Spirit Airlines Inc (SAVE) 2017 Q4 法說會逐字稿

Good morning, and welcome to the fourth quarter 2017 earnings call.

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

(Operator Instructions)

I would now like to turn the call over to your host, DeAnne Gabel.

DeAnne, you may begin.

Thank you, Sheryl, and welcome, everyone, to Spirit Airlines Fourth Quarter Earnings Call.

Bob Fornaro, our Chief Executive Officer, will give a brief -- 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 President and Chief Financial Officer, will discuss our cost performance, followed by Bob with closing remarks.

We will have a Q&A session for sell-side analysts following our prepared remarks.

Also joining us in the room today are Thomas Canfield, our General Counsel; John Bendoraitis, our Chief Operating Officer; and other members of our senior leadership team.

This call is being recorded and simultaneously webcast.

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

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

Forward-looking statements are not a guarantee of future performance or results and are based on information currently available and/or management's belief as of today, February 6, 2018.

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 fourth quarter 2017 earnings 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.

Earlier today, we reported our results for the fourth quarter and full year 2017.

For the fourth quarter 2017, net income adjusted for special items and onetime noncash tax benefit was $50.4 million or $0.73 per diluted share, and our operating margin was 13.4%.

For the full year 2017, net income was $230.8 million or $3.33 per diluted share, and operating margin was 15.2%.

During 2017, our team overcame several major operational challenges and still delivered a record on-time performance.

In the fourth quarter, our on-time performance exceeded 85%, and we recorded our lowest complaint ratio ever.

This past year, one of our goals was to improve our overall guest experience, and I'm pleased to see that -- the results of our effort so far.

We ended 2017 with a solid finish to the year and want to thank our team members for their contributions.

Before I turn the call over to Matt and Ted to discuss our fourth quarter performance in more detail, I want to congratulate Ted on his promotion to President.

In addition, we announced the plan for him to succeed me as CEO when I retire at the end of the year.

I'm not giving my retirement speech yet, but I've known Ted for over a decade, and I'm delighted with our board's choice and I'm confident Spirit will do very well under his leadership.

With that, I'll turn it over to Matt and Ted to discuss our fourth quarter performance in more detail.

Thanks, Bob, and thank you to the entire Spirit team.

From dealing with changes in the competitive environment to taking care of our guests in the midst of challenging operational disruptions, our team did an excellent job modeling our Spirit values of being safe always, leading with integrity and pursuing results relentlessly.

For the fourth quarter 2017, we reported total revenue of $667 million.

Total revenue per available seat mile decreased 1.8% year-over-year.

Our passenger yield performance during the peak holiday periods was better than we had initially expected, and the trough periods were in line with our expectations.

For ancillary revenue, we once again saw continued strength.

Non-ticket revenue per passenger segment improved 3.8% year-over-year in the fourth quarter.

Dynamic pricing of seats and our bundled services offering were among the primary drivers of the improvement.

In 2017, we were pleased to add Pittsburgh and Hartford to our list of destinations.

Beginning in 2018, we've announced service to 2 new international destinations: Guayaquil, Ecuador and Cap-Haïtien, Haiti.

Additionally, in the coming months, we will launch service at Richmond, Virginia and Columbus, Ohio.

Throughout 2018, we will continue to diversify our network by adding service to large, midsized and small markets as well as select international destinations.

The published fare structures haven't changed materially since October, and there are still a lot of dilutive selling fares in the marketplace.

However, the industry as a whole has been exercising tighter inventory controls in peak periods.

And at this point, that's how we expect things to play out in the near term.

We've pulled some Tuesday and Wednesday flying in the off-peak months of April and May.

This strategy worked well to help us mitigate some of the yield weakness in the trough periods during fourth quarter 2017, and I think it will be beneficial to second quarter 2018 as well.

With those changes and other tweaks, we are now looking at full year 2018 capacity increasing approximately 23% year-over-year.

We're currently forecasting capacity to increase about 21.5% in Q1, 28% in Q2, 26% in Q3 and 16.5% in Q4.

As a reminder, in Q2 and Q3 2018, we are lapping periods in 2017 that were artificially depressed due to operational disruptions.

Now turning to our outlook and based on current trends, we estimate our total RASM for the first quarter 2018 will be down between 1% and 2.5% year-over-year.

Along with our ultralow-cost structure, one of our largest competitive advantages is our ancillary revenue production, which accounts for roughly half of our revenue.

We remain excited about the potential we see to push non-ticket higher.

We anticipate we will continue to see improvement in non-ticket as the initiatives launched in 2017 continues [spooling] to maturity.

In addition, later this year, we plan to roll out some enhancements that will allow us to further leverage technology to improve our ability to both price and merchandise our non-ticket products, which should put us on a path to again deliver higher ancillary revenue per passenger segment for the full year 2018.

With that, here's Ted to discuss our cost performance and first quarter outlook.

Thanks, Matt.

2017 had more than its fair share of operational challenges, and I join Matt and Bob in thanking the entire Spirit family for their tireless efforts in caring for our guests while holding the line on costs.

Fourth quarter 2017 CASM ex fuel decreased 4.4% year-over-year to $0.052.

The decrease year-over-year was primarily driven by lower aircraft rent and salaries, wages and benefits per ASM, partially offset by higher depreciation and amortization expense per ASM.

Last week, we reached a tentative agreement with our pilot union on our new 5-year agreement.

I want to thank the negotiating teams and the national mediators for their hard work and diligence in getting us to this next step.

We anticipate knowing whether or not the contract will ratify by early March.

We believe this tentative contract rewards our pilots for their contributions while giving us the tools we need to run a consistently better airline, one that can deliver solid operational results in good and bad weather conditions, which we believe will drive further efficiencies.

Out of respect for the process, we are not going to comment about the particulars of the agreement.

That said, we remain committed to our long-term goal of maintaining or even growing our relative cost advantage.

During the fourth quarter, we returned approximately $45 million to shareholders by repurchasing 1.2 million shares under our share repurchase program.

Regarding fleet, we took delivery of 6 new Airbus aircraft and returned 1 leased A321 to its lessor, ending the year with 112 aircraft.

In other fleet news, all 5 of our NEO aircraft are fully operational, and we and Pratt have reached an agreement that we believe provides us with the support and modifications needed for a high-utilization, high-reliability operator.

We did make a slight tweak to our 2019 delivery schedule with Airbus (inaudible) 5 aircraft to CEO variance.

But our NEO deliveries will resume with Airbus in mid-2019, and we are very excited about how that aircraft will not only expand our operating cost advantage from a fuel burn perspective, but will also open up considerable route opportunities due to the enhanced range capability of the NEO.

In November 2017, we issued our second EETC that generated $420 million in proceeds at a very attractive blended rate of just under 3.5%.

We will use these funds to [advance] 10 new Airbus aircraft scheduled for delivery in 2018.

We ended this year with a return on invested capital of 15.9%.

As a reminder, our ROIC calculation is penalized during periods of high growth as it inherently overburdens ownership.

If you adjust for this, our ROIC would have been over 26%.

From a forward guidance perspective, like others in the industry, we will no longer provide monthly traffic reports, beginning with the January 2018 traffic results.

As for our cost outlook, our guidance excludes any impact from a new pilot contract.

For the first quarter 2018, we estimate CASM ex fuel will be down 5.5% to 6.5%.

For full year 2018, we are still projecting CASM ex fuel will be down 3% to 5% year-over-year.

We estimate CASM ex will be down high single digits in the second quarter, down mid-single digits in the third quarter and up low single digits in the fourth quarter, again, excluding any impact from a new pilot contract.

For the first quarter 2018, we are assuming a fuel price per gallon of $2.16.

In closing, I'm very proud of what the Spirit team has delivered from an operational and guest satisfaction perspective over the past year.

However, what is not lost on any of us is that we must remain focused to also deliver on the full profit potential of the business.

In the face of a very competitive industry with elevated domestic capacity growth, low costs are even more important today than ever.

Low cost, coupled with high-service quality, will make Spirit a very viable competitor in this compressed fare environment.

In any given period, pieces of our network may experience some level of under or outperformance.

However, with each success of aircraft delivery, our further expansion into more domestic and international markets will balance and diversify our network performance even more than today.

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

Thanks, Ted.

In 2017, we achieved good improvement in our customer service initiatives, but we know we aren't done yet.

Throughout 2018, we'll be focusing on driving even further improvements in our overall guest experience, maintaining a high on-time performance and strengthening our footprint for the future.

In addition, we are committed to deliver earnings growth for our shareholders.

To do that, we have to remain vigilant in driving productivity and increasing efficiencies throughout all areas of the company to protect our industry-leading low-cost structure, and we are confident in our ability to do so.

With that, I'm going to turn it back over to DeAnne.

Thanks Bob, Matt and Ted.

We are now ready to take questions from the analysts.

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

(Operator Instructions) Our first question comes from Duane Pfennigwerth.

Just with respect to your quarterly ASM guidance.

I don't know if you have it handy in front of you, but can you just remind us what the lower completion factor impact was maybe to the second, third and fourth quarters?

Well, I think our completion factor, maybe on an annual basis, we were about 96.1%, which I'd say is 2.5 to 3 points for the year.

And obviously, it was higher than that in the second quarter and the third quarter.

In terms of the impact, we were 94%.

So I think it's at least 300 to 400 basis points of the capacity increase [beside] the completion factor.

But we may get the number here.

Yes.

To -- just to quote the stats, Duane, we had a 96.1% in 2Q and a 94.8% in 3Q, so the hurricanes and the pilot disruptions kind of banged us up that way.

If you take the average of those and kind of spread it through the year, we expect a couple hundred, but I think Bob is right, about 200 basis points of full year lap.

That's great.

And then just with respect to the tweak in your '19 order book.

Can you tell us how you're thinking about growth in '19 and on a longer-term basis?

And does this conversion from NEOs to CEOs, does that change your thoughts on '19 growth?

Sure.

So the conversion does not change our views on growth.

It had more to do with just working with our partners to make sure that as the NEO ramps up in delivery, we're participating in a way that can make sure that, that aircraft gets to full success from a delivery standpoint.

So we think it's helpful to Spirit from -- making sure we maintain our slots, and it's helpful to both Pratt and Airbus as well.

As it relates to our thoughts on 2019, as we've said previously, our objective here is to get a pilot contract done, understand what the company's cost structure looks like.

And then we think we have availability to influence the company's growth in 2019 and beyond.

And so we'll continue to take that dynamically once we get our agreement in place.

Our next question comes from Savi Syth.

A little going off on the growth question.

And maybe to Matt, you mentioned the large, small, mid- and kind of pretty diverse growth there.

But could you talk about what components or what mix you're going to be doing more like frequency versus new markets versus connecting the dots?

Like what has it been and what could we expect going forward, generally?

Yes, certainly.

I don't have the exact breakdown of how much is connecting dots versus new cities in front of me right now, Savi.

We can get that for you.

But generally speaking, we've been doing a lot of connecting the dots in general.

A couple of the new international destinations are really just running out of Fort Lauderdale.

But if you think about Columbus and Richmond, we're looking at leisure destinations there, routes that we know we'll perform relatively well in and places that our customers, our guests want to go to.

In terms of a lot of our other growth, connecting the dots as well as some up-gauging as we get some larger aircraft in, our best-performing routes will see the larger-size aircraft and helps us to make sure that we're maximizing total unit revenue along the way as well as we think about that.

Let me just add just one other point, Savi.

Just in terms of the way the network has actually grown.

In March of 2018, we're going to have 10 cities that have more than 20 departures, with Fort Lauderdale, the biggest at 63 to 65; Baltimore, 24; Dallas, 20.

That's kind of the range.

So again, as we've been growing, and again, in some of the larger cities and some smaller ones are just -- the network kind of just filling out.

And as it does, it creates more opportunities.

We have more markets today where we have double daily service into some of our strength markets.

So again, the size creates opportunities in and of itself.

That's helpful, Bob.

And if I might follow up just on the cost side.

If you do see moderation of growth next year, then maybe you're not ready necessarily to talk about it, but could you remind us exactly again where the -- where you can drive lower cost even in kind of a slowing growth beyond just kind of growth?

Sure, Savi.

Growth is just one component of the company's cost structure.

As we've talked about, over the last few years, we drive efficiency in better operations.

We drive efficiency in a way that we use our balance sheet to the company's advantage.

Our overall scale not only provides operational leverage, but it provides buying power.

And that -- those things continue even as the growth rate shifts from 25% to 15%.

And so we remain optimistic about our ability to continue to manage an expanding cost advantage in the environment we see.

And the good news for Spirit is that we're in control of that, and we're very protective of it.

And so I think you're going to see continued operational improvement, which will continue to drive benefit throughout the cost structure.

And we've seen it over the last year, and I think it's going to continue as the company becomes more consistently reliable.

And I think that's probably where you'll notice it the most.

Our next question comes from Hunter Keay.

Similar question to what we've talked about so far here.

To think about the 4Q CASM ex of up low single digits, some 16.5% capacity growth, it's surely going to be higher than that with the pilot deal.

So is there anything that's driving that higher in 4Q?

I know you mentioned some ops improvement should be expected, obviously, as we move forward.

But as I'm thinking about translating that, the lower growth rate on the higher CASM number in the model, that exit rate, particularly given labor, it's a little bit higher than I would have thought it might be.

So is there anything that's in that fourth quarter number that you think goes away or doesn't repeat as we move into 2019?

Yes, I wouldn't get too hung up on the cadence, Hunter.

As you would expect, costs in our business flow throughout the year, and calendars are only useful because people want to know when the holidays are.

So we manage the cost structure through the quarters, through the years.

And so the timing of maintenance will have an impact on that.

The lap of whatever you saw on a year-over-year basis we just produced CASM ex in the fourth quarter at $0.052.

So I think it has more to do with the blended rate across a longer period of time, and that's why we're so bullish on our ability to deliver better cost performance.

So I wouldn't look too much into the fact that it's -- I think it's more coincidence than anything else.

The fourth quarter has 17% growth and a little bit more pressure.

All right.

Just a quick follow-up, and I have one more after this.

Are you budgeting anything in there for a new PFS?

You mean a [res] system?

Yes, a new [res] system, sorry, anything about...

No.

We continually do upgrades and improvements to our Navitaire platform, but that's more in the CapEx kind of normal maintenance.

Okay, cool.

And then it feels like Spirit is always sort of talking about strength in the peaks, but weakness in the trough, I know you said trough has performed as expected in this quarter.

But is there anything that you can do to be more surgical about your schedule?

Again, I think, I forget, it was Savi who mentioned it before about maybe some better day/week scheduling or anything like that.

But as you move forward, particularly as the growth slowed a little bit, is there anything that you guys see that you can do opportunistically to have better performance in the off-peak periods?

Yes, Hunter.

This is Matt.

Certainly.

So one of the things we mentioned in the remarks, and it's something that we're following on from that we did in a lot in Q4 this past year is starting to seasonalize our schedule a lot more, specifically, coming up here after Easter until we get to Memorial Day period.

We're removing some Tuesday and Wednesday flying to help address trough period yield performance.

So where we can, we definitely surgically take a look at what's performing well.

And based on expectations, we trim where we think is appropriate, and you'll see that coming in late April and into May as well.

Our next question comes from Rajeev Lalwani.

Ted, I guess, congrats on the expanded responsibilities.

A question for you as far as just the future strategy and positioning.

How are you thinking about the next few years for Spirit, and maybe how it's going to differ versus the last few?

And you've talked about maybe shifting the approach on capacity, keeping costs under control, but just trying to get an idea of what's going to change as we look ahead.

Sure.

I think it's an evolution, Rajeev.

I think we've been part of that over the last few years, and I think what you're going to see out of Spirit over the next 5 or so will be more of that.

And so what we're focused on is a highly reliable, clean and friendly product that provides value to our guests with a aggressively low-cost structure and continued improvement in the ancillary production.

And we think that those things give us a unique position in the business to deliver earnings growth.

And yes, the overall percentage of growth will migrate, over time, as the airline gets bigger, but we still see a pretty big opportunity out there for low-fare leisure-based traffic.

And that is our wheelhouse.

And so we will continue to pursue that using those levers that I just mentioned.

And I think with each passing day, as I indicated in my comments, we become a much more -- a much improved competitor with a better network and better cost structure.

So I think it's evolution more than change.

And Bob, would love to get your perspective on what you're seeing in the industry now.

I mean, you have this interesting environment where capacity growth is ticking up quite a bit, but at the same time, you're seeing higher fuel.

I mean, how do you think that plays out, again, for the industry, but I guess, also for Spirit as well in regard to yields and margins, et cetera?

Well, there's been a lot of evolution.

And to some degree, it's carriers like us that are growing.

But I mean, in many ways, you find the larger carriers doing things well beyond their hubs.

In addition to hub flying, most of the large carriers are competing in all the gateway cities, mostly for share, which is something we don't focus on.

So that's been ongoing over the last 2 years.

And it's going to last kind of how long it lasts.

I think fuel prices will discipline it to some degree.

But for us, to really to find our way, I think what we found is we have our core cities.

Like I said, in any given quarter or any given season, one maybe see heavy competition, and the good news about building a diverse portfolio of cities is always, there's a few pockets that are doing again quite well.

And so we can adjust our focus, depending on what the competitive situation is.

But at some point, I think we'll move down to the 3% range in total.

We'll be moving from the low 20s into the low to mid-teens area, which we talked about, and I think you'll see others follow as they respond to fuel and other cost pressures.

So -- but it's elevated for now, but it's -- we're just going to deal with it.

And again, we can manage our cost structure, and that's probably the best thing that we can do.

Part of our quality improvement is to help reduce our cost.

And if there's any upside due to improved reputation, we'll take it.

But the primary focus for us is going to be on cost structure and diversification.

Our next question comes from Brandon Oglenski.

I know you guys don't want to talk about the impact of the future pilot contract here.

But can you walk us through some of the unique operational impacts you guys faced in 2017, just summarizing the cost and the revenue impacts.

Because I think that was relatively unique to you guys in the -- or the lack of your ability to file whole schedule last year, if I'm not mistaken.

So again, so what we can do -- again, we're not going to really get into the agreement.

We can talk about the impact of the activity in May and June.

And Ted, do you want to take?

Yes.

I mean, Brandon, we were pretty public about what we felt the impact was in the second quarter on revenue and costs due to the cancellations and in the follow-on effect as we kind of worked our way out.

I think it was -- in the second quarter, we were seeing somewhere around $40 million to $45 million of impact.

And the revenue stuff will smooth its way out, over time.

But what's most important to us is delivering on, as I said earlier, consistent performance that will improve unit costs.

And you're correct, we're not going to comment specifically on the deal because we want to let the process run its course.

But our objective is to improve on operational performance, not to tread water.

And so we know that the Spirit team is behind that objective, and we'll let it kind of play out.

But I see there to be room for us to improve.

Okay, appreciate that.

And then on the revenue front, should we be thinking that -- I mean, your comps, because of that issue in the second quarter, obviously, got a little bit difficult.

But is the goal throughout the year to get total RASM metrics on a positive note?

Brandon, this is Matt.

We're not really comfortable talking about full year unit revenue guidance at this time.

We provided the first quarter guide.

One nuance to add to some of our numbers when we think about unit revenue as well is when you think about our -- how we're growing and where we're growing, our stage is increasing around 5% on average this year, and that has an impact on unit revenue.

So if you actually look back, and even our Q4 results, and think about our stage-adjusted results, I think we reported down [1.8%] for fourth quarter, but stage-adjusted we're actually around flat to slightly up.

So stage plays a role when you think about unit revenue, so it's something to keep in mind out there.

And Brandon, just wanted to comment, again, because it's an ebb and flow with passenger yields.

The one trend that's much more in our control is the ancillary activities.

And after a couple years of continuing declines for passenger, in our fourth quarter we had 3.8% improvement, and we see that improvement continuing.

So that is actually a real positive because it's less impacted by the industry dynamics and competitive positioning of carriers' capacity.

So that's a real positive for us.

And I guess, I think it's been declining since late '14 or early '15.

Our next question comes from Kevin Crissey.

When I was at JetBlue, and they continue to this day, they have a focus city approach with high-90-something percent of their flights going through their focus cities.

How does your network differ?

Do you think about it in a focus city perspective?

Is there a concentration of operations that you think about?

I think there were some benefits and some disadvantages of doing that strategy.

But when I think about your network, I don't think about it in those terms in terms of having 5 or 6 particular cities and then having all your flights touch those.

Can you talk about how maybe you differ from that strategy?

Sure.

I think it's a good observation.

And actually -- I mean, there's a practicality of this.

In the period of time, I think you can really credit JetBlue for getting the JFK slots, which, for the most part, most of the legacy carriers would have avoided, and that created maybe the last unique opportunity.

And during the previous decade, larger carriers were pulling back in a lot of the big cities, which created other opportunities.

And so that created these large operational centers in JFK and Boston.

So if you look at, really, at Spirit, I think we had about 30 airplanes in 2010.

So we were pretty small.

By the time Spirit started growing, most of the carriers had gone through their bankruptcies and were beginning to adjust their networks.

And those large opportunities aren't quite there.

So you got to look at your opportunities in a much different way.

If we wanted to run 100 flights in some major city, you need 10 or 12 gates.

So that's hard to do.

So you have to grow your route portfolio in many different ways.

Again, our strongest operation is Fort Lauderdale.

We'll finish the year somewhere in the 70s.

It's a very diverse network, extremely strong.

And last year, we really stepped up our activity in Orlando, which is a place where low-cost carriers should always have a large presence.

Right now, it's our second largest city today, but we've added about 25 flights in the last 1.5 years.

Las Vegas, so if you think about where we're strong, our place is that costs are a real driver, and we can compete with anybody, a legacy or a low-cost because our costs are equal or better.

And then we have some long-standing markets where we're flying to Chicago, and we've had a position there for years.

And Detroit was actually where Spirit was founded.

So there's a lot of places like that.

And we have been connecting our core cities together.

So in Los Angeles, we have over 20 flights.

Our strategy is focusing on mid- to long-haul leisure routes.

We're connecting those cities together.

So I think you're going to see that as -- again, all the cities are going to see a [rate] of growth, depending on gates and opportunity.

And we're finally getting an opportunity to leverage our Fort Lauderdale position with certain international destinations.

A lot more service to Cancun this year, additional Caribbean flying.

I think, actually, from Baltimore and other places.

So we're going to be at least beginning to capitalize in some of those international opportunities as well.

But then the growth of Spirit will be -- our opportunities came at a different time and so, therefore, our strategy has, in effect, it's got to take advantage of what's available.

So we're much different in many ways.

The only similarity versus, let's say, a JetBlue is we are stronger east of the Mississippi than in the West Coast.

And that's kind of where our primary geography is.

I really appreciate that.

Can you talk about how your legacy airline or network competitor growth, when they grow to small cities out of the hub, how that differs in terms of overall impact to the market versus when they grow out of maybe into large markets?

Yes, sure.

This is Matt, I can take that one.

So generally speaking, when there's connectivity into the hub from small cities on a legacy carrier, what they should be trying to do there is trying to find more higher-yielding traffic that they can flow over their hub, which is what they've been stating.

And when they do that and if they're successful in doing that, it actually pulls some traffic off of their flights to the major cities that we also serve.

So while we've seen different kinds activity, say, in the last 9 months or so from a pricing perspective, what's also happened is that our competitors are also taking some of that traffic.

Now to the extent that they add more connectivity from small cities, it should pull some of those seats back.

So it's almost like a virtual capacity adjustment in a way.

So we're monitoring the marketplace.

We're seeing what's going on.

In off-peak periods they sort of are what they are.

And the peak periods, we're relatively pleased right now with what we're seeing from the inventory control perspective, and we'll leverage that wherever and whenever we can.

And that's what we've been doing with a lot more analytics and a lot more data and a lot more process that we've put in place in the last 1.5 years.

And it's paying off for us in the way that we can compete and how we think about competing as well.

Our next question comes from Joseph DeNardi.

Matt, just on the first quarter RASM guide, what's the benefit there from Easter?

And then how does that looking going into 2Q?

Certainly.

So right now, we're modeling around a couple hundred basis points benefit into Q1.

We expect a similar sort of impact to Q2.

So as you can imagine, as we move through the holiday, we'll get much better visibility, but that's what we're looking at right now.

Okay.

And then, Ted, maybe just a couple questions on the balance sheet.

Just given the operating leases and when we think about the accounting changes taking place in '19 where the lease has come onto the balance sheet, is 7x still the right number for us to use to kind of approximate the impact of that?

And just from a leverage standpoint, can you just talk about where you're comfort level is there now?

Sure.

So as it relates to the first question, I think 7x is still a decent proxy for us, believe it or not.

You're right, we'll add that all to the balance sheet, there will be a full analytical exercise around making sure that we come up with the right number, but I think that's a fair proxy for today.

As far as leverage is concerned, we're a growth carrier, and the impact of leverage on us is a little bit different than it is on stable operating carriers that only have maintenance-related CapEx or swap-out CapEx, if you want to think about it that way, where they're taking airplanes to retire others.

And so our leverage position will move, over time, depending on where the denominator moves.

But what we've always said is that the principal use of leverage here is to finance our growth, and that is definitely going to remain consistent.

We have a very light balance sheet other than the airplanes, and I think that's part of the success of our model.

So again, I said it in my comments about ROIC, but it's true also as you think about leverage.

If the company had chosen to finance its aircraft off balance sheet for the last few years, our leverage position will be completely different than it is as it's presented today.

And -- but we don't think that's the right answer from a return perspective.

We don't think it's the right answer from an income perspective.

And building a balance sheet actually protects the company over the long term.

So as is true with ROIC, it's one input and it's one metric that we consider along with leverage, but we're managing the business across a wide variety of important metrics, including return.

So I hope that helps.

Our next question comes from Helane Becker.

Just a couple of questions.

I know that you said that you were doing 2 international cities and 2 domestic cities this year.

Is -- international hasn't been a focus of you for a long time, and I'm wondering, should we think about that going forward as an opportunity on where you add 1 or 2 cities a year internationally and then fill in with domestic?

Or is this just a one-off opportunity?

So Helane, you're right.

It's something that we had been wanting to focus on, and we have some constraints in some of our airports and how we can add capacity to international destinations.

Some of those constraints are loosening up.

So wherever and whenever we can, we're going to add some of those opportunities as we see them.

We have a very unique position here in Fort Lauderdale that we've grown and learned to leverage, over time, and it's something that is extremely successful for us, and we will continue to build on that strength moving forward from Fort Lauderdale.

In terms of other destinations -- from other, I should say, origination points in the U.S. to large leisure destinations, internationally, that's also something that we've been wanting to do.

We're starting to do more of that.

And as we get the ability to do that from an airport departure perspective and arrival perspective, we will certainly do that.

As we've mentioned, more Cancun this year.

I think we have some Montego Bay that we're launching shortly as well.

So we're going to continue to look for those opportunities.

And when it works, you're going to see us put those in.

Just -- the airport constraints that you're talking about, those are at Fort Lauderdale, specifically, or are those around your network?

In Fort Lauderdale, certainly, the [FIS] there a big constraint.

Now that's expanding this year, so that's why you're seeing the rollout of Fort Lauderdale.

But in others, in terms of the Cancun expansion, some of it were slots we've [bid].

And so actually, we had hoped to do a number of these things last year, so we're speeding them up.

So the Cancuns are really tied the slots, and the Fort Lauderdale was primarily because of the constraints on inbound customers.

Those are resolving themselves as we speak.

So that's why you'll see our expansion in Fort Lauderdale.

And again, we'll be approaching 70s -- 73, 75 flights by the end of the year.

And as we know, it's possible that there could be another city as well.

That's great.

The other question I have is with respect to -- and I don't know if this makes sense for your airline because of your high-load factors, but have you thought about code share agreements with other low-cost, low-fare airlines like an airline like a Norwegian, where they fly into the U.S. but don't really -- aren't able to connect?

Does something like that make sense for you guys as a growth opportunity?

Helane, it's Ted.

Code share is just an ultra form of distribution.

And you're right, we are high-load factor or have been in the past, and so for us, we've been focused on growing the organic network.

We never shut off any opportunity whatever we might look at.

But up until now, we haven't been able to justify kind of getting too interested in it.

Our next question comes from Mike Linenberg.

Two questions here.

I want to just start with Ted on, just on the balance sheet.

Your aircraft maintenance deposits, I mean, they're now over $300 million.

And I know as you put more airplanes on the balance sheet, that should start to come down.

But I would think also with just how aggressive some of these lessors are, is there an opportunity to really bring that down, that number down and really free that up as additional liquidity for the company?

Absolutely, Mike.

We've been working since, really, since my arrival as part of our move to optimize our financing mix on and off balance sheet.

But for those that we -- and we still have around half of the fleet financed using operating leases.

And so the lessor partners are still a big piece of the airline.

We've taken the opportunity to tweak those arrangements throughout the course of this 5- or 6-year period, and one of our primary objectives is to relieve ourself from those cash-type obligations.

So the answer is yes.

We continue to see an opportunity there to free up working capital over a period of time that will happen in the next, call it, 2 to 5 years.

Okay, great.

And then just my second question, on the decision to not provide monthly reports.

And I get the issue around providing monthly PRASM and the fact that it may create undue volatility in the shares as people trade around that number.

But when I look at just your pure monthly traffic reports and I look at things like completion factor and on-time, the DOT consumer report, I think right now, you can get like October's date or November's date.

And I feel like for Spirit, one of the sort of highlights of the investment thesis there is just what you're doing on the op-side and completion factor side.

And now it seems like we're not going to get that until way after the quarter ends.

What's the thoughts behind just getting rid of the basic monthly data?

Is it just -- would it cost a lot of money to put those reports out?

I mean, what is the issue?

No.

No, Mike, it was more around releasing some information and not others can -- isn't helpful necessarily.

So talking just about traffic and not about how cost or revenue is performing, and it was creating a lot of noise in the marketplace from our perspective.

So we felt like the right answer was let's just focus on what we know, and we'll deliver the results, and we'll be able to kind give a little bit more conviction about that rather than just creating undue noise with additional information.

Our next question comes from Dan McKenzie.

Matt, following up on a prior question.

Does the Easter revenue commentary also factor in kind of the move in spring break travel?

And then just related to the commentary of yield and peak versus trough periods, is the implication from the first quarter revenue outlook that, in fact, the Easter or spring break yields could be up year-over-year?

So Dan, great question.

So first part, about Easter and Spring breaks Really, what the impact is spring breaks.

You got that right exactly.

And that's what we're looking at, and a lot of spring breaks moved out of Q2 last year into Q1 this year.

And just the way Easter falls this year and the spring breaks and a lot -- nearly all of at least our part of the network, our part of the country moves with Easter quite a bit.

And Easter being April 1 this year, so there's a lot of straddling going on around the holiday, but the bulk of travel will be over in March.

And in terms of year-over-year yields, we're happy with what we're seeing in terms of yield production right now on the advanced book basis over the spring break periods.

We've been doing a lot of work in making sure that we're being smart in thinking about where we drive traffic and where we drive yields.

And perhaps, in prior years, we would have been more about sort of bulk moves, bulk activities, and now we're just simply much better at understanding what's happening more on a flight-by-flight, week-by-week basis and thinking about our pricing and inventory moves that way instead of just thinking about an entire period of time, if that makes sense.

Yes.

That's helpful.

And then, I guess, just following up, Matt, again here on the non-ticket initiatives.

Just going back to your commentary that you're confident you can drive non-ticket prices higher this year, is that simply better commercialization?

Are there new products that you're planning to roll out?

And maybe if you can include some commentary on the mobile strategy and the timing of how this all layers in this year.

Right.

So a lot of what we're doing on the non-ticket side is -- again, I know this is something I say a lot and I need to repeat it, is that when we think about data and analytics and the way that we just think about our products and how we not only price is better than we've had in the past.

But part of that's new technology that we've been able to bring in-house and some of it is just better process in terms of how we're thinking about the pricing of the products.

But exactly in terms of merchandising is something that we have not had the ability to do in the past.

It's been a one-size-fits-all kind of product offering.

As we move through this year, we're going to be making enhancements to our website that's going to allow us to do better merchandising, as well as the launch of our mobile app last year has allowed us.

We just went to market with some basic functionality, and we'll be coming out, as this year progresses, with more functionality that will allow us to think about merchandising and push notification.

And just a lot of things that makes us operate more like an e-commerce business and think about how we are in the digital age and how our customers want to be communicated with and how they want to receive offers.

All of those things, and that's a lot to take in and a lot to digest, but all of those things is what we're talking about not just for this year, but it will be, moving forward, that way as well.

This is not a once-and-done kind of opportunity or action.

It's going to be an ongoing, living and breathing process for us.

Yes.

I appreciate that.

Is the mobile 2.0 app, is that a second quarter phenomenon from your perspective, or perhaps later this year?

Yes.

So we'll be -- likely not be as early as second quarter.

It'll be coming later this year.

I don't want to overpromise on that because we're really just now getting moving on that added functionality.

But it is going to be real when it arrives.

And when it's there, we'll be able to talk about it and give you better visibility on that.

Our next question comes from Jack Atkins.

Just following up on that last point about the non-ticket revenue.

Is there a way, Matt, to sort of think about how much the dynamic pricing and sort of the efforts that you've already undertaken on that front are adding to your non-ticket revenue currently?

And then when we think about sort of this increased functionality as we move into the back half of the year, what's the revenue opportunity from that perspective?

Is there any way to kind of put some brackets around that for us?

I don't know that we're comfortable putting a number out there right now saying exactly what it's going to look like, just like we don't want to give full year TRASM guidance, things like that.

But what I can tell you is, just to take a step back on non-ticket, is there's things that we're doing from a business perspective that actually create headwinds for non-ticket.

For example, we're trying to drive a lot more traffic direct to our website, and we've been very successful on that.

It helps us from a cost structure perspective, and it helps us for making sure that we can communicate with our guests on a sort of a more globalized basis.

So we have to be careful when we think about overall non-ticket production that when we have some of those kinds of things that actually have slight headwinds to non-ticket, we then overcome those headwinds and then go above and beyond that with some of the new initiatives that we're talking about.

So I don't know if that makes sense.

But over time, things would naturally get a little worse if we didn't do new initiatives, and the new initiatives are overcoming that plus pushing us up even further.

Did that make sense?

No, it did.

It does.

And then just a follow-up question on sort of the peak versus nonpeak flying commentary.

Obviously, very encouraged to hear about the fourth quarter peak flying being better than you expected due to better inventory management, both in Spirit and among your competitors.

And I guess, as you look out into the peak flying in March around spring break travel, did the fourth quarter performance sort of influence sort of how you're thinking about the March peak travel?

Or I guess, what I'm trying to understand is do you think that the strength of inventory management after the marketplace during peak flying could lead to better-than-expected revenue performance when we get towards the end of the quarter?

Well, I don't know that I want to comment on possibly better-than-expected revenue performance for the quarter.

I mean -- but I would tell you that the fourth quarter and the peak periods have given us more confidence than we had for peak periods, say, from 3 months ago.

But it's more about also understanding what's happening from a trend perspective in the marketplace.

We can have an opinion, but what we like to do is make sure that we're also seeing the data reflect that our hypotheses are accurate.

Now having said that, pricing and inventory control is extremely dynamic, and what we want to do and what we try to do and where we try to take risks.

Do they always payoff is one of the things that we talk about and adjust to every day.

So as of right now, that's where our confidence lies.

It's not just historically, but what we're also seeing happening out of the marketplace over the peak periods as well.

And having said that, we would expect to see that play out through other peak periods throughout the year as well.

And we'll see what happens later this quarter to drive us forward for the rest of the year's peak periods.

Okay.

Great.

And one last housekeeping item for Ted.

Ted, what's the tax rate we should be using for our models for 2018?

For full year, you're going to be about 24%.

The first quarter is going to be a little bit higher just because of the pacing of earnings throughout the year.

So the permanent items have a bigger impact in the first quarter.

So I think it's closer to 25%, 25.5%, but it will work out to 24% for the full year.

And our next question comes from Susan Donofrio.

I just have a question on your growth strategy.

I'm looking at some of your newer markets, and you did add some seasonal winter.

You also have the new international destinations.

Is one of your goals smoothing out the revenues throughout the year?

Or should we continue to really see the big peak in the summer?

So Susan, one of our goals is definitely to make efforts to smooth out.

However, having said that, some periods of the year are simply going to be more peak in the way that our network is in general right now.

We'll still have peaks.

So -- but it's a great observation, and that's exactly what we are trying to do is find the right places to fly at the right time of the year, things that Spirit has always done.

We've always done those kinds of things in the past.

But right now, we're more focused on doing that more often as -- not only in the present, but as we move forward.

Okay, great.

And the other question was what would be the reason for moving to the New York Stock Exchange?

Yes.

We view all of our -- Susan, by the way, it's Ted.

We view all of our relationships on an ongoing basis.

And while we are pleased with the NASDAQ throughout our period, we thought it was time to make a switch.

And so it's nothing more in it other than that's the way we manage our relationships with our partners.

And our final question comes from Jamie Baker.

This is actually Nish Mani on for Jamie.

I respect you guys not wanting to comment on the specifics of the pilot agreement.

But can I ask you a qualitative question about kind of how the PBS system is going to play out in the potential new contract?

And I want to get a sense from you what kind of operational benefits that you guys can expect in terms of moving towards the PBS and away from traditional paper bids and how that kind of factors into your growth and your operational efficiencies, longer term.

I do want to stay away from all the details of the agreement, other than to say that PBS is something that the company's management and the pilot union will work on together.

But just going back in terms of what we're trying to accomplish with the agreement.

We had an open agreement for years.

We made some adjustments, necessary improvements to our pilot wages.

And I think everybody at Spirit really shares the desire to improve the quality of the operation.

So what our labor agreement simply does is provides Spirit pilots compensation, salaries and benefits that they deserve and the customers get a quality operation as well.

And I think one of the things that we've seen is there's a lot of things that happened in the company once the quality starts going up, and we're seeing that everywhere.

And we operate mostly in the Northeast.

If you have weather issues, you got to be able to manage and adapt really on-the-fly.

So we think the agreement is going to be a win-win for the company.

And again, we'll get into more detail as the year moves on.

That's very helpful.

And just one quick follow-up on that topic.

Are there any particular kind of integration challenges in moving towards a PBS that we should be aware of if, in fact, this agreement does come in front of a vote and is passed.

Is there a kind of hiccups, potentially in the system?

Or logistically, how do we move from paper to a PBS?

This is Ted.

Now we're going to let the teams work all that out.

As Bob mentioned, we will work closely with the union and make that happen.

But there's nothing specific to comment on right now.

Thank you, everyone, for joining us today, and we'll talk to you next quarter.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.

You may now disconnect.