Spirit Airlines Inc (SAVE) 2018 Q4 法說會逐字稿

Welcome to the fourth quarter 2018 earnings conference call.

My name is Sylvia, and I'll be your operator for today's call.

(Operator Instructions)

I will now turn the call over to do DeAnne Gabel.

DeAnne, you may begin.

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

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 based on management's current expectations and not a guarantee of future performance or results.

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 2018 earnings release, which is available on our website, for the reconciliation of our non-GAAP measures.

Presenting on today's call are Ted Christie, our Chief Executive Officer; Matt Klein, our Chief Commercial Officer; and Scott Haralson, our Chief Financial Officer.

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.

With that, I will turn the call over to Ted.

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

2018 was a year of many accomplishments.

We achieved a completion factor of better than 99%, ranked among the best for fewest bags lost, improved our customer service metrics and delivered a record on-time performance of 81.1%, besting most of the other U.S. carriers for the full year.

We ranked #1 in on-time performance in October.

And based on preliminary results, it looks like we ranked among the top 3 carriers for November and December.

We leveraged self-help initiatives to increase our average fare and average non-ticket revenue per segment and improved our CASM ex fuel nearly 4% year-over-year.

My thanks and congratulations go out to the entire Spirit team.

It is very fulfilling to begin to realize the benefit of our hard work over the past couple of years.

Before we begin with an overview of our fourth quarter results, I want to take the opportunity to acknowledge Bob Fornaro for his many contributions to Spirit.

In early 2016, following a shift in the competitive landscape, Bob joined the Spirit management team knowing that we needed to make some changes to succeed.

Bob is a proven leader and was instrumental in helping us improve our operational reliability and our customer service metrics, all while strengthening Spirit's position as the airline providing the best value in the sky.

Bob retired at the end of 2018 and will remain on our board.

The entire Spirit team thanks Bob for helping us become an even stronger competitor.

Turning now to our fourth quarter 2018 results.

Yesterday, we reported fourth quarter net income of $94.7 million or earnings per diluted share of $1.38.

We were exceptionally pleased with the success of our initiatives during the quarter to drive higher passenger and non-ticket revenues.

We also had a very strong fourth quarter operationally.

Our on-time performance was 85.1% and our completion factor was 99.6%, an excellent quarter all around.

With that, here's Matt and Scott to discuss our results for the fourth quarter 2018 and our outlook for 2019 in more detail.

Thanks, Ted.

For the fourth quarter 2018, total revenue increased 29.5% year-over-year to $863 million.

Total revenue per available seat mile increased 11.4% year-over-year on 16.2% capacity growth.

Our network reorientation, off-peak schedule changes and ticket and non-ticket yield initiatives all contributed to our strong fourth quarter revenue performance.

Additionally, throughout the quarter, we saw strength in industry pricing, which was assisted by tighter inventory controls.

Turning to non-ticket.

On a per passenger segment basis, non-ticket revenue for the fourth quarter was $56.70, up 5.2% year-over-year, primarily due to our dynamic pricing initiatives and the continued improvement of our bundled services offering.

In addition to our initiatives that are still maturing, we have several new revenue enhancements that we plan to deploy this year.

Our new website with improved merchandising capabilities is currently in the final testing stages, and we are excited about its potential to drive additional ancillary revenue and increased conversions.

We are working on a revamped vacation package program and expect to see the benefits of this new program begin to take hold later this spring.

As you may recall, last October, we made some changes to our co-branded credit card offer onboard the aircraft.

We have seen a nice uptick in the number of applications since the changes were implemented.

Lastly, we are also working on overhauling our loyalty program to be more reflective of the value our ULCC product provides to leisure customers.

We are encouraged with our continued growth in non-ticket revenue per segment and believe that in 2019, we will again see year-over-year improvement.

For the full year 2019, we estimate our non-ticket revenue per passenger segment will be between $56 and $57.

Turning to our network.

We've been very busy with new market launches and new market announcements.

During the fourth quarter 2018, we began service to Cali, Colombia and Jacksonville, Florida.

And we announced we will start service to Austin, Texas on February 14.

Next up after Austin will be Indianapolis service that starts next month, followed by Raleigh-Durham where service is slated to commence this May.

We are excited to add these new cities to our network, bringing our low fares with customizable travel options to more people in more places.

As for 2019 capacity, our outstanding operational performance in 2018 has given us the confidence that without sacrificing any operational integrity, we can increase our aircraft utilization in the peak periods, which is when we typically capture higher-than-average unit revenue.

This change, together with some other minor adjustments to our Wi-Fi installation schedule and a more refined view on timing of aircraft deliveries, rose up to a full year 2019 capacity growth of approximately 15% year-over-year.

First quarter capacity will be up approximately 16.5%, and we estimate capacity in the second, third and fourth quarters will each be up 14% to 16% year-over-year.

Now turning to our revenue outlook.

Based on our current booking trends and customer buying behavior for ancillary items, for the first quarter 2019, we estimate TRASM will increase approximately 5% year-over-year.

This includes an estimated 250 basis-point drag on first quarter 2019 due to the shift of Easter to late April this year.

The demand and volume for both domestic and international remain strong.

As you know, during the fourth quarter, we launched the largest international expansion in our company's history.

While we are pleased with the overall development of our portfolio of new international routes, they are still in their initial spool-up period, which is a slight drag to our first quarter TRASM.

But by the peak summer travel period, they should be approaching steady state.

Overall, we are very pleased with how well our ticket and non-ticket initiatives are performing along with the overall benefits from our network and schedule changes.

And with that, I'll turn it over to Scott.

Thanks, Matt, and thanks to all of you for joining us today, and thanks to our entire team for their contributions to our strong results.

Our core cost structure continues to improve.

And I'm exceptionally pleased that for the full year of 2018, our team once again delivered an industry-leading cost performance with adjusted CASM ex fuel decreasing 3.8% year-over-year, despite absorbing material increases related to higher pilot rates in connection with the revised contract ratified in the first quarter of 2018.

Turning to our fourth quarter 2018 results.

CASM ex fuel for the fourth quarter was $0.0549, an increase of 5.6% year-over-year.

This increase was primarily due to higher salaries, wages and benefits per ASM, largely driven by higher pilot rates.

This increase was partially offset by lower aircraft rent per ASM.

We also realized benefits throughout the business from increased productivity and efficiencies driven by better operational performance.

Regarding fleet, in the fourth quarter, we took delivery of 7 new aircraft, ending the year with 128 aircraft in our fleet.

Thus far in 2019, we have taken delivery of 2 aircraft and have 14 additional deliveries scheduled for the remainder of the year.

We plan to finance 9 deliveries using sale-leaseback transactions, 5 will be under direct operating leases and the remaining 2 deliveries will be debt financed.

Looking ahead to our 2019 cost guidance.

Our core cost outlook for 2019 has not changed.

However, rather than debt financing the majority of deliveries, we now plan to use sale-leaseback transactions to finance the majority, which of course means higher aircraft rent.

The higher aircraft rent will largely be offset by lower depreciation and lower interest expense, such that our pretax income is minimally affected by our financing decisions.

Our 2019 network plan has stage length decreasing 1% to 2% year-over-year.

Together, these changes add about 1 point of pressure to CASM ex fuel.

Incorporating these changes, we estimate our CASM ex fuel for the full year of 2019 will be up 1% to 2% year-over-year.

When you adjust for the shorter stage and the sale-leaseback financing, this is in line with our previous guide of flat to up 1%.

For the first quarter of 2019, CASM ex fuel is estimated to be up 2% to 3% year-over-year.

On a per ASM basis in the first quarter, we will have pressure from higher pilot rates and higher depreciation and amortization.

In addition, quarter-to-date, we have seen a significant year-over-year increase in de-icing expense, driven by both rate and volume of de-icing events due to the level and intensity of winter storms this year.

These increases will partially be offset by lower aircraft rent per ASM.

For the second and third quarters of 2019, we expect CASM ex to be up 1% to 2% year-over-year and the fourth quarter up about 1%.

I'm very comfortable with our setup for 2019 and how well our team is managing the various cost pressures in the business.

Our goal is to get better every day.

And while the comps are tough, given our exceptional performance in 2018, the team remains focused on holding the line on costs and committed to finding ways to increase efficiency and drive productivity.

With that, it's back to Ted.

Thanks, Scott.

We are very excited about our momentum as we head into 2019.

We continue to grow our network and are pleased to be adding Austin, Indianapolis and Raleigh-Durham to our list of destinations.

Throughout 2019, we will continue to see growth opportunities in large domestic leisure destinations and near-field international destinations.

In addition, as the opportunities present themselves to grow in large gate-constrained metros, we will do so as this is where many customers who have otherwise been priced out of the market with high fares live and where many leisure customers want to go.

We are broadening and diversifying our network, but large cities attract many leisure customers.

With our low fares, reliable operations and friendly service, we are the best airline to stimulate and grow the leisure traffic base in these markets.

Even though 2018 was a stellar year on many fronts, record on-time performance, improved operational reliability, record non-ticket revenue per segment, excellent cost performance and improved customer metrics and brand image, we are raising the bar for 2019.

Our top priorities for 2019 are to consistently deliver operational reliability while increasing fleet utilization, continue to innovate and grow non-ticket revenue per passenger segment, further refine our network to support diversification, maintain our industry-leading cost position and grow our relative cost advantage and deliver earnings growth for our shareholders.

These things, together with an improving brand image and our low fares, solidifies our position as the best value in the sky and provides us the leverage to deliver margin expansion and strong earnings growth in 2019.

With that, back to DeAnne.

Thanks, Matt, Ted and Scott.

We are now ready to take questions from the analysts.

(Operator Instructions)

(Operator Instructions) And our first question comes from Andrew Didora.

I guess, my question is for Ted or Matt.

Seems to be a lot of moving parts in 1Q versus 4Q RASM, just given the stage length changes and Easter shift, peak versus off-peak dynamics.

Can you maybe give us a sense of where you see the core underlying growth rate today?

And maybe what types of tailwinds could you see as you move into more peak travel periods in 2Q?

Yes.

Sure.

Andrew, this is Matt.

Thanks for the question.

So one thing that we want to talk about is how we think about off-peak and peak periods.

And as we move from sort of the peaks that we saw over the holidays in Q4, into Q1 and then back into Q2, what we're finding generally, and this has been something that we've been talking about now for probably 6 months or more, is that the off-peaks continue to be what they are.

They're off-peak periods.

We continue to change our network to address that, a little more seasonality put into the network.

And as we've talked about before, trimming some of the off-peak flying in some of the more weaker periods of the year.

And in the fourth quarter, there are certainly a lot more of what we would call off-peak periods than we're seeing in the first quarter.

And in the second quarter, we move out of that off-peak period into Easter and then a little bit of shoulder in May and then the summer peak really kicks in Memorial Day weekend and then into June.

So generally speaking, what we're seeing is a pretty good inventory control out there.

It allows us to also have pretty good inventory control around the peak periods.

And one other nuance that we want to talk about a little bit is that when you get into the peak periods, and every peak period is still a little bit different.

They're not all the same, but peak periods also allow us to do a little bit more with our non-ticket yields, especially when it comes to our bundled services offering.

So the bundled services offering definitely kicks in a lot more when families are traveling together and they want to sit together on the aircraft.

They're checking bags.

And the bundled offering that we put together for them also gives them then a couple of additional items that really seem to have a pretty good uptake around peak periods.

So that's something that, I think, is important for us to understand.

And then, as we move from Q1 specifically into Q2, year-over-year, our stage comes in from Q1 to Q2.

So in Q1, we actually have a little bit of a stage expansion.

But in Q2, the stage really starts to come in a little bit.

That will help unit revenue in Q2 as well.

Of course, overall revenue performance is what really drives the unit revenue production, but stage definitely will have a positive benefit to TRASM in the second quarter.

Great.

And just quickly as a follow-up, Matt.

Did I hear you correctly in your prepared remarks that you think non-ticket could be up about 3% in this year to about 50 -- I think you said $56, $57 per trip?

Is that right?

Yes.

So we expect to land -- by the end of the year for the full year, we expect to land between $56 and $57 for non-ticket.

Our following question comes from Jack Atkins.

Matt, just going back to that last question there on non-ticket.

Call it 2%, 3% in non-ticket.

Given the multiple initiatives that you guys are targeting for this year plus the maturation of your ancillary actions in 2018, I guess why wouldn't that number be a little bit higher on a full year basis as you think about 2019 non-ticket per flight segment?

So -- yes.

Jack, so a lot of the things that we started to put in place really a year ago and a lot of the initiatives that we're talking about require testing and learning and then the experience around revenue management.

And we really -- we've been talking about this for a while now, but a lot of the initiatives take time and it just takes time.

You can't just implement new revenue management strategy and expect it to work overnight, especially for something -- for us, that's new, which is revenue managing ancillary products and services.

So we really saw -- we thought the ramp-up would take longer, and it's a testament to our team.

It's a testament to our IT group working with our revenue management group, putting new reports in place, putting new systems in place.

And we've really been able to ramp that faster, and we saw a lot of that hit in third quarter into fourth quarter.

So a lot of that we think we captured in third quarter and fourth quarter.

And now yes, we're going to continue to improve, continue to make that better, but a lot of the big punch we think we captured late last year, so we'll just continue to improve on it.

But now it's just the big step up we think we may have taken on a couple of other products.

Okay.

Got you.

That makes sense.

And then just following up, Matt, for you on the international side.

You talked about sort of the spool-up of the international routes that you added in the fourth quarter.

Could you just talk about what you're seeing in terms of uptake for those routes?

And how do you expect the revenue performance there to trend as we sort of get out of the first quarter into some more of the peak travel periods later on this year?

Yes.

Sure.

So our -- the makeup of our network has changed quite a bit.

So we were -- I think on a year-over-year basis, we're going from around 10% of our system capacity being in what we call international, which is really Caribbean and Latin America and from 10% to around 15%, 16% as we go through Q1 and Q2.

So it's a much larger part of our network.

And a big benefit to these routes, once we get to a steady state for them, is not only -- again, we talked about our ability to sell to what we call VFR traffic, visiting friends and relatives traffic.

And a lot of the routes that we've added are unique routes like that, that we service very well.

Our model works very, very well for travelers of that segment.

And as we get through Q1 into Q2, normally, we like to think about routes taking maybe up to a year to really hit full maturation.

However, we started these routes on purpose in the fourth quarter so that by the time we got to the Easter period and then into late spring, early summer, they'd have a lot of time under their belt.

Really, a lot of these routes will have about 6 months of service before we hit peak Easter period.

And we really think that that's going to help allow us to step up the results on those maybe sooner than that full year would otherwise be the norm.

And it's mostly about timing of when the routes came into the market.

So we're very excited about what we're seeing now.

And a lot of these routes, because they have a heavy -- again, what we call VFR traffic, means a lot of the guests are carrying bags, and in some cases, multiple bags.

And again, this adds to our -- a profile of our success in our international routes and something that we can take advantage of quite well.

Our following question comes from Duane Pfennigwerth.

Wonder if you could just replay the fourth quarter a bit and the significant upward revision in your guidance.

What was the biggest driver of that?

Was it the behavior in the peaks and just that pricing was really, really firm?

Yes.

So what we saw happened throughout fourth quarter is a lot of our network changes really worked incredibly well, especially the culling of the Tuesday and Wednesday flying.

And what that allowed us to do was really take a different look as to the overall pricing that we needed to put in the marketplace in order to stimulate traffic.

So by pulling a lot of those Tuesdays -- and I believe, we had maybe 9 or so weeks of the fourth quarter where we were able to pull out a lot of that Tuesday and Wednesday flying that in the past hasn't been real accretive to earnings or to TRASM.

So in addition to that, a lot of the things that we did pull were some of the long-haul flying.

And I guess, it's a bit of a testament to some of the issues we were having on some of that flying that we were able to pull some of that out and really look at the Tuesday and Wednesday flying and really be able to see a better uptick from a pricing strength perspective.

We didn't need to go out there with fares as low in order to help fill Tuesdays and Wednesdays.

Therefore, our shelf strategy, as we like to call it for the whole week, improved.

And so that really gave us a nice upward lift, more than we expected, obviously, from our results based on our original guide.

And we have some of that going on in the first quarter as well.

We have that from about mid-January through mid-February.

We did some of that pull-down as well, but it's just not as aggressive as we saw out there for the fourth quarter.

So that's really kind of what helped push up fourth quarter.

In addition to that, we did have a strong industry environment for sure and that can't be left out of the conversation.

Things were pretty healthy out there, and they're good now too.

It's not that they're not good now.

They are.

It's just what we were seeing in the fourth quarter was an abundance of inventory control.

And as we move through February now and we have a line of sight into March, we're pretty happy with what we're seeing out there today.

Duane, the only thing I'd add -- it's Ted, is -- and Matt talked about in one of his other questions was, the success we're having with non-ticket initiatives really kind of accelerated through the end of the year, and I think that was also a positive surprise as we headed into the fourth quarter, which, again, contributed to TRASM very productively.

So that sets you up nicely as we head into the first and second quarters of this year to really capture a lot of that momentum going into that period too.

And a follow-up maybe for Scott or Ted.

Can you just expand a little bit on what you're seeing in the leasing market, lease rates, et cetera?

Why would the decision to tilt back to leasing?

What is it that's really driving that?

What has changed in that market?

Yes.

Duane, this is Scott.

We ended 2018 with 64% of our fleet owned, which 1/4 of that was owned outright.

So we feel like now we can look at financing from a balanced approach and really be opportunistic.

The leasing market has closed the gap to the debt side, EETC and bank side.

So we feel like we can take advantage of that today.

I like the idea of being able to look at the different funding sources and just sort of move where the economics are most favorable and that's sort of what we're doing here.

Our following question comes from Joe Caiado.

Matt, first question for you on RASM and on some of these new revenue enhancements that you mentioned.

You have the new website, the new app and all kind of the related functionality that comes with that.

How should we think about the ramp-up to a run rate revenue contribution from those things?

Just trying to calibrate how much of that is driving the $56 to $57 non-ticket target for this year.

Or if it's because of the learning that's involved, if this is a little bit more of a longer-term contributor.

That's right.

Actually, that is correct.

So we -- just like all of our other initiatives, as we get new functionality, we have to learn the best way to use it.

And we have really great people here with experience that know how to use these kinds of technologies and merchandising capabilities in general.

But once we get the new functionality in place, then we'll learn how best to apply those thoughts and processes to our product and to what we're seeing from our customer base.

So it is something that we expect to have a benefit this year for sure, but it's going to be more of a longer-term benefit, which actually works out pretty well from my perspective because as we continue to get better at revenue management of our existing services, that will help us as we then be able to test and learn on some of the new functionality coming in, that we'll then be able to monetize.

As this year progresses, but really by the end of this year and into early next year is when we should start to see a real benefit from that, not unlike a lot of our other initiatives that took about a year to kick in.

And then when they kicked in, they kicked in really well.

So we're expecting to follow a similar trend.

That's helpful.

And then just a bigger picture fleet and CASM question for Ted and Scott.

So operating a single fleet type has been an important driver of your low-cost structure.

You've got an RFP out there and you're evaluating a new aircraft order to kind of support your growth plans beyond kind of 2021.

I think you said you expect to make a decision this year.

Without asking you to get into specifics on that, I'd just love to get your bigger picture thoughts on the importance of that strategy and kind of the core ULCC tenet of operating a single fleet type to keep costs low as you think about Spirit's future and kind of retaining your cost advantage into the future.

Sure.

Joe, it's Ted.

I'll make a few comments and let Scott add into.

You -- I think you hit all the points, what's core to us is low-cost structure, efficiency, utilization, all of those things, clearly in historical perspective, while it would be natural to assume that a single fleet type is the most efficient use of aircraft.

There are examples in our history where that's not true, where very, very low-cost carriers like AirTran, for example, operated multiple fleet types and did so at the lowest cost in the business.

And what you really have to solve for is the mix between operating cost and upfront expense on the airplane.

And so it's in our best interest to drive the best deal, and we want to make sure we're ticking all the boxes.

So we're happy of our customer today, but we've got to evaluate all the options available to us.

Scott, I don't know if you want to add anything more.

Yes.

That's exactly right.

And even just from a status update for you, Joe, we are in the early stages of the RFP today.

We have gotten the first responses back.

We're evaluating those as we speak, but we are on path for the time line that we set out to sort of mid-2019 end result.

Our following question comes from Hunter Keay.

Ted, you mentioned you'd be looking to adding services on some of the large metros, gate constrained, specifically is what you mentioned.

How do you do that?

How do you get into some of these gate-constrained airports?

And when you do, how has your thinking maybe evolved over the last few years about how you market service both to and from those major metros?

Sure.

It's a game of patience, to be honest, Hunter.

We have, for the better part of a decade, been evolving the network.

And I think it's kind of the hidden story around Spirit is the network development over the better part of a decade showing where we've deployed the choices we've made.

And in doing so, we've been extremely vocal about and patient with our decisions around where it is we've grown.

In fact, over the last 2 years, the vast majority of our growth have been -- has been in Orlando and Vegas because they're very, very good leisure destinations.

They've been extremely accretive to us.

But at the same time, when available, we've been able to grow in Los Angeles and in Chicago and in Houston and Dallas and Newark, a lot of large metropolitan areas too because that's where people live, and it is also where people want to go.

So I think it's a balanced approach always.

And remember that we're -- when we go into a market from a marketing perspective, the primary marketing value is our low fares and we stimulate additional traffic to the market.

And that's a proven data-supported claim that the market gets bigger when we go into the market.

So we are clearly interested in bringing back customers who've been priced out with low fares.

From a targeted marketing perspective, we use very efficient low-cost type methods to attract our new customers and turn them into guests.

And that doesn't really vary that much, to be honest, depending on the size of the metropolitan area, but I guess that's the key theme.

As we've put our name out there, we got to be patient and we grow.

We think there's tremendous opportunity in all 3 pillars of our network, which is big origin cities, large leisure destinations and the international.

I think we're picking those off in the order we like.

Got it.

And then as you think about adding some utilization carefully, as you mentioned, and adding back some peak capacity, are these flights that you're kind of adding back in, in airports that you cut back because they were operationally challenged because of just airspace or congestion?

Or was it more scaling back some of that peak stuff because of competitive factors or inability to price?

I'm trying to think about that in the context of what you're going to be adding back going forward is the question.

Yes.

I'll give you my thoughts.

Matt, you can obviously add as well.

When we're looking at where we think we can, and to your point, carefully add additional utilization in the peak, and we've been talking about that for the better part of a year.

We think it's one of the opportunities we have as to the operation has improved and we've gotten our legs underneath us, which clearly we have at this point.

We think we can exploit more RASM-accretive flying in the peak periods.

And I think it's going to vary.

I think you're going to see it in -- clearly in some times of year in the peak it will be in Florida because Florida is the peak.

And that's happening right about now as we head into spring break and into the Easter holiday.

And then as the network kind of moves to more east-west into the summer, there's more opportunities in certain other metropolitan areas.

So I don't know that it's specifically, to answer your question, tied to whether or not we are trying to trim for operational integrity or competitive action.

I think we're just now looking at opportunities as they sit and picking off the ones that probably meet the best thresholds depending on the season.

So Matt, do you want to?

Yes.

That's right.

And one note, Hunter, about that is with change in our Wi-Fi installation schedule, we had a bit of a delay due to the government shutdown, so -- with a couple of certifications we had to get put in place.

So we definitely also had a couple of late adds that normally you wouldn't see something like that from us as late as they were loaded, but that's a bit of why some of those adds came in later.

And in that case, as Ted mentioned, we're looking for the routes that we believe we can drive a lot of demand late and get it in an extremely unit revenue and P&L positive way.

So a lot of it has been really maybe adding a second trip on top of a really good market.

It's not necessarily putting anything back in where we thought there was issues in the past.

We're looking for where we see strength and then -- or take some chances on the thought that some demand will come in pretty late at yields that we think are earnings-accretive.

Our next question comes from Helane Becker.

So I'm not sure who wants to answer this, maybe Matt.

Have you noticed a change in international bookings and demand from international passengers or is your focus more U.S. origination?

So our focus -- so Helane, great question because it's going to depend on the route.

There's certainly going to be routes that we add that we believe are going to be heavily leisure based.

When you think about -- when we fly to Cancun, most of that traffic originates in the U.S. And the way that we promote and market that service is going to be different than perhaps someone in Fort Lauderdale who's going to Honduras or vice versa.

And we've set up a pretty, I would say, unique distribution network in a few key Latin American countries for us where we can do business there that -- and it supports our model and it supports the way that we distribute there as well.

So we have some pretty tight relationships in place.

That really help customers on both sides of the journey.

So -- I don't know if that answered your question perfectly, but that's the way that we think about distribution and how we go after that kind of traffic, which we believe, again, is a little bit unique for us in the way that we think about how we carry guests, especially in this VFR kind of market.

Okay.

No, that's actually very helpful.

And the other question I had is sort of unrelated.

Scott, maybe you answered this.

As we think about the go-forward for financing aircraft, should we just think like 50-50 forever?

Or 50-50 for 4 years?

That kind of thing.

Or will it just be more dependent on existing market conditions?

So just an easy question.

Yes.

Helane, I think the latter is probably right.

Look, I think we feel good about our capital structure today.

And we think we can be opportunistic, so we can play on either side and it'll sort of be where the economics flow.

Our following question comes from Savi Syth.

Just wondering if you can talk a little bit more about the 1Q and the 2Q dynamic here from a unit revenue standpoint.

Just -- I'm curious, on 1Q, just if you can kind of talk about some of the drivers that are causing it to be up 5% year-over-year.

And your confidence, given that it's much more heavily weighted to March and kind of your confidence level around that.

And then also just a little -- digging a little bit more into your kind of 2Q commentary.

Does that -- is it fair to assume that we should see an acceleration from 1Q to 2Q?

And what can that magnitude be?

Yes.

Savi, so I think in terms of what we're seeing for first quarter in general, we're still definitely lapping in an industry environment that was a tougher environment in 2018.

So in 2019 this 1/4, we're lapping some of that tough environment last year.

It's a little bit better environment this year, so that's a piece of why we have confidence in the number.

We also -- in January, specifically, just to give you some color about January, is the New Year's holiday and the return from New Year's was very strong, not unlike what we saw for Thanksgiving and Christmas, which we've already talked about in the past.

But what we saw in New Year's also carried through.

And in addition to that, this is going to be very nuanced, but the placement of Martin Luther King Jr.

holiday this year was actually -- on the calendar, it's always the third Monday in January, but it was pushed to the latest it could possibly be this year and that gave some nice separation between the New Year's return and that holiday weekend, granted we had some weather and some other things going on that weekend, but it created a nice separation that allowed some people -- at least from our results anyway, some people to be able to take multiple trips.

And then heading into President's weekend, which is coming up soon, we're really pleased with how we set up our inventory control for that weekend.

And it looks like it's going to be paying off much like it did in the peak holiday periods in the fourth quarter.

So we're just trying to take a really pragmatic approach to how we think about yield management in general that the off-peak periods are still off-peak and they will likely always be off-peak.

And the peak periods, I think, we're just getting better and smarter as time goes by.

And the processes and the people that we put in place are just getting better, and that just happens with time and experience.

Revenue management, in general, is not something that just flips on and off.

It takes time to learn.

And for us, we came from a position a few years ago where we always just wanted to have the lowest fare in the market all the time, period.

Now we can be a lot smarter and recognize that things like time of day matter and things like outbound and return matter and how we think about different periods -- not all Florida is created the same.

Even though it's all in Florida, different cities in Florida act different ways.

And as Florida becomes a bigger piece of our network, we're able to harness that and think about yield management better.

So that's how we think about Q1.

In terms of Q2, I don't think we're ready to talk about Q2 specifically other than the Easter shift.

But what we have mentioned already, right, is the Easter shift is definitely going to push revenue into April.

And international, especially a lot of our international expansion being a larger part of our network, should also peak up Easter for us more, meaning that there's even -- there should be an even bigger push around Easter for us just because the network is a little different this year than last year.

That's helpful.

And if I may just on the fuel efficiency side.

You do -- kind of you're guiding to a decline in fuel efficiency.

Is that completely the result of the kind of decline in stage length?

Or how should we think about it?

Savi, this is Scott.

Yes, we do expect the ASMs per gallon number to come in a bit obviously due to stage, but also due to the price of fuel.

So the way our routing optimizer works is it takes the number of inputs, including fuel price.

So over time, we would tend to fly a little faster and it might have a slight drag to the ASMs per gallon number, but it's fairly small.

Our following question comes from Dan McKenzie.

Just a housecleaning question here on the growth for first quarter growth up 16.5%.

What's the growth rate in off-peak versus peak capacity, since you've talked about that?

So if we could just break those 2 types of flying out.

Is it a 25% growth in peak flying versus a 10% in off-peak to get to that 16.5%?

I'm just wondering if you can provide a little bit more perspective on how you're handling those 2 aspects of the schedule in the first quarter.

Dan, it's Ted.

Yes, I don't think we would have broken it out exactly that way in advance.

I think directionally, the way you're thinking about it is correct that obviously, we've trimmed Tuesdays and Wednesdays in a lot of the period, post New Year's all the way up through, quite frankly, the President's Day holiday.

And so that's going to bring down your year-over-year comp in those periods, and then it's going to raise the percentage artificially in the spring break and holiday weekends that sit in the quarter.

So I don't know what the exact number is, but I think directionally, the way you're thinking about it is a blend.

Understood.

Okay.

And then, I had a follow-up question on the non-ticket initiatives as well.

So Matt, if we look back, say, 2 to 3 years, what has changed the most?

What hasn't?

And maybe if we can take hotels or car rentals for example, are these being dynamic offered today versus 2 to 3 years ago?

Is there upside potential in this revenue vertical?

I just -- I guess, I'm just wondering if you can provide some more transparency about how you're thinking about the opportunity in the non-ticket part of the revenue structure.

Yes.

Dan, so our -- what we call vacation packaging, which is really the adding of hotels and/or cars to the itinerary, has definitely been performing below what we would want to see.

We're making some changes there from a technology perspective as well as from a content provider perspective.

And we expect to see some benefit from there, but it's going to come in stages.

First piece is getting new technology and new content in place, and then the second stage is starting to then be able to merchandise better and starting to get more thoughts.

And this is something that will take time as well, get more thoughts around when different customers are shopping for different kinds of destinations, how do we offer up the proper offer at the right time to the right customer.

So that's a piece on the vacation packaging.

We've also talked in the past, I can just add in now also about our loyalty program and about our co-branded credit card program, where we're also underperforming on a rate basis where we were in the past.

So what I mean by rate basis, it's not necessarily from an economics perspective that we have with our partner, Bank of America.

It's more about our program, quite frankly, has become a little bit dated, and it's not reflective of the ULCC model and the value that we provide and how we provide it.

So later this year, we're going to be putting changes in place for our loyalty program.

And that's something that we believe will have a positive benefit.

We do know that we have leisure customers who want a better loyalty program from us, and it'll take into account more things that are part of who we are, part of our ancillary model and part of our low-fare model.

So those are pieces that have opportunity for us in the future.

I'm not sure if I totally covered what you're looking for in that question, but I think that's some color there.

Yes.

Well, that's helpful.

So the timing for the new technology on the vacation side and then, I guess, I'm just assuming that the $56 to $57 non-fare sort of guide that you've laid out there for the full year probably doesn't factor in the upside from some of these developments.

Maybe you could add some additional perspective there.

Well, if we have upside on that, it's going to come from delivery happening sooner than we expect.

And based on the prioritization of how we're putting things together, I'm pretty comfortable with when we think the programs we're going to launch and then taking into account some of the learning that has to happen and take place.

So like I said earlier in one of the other questions, I believe we're going to see results from it this year, but it's going to be just like other non-ticket initiatives.

They take 12, 15, 18 months to really hit steady state because it just takes time to learn how to use the new technology.

Our following question comes from Michael Linenberg.

Matt, question to you as it relates to route selection since it's been real integral to, I think, your outperformance over the last year.

If I take a market like Raleigh to New Orleans, which I know you're going to start in May, it looks like Allegiant's going to be in that market, Frontier's going to be in that market.

That's a Southwest market.

I think Delta is going to add service.

And when I think about how Spirit differentiates yourself, it does look like you are going to start with the superior schedule.

You'll be daily.

You clearly have improved your ops.

Is that -- as we think about a number of players moving into a particular city pair -- is that how we think about sort of longer term your staying power because of the superior schedule, the ops, maybe a better product as you talked about improve loyalty and even improvement on the credit card, et cetera?

Yes.

So Mike, yes, that's correct.

We definitely come into markets.

And when we do route selection, we are looking for places that we think are overpriced and underserved.

And sometimes, that includes markets that have a lot of players in them already.

And we believe that the items you mentioned is what we bring.

We are amongst the best in on-time performance.

That matters to customers.

And in addition to that, one thing that Ted talked about in his remarks and one thing that I can add on to a little bit is that in some cases, there's also going to be real estate or gate situations in certain airports that basically say to us, make a decision, Spirit.

What are you going to do?

How are you thinking about your network opportunities?

And when are you going to go grab them?

So in some cases, we will advance adds if we think that's the right thing for us to do because the city that we want to be in and it's a place that if we don't move soon, then we might not be able to go back in there for a couple of years.

So in some cases, you're going to also see that from some of our route selection.

But by and large, we're not going to do that if we don't think it's a good opportunity at the right time for us anyway.

So that's kind of how we think about route selection.

And just going back to what we did with our international expansion out of Orlando, there's a number of routes in there that no one else serves.

So it's not that we're looking to go into routes where others already exist or a market is there, we will definitely look for places that we think is best for us to bring our low fares and our high-quality service to that market.

Okay.

Great.

And then just as a related follow-up, how do you think about maybe your penetration into going after price-sensitive business passengers?

Is that something that you track?

And the reason I also throw this out there is, when I look at Raleigh and some of the other markets that you've been adding service recently, Raleigh, Baltimore, for example, you're going in initially with double-daily service and what looks like a very competitive pattern on both ends that would be attractive to at least a price-sensitive business passenger.

And again, I know you've stayed away from that segment for some time.

So one, can you -- are you looking at that?

And two, can you maybe even give us a rough feel for what percent of your passengers today that you at least believe may be traveling on some sort of business, maybe mixing business and pleasure?

Thoughts on that.

Mike, it's Ted.

As you know, we're a leisure airline.

We focus on that and so we -- there's no really concrete way for us to measure the question that you're asking.

We do expect that there are people who are traveling on us for business.

Usually, they are people who are paying for their own ticket.

So it's going to be small business.

It's going to be sole proprietorships.

That sort of thing.

And then maybe mixing that trip with the leisure weekend or something to that effect.

But the vast majority of the traffic we carry is going to be simulated and that's true across the board.

So however you want to label it, we're trying to build a network.

And I think it's been -- again, I said it in my -- in the previous answer.

You can now look at where the Company flies and see an actual network.

And I think the idea there is we're targeting those types of customers that have been priced out in a variety of different origin and destinations.

So your example is one, where we think that there is just underservice there at our price point and we're going to go in and be able to carry that traffic.

Our following question comes from Brandon Oglenski.

This is actually Matt Wisniewski on for Brandon.

I was hoping we can come back to the network improvements and kind of expand on that a little bit more.

First, should we be thinking about this as a structural improvement?

Kind of -- would this be -- to assume that holding all else constant, this would -- this should be realized going forward next year?

And then second, can -- is there opportunity for material improvements going forward kind of what we saw towards the end of last year?

Yes.

This is Ted.

So the -- I think some of the network improvement you're alluding to is that we made a couple of adjustments.

We looked at some longer-haul flying and decided to redeploy towards the latter half of last year into slightly shorter stage, more core, Florida, for example.

And then we also made some network moves around peak and off-peak flying that reallocated aircraft into better places, to be honest with you, so they moved better gauge into different places, but also trimmed capacity in the off-peak, which moves demand into the peak periods.

And as Matt alluded to and talked about in his comments, that continues as we head into the first quarter.

Now our objective and the network team's objective is to continue to optimize within that band.

So you will see us continue to do things like that depending on the season, depending on the competitive behavior, depending on a variety of different things.

And so I think that, that -- we're just sharper about that today, plus we have a much broader reach than we ever did.

And I think that gives us a tremendous amount of flexibility with regard to what we do depending on the season.

Our following question comes from Joseph DeNardi.

Ted, in your slide deck, you refer to your cost advantage as Spirit's most valuable asset.

Wondering if you've ever given any thought to quantifying what the asset is worth?

The cost advantage has grown pretty substantially over the past few years, but stock price and your multiple obviously not moved in tandem.

So the market's not really seeing it as an asset.

Maybe it would help if you could quantify it a little bit.

Have you ever given that any thought?

That's an interesting question and a very obscure, like concept.

To be honest, I don't know how we would explore and Scott can think about it too or jump in here, but you're right, Joe.

We're extremely protective about that cost structure because it is an important part of who we are.

And going forward, one thing will always remain true is that's going to be core to who Spirit is, is maintaining and widening that advantage because it is core to the fare strategy; it's core to the non-ticket strategy; it's core to the network strategy.

And so how we quantify that, not sure.

Other than you can look at the 2 different cost structures and try to figure out what that means to us from a dollars perspective.

But it is definitely the one thing that we are extremely protective about.

And I think Scott made his comments in his prepared remarks that we're extremely pleased with the performance the company had last year.

We're very, very excited about what we have going forward.

Timing over calendar periods is to us interesting, but it's not what's most important.

And so when you look at the trends of the cost structure, when you look at the advantage that we have and watch it widen, that's what's most important.

Yes.

I would agree with that.

Joe, this is Scott.

So just one further comment is -- obviously, we are very protective of the unit cost advantage we have.

And I think it's a little bit unfair to say that the valuation has moved, which means they don't think the unit cost has the value.

I think there's a lot of other variables that have come into play there.

I think the unit cost is an extremely valuable component to our -- not only our company but our investment thesis.

So I think that may be a little unfair to say that.

Yes.

No.

I think I agree with you.

But just on the loyalty program, Ted, Matt, it feels like you're kind of indicating that maybe it's gotten overlooked a little bit given some higher priorities elsewhere.

How many people currently work on the program?

What's the size of that staff?

So Joe, we -- I don't think I'm going to actually answer that question directly.

I would just tell you that it's something that a number of us, including myself, pay attention to and we talk about frequently.

And we're in the midst of finalizing what our new program is going to look like.

And we've done a lot of work on understanding lifetime value of leisure customers and we've done a lot of work behind it.

And we've been talking about it for a while.

And the only reason why we haven't rolled something out yet is because we wanted to make sure that we get it right.

You don't get many chances to change your loyalty program and we want to make sure that we roll it out correctly, that we're putting the right program together.

And I'm really excited about the opportunity that we have there to make it more reflective of a program that our leisure customers are looking for.

Yes.

I would add that the precursor to all of this, to guest improvement, to customer service metrics, this all started with us running a better airline.

And we needed to know that we were going to do that consistently and regularly.

And to Matt's point, we want to make sure that we -- when we talk to our guests about how they're getting value from us, we can back it up.

And I think that was the first step and something that now we've proven.

And so now we can really let the guest-focused people really turn loose to focus on what is going to be best for a Spirit customer.

Hello?

Are you guys there?

Are there any more questions in the queue?

Our next question comes from Rajeev Lalwani.

Actually, I wanted to come back to the CASM discussion.

I'm not sure if this is for Ted or Scott, but can you just talk about general trends that you're seeing on unit costs?

I think the 4Q numbers maybe came in a bit wide.

I get the geography moves around 2019, but there's just been a lot of data points out there about just lots of pressures on cost maybe related to that.

Anything to think about as far as labor is concerned now that pilots are behind us as far as other groups or types of employees that may need step-ups?

Yes.

Rajeev, this is Scott.

As we mentioned in the update in the prepared remarks, we've adjusted financing mix for '19.

We've lowered stage.

So look, in reality, looking at the calendar view year-over-year does create some awkwardness.

We have some timing of the pilot contract, timing of the 319 purchase in 2018 and even maintenance events timing.

In fact, if you had signed the pilot contract in 2018, January 1, we would be down unit cost in Q1, and it would have material impact to full year and probably wouldn't even be talking about unit cost at this point.

So the timing does make it a bit awkward.

So we feel good about where we sit today.

We feel good about a growing CASM advantage.

And we said earlier, we're very protective of the unit cost advantage and always looking for ways to widen that gap versus the industry.

A quick one for you.

Are you seeing any signs of lower fuel making its way to the revenue environment, whether it's pricing behavior or capacity?

Any data points?

I think Spirit, a couple of years ago, was one of the first to see some of the pressures that we noted back in '15, '16 or so.

Rajeev, no.

We're not really seeing evidence of that.

The only thing I would mention is that off-peak periods are still off-peak and that really hasn't changed much.

And that was in -- that's when fuel was elevated last year and that's when fuel came down in the fourth quarter and where we are now.

It's sort of the off-peaks are the off-peaks, and we're feeling pretty good about the peak.

So I think to answer to your question directly is no.

Our following question comes from Catherine O'Brien.

Maybe first, a quick follow-up to a question Savi had earlier.

It sounds like with the ramp-up of your new international service, you're expecting maybe a larger tailwind from Easter versus the 250 basis point headwind you mentioned for the March quarter.

Is some of that just a timing of the holiday?

One of your peers mentioned they were expecting a larger June Q benefit.

Or is it really just this international boost that you didn't have last year that's driving maybe a larger Easter tailwind?

Yes.

I think, generally speaking, the tailwind for Q2 would, when the Easter shifts, is going to be about the same as if there's a headwind in Q1 or vice versa depending on how Easter moves around.

So when we get into the Easter period, we're going to be able to obviously see a lot more on closing demand and how that's going to materialize.

Is it possible that the tailwind would be greater in Q2?

Sure, it's possible.

I don't know that yet, and we'll know that as we get closer to the period.

So I would just tell you that overall, we're feeling pretty good about the peaks.

And just to reiterate, we do believe the international routes are going to be really beneficial to Q2 as we move forward.

Okay.

Great.

And then just another one.

So Spirit used to talk about getting to 50-50 for the ticket revenue and non-ticket per passenger.

In this quarter, you're very close.

So first, is that still a goal?

And then second, do you think that gap continues to close?

Or do you think if current -- if the current demand environment holds, your fare revenue per passenger should continue to recover back towards close to 2014 levels?

Yes.

Sure.

So as you mentioned there at the very end, we do know where the ticket fare resided in the past and there's a lot of upside and opportunity to keep pushing our ticket revenue up.

We don't set a goal to say that we should have 50-50 non-ticket and ticket.

Sometimes it comes out that way because of seasonality or what's happening in the industry.

But really, we're just -- we're out there trying to maximize unit revenue, how we get it and when we get it, and that's what we're always going after.

Sylvia, this is DeAnne.

I think we are out of time for questions today.

Thank you all for joining us, and we'll talk to you soon.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.