Spirit Airlines Inc (SAVE) 2016 Q4 法說會逐字稿

Welcome to the fourth-quarter 2016 earnings conference call.

My name is Jason, and I will be your operator.

(Operator Instructions)

I will now turn the call over DeAnne Gabel.

You may begin.

Thank you, Jason.

Welcome all to the Spirit Airlines' fourth-quarter 2016 earnings conference call.

Bob Fornaro, our Chief Executive Officer, will give a few 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 Executive Vice President and 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, February 7, 2017, and are subject to significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements, including the information under the caption risk factors included in our annual report on Form 10-K and quarterly reports on Form 10-Q.

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

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

Please refer to our fourth-quarter 2016 earnings press release for the reconciliation of our non-GAAP measures.

And with that, here is Bob.

Thanks, DeAnne, and thank you to everyone for joining us.

Before we begin discussing the fourth-quarter and full-year 2016 results, as Fort Lauderdale's hometown airline, I want to take a moment to let the victims' families and friends affected by the Fort Lauderdale airport shooting to know that our thoughts and prayers are with them.

I also want to commend all Spirit team members as well as employees from other airlines that joined first responders and local law enforcement in providing aid and assistance.

Earlier today, we reported our results for the fourth-quarter and full-year 2016.

Throughout 2016, we made solid progress towards our goal of achieving consistent reliability.

We improved our DLT on-time performance by over 5 percentage points versus 2015 with nearly all that coming in the last seven months of the year.

We also made great progress in lowering our number of complaints reported to the Department of Transportation.

We started the year with a high complaint ratio of over 11 per 100,000 customers.

By year end, we reduced the metric by over 60% to under four per 100,000.

We expect the progress to continue throughout 2017.

We are not interested in quick fixes.

Our goal is to run a quality airline while expanding our industry-leading cost structure.

Our team accomplished this will maintaining their focus on controlling costs and improving revenue to deliver solid financial results.

For the full year, we reported an operating margin of 20.9% and net income of $291 million or $4.13 per diluted share.

I want to thank the entire Spirit team for those efforts and dedication to achieve these operational and financial results.

We still have a lot to accomplish but thanks to the contributions of our team members, we are solidly on the path to achieving consistent reliability, improving the overall travel experience for our customers, and improving returns for our shareholders.

Before I turn the call over to Matt Klein to discuss our revenue results in more detail, I want to congratulate Ted Christie on his promotion to Executive Vice President.

Ted has been a valuable member of the Spirit team for nearly five years leading our financial group.

In addition to continuing to serve as Chief Financial Officer, Ted will be adding the commercial functions including pricing, revenue management, network planning, and marketing under his umbrella of responsibilities.

With that, here is Matt Klein.

Thanks, Bob.

While I have only been a part of the Spirit team for a short period of time, we've already made quite a few changes that have the potential to make a real difference.

I've been delighted to see how eager everyone is to think about the business in a different way, to think about the way new analytics can drive different outputs, and it's especially refreshing to see the willingness of the team to innovate and adapt.

During 2016, we brought our Bare Fare plus Frill Control product to Seattle, Akron-Canton, Newark, and Havana in Cuba.

And just a few weeks ago, we announced we will start service to Hartford in late April bringing the number of communities we serve to 60.

Thus far, we have announced 17 new routes to launch in 2017 and plan to announce 10 to 15 more before the end of the year.

The number of markets meeting our threshold for growth continues to far exceed what we can capture within the next five years.

We have prioritized and identified our target markets for the next five years, but will of course remain flexible and opportunistic as the competitive environment changes.

Now turning to our fourth-quarter results.

Total revenue for the quarter increased 11.3% to $578.4 million on a capacity increase of 15.4%.

Total revenue per available seat mile, or TRASM, for the fourth quarter of 2016 decreased 3.6% year over year.

This equates to a 340 basis point sequential improvement in year-over-year TRASM from the third-quarter 2016 and was in line with our initial projections for the fourth quarter.

However, the components turned out to be slightly different than we had anticipated.

The trough period in December was weaker than we initially expected but the holiday period was stronger than we had expected.

During the peak holiday travel period, we realized benefits from our continued efforts to push fares higher, which helped offset the longer off-peak effect.

Total revenue per passenger segment for the fourth quarter of 2016 declined approximately $3.67 year over year to $108.11 driven by modest declines in both ticket and non-ticket revenue per segment.

We are very focused on driving revenue improvement through additional product and pricing innovation.

With that in mind, we recently reorganized our pricing revenue management and marketing departments to better align with the responsibilities and strengths of our team members, and we have also added some key analytical roles as well.

This is especially helpful as we continue to move towards dynamic pricing of ancillary products.

On that note, last quarter, I mentioned that we were moving forward with the testing and learning phase of our new dynamic pricing capabilities for certain services.

The testing and learning phase is going well, and we will continue for several more months in a select set of markets before we begin rolling it out to other markets.

In terms of newer products, we now have paid expedited security lanes in 12 airports, and while it is still in its infancy, we are pleased with the early results.

Additionally in January, we launched the availability of TSA Precheck to further enhance the airport experience for those customers with TSA Pre.

On the passenger revenue side, we continue to see success with being opportunistic in pushing yields up where and when we can, and there is good momentum for continued sequential passenger yield improvement in the first quarter.

In terms of expected load factor estimates for 2017, we should note that the growth of our airline via A321s, which represent 11 of our 2017 deliveries, will have an initial negative impact on load factor and TRASM, however, the significantly reduced unit cost benefit of the aircraft is accretive to earnings and offsets the headwinds of the added capacity.

One other item of note is that the number of markets in the spool-up period has an impact on load factors and TRASM.

In Q1 of 2016, we only had 1% of markets in their initial spool-up period.

This year, we'll have 8% of markets in their initial spool-up period.

Turning our attention to Q1 revenue guidance, we estimate that Easter occurring in the second quarter this year compared to being in the first quarter last year negatively impacts TRASM in the first quarter by approximately 150 basis points and benefits second-quarter TRASM by at least that amount.

Another item to include in your Q1 models for Spirit is the impact from the recent tragic event at the Fort Lauderdale airport, which caused a number of cancellations and subsequent refunds during the strongest part of January.

And that same weekend, winter storm Helena also drove an unusual number of cancellations across our network.

We estimate these events together negatively impacted total January revenue by approximately $7 million to $8 million and had about a full point drag on January load factor as the impacted period had higher than system average loads.

For the first quarter, this equates to negative TRASM impact of about 75 basis points.

What does this all mean for Q1 TRASM?

Including the impact from the calendar shift of Easter, January actuals, and what we currently have on the books for February and March, we believe total RASM for the first-quarter of 2017 will be down approximately 2.5% year over year.

Sequential improvement continues in Q1, and our preliminary view on Q2 is that TRASM will be positive year over year and remain positive on a year-over-year basis throughout the year.

Our ability to deliver the amount of capacity growth that we produce and move TRASM in a positive direction is clearly a sign of the strength of our model.

With that, here is Ted.

Thanks, Matt, and thanks to everyone for joining us this morning.

And again, a thank you to our team numbers for their contributions in making 2016 a successful year.

For the fourth quarter 2016, CASM ex-fuel increased 5.6% year over year to $0.0544 driven primarily by higher other operating expenses and salary, wages and benefits per ASM, partially offset by lower aircraft rent per ASM.

During the fourth quarter, we took delivery of five new leased A320neos and purchased one new A321ceo aircraft ending the year with 95 aircraft in our fleet.

We ended the year with unrestricted cash, cash equivalents, and short-term investments of $801.1 million which is net of the $100 million share repurchase.

Turning now to our first-quarter and full-year 2017 guidance.

Scheduled capacity is expected to be up 15.2% in the first quarter and up about 18.5% for the full-year 2017.

Our capacity growth for 2017 assumes the addition of two used A319s that we plan to begin operating during the second quarter of 2017.

Based on actuals to date and the forward curve as of February 3, we estimate our economic fuel price per gallon for the first quarter will be $1.81.

For the first-quarter 2017, we estimate our CASM ex-fuel will be flat to up 1%, and for the full-year 2017, we are targeting CASM ex-fuel of flat to down 1%.

The largest cost headwind that we expect in 2017 is higher depreciation and amortization driven by an increased number of heavy maintenance events as well as aircraft depreciation related to purchased aircraft.

To put the heavy maintenance pressures in perspective, in 2016, we performed five engine shop visits, while in 2017, we plan to perform over 25 engine shop visits.

We estimate most if not all of this pressure will be offset by lower aircraft rent per ASM driven by a change in the mix of leased and purchased aircraft and lower wages, salaries, and benefits per ASM driven by scale and efficiency benefit.

Within the other operating expense line, we anticipate solid improvement in lower interrupted trip expense as we continue to improve our operational reliability.

However, there will be offsets from other inflationary costs such as increased ground handling rates driven by higher wage rate pressures.

As a reminder, we outsource our ground handling at all stations other than Fort Lauderdale, so these wage pressures show up in OOE rather than wages, salaries, and benefits.

There may be some variability in our CASM ex profile this year due to the timing of the heavy scheduled maintenance events, but in general, we expect CASM ex will be up mid-single digits in the second quarter and down low digits in the third and fourth quarters.

Our 2017 CASM ex estimate does not reflect any impact of open labor negotiations.

If the trend of peak year peaks and softer troughs continues throughout 2017, our margins in the second and third quarters should be materially higher than they are in the first and fourth with the third quarter being the peak as it has the most peak leisure days.

With has said, and its early in the year a lot could change, our outlook is based on current trends holding steady.

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

Thanks, Ted.

We've made very good strides forward in 2016 on our customer service additions, but as I said earlier, we still have a long way to go.

In 2017, we will remain committed to driving higher revenue through innovation as well as leveraging tools, people, and processes to better maximize our revenue on each and every flight.

We are also going to invest in soft skills training for many of our customer facing team members.

In a recent employee engagement survey, this scored as one of the most often asked for items and aligns well with our goal to improve the overall Spirit experience for our customers.

We will remain focused on maintaining and improving our cost structure while making further improvements in our operational reliability.

As I mentioned in my earlier remarks, our goal is to improve our service quality the right way, deliver steady improvements in all service metrics while keeping our cost structure intact, and we will remain committed to driving earnings growth for our shareholders by growing the business.

With that, back to DeAnne.

Thank you Bob, Ted, and Matt.

Jason, we are ready to begin the question-and-answer session.

(Operator Instructions)

Hunter Keay.

Good morning.

A question for Matt and maybe Bob can chime in, too.

That's fine.

I'll just ask one.

You said you've made some changes obviously, Matt, you've taken over of the network planning role a little bit.

I'm curious to know if the market criteria selection has evolved.

Just iteratively, I'm not saying overhauled but you guys used to look at like DOT PADU data and put some theoretical discount on the average fare and made some assumptions on demand simulation.

I'm wondering if you have evolved that analysis a little bit to think about strategic responses that may not make a whole lot of economic sense in theory, but factor in some of the lessons learned that you've seen as you've grown over the last couple years.

Hunter, I will take the question.

Again, in thinking about it, as I said, I've been here about a year and one of the things I'm supposed to do is rethink everything that we are doing.

Let's put the markets aside.

The competitive environment has changed dramatically.

Prior to the summer of 2015, for the most part, the competition did not match many of Spirit's prices.

Certain markets I'd say in Florida have always been competitive, but in a lot of mid-continent markets, our pricing was ignored and we were viewed as a small carrier.

And with all the restructuring going on, again, we were ignored in many of those markets.

That has changed.

And basically today, we see heavy competition across our whole network.

So prior to 2015, there was a competitive environment that quite frankly just about everything worked.

And today in a more competitive environment, what you see across the industry, you see lower margins today across all carriers because the competition is very, very aggressive.

And so it's under that assumption that we assume we're going to face competition everywhere.

We never make the assumption that we will be ignored.

That is a much different philosophy versus where we were a couple years ago.

Again now, as we look at markets, we are just as willing -- we focus on obviously numbers that we think we can bring value to, big or small, so I think I would guess versus what we were doing several years ago, we were investing heavily for the most part in legacy carrier hubs; we're still doing that but you are seeing a broader array of markets.

It could be Newark.

It could be Canton-Akron.

A market like Hartford.

The selection is wider.

Again, but the underlying assumption today is we will face competition wherever we go.

Right?

Thank you.

Jamie Baker.

Good morning, everybody.

Following up on that, when you look at markets where you compete with airlines that offer basic economy and so far that's really just shorthand for Delta, is there any RASM conclusions that you can draw yet?

I'm not asking whether these markets are stronger or weaker than average.

I'm really just curious how your RASM might have changed, how it might have progressed as the competition brought basic economy into the prevailing fare structure.

Any color on that?

Or is it still too early to tell?

Hi, Jamie.

It's too early to tell.

First of all, Delta rolled out its fare offering without a lot of the fanfare.

I would not necessarily -- even though it's relatively broad, it didn't come out in the same way that perhaps the United and American are being talked about.

Again, they just rolled out in the normal competitive environment.

I would say for the most part, like I said, from Delta's perspective, this is just one way they are going to compete.

Not necessarily a radical way, but it was one more tool in their tool chest to compete with Spirit.

What American is about to do or United to some degree, it's taken -- it's been talked about for two years.

There's been a lot of fanfare going on and like I said, we really have not seen much yet.

But my summary now is we really can't tell.

We compete well with Delta in the markets that where we see it, but it's too early to predict anything else.

Okay.

I appreciate it, and I will get back in the queue.

Thanks.

Rajeev Lalwani.

Thanks for the time.

Going back to some of the comments you made on RASM and the improvement into Q2 going forward.

Can you just talk about what gives you the confidence that things are going to get that much better?

Is it just the Easter dynamic?

I'm just wondering how you offset things like growth and capacity throughout the year, Florida growth comps, et cetera.

Sure.

For Q2, we do have confidence about the Easter shift.

We also know there's going to be a lot more peak days.

Q2 should be -- a lot of Q2 should -- we should see some pretty good RASM improvements there.

Don't know that we want to get a lot of specific guidance on how loads versus fares will come out but, for example, we are confident in Q2 and the rest of the year mainly because we had I would say some new strategies and things that we are doing now.

We're implementing that we did not have in the past, and we're also simply expecting a lot of our growth and things to continue to mature.

Granted, we will have the new routes.

We are going to be adding more new routes but we're very confident in where we're going to be adding that we're going to see some success there.

Just to follow-up a little bit further.

Again, as time goes, our efforts to push fares up, we think will gain traction.

As we said in the off-peaks, it may impact load factor but we're generally comfortable with that.

One of our biggest capacity initiatives, which began last year, was Orlando.

We basically went from two gates to five gates, a fairly large initiative.

We'll really begin to see the benefits of the Orlando push March, end of second quarter.

We have more exposure to Florida this second quarter than we've had in prior second quarters.

And that will be reflect very positively I think on our overall RASM numbers.

Thank you.

Savi Syth.

Good morning.

A quick follow-up on the puts and takes for unit revenue in the quarter.

I was wondering for 4Q, the initial expectation was maybe a 0.75 drag.

Is that what you ended up seeing?

And then also, is there any benefit to the first quarter from Connecticut return travel in January?

Sure.

The overall holiday impact ended up being a wash.

We did see some more negative in that holiday shift.

The weaker days of that was a little weaker than we expected, we initially expected, but the stronger days were stronger than we had initially expected.

So it washed out there in Q4.

For Q1, we were expecting to see some of that benefit heading into January, especially that return weekend, which is unfortunately when a couple of the events that we had mentioned in the remarks occurred.

That's why we saw such a negative impact in the beginning of January, which we would have normally have seen some results on.

That is helpful.

If I may take a step back, Bob.

I was just looking at the Spirit pre-tax margin.

It's less than one point higher than what it was in 2014 versus your US competitors have seen maybe a more meaningful improvement, though maybe two of them have higher margins than Spirit.

Stepping back, I was wondering if this is a function of a structural change or as we seek maybe perhaps margins coming in for the industry, do think there's any reason to believe there will be less pressure on Spirit versus competitors outside of the labor cost timing?

Again, I actually really do want to go back to pretty much any period before 2015.

For the most part, again maybe we will ignore Florida, but in many places around the country, our fares were matched.

And in an environment like that, that is something that -- a condition that we can't create.

That is something that the competitors have to decide to do or not.

And so if you are being ignored by the competition, you're going to produce better numbers.

And so, 2014, the numbers were high.

I don't see those numbers coming back unless the competition decides to walk away.

But again, the reality is that had to do with the way competitors matched us.

I would say today, the underlying profitability is better today but we face competition everywhere.

And that is the way we planned the airline.

We expect to be competed against heavily everywhere we go.

The competition decides to walk away from us, that is a high-class problem.

But again, it's not one that we can control.

So it's not something that I really worry about.

Bob, on that point, you've talked about self-help initiatives.

How far along are we on that it and how much of that could you offset or maybe just wash out with the initiatives that you are doing?

Let's go back.

We have probably have had negative TRASM drops for 10 quarters in a row; maybe this will be the 11th.

Its going to turn positive in the second quarter; that's our forecast, and we believe it's going to stay positive.

And that's for an airline that is growing 18%.

Just think about -- if you are growing 18%, your unit revenues will naturally go down.

So we expect to turn positive; that means the self-help initiatives are already occurring, and you'll start seeing even more of it in the second quarter when we turn positive.

Got it.

Thanks, Bob.

Brandon Oglenski.

Good morning.

Thanks for taking my questions.

I wanted to come back to the first one from Hunter, Bob.

If you're still compounding growth close to 20% here, you have more competition.

It does look like margins will be down for three years in a row now.

As you look at the Company going forward, should we expect lower growth as we get into 2018, 2019, 2020, or do you think you can you maneuver in this environment and still maintain high-teens growth?

Again, to go back to base everything on 2014, again, if you want to go back to the competitive environment, it would be -- the industry is different than 2014.

It's different for every carrier out there, including us.

There was a snapshot when we looked back but again, those are again conditions.

I would go back and say, what would our margins look like if we faced the same level of competition in 2014 versus today.

In terms of the growth rate, 2019 is the period of time I suspect where we can actually -- if we want to make big changes in the growth rate, it will be then.

Right now, our underlying rate in 2019 to be 9% to 10%, I think.

And we'll have to make some decisions either this year or early next year about whether we're going to increase that or not.

And a lot of that we'll do it, regarding how we feel about our cost structure.

We have some of those decisions to be made.

But right now, we are pretty comfortable with our growth rate.

We think we're going to have a pretty good year given the way the competitive dynamics are flowing out.

And I would go back to one comment that Ted made.

I think that maybe the distribution of the margins will be a little bit different going forward where we expect the second and third quarters to be higher relative to the first quarter and the fourth quarter.

I think you pull it all together to produce nice results.

The peaks will again be stronger, and the marketplace is still very, very competitive.

And that will mean all carriers.

The underlying off-peaks still have some pressure around the industry.

But I think going forward, we feel pretty good about where we are at.

I would say going about as I expected and again, I have not seen anything that's changed my mind about that.

Thank you.

Helane Becker.

Thanks, operator.

Hi, guys.

Thanks for taking the time.

Just a couple of things.

Ted, you mentioned the engine maintenance, the big increase in engine maintenance this year versus last year.

Is that also true for airframes or just for engines?

There is some airframe effect, too, Helane.

The big numbers are the engines though because the cost overall of the motor might be two or three times to do one whole airframe, so that is why we called it out; it's more meaningful.

But there is incremental airframe maintenance, too.

Okay.

Is that just for clarification?

Is that in-house or do you send that out?

No.

It's all outsourced with -- on our engines, we have long-term PBH with the OEM, and on our airframes, we have a contracted provider that helps us do our heavy maintenance on those.

Okay.

So you called out in the press release the fact that you are still negotiating with your pilots.

And actually, yesterday, they sent an email out to people with a note that they want to meet up with the analysts or something to let us know what they are doing versus -- what they want versus what maybe you're willing to give them.

I don't want you to negotiate obviously in public, but this is an open contract for a while now.

What can we expect?

Usually, you guys have been known, especially Bob in prior lives, getting these contracts done in a timely fashion.

What can we think about in terms of time of getting this one done?

A good question.

First of all, we are in mediation, and if you go back we've been in mediation since last summer.

The pilots requested mediation and we opted to join them.

Mediation naturally slows down the process.

I think we've completed about 20 of 31 sections, but we have not hit the difficult ones, mostly the ones around money.

And eventually, we're not that far away from getting in there, and over this period of time, the ask of the pilots has gone up several times.

Our position is, and we understand pilots are going to get a substantial increase, but we also know if you want what are the relevant wage rates, we've got to have similar or equal work rules.

And we have a relatively unproductive contract, again, negotiated 10, 12, 13 years ago when we were a much different airline.

It's very difficult to scale an airline like ours to an agreement that was signed many, many years ago.

Again, we have to accomplish a number of things in the agreement but when we're done, we expect the pilots to get a substantial increase and we expect to get improvements in work rules that are necessary and are typical across the industry.

Again, we are at it pretty hard.

Thank you for that.

It was more than I thought I was going to get.

Just on hiring levels, are you still finding it easy on a relative basis to attract quality applicants to the pool?

We feel pretty good about it.

We have got a growth rate of 18% and, yes, we are going to meet those targets.

I think the outlook here is positive from that perspective.

Thank you very much.

Joseph DeNardi.

Thank you.

Ted, on the utilization in the quarter was down quite a bit year over year.

Maybe there was something specific to call out there, but if not if that's just an effort to improve reliability, can you just talk about the impact that that's having on unit costs?

Or is the reaccommodation expense offsetting the lower utilization or is that really an investment now with the hope that that's accretive to margins in the future?

Yes, Joe.

You're hitting the points.

Part of what we've talking about for the past year is doing that mathematical exercise to arrive at where we think the right balance is between fleet utilization and the reaccommodation expenses.

The theory we have been testing over the last year is that by pushing the expense into different buckets or moving it from fixing problems after the flight to improving the conditions of the flight, we believe can leave us in a cost neutral position on a unit basis and improve the product, which is good for the customer.

Right?

We get a winning customer solution, and we get a neutral to, we hope, improving cost benefit.

And as I said on our last call, the early returns are telling us that it's very much in line with our hope and expectations.

Yes, utilization, and some of the utilization timing by the way may be due to when aircraft deliver and when they go into the schedule.

Even though we're still growing 18%, we take a couple three shells every quarter.

Where those actually land can add spare time, inadvertently depending on when they deliver.

But we have intentionally brought utilization in some in order to offset the negative impacts of disruption.

And again, as we said earlier, we feel really good about how it's laying out, and our cost guide should give you that comfort.

Great.

Thanks, guys.

I'll get back in the queue.

Duane Pfennigwerth.

Good morning.

This is Ray actually filling in for Duane.

Could you speak qualitatively about the new market performance in more specifically mid-markets like Akron-Canton or in larger new markets like Newark?

Yes.

I would say that the new markets are producing as we expected.

New markets take some time to spool up.

Having said that, like every new market, some do better than others right out of the gate.

But we're happy with where we are at.

It's not changing our thoughts on how we pick new routes, and we're pretty satisfied with what we've seen so far.

Any color on mid-markets such as Akron-Canton to some of the larger markets like Newark?

You're going to have different variability.

I don't know that we need to get into individual specific routes.

Some are doing better than others.

Like anything else, we will adjust if we see that there is issues if we do see issues moving forward.

As a right now, we are pretty happy with what we have.

So overall, I would say the midsized routes are performing fine and the larger routes are performing fine based on where we're thinking they should be right now.

Okay, great.

We'll see you in (inaudible.

Mike Linenberg.

Good morning, everybody.

Just a couple here.

Matt, just maybe going back to the ancillary piece.

That peaked maybe a year ago and it's come down a little bit.

I recognize or appreciate some of that is just mix and the fact that you are flying shorter markets.

You talked about a lot of different revenue strategies and things that you're probably going to implement over the next year or so.

Does that plateau and do we start to see that number move back up or is it going to be more impacted by market selection?

The fact that maybe you're moving into some of these shorter haul markets where you just don't get as much ancillary uptake?

Can you talk about that?

Sure.

It's a little bit of both, actually.

But the reality is, there are some things that we believe that we're working on here internally, things that we've had in the works for a little while where we think we can move the needle on.

We mentioned about how we're trying to test out dynamic pricing of ancillary services, not unlike traditional yield management happens on the base fare, the Bare Fare itself.

We believe there is a lot of opportunity there, and that will help us.

Obviously, something that we should do in terms of the future is also think about how we are redesigning parts of our website.

We are moving forward with slowly putting pieces out step by step on our site.

I don't think we're comfortable saying exactly right now when we're going to push those pieces out, but as those pieces push out throughout this year, will be able to start to see better merchandising activity there and we will be able to also have better ways that we talk to our customers.

Quite frankly, it's things that as an eCommerce business, we're very excited about, and we expect when that starts to roll out, we will start to see some results from that as well.

Okay, great.

And then just one more and it's either Matt or feel free to chime in, Bob, post executive order signed two weeks ago, did you guys see anything, any noticeable impact to bookings?

And look, I realize that you don't -- some of the markets that matter then, and it's not just the seven markets, but with some of visa issues and some of the visas tied to visa countries and some of these waivers, there may have been unintended consequences.

And I was curious if some of those headlines had some impact on some of your international flows or you didn't see anything?

No, we really haven't seen anything from that at all.

Obviously, we are following it and we've heard all the -- we are following, let's just say that but we haven't seen any impact from what we've heard from customers.

We haven't had calls or emails to our Customer Relations group either.

So we feel pretty comfortable that it really hasn't had an impact on us.

Glad to hear.

All right.

Thank you.

Kevin Crissey.

Good morning.

Thank you for the time.

Could you talk a little bit about what you're seeing in the Caribbean?

Sure.

It's performing well.

We don't really see any issues there moving forward.

We are actually quite pleased with what we have.

Relative to your performance in the rest of your network, it was similar result?

The Caribbean itself, yes, that's right.

I think actually in terms of South America, we've actually seen the bottoming and actually starting to improve.

Again, the Caribbean, which is actually a positive because for almost a year straight with mostly driven by currency, we saw fairly large drops but it's starting to turn up.

So that's a slight positive going forward.

Okay.

Thank you very much.

Dan McKenzie.

Good morning.

Thanks, guys.

Bob, can you talk about the on-time and completion rate pre and post the network rebuild in November?

I am just wondering what improvements you saw.

And then tied to that, just more broadly, I'm just wondering if a single frequency a day across the network is the right network strategy or do you perhaps need more frequencies to ultimately get to the operational reliability that you'd like to see?

Right.

Let's go back to the second part first.

I think for again, an airline like Spirit, essentially over time, the airline began in a large push to the West with generally low frequencies.

And if you look at the structure, we're in all the weather cities, Chicago and New York airports and Atlanta.

So you do have an underlying amount of vulnerability.

We had high utilization.

We had low turns.

And so we're pretty much set to run on good weather days and for the most part, we would struggle on more challenging days.

And what we are doing actually is literally combining the marketing plan and the operational plan, we are putting them together, and we have got everybody involved.

And so everybody's got the same mission.

It's costs low, revenue improvement, operational integrity.

And frankly, that wasn't the case across all the departments.

Everybody has got the same mission.

I think in terms of really what we do, first of all, we're not going to add weak routes to improve the network, but we certainly by building more densities in routes that we want to be in.

Like the Orlando operation will actually help our network because we get a little bit more dense in the East Coast.

So we're trying to do things like that.

When we look at industry on-time performance, again, I think -- I don't know the final number for the industry, but it was -- the industry in round numbers was probably 81% to 82% on-time for the year, and we are about 75%.

In the first quarter, we were about 17 points behind the pack.

We had a very difficult first quarter.

The second quarter, in May is when we started to make the changes, and we were about seven points behind the average.

In the third quarter, we were about three points behind the average.

In the fourth quarter, about 1.5 points behind the average.

And I think the progress is going to continue.

And we're trying to do this with real effort.

Quite frankly, we are not going to necessarily put in all the pad that a lot of carriers are doing.

Basically, our goal is to make gradual improvements, and we think we can improve the cost structure at the same time if we make it gradual and we do it very, very smartly.

And like I said, I think we are tracking probably slightly better than where I thought.

I'd say it's probably the most -- the key thing ultimately is really combining all the functions into one direction.

The marketing plan supports the cost plan, and everybody has got an operational goal as well.

Right?

Okay.

Understood.

Matt, following up, what was the take-rate on the Shortcut Security where it was offered, so in terms of percent passengers that chose to pay for it?

And then more broadly with respect to eCommerce, where are you at with respect to car rentals and hotels?

What is the take-rate today and what should it be?

As you talk about merchandising capability, at least those are two of the things that come to my mind, and maybe I missing some other low hanging fruit that you might be looking to monetize.

I was just wondering if you could elaborate a little bit more on the shortcut security take-rates and how you are thinking about more broadly on eCommerce.

I think your comments about more broadly on eCommerce are correct.

In terms of actual take-rates, we're not going to really comment on that or talk about that.

I would just say -- I will say about Shortcut Security, which is the name of the product, it has launched out and we're happy with it.

Right now, about 55% of our passengers have access to it today in 12 airports.

I think I will just leave you with those couple statistics, but we're not really comfortable commenting further beyond that.

Okay.

Thanks for the time you guys.

Andrew Didora.

Good morning, everyone.

Bob, just wanted to follow-up on the basic economy question that you got earlier on in Q&A.

I ask this in the context of knowing that you have a lot of Company-specific opportunities on the revenue management side.

But were any of the changes that you made in terms of the revenue or marketing, staffing, or changes that you talked about that went on in those parts of the Company due to address the threat of basic economy?

And then my follow-up to that is, with all the legacies thinking that this new product will help industry revenues, what do you think is the biggest risk to industry pricing from this new product?

Thanks.

Again, good question.

I think first of all in terms of addressing -- what we're trying to do is basically run a quality airline.

I think perhaps the coach product on those airlines is first of all not quite as good as perhaps they say it is.

And I think, frankly, with the right training, we can certainly beat them on friendliness.

And I think we can match their quality from an operations perspective.

But we have to do those things and we haven't been doing that.

Again, we've lagged in every operating metric.

So the first step of everything we're trying to do is be able to improve our quality, and ultimately over a very long period of time we'll maybe we'll improve our reputation as well.

Again, so going back to the basic economy, again, I view this as basically it's competition and ultimately from a pricing perspective, how many low fare seats are in the marketplace.

Today, there is plenty of fare matching in head-to-head markets.

It's not that much different than it was six, seven months ago.

There is some upward movement in pricing driven by fuel prices, but for the most part, it's pretty competitive.

And the basic economy again is starting -- it's a way for those carriers to continue to compete with us because quite frankly, although it had a big impact, again, I've been asked on this call about 2014, 2015, we weren't matching and carriers decided to aggressively match us beginning in mid-2015.

What they also found is they took big revenue hits and margin hits as well.

So what they are trying to do is address their own profitability but at the same time putting pressure on us.

So I think it's going to boil down to their ability to execute.

Their benefit is going to come from less seats.

If they keep the same amount of seats out there as they have today, they're going to have the same number results.

So and their goal is to try to sell up, but at the same time, my guess is the Spirit of 2017 will be a much better run and offer much better quality than we did in 2015.

So we are getting better as well, and the competition knows it.

They can see our results, and we expect them to continue.

So, but ultimately, it boils down to the number of seats they keep in the marketplace.

And so we don't know at the end of the day if to some degree -- my guess is, if they are doing better because of the product, we will do better.

If things don't change much, that's because there is still a very, very high inventory of I'd say discount seats.

So again, I think we will improve as they improve, and we can debate at the end of day who does better.

That doesn't really matter at the end of day.

We are worried about our own results and they have to worry about theirs.

So again, we're optimistic.

Costs are going up at many carriers.

Fuel is going up.

That should create an upward bias on sell-ups in the marketplace.

Right?

That's great.

Thank you, Bob.

Joseph DeNardi.

Thank you.

Bob, I think on the last call, and I'm sorry if I missed this or you addressed it earlier, but I think you mentioned maybe looking at taking up your capacity growth up to 20%.

I'm wondering if you could just update us on where you stand with that.

Hey, Joe.

It's Ted.

We reiterated and we're still looking at around 18.5%.

Admittedly, things do bounce around just because of the way our aircraft deliver, and where we move gauge on individual flights will have an impact.

Smaller airplanes on longer flights changes capacity a little bit here and there.

But based on what we're seeing right now, we're still staying around 18.5%.

It may move depending on when aircraft deliver and how we view sparing and utilization in the back half of the year.

But that's where we are landing.

Okay.

On the non-ticket side, can you give us an update on when you think the year-over-year decline turns around and maybe when that gets back to positive on a year-over-year basis just based on the timing of rolling out some of the new initiatives?

We think that as we roll through this year we should start to see things start to stabilize and continue to stabilize, not start, and then once we hit the back half of the year, we'll start to see incremental improvements.

Okay.

Thank you.

Hunter Keay.

Thanks, again.

Ted, I'm really putting you on the spot with this one here.

So, sorry in advance buddy, but if you look at your distribution CASM in 2012, it was down like 10%.

Do you know if that was driven by the Durbin Amendment to the Dodd-Frank Act, which effectively cut your processing fees on debit card transactions?

I hear you're laughing.

Maybe you just answered the question, but that was a big tailwind.

If you try to quantify it, the numbers can get pretty big.

So I may ask you a couple different questions.

You can pick which one you want to answer.

Do you know what percentage of your customers use a debit card to buy tickets?

Are you factoring in any headwind in the event that Dodd-Frank goes away and this processing fee maybe goes up a little bit to be in line with what you pay at credit card vendors?

Any one of these questions, feel free to answer.

I'm trying to get a sense of cost headwind potential.

Yes, I got you.

Thanks.

You are right.

In 2012, it definitely had an impact.

I think our mix of debit to credit does flow throughout the year, believe it or not.

So as you approach the holidays and then come out of the holidays, we do see a shift from people using credit cards to debit cards.

But it can get as high as 40% on debit as I recall.

If there is a repeal, it does change that there may be an impact, but we'll have to see how the legislation comes out on that.

Okay.

Do want to quantify by any chance how much of a benefit you had in 2012?

We can talk about it later if you want.

I think I will have to go back to on that one.

Okay, thank you.

Jamie Baker.

Thanks.

Bob, earlier you mentioned RASM turning positive and staying positive.

I'm curious for how long.

And I'm not asking for the sake of my earnings model.

I'm really asking about the business model because positive RASM for ultra low cost carriers, that tends to be the long-term exception rather than the norm.

I think most owners view LCCs accept this, whether we are talking Spirit, Wizz, somebody else.

Was your comment on positive RASM meant to imply that the changes you are making to your operation will potentially allow you to grow RASM in perpetuity or were you just pointing out that for the next several months, the comps are easy so investors shouldn't expect a long-term relationship with positive RASM, maybe more of just a summertime (inaudible)?

No.

It's a good question.

I'm certainly not making a call on the long term.

How about I make it a call on 2017.

And it goes back -- and a lot of this -- we've had some of this question before.

In years like 2013, 2014, Spirit had exceptionally high capacity growth rates and still grew its TRASMs.

And again, that was in a period of time where we were relatively small, somewhat ignored by the competition, and we had a rarity, again, TRASM going up and with high growth.

We've now had 10 or 11 quarters of deterioration.

The way I viewed it, Jamie, is in that decline, which has been a couple of dollars on TRASM, about $30 on fare, there is some opportunity to get back some of it by some of the improved processes that we actually are beginning to implement.

So, again, so another way of saying it is -- again there is some level of catch-up that I think we started to latch on to in the latter part of the year, and we will continue to see some of that catch-up going forward.

I don't know how far it ends, but again, it's based on my own experience.

Some of the drop may be perhaps could have been avoided if we were perhaps doing different things.

So, we're just looking out through the year, and obviously by definition, there's an assumption that oil is staying in the $50s and not going back to the $30s because there is some industry effect going on here as well.

Everybody needs to raise their average unit revenues to some degree.

It's unique to 2017.

And will there be more upside in 2018?

It's way too early to talk about it or think about it.

All right?

That helps.

Thanks, Bob.

I appreciate it.

Thank you, everyone, for joining the call.

With that, we are out of time.

Again, thank you for joining and we'll catch you next quarter.