Spirit Airlines Inc (SAVE) 2018 Q1 法說會逐字稿

Welcome to the first quarter 2018 earnings conference call.

My name is Hilda, and I will be your operator for today.

(Operator Instructions)

And now I would like to turn the call over to Ms. DeAnne Gabel.

Ms. Gabel, you may begin.

Thank you, Hilda, and welcome, everyone, to Spirit Airlines' first quarter earnings call.

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

We will have a Q&A session for sell-side analyst 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, April 26, 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 first quarter 2018 earnings release, which is available on our website for the reconciliation of our non-GAAP measures.

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

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

Earlier today, we reported first quarter 2018 net income adjusted for special items of $29.9 million or $0.44 per diluted share and our operating margin at 7.3%.

We had a very good operation in the first quarter 2018 despite numerous winter storms.

We achieved our best-ever first quarter DOT On-time Performance of 83.4%, and we also achieved a record-high March DOT On-time Performance of 85.1%, an increase of 10 percentage points year-over-year.

I congratulate and thank the Spirit family for delivering this operational excellence.

During the quarter, we finalized a new 5-year contract with our pilot union.

The new contract provides pilots increased benefits and wage rates and gives the company a platform for further improved operating efficiency and reliability.

Our team has done a great job delivering improved reliability over the last several months, and we are committed to delivering strong operational performance on a consistent basis going forward.

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

Thanks, Bob.

From the revenue perspective, the quarter generally played out as we had expected.

For the first quarter 2018, we reported total revenue of $704 million.

Total revenue per available seat mile decreased 2.4% year-over-year, primarily driven by a 1.7% decrease in operating yields and a 4.1% increase in average stage length.

The calendar shift of Easter benefited first quarter TRASM by approximately 200 basis points.

Non-ticket revenue per passenger segment improved 5.9% year-over-year in the first quarter to $55.29.

The largest driver of this year-over-year improvement in the first quarter was our bundled services offering.

We are still in the early innings with our rollout of bundled services introduced late last year and we are very pleased with how well the offers are being received by our customers.

We have other initiatives in the pipeline that we expect to deploy throughout this year and believe we still have upside from dynamically pricing existing ancillary items.

As a reminder, as a result of the adoption of the new revenue recognition guidelines, non-ticket is comprised of non-fare passenger revenue as well as other revenue.

A reconciliation of non-ticket revenue per passenger segment is provided in the tables in our earnings release.

During the first quarter, we opened 3 new cities, including: Columbus, Ohio; Richmond, Virginia; and Guayaquil, Ecuador.

As these new cities demonstrate, our goal over the next few years is to continue to diversify our network.

We'll continue to have some growth in big cities, as that is where many of our customers live or want to visit.

But we expect to be largely focused on adding service to popular leisure destinations.

Additionally, there continues to be some near-field international opportunities that our ULCC model allows us to uniquely serve in a profitable manner.

The published fare environment remained similar to what we've been seeing over the last few quarters.

However, as we head into the peak summer travel period, passenger demand looks strong and we have taken action, using both price structure adjustments as well as revenue management techniques in an effort to drive yields higher.

Turning to capacity.

We estimate ASMs for the second quarter 2018 will increase approximately 29% year-over-year.

Given the significant increase in fuel of late, we are planning to redeploy several lines of flying after the peak summer period in a manner that we believe will allow us to better capture revenue to help offset increased fuel costs.

These network changes will reduce our ASM production in the last 4 months of the year.

Including these changes, we estimate a year-over-year capacity increase of 26% in the third quarter, 13% to 15% in the fourth quarter, for a full year 2018 estimate of about 22.5%.

Now turning to our revenue outlook for the second quarter of 2018.

As a reminder, we are facing a relatively tough year-over-year unit revenue comparison due to holiday timing.

Based on the current trends we are seeing, we estimate our total RASM for the second quarter 2018 will be down between 6.5% and 7.5%, year-over-year.

This incorporates the couple of 100 basis point impact related to the calendar shift of Easter as well as a 350 basis point impact related to our 7.7% increase in stage length.

In addition to diversifying our network and adapting to changes in the operating environment, we remain focused on driving non-ticket revenues higher and we are confident we can continue to grow our non-ticket revenue per segment over the next couple of years.

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

Thanks, Matt, and thanks to all of you for joining us today.

We had a busy first quarter, and I want to thank our team members for their contributions to our results and encourage them to keep up the good work.

First quarter 2018 CASM ex-fuel decreased 5% year-over-year to $0.0533.

The decrease year-over-year was primarily driven by lower aircraft rent per ASM.

As Bob mentioned, throughout the quarter, we had outstanding operational performance and this contributed to a better-than-expected outcome for CASM ex-fuel for the quarter.

One area of improvement I'd like to highlight is a reduction in interrupted trip expense, which was down almost 30% year-over-year on a dollar basis or down 42% on a per ASM basis.

Regarding fleet.

We took delivery of 5 new A321ceo aircraft and 1 new A320ceo aircraft, ending the quarter with 118 aircraft in our fleet.

Recently, we announced that we are purchasing 14 A319 aircraft off lease and terminating the underlying lease agreements, many of which extended into 2022.

Effective March 31, 2018, the lease agreements associated with these aircraft will be classified as capital leases on the balance sheet until the closing of each individual sale.

All transactions are anticipated to be completed prior to June 30, 2018.

Given the current fuel and operating environment, we are now targeting to grow at the low end of our 2019 guide or about 13%, and have secured 7 additional A320neo aircraft delivering in late 2018 and early 2019 to support that target.

These fleet moves give us the necessary aircraft and flexibility we need to pursue our growth through 2021.

As for our cost outlook, for the second quarter 2018, we estimate CASM ex-fuel will be down 7.5% to 8.5%.

For full year 2018, we are projecting CASM ex-fuel will be down 3% to 4% year-over-year.

We estimate CASM ex will be down mid-single digits in the third quarter and up low single digits in the fourth quarter.

Outstanding cost performance in 2018 creates a slightly tougher comparison for 2019.

Nonetheless, when you look at the 2-year performance, we expect to deliver down CASM ex over a 2-year period that includes a pilot deal and lower growth rate in 2019.

I am very happy with that result.

In closing, we are committed to generating earnings growth regardless of fuel price or competitive environment.

Our goal is to build a business that makes us an even stronger competitor.

The team is doing a great job sourcing additional ancillary revenue, and we continue to hold the line on non-fuel costs, all while delivering improved operational performance and better customer satisfaction metrics.

In addition to basic blocking and tackling, I believe these fundamentals provide the platform to compete well in any environment and to drive earnings growth.

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

Thank you, Bob, Matt and Ted.

Hilda, we are now ready to take questions from the analysts.

(Operator Instructions)

(Operator Instructions) We have a question from Hunter Keay.

Ted, I'm going to ask you 2 questions.

The second one is a follow-up.

Because I just want to clarify something I heard.

But also, did you say that you are dedicated to driving earnings growth?

Is that a new line that you guys have inserted into the script?

I don't recall you talking about that before.

Is that something you're going to plan on going forward from here on year in, year out?

No, Hunter.

That's not new.

We talk about that all the time.

So go ahead, yes.

Oh, you talk about it all the time?

Okay, great.

Yes.

Well then, never mind.

And then did you say the 2019 and '18 CASM ex together would be down year-on-year?

I'm sorry.

Yes, that is what I said.

Exactly what I said.

So we're -- as I said, the guide for 2018 is down 3 to 4. And we have been having a great operational performance thus far, and we expect that to continue.

So that does improve that, meaning that in -- baked in there is a better operational airline.

So that makes the comp a little bit tougher for 2019.

But that factoring in, plus the fact that we've done this aircraft-related transaction, which we also know contributed to the benefit.

So you'll start to lap some of that next year.

Net-net, we're still going to be down over that period.

And I feel really good about that.

I just want to make sure nothing got incrementally worse about the 2019 outlook.

You're just saying that the comp got a little bit harder, which is why you're putting it that way.

Yes, that's right.

That's exactly right.

The next question comes from Michael Linenberg.

Two questions here.

So I just -- when you look at the sort of the non-ticket revenue versus the passenger revenue or the fare, ancillary versus the fare, it does look like that's higher.

And I'm not sure if this is the first time it's higher.

And I was just curious, is that being driven by just the change in accounting?

Is that part of it or is that really we're seeing an inflection point in that area?

And as you mentioned, Ted or Bob that -- or Matt, the strength of the unbundled product really starting to -- or bundled product starting to have an impact on that number?

Right.

So generally speaking, the ancillary number, the non-ticket number is moving up with not only the products like we mentioned, but also the revenue management techniques we're applying to non-ticket as well.

Ultimately, our goal is to also keep pushing up where we can the passenger yields as well.

So in the meantime, that's how the breakdown is shaking out.

But we expect there is upside on both of those numbers in the future as the years go by.

And just -- so just to summarize, I think the ancillary number has been dropping since about 2015.

And I think, as far as I start there has been mostly new initiatives.

And I think we've said somewhere that we expect the full year to be above $55.

And maybe that, sorry, every quarter.

But we'll end the year certainly above that number.

So I think you're going to see a healthy increase throughout the year.

And Mike, one clarification.

It's Ted.

The accounting impact is almost 0. Little to nothing.

So this is really just raw performance.

It doesn't have to do with that.

Great, great.

And then just my second question.

And this is little bit of a micro airline question.

Bob, I'm going to address it to you.

I -- you look at the market Akron-Canton, and that's a market that you guys went into, I don't know 1 year, 1.5 year ago.

And we saw both Allegiant and Southwest leave that market.

And I just thought it was interesting, a market that you know very well more recently, it did look like you were scaling back pretty materially in that market.

And I'm just -- I'm curious, have the dynamics in that market changed or is it just the availability of ultra low-cost carrier competition in markets nearby like Cleveland, maybe sort of permanently reducing the long-term demand opportunities in a market like Akron-Canton.

Because I know when you went into that, the fact that your 2 competitors left, it seemed like there was huge upside there.

And it just seems like that it hasn't played out as, at least, from the -- from sort of the superficial perspective, it hasn't played out as maybe as what we thought it would.

What -- your thoughts on that?

I think it's a good question.

And you've got a lot of the pieces right.

I think Southwest was leaving anyway.

And they barely had any service in there.

And I think their exit from Akron-Canton was planned well before we announced our service, I'm just guessing there.

But I think I have to say, when there is that much a low-fare service in Cleveland, a little bit by Allegiant, a lot by Frontier, and a lot by Spirit.

There's just too much low fare.

And we weren't willing, even amongst ourselves, to drop the Cleveland service.

So this -- so it was -- I think it was a situation where, historically, there is an area -- there is an overlapping service area between those communities.

And with all the low-fare service, including ours in Cleveland, is shifting the market back to -- towards Cleveland.

And it was impacting our results in both cities.

So we're -- our plan is to stay in Akron at a reduced level and make more adjustments.

And that's -- so that's the way it's going to end up.

It's, again, I can just chalk it up to an overwhelming supply of low-fare seats in Cleveland.

The next question comes from Duane Pfennigwerth.

Your '19 growth rate, any thoughts on that?

And do you have the order book in place with the extension of these 319s to deliver that growth rate?

Duane.

Yes, the growth rate we're targeting right now, around 13% next year.

And yes, the answer to the question is, with the addition of, as I mentioned in my prepared remarks, 7 aircraft scheduled to deliver in the fourth quarter this year and the first quarter next year.

That coupled with the ongoing fleet that we have and the adjustments we've made, puts us in line to deliver upon that growth target.

I think I just would add one question there.

I'd say, prior to oil moving up to 70, we're probably been on the higher end of that.

But we think this is a more appropriate number where we're heading with fuel prices down slightly.

Any early thoughts on '19 CapEx given that outlook?

Nothing to share specifically right now.

But as we get closer as we normally do throughout the cadence, give you an update on that.

As I mentioned, the new aircraft that we've added to the fleet, those are operating leases delivered from a lessor.

So no changes in formal CapEx as it relates to those.

And then just on the -- just to stay on the A319s, the -- did you have a maintenance deposits?

Obviously, we see the headline figure for the consideration.

But did you have maintenance deposits accrued against those aircraft?

So what was effectively the net -- what was the net purchase price?

I'm not sure you've disclosed that.

Yes, we did.

We had maintenance in other deposits on with that lessor.

And you're right.

We haven't talked about it specifically.

But I can tell you there is an amount.

And it's not insignificant, that gets applied against that purchase price.

We're still going to have an incremental amount that we're going to look at potentially financing.

We haven't discussed the vehicle yet for that.

But more to come on how we decide to do that and what it is.

I think the net effect though, from a leverage perspective, is your -- the way you calculate operating lease as part of your overall leverage.

Right now, the way we see things, it's neutral to positive.

The next question comes from Jack Atkins.

Matt, just to go back to the non-ticket side for a moment.

You're obviously very encouraged there.

It sounds like there's more to come.

I guess, when would you really expect to see the initiatives around more dynamic pricing really begin to kick in there to sort of drive incremental upside to what you've been seeing earlier this year?

So Jack, thanks for the question.

We're already seeing some of the benefits of it.

But we're in the early stages of it.

So just -- it's a little nuance.

But if you talk about revenue management techniques, there's a lot of testing and learning that goes on.

So I think we're starting to recognize and realize some of those benefits now.

As we move forward, and as our technology and thoughts around the overall process continue to improve, I'd expect we'll continue to see improvement there.

So I'm not going to pin down on an exact date, because it's fairly a fluid kind of learning experience.

As you get better at it, then the numbers improve.

Got you.

Okay, great.

And then, Ted, going back to the 14 A319s that you guys bought off of lease.

So are there other opportunities to do that with the fleet, as you look forward over the next couple of years?

Just some low-hanging fruit there that you guys can capture, as you look out?

Well, over the last 2 years, we've taken advantage of a couple of opportunities.

I think we have 8 aircraft today that are on the balance sheet unencumbered.

And we've -- so we've dabbled in that market for a while.

As I've mentioned to you guys at length, we're a much smarter acquirer of and consumer of aircraft capital these days.

And we have a good feeling for residual value and how we plan to use those aircraft.

And the flexibility that having those aircraft on our balance sheet creates is a good thing.

And so the answer to your question is, we're always going to evaluate those opportunities.

Of course, there has to be 2 to tango.

So someone has to be a willing seller.

But -- well -- we think over time, and I wouldn't put a date on it either, there are still opportunities to do more of that, yes.

The next question comes from Brandon Oglenski.

So Ted, I guess this is just more of a longer-term view on the business.

But given the fact that your cost have come up on the labor side, and we're facing higher fuel this year.

But do you think long-term profitability in this business, at least for you guys, can go back to mid-teens or even higher in terms of EBIT margins?

Or are we structurally lower in terms of profitability looking forward?

Well, it's a great question.

And clearly, we're not hitting that target right now where things sit.

But the way we evaluate market opportunities, Brandon, is that we're always looking to target that type of opportunity.

And so to us, and I've said this before, the opportunity that exists is large.

But the rate at which we consume that opportunity, the rate at which we deploy into it, is important.

And because it affects your spool, it affects how much drag that new market may have or how long it is spooling.

And so we're going to tinker with that.

And I think that will -- that active management will help us drive margin -- drive at the margin.

And that coupled with, of course the, continued focus on ancillary, the continued focus on cost structure, gives this group a lot of confidence that we can actually start to push the margin back in the direction where we think those markets are targeted.

And I don't know -- it's not a boomerang.

But we're optimistic about what we see over the coming years.

Ted, I appreciate that.

But I guess if I interpret what you said, then maybe you're saying you need to address those opportunities a little bit slower going forward, and maybe not grow as fast.

Is that the right take on it?

That's right.

Yes I mean we're growing 23% this year.

Some of that is because of an easier comp, I guess, if you want to look at capacity that way from what we faced last year with storms and some pilot disruption earlier in the year.

But a 13% growth rate in 2019, I think, is going to be indicative.

And we've already indicated that low to mid-double digits is sort of our target.

Falls right in line with that.

I think that's less.

If you just took a straight average of our growth rate over the last 5 years, it's around 20%.

So the answer to the question is yes.

So Brandon, just to go a little further, if you want to take, at least, my reflection on this and if you take the earlier part of the decade, where we had virtually no capacity increases across the industry, a lot of restructuring, a lot of putting companies together, again, it was virtually 0 almost over a many year time.

And I viewed that as not permanent.

Maybe perhaps others did.

Now we're in a situation where domestic market is growing 4% to 6%, which is elevated.

I think we're going to find the spot somewhere between those 2. And that's where you're going to see improved profitability.

I think either one of those ends, 4 to 6, where we are now domestically versus nil for almost 4 years.

Neither of those were stable.

And I think we're going to move -- eventually move to a spot in between.

And as Ted said, we've been growing for many years Plus 20.

We've made a decision to grow in low to mid-teens.

So we have the flexibility with our aircraft, particularly these A319s, to make adjustments.

So I think we have a lot more flexibility going forward in what we're going to do.

And we have -- we are beginning to respond to the realities of the marketplace.

The next question comes from Kevin Crissey.

Can you talk about the characteristics of the markets that are doing better than those that are maybe doing less well?

Sure, Kevin.

This is Matt.

Generally speaking, just like everything that we see from the supply and demand perspective, is generally the supply -- the supply and demand is going to drive what's going on from a pricing perspective.

And where we see elevated supply in general, our results aren't quite as good, as we're seeing with less of the supply or capacity deployment.

Not just from us, but from the industry in general.

So generally speaking, it's probably not a -- it's not really a direct answer, but that's generally what we're seeing.

What I'm not comfortable commenting on is specific markets or specific regions, per se.

And I think generally though, you can probably take a look for yourself and see where capacity is elevated.

And that's where we're going to have a little bit of an issue relative to other markets.

And more broadly, when you think about it, we see a lot more competition, virtually everywhere today in comparison to a couple of years.

So really, all markets are impacted when you have a generally more competitive industry.

And I think you see, also in addition to that, new routes will build slowly.

And so that's the reason for slower growth as well.

So it's a combination of all markets and a -- again, a broader capacity increase, maybe we can call it excess capacity.

All markets are impacted.

And new markets take longer to hit their potential.

And as we think about you slowing the growth rate next year, how should we think about those new markets?

Because I am of the opinion that many people underestimate the challenges created by new markets in terms of the financials and how long it can take to spool up.

But a slowing growth rate could significantly have more routes maturing.

Can you talk about your mix of new markets next year versus those that are maturing?

So Kevin, you're hitting it right on the head.

That's exactly how we think about it.

And that's why we are looking at slowing slightly.

Making sure that we have more of a mature mix into our route network will improve our overall numbers.

So as Ted mentioned earlier, as we look for opportunities, they are out there.

The question just is, what is the best way for us to consume them.

And what is the right cadence for us to do that.

And also, I guess, as we think about routes as we go forward, it's not necessarily new routes.

We may do less off-peak flying than we did in the latter part of 2017 going into 2018, because in a more aggressive capacity environment and oil getting higher, it perhaps maybe some long-haul flying on our part maybe to access it.

So we're taking a look at all that as well.

So it's a combination of new routes and it's a combination of some of the things that we were doing.

We think there's always opportunities to improve on what you did and we think there's a number of them.

And your stage length shouldn't have that year-over-year type of change again, right?

Is that fair?

I think, if anything, Kevin, it starts to come in.

As what Bob just mentioned, some of the things we evaluate will be new route deployment.

The speed, obviously, next year is going to be a natural tailwind if you think about how many new routes you're deploying.

But then also, as we look at some of the long-haul stuff, that's probably one of the areas we're going to be focused on.

So I think, if anything it will, we'll come in some.

(Operator Instructions) The next question comes from Steven Donofrio.

Susan Donofrio, just a quick question here on -- just want to follow up on your bundled offerings.

You said we're selling well.

I'm just wondering if -- should we be looking out for more partnerships let's just say, with hotels or car rentals to maybe further drive this?

Or am I not thinking about this right?

And I'm just wondering where you are with your app, in terms of upgrading it and really driving revenues off of that?

Thanks, Susan.

It's Matt here.

So we do believe we have opportunity to do more on, we call it, the packaging side.

When you think about hotel and car offerings.

We do relatively okay today.

But we do think there's opportunity there to do more.

And when we think about bundled services, that has a lot to do with other pieces that we've unbundled in the product years and years ago.

And one of the things that we look -- what we talk about it internally is making sure that we think of ourselves as a way -- as a merchandiser and retailer of products, not necessarily just being an order taker of what those -- what do our customers want to purchase.

So we think there's opportunity there in thinking about how we merchandise on site.

And then, I think your thought -- your other question was regarding the app.

So our -- a rollout of our app started fourth quarter last year.

It has a lot of the basic functionality in it that we know our guests would like to utilize to help get through the airport experience faster.

We also know that there's opportunity there for us to do a lot more with our app, thinking, again, thinking about how we merchandise and retail through the app.

How we notify customers of opportunities.

And there is examples of that as well in how we think about retailing, say, our BIG FRONT SEAT products.

And when there's opportunity there, how we get those offers in front of our customers at the right time, can be really it -- can be augmented quite well through the use of the app as app adoption continues to improve as well.

The next question comes from Joseph DeNardi from Stifel.

Ted, if you would -- if you were to look out over the next 4 to 5 years, what's the slowest rate at which you can grow and keep CASM ex flat?

And I'm guessing that, that rate is less than 13% to 15%.

So why is that rate not the kind of optimal growth rate for you that will allow you to kind of maximize margins and earnings?

Yes.

I understand the question.

Thanks, Joe.

The way we think -- again as I said earlier, we're seeing available market opportunities.

We're looking to pursue those in some sort of a -- whatever the right cadence is depending on the market.

So in boom times, obviously, we grew a lot faster and we're managing that going forward.

We don't grow to manage costs.

We grow because there's an opportunity to pursue.

And so we're trying to optimize that from a return perspective.

I think you're right by the way.

I think we could manage costs at a lower growth rate if we wanted to, because...

Do you have a sense for what that is?

Well, I think it's dynamic to be fair.

Because that's the way we manage our business.

I think if you could mathematically arrive at something, which I think would be irrelevant.

Because we would adjust -- we always adjust based on the input conditions of the business.

And what we're seeing from a competitive standpoint.

So what's most important to us are 2 things.

One is that we're growing in a manner that we think digests markets that are accretive to the business and delivering return.

And so making adjustments to that, what you're seeing us do right now in the real time, is an effort to kind of reflect what's happening in the competitive environment.

And what's also important to us is managing the cost structure in a way that keeps us competitive.

And that's clearly a focus on expanding our relative advantage against everyone else.

And so quite frankly, I mean, I'm not suggesting this is an outcome by the way, but you could -- if we felt that it was appropriate, we may grow in a way that might produce pressure on CASM ex.

But we feel like that might be a really good thing from a return perspective.

So that's why I say, what's most important to us is we're tackling markets in the right speed, in the right manner, that's delivering return.

And so I think, Matt, look, to answer your question, I think there's a mathematical answer as to what growth rate would produce a neutral CASM.

But I think that from our perspective, we're much more dynamic in the way we evaluate it.

So I wouldn't put a number on it.

Okay, okay.

And then, Matt, it seems like maybe the messaging around which type of markets you guys are going to target over the next couple of years changed subtly.

You talked about not as much large markets, more to leisure destinations.

Can you just maybe flush that out a little bit?

Well, yes.

We can.

It's going to be really a continuation of where we've seen strength and where we've been growing already, say that this year our growth to Orlando is notable.

Our growth to Las Vegas is notable.

We continue to grow in New Orleans.

And we also see opportunity in some new, say, some new international destinations that we feel have opportunity for us as well.

Our model allows us to really look at some destinations that we call it, Near Field International, that -- we know the market here in South Florida really well.

So we know how to penetrate the market.

We know our customer base here extremely well.

And it allows us the opportunity through our network in Fort Lauderdale to really have opportunities that we feel are out there for us to exploit and look at growing into as we move forward.

In terms of some of the longer-haul flying that we put in place, as we look where fuel is today, some of the flying that we put in place works really, really well in the peak season.

But once you get outside of the peak season, as the overall CASM moves up, if we can't push those costs off onto the passenger fare, then we have to reevaluate if that's the right place for us to put our assets.

So it's really as simple as that in terms of when we think out past the summer on how we're thinking about some redeployment and some of the route and how our network may changed a little bit.

The next question comes from Jamie Baker.

With the pilot contract behind us, can you give us an update on timing in terms of rolling out a preferential bidding system.

I seem to remember that the contract gives you up to one year to choose the vendor.

So if that's correct, that implies that maybe the benefits are more of a second half 2019 event?

And are said benefits already captured in the ex-fuel CASM guide that you gave?

And thanks for clarifying that, 2 years stack on that topic.

Sure, Jamie.

John Bendoraitis is here, our COO, might have an answer first question for you.

Jamie.

You're correct in that.

We have about a one year target to implement the PBS.

We've already formed the working committee, and they've already begun conversations with the various suppliers.

And we hope to make a selection actually relatively soon from there.

The group will be working together on the details and the rules of how we're going to implement the PBS.

And so I think your -- in the industry, this kind of is a, call it, 9 to 18 months window, depending on the carrier.

I think we're very capable of doing 12 months or inside 12 months.

Got it, perfect.

Yes, go ahead sorry.

Your second question is (inaudible) the benefits that are contemplated in our CASM ex.

Is that correct?

Yes.

Yes, so the answer is, yes, I will caveat that and say, to the best of our ability.

So what I mean by that is, we have an expectation of what sort of incremental benefit we expect with regard to a pref bid system.

But we also anticipate, and I've said this before, that we are running today and will run over time a better airline.

And the benefits associated with that flow through multiple line items in the P&L.

And we've done some investigation modeling.

We understand our airline works pretty well and attempt to reflect that.

But I think that improves over time to be honest with you.

And so it's hard to say for sure exactly when and in what amount.

But our expectation is that we've really -- we've run a very challenged airline.

We've done a great job with a difficult network.

And now we're able to run one with maybe both hands.

And I think that's going to provide us with some natural benefit over time.

That's excellent.

And can I just confirm that there was no material push back to last week's fare increase?

Not asking about future pricing obviously.

Just trying to confirm that the increase was taken by your competitors?

Jamie.

It's Matt.

So we raised fares $3 late last week.

And for the most part, from what we can see, our competitors also increased fares as well from a publicly fare available kind of data information.

The next question comes from Rajeev Lalwani.

Matt, a question for you.

And related to basic economy, we've had that on the system now for about one year or so.

Can you talk about what -- your ability to sort of get fares do well with that sort of product out there?

Is it keeping you from participating in some of the strength in close-in fares and the upside that some of your peers are seeing?

Just some color that would be great.

Sure, Rajeev.

It's Matt.

So let me go back to almost before basic economy was in the market place, is the low-fare environment has been in place for quite some time.

The fact that basic economy got introduced by some of our competitors didn't really change the fare environment, per se.

So what really has the impact from a booking perspective, not just for us but for anybody, is what fare levels are in the marketplace.

And for the most part, those published fare levels really haven't moved much by our competitors.

How they price and how they make those decisions is completely up to them.

I can tell you that from our perspective, we are extremely active in making fare adjustments, in canceling fares that we don't want in the marketplace, that we don't think benefit our revenue production, we will cancel those fares.

And we do that frequently.

And we'll also make other types of price adjustments as we feel appropriate to help us and help our revenue production.

So I think I should leave it there for now.

Okay.

And then Ted, a question for you.

On the leverage side, I mean, your metrics have creeped up quite a bit over the last couple of years just given ongoing CapEx and then what we're seeing in the fare and fuel environment.

Do you have any thoughts going forward as to whether or not we sort of plateau from here.

Does it continue to go up?

And maybe any thoughts on like a target level?

Sure.

So the leverage is -- it's really -- there's 3 things impacting it.

One is the numerator.

The other is the denominator.

But more importantly, also there is a bit of a mathematical optical effect of taking aircraft on balance sheet versus using operating lease financing.

And for a company like ours, which prior to 2015, really, we were exclusively financing our fleet using operating leases to shift now to the point where we're about, where a little bit more than half of the fleet is owned and during that transition, it actually has a massive headwind to leverage.

So I think that that's mostly optical because the financing of CapEx is part of our growth strategy and how we choose to do it is based on return and investment.

And so in fact, if you kind of try to unwind the way we finance our aircraft today and you just said, well instead we were going to use all lease financing, the leverage numbers about flat.

And so there is an impact to both sides of it, so I'm not suggesting there hasn't been an EBITDAR effect too.

But I think what's more important for us is trying to find the best possible source from a cost perspective in financing our aircraft.

So going forward, we're clearly very comfortable at this leverage point, by the way.

And I think that would've been true 3 years ago and I think it's going to be true going forward because of the vast majority what we do today is based on our growth.

So it's based on our aircraft.

And I don't put a hard cap on what the number is, but I can tell you that based on what I know today, looking forward we're going to be very comfortable from a leverage perspective based on what the business can generate.

Next question comes from Daniel McKenzie from Buckingham Research.

I'm wondering if you can put a little finer point on the growth opportunities.

So maybe the similar question asked a little bit differently.

And I guess at the outset, I hear you with respect to less focus on the larger cities, less long haul, maturity in the core markets, ancillary all things looking to drive margins here, but you throw in higher fuel and what is the actual opportunity set look like over the coming 5 years?

And just with related -- with respect to that, I'm wondering if the spool is something like 15 new markets a year or 30?

And the reason I'm asking this question is I'm -- you had mention potentially network redeployment.

So I'm just curious if you could kind of help tie those loose ends together here.

Yes, certainly.

And this is Matt.

So the opportunity set is large and continues to be large.

I don't really feel comfortable describing exactly where we thinking about flying into other than some of the high-level points we've already talked about just from a competitive perspective.

However, one of the things that we will continue to do, and we've been doing this, we're just going to do more of it is think seasonally and think about how much we deploy in terms of how many departures per week we think about in certain markets.

So those opportunity for us to grow into more routes, grow into more markets and do that in a more diversified way and really a more risk-averse way, quite frankly.

So -- and that's one of the things that we think in this environment right now as we adjust and make sure that we're thinking about what's happening in the industry, think is an appropriate pace for us to move and also an appropriate way for us to think about the opportunities set it's out there.

So just to reiterate, the sets large.

The question just is how quickly do we want to consume them and how do we enter the markets in a way that diversifies the risk and really mitigates the risk in terms of -- from the spooling up and getting to maturity faster.

Yes.

And if I could just maybe go back to your response and focus on one part of it and that's the seasonality.

One thing that I don't think investors have thought about is sensitivity to a non-fuel CASM to utilization, but is there some degree of off-peak flying that you could trim, say 15% or 10%, and still keep non-fuel cost flat or down or is that utilization flying in the off-peak period really a critical component to maintain in the non-fuel cost outlook?

So I think actual -- that's a pretty good question.

And I think we're going to start especially as oil moves back up.

Utilization at all cost doesn't make sense.

I -- they move into July.

You can fly pretty much wherever you want.

You'd want to maximize it in peaks, but I think you're going to seeing us be much smarter about utilization by month.

And I could say when we talked about some of the off-peak flying.

I guess if we can replay what you did we would've done less last year at least in certain markets.

So it's hard to put a number on because you really want to look at the math, but I think you'll see more opportunities in the less than daily.

Again, if you look at the way we fly, we have some very strong routes, and about 1/4 of our airline is in multiple frequency routes.

And then in the large bulk is daily.

There are plenty of opportunities and infinite more opportunities in less than daily.

And by definition some of the less than daily is less competitive risk as well and there's less spool off risk.

So when the growth rate slows, and you're not deploying a higher number of airplanes, some of the stuff actually gets easier.

Because again, the simply less routes -- and on average the planes are slightly bigger so some of the growth is also coming from ASM, but I think you're going to see us, there will be much more tactical.

We are in the environment is what it is, the peak months are good and the off-peak months are challenging.

And you basically have got a change your airline every couple of months.

So I think you'll just see more changes but to put a number on whether it should be 10% or 12% or minus 5%.

I think you build it on a more micro way, which is the way we will do it.

And the next question comes from Savi Syth.

On the unit revenue trend that you're seeing for second quarter if I can adjust for Easter and kind of the stage length, it looks like quarter 4 is down too, could you help me understand maybe as you go through the quarters this year just what that stage length headwind would look like?

I'm just trying to get a sense of what we can expect for the quarter 2 as we kind of walk through the year, assuming no changes in the industry.

Savi, it's Ted.

I think as we headed towards the end of 2017, the stage -- that was when the stage really started to walk-up.

In fact, by the fourth quarter, yes it was up 5. So as we get closer to the back half of this year it's going to be less and less of an effect.

I don't have the actual kind of headwind, tailwind numbers of -- at the top of my head but I can tell you that there was already -- the stage is already feathering in by the time we hit the fourth quarter of last year.

Got it, and Ted, if I might ask on the unit cost on 2019.

Are you -- I'm just want to clarify when you talk about that 2-year stack.

Are you trying to say that it's most likely to be up slightly next year just because of tougher comps or is there can opportunity for it to be flat or down next year?

Yes, there's an opportunity.

And we're always very thoughtful and careful about the cost structure.

So I've said that before.

And that's why I'm confident right now saying that we thought about this year, given all of what's going on this year with a new pilot deal and the kind of growth rate that we had versus what was happening last year along with the fact that next year is obviously, going to be a more normalized growth number given our long-term guide.

We've always thought about this is kind of a 2-year period and that's why we are comfortable saying it's going to be down.

The question is heading into next year, what are we going to tackle and what are we going to do?

And so there's always an opportunity for us in any given year to kind of push the cost structure harder and be thoughtful about those things, but I think I've thought about it more over a 24-month period.

We have a question from Duane Pfennigwerth.

So Bob, you have some long-term perspective on this industry.

Let's call it experience.

You've participated directly in a consolidation event, which was very shareholder friendly, I think a lot of CEOs would not of made the same call.

Some larger peers are generating very meaningful substantial free cash flow.

And yet we have all these questions about basic economy, which are just not that interesting, right?

It semantics, in some cases it's feels like another name for pricing below your cost structure.

I'd love to get your perspective on the prospects for consolidation from here.

Maybe the industry just lacks the creativity of, say, a Willie Walsh.

There's more than one question in there.

And one about consolidation and one about basic economy.

We'll kind of break them into pieces.

Consolidation is really what I'm curious about.

You're going to get a little bit of a stock answer here because you know we can't speculate on this stuff other than I think, that you'll know at least personally and as a group we'll evaluate opportunities as they come and I think there has been benefits for this industry in consolidation.

And I think for us it's always a matter of trading off what your standalone opportunities are versus how they would be with the combined environment, and how they would impact the entire landscape.

And again, you have to assume those things are ongoing.

There's a lot going on in the industry.

And to some degree, again, maybe the industry overearned perhaps 4 years ago and now it's underearning.

And it's all about excuses about why things need to happen.

And like I said, I think at least you've heard -- we've stopped really talking about the industry pricing environment.

I mean it is, what it is, it's aggressive.

We lead most of the time, we're undercut from time to time.

We know carriers whose cost structures are double ours who undersell us.

And then they complained about our prices.

We're in the low fare business, that's our business.

And there is a strong niche for it, there's a lot of classic leisure markets that we should fly in.

And in fact, most of our growth, the last 2 or 3 years has been in Fort Lauderdale, Las Vegas and Orlando, which are you said, they are classic low fare destinations.

Many of the high-cost carriers, they are growing in there as well.

There is room -- really room for us, in a broader way and like I said, it's -- so we have to manage the opportunity.

Right now we see the opportunity for growth either flying on a daily basis and we think a great opportunity for us is more international.

And we have the opportunity to seize on that.

We will now make our adjustments in and will react to the environment.

And like I said, Duane, we are interested in trying to make -- we can influence what we do and we can have a broader impact on the industry and I think you just need to assume that our practice is to evaluate the opportunities, either internally or externally.

Okay?

Hilda, we have time for one more question.

It comes from Hunter Keay.

I actually have a couple of follow-ups.

Bob when we were talking about feeling the impact on some of the longer stage length flying, you said you were taking a look at that, is that already part of the modest capacity reduction you announced today?

Or are you implying that, that sort of like an ongoing process that as you look at post-Labor Day schedule, if fuel stays at or above these current level, is there's potential for some incremental capacity reductions?

So it's both.

It's part of and the presumption that some of it will change.

And we're just not complete and it's a little early for us and we're kind of way out just start seeing at the bulk of the September and October changes as we move into early June in that timeframe.

But it's an anticipation, and what we at least expect, even a modest measure of what we're planning on.

Okay?

Yes, that's good, Bob.

And then a little bit more on utilization.

I did notice that your utilization was up for the first time in 2 years this quarter.

How much -- how should we think about the 2019, 13% capacity growth in the context, if you want to make it simple, how much of that 13% is coming from higher utilization?

Is it 4 points of the 13% or whatever I mean what's -- put it that way, that would be easy.

Yes, I hear you, Hunter.

It's Ted.

I don't know that I have the break out, but right now, as we said before, 2017 was an unusual utilization year.

So it was depressed and you would expected this as we start to lap that our utilization is going to look better year-over-year.

We get past the pilot-related issues in the second quarter, you passed the hurricanes in the third, that's going to be show year-over-year improvement in utilization, I think for now you should assume whatever we produce this year is kind of we're thinking about going into next year, where we can push utilization clearly in the peak is our primary focus.

And I think that having our labor issues settled and then having a good understanding of the working parts of that agreement, I think is going to help us as we head into peak periods, which is when you want -- when we really want utilization.

And that's the focus.

Thank you all for joining us today.

Ladies and gentlemen, this concludes today, Oh, I'm sorry, go ahead.

This concludes today's conference call.

We thank you for participating.

You may now disconnect.