Spirit Airlines Inc (SAVE) 2017 Q3 法說會逐字稿

Welcome to the third quarter 2017 earnings conference call.

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

(Operator Instructions)

I will now turn the call over to DeAnne Gabel, Senior Director of Investor Relations.

DeAnne, you may begin.

Thank you, Ellie.

Welcome to the Spirit Airlines Third 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, Chief Commercial Officer, who will review our revenue performance and outlook.

Then Ted Christie, 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, October 26, 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 third quarter 2017 earnings press release, which is available on our website, for the reconciliation of our non-GAAP measures.

With that, here's Bob.

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

A special thank you for all our team members that went above and beyond as we prepared for and recovered from Hurricanes Harvey, Irma and Maria and dealt with the shootings in Las Vegas.

For Irma, we were forced to move our system operation control center to our satellite location in Detroit and did so successfully while planning for a dramatic pull down in scheduled flights for the impacted period.

Following the storms, in addition to dedicating company resources, our team members answered the call to action by donating their time and money to help those impacted by the storms.

I couldn't be prouder of our team members -- how our team members handled these situations.

Our hearts and prayers go out to the team members' friends and families who've been affected by these events.

Excluding the hurricane-related impacts, during the quarter, we ran a good airline and continue to make progress on our operational reliability goals.

The pricing environment remains competitive but we continue to be well positioned to leverage our industry-leading cost structure to stimulate and grow markets we serve with low total fares.

On our second quarter earnings call, we discussed how we are pivoting our revenue management strategy and a portion of our routes to compensate for a change we saw in the competitive environment.

As anticipated, this has begun to benefit our load factor and therefore our TRASM.

I am pleased with how well these initiatives have worked.

With that, I will turn it over to Matt and Ted to discuss our third quarter performance in more detail.

Thanks, Bob.

And I'd like to start by joining Bob in thanking our team for their extraordinary efforts to keep the operations running smoothly despite disruptions caused by the unprecedented number and severity of hurricanes that affected our network.

For the third quarter of 2017, we reported total revenue of $687.2 million.

Total revenue per available seat mile decreased 6.3% year-over-year.

We estimate the hurricanes and overhangs from the pilot work action earlier this year negatively impacted our third quarter revenues by approximately $40 million.

As Bob mentioned, in response to the dramatic change in the competitive environment in many of our markets, we pivoted our revenue management approach in these markets, which was helpful in mitigating some of the impact from lower fares.

In our model, volume does matter, and we have taken this opportunity to focus on the things that we do very well: low fares, ultralow costs and significant ancillary production.

This has always been a recipe for success.

Contrary to some rhetoric of late, the Spirit model continues to produce excellent returns, and our focus on new and optimized ancillary products is a unique driver of unit revenue for us.

On the topic of ancillary revenue, we continue to see year-over-year improvement in non-ticket revenue per passenger, which increased 2.6% compared to the third quarter of 2016.

We are delivering on products to improve our customer-facing technology, and we are investing in e-commerce initiatives.

We are excited about the benefits for our customers as well as our bottom line as we improve the guest experience and leverage technology to drive non-ticket revenue.

In Q3, our new app went live, and with only limited notifications to select Spirit customers, the number of downloads has already surpassed our most bullish expectations.

Additionally, just yesterday, we launched a new website which included dedicated mobile design.

Approximately 50% of spirit.com visitors use a mobile device to access the website so we expect that this will be highly beneficial from a guest experience perspective.

While the direct revenue impact of the app, website redesign and other ease-of-use business initiatives are somewhat difficult to pinpoint, there is no doubt that together with our improved operational reliability, improved guest experience, low total fares and accretive non-ticket initiatives, we have a platform to continue to deliver excellent returns.

Turning to our fourth quarter outlook.

I thought it would be helpful to give a bit of color as to what we are seeing.

We are experiencing a lingering impact from Hurricane Harvey, which is modestly affecting our Houston markets.

We are not seeing a significant lingering impact in Florida as a result of Hurricane Irma.

We've temporarily pulled down some of our capacity in several of our Caribbean locations, rightsizing them for the new demand environment post Irma and Maria.

As for the calendar shift of Christmas from Sunday to Monday, for our network, we think it's roughly neutral on a year-over-year basis.

We've trimmed some flying on the off-peak days of Tuesday and Wednesday for the quarter, and we also have somewhat less new flying in its initial 90 days [spool] period than we did last year, which are modest boosts on a year-over-year basis.

Together with the current pricing environment, our continued improvement in non-ticket revenue and our improved revenue management strategies, we estimate our fourth quarter TRASM will decrease between 4% to 6% year-over-year.

With that, here's Ted.

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

I want to thank our entire Spirit family for pulling together in the midst of what has been a time fraught with disasters.

Both before and after the disasters, people from all areas of the company were raising their hand, asking how they could help.

I appreciate the tireless effort of all that worked to help keep the airline functioning, assisted with restarting the network post the storms and continued to help with the relief efforts in the Caribbean.

It is a privilege to serve alongside our dedicated Spirit team.

Moving on to our third quarter 2017 results.

Net income excluding special items was $65.5 million or $0.94 per diluted share, and our operating margin was 16.4%.

We estimate the overhang from the pilot action and Hurricanes Harvey, Irma and Maria negatively impacted our third quarter operating income by approximately $39 million and our operating margin by 450 basis points.

CASM ex fuel decreased 1.1% year-over-year to $0.0542.

On a per ASM basis, the decrease year-over-year was primarily driven by lower maintenance and salaries, wages and benefits per ASM, partially offset by higher passenger reaccommodation expense and depreciation and amortization.

Lower ASMs as a result of the storm-related cancellations also pressured CASM.

In the face of a very difficult operating quarter, the Spirit team delivered admirable results on cost control.

In fact, excluding the expenses associated with the hurricanes and the loss of ASM production as a result of the cancellations, our CASM ex fuel would have decreased by nearly 5% year-over-year.

I commend the team for retaining their focus on our guests and each other, all while running the business the Spirit way.

Regarding fleet, during the quarter, we took delivery of 3 new A321ceo aircraft and 1 new A320ceo and returned 1 A321 to its lessor, ending the quarter with 107 aircraft in our fleet.

We continue to schedule service with only 3 of our 5 NEO aircraft.

The latest solution to alleviate the reliability issues has had some success, but it's 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.

We ended the quarter with unrestricted cash, cash equivalents and short-term investments of $965 million.

As mentioned in our earnings release this morning, our board has authorized the company to repurchase up to an additional $100 million of common stock.

Looking ahead to the fourth quarter, we estimate CASM ex fuel will be down 3% to 4% year-over-year on a capacity increase of about 17.5%.

I want to spend a few minutes discussing our 2018 capacity growth.

Our 2017 capacity production has been artificially depressed.

Throughout the year, we've only operated 3 of our 5 NEO aircraft.

We've also experienced the lower-than-normal completion factor due to the impact of the pilot work action that continued into the summer and the cancellations related to the hurricanes.

Therefore, our 2017 capacity increase of 16% should have been closer to about 19%.

In the beginning of 2017, we expected our growth in 2018 to be 18.5%, which was based on similar operating assumptions as 2017.

We now estimate our 2018 capacity will increase between 22% to 25%, of which about 7% is attributable to 2018 aircraft deliveries and the remainder is run-rate growth from 2017 and increases in gauge and stage.

For the period of 2019 and beyond, we estimate that our growth rate will be in the low to mid-double-digit range.

Nonetheless, as we've communicated previously, our annual capacity growth rate for 2019 based on our current firm aircraft commitments is about 10%, which is at the low end of this target.

However, we don't intend to lock down any additional aircraft until we have more certainty around the productivity of our pilot deal.

We are still in the early budgeting -- early stages of the budgeting process, but initial estimates for 2018 indicate our CASM ex fuel will be down 3% of 5% compared to 2017.

This excludes any impact from our new pilot contract.

In closing, our team has done a great job overcoming and adapting to challenges we faced in the third quarter.

In addition to our industry-leading cost structure, it is this can-do attitude that positions us well to achieve our long-term goals.

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

Thanks, Ted.

Based on our guidance for the fourth quarter, we are on a target to achieve an operating margin of 14% to 14.5% for the full year 2017.

If you adjust for the impact of the pilot disruptions and hurricanes, that equates to an operating margin of about 17% for the year.

This is below where we had anticipated to land at the beginning of the year, but considering the aggressive pricing we've seen in about half our markets since late June, I think we've done a pretty good job being nimble and adapting as needed to address the challenges.

Overall, we continue to make good strides in improving our operational reliability, and we are focused on leveraging the strengths of our business model by offering the lowest fares in the marketplace.

With that, I'll turn it over to DeAnne.

Thanks Bob, Matt and Ted.

We are now ready to take questions from the analysts.

(Operator Instructions) Ellie, we are ready to begin.

(Operator Instructions) Our first question comes from Hunter Keay.

So I'm sorry there was a lot of numbers, I may have missed this.

I know you said the 2018 capacity is going to be up 22% to 25%.

How much of that is because of the strange comp?

Like what sort of like the schedule-on-schedule growth rate is maybe a better way to ask that.

Hunter, it's Ted.

We looked at -- one way to look at it is seats, and seats are going to be up more like 17.5% to 21% or something like that, which is closer to where we would have expected capacity to look prior to the unusual comp.

So it's right in line.

It's the same number of seats we were planning to deliver when we entered the year 2017.

So the -- I would say the ASM comp is skewed by at least 300 basis points.

I got you, okay.

And then, obviously, appreciate the commentary around 2019 being in the 10% range, and then you said low to mid-double digits.

There's a lot of moving parts, I get that, with pilots.

But is it a foregone conclusion that you're going to place an aircraft order?

I mean, would you actually contemplate a 10% growth?

Is there a way to maybe do that and not grow, maybe like extend some lease returns and growing maybe like 10%, 12% without placing an aircraft order?

Or is it fair to say that, contingent on getting the pilot deal done in terms you think you can get from them around productivity, that an aircraft order is effectively a matter of when, not if?

Or is there a scenario where you actually don't place that order for a couple of years?

Well, I -- you kind of laid out the options pretty well.

I think where we are, I think we actually have the luxury with potential returns.

But we have a pretty good base, and I think over time, we expect the NEO to begin to play the role that we expect, which is really to give us length of haul opportunity.

Yes, we can do these things with leases, small orders, relatively -- there's a lot of flexibility because we still have an underlying core order that was made years ago.

And I think, actually, it gives us the opportunity to be fairly tactical in the way we will approach the market.

Ted, you got anything else to add?

That's 100% correct.

And Hunter, you did lay out the options.

And I think that the flexibility that Bob mentioned is one of the things we're excited about, is it does give us the ability to be more tactical.

So it's entirely possible we may decide that 2019 is fine where it is and we're just going to continue where we are or we can be a little bit more nimble in that regard.

So I think that's right.

And just staying on that, I think our preference would be if we ever make decisions, to do it in smaller chunks.

Because often, an airline can place an order and start taking deliveries 6, 7 years later when there's going to be a lot of changes in the market.

So I think over time, we will approach the marketplace from a position of flexibility.

And our next question comes from Kevin Crissey.

Can you talk about where you're growing in 2018?

If not specific markets, maybe the types of markets that you're looking at.

Sure, Kevin.

Let me just -- before I even talk about that, maybe let me kind of summarize really what we did this year.

I think this year, we opened up a couple of midsized cities.

But there's been really a lot of talk about where we're growing and carriers' responses to that.

But let me kind of start at the beginning.

The 3, let's say -- let's call it, the 3 areas of concentration that we've seen the most pricing pressure in our network are Chicago, Dallas and Houston.

In Chicago, our capacity was down about 4% in 2017.

In Dallas, it was down about 4%.

In Houston, it was up about 8%.

When you put them all together, the capacity in those 3 areas was down about 1%.

And so in fact -- and if you go back over 2 years, I guess the numbers would be similar.

So there isn't -- wasn't a whole lot of correlation between where we were growing and the pricing activity in the market.

So -- but this year, we had a fairly big expansion in Fort Lauderdale.

We opened up Newark.

Again, 2 midsized cities.

So I think as we go forward, what you're going to see us to do is continue to grow on a diversified way, large cities, midsized cities or small cities.

It's likely that we will open up 2 midsized cities or announce sometime during the year.

We've been waiting for a number of years to add a new international destination out of Fort Lauderdale, and you'll see a lot of that coming as we move into the latter part of the year.

We also have certain things that have been announced.

I think we've added several fights into New Orleans last year, and this year, we've gotten bigger in Florida.

And I think you'll see us seasonally stronger once again in the February through June period.

So it's -- but I think the key thing is it's diverse.

We have a number of cities on our system that have in excess of 10% of our capacity.

And so I think, in our own way, we are building, again, a diverse and, over time, a more defensible network.

Terrific.

And maybe if you could kind of expand on and talk about the characteristics -- I'm sure you're not going to tell me what specific markets are doing the best, but maybe the characteristics -- if there's any consistency among the characteristics of the markets that are doing the best financially.

Well, generally -- again, for the most part, we're pretty happy with some of the new cities.

I think Fort Lauderdale has been especially strong.

It's our biggest market.

It's about 27%, 28% of our total capacity.

It's got most of our international capacity.

I think we're pretty happy with the way things have gone in Newark this year.

Again, Newark is -- it's part of New York.

And quite frankly, if we could get a gate in JFK, we'd take one of those as well.

We want to be in big cities.

Big cities create opportunities because, generally speaking, the carriers that control the big cities have operating costs more than double ours.

And so I think those opportunities we think will continue to exist for us.

So in the big cities, I think there is -- they're generally overpriced.

In some of the midsized city, there's an opportunity just to stimulate the markets in a very big way.

And our next question comes from Savi Syth.

Ted, maybe a question for you.

I appreciate the color on next year's cost trend.

Could you just talk about -- is that mostly because of the strong growth?

Or if there is anything we should consider from a kind of headwind and tailwind aspect next year.

Sure, Savi.

So next year, obviously, growth helps.

We do have some puts and takes, and they're not dissimilar from what the company has been tackling for the last 3 or 4 years.

So mainly that's related to amortization expense.

It's still going to be a pressure.

We will see benefit on rent per ASM as we optimize the balance sheet to take advantage of cost-effective financing.

Of course, we're lapping a difficult year as well so there is some benefit from that.

But nonetheless, despite all that, I'm encouraged by what we're seeing as we go through the budget process.

And as we always do, we turn some knobs around here to kind of figure out ways to get the costs moving in the right direction, and our job is to manage the business.

Our -- we all know that we're going to be tackling a -- or getting done with a pilot deal soon, we all hope.

And our pilots are doing a great job for us, and we want to make sure we get that done and we're moving on.

But our job is to make sure that we're paying for that deal as best we can.

And so the businesses is very engaged in coming up with ways to continue to move the cost structure in the right direction.

And like I said, I'm very encouraged with what I'm seeing initially as we get ready for 2018.

Helpful.

And if I might follow up with Matt.

The ancillary revenue at least on a per passenger basis is starting to turn.

Any color there in what you're seeing?

Yes, certainly.

We're making lots of good strides in the way that we're merchandising on our website.

A couple of new products have come out.

The way that we're merchandising and putting some products together in bundles for customers is having some pretty good take rates thus far.

And as you can imagine, it's really just started for us so -- on that product -- or that combination of products, I should say.

So we're still testing out the pricing and understanding on a market-by-market basis what can work best, but really happy there.

And a lot of the work that we've done in the last year on revenue management theory around other products like our BIG FRONT SEAT product is paying off for us now.

And our next question comes from Andrew Didora.

Bob, I know you weren't in your current CEO roll back in 2015, but you were still heavily involved with the company.

You mentioned in your prepared remarks and Matt as well just in terms of pivoting revenue management in the face of these competitive pressures.

But what do you think Spirit learned in 2015 that has helped you pretty much cope better with some of the competitive actions you're seeing today?

Is it anything from a ticket perspective, an ancillary perspective, a little bit of both?

Just curious to get your thoughts there.

Well, I think it's a lot of things, but actually, again, from time to time -- first of all, it's a competitive business, and I think we should be expecting competition.

And it's just always going to be a matter of degree.

But I think we found in 2015, these things have a way of working the sales up.

First of all, pricing issues tend to spread, and the more they spread, eventually, it leads to a turn.

Because rarely, what can start out as someone bracketing a flight, eventually, at the end of the day, takes the whole market and maybe even nearby markets and can ultimately even spread across a whole series of markets.

What we found -- and quite frankly, we played a fairly big role going back to last summer in actually taking risk and actually raising average fares, and for the most part, most of the industry was following us.

And so we've played a fairly big role.

And I think as we got into late June, early July, we saw a fairly big change, which left us exposed for a couple of months.

And we can have a long debate about why those changes ultimately took place.

I can't be sure.

But we are letting our load factor go down.

And so again, going forward, we're not going to take the same load factor risk.

But I think the marketplace is going to present opportunities to improve pricing because I think, once again, even this summer, we're seeing that they don't stay contained to our one flight.

And depending on the carrier, each carrier has their own level of impact and, ultimately, have their own margins to manage.

So I think, eventually, these things will subside.

One of -- we never -- I've been here in the position about 2 years.

I don't think we've ever -- we'll never talk about market share because when you're our size, it's irrelevant.

And we want to serve key markets.

We're working.

We think our cost structure can widen over time if we keep doing what we're doing, and that's always our focus.

So I think -- and with our balance sheet, there's a lot of airlines trying to play our game, and I think that's a pretty difficult situation.

We don't have 20 airplanes, we have 110, and we've got $1 billion in the bank.

So we won't stay in every route, but our plan is to build a diversified route network.

And I think we can pretty much stay at a reasonable size in all the key markets.

And our feeling is if we're not doing it, somebody else is going to be doing it.

So again, it's diversification.

And yes, we're not out to build 100 flights in any one of these cities.

We've got 20 to 30.

And if you look at what we're doing around the country, again, it's maybe a different kind of network than what others are used to seeing, but nonetheless, it's -- we're building breadth, and that's going to allow us to enhance our brand over time.

All right.

My second question is for Ted.

Just given what's transpired the last few months, your net leverage has come up about a turn to around -- I think around 2.5x over the past year, probably going maybe modestly higher in 2018.

What -- can you remind us, where do you feel comfortable with your leverage?

What are your leverage goals?

And based on your current plans, when do you see leverage peaking?

Yes, sure.

So it is up above 2, and most of that is because of the pressure we've seen in the revenue environment driving what's happened on (inaudible).

It has little or nothing to do with the company's borrowing activity because we generally lever the company to grow with airplanes, and that's relatively consistent.

There is a notable timing penalty associated with buying aircraft versus leasing aircraft in the way that people generally calculate both leverage and ROIC, and we've illustrated this before.

But in theory, if we leased all these airplanes, our leverage position would be less today than it is as indicated, which is not necessarily the right answer for either the balance sheet or the P&L.

And that's true with ROIC as well.

So while we manage to leverage and we do that by optimizing the use of the balance sheet and the amount we borrow and how we amortize and eliminate bad debt, the company is a growth company, and we will continue to make sure that we have optimal capital to deploy that growth.

So it's not a concern for me at 2, 2.5, and we're going to continue to execute.

And our next question comes from Michael Linenberg.

Bob, if we went back -- and actually, Matt as well.

If we were to go back and kind of look at how maybe intense the competitive backdrop was back in July, maybe even on your last call and maybe compare that to early September, and I realize that we were dealing with hurricanes, and where we are today, like how would you -- would it be fair to say that the intensity has moderated?

Is it the same?

Is it worse?

Is it market by market?

Yes, Mike.

Thanks.

This is Matt.

Since our last update -- if we go back to early September, when we did our last update, we'd say that we've seen the pricing environment largely stabilize.

We believe there are many routes where the fares are still relatively too low and are diluting OND revenue.

We also recognize that the environment may be around for a little while, but that's okay.

Our cost structure allows us to thrive this way and grow in a low-fare environment.

Having said that, we have seen some evidence of fares firming up around the holiday periods, and I would characterize the overall environment as improving relative to a couple of months ago.

I think it's important to also add about the 2 separate components of revenue management.

You have the actual fare menus that are filed at any given route as the first component.

Then you also have the inventory -- yield control of those fares on the route.

So it's normally more effective to improve realized average fares by simply not having low, dilutive fares filed on the route.

The good thing is we are seeing more evidence that our competitors are shutting off the availability of these low fares more often than they had in the past.

What this means for us ultimately is that when we see the ability to shut off the lowest of the low fares, then we will and we'll realize higher yields along the way.

I guess to summarize, it's not happening as often as we think it could be happening, but I'd say the trend in certain markets -- some of the trends are certainly encouraging.

If I could just get more granular here.

Is there any meaningful difference between within 7 day and outside 7 day?

I mean, has there been any noticeable shift in activity around that over the past several months?

Yes, certainly.

So on a route-by-route basis, the answer is going to be different, as you would normally expect me to say something like that.

I would say, in general, inside 7 days, we're starting to see some changes there that are encouraging.

Outside 7 days, it's still extremely competitive.

And from our perspective, when you start thinking about inside -- close to travel, inside 7 is one thing.

Inside 14 matters almost as much as inside 7. So we still think there's some room there that we're looking forward to optimizing on in the near future.

So there's still some room there, but inside 7 is certainly a little bit healthier.

Okay, great.

And then just a quick one for Bob or maybe you, Matt, as well.

When you announced that you're going to fly from Newark to Vegas and New Orleans, are those 2 flights -- are they incremental to your current schedule?

Or did you actually pare back services to other markets?

Mike, we dropped -- yes.

No, talking about Newark.

And again, I think just in terms of Newark, I think we're probably jammed at the end so that we have no more flights because we're using our one gate.

But in the fall, we dropped one of our Fort Lauderdale-Newarks, went from 4 to 3. And we kind of focused on these large leisure markets.

In fact, I actually think another carrier may have dropped Newark-Vegas.

So that's -- so we think we added the 2, we dropped one.

And that's going to be our schedule going forward.

Okay.

And that's what -- I figured you're pretty full up at that gate.

Our next question comes from Jamie Baker.

Guys, years ago, when American had uncompetitive pilot economics, Gerard used to say what he'd be able to earn if he had the wages and work rules of some of his competitors.

So I'm wondering if you've worked up anything similar?

Not really on the wage front, but if you had Southwest work rules, and again, I'm setting aside the wage component, but if you have their flexibility, how would Spirit fly differently, if at all?

Any metric you choose, crews per aircraft, turns per crew, whether this would potentially make some point-to-point markets more feasible, that sort of thing.

Well, I think -- Jamie, I think that in terms of pilot work rules and things, we have some just -- we just have certain issues which, to some degree, can impact really what we do.

But let's -- I think, why does Spirit do what is does?

I mean, again, if you think about our company, I think in 2010, we might have had 25 air points, round numbers.

And so to some degree, you've got to shape around available gates and what are those opportunities.

And to a large degree, our network is kind of shaped as to perhaps what's available to us.

And if you think about a lot of these key places, it could be Chicago, 3 or 4 gates.

In Newark, it's 1 gate.

In Atlanta, we have 2 to 3. The ability to get real density in any market, very difficult.

Fort Lauderdale happens to be where we're headquartered, and we have a fairly big stake here.

We want to enhance it.

So a lot of what we're doing, to some degree, is shaped by what the competition is doing.

And so that, I think, is really the primary driver.

And to some degree, it shapes how we market ourselves.

(inaudible) I mean -- so we -- for us to grow, we actually have to be different.

And like I said, I was not here when we developed the strategy, but I would not change that.

We -- if we start doing what other low-cost carriers are doing or even a legacy carrier, I think we'd find ourselves in a difficult spot.

All right?

Okay.

And second -- and I guess this is somewhat of, I don't know, like a philosophical type question.

But when I look at the deployment of the LCC model around the world, and I realize there's no actual written playbook, but one of the core tenets appears to be the avoidance of OA hubs.

So when I think about Ryanair over time, when I think about Southwest's first, I don't know, 34 years, when I think about -- with most, not all but most low-cost carriers seek to avoid the type of hand-to-hand hub combat that Spirit seems, I don't know, eager to engage in.

And I'm just curious whether that speaks to a differentiated approach at Spirit or if it's really just driven by sort of where the U.S. is in terms of discounter penetration, what's been made available to you, getting back to the first question.

I mean, why the OA hub willingness given that it does seem inconsistent with some of the world's other low-cost, high-margin operators?

I think it's a great question.

And I've seen a lot of comparisons between Europe and the U.S., and the bankruptcy laws in the U.S. have made the U.S. a lot different than perhaps the other places.

And again, when we think about all that, Europe -- quite frankly, there isn't a strong legacy profile in Europe really other than Lufthansa on the continent, so there's actually very, very big opportunities over there.

But when we think about opportunities here, the reality is the legacy carriers still have very high costs.

And consolidation didn't really improve the cost structure.

It improved the networks, but the costs are going higher.

And quite frankly, I think our gaps are going to grow versus them.

But in terms of the things that we do, Las Vegas in December is about 19% of our capacity.

Our biggest growth, large market last year was Orlando.

We are up about -- so those are the natural places that you would expect a lot of the low-fare carriers to be or where we'll be.

So we actually have quite a few of those.

To some degree, Spirit replaced AirTran in Dallas.

Spirit's been in Chicago for years.

It's not as if it's brand new, we've always been there.

But there is an opportunity, and I've kind of watched this, in the large markets.

The high-cost carriers, because of their cost structures, can't price the markets for the typical leisure customer.

And that's why there is an opportunity, let's say, in the large markets and probably not the opportunity in the small one.

But I think it's because of the cost structure, and the cost structures are not narrowing, they're widening.

Our next question comes from Brandon Oglenski.

This is actually Matt Wisniewski for Brandon.

I was hoping you could expand a little bit on the ancillary products and ancillary revenue stream potential.

How has it changed?

How is it can we -- how can we use that kind of tool to respond to changing fares?

I know around this time last year, there was a big initiative to roll out dynamic pricing.

So just hoping for some more color there.

Yes, absolutely.

This is Matt.

Thanks for the question.

The -- let's say, a piece of our largest opportunity continues to be how we revenue manage our products.

So we talked a year ago about starting to dynamic price, and we're liking what we're seeing there.

It's paying off.

We have other products that we're not yet revenue managing, that are relatively static price points.

So we're looking forward to starting to test out some of those.

And in any test-and-learn scenario, not every test is a 100% successful.

So we learn from that and then reapply our learnings.

Again, our seat products are responding very well to that, and we just started with the bundling of services.

And as we get smarter and better -- so when you think of ancillary, I like to also think about what we're doing on our website and some of our e-commerce initiatives in general.

As we get smarter about who our customers are and the personas of those shoppers, we then -- we will then learn from that and be able to merchandise and offer proper products at the right time to the right customer.

So there's a lot of opportunity still there for us to grow into the future as well.

Okay, great.

And just kind of a quick follow-up.

How has this changed at all with now the kind of more pervasive basic economy going through the system?

Has that changed?

Does it still seem a clear advantage of pricing?

Any color there as well?

Yes, sure.

So one of the things with our product relative to basic economy is that when you purchase products on us, we give you full options -- an optionality as to what products you want to add to your travel.

So in most regards, we actually believe that when a customer is choosing between basic economy and the Spirit products, the Spirit product gives them the opportunity to add to their trip and gives them that optionality that they're looking for.

So generally speaking, our ancillary products seem to be producing very well in that -- in those scenarios.

And our next question comes from Duane Pfennigwerth.

Most of my questions have been asked, but I just wanted to see -- and maybe you said this in the prepared remarks.

But obviously, you had a lot going on this year both on the pilot side and massive storm impacts.

So is there a way to very simply add up all of the perhaps nonrecurring bad guys on the cost side for 2017?

How much -- how many points of CASM did all of that represent from a cost perspective?

Duane, it's Ted.

It's a combo of the actual expense and the reduction in the ASMs, so -- which can actually be more punitive on the expense side.

I seem to recall that we indicated on the second quarter call that we thought pilot disruption-related expenses was around $25 million.

We did incur some incremental amounts -- $20 million.

We did incur some incremental amounts in the third quarter.

But that, coupled with the ASM production -- reduction, we think is at least a couple of points on CASM.

And customer reaccom are higher up?

Yes, exactly.

And then just a follow-up to the last question on ancillary and ancillary revenue growth.

Maybe this is a stretch, but do you think that the basic economy push is actually helping to stimulate ancillary revenue for you or impact your ability to price up on those ancillary offerings?

Duane, it's Matt.

I'm trying to formulate an answer there.

We're not seeing negative impacts from our ability to sell ancillary services, one of the things that we do get impacted by is that as -- when we have competitive fare environments, then we take a small hit to the average rates that we get on some of the services.

But generally speaking, it doesn't prevent us from selling the service.

And what we're doing right now, with our ability to do better analysis and merchandise, is actually offsetting some of those headwinds that we would perhaps otherwise be seeing from general ticket levels.

So that's really the big benefit that we're seeing now, is that we've more than offset maybe some of the headwinds that, a couple of years ago, you would have seen turn into negatives on non-ticket.

Now we're able to not only offset that but actually still push up slightly in this environment.

Is there opportunities to perhaps bundle more aggressively as the rest of the industry unbundles?

So is there -- from a revenue management perspective, is there the potential to reference a main cabin price point for Spirit?

No, I wouldn't say that we would really ever get into that game per se, but some of the things that we're doing with bundling in general is taking a look at what products the customers naturally like to put together.

And then as we're -- and we really just started this, so it's really hard to say exactly how the learnings will play out.

But when we see certain travel patterns, and almost -- in some cases, it doesn't matter who the customer is.

It matters more about what size is their party, where are they traveling, how long are they going on their trip.

We can start to learn some things.

And much like other e-commerce companies, we can use that knowledge to then offer up what's maybe most appropriate or what we think is most appropriate for them at that time of purchase.

They can choose to accept if they want to.

And if not, they can still go through our a la carte menu and still add what they would like.

It's very exciting for us moving forward.

And our next question comes from Joseph DeNardi.

Ted, I think one of the questions out there is, when and if you guys start to grow at a slower rate, which you guys have kind of spoken to starting in 2019, can you maintain kind of the cost performance that you've been able to deliver recently?

So can you just talk about -- if you guys start to grow at 10% to 12% in '19, can we still think about CASM ex every year kind of flat to down?

Can you still get that kind of leverage?

Yes, that's right.

While growth is beneficial to cost production (sic) [reduction], it is not the only thing that we focus on.

So optimal deployment of the existing assets is as beneficial as the growth.

And we definitely have pressures that we talk about every year and I won't regurgitate them.

But the truth of the matter is that our objective is to always manage to a stable declining cost structure.

And growth at 12%, 15%, 10%, 18%, we come up with ways to make it work.

And so I'm still in the same camp as I was before this call or before you guys learned that we might be at 10% for 2019.

I still feel the same way.

And just to go a little further, Ted, I think at some point, there'll be opportunities for us to perhaps adjust our utilization positively as the operation continues to improve and, I think, we get certain work rule improvements.

But yes, it should create efficiencies.

Because I think one of the things kind of built in to our numbers still and, unfortunately, we didn't make progress because of the issues this year.

There's a high cost of disruption, which we think will start going down in 2018 and create opportunities for us.

And again, those numbers -- when you have 1 or 2 flights in a market, cost of disruption is exceptionally high.

And we see the opportunity.

It would have started this year.

You'll start seeing some of those benefits next year and probably more in 2019.

Yes.

And I guess just to the pilot contract.

I think, again, one of the questions is how much of that higher pay rate can you offset with productivity, I guess to Jamie's question.

Is the right way to think about that, that maybe the pilot contract costs you maybe 4 points of CASM, but in the first year, you can offset 2 of that?

Or is the offset really the year after and the year after that?

Like how quickly do the -- would the productivity actually start to offset the higher pay rate?

It's a good way to phrase the question.

And we're -- we and our pilots are in that active discussion about how we get the recoverability that we need to make the airline work and be reliable such that we can deliver upon the utilization that Bob was referencing.

And that's why I say that aircraft growth is not the only knob that the airline has available to it.

So to answer your question directly, we think that the benefits of running a better airline phase in over time.

As the airline starts to become more confident in its ability to deliver, it will add more utilization, which should enhance the overall cost structure and profitability and recoverability.

So I think it is more of a phased look than just kind of like offset on day 1, and that's certainly the way we're planning and thinking about it.

And our next question comes from Helane Becker.

So just 2 questions.

One, and Ted, this is probably for you, what's the right amount of cash for an airline of your size to have on the balance sheet?

Helane, you know that we've always maintained a comfortable level of liquidity on purpose to deal with fluctuations in fuel.

We basically self-insure a lot of different things, changes in the competitive environment.

We deliver a lot of airplanes every year, and we want to make sure we're -- we get the best possible deal.

So the adequate level for any particular airline is going to change depending on their scale.

For Spirit, we think the adequate level is somewhere in the neighborhood of what we enjoy today.

And could we operate with less cash?

Absolutely.

And we look at opportunities to be broadly diversified in the way we deploy our capital.

So today, we talked about the fact that our board has authorized another repurchase, it will be the third, $100 million allotment.

And that's just another indication that we plan to deploy capital in a variety of different ways.

We're going to grow.

We're going to maintain an optimal balance sheet from a leverage perspective, and we will return to the shareholder when we think the timing is right.

And so I think we're comfortable in this range.

Okay, great.

And then, I mean, maybe this is for Bob.

What do you think is the most misunderstood part of your airline?

Like what don't your -- either your competitors or your customers or your shareholders don't understand about what Spirit does so well that makes it successful?

And maybe why do you think they don't get you?

I think -- in fact, I think most of the competition doesn't understand us, quite frankly.

Again, I've worked in high-cost carriers and low-cost carriers, and I had to learn myself.

But we're hard to compete with.

Number one, we've got the youngest fleet in the country.

We, round numbers, have $1 billion in the bank.

And we have a very, very wide cost structure advantage versus the competition.

It's huge and necessary because we're competing against giants.

But probably the other piece is, when we do have these pricing impacts and they are uncomfortable, the reality is that it impacts only about half of our revenue.

And that's a big difference.

Because we still have that other ancillary bucket, which is $50 to $55, whatever it happens to be.

That makes us a little bit harder to compete with.

And the competition, as they get their prices awfully low and -- they typically prove that they can't compete with us without any pain for themselves.

So I think we can be underestimated.

To some degree, we have some reputational issues, which are improving.

And quite frankly, we would have made huge progress this year if we didn't have a couple of things adversely impacting us.

But I think we're going to surprise a lot of people about how good an airline we can run.

So it may be typical that -- it's always been the sense -- I do think the world is different.

And when I started in the business, we used to look at the big 3 or 4 and say that's the way an airline should be.

But if you're a younger millennial, you are less interested in some of the attributes that these large carriers have to offer, and they are much more price oriented than perhaps the target market.

And then finally, I guess the last thing is we're just going to keep doing what we're doing and really keeping it simple.

We have companies out there substantially larger than us trying to do what we do, trying to do what Delta does, trying to do what everybody does, and eventually, that just drives cost.

And there's a huge advantage to keeping it simple.

And it's hard because it's easy to do one-offs, one-offs, one-offs, and I think we do a very good job avoiding it.

That's actually something that I actually did understand and I think our company knows very well, is that it's a skill to not just go after one or every other little project and before you know it, it dramatically changes everything you're doing.

So I think there's always a sense they can beat you at your own game.

I think we disagree because we always do one thing, and I think competing with our revenue structure, they're only competing with half of it.

So I think I like our chances.

And we can always be impacted from time to time, but we've got very good core strengths.

Our next question comes from Susan Donofrio.

So you've done some work already on this, but I was just wondering if you could talk about your operations as we go into the holidays and what you're doing to proactively manage some of the ATC issues.

And just as a follow-up, if you could talk about if you feel you're properly staffed on the pilot side.

Okay.

From the pilot perspective, we are properly staffed.

We don't see any issues there.

Regarding ATC, it's -- we all report our numbers, and I think we all know generally operations get tougher as you move east.

And I think, probably the areas that are most difficult for carriers like Spirit or even JetBlue is we don't have RJs to cancel flying.

And when there's long delays, we are in much more difficult situation.

We don't have 8 slots in an hour, and so that makes it much more difficult, puts us in a situation where you have to, again, absorb the delays.

So what we do -- a number of things about how we lock in our crews.

We try to create extra time.

Sometimes, we try to isolate certain types of flying from the network so if we're going to have a delay, it stays contained.

So we try a lot of different things.

And sometimes, they work very well.

I think it was yesterday or 2 days ago, it was a tough day.

And -- but as best we can, we try to anticipate.

Some of the stuff is -- you can actually predict some of the seasonality.

I mean, generally September and October are always very good and then -- given months have their own issues.

But I think if you look over time, we -- even with the disruptions, we have a good chance of running a better operation this year than the last year.

And so it's routings.

It's planning.

It's proper time.

It's launching your airplanes at 90%.

And I think we're doing a little bit of all these things.

And quite frankly, as your team members begin to succeed, it starts to get building on us.

We used to be on the bottom every day.

And now we're in the middle, and sometimes, we're on top.

And that's where we want to be.

And again, our target is somewhere 79% to 80%, manage issues, recover well, and I think we're making pretty good progress on those things.

Ellie, with that, we are at the top of the hour, and we are out of time for questions.

But I thank you all for joining us today, and we'll talk to you next time.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.