very little effort in the past, trying to smooth over efforts.

The key thing for us, Helane, is to make sure to begin to solve some of the problems before it occurs.

And we actually have, and so when you have a summer like we had last year, it can create months, ultimately of issues.

And quite frankly if you don't go out and try to manage those when they occur, sometimes these problems get larger.

The fact is -- and again it is -- the initiatives are now new to Spirit, they are not new to the competition.

Outreach needs to go on, because most customers are going to come to the airlines first, and the stats really show.

If you make an effort -- it is not necessarily about money.

A lot of this is about effort, it's about apology, it's about really caring.

We get a shot at handling most of these issues.

As we have begun new initiatives in the first quarter, I am actually seeing some benefits.

There are some areas where we do charge for more things, which is a policy.

So sometimes we will get a complaint, a complaint can be an observation.

Our strategy is to charge for bags, so a customer can complain, and say I don't like that you can charge for bags.

That still counts as a complaint.

We are not going to be able to remove that, because that is a strategic decision.

But there are others particularly in terms of recovery, after a four hour delay that we can be proactive quite frankly, and make sure we begin the process of apologizing and managing the problem.

Quite frankly, you can do that before the customer ever gets home.

So we don't really have to invent the wheel.

There is a number of airlines who have done a very good job over time, and this is probably a place where being like other carriers can be an advantage.

I think like I said, it is one of the easier things to do.

Apologizing and caring don't cost a lot of money.

And quite frankly, that is the primary focus.

That will move the needle, quite frankly, really more than anything else.

Okay.

Thank you.

I appreciate that response.

The other question I have is, I know one of the issues you had talked about with a decline in ancillary fees is the take rate on bags, or I guess change fees, because sometimes the actual fare is lower than the change fee.

So is there a base fare that you need to get to before -- in order to see the take rate to go up?

Or is it just a simple as, the fare has to be higher than the change fee?

It is somewhat related.

I think if you look -- generally again for an airline structured the way Spirit, certainly total revenue obviously is a key focus, but fares at some point need to go up here as well.

When you see your average yields dropping over a period of potentially, we are going to need some improvement there, as well.

So, the efforts have got to be certainly and again at some point going forward -- we are going to need to see some change in yield, as well.

At this point we won't be able to make -- get to where we need to go working with just half the ledger.

And like I said, eventually we will see some upward movement in prices, and I think generally, some resistance to, let's say, ancillaries may go away, but I also think there will be more initiatives.

Again, we don't have a mobile website.

We have locked down our entire web system to basically new initiatives, pretty much for the last six to nine months.

So we really held off on doing a number of things, of which we naturally need, to keep that base rate steady.

I think you'll see some improvements as we move into the third quarter, as we go live with the new web system.

Great.

Thank you so much for your help.

We have Joseph DeNardi on the line.

Bob, just to follow-up on the ancillary side.

Can you provide maybe a little bit of color as to what some of these new initiative, if not what they are, what they could mean?

I think there has been some discussion about, could be worth $1 or $2 per passenger.

Is that the right way to think about it?

And when did they really start to come in, is it more 4Q?

Later in the third and into the fourth.

In terms of the ones, I think we've spoken about.

We talked a little bit about some of the dynamic pricing.

But beyond that, there is a few others, but I prefer not to talk about things too much, just so -- I don't really want our competitors to know ultimately what we are thinking.

But like I said, in terms of future gains come in $1 and $2, not $10.

And we have got the large initiatives in terms of bags and seats change, but really $1 and $2, and it really needs to be a constant flow of initiatives.

So just shutting some of those off, with some of this natural flow and adverse selection, has made our total ancillary number move down.

And again I probably say, it is a good eight to nine months of holding back on initiatives, that is really the primary issue here.

Again, that number has largely been steady for several years.

It is hard to bring it up, because the initiatives need to have a steady flow again of $1 and $2 items.

So give us -- third quarter you will start seeing a few new initiatives, and obviously in the fourth quarter, we should be up to speed -- more of a normal mode.

We haven't seen that in about a year.

Okay.

That's helpful.

And then you obviously gave a pretty comprehensive assessment of the pricing environment.

I think there is some uncertainty among investors, as to what a broader rollout of the basic economy is going to mean for you.

I'm wondering if you could just talk about that a little bit, when your peers start to roll that out a little bit more in the second half of the year, do you expect that to help, hurt, or not impact your pricing?

Again, so let's try to describe what basic economy is.

It is based, let's call it a coach seat on a legacy carrier, with no frequent flyer points and maybe no seat assignment.

So that is what it is.

It is not a new product, it is as simple as taking away maybe a couple of items.

I don't see how that necessarily is more attractive than what they are selling today, by definition, it's a little less.

The only thing that really matters is the number of seats that the legacy carrier allocates to that fair cost.

And if they allocate -- generally speaking, if they keep the same sort of number of seats out there, then it is neutral.

If it allows that legacy carrier to reduce, or say, better manage, then it can be slightly positive to us.

So I would be more in the neutral to positive camp.

I think what we have seen out there is that pricing doesn't stay localized.

Price matching tends to spread.

And a lot of the initiatives that we saw, perhaps start with the Southwest build-up and Love, and then some of the competitive dynamics in Dallas, they end up spreading to other places, and they don't stay localized to Spirit or other low-cost carriers.

So, the more of this that you see, the more, let's say pricing dynamics we have.

So I think just to go back to really where we are -- and just think about some of the comments we are hearing.

Matching the prices of Spirit, they do break down the pricing barriers between the leisure and business.

That is very hard to control.

And the basic economy doesn't necessarily address any of that.

If you have low walk-up fares as a legacy carrier, it makes it exceptionally difficult to manage the inventories, and quite frankly, basic economy is not going to help that.

So, if I go back to the amount of seat and we can't be sure of, the number of seats that they put out against us, will determine the impact on us, and I would say it will be neutral to positive.

I would refer to some of the other commentary around, and I think it would support that opinion.

Again, the more low prices that a legacy carrier charges on a walk-up basis, the more difficult it is to manage the revenue.

Okay.

That's great.

Thanks Bob.

We have Dan McKenzie on the line.

With respect to the costs that have gotten pushed to later this year, what costs are those exactly, and when do they hit?

Dan, it is Ted.

It is mostly maintenance-related stuff, and it will be spread between the remainder, I'd say peanut butter through the remainder of the year.

And then just given the move to fix operations this summer.

I am wondering what's the front end cost pressure that's embedded in the second-quarter outlook either in terms of block hours, or in terms of overall cost?

Things that you are doing differently this summer that you did not do last summer, that affects the experience?

Again, our objective is to do all of this, as Bob was mentioning, carefully and thoughtfully, in a way that does not penalize the cost structure.

Because the expenses that otherwise would be on the back end would be on the front end.

So that is the way we are thinking about the operational improvement.

So while there are -- there would be a shift that expenses throughout the income statement, I would not say that it is timing, front-end loaded, or back-end loaded.

Okay.

And then I guess just one final house cleaning item.

Where are we at with respect to the $100 million of stock repurchase authorization?

I mentioned that in my prepared comments.

Through the end of yesterday, we had repurchased $25 million of that $100 million authorization.

It was about 520,000 shares.

Very good.

Thanks, sorry, I missed that.

Next we have Julie Yates on the line.

It is Parker Kim on for Julie.

With regard to moving downstream into more midsize cities, you mentioned 2016 is still large city focused, mostly because you're building out the West Coast.

But how long will it be before we start seeing midsize cities represent 30%, 50%, 70% of the growth, if it is that high at all.

Well, in terms of -- I don't necessarily -- again, we're not targeting a percentage, we're actually going to target markets.

I would say, whatever percentage -- we're not trying to calculate a result.

What we're doing is again, we are creating a better ability to fly the midsize markets by maintaining the A319s, and by definition, over time, maybe having a few less A321s and more A320s.

So that will create the ability to do so.

But I think we will see some new markets.

Again, these markets are not unique to Spirit.

It is just more recently the focus has been in some of the large metropolitan areas, but I think you will start to see some initiatives in the latter part of this year.

More in the November timeframe.

And I would add that our objective is to be more nimble and less predictable in our deployment, and so these fleet moves afford us that luxury.

So how we deploy our aircraft now is even broader, as we make these changes.

Over time, again, as I said, this is the beginning of what is an evolution.

But over time, that gives us enhanced opportunities to do some of the stuff we do today -- more of it, different things.

It is going to be a net positive to the flexibility of the business.

One last one.

Are there any operational issues associated with moving operations into more midsize cities, and away from the larger crew bases in the top 25 metros?

Any sort of labor productivity declines as a result of the move?

Thanks.

No.

I think actually, it is a lot easier.

I think there is less things going wrong in smaller markets.

And the operation tends to be simpler.

Less prone to air traffic control delays, so I think actually, it is easier.

Most of the bigger issues are going to occur in large metropolitan areas, where you are subject to gate constraints, runway constraints, weather.

The biggest delays tend to initiate in some large metropolitan area.

We have Jamie Baker on the line.

Bob, I am trying to reconcile the modifications that you intend to make to the model with the timing of pilot negotiations.

Basically, does the current contract permit you to do everything that you hope to, in terms of the revisions to the business model?

Or is it to the Company's benefit to hammer out a new contract, before you can really pursue some the changes that you have been talking about on the call today?

Well, I think actually, in terms of making adjustments, I don't think it necessarily has an impact really one way or another.

I think what we are doing in many ways is simpler, quite frankly.

We are talking about doing it is simpler than probably what we're doing today.

I think over time we will create, it will be less complex, we will end up having more density perhaps in some of our markets and a little bit more concentration, which will, quite frankly, just allow us to manage, I would say, daily operational issues simply better.

Again, today with one flight in every market, again, small issues sometimes can turn into larger ones.

And as a follow to that, Bob, I know you want to avoid negotiating in public, but the industry wage bar is rising at a pretty rapid clip for aviators, and in your cost structure, obviously is already quite lean.

Is it inevitable that the next pilot contract reduces margins?

When I think about flexibility that some of your competitors have, they can densify, they can make offsetting revisions to profit sharing, they can add bag fees, that stuff.

You are already doing all of that stuff, so am I missing something?

No.

I think there are again, a couple of differences.

And like I said, in terms of pricing, there are tiers.

You have Frontier and Allegiant well below us, and that is our peer group, and you move into another bracket and you have JetBlue, slightly above us, and that you actually have the legacies.

And I think there is a context for all this stuff.

And I think, in terms of what we offer, we offer fast growth.

Our pilots become captains much earlier than their peers.

And there is a benefit of that, so there is a benefit of maintaining a higher growth rate, and that is what we primarily offer.

None of the large carriers can get you to that left seat in a couple of years, and that is a primary advantage, that's a primary reason or a key reason for coming here.

And quite frankly, the longer we can maintain a higher growth rate, that will provide the best benefit to the pilot group.

So that is the context that we are thinking about, and like I said, that's the way we will approach negotiation.

Understood.

Thank you very much Bob, appreciate it.

We have Steve O'Hara on the line.

Just maybe going back to the ancillary revenue.

I apologize if you mentioned this, but did you talk about what the, where this comes from, in terms of where the weakest revenue, the weakness emanates from?

And then also just in terms of pricing -- when you look at a market, I think in the past you used something like a 25% haircut to the prevailing fare to look at where the fares were.

Does that math still make sense, or do you maybe have a normalized fare environment or what you estimate to be normalized?

Well, just to go back and to explain again, the compression in ancillary.

It tends to be, in each key bracket there is a slight degradation.

There is nothing that really stands out, and I just think it is continued downward pricing just creates the adverse selection, whatever that is.

Like I said, I think if we had more upward pressure with new programs, it wouldn't be very noticeable.

So I think actually, it is an ongoing process but we don't have the new initiatives coming in.

But regarding pricing, I think we can start out with a 25% number, but I think actually, as oil prices have moved down, I think that there is a relationship.

We have seen the relationship, so the underlying prices have actually come down even lower than that.

And again some of these, let's call it advantage fares, they could be 40% to 50% off fares.

So there is fares in the marketplace that go well beyond some of the other things that Spirit is doing.

But just going back, it is -- the one thing I would say is, I think it is something that is in our favor.

Our prices tend to be cost based or largely cost based.

And in round numbers, close to $0.05 a mile on cost, that creates a huge advantage for us.

And again, it's an area that we are very comfortable in, and our goal, because of our ancillaries, is to maintain a high load factor.

So we approach, I would say revenue slightly different than traditional carriers do.

Okay?

I'm sorry folks we are out of time today, but thank you so much for joining us today, and we will see you all next quarter.

Ladies and gentlemen, this concludes today's conference.

Thank you for joining.

You may now disconnect.