Spirit Airlines Inc (SAVE) 2016 Q3 法說會逐字稿

Welcome to the third-quarter 2016 earnings conference call. My name is Richard and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

I will now turn the call over to Ms. Deanne Gabel, Senior Director of Investor Relations. You may begin.

Thank you, Richard. Welcome to Spirit Airlines' third-quarter 2016 earnings conference call. Bob Fornaro, our Chief Executive Officer, will provide brief opening comments, followed by Matt Klein, our Chief Commercial Officer, who will review our third-quarter revenue performance and fourth-quarter outlook. Then Ted Christie, our Chief Financial Officer, will discuss our cost performance, followed by Bob with closing remarks.

We will have a Q&A session for sell-side analysts following our prepared remarks. Also joining us in the room today are Thomas Canfield, our General Counsel; John Bendoraitis, our Chief Operating Officer, 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, October 25, 2016, and are subject to significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements, including the information under the caption Risk Factors, included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

We undertake no duty to update any forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items. Please refer to our third-quarter 2016 earnings press release for the reconciliation of our non-GAAP measures.

And now, I'll turn the call over to Bob.

Thanks, Deanne, and thanks to everyone for joining us. First, I want to thank all our team members and service providers for their contributions to our better-than-expected third quarter operational and financial results. I also want to thank them for the dedication and professionalism in assisting our customers and communities affected by Hurricane Matthew.

I was impressed with how smoothly our team handled the network implications, how quickly they brought the airline back up to full speed after the storm had passed, and their support to the affected communities. I also want to welcome Matt Klein and Rocky Wiggins to our senior leadership team. Matt joined as Senior VP and Chief Commercial Officer, and Rocky joins us as Senior VP and Chief Information Officer.

Both these gentlemen have extensive industry backgrounds in their areas of expertise. I am pleased to have them join our Spirit team.

For the third quarter of 2016, we reported net income of $86.3 million or $1.24 per diluted share, and an operating margin of 23%. During the quarter, we benefited from our own revenue initiatives as well as a modest improvement in the industry pricing environment. We continue to see constructive trends that support additional yield improvements in the fourth quarter.

We had solid cost performance. And operationally, we made good strides towards improving our performance. In fact, for the months of July, August, and September, we set new Company records for on-time performance, including all-time high -- the Company's all-time high September of [85.2]. I applaud our team for the progress made to date towards achieving our goal of consistent reliability.

With that, I'll turn it over to Matt to discuss our revenue results and marketing initiatives.

Thanks, Bob. And let me first say I am pleased to be here leading our innovative marketing, network planning, and revenue management teams in developing new initiatives to further improve our already strong results.

Turning now to our third quarter of 2016 performance, total revenue increased 8.1% on a capacity increase of 16.2%. Total revenue per available seat mile decreased 7% compared to the third quarter last year, primarily driven by a decrease in passenger yield largely as a result of industry competitive pricing pressures.

Although yields decreased year-over-year, we did see substantial sequential quarterly improvement in the rate of decline for the third quarter. Total revenue for passenger segment for the third-quarter 2016 declined approximately $11 year-over-year to $109.51, primarily driven by a decline in ticket revenue per segment related to the competitive pricing environment.

Non-ticket revenue per passenger segment declined $2.22 year-over-year to $51.17. While we are dissatisfied with this 4.2% decline in rate, the non-ticket revenue portion of our results were in line with our expectations.

As we've mentioned in the past, the majority of our non-ticket revenue is generated from sales at spirit.com. As I work closely with my new team, with my team to develop new and innovative non-ticket products, we are simultaneously working with our new CIO, Rocky Wiggins, in prioritization of IT resources to bring new products to our customers in an efficient and, most importantly, effective way.

Among other things, Rocky has an unmatched level of expertise with Navitaire, our reservation platform, and we're all very excited to have him join our Spirit team. Additionally, I can announce that we have recently rolled out new dynamic pricing capabilities for certain ancillary services. We are in the very early stages of testing and learning in a select set of markets, and we are excited about the potential benefits this new scalable functionality offers.

In terms of new ancillary services, just this morning, we began offering customers in LaGuardia the opportunity to purchase a product that allows access to an expedited security lane. This will continue to roll out to additional airports over the next few months, and is a great product that enhances our customers' experience and provides us with a new non-ticket revenue stream.

And, by year-end, we will be rolling out the availability for TSA pre-check. While it is difficult to measure the revenue value of this service, for those customers who have TSA Pre, this is a benefit that further enhances their airport experience.

Now, moving on to our fourth quarter revenue guidance, we estimate that Hurricane Matthew negatively impacts total RASM for the fourth quarter by 50 basis points. Additionally, we estimate a 75 basis points drag related to the shift of the Christmas holiday. With this in mind, and given the current pricing environment and capacity trends, we estimate that total RASM for the fourth-quarter 2016 will decline between 3% and 4.5% year-over-year.

With that, here's Ted.

Thanks, Matt. I also want to thank our team members for a continued focus on operational reliability and corresponding cost results. I'm very pleased with the successes we've seen on the cost side, which are a direct result of the improved operational performance.

For the third-quarter 2016, CASM ex-fuel increased 1.7% year-over-year to $0.0548, primarily driven by higher salaries, wages and benefits, and higher maintenance expense, partially offset by lower aircraft rent per ASM. During the third quarter, we took delivery of two new A321 CO's, ending the quarter with 89 aircraft in our fleet.

Also during the quarter, we purchased three A319 aircraft off-lease, and extended the leases for two other A319 aircraft. On October 7, we took delivery of our first A320neo, becoming the first US operator of this new engine option aircraft.

During the third quarter, we returned $38 million to our shareholders, repurchasing approximately 1 million shares. Over the last two years, we have returned a total of $200 million to our shareholders, repurchasing approximately 4 million shares or about 5.3% of shares outstanding. We ended the quarter with an unrestricted cash, cash equivalents and short-term investment balance of $926 million, an average net debt to EBITDA ratio of 1.55, and a pretax return on invested capital of 25.3%.

Turning now to our fourth-quarter and full-year 2016 guidance, scheduled capacity is expected to be up 15.6% in the fourth quarter. We continue to target a capacity increase of about 20% for the full-year 2016. Based on actuals to date and the forward curve as of October 21, 2016, we estimate our economic fuel price per gallon for the fourth quarter will be $1.70.

For the fourth-quarter 2016, we estimate our CASM ex-fuel will be up about 8%, which includes an estimated 1 percentage point drag, due to expenses and the cancellation of about 310 flights or 48.2 million ASMs, related to Hurricane Matthew. It's worth reiterating that our Q4 2015 CASM ex- was unusually low, due to some favorable timing from maintenance, creating a skewed comparison for Q4 of this year. However, our absolute Q4 2016 CASM ex- is very stable sequentially.

All-in, we estimate Hurricane Matthew impacted fourth-quarter 2016 operating income by approximately $6.5 million when you take into account lost revenue and incremental expenses, offset by the forgone expenses due to the canceled flights. For the full-year 2016, thanks to good core cost performance, we remain on track for CASM ex-fuel to be about flat year-over-year.

Next year, based on our current aircraft deliveries, we are projected to grow capacity approximately 18.5%. However, we are evaluating several options to push that closer to 20%. Throughout 2017, the amortization of heavy maintenance and supplemental rent expense will drive some pressure to our CASM ex- profile. While we are in the midst of our 2017 planning process, we believe that 2017 CASM ex- should be about flat year-over-year, despite pressures from maintenance timing.

In 2017, the cadence of CASM ex- changes year-over-year for each quarter should be the opposite of 2016, with year-over-year increases in the first half and year-over-year decreases in the second half. I'll be able to give more granularity on 2017 CASM ex- on our next call. Of course, this view on CASM ex- does not reflect any impact of open labor negotiations. Our long-term cumulative average trend for CASM ex- on a stage-adjusted basis through our growth cycle has been, and remains, stable to declining, which is critical to our business strategy.

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

Thanks, Ted. As I look back at what we've accomplished together over the last 10 months, I am even more confident about our competitive position. We've enhanced our leadership team in a few key areas.

In addition to Matt and Rocky, we added Greg Christopher as our VP of Operations Control, and Kirk Thornburg as our VP of Tech Ops, both of whom have many years of industry experience in their areas of expertise. Together with our other talented leaders, we are well-positioned to manage the next phase of Spirit's growth.

Throughout the year, we've made a few tactical changes that have helped improve our operational reliability. Our November schedule change should drive further significant improvements, and do so while being cost-neutral or, based upon results so far, be cost-beneficial. From the outside looking in, you won't notice much difference, as our route map will look very much like it does today, but how we are flying the network will be quite different.

Spirit has an industry-leading cost structure and a strong brand. We have a young fit fleet. We have the strongest network in the ULCC space with a large successful international network at Fort Lauderdale. We have improving positions at most key US airports, and we have the flexibility and discipline to adapt as the environment changes.

So we are nimble and flexible. And regardless of the economic, pricing, or fuel backdrop, we are well-positioned to continue our track record of industry outperformance.

With that, it's back to Deanne.

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

Richard, we are ready to begin.

(Operator Instructions) Mike Linenberg.

I guess just a question to Bob on the November schedule change that you talked about. -- you said that we wouldn't see, I guess, much on the surface. What is going on behind the scenes? And what have you already implemented that helped drive much better operational numbers in July, August and September?

Well, good morning, Mike. If you look at the route map, I think the route map won't look dramatically different. I think -- but there are a number of, say, individual route adjustments. And then I'll talk about the operations.

But we do have a fairly large buildup in Orlando beginning in November. I think, a year ago, we operated two gates in Orlando; now we'll be up to five. And we are adding nonstops in Boston, Fort Lauderdale, Newark, Akron, Kansas City, San Juan, class person. And so there is a series of places where we were -- are building up. And I'd say Spirit was probably smaller than what you might have expected in Orlando. And so, I think you'll notice that, and you'll see Newark and eventually San Juan.

But I think in terms of really the operations, it's really our first chance to combine some of the planning initiatives and the operational initiatives, and kind of put them in what I would describe as somewhat of a new schedule, where we really can kind of take into account, from the bottom's up, all the operational initiatives, and combine them with a marketing plan.

So I think we'd start out -- we've talked about over the year, we've dramatically changed the way we operate in our Operations Control Center. We've made some minor block adjustments. We've made a number of adjustments to the way we operate our Red Eyes in terms of the way we fly.

We have added some gates in a few key airports, but we've had some shortages in the past. We've adjusted the way we pay our crews, and we are connecting fewer crews throughout our network, some aircraft routing changes. And so what we're trying to do is really kind of compensate for the lack of density in our market.

I think, as you know, most of our routes have about one flight a day. So, again, we don't have, let's say, the density to make adjustments. We have to build those adjustments into the underlying schedule. So we are planning on -- and like I said, anticipating more in our schedules going forward.

Great. Thanks, Bob. Yes, perfect. Thank you.

Duane Pfennigwerth.

Bob, maybe a related question, but can you talk a little bit about why it makes sense to bring current-generation A319's on balance sheet, and what price point you're doing that for?

I can start, but I'll let Ted give you the primary answer.

Sure. Hey, Duane. It's Ted. So, we have been using the opportunity for the transition period here as 319's reach the end of their initial lease term. We've been viewing that as an option period for the last three or four years.

And to your point, we've always evaluated those aircraft as a component of the Company's fleet. And, at some price, they are valuable for us to keep them around for a while to continue to operate. They do have certain mission-critical use for us. And at the right price, they are a very effective airplane.

So, we've been working on those types of initiatives with our lessor partners, and have bought a few and extended a few. I wouldn't comment specifically on the price point that we think is the trigger point, because there's still open negotiations with a few other parties. But I would tell you that we are very pleased with the effect that they will have on ongoing CASM ex-. So we actually think that the benefit of those, both on balance sheet moves and extensions, are a tailwind to unit costs going forward.

That's great. And then just as a follow-up, this RASM improvement trend that you are seeing here in the third quarter and also into the fourth quarter, can you comment on how much of that is being driven by improvement in closed-end pricing from an industry perspective versus your own self-help initiatives?

Well, again, I think we'd be guessing -- it's an educated guess as to the exact percentages. But, again, I would say I think you hit the high points. The improvements are coming from general industry actions and, let's say, internal actions. And from our perspective -- again, we've seen the advantaged pricing, which is a lot of that hub-to-hub pricing that existed throughout the summer; that's largely gone.

From our perspective, yes, we took a fairly large increase on September 1st -- $5 across the board. And a lot of things that you perhaps might not see if you follow industry pricing. We've taken some surcharges on Fridays and Sundays. And so we actually think there is a lot of opportunity on peak days to improve our own underlying affairs outside whatever else goes on in the industry.

So, again, so, yes, I think we are seeing it. It's fairly positive. Again, we've made some changes with people, and the processes that we've instituted are working. And I think, again, you know, I see huge opportunity. Again, we've had two years of fairly substantial yield declines, and I think that we see a real good opportunity of initiatives, just unto ourselves, that's going to help us going forward.

Thank you, Bob.

Andrew Didora.

Bob, just had a follow-up to Mike's question earlier in terms of the improved operational performance. Is there any way to quantify either the costs or profit benefit from this improvement? And I guess as a brief follow-up, of the initiatives you put in place earlier this year, and the ones you talked a little bit about earlier, which have been the most beneficial to improving this performance? Thanks.

First of all, in terms of the cost impacts. First of all, I think even prior to my arrival, the Company certainly realized that it needed to take certain steps to improve its operational reliability. Again, we had a very, very difficult summer in 2015. So there were certain initiatives actually beginning to start. And I guess from my perspective, this kind of gave them a push and really try to accelerate it.

But my guess is that at least from a utilization perspective, they'll -- eventually utilization will go down 2% to 3% because of the operational initiatives. And we are going to be doing this again over an 18-month period of time; not a six-month period of time. Because we don't want to build substantial costs in.

But there is an item which we report to from time to time. It's called interrupted trip experience -- which, at Spirit, is a substantially large number. And so the cost of poor on-time or reliability is much higher than at other carriers, because we don't have three or four other flights a day to move the customers on. We don't have airline agreements.

So, initially, you'll see improvements in terms of on-time and various station performance, and eventually that will lead to improved completion factor. And again, getting our goal back to 99% over a period of time again is a key focus for us.

I know you had a second part of that question?

In terms of the initiatives that you kind of put in place earlier this year around the operations, which do you think has had the most beneficial impact to your results of late?

I think actually it's -- it has to do with the way we route the airplanes. You know, with a high utilization, especially in the summer, and with a lot of -- we have a high percentage of Red Eyes as well, and we would have airplanes that could run continuously. And so on day one, if the plane was late, it could go for two or three days being late. It would just kind of create some compounding effects.

And so what we're doing is we're creating various options to actually create more flexibility. Again, one thing I didn't add relating to our questions, we actually have a study going on. And I think as we move into 2017, we are also going to reengineer the way we operate our maintenance bases as well, which we think, given our route plans over the next five years, will allow us to improve our reliability and also reduce our costs as well.

All right?

Great. Thank you, Bob.

Savi Syth.

I wonder if you could -- I know last time there was a different dynamic between domestic and international. I wonder if you could provide a little bit of color on what you saw in the third quarter?

I think in terms of the dynamic, I'd say the international -- so again, we are about 88% for domestic, about 12% -- 10% to 12% international. And I guess starting with third quarter of last year and going into fourth-quarter/first-quarter, we saw fairly big declines in South America, particularly Colombia. And I think right now those results are about the same as domestic.

But there is a, I think, a real opportunity to improve. Again, Colombia, which is where we operate four cities, was down substantially over the last 12 months. And we are seeing that bottom out. But I would say the international and domestic are, round numbers, the same level.

Got it. And then just on the follow-up on the non-ticket revenue, I wonder if you could provide a little bit more color on what type of ancillary revenue you are dynamically pricing? And also on the bag fees, I know the drag, given the low prices, but are we going to start anniversarying that here in the fourth quarter? Or is there a little bit more before we fully lap that?

So, thanks. This is Matt. I can take that question. In terms of the dynamic pricing capabilities, we started to roll that out as we think about customers that are selecting seat assignments. And some of the functionality that we are putting in there will start to allow us to manage our revenues there, much in the same way we think about revenue management in general.

So we are very excited about that. And there is a tremendous amount of scalability that that will provide to us.

In terms of your second part of your question regarding lapping the issues with bags, we don't necessarily believe that's coming in the fourth quarter. There seems to be a correlation there between overall fare activity and our bag rates. So, until that changes dramatically, we don't expect to see a big impact there.

Okay, great,. Thank you.

Rajeev Lalwani.

Thanks for the time. Ted, I think you mentioned in your prepared remarks that you were taking a look at taking capacity growth next year to 20% or so. Can you talk about why that is and how you're thinking about sort of margins in RASM in light of that?

Sure. Well, we -- we've always had a long-term 15% to 20% target growth rate, and what we see as an opportunity there, that the Company is looking to capitalize on. And so we are always trying to optimize that for aircraft deliveries and availability and utilization, to some of what Bob was discussing earlier.

So we had some initial reads on what we thought was going to be capacity for next year at about 18.5%. We do have an opportunity or two that we are evaluating that may push that number closer to 20%. And, like I said, we see a big opportunity in the full market. So that's really what we are trying to optimize to, is to capture that opportunity.

I think the effect, to our point, Rajeev, is that we are always going to be looking at margin-accretive decisions. And so we view the incremental opportunity beyond just 18.5%, we view that extremely positively from a margin perspective. We think it will be beneficial both on the cost side and on the unit revenue side.

Because while we grow into markets that are new ONDs, we are hopeful that those types of markets will produce positive unit revenue trends. And so we are excited about that opportunity. We think there's good tailwind opportunity on the cost side. And so that should be productive to the margin.

Thanks.

Helane Becker.

Thank you so much for your time. Is there any way -- or is there any incremental costs associated with your new IT initiatives? Or is that 100% profit?

Hey, Helane, it's Ted. So, the Company, over the last couple of years, has been investing in its IT infrastructure. I think when you talk about initiatives, you are talking about ancillary-based initiatives. And there is some investment that the Company needs to make to have those things happen.

You wouldn't notice them. They are small from a cost perspective. There is an amount of time that is required from our IT folks that, when we talk about resources, we really mean IT time, to make sure that everything kind of feathers in at the right way. But clearly, the revenue opportunity, and therefore, the margin opportunity, considerably is -- dwarves any kind of investment in time and cost.

Okay. And then could I --

Yes. Sure. I have one thing to add to that, Ted. So while we are looking at our prioritization, we are also thinking about what can we absorb in terms of bringing on new ideas and new projects?

We have quite a long list that we think is productive for our customers and for the Company. And so part of what we are doing with Rocky now is understanding what's the right way to layer these things in the smart strategic way, so we can succeed from day one on the initiatives.

Okay. And then could I just ask a follow-up to IT? With -- some of your peer group have had IT issues where their computer systems have failed. What are you guys doing to kind of prevent that? Like can your pilots, for an example, check in wirelessly using their iPads? Or is there any way you can get ahead of an IT issue that would ground your aircraft?

This is Ted again. I'm going to make a couple of comments, and then I'll let Rocky jump in as well, since Rocky is just getting his feet wet. But, as I mentioned earlier, Helane, we've been spending some time over the last couple of years to invest in things that the external business wouldn't see, but are intended to shore up the infrastructure and reliability of IT services.

And so, while nobody is going to be perfect at any time, the Company has recognized that there is a need to deliver the product reliably to the operation. So I think there have been a lot of strides made over the last couple of years, and we are going to continue that process going forward.

So, Rocky, do you want to add anything more or --?

Yes, Helane. I would just add that, in the area of reducing risk from an IT infrastructure perspective, it's an ongoing journey. We'll always be looking at where we should invest to reduce that risk.

It's impossible to eliminate it fully, but we've done some recent things, just before my arrival, that are really good investments in moving some of our infrastructure to even more secure environments. And we'll continue to look for those opportunities and learn from certainly the industry experience to minimize the potential that that could impact Spirit.

I just want to add one final thing. During this hurricane that just passed through last couple of weeks, we had to close our Operations Control Center here in Florida, and we operated it remotely and it worked pretty well. So I think we are certainly happy with those types of initiatives. You don't often get a chance to do live tests of operational backdrops. But ours worked pretty well.

Thank you. Thanks very much for all that.

Joseph DeNardi.

Ted, just a question on your comments around CASM next year. I mean, you've got other airlines much larger than you that grow at 1% or 2% and keep CASM, excluding labor deals, roughly flat, maybe up a little bit. You guys are going to grow 18% to 20%. Why isn't CASM down more? I mean, are the operational improvements you guys are implementing, is that a material drag on CASM ex- next year?

Hey, Joe. No, the things that we have faced over the last three or four years, and continue to digest as the Company matures, mostly revolves around maintenance-related expenses and the maturation of that over time. So, as you're aware, the way we account for our heaviest maintenance, that pushes through our depreciation and amortization line.

And so the Company has been, over the last four years or so, seeing significant increases in that area of expense. And what we've been successful at doing is using the Company's scale and its balance sheet to continue to manage growth in other related maturation expenses, such that we maintain our industry-leading cost structure. So we believe -- the objective here is to start at the lowest base and keep that in line while the Company matures.

So, for example, when you get to be a large carrier -- the large network carriers, they are already mature from an expense perspective. And that's why you see the ins and outs sort of match. As expenses get older, the new stuff is coming in to dilute it, and that's why their costs don't move much.

We're still in the growth phase. And so, that is -- there is some mismatch one way or the other. But the longer we can keep our costs flat to down, we believe we eventually reach that maturity standpoint, and we can enjoy a significant advantage over the long-term.

So you've got to remember there's no real -- there is no direct relationship between our growth and necessarily our expenses, because a lot of us -- a lot of our existing expenses are variable in nature. We -- because we're low-cost, we have a lot of -- we don't have a lot of indirect expense. Right? So we use whatever scale we can to help offset the maturity-related expenses

Okay. Yes, that's helpful. And then just a question for Matt Klein, and hopefully, you'll decide to answer this. In an environment where you guys are growing 18% to 20% next year, assume industry capacity is up 3% to 3.5%, and pricing actions from your competitors are relatively stable, how would you go about forecasting your RASM in that scenario for next year? I'm not looking for guidance, just how you would think about forecasting it.

Well, certainly. So we'll be looking at where we expect to be adding new routes, where we expect to grow, taking into account what the industry is doing in general, and how the competitive nature looks in places that we choose to grow. I'm not sure I can really comment beyond that.

The thing I would add is, again, normally, with growth like that, it would naturally have a downward pressure on pricing. But I think we are actually in a very unique position. We've had basically nine quarters of downward movement on average prices. And, like I said, we've done enough things here that I believe, if we could have relived the two years, maybe we could have made some improvements.

I think there are opportunities for us within our own markets to make some underlying improvements. And as I said, I think you may still see the very, very low prices that we've had, but they may just be on Tuesday and Wednesday. But there's a lot of stratification of our demand across days, which we think there is a real opportunity, as again -- the one thing that hasn't changed in 30 years in the business is Friday and Sunday remain the very best days. Never changed.

And there's a lot of opportunity for us when we run 90% load factors to enhance the average fares on those days without changing fares during the week. So there is, I think, to the degree there is unique opportunity for us within our markets that perhaps we weren't tapping. So I think we think the self-help creates a lot of opportunity for us going forward. Okay?

Great. Thank you.

Hunter Keay.

A little bit more on this bag fee commentary. Is that a decline in checked bag fees or carry-on bag fees or both? Or is one up and the other is actually down more? I'm kind of curious about that dynamic. And while you are talking about it, any other commentary you can give on what's driving any other ancillary streams, like maybe change fees or something like that, in this low-fare environment, would be appreciated. Thanks a lot.

Yes. Certainly we can address a little bit of that. So the change in rate from our bag fees is generally across the board; both our check fees and our carry-on fees have been impacted there.

In terms of other categories, you are correct. We've made some changes to our change fee amounts. And in addition to that, we've just seen a take rate change as well on change fees. As fares continue to be depressed, although improving sequentially, still depressed, we're going to have issues where change fees may not make sense for all of our customers at all times.

And then in terms of other categories, we have seen a decrease from -- on a per-passenger basis, from seat assignments. So, that continues to be there, and that's one of the opportunities, though, that we see rolling out over the next -- well, we started to roll it out now. It will take a couple of quarters to fully realize the value, but we are starting our dynamic pricing capabilities there. We think there is a big scalable opportunity with that product.

Okay, good. Thanks. And then, Bob, I think earlier this year -- I'm surprised this hasn't come up yet on the call -- but you made a comment -- I don't know if it was like sort of an off-the-cuff comment or what -- about showing some interest in the C-Series. Obviously, we know there would be a big cost headwind attached to that if you were to start flying multiple fleet types. But obviously you see some theoretical benefit worth investigating at least around margins or revenue.

So, was that just a function of things feeling really bad at the time? And now that things are stabilizing and getting better, that's probably lower on the priority list of studies that you would undertake? And in the event that you guys do decide to fly multiple fleet types, why would investors -- why should investors not just immediately freak out and assume it's a bad thing? Thank you.

No, I think, Hunter, it's a good question. Let's just think about in terms of our fleet plan again. We have a delivery stream that goes through, I believe, 2021. And without, let's say, an additional order, I think in 2019, I think our growth will start dropping below 10%. And so, I think if we want to maintain a high growth rate, we're either going to have to make a whole series of one-off purchases or look at further orders.

And so when you are doing that, I think you have to look at the whole landscape. And so -- again, studying and actually acting on a decision are actually two different things. Right now, the marketplace is very competitive. And if you look at North America, the low -- and even South America, the low-cost sector, the true low-cost sector, is largely Airbus. And so the other manufacturers are ultimately going to be pretty aggressive.

And so you have to weigh the opportunity of a new airplane, whatever incentives you can get versus the inefficiencies of creating another fleet type. So I don't think you ever want to dismiss -- competition is good for the consumers. In this case, we are a consumer and we need to explore all the opportunities in the space.

So we're just -- basically just doing our job. It really is the right thing to do is to see what the competition will make available to us. So I think it's -- again, the airplane manufacturer, they are just as competitive as we are in the carrier space. And so we want to use the opportunity of this to listen to all sides. All right?

Yes, thank you.

Julie Yates.

Thanks for taking my question. And welcome, Matt and Rocky. Pretty impressive sequential improvement in Q4 unit revenues considering the headwinds. Assuming that Q1 benefits from the holiday return travel that's pressuring Q4 on top of the industry yield improvement and the self-help letters that you talked about, do you think Spirit can get back to positive unit revenues in early 2017?

I'm looking over at Deanne. She says no comment. You know, it's -- I don't want to go out that far. This is forecasting revenues beyond next month is treacherous, and it has always been. But I think, again, if you look at the environment, there are -- I think there's some tailwinds. The tailwinds are -- the fuel is coming up and we need to respond to that. Right? That's number one.

I think as I sit -- we are making changes and doing things within markets that we probably weren't doing before. So, yes, I think we will be very competitive with anybody who sees revenue improvements next year, but I think we are best off just trying to manage the process one quarter at a time.

Got it. Understood, Bob. And then just as a follow-up, can you remind us how to think about the impact of Easter shifting back into the second quarter in 2017? Is that a headwind to Q1 for you guys or is that a tailwind?

Yes, sure. It would be somewhat of a headwind. We haven't tried to value that specifically at this point. That's pretty far out for us in terms of booking curves, so we probably ought to give a little more guidance on that on the next call.

And I guess the one thing I would add is, to get the quarter changes, generally a later Easter is better for both months combined. The later Easter usually is -- it will improve both months. Obviously, sometimes the shift can go between March or April, but a late Easter is generally a positive for the first half of the year.

Okay, helpful. Thanks, guys.

Dan McKenzie.

Matt, congrats on the new role. It's interesting you come into the role with a fresh set of eyes here, so I guess my question is similar. Where is the biggest potential on the commercial side relative to what you inherited? Is it on the network side or the IP side of the business? And how does the overall travel proposition that Spirit offers need to evolve going forward?

Yes, sure. So, generally speaking, we think there's a lot of opportunity in the way that we think about pricing and the way that we think about revenue management. Clearly, we have a lot of initiatives that we want to tackle on the IT side that are related to non-ticket revenue items. We think there's a lot of opportunity when we think about analysis and data, and lots of opportunity that we have here to just to think about things in a different way.

The team is very strong and definitely is very analytical. It's a matter of, are we looking at all of the data that we should be reviewing in terms of how we can move forward? And I think in the 10 weeks or so that I've been here, I think we've started to think about things in a little bit of a different way.

Specifically when we think about -- we think about pricing, for example, we are getting very good at tracking and digesting industry fare activity. And from our perspective, that gives us an ability to position ourselves to compete in a substantially more effective way. And so it's things like that that I think we're making big improvements on. And it's a pretty exciting place, pretty exciting opportunity. Happy to be here, for sure.

And Ted, is the potential acceleration in growth next year on the domestic or the international side of the business?

You know, nonspecific right now, Dan, but I would expect that it would track along with kind of the size of the network. Most of our opportunity over the last few years has been domestic for the most part. We have added some international flying. But as Bob mentioned, international is about 12% of the network, and so the vast majority of our growth is going to be in the [88].

Okay. Thanks, guys.

Jamie Baker.

Bob, a question on how you intend to position Spirit within the industry. I mean for passengers and investors, you made it clear. I'm wondering about the pilot perspective. On one hand, you may want to keep Spirit as sort of a springboard to more lucrative mainline flying, you know, a place where you move quickly into the left seat and then on to greener pastures.

The other extreme you may want it to be considered the first and final place that pilots live out their career. So any one of us can draw conclusions on what happens in terms of future labor costs, But understanding how you feel Spirit should be positioned in the eyes of aviators could help us with that process.

Well, it's a -- Jamie, it's a good question. It's also a tricky question, because we are in mediation and that process, you know, it does take time. I think again, as a starting point, given the trends, pilot pay is moving up, and now we are towards the bottom with Frontier on the low end.

And so, we expect and believe our pilots deserve a raise, but we also have to look at some of the underlying work rules, right, that go with the agreements. And I guess the one comment I would make is, we think there's a lot of opportunities where our contract is efficient versus some of the other carriers in terms of work rules and some of the ability to run the airline. And we think -- and, quite frankly, we are willing to trade off increases for some of that flexibility that we should have.

Again, our contracts were not written for the carrier that we've become. So we're not working off a blueprint. And so we think there is a real opportunity here for the Company to get substantial benefit and for our pilots to get good increases. And I think, again, that will create some costs, but perhaps not as much as you might expect, because we think there's a lot of opportunity to reduce our pilot efficiency. Okay?

Okay, that's very helpful. I appreciate the disclosures. Take care.

Stephen Trent.

Thanks for taking my question. This is actually kind of more a question for Bob. Bob, your predecessor had kind of mentioned on a call some time ago, when I asked about Cuba and kind of Cuba's longer-term potential as a destination for US tourist, it was his view that we could see very important shifts in terms of how US carriers plan capacity in the Caribbean Basin.

And I know in Spirit's case, you guys, I believe, are only starting to launch flights in December. But kind of wanted to get your longer-term thoughts, assuming we have a Democrat in the White House again and normalization continues.

Sure. Well, I'm not exactly sure what Vince's comments were, so I'll kind of give you my thoughts. You know, it's -- first of all, it's, for us, we are flying from Fort Lauderdale, so it's kind of a short-haul opportunity. Now let's talk about the parameters.

I think there's not much infrastructure there, and it's going to be -- Cuba's operation for all carriers is going to be exceptionally high-cost. So I think it's going to be something that's going to develop over a long period of time. I think, initially, it might take away a little bit from other Caribbean destinations. But again, I think you have to go and kind of put it in perspective.

It's not going to be a game-changer in terms what it is, in terms of financial opportunity. I think it's new -- for political reasons, it's very unique. But again, I think it's going to be -- at least from our perspective, it's going to be something that we are going to approach very diligently and slowly. In fact, I mean we are going with two flights. We got what we asked for.

Over time, we will explore some of the other destinations within Cuba, but it's going to be a lot of capacity coming in here very, very quickly. And generally, that's not a positive for those markets. And that's exactly why we decided just to go with the two flights early.

So I think it's going to develop over time. And like I said, it's -- only time will tell. But again it's a leisure destination, so you've got to put it in perspective of how big that opportunity can really be. Right?

Okay. That's great color. I really appreciate that then. And thank you.

Savi Syth.

I just had a quick follow-up on the A319's. Ted, I think, early on in the year, you had mentioned targeting about maybe 7 to 10 extensions this year, and it looks like you've gotten to 7. So I was just wondering with A319's, is that where you want the fleet to get? Or is there more to come as it's just kind of dynamic as the leases come due?

I think it is more dynamic than that. We did see that we had -- it was somewhere in that dozen range that were set to expire over the next couple of years, and those were the ones we tackled in this group. But you know, what we'll have to evaluate is that fleet type longer-term.

And to Bob's point earlier, we are in the process of a fleet-planning exercise as we start to hit 2019, 2020, that kind of thing. And so we'll be making longer-term decisions over the next year or so. But for now, we've kind of tackled this group and feel pretty good with where we landed on that set.

Got it. And then if I may just ask on the guidance that you provided, is there any assumption that like stage length will be either increasing or decreasing next year?

No. I mean -- our stage has moved around not much over the last four or five years. It's hovered in the kind of mid to high-900's to just over 1,000 miles. And I would expect that it's not going to materially change from that. So, for now, I wouldn't assume anything different than what you've seen from us. And then we'll refine that as we head into the next call.

And just to add one thing, Savi. I mean, the stage length is a result. I mean, we don't necessarily target -- we target routes. And, like I said, certainly as we retain more A319's, it's less likely to push up. If we were just going more towards A321's, you'd see that number probably push over 1,000 miles. So we've been in this [990] area, and like I said, it's -- the route mix will decide ultimately where it shakes out.

That makes sense. It's helpful. Thank you.

Joseph DeNardi

Bob, you mentioned uninterrupted trip expense. I think you referred to it as significant. Can you guys just quantify for us what that was in the quarter, and maybe what it was last summer, third quarter?

Hey, Joe, it's Ted. Yes, we've never really talked publicly about the number, but I would tell you this -- that, on an annualized basis, it's in the tens of millions of dollars. And it may average in peak periods as much as anywhere from $1.50 to $2 a passenger.

And so when we are trying to tackle better operational performance, and making the trade, as Bob said it, between perhaps utilization or how we fly the airline versus that bucket of money, that's the trade we're talking about. And for now, based on what we've seen thus far, that trade has worked to our advantage through the fall. So, we are optimistic that that will continue going forward.

Okay. Bob, would you care to comment on -- on a per-passenger basis, how does that $1.50 to $2 compare to what you guys had at AirTran?

I don't remember the AirTran number; it's dramatically higher. And just think about it. If you look at the structure, again, our largest operation is Fort Lauderdale but it's not geographically central. But if you have a large operation with 100 flights, that creates the opportunity to kind of create the backups. And actually AirTran had multiple interline agreements.

So, it's orders of magnitude higher; maybe 4 or 5, 6X, compared to what we had at AirTran. So it's a -- again, it's a fairly big number. It's -- to some degree, it's -- it -- I think to some degree, it expanded as we began our push towards more Western destinations over time. I mean we stretched out our operation geographically over the last couple of years. And it's actually put that number up. So, I think what you'll see over time, as we build the route network, our ability to manage the network will be increased as well.

Thank you very much.

Richard, we have time for one more question.

And our final question comes from Hunter Keay. Please go ahead.

Ted, just a clarification. The 2017 ASM guide is 18.5%. And the CASM ex- of flat is on that. So, if you do go to 20%, would there be some theoretical good guy to that CASM ex- number? Or would you be expecting some incremental costs with the new planes to kind of offset any theoretical benefit from that?

No, I mean, yes, we would expect some benefit as we -- you know, as -- if we can get some increased utilization and/or some ASM production. I'm not prepared to commit today as to the scale of that. But I think the comfort that we can give you, at least at this point, is that we are still on track with our long-term guide into next year. The idea was to kind of allay some potential fears in that regard.

Okay. And then, Bob, just to clarify when you were talking to Jamie before, you said that the contract what you have with the pilots wasn't really designed for the airline you've become. I don't think you are that much different, are you? I mean like what are you referring to when you say that?

And when you talk about efficiency trade-offs, can you give us some examples of what you mean by that? Are we talking about like sick time? I mean, what are we talking about here?

You know, I would just -- I'm not going to spend too much time recognizing that we are in mediation, so I'm generally not going to talk about it too much. But we've got 90 airplanes and we operate all across the country, perhaps versus an airline that used to operate casino junkets, and was largely contained to the eastern third of the US. So, a dramatically different structure than we are today. Right?

Got it. Thank you.

Well, thank you, everyone, for joining us today. That concludes our call. Thank you.

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