Spirit Airlines Inc (SAVE) 2016 Q2 法說會逐字稿

Welcome to the second quarter 2016 Earnings Conference Call. My name is Sophia and I will be your operator for today's call. I would now turn the call over to Deanne Gabel. Deanne, you may begin.

Thank you, Sophia. Welcome to Spirit Airlines second quarter 2016 Earnings Conference Call. Ted Christie, our Chief Financial Officer will review our second quarter performance and forward outlook followed by Bob Fornaro, Spirit's Chief Executive Officer with closing remarks. 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, July 29, 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 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 second quarter 2016 earnings press release for the reconciliation or our non GAAP measures.

And now I will turn the call over to Ted Christie.

Thanks, Deanne. Thanks to everyone for joining us. For the second quarter 2016 we reported net income of $78.5 million or $1.11 per diluted share and an operating margin of 22.3% approximate. While our bottom line results were in line with expectation we are disappointed with the yield performance. We saw slight sequential year-over-year improvement in domestic TRASM for the second quarter but despite our efforts yields were and continue to be pressured by more fair discounting by our competitors than what is typical for a peak summer travel period. International accounted for approximately 12.5% of our capacity in the second quarter and TRASM for that region under-performed our system average.

While the international beach destinations are doing fine many of the VFR markets continue to be negatively impacted by macroeconomic conditions in the region. We pulled several of our red eye international nights from the fall schedule which should help our international TRASM performance going forward. This should also contribute to better operational performance as it will provide additional time for operational recovery and maintenance. Total revenue for the second quarter 2016 increased 5.5% on a capacity increase of 23.1%. Total revenue per passenger segment for the second quarter 2016 declined approximately $18 year-over-year to 104.19 dollars primarily driven by a decline of $15 in ticket revenue per segment.

Non-ticket revenue per passenger segment declined about $3.00 year-over-year to $51.32 in line with our expectations. We continue to experience modest pressure on take rates for certain ancillary items which we believe are correlated to fare compression. We have several new initiatives we will begin rolling out by year-end which should help mitigate some of these pressures. Given our booking curve we anticipate there will be a one to two quarter lag post-implementation before we start recognizing the value of these initiatives. Non-ticket is a stable strategically important part of our model. However, it is worth reiterating that we manage the total revenue. We highlight this reminder because as we add more shorter haul routes to our network it is likely to have a negative impact on non-ticket revenue per passenger segment.

Take rates for certain ancillary items are strongly correlated to stage length. On shorter haul routes it is anticipated that non-ticket revenue per segment will be less than the system average. Conversely, passenger yields on shorter stage routes, especially in markets we are targeting that have less competition, are expected to be higher than system average and should more than offset any drag from lower non-ticket yields on these routes. The change in our mix of routes will be gradual so this isn't something that will be noticeable immediately, but it is something to keep in mind as our network evolves.

Turning now to cost for the second quarter 2016 CASM ex-fuel decreased 8.6% year-over-year to $0.5.3 the primary driver lower aircraft rent per ASM. Primarily driven by a change in the mix of leased and purchased aircraft as well as lapping the higher expense in the second quarter last year related to an unusual number of flight cancellations and delays. The Company purchased one 319 aircraft formerly under a lease arrangement and negotiated four extensions during the quarter which also contributed to the lower aircraft rent per ASM.

Keeping some of our 319s in the fleet will enhance our deployment flexibility including the transactions completed in the second quarter and during the month of July year-to-date we have purchased six 319 aircraft off lease extended the leases of five 319s and are in negotiation to purchase or extend the leases on a couple of additional 319s currently in our fleet. During second quarter took delivery of one new 320 and three new 321s ending the quarter with 87 aircraft in our fleet. Under the share repurchase authorization approved last October we spent $51.3 million during the second quarter repurchasing approximately 1.2 million shares.

Since we began our share repurchase program through yesterday we have spent a total of $173 million -- $173.8 million and repurchased over 3.2 million shares or approximately 4.5% of shares outstanding. We ended the quarter with an unrestricted cash balance of $1 billion and average net debt to EBITDA ratio of 1.35 and a pre-tax return on invested capital of 27.6%. We have proven that our cost structure coupled with our low fare plus ancillary model positions us to deal with a wide variety of macro environments. We believe this will prove valuable as we head into the latter part of this decade and into changing economic cycles. We have recently announced several network changes. We are adding Akron/Canton, Ohio and Newark New Jersey as new destinations to the route map.

Akron/Canton will be the first among several mid-size cities that we have identified to add. Newark, New Jersey will be a great way for us to grow in the New York area supplementing our New York/LaGuardia service. Additionally, we are delighted to have been granted provisional approval to offer service between Fort Lauderdale and Havana, Cuba. We have also announced new service from Orlando starting in the fourth quarter to Boston, Philadelphia, Newark, Akron/Canton, Kansas City, Niagara Falls an Plattsburgh. Other changes will include an increase in seasonal markets to better maximize peak travel periods. For example we have identified several existing markets including four touching Dallas that we will seasonally reduce for their none peak winter season but resume again in the spring. In addition, some of our new markets such as Akron/Canton to Fort Meyers and Akron/Canton to Tampa will be served in the winter to align with their peak travel season. Turning now to our third quarter and full year 2016 guidance scheduled capacity is expected to be up 16% in the third quarter.

We continue to target a capacity increase of about 20% for the full year 2016. On a demand front, domestic leisure volumes are strong however yields remain soft. Towards the end of the third quarter we will begin to lap the initial from the domestic fare structure change last year and our system capacity growth drops from up 24% in the second quarter to up only 16% in the third. Based on current pricing demand and capacity trends we expect TRASM to be down approximately 9% year-over-year, a significant sequential improvement compared to the down 14.3% in the second quarter 2016. Based on actual to date and the forward curve as of July 28, 2016 we estimate our economic fuel price per gallon for the third quarter will be $1.52.

For the third quarter 2016 we estimate our CASM ex-fuel will be up about 3% year-over year. Higher maintenance expense driven by the timing of events is the largest driver of the expected increase. Offsetting some pressure from maintenance expense will be lower aircraft rent per ASM. We currently estimate our CASM ex-fuel will be up mid-to-high single digits for the fourth quarter, again primarily related to the timing of maintenance events. With all that said we remain on track to achieve adjusted CASM ex-fuel of about flat for the full year 2016. This includes the economic impact from the recently ratified agreement with our flight attendants which adds approximately a hundred CASM ex this basis points to the year-over-year change in CASM ex this year. Our long-term goal remains to produce stable to declining costs throughout our growth cycle.

We are confident we can achieve this goal. However, it should be noted that due to the timing of maintenance events and/or new labor agreements we are likely to see volatility either up or down in any given 12-month period. But, again, the long-term cumulative average trend for CASM ex on a stage adjusted basis through our growth cycle is stable to declining. As the Company moves into market with a shorter stage, it mathematically increases absolute CASM. However, maintaining and growing our relative CASM advantage in short, medium and long haul markets is the true goal and one that we remain 100% committed to. Taking into account July revenue performance current pricing and booking trends the current outlook for the industry capacity and our CASM ex-fuel estimate you get to a third quarter operating margin of about 21%. With that I will turn it over to Bob.

Thanks, Ted. On the revenue front we are seeing some sequential improvement. The recovery is at a slower pace than we had hoped for. During the quarter we pushed through several structured fare increases. This was for a first for Spirit. Although we are strong proponents of low fares heading into the peak travel period we felt the pace of our bookings implied that our fare levels were sub-optimal for the peak demand period. Unfortunately, the benefit of these increases was largely diluted by aggressive competitive pricing actions during that period. However, thanks to our ultra-low cost structure we are still able to deliver solid profits and among the highest in the industry. Our team continues to execute well on cost performance and remains focused on maintaining and improving upon our relative cost advantage which is even more important in this low fare environment.

Operationally our team has made good progress during the quarter. I want to thank and congratulate our team members for achieving the highest second quarter on-time performance in the last five years. We still have a lot of work to do to achieve consistent reliability and improve our customers' overall experience but the changes we are making are beginning to take hold. We are pleased to have reached a five-year contract during the quarter with the Association of Flight Attendants who represent our flight attendants as well as the International Association of Machinists who represent our ramp service team members at Fort Lauderdale.

Alpha, who represents our pilots applied for mediation and we join them in their request. Our pilots do a great job for us and we work forwards to working with the NMB and union leaders to reach a mutually beneficial agreement. The focus of our discussions will be on pay rates, benefits, and productivity. We will not be commenting further on this call about the status of our negotiations. In addition to the near-term changes to the network Ted described we are working on finalizing the next round of changes to be announced soon. Broadening the array of types of markets we serve should lessen the susceptibility to negative impacts when other carriers have pricing skirmishes.

In summary we feel confident about our competitive position and believe the changes we are making to our network along with our operational improvements further solidify our competitive advantage.

With that back to Deanne.

Thank you Bob and Ted. We are now ready to take questions from the analysts. We ask that you limit yourself to one question. If you have additional questions or follow-up, you are welcome to place yourself back in the question queue and we will allow for additional questions as time permits. Sophia we are ready to begin.

Thank you. (Operator Instructions). And our first question comes from Savi Syth.

Hey. Good morning, guys. Just -- I was wondering if you could -- I appreciate the color on the drag from international. Wondering if you can provide a little bit more on -- on just how long that drags in and what that trend is like and I little bit more maybe color on the domestic market and how -- how kind of the fare weakness progressed through the summer. It seemed like maybe throughout the summer it's been weak with a higher level of fare activity but -- just a little bit more color would be greatly appreciated.

Sure, Savi. It's Ted. I'm going to comment on international and let Bob handle the domestic, but I think as we mentioned on the last call we did see some -- some weakness in a few of the currency driven countries most notably in Columbia and a few places in Central America where we have had some weakness associated with probably their micro-related currency issues. That persisted again into this quarter and I think drove some of the performance we saw in Latam. Caribbean was performing well. So this is more about what we've seen in more VFR type markets. We made some adjustments, as I mentioned, going into the fall and into next year that we think will -- will adjust capacity the right way into those markets and we're optimistic that -- that we can start to see some -- some improvement from that going forward. So with that, Bob, you want to comment?

Sure, Savi. Going back to the domestic, I mean first of all we have had a lot of color from previous calls with other carriers, but I think actually around early May we began to look at the quarter and we actually felt comfortable putting in some structured peak off-peak pricing changes and as we got into middle of June, you know, a 5-dollar across-the-board fare increase and quite frankly we expected June, which is obviously the strongest month in the summer to play out as you might guess, you know, carriers trying to sell up and exactly the opposite happened. I think in about the last let's say two weeks of the quarter we saw a lot of discounting primarily by Southwest in markets like Atlanta, Minneapolis those types of markets which are important markets to us. So we saw -- and to be frank we actually had to lower our fares because their fares were below ours, which is not typical. So we didn't get to see the strength in the back half of June that you would have expected and a lot of that competitive dynamic continued into early July. As I say now towards the end much July I would say situations better, and I think, you know, perhaps the third quarter will play out more normally where during peak days an very, very peak demand there's sell up opportunity. So it's a little more stability today in the marketplace than what we were looking at the very end of June.

Sophia, we're ready for the next question.

Our following question comes from Rajeev Lalwani.

Hi, guys. Thanks for the time. You have been adding a number of routes on -- for -- midsized cities just per your strategies obviously delivering on that, but can you just talk about performance initially and how you have been able to make it work just given the model that you have with high frequency, higher load factors, et cetera? And then if you can maybe now give us more color on maybe the mix over time of mid-sized cities as you look forward.

Sure. In terms -- it all basically starts with the cost structure and for the most part we have relatively dense airplanes, so we have to take it from that -- from our perspective so we have dense airplanes and a low cost structure so we tend to look for generally high -- you know, high demand markets and perhaps a lot of markets that create seasonal opportunities for us. When we look at it from that perspective there's a lot of route opportunities, either on an annual basis or on a seasonal basis. One thing again I will -- you will hear more and more -- we seasonally will make more adjustments in our network and as the market remains competitive, which we assume it will, you know, we will be more tactical on a seasonal basis and take -- and take advantage of those -- of those seasonal valleys. You know, when -- perhaps when we're looking out for the fourth quarter we actually might have moved to a greater degree into small cities but a couple of things have happened in the last three or four months.

The opportunity to fly to Havana, came up , we didn't anticipate that necessarily for the fourth quarter and -- and we were able to get -- get a tentative award and more recently, Newark, and for a carrier like Spirit we have been closed out of Newark and we're presented with an opportunity we announced our schedule yesterday. So there's two airplanes that will be flying in Newark in the fall that perhaps we might have used in other places. So we will continue to move let's call those random opportunities that we may or may not be able to predict. There is us going to be issues with let's say space in airports an what we don't want to do is forego those types of opportunities. So we have a lot of flexibility baked in and like I said I think you're going to see a balance of long and short routes and with all that, again, more focus on seasonality. Just one area that we -- if you look at the announcements quite a bit of Orlando and just kind of view -- Orlando is actually a very good place for mid-size city opportunities, and I think relative to the breadth of service that we have we will probably a little bit smaller in Orlando than one might expect and you actually see some -- a lot of activity in Orlando going into the fourth quarter of this year.

Our following question comes from Mike.

Oh, hey everyone. It's actually (inaudible) in for Mike. Good morning. So first I was hoping you could put a finer points on the progress you have made around operational improvement from a financial perspective. We would of course expect that our operational results to be a solid net contributor to the bottom line, but it does come with associated costs. So I wanted to see if you could tell us the total benefit after considering the pluses and minuses the improvement has had financially be it on margin or earnings or any financial metric would you willing to shed light on. Thanks.

Hey. Good morning. It's Ted. So first of all we're very pleased with the -- with the operational performance in the second quarter as Bob mentioned. Very good on-time performance. So the work that the team has been doing and there's a considerable amount has really started to already bear fruit and I think that that's a very positive sign as we head into the fall when we have a really opportunity to look at the way the network is structured to help the operation. From the puts and takes perspective one thing I would say is the way we entered the quarter thinking about unit costs and the way we exited the quarter thinking about unit costs I would say was generally positive. So we're actually encouraged that better operational performance over time will yield cost benefit. There are investments in the business that we make in order to produce those better operational results, but as we have talked about before we're feeling like that could at the very least net itself out over time or perhaps provide a tailwind and while the -- the tape is not fully in yet on this project it's still early the -- the progress we have made and the results the team is able to it generate with the kind of network tweaks that we have been doing so as you have seen from our network instruction there's nothing significant that would appear on the outside. These are just tweaks that we have been able to make. You know, we're encouraged about that. Now, the real -- the real kind of step function or best move that we'll make will come in the fourth quarter when we really have a chance as I said earlier to take a look at network construction and think about how that is going to make the operator's job a little bit easier. So hopefully that helps. We're encouraged by the results and we're also optimistic about what it means for our cost structure.

Next question comes from Hunter.

Hey, guys. It's actually Matt Morrison on for Hunter. Thanks for the time. Hey, Bob you (inaudible) last quarter to expect some ancillary initiatives in the $1.0 dollar to $2.0 range as early as Q3. And today you say you expect to phase those in by year-end. So I'm wondering if that push-out coincides with the decision to make pursue a new reservation system like Navitaire. Is it fair to assume a new reservation system would be a (inaudible) for CASM? Thanks guys.

Well, I mean obviously we're in the process of re-negotiating our deal with Navitaire so I just kind of leave it at that, but in terms of initiatives -- ancillary initiatives you know typically these things always take longer than we would like and I think our experience -- ultimately we always have a tendency to underestimate when these projects are going to be online, but it looks like November, December, you know, we will be rolling out the new initiatives and so we're really going to see the benefits as we move into 2017. Again, the website we do -- the redesign we do expect in the fourth quarter. That will allow improved merchandising. And I think we'll have some dynamic pricing opportunities in ancillary as well. So the things will start to roll out but the real benefits are going to come after that.

The next question comes from Julie Yates.

Good morning. Thanks for taking the question. I wanted to ask a couple of questions on the new service announcements. How are you determining the level of demand on these routes to support the new service and what are your assumptions in terms of competitive response where you're entering a market that's currently served by only one other player?

Well, let's take this Akron which is we have announced four new city pairs. I think there has been 10 years to 15 years of continuous service initially with AirTran and later Southwest. You know, that one is actually fairly easy to predict because there is a kind of a base of service. And we -- we expect competition anywhere. There is I believe, allegiant is in the market in a small way and there is competitive activity in Cleveland. We're also in Cleveland, but my own experience is there is some overlap between the two markets, but there's also some -- there's some very, very separate business pockets of demand for each airport. So that's actually one where it's more easy. You know, in other markets that are smaller you can use various relationships and perhaps other comparable cities in experience and so I think we think for example the new services in Plattsburgh and Niagara are actually very low risk because we're coming at a time of year where there's a huge snow bird activity. So those kind of markets I think are generally easy to define. You know, none of these routes are routes where the customer base is 20 to 30 a day and you're trying to push it on two days. Those aren't the kind of markets but mid-size markets are different than I would say small market that have never had any service. These markets are actually have been fairly well served over time. So I think -- and I think -- we there I there's quite a few of them out there. And those are the kind of routes that, again, you could fly on an annual basis and certainly they also fit the mold of allowing us to do seasonal adjustments as well because they also tend to peak in the winter when certain east, west markets are weaker.

Okay. Great. And then just on RASM as we think about the prospects for further improvement into fourth quarter, can you just give us your view on kind of the seasonality as we get into more of the off-peak and whether we should expect the sequential improvement to continue into the fourth quarter.

You know, I mean obviously we can't read your bookings really to tell us what's going on in the fourth quarter, but we certainly believe there will be continued sequential improvement going into the fourth quarter. You know, as we look forward, -- the third quarter is a little different. The strongest month of the quarter is July and that's largely done. You know, September is generally -- September is generally one of the weakest months of the year across the industry and -- but fortunately it's also -- also contribute the least but looking out, you know, we -- we see strong sequential improvements as you -- I think people would expect.

Our following question comes from Jamie Baker.

Hey there. Good morning. I have a variation on Julie's first question. In a situation where you're deciding between two routes so let's say identical stage lengths, identical (inaudible) et cetera the only differentiation being who your nonstop competitor is going to be. First does that influence which of those two routes you would hypothetically choose and if it does what sort of competitor do you prefer in the current environment, another ultra-low cost carrier or an aggressive mega carrier that's flush with fuel savings?

That's a heck of a question. You know, it's -- you know, it's -- I don't think you could, Jamie, just kind of group everything into sort of one statement, but I would just say this. There are first of all certain routes which you can kind of go under the assumption that let's say there's an incumbent, it's a very, very important route and they're likely to never adjust their capacity and that's -- that's someone's hub route where they have got seven or eight nights to LA, you can just kind of view that as one that's going to be competitive. There may be a route where your competitor only has one flight and that flight is not let's say a hub market. It could be a point to point market. There's always a possibility that the other carrier could withdraw. There are a number of criteria's, but I think when you look -- we think there's going to be a mix of all kinds of routes. In Chicago, in Dallas, in Atlanta.

We view those markets as big enough where and Houston where we can establish a position right alongside of incumbent competitors we're always going to keep those services up, but I think because of our cost structure there's always going to be some pricing opportunities for us. And -- but the key thing for us is we have established those positions and actually they're very -- going to be very, very important to us going forward and over time we will us have the opportunity to continue to grow those or keep them stable. You know, right now in terms of certain leisure markets it could be Las Vegas, it could be Florida, a little bit more in Tampa, those markets -- I don't want to use the word less important, but the fact is those are markets where the cost structure should create advantages for us because I think at the end a legacy carrier or a high cost carrier is a less likely to stay in a mid-size leisure route than a strength market in one of their hubs. So I think that would -- beyond that I would just say every route we'll judge on its own merits, but I think in terms of structure we don't anticipate when we go into Chicago, West Coast or Dallas, West Coast that either American or United is going to change or reduce.

Following question comes from Joseph DeNardi.

Yes. Thank you. Bob, sorry to focus on Akron here, but you mentioned that Alligant is there on a relatively small presence. I mean I think they do that because they think that twice weekly is where the demand lies. So do you think that you can stimulate more demand to justify daily service or is the strategy to go in and try to and take share by offering a better schedule or a lower price is this I think that's a pretty specific question is the strategy--

Sure.

Stimulate new demand?

I actually think Akron is actually an easy one and I actually think that's an airport that they -- Allgiant hasn't serviced on an optimal basis. That route, for more than a decade had nonstop service to several Florida destinations daily and so that's -- that's the basis of the opportunity and we're very, very comfortable that all of the information proves it out so it's a different companies can have different views, but like I said that's one from personal experience there was a decade of flying at AirTran and double digit margins. And I think that my cost structure is even better and I think that we are going to have exceptional margins. So very comfortable with that first small new city.

Our following question comes from Helane Becker.

Thanks, operator. Hi, guys. Thanks for the time. So my first question really is when you think about like Newark, Bob you know this market. It's horrible air traffic control. It's actually raining today ceilings were low, flights were delayed. I mean you have made such great progress on on-time performance in operations. Does if make sense to go into a market where you're knowingly going to have issues right off the bat, A, and more maybe -- or are you going to dedicate the two aircraft to the market go back and forth all day?

Well, Eileen that's a really good question, and we both know Newark pretty well and it's just -- it's another LaGuardia, which has also been a challenging market for us because we're not an airline that has commuters and who can cancel our commuter flights to keep our mainline nights on time. But we have been -- you know, airport capacity is -- it can be a challenge. When the opportunities open up we really can't wait for the ideal situation and Newark is going to be what it is. I don't necessarily view it as a huge city for us, but it can make a difference, you know, if we can get a gate or two to our network and that will pay dividends because it will create opportunities for us going forward. So we have to really grab the opportunity because we don't know when the next one will be. And so like I said it's just -- we're prepared to adjust our schedule and we're going to do our best to build in buffers on this flight so if we take the anticipated delay, you know, in the 4^00 hour we're going to try to create recoverability so I would just say that's actually an area where we are committed. We're -- we're going to make sure that we build in some buffers and recoverability to allow us to take advantage of the opportunity. So like I said, we have to always balance off the operational issues versus the revenue opportunities and try to kind of find a path between the middle of those two points.

Following question comes from Duayne Pfennigwerth.

Hey. Thanks. It sounded like Helane may have been talking from personal experience there in Newark. Any way, I wondered have you studied what Ryanair is doing with respect to bundling seat assignment, bag fees, priority boarding into new fare categories what they're calling leisure plus and business plus. It's effectively the inverse of basic economy for the legacy carriers low cost carrier re bundling if you will simplifying the experience for some customers that are willing to pay for that. Have you studied this opportunity and what would it take from a systems perspective for you to attack it? Thanks for the one question.

Hey Duane. It's Ted. Yes, we have looked at that and have been following a little bit about what Ryan has been doing. You know, for us the un-bundled strategy has proven very successful over the year. We're still a big proponent of that idea, but there are going to be some customers over time who value a bundled look and so what we are thinking through right now is how that might work with -- with our -- our structure such that we don't -- that we keep the pricing optimal for the passengers who want un-bundled service and who want bundled service which is a nice way of saying you don't want the two things to work against each other or cannibalize each other and so we -- we have the necessary expertise to modify the systems to make that work. This is more of a strategic discussion internal to Spirit and trying to evaluate how that might play out over time so I wouldn't give it any specific time frame right number we are focused on a number of ancillary initiatives rights now which we're excited about as we head towards the end of the year and the benefits that they may produce going into the next year. We talked a lot about dynamic pricing on some of our initiatives and while that has appeared to be a very long pull in the tent we're actually really excited about the progress we have made over the last six months and feeling very encouraged that we're going to have some real stuff to talk about in the fourth quarter of this year.

Next question comes from Dan McKenzie.

Oh, Hi, good morning, guys. Bob, as you look at the sources of weakness around the system, you have highlighted Latin American flying but the majority of Spirit's really touches larger markets and as you shift to more mid-sized cities you reset the operation, I'm wondering about there might be a need to further trim service from some of these larger markets looking ahead. I'm just wondering if you could share some thoughts along those lines.

No. The -- you know, right now we think about large markets go with the assumption that we are -- that we're talking about say the Chicago's, the Dallas those kind of markets and let's use Dallas as an example. I think right now we have had about the same service levels in Dallas for a couple of years. You know, there's some things that have been in the business long enough one thing you will realize is very peaks in the summer and, again, we're a leisure carrier and the opportunities for us are dramatically better in the summer than they are in the winter. Maybe two years ago when our prices where not being matched you could do very well in January, but that's not the indicates anymore. We have got a much more competitive environment so what you need to do is actually be more flexible about your approach and so in that regard we will have a schedule next summer in Dallas very similar to what we had this year because our numbers are exceptional. However, in the winter that's not the case and the same capacity level in the summer versus the winter does not produce the same results and then we're able to utilize those mid-size cities that we're talking about that's the Plattesburgs, the Niagara's the additional Canton Akron service so that's the way to kind of balance out the network is to do it on a seasonal basis.

Same thing I think Chicago. Very strong market generally year-round although the deep winter is a little softer. You know, we will have a little bit more seasonality. So there is more movement within the network during the year and I think we will produce better results. You know, it's easy to do. I think we're pretty good at it. We understand it. So that's actually the way we'll manage network and if there's a route that's not doing well and for example some of our red eye flying from Houston to Central America, if it's struggling in the summer, you know, for sure it's not going to do well in the winter and so these will disappear, but I think generally speaking we're pretty happy with the core level of flying and we'll make our adjustments on a seasonal basis and I think it will produce better profitability for us going forward.

Following question comes from Steven O'Hara.

Hi. Good morning everybody and thanks for taking my question. I actually just had a follow-up question on what you mentioned about some of the Caribbean and Latin routes. You know, when you think about the trends you have seen so far and maybe what you may have been expecting with respect to a potential impact with respect to the Zika virus have you seen any impact at all or has it -- the impact been somewhat less than you would anticipated when you think about some of these regional routes you cited? You know, and just wanted to get your take on that.

I just think it's actually really isn't all that complicated. I don't think we have seen the Zika issues, you know, in our network. I think -- I think the bulk of it is the local currency issues and these are actually markets that -- that historically have produced exceptional profits for us and we're taking a hit. It's always hard to predict the bottom -- this has been going on for about a year. We started last summer. We have been seeing the deterioration. It's kind of approaching hopefully approaching the bottom, but there are important markets for us going forward. It's not a large part of our network and so fortunately we can offset it, but we do see opportunities down in these various Latin American markets going forwards and we're pretty comfortable sticking it out because they have been very, very good routes for us an none of it has anything to do with the competitive dynamics. It's really more tied to economic and currency issues.

Our following question comes from Hunter Keay.

Hey, guys. Thanks for the follow-up. I just wanted to get your thoughts back on Savi's response. You said you had seen some lighter discounting by Southwest so I was just curious did that -- you said that end the July. Did you also see some of the carriers maybe selling low fares across each others hubs? Thank you.

I think probably go back in the latter part of June I would say about the first week of July which in the latter part of June is really the strongest part of June. You know, we -- we saw a lot of discounting and I would say in Chicago, Minneapolis, Atlanta, you know, some of those advantage fare markets where like I said we had set a summer structure that was higher because we thought the demand was there and we saw a lot of discounting. Again, that forced us to lower our prices for a couple week period of time. And like I said, I think the marketplace again is more stable and, again, it's -- my own guess is generally when you see discounting like that in close probably the way carriers might organize or set up their revenue management they might not have sold enough seats for those periods of time and they're forced to scramble at the end because a lot of airlines -- a lot of airlines including us I think missed their revenue projections in the last two weeks of the month. Again, that's just my guess because traffic at the end of June is fairly predictable and we saw the most discounting in the quarter in that period of time, which is not typical. But as I said I think going forward -- you know, again this can always change. I think there's a lot more stability in the marketplace right now.

Our following question comes from Joseph DeNardi.

Yes. Thanks. Bob, just from an M&A standpoint now that you see more opportunities in the small and medium market does that change the value that you think a combined Allegiants, Spirit network would create?

You know, again, I would actually just really separate -- really separate the issues and I think generally I think you could look at market opportunities a number of ways. It could be M&A, it could be, you know, route additions. I would say we think there is plenty of growth opportunities out there and like I said, I think I feel better about those today than I did six months ago because I think -- I think it allows us -- this Company is naturally flexible, very nimble and by kind of just doing what we're good at we see probably even more opportunities at least than I thought six months ago, but like I said, I think even though we're comfortable with our growth opportunities today so again if we are ever able to look the a transaction, you know, we would have to see more benefit and more synergies that perhaps we're seeing today as a standalone carrier. So like I said, I -- I feel better that there are more route opportunities than I thought coming in the door and as I said our job is also to evaluate all opportunities as they become available. So I think you can be assured that we're going to be responsible to our investors.

Our following question comes from Jamie Baker.

Hey. Thanks. Bob, just some additional color on the fare increases that you -- you mentioned that you took in the quarter. I'm not looking for any route specifics or anything like that, but basically how did your passengers respond in I mean I know you were disappointed with the result. Was it that (inaudible) traded down to lower fare buckets, did it flatten out the booking curve, did loads drop or was it simply that competitors opened buckets that were below your elevated levels? I'm just trying to understand better how your unique passenger demographic responded to something -- a 5-dollar increase, that we were pretty bullish on.

I think that your last point, competitors opened buckets below ours.

Okay.

I think that would -- that's largely where it was. Again, as we kind of looked out, you know, generally -- if you look at our average fares, you know, they're down quite a bit versus two years ago. You know, these have been substantial declines, almost for two consecutive years. So I think actually we saw at one point the customer could and would pay more. It's just that, again, towards the end of the quarter we saw buckets open up with substantial inventory below ours and it just put us in an awkward position where we were not competitive. The fact is for us we compete on price.

Yes.

And we saw prices substantially below ours and we actually basically had to, again, put more inventory out there at those prices. Again, our load factors were fine but obviously we didn't get the yields that we would have expected in the strongest part of the quarter and so like I said I think some of that is perhaps the overall elevated level of capacity in the industry. You know, that creates it and, therefore, the dynamics when capacity is elevated, you know, they play out in different ways. Like right now I think again the marketplace is I would say, you know, more stable, a lot more stable than it was about a month ago.

Our following question comes from Dan McKenzie.

Yes. Hey thanks for the follow-up. Bob, you know, you installed the new flight dispatch system in the first quarter and I'm wondering if you can talk about to what extent if any it benefited second quarter from a either a cost or revenue perspective.

Dan, I would say it's actually too early. Again, we have got a number of things -- actually right now it's actually helping outside, but we have a lot of initiatives going on at really the same time and -- and it's going to be really hard to tell, you know, for a while where the benefits are coming from. And like I said we had a number of I would say smaller initiatives for the summer. Again that are helping. The larger initiatives are coming and then what we're going to do is stop and let the airline run for a few months and so our goal is to kind of get where we want to go, you know, kind of next year at this time. You will see a lot of improvement before that, but what we don't want to do, it again, part of the reason why we're doing it this way is this is -- we are -- you know, we're not throwing huge chunks of money at it. This is basically it's mostly -- mostly around team work and focus and actually aligning our objectives. This is not necessarily about money. What we don't want to do is again, you know, create an airline that drives too much cost. We think a lot of it is our own discipline and so we want to take it in steps. But the fact is the potential for the flight -- I think it's actually going to be a good one for us, but it's just one of many things that actually we're doing. So I -- perhaps by the time we get to next quarter's call we will be able to take you through all of the initiatives because at that point in time we'll be starting that November schedule where most of this is going to happen.

The following question comes from Duane Pfennigwerth.

Thanks Bob, really appreciate your commentary on inventory allocated to lower fare buckets because I think mix has actually been a much more important driver of fares thank this focus on headline fare increases which really has been noise, frankly. I wonder if you could comment on advance purchase requirements which is a much more subtle thing that's harder for us to see from the outside. Have you seen any carriers try and restore those at their lowest fare buckets and is there one party that is still reluctant to follow there.

You know I think when we go back to the--I know there has been a lot of commentary about fences in generally what we would consider a fence is which could be Saturday night stays in advance purchases for the most part help carriers because once it gets into pure inventory all of this stuff is harder to control. Going back I think Delta was the most aggressive I thought from our perspective to keep or maintain fences and eventually some of those things broke down because of all the fare competition that we saw. For us, again our approach is different, our plan is not to simply follow along with everybody else, we are a price driven carrier, we are not a hub carrier. We are not a market share carrier and -- for us managing inventory is actually critical to us an it is ultimately up to the others to decide what is the best approach for them. I think everything is harder when the absolute industry capacity is up 4.5% to 5.0%. That makes everything more difficult--like I said, I think if overall capacity comes down, everyone of those efforts to create fences will have a much better chance of success. It still all comes down to supply and demand and that could be on a broad basis, that could be on a root basis, but I think, again, 5% industry domestic capacity when the economy is growing 1%, 1.5% it is going to create in effect more competition.

We have time for one more question and that question is from Rajeev Lalwani.

Hey guys, thanks for squeezing me in again. Bob, do you think that in this sort of supply and demand environment and when Spirit is growing 15% to 20% that it is possible to get to a place where RASM is a bit more flattish and stable, maybe just from all the initiatives you have and the impressive efforts that you have made over the last several months.

Do I think it's possible--- I do, I don't have a forecast for it but I think we've had--at some point you'll see inflationary pressures and quite frankly inflationary pressures will--- higher oil, I think, we think, quite frankly we'd be better for us. I think over time-- again, we've had almost two years of --- (inaudile) declines, fairly substantial ones -- I say, however, even after that we have 20% plus margins. Which I think is very impressive. I think at some point it will turn, it's slowly turning. It's turning because we are kind of hitting the bottom of these long two year period declines, but at some point it will turn up. And a lot will have to do with again, the strength of the economy and overall industry capacity. Again, and finally at some point oil is around 41 or 42 today, I am not sure -- in everybody's long term target. Some point we'll see it.

Great thank you all for joining us today and that concludes our second quarter 2016 news conference call.

Thank you ladies and gentlemen this concludes this conference. Thank you for participating, you may now disconnect.