Spirit Airlines Inc (SAVE) 2017 Q2 法說會逐字稿

Welcome to the second quarter 2017 earnings conference call.

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

(Operator Instructions)

I will now turn the call over to DeAnne Gabel.

You may begin.

Thank you, Christine.

Welcome, everyone, to Spirit Airlines' Second Quarter 2017 Earnings Conference Call.

Bob Fornaro, our Chief Executive Officer, will give a few brief opening comments; followed by Matt Klein, our Senior Vice President and Chief Commercial Officer, who will review our revenue performance and outlook.

Then Ted Christie, our Executive Vice President, Chief Financial Officer, will discuss our cost performance, followed by Bob with some closing remarks.

We will have a question-and-answer session for the 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 the senior leadership team.

This call is being recorded and simultaneously webcast.

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

Today's discussion contains forward-looking statements that represent the company's current expectations or beliefs concerning future events and financial performance.

Forward-looking statements are not a guarantee of future performance or results, and are based on information currently available and/or management's belief as of today, July 27, 2017.

There could be significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements, including the Risk Factors discussed 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 second quarter 2017 earnings press release, which is available on our website, for the reconciliation of our non-GAAP measures.

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

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

Earlier today, we reported our results for second quarter 2017.

Net income, excluding special items was $79.1 million or $1.14 per diluted share, and our operating margin was 19.1%.

The progress with our own revenue initiatives as well as the underlying revenue trends as we headed into the June quarter was encouraging.

We saw good traction related to the changes in our pricing and revenue management strategies, which helped drive year-over-year improvement in passenger and nonticket revenue per segment.

This was the first-time and over 2.5 years that either of these metrics increased year-over-year.

Unfortunately, given the level of operational disruptions and associated negative financial impact, the overall June quarter performance was disappointing.

Before I turn it over to Matt, I want to thank the Spirit team members who went above and beyond during the second quarter to assist our customers.

I appreciate your efforts and dedication.

With that, here's Matt to discuss our revenue performance and outlook.

Thanks, Bob.

Total revenue for the quarter increased 20.1% year-over-year to $701.7 million on a capacity increase of 13.6%.

Total revenue per available seat mile, or TRASM, for the second quarter 2017 increased 5.7% year-over-year, largely driven by the calendar shift of the Easter holiday.

Had we not lost $25 million of revenue and the available seat miles associated with the pilot-related cancellations, we believe TRASM for the quarter would have been up approximately 6.5% year-over-year with the Easter shift accounting for about 400 basis points of the year-over-year increase.

As Bob mentioned, the underlying revenue trends as we headed into the second quarter were encouraging.

In addition, to seeing good traction on passenger yields we also saw improved yields and take rates for both bags and seats.

We continue to test dynamic pricing of seats and, although, we are still in the beginning stages of leveraging the data to drive higher revenue, we are pleased with the results thus far.

We are also focused on deploying technology that will make it easier for our customers to do business with us.

Our Spirit mobile app for iOS and Android devices, which we anticipate will be released by the end of the third quarter 2017, is one step towards this goal.

We believe we will see operational and financial benefits as we improve the ease with which customers can do business with us.

Turning to our forward outlook.

There has been a developing change in the pricing backdrop over the last few weeks.

In late June, which started out as a slightly more competitive environment in just a few select markets has quickly spread to a larger number of markets at deeper discount levels than we have experienced yet this year.

While we are not surprised that the environment remains very competitive, it is surprising to see our competitors resort to the unusual level of discounting we are currently seeing, especially since we are still in the summer peak period.

In order to be competitive, we too have had to arrest some of our efforts to push fares higher, efforts that have had much success over the last 9 months.

Spirit is at its core, a low fare carrier, and we will use our low costs and flexible pricing model to make sure we are serving our customers with the best value.

That said, we are still using pricing and revenue management tools and techniques to manage yields higher wherever and whenever we can, but are having less success of doing so in the aggregate than we did in the first 6 months of the year.

As we entered the second quarter, we were very encouraged by the advanced booking trends we saw building from mid-April and into early May.

Unfortunately, the recent pricing developments, coupled with the lingering hangover associated with our poor second quarter operational results, puts us in a position to revise our view on third quarter's TRASM performance.

We now expect Q3 TRASM will be down 2% to 4% year-over-year.

We estimate that approximately 150 to 200 basis points of the year-over-year decline is attributable to the fallout from the pilot-related cancellations in the second quarter, which is when many customers were booking their summer vacations for July and August.

Based on recent customer surveys, the impact from these concerns on bookings has started to wane.

As our operations normalize, we would not expect to see further significant impacts related to this issue.

Before I close, I do want to comment on our July load factor.

Because of the success we had moving fare structures up during the first and second quarter and the improving trends in closer in bookings, we are purposely managing our inventory to allow us to take a larger percentage of bookings closer to departure.

This was a moderated risk to help maximize our unit revenues.

As we saw the competitive environment changing in late June, we began to adapt our inventory management strategy accordingly but not soon enough to make up the volume shortfall in July.

As a result, we currently estimate July's load factor will be down approximately 3.5 points year-over-year, slightly more than we would otherwise have anticipated.

Our views on the second half of this year have clearly changed over the last month, and it is frustrating and disappointing that those trends deteriorated.

However, we will always retain our ability to drive low fare demands, coupled with industry-leading low costs and we're confident in our ability to continue to stimulate demand and be a formidable competitor in the markets we serve.

With that, here is Ted.

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

I also want to say thanks to our team members who are dedicated and committed to serving our customers.

I know it can be tough to be in the trenches when the operation is not running smoothly, and we appreciate your contributions.

For the second quarter 2017, CASM ex-fuel increased 10% year-over-year to $5.83, driven primarily by higher passenger re-accommodation and higher depreciation and amortization expense per ASM.

This result is unacceptable, but I take heart in the core cost trends of the business.

Had we not incurred the expenses and lost the ASMs associated with the pilot-related cancellations, we estimate adjusted CASM ex-fuel would have been up approximately 2% year-over-year, which would have been far better than our initial guide for the quarter.

I know everyone is curious about when we will reach a new contract with our pilots.

Reaching an agreement on a competitive economic package that allows us to improve our operational reliability is our priority.

We are diligently working with our pilots and the National Mediation Board towards that goal, and we will have no further comments as to the pace or status of those negotiations.

We continue to move forward with initiatives to improve our operational performance.

Matt mentioned our focus to leverage technology to make it easier for customers to do business with us.

We are also focused on improving our service levels when things don't go as planned.

In the past when trips were disrupted, the customer might miss their next best Spirit flight option because they are waiting in line to see an agent to get rebooked.

During the second quarter, we implemented a system that notifies customers when their trip is canceled and automatically suggests the next best Spirit flight option, thus minimizing the inconvenience of getting rebooked.

Our goal, of course, is to minimize operational disruptions.

But when that doesn't happen this program is very beneficial in helping us quickly and efficiently find another solution for our customers.

Turning now to our fleet.

During the second quarter, we took delivery of 3 new A320ceo aircraft and one new A321ceo, ending the quarter with 104 aircraft in our fleet.

All 4 of these aircraft were financed under secured debt arrangements.

We continue to experience performance issues with the GTF neo engine and are currently operating scheduled service with only 3 of our 5 neo aircraft.

It is unclear at this point as to when we will be able to operate all 5 of these aircraft.

The latest solution to alleviate the reliability issues has had some success, but it is too early to say this issue is fully resolved.

We continue to work with Pratt and Airbus to find a solution to support the neo fleet in both the short and long-term.

Moving on to our third quarter and full year guidance.

For the third quarter, we estimate capacity will up 21.5% and for the full year 2017 we estimate capacity will be up approximately 16.5% year-over-year.

Our capacity guidance takes into account our July month-to-date completion factor and a 98% average completion factor for the remainder of the year.

The loss of ASMs due to a lower completion factor does put pressure on our adjusted CASM ex-fuel.

However, we have launched a cost-saving initiative in an effort to mitigate some of the impact of the additional passenger re-accommodation expenses.

For the third quarter 2017, we are guiding the CASM ex-fuel range of down 1% to up 1% year-over-year.

And for the full year 2017, our estimated CASM ex-fuel range changes from our prior guide of flat to down 1% to up 2% to 3% year-over-year.

In addition to headwinds of higher depreciation and amortization driven by an increased number of heavy maintenance events, as well as aircraft depreciation related to our purchased aircraft, higher air passenger re-accommodation expense will now also be a headwind for the third quarter and full year.

And, of course, fewer ASMs pressures costs on a unit basis as well.

In closing, I want to remind our shareholders and team members that while the labor negotiation process can take a long time and be frustrating, nothing about the current environment changes the long-term prospects for the success of our business model.

We have an industry-leading cost structure.

We have a strong presence in most of the large U.S. metros where the major of the people live and want to visit.

We have a successful international network out of Fort Lauderdale National airport with room to grow.

We have a mix -- a large mix of various sized aircraft, which positions us well to serve both large and midsized markets.

And we have many untapped high-margin growth opportunities.

One thing is sure about Spirit, our long-term strategy will not be driven by short-term thinking.

The model is alive and well, and history has shown that low cost and low fares are a winning combination.

Now I'll turn it back to Bob.

Thanks, Ted.

Over the past year, we have made numerous changes to our schedules and business processes to drive improved operational reliability, which we believe is contributing to our improved yield performance.

For the 12 months ending April 2017, our on-time performance improved 9.5 points -- percentage points over the previous year, significantly closing our industry gap in performance.

We had a few operational setbacks recently but I'm confident the ground work has been laid over the past year and will allow us to continue on our path towards improved reliability.

I'm equally as confident that we can successfully leverage the core principles of our business model to drive shareholder returns in a wide variety of operating environments.

Let me turn it over to DeAnne.

We are now ready to take questions from the analysts.

(Operator Instructions) Christine?

(Operator Instructions) And our first question is from Helane Becker.

It's actually Conor in for Helane.

So just given the issues with the pilots, how should we think about 2018 capacity?

Should we just assume that it's going to be brought down a little bit to just accommodate, like, potential -- like any more potential issues or is there like a spare account increasing at all?

Any comments there would be great.

Thanks, Conor; it's Ted.

For now the scheduled deliveries are set for 2018.

I think the way you might think about it is, if capacity is coming down a little bit this year that, of course, on a year-over-year basis may change 2018 just from a statistical perspective.

But we're going to take a look at the schedule, we're going to take a look at the fleet deployment and get back to you later on in the year as to how we're thinking about capacity next year.

Okay.

And then just on the pricing environment.

So clearly things have changed a little bit.

What markets are you seeing the largest discounting in?

Is it pretty much any market that you're competing against United on?

Or is it more like a basic economy type of situation?

I think, it's mostly the primary markets, at least that involve us, are Chicago and then to a lesser degree Houston and Newark.

Certainly, there is tremendous discounting going on in Denver as well, but we're not a major participant there.

And I'd say very little of the, I would say, increased competition has anything to do with basic economy.

In fact, I think, I'd say it's actually rare.

In many cases, we're seeing carriers with higher cost than us actually charging prices below us.

Our next question is from Savi Syth.

Just a follow-up on Conor's question there.

Is this kind of basic economy that you're seeing it or you're seeing just fares kind of on a broad basis, are you able to going to disaggregate that?

Savi, it's Matt.

No, wouldn't necessarily say basic economy has anything to do with this.

Largely whether basic economy is in the marketplace or not in the marketplace, pricing is going to move up or down as capacity and demand environments allow it to.

Basic economy is a pricing segmentation tool, but it doesn't have anything really to do with what are the core levels of the fares that are in the marketplace.

At least that's what we're observing from our side.

Got it.

And so as you look to this pricing environment, could you talk a little bit more about what you -- what tools you have on the kind of the nonticket side or to maybe offset some of the pressure you're seeing?

Yes, sure.

So we're continuing to deploy and do testing around more revenue management techniques of ancillary products.

So as this year progresses, I'm very pleased with what we've been able to do and observe and test elasticity on some of our seat fee levels, primarily in our -- what we call our BIG FRONT SEAT product, but it also applies to all of our seat products across the cabin.

Just a follow-up on that.

So should we expect the nonticket per unit cost -- unit revenue to continue increasing as we go through or does just kind of set that back as well?

No, no, this should not set that back.

We do expect to see the continued good progress on our nonticket rates.

We're looking pretty good from what we see from an advanced perspective on those products.

And we're also shortly going to start testing some elasticity on the concept of bundling some ancillary services together as well, and seeing how we can leverage the same kind of concepts with data to see what's the best way to drive higher take rates and, therefore, higher nonticket revenue per segment.

Our next question is from Duane Pfennigwerth.

Maybe you said it, but can talk to what completion factor you're assuming in your 3Q guidance?

Duane, it's Ted.

Yes, we assumed July to date, which the statistics will come out when we publish our traffic.

And then 98% for the remainder of year on average.

There is some seasonality depending on the month but that's basically what gets you there.

And, Duane, last year in third quarter, we were 99.2% or 99.3%, so we're going under the assumption we'll be slightly below that.

Thanks.

And then I'll just maybe test your statement about not wanting to say anything more about negotiations.

But I think most reasonable people would agree that if you harm your employer and harm your customers, you're not making a particularly strong case for a raise.

So my question is given the data that you have about the damages, given the actual numbers that you have about the impact here, where is the bright line, if there is one, to pursue those further from legal avenues that are available to you?

Well, Duane, I'm not necessarily going to get into all the -- really all the detail.

Our preference is to get a deal.

And we think our chances of getting a deal are better if we are at the bargaining table rather than pressing on the lawsuit.

We are seeing improvements again in the operation, and I mean clearly May was extremely difficult.

We're certainly running better in July.

But for us the -- we like to get a deal that actually allows us to run a professional airline.

That allows us to run reliably and scale the business up.

And so, again, it's being timely, running a high completion factor for really a company like Spirit with -- we average about 1 flight a day, is very, very important.

It's important to how we operate.

It's important to -- and to the message that we have to the customer.

So we know we've made some progress.

Again it's -- but this is -- it's done at the bargaining table.

It takes 2 parties and, I guess -- I believe we are making some progress, and we'd rather let that path play out for ourselves.

Okay.

And then just for my last.

Could you speak maybe qualitatively about when you think about this timing year historically, and you think about close in fares offered by legacy carriers versus fares that are 3 weeks out, how much higher are close in fares typically, walk up fares typically versus a leisure booking 3 weeks out relative to what you're seeing now?

Right.

This is Matt.

So that's going to be different based on market, obviously, and based on the carrier as well.

Largely in a healthy-yield environment, you'll see walk up fares be, say, maybe 200% or more over leisure fares and in some cases more than that, depending on the level of the stimulatory leisure fare in the marketplace.

We are not necessarily seeing that dynamic holdout, hold true right now.

We're talking about, in many cases, reduced leisure fares and then on top of that you're looking at holding premiums on walk up fares that aren't even at those levels from a percent increase that we're talking about in a normal environment.

So it's definitely impactful, and at least in some cases could be considered dilutionary.

Our next question is from Rajeev Lalwani.

Bob or Matt, a question for you first.

As far as the step down in the competitive environment, et cetera, what do you attribute it to?

Is it higher industry capacity that we're seeing now, is it change in managements and competitive dynamics?

What do you think is going on?

Well, I mean, there is no question we have higher capacity.

Again, for us we've been rolling at 15% to 20% a year.

We've been doing that for a number of years.

But we have, as we approach the second quarter, round numbers up 5% increase in domestic capacity.

And so that's fairly substantial from where we were a year ago, and probably similar to where we were heading 2 years ago.

And it looks like it's related to and will stay up 4%, 4.5% in the fourth quarter.

So generally speaking, capacity always has an impact.

It can either be on a broad basis or it can be in a micro case on a specific route at the end of the day.

And -- but as I said, for us in terms of where the biggest focus is for us in Chicago, and again our schedules have been stable for probably 3 years -- we're probably slightly smaller today than we were 2 years ago, primarily because our operational footprint in O'Hare.

So at least the area of biggest impact is Chicago, where we've added, like I said, round numbers we are flat on capacity.

Houston is, again, another big area.

We have some growth this year and there has been some impact which will -- in the Northeast as well.

Again, we have a one-gate operation in Newark and really a handful of flights.

It's actually interesting how again one gate can perhaps change the dynamics of an entire city.

But I think we have the right to operate with one gate in Newark.

And so, like I said, there is a couple of ways to complete.

Again, over the last 9 months, we've made a concerted effort again to move up our average fares.

Recognizing that we want fares low, but we're trying to move the average number up.

So -- and then all of a sudden, I'd say it changed very quickly in June.

When you hold out for higher fares, you leave more inventory open and when the dynamic environment changes, you have to catch up.

So again -- So in Newark we are a new entrant, so that can change the dynamics.

In Chicago, certainly we're not.

And I -- we are in the biggest market.

So I'd say there is a lot of carry -- a lot of aggressive competition in Chicago and certainty in Chicago it will spill over to Midway as well.

So it's -- but ultimately, we've been fairly consistent about really what we're doing and so really the change is probably elsewhere.

Very helpful.

And, Ted, a quick question for you on the CASM update.

So your original guide was flat to down 1%.

I think now you are at plus 2% to 3% for the year.

Should we assume that next year you'll make up for the difference or for some reason should we assume that the weakness this year is permanent?

I don't think that's the case, but I'd love to just hear how you're thinking about it?

That's right.

It's definitely not the case.

If you just look at the second quarter, as I mentioned in my prepared remarks, we anticipated -- or if we didn't have the impact of the disrupted operations, CASM would have been up 2% instead of 10%.

So right there, that's where 2 points on the year, just in that quarter alone.

So I think we were absent the operational environment over the past 90 days.

And what we expect or are conservatively planning for for the remainder of this year, we would have been in a very healthy position from a CASM perspective.

And our views on next year don't change.

The long-term fundamentals are still very much intact.

Our next question is from Michael Linenberg.

Ted, I just want to go back to the completion factor.

I mean, I know you mentioned July, it's going to get published.

But what is that running right now?

Can you just give us a sense of what July -- the completion factor is running?

And then using 98% for the rest of the year, I mean, that's still pretty low.

I mean, you told us what it was a year ago.

Implicit in that is there some sort of lingering impact from maybe pilots not bidding for additional time.

Like, what underlies that?

So we are over in the 96% range now, 96.5%, I believe.

The last year, Mike, we ran 99% something, and I think us -- we will generally run better in that period of the year anyway.

And so like, we're basically going under the assumption that we're going to run about 1 point or less than the last year that we actually experienced.

And again there is -- when we think about that -- for us there is a considerable expense for us in a nonweather cancellation.

Yes, we -- and we end up generally buying customers' tickets on other carriers.

So it's a fairly expensive proposition for us.

But, again, I think where we would have us -- would have assumed we would be higher in completion factor in the third and fourth quarter we're assuming that's going to be lower.

And maybe we'll be pleasantly surprised, but that move -- we got to have an assumption and we decided on 98%.

And to be clear, Mike, it's Ted, what Bob mentioned is 100% correct, and they -- what we've contemplated in that slightly lower completion factor is the impact of both items, which should be the increased expense associated with the interrupted trip as well as the reduction in ASMs.

So that's what we're contemplating in our forward guide.

Okay.

So that's -- okay, that's fine.

And then, Bob, just back to -- you made that comment about one gate in Newark and it changes the dynamics of an entire city.

And so, I mean, I was just under the impression that we were seeing the pressure in sort of the Newark Florida markets and obviously not just Newark, but out in LaGuardia and Kennedy.

And if you could just kind of confirm that it is those markets, but are you also seeing it spread to some of the other markets?

And I mean, I know you are in Newark Houston now, for example.

This is Matt, I'll take that question.

Yes, certainly -- there definitely is impact in the New York metro area to South Florida.

But generally speaking, we don't like to comment on individual routes beyond that.

I would just say, as Bob mentioned it can be a little surprising to see how an addition of one-gate and a handful of flights has the impact it has, and then quite possibly then has different kinds of decisions being made across other cities that frankly, haven't seen those kinds of capacity increases from us.

So that's how fares when -- fare activity can start somewhere that's the way that it can spread to other places.

And every airline has the ability to choose what it charges for fares.

And we're going to compete vigorously wherever and whenever we need to.

Our next question is from Brandon Oglenski.

This is actually Matt Wisniewski on for Brandon.

In light of the recent operational issues and then the imminent labor contract and wage increases, I wanted to kind of get your thought on how we should be thinking about growth and kind of about the long-term and kind of the number of addressable markets to actually operate profitably, and how we should be thinking about that given the cost increases?

Well, like I said, we'll see where we ultimately will come out.

I think as even in some of the documents that we filed, you could -- in fact, I think some of you have written on it.

I think there is, as you saw, actually in our documents from the legal briefs that there was at least a 30% increase up the table.

So you can say that would be at least a minimum.

So we know there is going to be an increase in our rates, and we expect it and it's our job to manage them, that's really part of the Industry dynamic.

We expect to run high growth next year.

The first real opportunity to adjust our growth rate is going to be in 2019.

I think our growth rate -- planned growth rate now in 2019 without any additional airplanes or orders is around 9%, is that right?

That's correct.

And I think it's too early for us to make any other decisions on that.

Again, we think there's plenty of available routes for us.

We are comfortable with the opportunities because we believe there is opportunities in big both big markets and small markets.

And I think it's very clear that if any city that's dominated by 1 or even 2 high-cost carriers generally leisure prices tend to get overpriced.

And I think there is a void for us in those markets.

From time-to-time, competition will breakout as we're seeing right now, but we have also been through periods where it's the real opportunity.

So where we can, we may -- we will look to expand in those markets as gates become available.

So I don't think necessarily we see any change, again, that bothers us.

We always have to get -- they're very hard to expect.

Again, low fares are our business.

And like I said, we see real opportunities for point-to-point carriers like ourselves.

Okay, great.

And just kind of on that, too, as well as thinking domestically or then beyond domestically, internationally.

Is there any updates on kind of plans to go international with some of the international routes, specifically Latin America if there is increased competition there?

Well, I can just say a little bit about it.

The best real opportunity for us for Fort Lauderdale, after a number of years of not adding much, will come next year.

And again we've had a pretty strong operations.

And I think, we're hoping to expand that and I think we'll see some additions in Cancun as well next year.

So I think our growth internationally will be bigger.

The Fort Lauderdale expansion will be more late in the year, as the construction projects finish at Fort Lauderdale.

Our next question is from Hunter Keay.

Matt, well, I appreciate the comments on the pricing environment.

And I understand it's very frustrating.

But at what point does this just not become a surprise.

At what point do you just accept the fact that, like, you know who this guy is, you know how this is going to be, you don't have the scale to get into this type of a ground war, and it just becomes incumbent on you to figure out a strategic long-term solution behind, like, tactical pricing initiatives.

Have you guys thought of really taking a sort of introspective hard look at, like, who you are and what needs to be done in this new environment?

Well, I'll take that.

Listen, I think, it's -- again, the question is who you are, but it also is a kind of a two-way street.

I think given the cost structures in the industry, it's pretty clear that a cost structure, let's say of a United or a Delta, can't accommodate all the needs of every customer.

It just doesn't work that way.

The airplane that accommodates well premium customers at the end of the day is not going to have enough low fare seats on it to accommodate customers through the entire demand, so -- and I have to look at it.

This company has been operating in Chicago profitably for 15 years, and it's in our plans.

And fortunately, if we were a higher cost carrier, now it will be harder to defend, but we have the ability to compete.

We have the balance sheet to compete.

And so we will.

So we have our own plan, and I think sometimes high-cost carriers charge a low prices, and sometimes it doesn't work.

It's happened before.

And I guess if we go back, I think we've kind of weathered -- we've got a pretty good operation in Dallas.

It's bigger today than it was 2 or 3 years ago.

And the reason is that these are expensive when fairs drop, but we have a good cost structure.

And so that is ultimately -- our place in the business is really defined by our relative cost gaps.

And I think if we can improve the quality that we offer, that's an additional advantage as well.

In fact, I think we're already actually seeing benefits of that as well.

So, we're -- our goal isn't to go out and, again, pick a fight.

There are so few airlines, by definition you're going to overlap with the Big 3, you can't help it.

Quite frankly, our smallest overlap is with United.

We have bigger overlaps, much bigger overlaps with American.

So again, my view -- I've worked on high-cost carriers and low-cost carriers.

I think there is a room -- there's room in the marketplace for a carrier like Spirit.

And ultimately sometimes everything works out well, sometimes the dynamics change.

But I think we're still in a pretty good position.

And based on pricing in the last month, we're not going to make a drastic change in our strategy.

I get that Bob.

But like, we're in sort of a new normal here in this environment, right?

And everything you're describing is sort of how things have been.

But what about -- we're making an argument for oh, it's different this time.

Maybe it is different and maybe you need more scale.

So here is a specific question for you.

Is Spirit, in the company right now, from an operational and IT perspective to do something in the M&A arena?

Or is there still some sort of like internal we've got to get our house in order type stuff before you think about that as a gating item to add scale so you can be more competitive against these behemoth airlines that are clearly creating fundamental problems?

Well, now listen -- I think your point on that in terms of -- let's talk about M&A scenarios.

I guess that's something that we look at.

That part of the business is to evaluate growth opportunities.

And I think from our perspective growth can come either from, again, internal growth or through various types of combinations.

I think that's something that we do as a matter of practice, but I really don't want to get into any speculation on a call like this over what we should be doing.

Our next question is from Joseph DeNardi.

Matt, I think, with all due respect, I think your commentary that there has been a -- kind of a sea change in the competitive environment is creating a little bit of bloodbath in airline stocks today.

So I'm just trying to understand how much of it is maybe you guys got a little bit too aggressive in terms of your RASM expectations for the back half of the year?

Can you just provide a little bit of color between how much of it is that versus, I guess, seeing a noticeable change in competitive behavior?

Yes, sure.

Thanks, Joe.

So as we were looking at -- as we made comments about the rest of the year, earlier in the year, we were, of course, evaluating what was happening in current trends, looking at the strength of what we were seeing and also understanding what was initially to be thought of the capacity environment for the industry.

That capacity environment changed and as capacity environments change then airlines will react to that from a pricing perspective.

And I think right now we are seeing some of that.

And is it transitory or will it be there for longer than a little bit of time.

Well, that's not necessarily something that I can speculate on or know about.

So we'll see how this plays out.

In terms of figuring out the guide for this quarter, we are still being impacted somewhat in our -- in what we'll see from realized fares, a lot of that we talked about earlier, from some of the lingering effects we had from our operations last quarter.

And that's something you just can't overcome immediately because we have to change strategy to adjust to that.

And we've adjusted to that to the best of our abilities and feel good about the volumes that we're driving right now.

We want to see higher realized fares, and we're working hard to make that happen.

Okay.

And then just 2 quick questions if I could, following on Hunter's question.

Bob, do you think if you were to look at M&A, would you need to use equity to do that or could you finance it on the balance sheet?

And then, Ted, can you just provide us with kind of an all-in cost, and what your proposal to the pilots would mean?

Alaska provided something like that yesterday and it was pretty helpful.

Yes, just to go back, I think, in terms of really speculating on a combination in financing, I just -- something that I don't want to tread into.

So we're not going to talk about potential M&A on the call.

Yes, and, Joe, I'm going to disappoint you again, we're not going to provide anything to the level of detail that for some reason Alaska did on their call as it relates to our various exchange of proposals with our pilots because that's still an ongoing process.

So it's premature for us to comment on that beyond what we've already said in our court filing.

And the reason why I think it might have more commentary on Alaska.

Again, they are no longer at the bargaining table, they're with an arbitrator.

Their pilots have an ask and Alaska has a bid, and those documents will be sorted out by arbitrators.

So you know the bookings of the deal, so that's why perhaps they're willing to talk about.

But generally speaking, again, we are in mediated negotiations.

So I think it's hard to speculate.

Our next question is from Jamie Baker.

You spoke with disappointment about the pricing environment.

Obviously, you didn't name names you named hubs, so that was helpful.

My question is whether Spirit is prepared to take a leadership role in trying to clean up the environment?

And, obviously, I don't expect you to say, yes, we're going to raise fares tomorrow.

But it wasn't clear from the prepared remarks or your responses to questions so far that you're really making any substantive adjustments as it relates to industry pricing.

So I mean maybe I'm just being shortsighted, but I've always looked to the industry's low-price leaders for solutions, whether that's Ryanair, whether it's Air Asia, whether it's Spirit.

Am I wrong in thinking this way?

So, Jamie, I have to be a little careful how I answer this question.

But I would tell you that we take a leadership position when it comes to fares and markets.

And I think you've seen success over the last 9 months as to what's happened to fares.

I don't think it's an accident that those fares have gone -- have realized higher in the past.

The fact remains that any airline can charge whatever fare they want at any time in any market and that's what's going on right now.

So we're adjusting to that environment the best to our ability.

And if we have to reduce fairs to remain competitive with others, then we'll do that.

It's probably the most I can say on that topic.

Okay.

Your implication that some of your competitors are retaliating in certain markets based on what you've done in other markets.

I mean, I know that probably stings, maybe it doesn't seem fair, but I think it just highlights that airline compete in network terms.

They don't compete in spoke terms necessarily.

And look, I get it, nobody likes to admit defeat, but if a single-gated Newark elicits this sort of network response, isn't the solution to get out of Newark?

No, I don't think it does.

This is -- I think you have to look at this over periods of time.

And also a lot of things can change in this business.

And quite frankly, a change that occurs in Asia could ultimately impact what happens in the U.S., however those things occur.

Again, I've lived through many of them.

And a couple of years ago, we experienced a lot of activity.

We went through it, I think, we came out pretty good.

So -- but I -- the reality is if you fly out of Newark, the price to Fort Lauderdale is pretty high.

And I think there is actually an opportunity.

But eventually, again, if you react or overreact to every one of these situations, I think the outcome is bad.

We're not stubborn.

We pick a route that doesn't work out, we'll leave.

I think we don't stay in every route.

I think if you go back over the last 4 or 5 years, probably 10% to 13% in other routes that we go in don't work.

And it just could be that the market dynamics don't end up as we would plan.

But I think we see opportunity there.

And over time I think the situation will improve.

But we're not going to create learned behavior because...

I asked about it, Bob, only because the kind of market churn that you describe had kind of died down under your predecessor.

And you indicated that you were going to try to restore that and restore Spirit to some of the more opportunistic nimble behavior that you exhibited longer-term, And, I guess, I'm just not seeing that, that's all.

Well, Newark was opportunistic.

We actually had no plans on going in and the FAA -- Northrup made a change, and we decided to enter the market.

We probably wouldn't have planned on being there at this point in time.

So we decided to go in.

But listen, I think -- again I think I play out over time.

Again, if you know the hubs, a lot of this activity is, again, around -- by definition knowing the hubs generally more around United.

But I think other carriers are not seeing some of the same pressure.

So it's not necessarily about Newark.

It's again other parts of the network are pretty solid.

Our next question is from Kevin Crissey.

Let's set aside the current pricing environment because pricing ebbs and flows in different markets.

Let's look back a little bit more and talk about the changes that you've seen.

Spirit had seen a different competitive response from the legacy airlines.

You've had operational challenges and you've had pilot issues.

So my question is, with that as the backdrop, you've seen some significant changes environmentally here, forgetting this recent revenue weakness?

But we haven't seen much in the way of your growth rate change.

Maybe you select different markets and so forth, but structurally the growth rate of this company is significant and has been for quite a while.

So I'm just -- earlier, Bob you said, it certain -- now I forget exactly what it was, but it didn't bother you.

So I'm wondering what would bother you and what would cause the overall growth rate of Spirit to maybe decelerate?

Obviously, I think you can measure our ability to earn and ultimately, I think, it's going to be about various operating and cash flow metrics that will ultimately decide.

I think, again as I've mentioned, our growth rate will be double-digit next year, and we have to make decisions for 2019.

And if the outcome of our pilot agreement can have an impact on that, our own assessment as to the way the industry is evolving.

So it's kind of dynamic situation, one we think about a lot.

And also, what's the right way to do that.

So it's -- again it's an ongoing thing.

But like I said, I think we're not going to put ourselves in a situation where we're going to allow one carrier to push us in that direction, because those things come as well.

Again, just kind of looking at some of the industry dynamics, in a broader sense, individuals can make a difference in attitudes.

And we're seeing United's at least domestic PRASMs trail the other carriers.

I mean Delta's is fairly stronger, and American is improving.

So the question is how long can that stay up by our competitors as well, can they keep up what they're doing?

But we don't want to be pushed in a direction over 1 or 2 months of pricing activity, and we're going to let it play out over time.

Quite frankly, we were making pretty good progress.

And at some point we'll see a normalized activity when we get our pilot deal done.

Then we can make an assessment.

But we're not going to -- you don't make an assessment in the middle of a situation.

Kevin, it's Ted.

I just want to add one point to the -- because you mentioned what are the things that influence our decisions around growth, and Bob referenced metrics and that sort of thing.

But as you know, and we talk about this a lot, we evaluate the opportunity dynamically and consistently.

And there are 2 inputs that reflect that, it can be the size of that opportunity and the rate at which we tackle that opportunity.

So the growth rate annually is the speed at which we get that opportunity, and the opportunity is the volume, and we're constantly evaluating both of those things.

What I would tell you is the volume, the size of the opportunity has not moved, it's still very large.

So what we evaluate is how quickly can we get that, and what is the appropriate speed at which we tackle that opportunity.

And that will be driven by our metrics.

Can you -- I view Spirit's primary comparative advantage as your cost structure and particularly relevant in leisure routes.

Can you talk about not specific to what the numbers are for your pilot plan, but can you just talk structurally about how you think of your gap in terms of your overall cost structure versus that of your competitors post-labor contract, maybe over the next 3 to 5 years?

What kind of competitive advantage on the cost structure, how do you see that gap having migrated toward?

Well, you're right.

The primary focus of the business is maintaining our cost advantage against our competitors and widening it when we can.

And we've had success at doing that over the last 5 to 10 years.

And our objective is that we intend to make that be true going forward.

Now there are pressures that we face and the pilots -- a deal with our pilots would be one of those.

And it is beholden on management to do our best to manage that as we can.

Our competitors are going through some of those pressures as well.

And so we anticipate that there will be individual years where that cost level for Spirit may change.

It may be up, it may be down, but over the longer term as we deploy the growth, our objective is to grow that advantage.

And we think about a variety of different things in that, including our pilot deal.

The pilot deal will be pressuring cost, there is no doubt about it.

Our objective is to try to do something about that.

Christine, we have time for one more question.

Thank you.

Our last question is from Dan McKenzie.

Going back to the commentary on pricing.

It's still not clear to me to what extent the network has been impacted.

So I'm hoping you can provide just a little better clarity.

What percent of the network was impacted initially?

What percent of the flying has it spread to?

I heard you say Chicago, Newark and Houston, but that's still not quite clear to me?

And then just given the volatility in pricing, are you comfortable the revenue outlook is sufficiently conservative here in the third quarter?

For example, does the guide factor in potentially a further expansion of the pricing challenges?

So I'll talk about the facts that we have right now.

So about roughly 1 quarter of our revenue is tied up in some of the pricing activities right now.

Now, remember, when you think about that, that's not -- 25% of our system revenue is not tied up in this.

Some percent of that revenue is tied up in what's going on with this right now.

In terms of how we think about that and in comparison to others, just know that it's a material and significant percentage of other airlines revenue as well.

This pricing activity is not in small markets.

And while we may have 1 flight a day in certain markets, others have many more flights a day in these kinds of markets getting tied up in this activity.

So it's just a way to kind of couch the magnitude of what's going on for you.

In terms of talking about the guide.

We're comfortable with what we put out as the guide and that's what we're looking at right now from the environment.

Okay.

And then just a second question here, Bob.

I hear you loud and clear on your desire to stay focused at the negotiating table.

But I wonder if you'd just allow me to push back here, a little bit here.

And please fill in the missing holes in my recollection of history.

But what's wrong with the Bob Crandall playbook to sue the pilot union to protect your shareholders and customers?

And, I guess, following the February 1998 sickout American won a $45 million fine against the APA.

So the precedent is on your side.

Why the reluctance to make your shareholders or your owners whole here?

Dan, I think, again, ultimately again our goal is to get a deal.

I think where our negotiations are, I think they progressed.

We've got 2 mediators joining us, which is again a good signal.

And like I said, I think there is really a lot of focus and a lot of pressure to keep the 2 parties together and bargain, because this is a bargaining process.

And I think right now the best path is to keep the parties together.

And, quite frankly, have the mediators play their traditional role in forcing us both to move and negotiate.

And we believe that is the best path.

And like I said, I think that's our expectation in the coming months.

Great.

Thank you, everyone, for joining us today.

Thank you.

And thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.