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Executives

Maurice J. Gallagher, Jr. – Chairman of the Board & Chief Executive Officer

Andrew C. Levy – Chief Financial Officer & Managing Director Planning

M. Ponder Harrison – Managing Director Marketing & Sales

Analysts

Michael Linenberg – Merrill Lynch

Kevin Crissy – UBS

Steve O’Hara – Sidoti & Company, LLC

James Parker – Raymond James

James Parker - Raymond James

Duane Pfennigwerth - Raymond James

Bob McAdoo - Avondale Partners

Travis Anderson - Gilder Gagnon Howe

[Scott Mackey - AAD Capital]

Kim Zotter - Imperial Capital

Allegiant Travel Company (ALGT) F3Q08 Earnings Call October 22, 2008 1:00 PM ET

Operator

We have on the call today Maury Gallagher, the company’s President, CEO and Chairman, Andrew Levy, CFO and Managing Director of Planning for the company and Ponder Harrison, the company’s Managing Director of Marketing and Sales. Today’s comments will begin with Maury Gallagher followed by Ponder Harrison and then Andrew Levy.

After the presentation we will hold a short question and answer session. We wish to remind listeners to this webcast that the company’s comments today will contain forward-looking statements that are only predicts and involve risks and uncertainties. Forward-looking statements made today may include, among others, references to future performance and any comments about our strategic plans.

There are many risk factors that could prevent us from achieving our goals and cause the underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed in or implied by our forward-looking statements. These risk factors and others are more fully discussed in our filings with the Securities & Exchange Commission.

Any forward-looking statements are based on information available to us today and we undertake no obligation to update publically any forward-looking statements whether as a result of future events, new information or otherwise. The company cautions users of this presentation not to place undue reliance on forward-looking statements which may be based on assumptions and anticipated events that do not materialize.

The earnings release as well as a rebroadcast of this call are available at the company’s investor relations site ir.AllegiantAir.com. At this time I would like to turn the call over to Maury Gallagher for opening remarks.

Maurice J. Gallagher, Jr.

It’s a pleasure to talk with you again this morning. Joining me today as the operator indicated are Andrew Levy, our CFO and Managing Director of Planning, Ponder Harrison, Managing Director of Sales and Marketing and also in the room is Robert Ashcroft of Vice President of Planning. I’ll give a brief overview, Ponder will comment on our revenue results and Andrew will wrap up with comments on our network activity, expenses and balance sheet.

Once again, we had an excellent quarter. If you recall, our last conversation we talked about our unit revenues beginning to increase nicely particularly in June. The story this quarter is the maturing of these revenue increases. They are the culmination of a great many changes taken by our management team over the past year to maintain and increase our profitability in the face of accelerating fuel costs.

It takes time to roll these changes through our system. But, in the third quarter we began to see some real traction from reductions in capacity and corresponding fare increases. As a result, operating margins almost doubled to 7% this quarter from our second quarter operating margin of 3.6% while fuel was essentially unchanged from the second quarter. I might add that we produced our results without the benefit of any fuel hedges.

Ironically, while operating without hedges opened us up for some criticism when fuel prices were racing towards $150 a barrel, it’s serving us quite well now that oil prices are in free fall. As we have been commenting, our number one corporate goal is profits. Moreover, we continue to be focused on double digit margins as our standard. Last year we achieved these results in the third quarter and then fuel began its decline.

We reacted by cutting long haul flights in a number of markets and trimming capacity in many others. We redoubled our efforts to increase our ancillary revenues and I’m pleased to report an increase of $11 per passenger to $32 in the quarter a 51% increase. We also focused on higher load factors with a $30 plus per passenger in ancillary revenue, we wanted to fill as many seats as possible and we achieved a 94% load factor for the quarter in our scheduled service system, averaging 137 passengers per departure.

The overall net effect of these changes is a stunning 33% increase in total RASM. Regarding capacity reductions we were very focused about who we handled them. With a cautious effort to end a number of our long haul flights and to trim capacity in many of our mid haul markets such as Peoria and Des Moines. We were also careful about how we redeployed our new service emphasizing short hauls looking to trim our stage length.

This combination of fewer trips in the market and a shorter overall stage length we knew would allow us to increase unit revenues necessary to try and catch up with accelerating fuel costs. The outcome of these efforts for this quarter for our scheduled service was 4% more departures on 3% fewer ASMs resulting in a 7% shorter stage length. The last element of the puzzle was to focus on increasing our passengers per departure.

This would allow us to not only leverage our increasing ancillary revenues but also to spread out costs, particularly increasing fuel costs across more passengers on each flight. The result is we carried over 100,000 more passengers during the quarter, a 14% increase compared to the third quarter in 2007. Moreover, the combination of a shorter stage length and more passengers per flight allowed us to substantially drop our fuel consumed per passenger.

We dropped our gallons consumed in schedule service 14.5% from 18.7 gallons per passenger in the third quarter of 2007 to 16 gallons this quarter. In summary, this marginal increase in departures and fewer miles flown generated 14% more passengers paying us an average of $32.28 in ancillary revenue at a higher average fare and we consumed less fuel per passenger while doing it. Those are very good results.

As I mentioned previously, these outcomes produced a very respectable return in our slowest quarter of the year I might add. The 7% operating profit with fuel at an average of $120 per barrel. Now, fuel has dropped more than 50%. Let me talk about our fix fee flying for a moment. Another change this year was that that portion of our business was up substantially.

Our departures year-over-year are up 73% while revenues have increased 19%. Ponder will take you through a number of these details in a momentum. The increases in fixed fee activity was well timed from one aspect, mainly we have limited fuel exposure from this increased flying. Lastly, as we announced in our release, we have recently been approved by the Department of Defense as a charter services provider.

We’re not sure what the impact will be as of yet but are comfortable we can do an excellent job transporting our military personnel in and around the US. Since late 2007 we have been focused on increasing unit revenues to offset our accelerating fuel prices. As I stated, trimming longer haul, poor yielding flights and capacity in general has been required to generate higher unit revenues.

We have had the added benefit of our ancillary revenues to super charge this effort. But, during this process overall growth had to slow as we focused on rearranging our system. Reductions in capacity and a shorter stage length have also generated slack in our system. We are not as efficient as we were last year at utilizing our personnel and aircraft. As an example, we only flew and average of five block hours per day in the past quarter versus six hours last year or a 16% reduction year-over-year.

As a result, our fixed cost for aircraft, labor and other non-fuel costs have increased on a unit basis. We’ve seen this reflecting in our ex fuel costs per passenger this quarter, $53.44 versus $49.83 in last year’s 2007 quarter. Ours is a simple system out and back. We have no hubs, no connections nor any through passengers. We are focused on the passengers we carry on a particular segment and the associated revenues and costs.

As a result, we have been able to make many changes in just a few months to produce these improving returns we’ve seen this quarter. I might add, it’s a real compliment to this management team and the 1,500 team members who provide the leadership and flexibility to make these mid course corrections necessary to dealing with the changing environment dictated by fuel in the past 12 months.

In closing, our focus has been on enhancing revenues in the past year. We certainly understood that unit costs would increase but we certainly also understood it would not be as much as the unit revenue increases. The revenue enhancements we have made to this system during this [regenerating] have positioned us exceptionally well for the coming months. Our 33% increase in total RASM in our schedules services is indicative of these enhancements.

Our traffic outlook remains good. We are comfortable we should be able to maintain our $86 and change average fare from the fourth quarter of last year as well as meet or exceed last year’s fourth quarter load factor in the coming months. As fuel moderates to the $70 barrel range and we become more comfortable that this is the norm versus the exception we will begin looking at ways to accelerate growth.

As we look at future growth we will not lose the benefits of our revenue enhancements, our $32 per passenger ancillary revenue nor our understanding of how to manage high load taxes. What we will gain will be increased efficiencies or lower cost per passenger as we improve our current aircraft and personnel utilization and better spread our fixed costs across more production.

Let me turn things over to Ponder to add his comments.

M. Ponder Harrison

As Maury already pointed out, all facets of revenue growth during what is traditionally our weakest quarter worked out very well. We remained true to our historical approach of aggressively adjusting capacity to fit demand on a market specific basis. This philosophy fits solidly with our flexible leisure focused destination oriented business model and has served us well even before fuel prices skyrocketed and drastic capacity cuts throughout the industry became vogue.

However, we approached the third quarter much more cautiously this year than in years past and we believe that this strategy was more than validated based upon the exceptional year-over-year unit revenue improvement. Now, to the numbers, as Maury mentioned total operating revenue grew by 35% to just over $116 million, a year-over-year increase of approximately $31 million. Equally important, all major revenue line items, fix fee, scheduled service and ancillary contributed positive year-over-year results.

Let’s briefly review each one individually. First off fixed fee, fixed fee revenue increased significantly as Maury mentioned by 93% year-over-year producing $14 million and comprising just over 12% of total operating revenue. The year-over-year gains were driven principally by three factors, first additional flying that we performed for Harrahs in Tunica Mississippi. Second, track charter program flying for MLT Vacations, a contract which begin in June of this year and actually will end this month.

Third, a significant uptick in our fall ad hoc charter work. Availability of our east coast based aircraft for charter lift correlates quite well with the significant annual third quarter capacity reductions in our Florida markets. We’re also seeing the benefit of a very new aggressive sales team focused on ad hocs that we put in place back in March of this year.

With respect to scheduled service, despite a 3% overall reduction in capacity as dictated by ASMs, scheduled service revenue increased year-over-year by 18.5% to just over $73 million. This represented 63% of total operating revenue. Three key drivers stand out here, number one capacity management. Though scheduled service ASMs were down slightly, more dramatic cuts were made in select destination markets.

As was just mentioned, we’ve made it a habit over the years to severely reduce our Florida flying from mid August through the midpoint of the fourth quarter. Once again, we did this, only more dramatically given the expected fuel environment when schedules were actually loaded. Additionally, however Las Vegas capacity as measured by ASMs was reduced even more severely down 18% year-over-year.

As Maury mentioned, to combat lofty fuel prices we continued to actively shrink our scheduled service stage length year-over-year resulting in a 7% decline to 856 miles. As you would expect, our Las Vegas long haul routes were the focal point of this effort as its year-over-year capacity reduction far exceeded the system average.

To further quantify our seasonal capacity rationalization, capacity for our entire scheduled network for the third quarter was down 23% versus the second quarter in 2008 and 29% when compared to the first quarter of this year. The advantage of our MD80 fleet is that we don’t have to fly when we cannot make money.

The second key driver is traffic. We continue to produce record load factor results filling 93.8% of our scheduled service seats in the third quarter up 7.6 load factor points year-over-year. This is our second consecutive quarter of 90% or better load factor production. When compared against all US domestic reporting carriers, Allegiant has been number one in load factor for all three quarters in 2008.

When each passenger is worth over $30 in ancillary we’re obviously heavily incented to fill the aircraft. In the third quarter scheduled service passengers increased to $854,000 or 14% year-over-year. Combined with departure growth of 4% the resulting 10% growth in passengers per departure was nothing shy of extraordinary to say the least. Said differently, we generated 137 passengers per flight in the third quarter of this year versus 125 passengers per flight in the third quarter of 2007.

The third key driver is price. While reducing our average stage length and generating record load factor results, conventional wisdom would expect at least a moderate trade off in average fair. In fact, just the opposite was true. We saw a 4% year-over-year improvement in our average fair. A again of more than $3 resulting in an average fair for the quarter of just over $86 per passenger.

As you would also expect, this coupled with our dramatic capacity reductions produced exceptional unit revenue metrics as passenger revenue per ASM jumped 22% year-over-year to $0.0928. Now, let’s turn our attention to the ancillary revenue line item to complete the scheduled service revenue story. We continue to maintain our position as the global industry leader in ancillary revenue generation.

As such, we’re delighted our ancillary revenue production continued its climb, increasing by 73% year-over-year to $27.6 million in the quarter. This translates in to a unit rate per passenger of $32.28 or as Maury mentioned, up $11 or 51% year-over-year and up $4 over last quarter. That’s our largest sequential quarterly gain ever since we began producing ancillary revenues and recording them.

Further, ancillary revenue per passenger now represents 37% of our scheduled service average fair. Better yet, the ancillary category overall appears to present a very limited correlation to stage length. With scheduled service ASMs down 3% year-over-year, ancillary RASM was up 77% generating $0.0374 per available seat mile. So, when combined with our passenger RASM or $0.0928 our total revenue ASM or TRASM for the quarter, as Maury mentioned, improved 33% to $0.1275 versus $0.0959 in the third quarter of 2007.

By any comparison we believe these are exceptional results and provide further evidence of the strong pricing power we enjoy in our markets. These ancillary gains reflect July prices increases to the current level of $15 one way and $25 one way for our web baggage and our airport baggage programs respectively. Appreciate the power of these programs, with regard to check baggage we now carry approximately .55 bags per customer versus over 1.2 bags per customer before we actually began charging for this service.

As a result we’ve realized serious cost savings and revenue benefits. That said, our newest challenge, and I’m sure we’re probably not alone in the industry on this is managing the avalanche of free carryon bags now filling every inch of our overhead bin space. Some would argue that it sounds like a new revenue opportunity but we’ll have to address that in future calls.

Additionally, we’ve made solid strides in further developing our ability to dynamic revenue manage pre-assigned seat selection by market and by seat type. For example, exit row seats and other seat types based upon their actual location in the aircraft. Our auto rental car revenues in Florida remain very strong throughout the quarter and we are also currently in negotiations to renew our exclusive partnership agreement with Enterprise Rent-a-Car the parent company of National Rent-a-Car, Enterprise and Alamo rental car companies.

As we’ll we’re pleased with our hotel production in the Las Vegas market for the quarter as we generated 14% more total room nights year-over-year which translated in to an increase in room nights per Las Vegas departure of 32%. Looking ahead, we are constantly searching for new ways to improve ancillary revenue through product innovation rather than just simply by increasing price points for existing product offerings.

Just last week we introduced a priority boarding feature which for a nominal fee permits passengers to board the aircraft first and possibly claim that value to carryon luggage overhead bin space. Later in the fourth quarter we will roll out a web check in enhancement which will allow remote boarding pass distribution within 24 hours prior to departure. In certain of our Florida destination cities where seasonal traffic patterns will sometimes produce up to 40% local Florida originating demand, this will be a very welcomed amenity.

Looking forward, we are actually not adding a new destination this year as we have done in the fourth quarter of prior years. However, we are introducing a number of new routes, as we mentioned in the release, throughout our scheduled system in the fourth quarter with the majority of the growth focused in our Phoenix and Florida markets. As the numbers above discussed proved, we are incented heavily to run high load factors, maximize revenue per passenger, maximize ancillary revenues and thus total revenue per departure and total revenue per passenger.

With October’s revenues all but in the bag, we are pleased thus far with our progress in the fourth quarter. However, we obviously remain quite cautious about the impact of the recent financial disruption and what it could have on future customer discretionary spending. That said, the current fuel environment provides increased flexibility for us to aggressively price our product lower in order to drive demand if so required.

Now, I’ll turn it over to Andrew to review our market planning activities as well as our fuel and financial details.

Andrew C. Levy

We’re pleased to report our 23rd consecutive quarter of economic profits. Our 6.9% operating margin and 6.6% pre-tax margin lead all our US peers that have reported to date. While our third quarter ’08 profits fall short of our goal of double digit margins, we have made progress as compared with the preceding quarter and we remain confident we can return to that level of profitability as soon as the fourth quarter if fuel prices remain near current levels.

We have repeatedly stated we can produce strong profit margins at any fuel price as long as we have time to adjust our network and capacity. While these adjustments were made in the second quarter when we loaded our third and fourth quarter schedules, based on our expectations of substantially higher fuel prices and now instead of nearly stable fuel prices they have dropped dramatically to levels close to 50% of where the futures curve had predicted prices would be.

Obviously, we are very pleased with this development and we will enjoy 100% of the benefits since we ceased our hedging program over one year ago. Turning to costs, we are pleased with our cost management during the third quarter. As Maury stated in his comments, when utilization and average stage length are reduced, unit costs will increase but, this does not overly concern us as long as revenues increase faster than costs.

We manage our business to maximize earnings not to minimize unit costs. Three expense areas increased at a faster pace than revenues and let me touch on each of these. First, fuel expense increased by 55.1% driven mostly by an increase in cost per gallon of 48.3% from $2.32 to $3.44, only slightly lower than the $3.52 we paid during the second quarter. Fuel did us no real favors in the third quarter, our improvement and performance compared with the second quarter was mostly due with having more time for our network and capacity adjustments to take affect and our ability to increase our ancillary revenue by more than $4 per passenger.

However, our fuel expense for the fourth quarter at this time looks very different and if prices remain at our near current levels that should propel significant margin and earnings improvement. Second, depreciation and amortization expense increased 46.7% mostly because we own 16 more MD80 aircraft than we did a year ago. Six of these aircraft were on lease during the third quarter to a European airline and will enter service starting later this year. I will provide further details in a moment.

Finally, maintenance and repairs expense increased 70% compared with the same quarter a year ago. The increase is mostly due to more airplane scheduled maintenance and more expensive events because of where these particular aircraft fall within their maintenance calendar, more engine maintenance events and higher parts and repair expense. The year-over-year comparison was particularly difficult since third quarter ’07 maintenance expense of $69,000 per aircraft per month was lower than the $78,000 per aircraft per month average we experienced during 2006 and 2007.

However, the $91,000 per aircraft per month we experienced during the third quarter is higher than the average principally due to the reasons outlined above. We now expect our maintenance and repairs expense to be around $91,000 per aircraft per month through 2009. Again, this is mostly due to the quantity of aircraft heavy maintenance events schedule for the next several quarters and our belief they will cost more per event due to many of these aircraft having more substantive seat check required.

We’re recommending you think about our maintenance and repair expense as largely a fixed cost. Because of our low aircraft utilization we do seat checks when they reach their calendar limits rather than their flight hour limits. Other maintenance and repair expense items are driven more by the quantity of aircraft as opposed to their utilization. Recall, we have no power by the hour agreements. We believe if you forecast maintenance and repair expense using this approach it will help you better predict our future expenses.

Let me now touch on our balance sheet and liquidity. We ended the quarter with $138.6 million in unrestricted cash and short term investments down from $153.8 million at the end of the second quarter. Key transactions during the quarter included capital expenditures at $8.8 million consisting principally of the purchase of two aircraft previously under operating lease for $4.1 million and the purchase of two spare engines for $2.5 million and the reduction in debt to $70.1 million from $75.2 million at the end of the preceding quarter.

In addition, our air traffic liability declined by $3.8 million due to seasonal reductions in capacity and having our future schedule open for four months at the end of the third quarter versus 5.5 months at the end of the second quarter. We remain very comfortable with our liquidity position and are particularly pleased that we have pre-funded to a large degree much of our 2009 growth through the purchase of six aircraft earlier this year.

These aircraft will enter our fleet as follows: one, at the very end of this year; three during the later part of the first quarter 2009; and the remaining two will enter service by the end of fourth quarter 09. Please note that the work required to prepare these aircraft for service is capitalized and makes up a substantial portion of the 4Q and 2009 cap ex forecast we outlined in our release.

Lastly, let me touch further on the guidance issued in the release and how we are viewing future capacity growth going forward. Assuming lower fuel prices persist, we will benefit substantially but our concern is now shifted to the global financial crisis and how it may impact demand and the price we can charge for our services. So far so good, we see no evidence of a change in demand due to the macro events but we have been cautious in our decision about capacity growth for the first quarter of 2009.

As noted in our release, we expect system departures to be up about 5% and ASMs to be up about 7% in 1Q ’09. We will continue to closely monitor our forward bookings and if we believe there are opportunities to insert more capacity and grow earnings, we will do so. We have plenty of time to make these decisions and still impact first quarter results since the key period for the quarter starts in the middle of February and continues through March which has historically been our strongest month of the year.

Thank you and we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Linenberg – Merrill Lynch.

Michael Linenberg – Merrill Lynch

I have a couple of questions, first just a nit here, Maury when you had given some early guidance on the fourth quarter you said the indication was that you would meet or exceed the fourth quarter of a year ago. How should we take that when you talk about it meeting or exceeding when the last couple of quarters your loads have been up significantly on both the scheduled and on a system basis so are you tempering the load gain? Maybe it’s up a couple of points or are we going to see something like we saw in the third quarter?

Maurice J. Gallagher, Jr.

Let me first clarify Michael that I wasn’t suggesting fourth quarter numbers, I was referencing fourth quarter statistics we achieved last year. I think you asked specifically about the load factor that I referenced and just to be conservative, I’m not trying to temper and say that we’re not going to make good numbers but I’m pretty comfortable that we can make those numbers at this point in time.

Michael Linenberg – Merrill Lynch

My second question when we look at your departure and ASM stats for fourth quarter and even first quarter of ’09, is that scheduled or is that total? And, if that is total can you just break out between scheduled and charter only because your charter numbers were up a lot and I’m just trying to get a better feel of the breakdown between the two?

Andrew C. Levy

Those numbers are total so that does include the fixed and I’m afraid I don’t think I have those numbers at my finger tips at the moment but clearly the fixed fee has gotten larger year-over-year. The business is still driven by what we do on the schedule side of the house.

Michael Linenberg – Merrill Lynch

Just I guess with the MLT piece going away in October how much of that was – because I know we can kind of back in to it, what did that represent of the total?

Andrew C. Levy

MLT was a fairly meaningful contributor to third quarter earnings. I’d say I believe it was in the range of about $3 million of revenue, somewhere in that range. And, we have a partial month of that at a much reduced amount of flying in the month of October and then that program will be over.

Michael Linenberg – Merrill Lynch

Then just my last question, this may have come up on the last call but where you guys are with respect to new aircraft purchases because at $110 or $120 oil and where the MD80s are on an efficiency basis you may have come to a different conclusion than where you would be today with oil under $70 a barrel. Just your latest thoughts on that would be great?

Maurice J. Gallagher, Jr.

I’ll comment and then Andrew might have some further comments. The world has changed considerably at least in my looking glass and we’re sitting on the sidelines at this point just wondering what’s the outcome of all this. We certainly have our head down focused on our activity for next year, we’ve had a lot of growth already in the system. New airplanes, are they available? I don’t know. Boeing has always been very tough trying to even get stuff out of them.

My guess is they’re going to loosen up considerably. Having said that, we like what we’ve got right now in our formal with fuel coming down it really has kind of made this business even more advantageous. But, at the end of the day we’re on the sidelines right now. At a minimum we’ve been told there’s minimum debt out there knowing you can finance the airplanes. But, be that as it may, we like what we’re doing at this point.

We’re never going to say never in this regard but it’s a good time to sit and watch we think.

Andrew C. Levy

No further thoughts but let me go back to the question about MLT, it actually contributed about $2.4 million of revenue in the quarter.

Operator

Our next question comes from Kevin Crissy – UBS.

Kevin Crissy – UBS

Can you talk about the demand by destination and maybe the trends of I don’t know how you want to costify it fare or RASM kind of by destination if there’s been a change in that?

Maurice J. Gallagher, Jr.

Kevin, as a general rule we don’t kind of talk about those things on a breakout basis here. I’m not sure we’re even prepared to kind of go through it because we’ve got six, seven or eight destinations now with all the different things we’re doing.

Andrew C. Levy

Let me make one comment Kevin. I think that one of the interesting things that we’ve done is that we’ve mapped a little bit of the severity of the capacity reductions that we’ve made in some of our older destinations because we have been expanding the network. If you were to look at kind of let’s say a same store approach in Las Vegas, St. Petersburg and Orlando, three major destinations that we were in all of last fourth quarter.

In the great majority of those markets, the city pairs that we served this quarter and last quarter, we have fewer seats in the market. On an overall basis, if you wanted to look at it on ASMs, as much as we don’t care for that particularly as a good measure of capacity but the reductions are very significant, well in to the double digits. So, we expect to benefit as a result of that on the fare side of the equation and obviously it’s easier to drive very high loads when you constrict capacity the way that we have.

Operator

Our next question comes from Steve O’Hara – Sidoti & Company, LLC.

Steve O’Hara – Sidoti & Company, LLC

Just curious about your utilization, it seems like you have a ton of leverage there in terms of your hourly utilization. Is there a limit on where you can go with the MD80 in terms of daily utilization?

Maurice J. Gallagher, Jr.

When you say limit?

Steve O’Hara – Sidoti & Company, LLC

Well I guess my question is I assume maintenance will go up as hourly utilization increases past a certain point?

Maurice J. Gallagher, Jr.

Well, we’ve never pushed the airplane past seven hours in our five, six, seven years we’ve been doing this. I couldn’t disagree with you that if you tried to get 10 hours out of the airplane you’re probably going to spend more on maintenance, just day-to-day maintenance trying to keep the airplane [inaudible]. As we look forward though we just don’t see doing more than the seven hours a day for the utilization we’re looking at.

Having said that, that’s kind of a 20% increase in where we’re at now in the low fives for the third quarter and fourth quarter won’t be that much above that as well.

Steve O’Hara – Sidoti & Company, LLC

Then the second thing is in terms of our average stage length, I mean that’s come down quite a bit. Are you comfortable with the level it’s at right now? Do you see it continuing to decrease or possibly increasing with fuel where it is?

Maurice J. Gallagher, Jr.

Well, it will be increasing somewhat the fourth quarter as we’ve added some longer haul flying in Phoenix that’s stretching us out a little bit. Any other longer haul?

Andrew C. Levy

Yeah, there’s some longer haul flights that we’ve added in Florida as well which are performing very, very well by the way. It’s going to increase slightly.

Maurice J. Gallagher, Jr.

It should be in the high eights is what I would suggest to you to look at Steve.

Steve O’Hara – Sidoti & Company, LLC

Then lastly, the military charter, when does that begin?

Maurice J. Gallagher, Jr.

As soon as now. There’s a lot of paperwork to get done, there’s always paperwork with these things and hopefully we’re ready for a phone call here not in too distant future. In other words, go to work.

Operator

Our next question comes from James Parker – Raymond James.

James Parker – Raymond James

I have a question for Ponder. Ponder, what are you planning to charge for priority boarding?

M. Ponder Harrison

Jim, right now we are just rolling it out. We actually introduced it last Thursday evening and we initially loaded it at a rate of $5. That is purely experimental at this point. We have moved that price point around even since the initial load to a variety of price points not exceeding $10 I would add but probably every variation between $10 and $5.

We may couple that with some other services and try and further create value to the idea of boarding first. In particular we mentioned the carryon baggage opportunity. So, if you were to look at the website last week you’d see $5, if you looked at it over the weekend you’d see some different numbers so it’s a fairly dynamic price point at this moment because we’re just trying to understand it’s take rate.

I would mention that you need to book a pre-assigned seat with us in order to have the opportunity to priority board as well so those two are coupled together at this time.

James Parker – Raymond James

That was my next question, what proportion of your passengers purchase an assigned seat?

M. Ponder Harrison

I don’t know if we’ve ever really specifically released that number, I think we’ve talked in general terms. It depends on seasonality and the destination and on the stage length as well. But, often times I think a good average number would be roughly half our customers in general end up booking a pre-assigned seat.

James Parker – Raymond James

So who get’s on first? The people that purchase an assigned seat and then the priority boarding person get’s on?

M. Ponder Harrison

No. The priority boarding customers will actually board the aircraft first. The pre-assigned seat going forward simple gets you the seat.

James Parker – Raymond James

And how do I know if I’ve gotten a priority boarding pass whether this isle seat is already taken by someone?

M. Ponder Harrison

Well, it’s a separate product. Again, if you’ve not purchased a pre-assigned seat in the web booking pass, by definition you don’t get priority boarding. Priority boarding is a new product, it’s called out specifically in our seat map menu and based on your confirmation and your boarding pass, you will know whether or not you’re a priority boarding customer.

James Parker – Raymond James

Maury, let me get to this maintenance issue, so I just think it’s great that you operate MD80s but the other side of that is maintenance which I’ve been around these type airplanes for a and usually in these supplies and maintenance, it’s on the upside. I think last quarter you had pretty high maintenance costs per aircraft and you were thinking maybe this quarter it goes down or maybe after this quarter. Now you’ve said it’s going to stay high at $91,000 through ’09. Is this the new maintenance rate? Are these aircraft maintenance costs going up that much and this isn’t a blip for a quarter or two or whatever? This is it. These aircraft just cost a lot to maintain?

Maurice J. Gallagher, Jr.

First off, I’m not sure I’d call them a lot at that point. A couple of things Jim.

Organizationally, we’ve not done as good a job over the last six to nine months in just managing stuff, making sure we’re getting proper repairs, things like that. And I think that’s just endemic of any organization that grows. We’re attacking it voraciously here with our new systems process. Our new building is allowing us to put everybody together and we’re literally going after a lot of this stuff day-to-day. We expect that to improve things.

The second area is that we’re just getting into some heavier maintenance checks that in the sense of they’re progressive. You do a light one the first time. The second one’s a little heavier. Third one’s heavier still. I think the fourth one rounds out the heaviest. Then you go back to the light one. Depending on where your fleet is at, you can progress into some heavier checks and I think we’re expecting to see more of those next year than we saw say in the past year.

Having said that, as Andrew suggested, we really do believe you should look at airplane maintenance kind of as a fixed cost. That $91,000 while it’s higher; we hope to beat that I might add; but that’s the conservative number that should be very doable by us as we go forward on average.

Operator

Our next question comes from Duane Pfennigwerth - Raymond James.

Duane Pfennigwerth - Raymond James

On your routes to Vegas year-to-year, I saw they were down four. I wondered if you could talk about how many you entered in terms of new cities to Vegas? How many routes were actually cut versus how many were added in that net down four?

Maurice J. Gallagher, Jr.

That’s a good question. I believe that we’ve eliminated about nine routes of a long-haul nature that we were flying last fourth quarter. A couple routes that we’ve added, and we mentioned this in the release, are really replacement routes like Appleton instead of Green Bay and Grand Island, Nebraska instead of Lincoln. We mentioned a couple others that we’ve added and not yet started here in Grand Forks and Casper, and earlier this year we added Santa Barbara and Monterey into Las Vegas as well. I think I’ve captured them all at that point. I’m not sure how that nets out.

Duane Pfennigwerth - Raymond James

You may have already answered this, but if you look at the routes that were in service in both periods, can you characterize same-store RASM to Vegas and what does that look like if you included or exclude trends in hotel take rate?

Andrew C. Levy

I can tell you that same-store RASM if you’re just looking at Vegas but the same holds true with St. Peter or Orland, air RASM is definitely up as a result of the capacity changes that we’ve made on a same-store route; same routes this year; same routes last year. So if you restrict capacity, there’s no question that you get higher fares. And we’ve seen that.

It’s kind of independent of take rate on hotels. We view that as completely separate and distinct I think.

Duane Pfennigwerth - Raymond James

On fuel, to your credit you’re unhedged here, the only domestic airline we follow that is. What price do you really consider it seriously? If you wanted to given your balance sheet, how much of ’09 could you hedge out and how would you think about doing that?

Maurice J. Gallagher, Jr.

We continue to debate internally on hedging. Certainly I think it’s been a wise strategy when fuel is moving so quickly, trying to pick a point upon an upside of the mountain or the downside of the mountain where you think you want to enter the market is tough. If you’re hedging, you should be hedging all the time because the theory then is that you’re just offsetting or locking in future revenues with fuel prices that exist at the time you’re making the sale.

The fallacy in that argument is that particularly in the past years, you’ve not been able to raise fares to be compensatory with the hedges that are being offered at the time, so you’re in effect locking in losses. If the fuel moves off of that, then you’ve either got a further loss or possibly a gain. As we sit here looking forward, as we discuss it internally, we’re still debating should we speculate. I [inaudible] the term speculate personally. At what rate should we do it?

We really believe managing the business for the business’ sake using the airplanes, using the capacity, using the accordion effect, add capacity, shrink capacity as fuel dictates allows us to be reactive to fuel. If you wanted to speculate, you’re starting to get into ranges where buying fuel at this point and Southwest buying in 50s in ’07 did well for them. We have no any specific plans at this point to buy hedges or to speculate at this point.

Andrew, do you have any further thoughts?

Andrew C. Levy

I think the only other thing I’d add is that we believe we have the balance sheet strength to hedge as much as we want, certainly through the entire 2009 timeframe and probably beyond that. I don’t think the balance sheet really comes into play as far as when we think about our hedging strategies.

Operator

Our next question comes from Bob McAdoo - Avondale Partners.

Bob McAdoo - Avondale Partners

Can you help us think about longer-term growth profiles? We know about the six airplanes, but in terms of realistically in terms of people trying to think about this company as a growth company going forward, what are your thoughts in terms of what’s reasonable to be assuming or given the nature of airplanes and the nature of roots assuming fuel doesn’t go jumping around a lot? How do we tell people that they should be thinking about this from a longer-term growth point of view?

Andrew C. Levy

The first thing I would say is that we grew revenues 35% this quarter. That may not have required a lot of capacity growth but that’s even better. I think clearly we’re a growth company. As far as adding of departures, aircraft and what not, we have lots of capacity. Historically we’ve operated the fleet closer to seven hours’ utilization per day and we’ve brought that in this quarter, and next quarter we’ll see the same thing.

Certainly as we get more comfortable with the economic environment both fuel and demand, we can very quickly add a lot of that capacity back in. On top of that we have these six airplanes that are going to be added to the fleet. We think that we’ll grow as fast as the opportunities present themselves. We think there are certainly lots and lots of opportunities in terms of new routes and adding back capacity to many of the routes that capacity which we took out because of what we’re looking at in the futures market on oil.

I think we’re just going to make decisions when we need to; not ahead of time; so that’s why we haven’t given any guidance beyond the first quarter.

Bob McAdoo - Avondale Partners

I guess what I’m saying is, obviously we’ve seen the Jet Blues of the world and some of these other guys who said, “Oh I can grow 35% or 40% per year forever.” At some point it gets to be too big to be able to do that. I’m trying to figure out where you think you guys are in that cycle.

Andrew C. Levy

I think that what we said before is we think the five-year 15% to 20% [compound] annual growth rate from a capacity standpoint is still very, very doable and that it’s not a matter of a lack of opportunities for growth if you look out in the future but on a tactical basis quarter-by-quarter we’re going to be focused on some of the issues we discussed today.

Bob McAdoo - Avondale Partners

Obviously with what’s going on on Wall Street and residential housing and every other crazy thing, what’s been the trend in terms of the last few days? Have we seen any pluses or minuses in terms of new bookings coming in through the call center or any new bookings coming through the website? Is there any kind of thing you can say in terms of the last few days versus what we were a week ago or two weeks ago or three weeks ago in terms of the flow of new bookings coming in? Is there any change one way or the other?

M. Ponder Harrison

Maybe I can give you some color on that. You may or may not be aware that traditionally in the fourth quarter we will run a Las Vegas fare special. It’s a fly free type promotion that lasts for approximately two to three weeks, and we just kicked that off this past Sunday. That was not in any way a reaction to the current market environment. That’s just something that we would normally do to try to load for demand. So we’ve got a fairly baseline really reaching back over the last four to five years of this same type of promotion, certainly in same-store markets.

As I think Andrew mentioned earlier, we’re not in a number of our longer-haul markets at the same point that we were last year. Probably eight or nine of them to be specific. Those were very strong contributors to the Vegas hotel take rate. They just couldn’t make money obviously at high fuel prices.

But when we look at a same-store sale, we would look at our hotel revenue. We’ve got a fairly good barometer like-for-like as to kind of how current bookings are progressing and right now they look like they’re coming in as Maurice indicated right on target. We don’t see a whole lot of reduction year-over-year. We certainly don’t see significant increases year-over-year at this point but again the bookings look very solid relative to what our expectation would be and on a year-over-year basis same-store sales seem right in line as well. We’ve not seen massive erosion.

Bob McAdoo - Avondale Partners

In terms of what’s going on in the last week versus a week ago or two weeks ago when the market was maybe even looking worse versus what’s happened in the last few days other than today, basically what you’re saying is there really hasn’t been any impact to it?

M. Ponder Harrison

I wouldn’t feel comfortable giving any kind of statistical point on that. I think one other variable worth mentioning is our stage length. As we brought the stage length in, it somewhat shortened our booking curve. We still have very good visibility looking out but we just actually are putting more demand into our periods on a tighter basis. We do that particularly in Florida as we add some of the new markets that have a much shorter stage length, so a number of those new markets we don’t have as good of visibility into them today say as we would had we been in them a year.

That being said, we’re comfortable with what we’re seeing right now.

Operator

Our next question comes from Travis Anderson - Gilder Gagnon Howe.

Travis Anderson - Gilder Gagnon Howe

I was really going to ask Bob’s question and I guess the only thing I would ask in addition is, I know you sell trip insurance. Have you seen any increase there perhaps or any fall off in farm economy with some of the problems in commodity prices at all?

M. Ponder Harrison

No noticeable movement in our trip insurance. It continues to move but it moves very slowly. We haven’t seen a jump in that as a hedge. No real noticeable impact negative or positive to the agricultural communities that we serve or the natural resource communities that we serve.

Operator

Our next question comes from [Scott Mackey - AAD Capital].

[Scott Mackey - AAD Capital]

Just a point of clarification that I think has already been clarified. When you talked about load and yield in the fourth quarter, you were talking about fourth quarter of ’08 versus fourth quarter of ’07 year-over-year sustaining load and yield?

Andrew C. Levy

Yes.

Travis Anderson - Gilder Gagnon Howe

The $91,000 per month per aircraft of maintenance, what did that look like last year?

Andrew C. Levy

Last year in the quarter I think I mentioned that it was $69,000. When we looked at it on a two-year average looking at ’06 and ’07, it was $78,000. In general it was fairly tight quarter-over-quarter. There were a couple outliers; one on the high side and one on the low side. Third quarter ’07 was actually the low side.

Travis Anderson - Gilder Gagnon Howe

You talk about the ability to dial up capacity on block hours. You’ve also got new routes that are already in process. As we think about dialing back up the block hours, are those more likely to come from existing routes or will those go to additional new routes?

Andrew C. Levy

I think those would be existing clearly. We’ve put out a lot of new routes. We have some more we’re going to be putting in and we certainly think there are lots more out there in future times. When we talked about dialing up capacity, it’s putting more capacity into existing routes particularly those where we’ve really taken a lot of capacity out on a year-over-year basis out of concern over the fuel prices that we were seeing.

Travis Anderson - Gilder Gagnon Howe

As I think about yield and load in dialing those block hours back up, then again maybe this goes back to your point of just looking on an overall earnings basis and not necessarily sustaining yield or load as I dial those back up or will those only be dialed up if I sustain yield and load?

Andrew C. Levy

I think that we’re going to put in capacity if we think we can increase earnings. That’s how we’re going to look at that. Could load and yield go down? Yes. It’s certainly possible because at the end of the day we just want to maximize earnings. But we’re going to be very prudent about how we do that to make sure that we give ourselves the best chance to actually increase earnings.

I think on load factor we have said that we’re going to manage for high load factors and I think that remains true regardless of the amount of capacity that’s in the market. The load declining because there’s more capacity is less likely than perhaps some yield erosion.

Travis Anderson - Gilder Gagnon Howe

As we go into these new routes, could you talk a little bit about historical experience just in terms of load and yield, your first three to six months as you get into these new routes? Is there an impact as I model this out or do they tend to come in higher or lower than the other aspects of the system?

M. Ponder Harrison

Maybe I can shed some light on that. You kind of have to look at each of the unique destinations. For instance, in our Phoenix expansion that we’ve inputted in load into the fourth quarter, every one of those markets is a market that we actually currently serve already. So those five to six cities, we’re already there. Typically where we have a presence we do see those markets come up to speed a little more quickly perhaps than we do markets where we have not had a presence.

For instance, we’ve added Bozeman and [Calis Bell] into Las Vegas. Those are new markets where heretofore we’ve had no presence. In the St. Pete market’s the only market expansion where we had not been is Lexington. All the rest we actually already have a presence. Again we’re adding of the five markets, three are new: Elmira, Hagerstown and Lexington. The other two we’ve been in.

In markets where we’ve had a presence, where we have a brand, where we already serve existing destinations we see I wouldn’t say instant traction but it’s very good traction very quickly. That being said, we load capacity in new markets we believe in the right time of year. This is when the wind’s at our back, there’s a natural desire to travel during these periods as well, and we’re able to get good market response fairly rapidly.

Travis Anderson - Gilder Gagnon Howe

Could you talk about the potential or the ongoing negotiations to some of the Vegas hotels and the rental car opportunity? As I model out the ancillary revenue, can you help me just kind of define the parameters? I appreciate the information on the take rates. That was very helpful. Just the potential opportunity that you see in negotiating or renegotiating some of those and what that could add to ancillary revenue per passenger?

M. Ponder Harrison

I don’t know that I can be extremely specific about that but we have been in negotiations with a number of the hotels here. We remain constantly in dialogue with them. We are always looking to maximize our position relative to reductions in rates. Rates are down year-over-year both on a flown basis as well as a sold basis. Really the strategy for us is to try to maintain margin and/or drive margin where possible and to try to drive that take rate.

As I think we mentioned, we did sell more room nights in the third quarter year-over-year even with the reduction in departures in Vegas and that’s what drove roughly instead of 14% room night growth we ended up having 32% room nights per departure in Vegas. We do believe there’s upside. We’re just trying to navigate that and it’s kind of a dance that we do on a daily basis. Nothing definitive at this point.

Just in terms of cars, we’ve worked exclusively with Alamo for a number of years. They’ve been acquired by the Enterprise Rent-a-Car Holding Company and we’re real pleased with our relationship. If we were to renew it, we’d probably do it on an exclusive basis and it would be extremely favorable to us. Otherwise we would look elsewhere.

Travis Anderson - Gilder Gagnon Howe

Is the opportunity on the hotel side for you guys primarily on that take rate and the ability to drive that higher or did you also in the quarter see a higher revenue per transaction or per room as well?

M. Ponder Harrison

I don’t know that we can comment on that. I think the take rate is certainly something we’re going to work on.

Operator

Our next question comes from Kim Zotter - Imperial Capital.

Kim Zotter - Imperial Capital

Most of my questions are already answered, but just a quick housekeeping item. What was your third quarter end debt balance?

Andrew C. Levy

$70 million give or take.

Operator

There are no further questions at this time.

Andrew C. Levy

Thank you everyone for your time. We appreciate your interest. We’ll look forward to talking to you at the end of January or thereabouts as we get ready for our first quarter of the new year on our fourth quarter activity. Thank you very much.

Operator

That does conclude today’s teleconference. You may disconnect your lines at this time. Have a wonderful day.

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Source: Allegiant Travel Company F3Q08 (Qtr End 9/27/08) Earnings Call Transcript
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