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Allegiant Travel (NASDAQ:ALGT)

Q4 2012 Earnings Call

January 30, 2013 4:30 pm ET

Executives

Maurice J. Gallagher - Chairman and Chief Executive Officer

Andrew C. Levy - President

Scott D. Sheldon - Chief Financial Officer and Senior Vice President

Analysts

Isaac Husseini - Barclays Capital, Research Division

Richa Talwar - Deutsche Bank AG, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

James D. Parker - Raymond James & Associates, Inc., Research Division

Hunter K. Keay - Wolfe Trahan & Co.

John D. Godyn - Morgan Stanley, Research Division

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Stephen O'Hara - Sidoti & Company, LLC

Glenn D. Engel - BofA Merrill Lynch, Research Division

Operator

Welcome to the Allegiant Travel Company's Fourth Quarter Full Year 2012 Financial Results Conference Call. We have on the call today Maury Gallagher, the company's Chief Executive Officer and Chairman; Andrew Levy, the company's President; and Scott Sheldon, the company's Chief Financial Officer. Today's comments will begin with Maury Gallagher, followed by Andrew Levy and then Scott Sheldon. After their prepared remarks, we will hold a short question-and-answer session.

We wish to remind listeners, at this webcast, that the company's comments today will contain forward-looking statements that are only predictions 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 goal and cause underlying assumptions of these forward-looking statements and our actual result 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 and Exchange Commission.

Any forward-looking statements are based upon information available to us today, and we undertake no obligation to update publicly 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 the 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

Thank you, operator. Good afternoon, everyone. Thank you for joining us again today for our fourth quarter 2012 conference call. It's a pleasure to be with you. Joining me as the operator indicated are Andrew and Scott.

I'm proud to announce our 40th consecutive profitable quarter, 10 years of continuous earnings. We had a 36% increase this quarter in net income compared to last year. While over during 2012, we increased net income 59% to $79 million and EPS, 58% to $4.06.

Our operating margin for the year was just short of 15%, up nicely from 11% last year. You've heard us say our continuing goal is to maximize our profitability. We're pleased with the results as a result of that.

On the aircraft front, we recently told you of our contract to purchase 9 A320 aircraft. We're excited about this transaction that's right in our wheelhouse. These aircraft will have 177 seats. They'll have improved economics compared to our MDs, mainly lower fuel burn and more seats. It will be fresh from their 12-year checks with most engine work updated. And we expect they will require a limited amount of investment in heavy maintenance in the coming years. We expect to take 7 this year and 2 of them -- the final 2 will come in 2014. Initially, we'll purchase the aircraft for cash and then look an alternative financing that's available. We're in good place -- in a good place with respect to aircraft availability as well.

During the next few years, the 9 A320s combined with our 9 leased GECAS 319 aircraft should provide us sufficient lift to take us through the end of 2014 and end of 2015. Airbus adds over the next 2 to 3 years will be used primarily for growth. While we will be retiring up to 7 MDs this year, we do not have anymore plan retirements for this airplane in the near term. This aircraft has been and will continue to be a solid performer. It will be a key part of our fleet for the foreseeable future.

Lastly, we continue to be pleased with the state of the used aircraft market. There are sufficient aircraft that price is appropriate for our business model. And as you saw with our [indiscernible] transaction, we work hard to achieve what we believe are the appropriate economics. If not, we move on. Our ample balance sheet and ability to transact for cash is critical in this space, and we will continue to be using these advance assets to our advantage.

Speaking of a strong balance sheet and available cash, how about that EBITDA this past year? We generated $190 million for a 21% margin. This represents, I might add, a 49% increase year-over-year in EBITDA. During -- and during the past 5 years, we've had this total increase over 200% from $62 million to this year's $190 million. And I might add, this is EBITDA, not EBITDAR.

Looking forward, assuming a reasonable growth and continuity in our margins, we expect the cash flow -- this cash flow generation to continue to grow. Our cash position, combined with our minimal levels of debt, put us in an enviable position. Historically, one doesn't think of aviation-related companies as cash-generating machines, but we are. Today, we have $400 million plus in cash. Indeed, we have managed to increase our cash balances in recent years while purchasing our new fleet of 6 757s and increasing our MD-80 fleet and associated engines.

Additionally, as you're all aware, we've paid our shareholders a onetime dividend this past quarter of $2 or almost $40 million. Our return on equity this past year, as a measurement, was 21%, up 15% from 2011. And our return on invested capital was still short of 16% at 15.7%. I might add this return, already one of the highest in the industry, is more impressive in my mind given the makeup of our balance sheet. Last year, we owned all our aircraft. As such, the asset values of these owned aircraft were carried on our balance sheet and are included in this calculation.

However, off-balance sheet-leased aircraft magnify returns on capital by allowing greater earnings from assets not including -- included on one's balance sheet. As soon as the next 3 to 5 years, according to our information, leased assets could be included on a company's balance sheet. And this inclusion will reflect much more closely the 2 assets available to our company. As a result, today's ROIC, for me, will not be tomorrow's ROIC.

Comparably, if we were to eliminate our aircraft from total assets, our ROIC could increase over 30%, a substantial change. I'm excited about our opportunities we look forward. We continue to make great progress with our automation enhancements. In particular, during the past quarter, we turned on our new booking engine. This was a result of 18 months of development efforts including overhaul in the architecture supporting our sales engine. While we still have a number of projects in front of us, the pace of implementation is proceeding very nicely.

Going forward, we will continue to follow our model as we have these many past -- many years past, working towards the success with our 3 stakeholders: our customers, our shareholders and our team members. And once again, let me recognize our team members. Since we began this effort almost 12 years ago, these folks have been critical to our successful growth and prosperity, and we all enjoy being part of a growing successful enterprise in what is arguably one of the toughest industries in the country. However, we need to be mindful that yesterday's successes are just those yesterday's. Long term, it's my strong belief that only the paranoid survive and prosper. A famous quote by Mr. Andy Grove of Intel saying, "We, as a result of that, will continue to be ever vigilant." Andrew?

Andrew C. Levy

Thanks, Maury. Our fourth quarter revenue performance was very solid. The total fare was up over $5 or 4.4% year-over-year, so $133 per passenger. Air-related ancillary revenue per passenger was higher by more than $8, or almost 27%, mostly attributable to the introduction of our carry-on bag fee and a higher contribution for checked bags.

Third-party ancillary revenue per passenger was up $0.31, or 6.4%, to $5.19 per passenger, our 11th consecutive quarter showing year-over-year increases. In combination, year-over-year ancillary revenue per passenger growth of almost 24% more than offset a $3 decline in the base airfare.

Trading a lower base airfare with higher ancillaries is one we very much like. Since customers continue to be drawn to the lowest base airfare possible before determining whether they'd continue through the booking flow on their way toward making a purchase decision. Once again, we are especially pleased with these results considering the 22% growth in scheduled service available seat miles we had during the quarter. The largest contributor to third -- excuse me, fourth quarter ASM growth was the larger fleet of higher gauge MD-80s. We now have 47 of the planned 51 in a 166-seat configuration.

ASM growth also was driven by our growing fleet of 757 aircraft, primarily used to support our fledgling Hawaii network. We ended the quarter with 5 in service and now have all 6 757s in our operating fleet. More seats per aircraft as well as the 3% increase in scheduled service or an average scheduled service stage length, mostly due to the introduction of our Hawaii service contributed to an over 10% decline in passenger RASM and a 3% decline in total RASM. The increased gauge was the largest contributor to a 3-percentage-point drop in load factor, 86.5%, which added pressure to unit revenue.

Additionally, new routes, not expecting, underperformed the rest of the system. Same-store markets, however, in which we operated the full fourth quarters in both 2012 and 2013, produced a 1.3-percentage-point improvement in total RASM despite ASM growth of 5.2% in these markets. As new routes mature, we will continue to invest in those which show good profitability trends and eliminate those that continue to underperform, same as we have always done.

Part of the decline in unit revenue is due to the introduction of larger gauged MD-80 aircraft in the Florida market during a traditionally soft demand period, which exacerbated our ability to fill seats. We expect load factors to begin to trend higher again and hope to be able to approach the 90% load factor we have historically been able to post now that the vast majority of our MD-80 fleet has been reconfigured, and we have a full selling cycle available in which to maximize revenue production for the additional seats.

That being said, we expect reaching 90% month in, month out, we will be tougher to achieve the higher gauge aircraft and may no longer be a realistic expectation. But we do believe we can drive higher loads than the 86.5% load factor we produced this past quarter.

During the quarter, the combination of larger-gauge aircraft and year-over-year fleet growth of almost 8 units drove capacity growth, but a decline in aircraft utilization of over 5% to 5.3 block hours per day muted the potential for even higher growth rates. Lower utilization also dampened our unit cost performance, but we are pleased with the year-over-year 4.4% reduction in cost per ASM excluding fuel.

Of course, as we always like to emphasize, we do not manage the business to optimize RASM or CASM, but instead to maximize operating margin and earnings per share. We are very pleased with the 1-percentage-point year-over-year increase in operating margin and even more so, with our 36% improvement in diluted earnings per share.

When we reported our November traffic, we shared our observation of a slower-than-normal booking trend for closer end bookings within the month. This trend continued in December, which is why our passenger RASM declined was greater than forecast during our last earnings release. This same trend continued in January, however, at a reduced rate. We attributed most of the softness to fiscal cliff concerns although it is difficult to prove this. However, with yesterday's poor consumer confidence numbers and today's reported GDP contraction during the fourth quarter, we are more persuaded that macro issues contributed to the weaker-than-expected demand we experienced.

Despite these macro issues, as we look after the balance of the first quarter, which is historically our strongest, bookings are very strong and we expect to have a very good quarter. In part, our optimism results from aggressively managing our capacity, which will result in another sizable decline in aircraft utilization in the first quarter of '13 as compared to the first quarter of '12.

During the first quarter of '12, we had too many seats in the market during off-peak days, as well as on off-peak times, which is particularly challenging with the continued high fuel prices we have experienced for the past several quarters. This was particularly true in the Las Vegas market. As a result, this first quarter, we had focused on much higher percentage of our flight to operate only during peak windows and expect our profitability to improve as a result.

Las Vegas available seat miles are expected to be flat year-over-year with an almost 16% decline in departures due to the shift of flying in the first quarter.

Our network continues to grow. We ended the fourth quarter with 195 routes in service and expect to end the first quarter of 2013 operating 198 routes. The largest increase in year-over-year capacity during the first quarter will be in Hawaii, which we did not operate last year, but it will still only represent 8% of scheduled ASMs and 2.3% of departures. The second one of this increase will be in Orlando, where we will grow ASMs by almost 28% and departures by almost 18%.

As a result, during the first quarter, Orlando will represent approximately 21% of scheduled service ASMs and 23% of scheduled service departures.

Saint Petersburg will also experience sizable ASM and departure growth. Along with our expanded bases in Punta Gorda, we are placing a lot of bets this quarter on Florida.

As our network continues to evolve, we will have an impact on our third-party products' mix. We expect to see a higher rate of growth in the sale of rental cars with slower growth in our hotel business due to the larger mix of seats in markets where demand for cars are stronger than hotels. However, we continue to be pleased with our performance in this important business area where we can drive substantial incremental profits while offering our customer -- customers, excuse me, meaningful savings when they choose to purchase these products from us in an air package transaction.

With that, I'll turn it over to Scott for a more detailed look into our financial results for the fourth quarter in 2012.

Scott D. Sheldon

Thanks, Andrew. Our fourth quarter cost performance exceeded internal expectations as our CASM ex-fuel decreased 4.4% to $5.63, slightly better than our previously guided range of down 4% to down 2%. On a full-year basis, our ex-fuel cost decreased 6.7% to $5.32 with trends continuing towards pre-2011 levels. As mentioned during our third quarter call, we anticipated some nonreoccurring expenses in the fourth quarter in addition to decreased aircraft utilization, which had a meaningful impact on our ex-fuel cost results. Nonreoccurring expenses during the quarter totaled $4.7 million and $8.7 million on a full year basis. In addition, our aircraft utilization decreased 5.4% to 5.3 block hours per aircraft per day, which placed additional stress on our cost structure.

Energy prices slightly increased year-over-year and on a sequential basis. Absolute fuel expense increased 13.3% to $92 million on a 9.3% increase in gallons consumed. On a per-passenger basis, our fuel cost increased 1.8% or $0.95 to $55 during the fourth quarter. Consistent throughout 2012, our fuel consumption efficiency improved both on our ASM and per-pax basis. At year end, we operated 45 reconfigured, 166-seat MD-80s, which was up 36 -- up from 36 aircraft sequentially and 7 aircraft year-over-year.

Our ASMs per gallon increased 9.1% year-over-year to 65.6% and our gallons per passenger decreased 1.8% to 17.2%.

Moving onto labor. We continue to employ one of the most productive workforces in the industry, with an FTE per aircraft now just under 30, despite of 14.2% increase in FTEs during the quarter. Our salaries and benefits per pax increased just $0.69 or 3% to $20. A key driver of cost control in this area continues to be crew efficiency. Consistent with prior quarters, we continue to drive increased productivity from our pilot and flight attendant work groups.

On a full-year basis, our pilot and flight attendant productivity, as defined as block hours to paid hours, increased 3% to 4%. An additional item to note in this area was our -- was on our last third quarter call, Mark have mentioned a period for potential changes to our pilot pay scales. As a result of our 14.6% trailing 12-month operating margin, our pilots received the pay increase, which took effect on November 1. We expect the full year '13 effect to drive incremental cost of approximately $6 million if we continue to produce a trailing 12-month operating margin of 14%.

We experienced a significant increase in station expenses during the quarter, which is driven by rate increases in Las Vegas. Station expenses increased 25% or $4.1 million year-over-year to $16.5 million or $12.40 per passenger.

Effective July 1 of last year, McCarran's T3 terminal, which is an international terminal, came online which increased our cost structure, which is our largest base. Assuming we operate with the same operational footprint in 2013, we expect our Las Vegas cost increase approximately $3 million to $3.5 million year-over-year. We are currently working with the airport and evaluating different options in an effort to reduce the effect of these rate changes.

2012 marked a return to historical expense trends in the maintenance and repair area. Maintenance and repairs expense per pax for the fourth quarter decreased $4.48, or 28.2%, to 15.9 -- excuse me, $15.90 year-over-year which is primarily due to a mix in heavy maintenance. During the quarter, we experienced a $7.1 million decrease in engine overhauls, which was offset by a $2.1 million increase in heavy structural checks.

Looking forward to 2013, we expect to see our maintenance per aircraft per month fall within our historical range of 100 to 110 per month with the first and second quarters trending towards the higher side of this range.

We continue to see the cost pressure in the depreciation expense line, which is driven by our 166-seat modification program, incremental 757s and 13.8% increase in average aircraft growth year-over-year. On a per-passenger basis, depreciation increased $2.48, or 33%, to $7.52 year-over-year. At year end, we had successfully modified 48 MD-80s to 166 seats, up from 7 aircraft in the prior year. Compounding this increase was approximately $1.5 million in accelerated depreciation during the quarter related to the planned MDA-80 retirements in 2013.

Looking forward to the first quarter, we expect to see an additional $1.1 million in accelerated depreciation related to these planned retirements. As discussed during our third quarter call, we expected to see cost pressure in the other expense line item during the fourth and first quarters. Expenses related to Airbus training, preoperating costs, and engine impairment charges drove an additional $4.2 million in expense year-over-year, which was as expected. Looking forward to the first quarter, we expect to see an additional $1.5 million in Airbus pre-op costs as we complete the certification process.

Quickly moving to the balance sheet. We ended the quarter with $353 million in unrestricted cash and marketable securities, which was up 10.4% from the third quarter. This is despite the $43 million capital deployment for a special dividend and share repurchases. During the quarter, the company paid a special $2 per share dividend totaling $39 million. In addition to our repurchase of approximately 55,000 shares for $4 million. The company currently has $41 million in remaining authority to be used throughout 2013.

Our unrestricted cash and marketable securities currently represents 39% of our trailing 12-month operating revenues.

Our CapEx spend of $16 million during the quarter primarily consisted of deposits for 7 Airbus A320 aircraft and the continuation of our 166-seat modification. At the end of the quarter, we have modified 45 MD-80 aircraft from 150 to 166 seats, for a total spend of $40 million. Looking forward to 2013, we are projecting total CapEx of $150 million to $160 million, primarily driven by the purchase of 7 A320 aircraft.

We ended the quarter with $150 million in total debt, which was down from $153 million at the end of the third quarter. Our leverage ratios continue to improve with our debt-to-equity ratio is now 37%, which is down from 41% in the prior year, our interest coverage is now 21x. And finally, our return on equity and return on capital ratios improved and were 20.9% and 15.7%, respectively. And with that, we're ready to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David Fintzen with Barclays.

Isaac Husseini - Barclays Capital, Research Division

This is actually Isaac Husseini in for David. I forgot I had a question for you. I appreciate the color that you gave us on the 1Q cost trends, but I was just wondering, just to clean up a bit of that, does the guidance that you give for the full year still hold of down 1% to 6%?

Maurice J. Gallagher

Yes. We're not updating that. That's -- I think we've put that out during our November Investor Day. So that's correct.

Isaac Husseini - Barclays Capital, Research Division

Okay. And then maybe just a quick one for Andrew. If you can just give us a quick update on Hawaii, I know during the Investor Day you talked about the seasonality and how strong the difference between the peaks and the troughs were. Is there anything that you've been doing that's different to manage that and any results that you can share with us on that?

Andrew C. Levy

I think -- look, I think this quarter, we had 2 routes that operated during the full quarter, and then we had, I think, it's another 5 routes that started in mid-November. With the startup service, especially just the nature of it, the first flight out might be full, but the one coming back right away is empty. It really just doesn't give a good indication as to what those routes are going to look like. So, I mean, I think the startup expenses and things of that nature just kind of pollute the numbers at this point. I don't think anything has really changed. I think that maybe one thing that's changed since we visited in November is that we've made some capacity adjustments trying to do what we do for the rest of our network and make sure that we fly the right amount of seats in good times and then for demand periods. So we've had one route and we've had a suspension of service for about a several-week period in the January, February time frame. And I think you'll continue to see us do things like that as we go forward as we better understand the seasonality, which is in general, it's the same across all markets, but some markets can better support the off-peak demand periods than others. So I think maybe the only change is that we're starting to get a little more aggressive on how we allocate capacity there. But we're very early stages, we're going to learn a lot as we continue to go forward, and just like every other network that whatever the base we use started service, we learn and then we adjust accordingly.

Operator

Our next question comes from the line of Michael Linenberg with Deutsche Bank.

Richa Talwar - Deutsche Bank AG, Research Division

This is actually Richa Talwar filling in for Mike. I was hoping first that you can comment on your experience of listing on KAYAK. I believe you're planning on listing on that site in December. I was hoping you could share whether or not that move was accretive in terms of bringing on new customers and if we could expect the website and other OTAs to be an important source of revenue in the future?

Andrew C. Levy

This is Andrew. I think the answer to the second part is no. We have no intention whatsoever of listing our inventory in other channels where you can transact. So absolutely no plans at all to list to any of the large OTAs out there or any of the GDS systems, et cetera. KAYAK is a very, very small limited experiment that we did begin in late December. And so far, the results, I think, are generally mixed. It appears to be helping in a couple routes and in others haven't seen much of an impact at all. So we'll continue to experiment with that and perhaps continue to use it in certain markets and maybe not in others, but we remain committed long-term to the strategy of distributing our product directly to the end user, avoiding intermediaries, and we think owning the customer is strategically really important for us. And so that hasn't really changed, but we will continue to experiment a little bit like we're doing right now with KAYAK.

Richa Talwar - Deutsche Bank AG, Research Division

Okay. And just one more follow-up on the Hawaiian question. Yesterday, we heard on Hawaiian's conference call about the competitive capacity between North America and Hawaii, particularly between the West Coast and Hawaii, and that weighing down on results in the December quarter. Can you comment on that and maybe just looking out how the competitive landscape is shaping up and how that might be impacting results?

Andrew C. Levy

Well, I think it's hard for us to be able to say how it's impacting since we really don't have a history in these markets. This was our second quarter serving Hawaii at all. Keep in mind, there's only -- there's really -- well, there's 2 routes where we are competing. One is Honolulu-Las Vegas and the other one is Bellingham, and Bellingham is a different kind of market than Las Vegas. So Hawaiian's exposure is really geared toward larger cities in the Western U.S. whereas ours is exactly the opposite. We're in markets nobody else is in. So I think we're probably a lot more immune to the capacity issues that affected them because of the nature of the markets that we serve. So I can't really offer a lot of commentary there. I think that certainly, less capacity is always better than more even if it only affects us indirectly. But we're off to a pretty good start in Hawaii. We saw a great demand in the summer during the peak period and then we saw very soft demand in the fall, which is historically normal. And holiday season is a real busy time and it was for us as well. And between now and kind of the spring break travel period, things get a little soft again. So it's hard to know what the results would have been had there been fewer seats in the Western U.S. But again, very few of those seats are really competing head-to-head with us. So we're just very different than Hawaiian in that regard.

Maurice J. Gallagher

This is Maury. One other kind of general comment, we continue to be bullish about our advantage on the cost side. We are substantially more efficient than most of the competition moving to and from Hawaii from the West Coast in general. Secondly, we are on a learning curve on how to market and sell this. This is a different product in many ways and our usual experiences as we've gone into smaller cities to more traditional destinations that are here on the mainland. So we need to be a little better in how to sell and to how to market and package, and that would be a learned skill over the next coming months that we're engaging in as we speak. But it's -- Hawaii is a long-term place for us that we think and it's -- fits very well into what we want to do and how we want to grow the company.

Operator

Our next question comes from the line of Duane Pfennigwerth of Evercore Partners.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Just wondered how much of your '13 CapEx do you plan to finance and what sort of rates are you seeing for used A320s?

Maurice J. Gallagher

We've got a number of offers out there that are very good loan to advance, ratios of at least 50%, maybe 60% type of thing. The rates are very attractive. Certainly, sub-500 basis points, 5% is available to us. And in general this is the basic, secured program. We'll take a look at the market when we start taking deliveries and see what makes sense for us.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

That's helpful. And then just on the ancillary line, can you give us an update on new initiatives in the pipe this year, when should we be thinking about your travel club and branded credit card offerings?

Andrew C. Levy

You know, Duane, I think the timing on both of those hasn't really changed. I'm not sure that we've shared that, but I think we did in Investor Day. The credit card is likely to be a kind of middle of the year rollout and travel club is something we're looking at approximately the same time frame. It might slip into the third quarter. We need to do a lot of development work to build the foundation to be able to offer that type -- well, actually both of those types of products. So we're excited about that, and we've got some other things that we're working on as well and we'll roll things out when we're good and ready to do so.

Operator

Our next question comes from the line of Helane Becker with Dahlman Rose.

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

Just a couple of small things. One is do you have a charter business deal, and can you update us on how that's going?

Andrew C. Levy

Yes, Helane, we certainly continue to seek out opportunities to do charter flying, as we described it, as a fixed-fee flying. But it is definitely of a smaller scale as we go into the start of the year. We still have one long-term contract in place with one aircraft dedicated to that flying for a casino company up in Northern Nevada. And we did have, for many, many years, aircraft with Caesars, and that contract finished at the end of this past year. So that flying is being done by a different operator now. But we do continue to seek out opportunities, and we also continue to fly. We called out our charters, so whenever we have the capacity available, doing different trips, March usually represents a lot of opportunity with the men's and women's NCAA basketball championships, so we'll be very active in that again. But the charter business has been a very small piece of the business for many, many, many years. And this year it will likely be smaller than it was last year.

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

Okay. And I noticed Apple Vacations is doing a Rockford-Jamaica charter. That's not you guys then, right?

Andrew C. Levy

That is correct. We are not working at the moment with Apple Vacations.

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

Okay. And then another update, so I haven't heard from those flight attendants in a while. Is there anything going on there, with their contract negotiations?

Maurice J. Gallagher

Yes. We continue to discuss things with our flight attendants. We're under mediation, if you will, with the NMB mediator. At an impasse at this point, I'm not sure I'm using all the proper jargon, but that's moving along as expected and stay tuned when something happens or breaks. We'll be putting releases out and talking about it. We've searched and look for positive good outcome to this for both our flight attendants and the company. We're married for the long-term between the 2 of us.

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

Okay, that's great. And yes, they haven't contacted me in a while, so I just kind of wondered. I guess it's that because the NMB thing is going on. So that would explain that.

Operator

Our next question comes from the line of Jim Parker with Raymond James.

James D. Parker - Raymond James & Associates, Inc., Research Division

A couple of questions. And this Hawaii thing, it looks like of course you're not the only airline that has some problems with peak and off-peak and what you do with that capacity off-peak. So you're not going to need all of your 6 757s to fly to Hawaii [indiscernible]

Maurice J. Gallagher

Jim, How do you know that? [indiscernible]

James D. Parker - Raymond James & Associates, Inc., Research Division

Well, that would be my guess. Just hold on, hold on. That's my guess. If you do need all of them, you're going to fly them year-round and I don't need to ask this question. But in the event that you don't and you need to fly them in the main land, would you give us some idea using one, I believe, currently on the mainland. So what would you do with those aircraft other than flying them to Hawaii and would the profitability be similar to your other domestic operations?

Maurice J. Gallagher

That's a loaded question. I think that would be foretelling the future if we answer that. That airplane -- it's just way too early to make speculative statements about we'll do this or that. Hawaii is going to work for us. If you remember, back in '04 or '05, when we started Sanford, we had a miserable outcome with Sanford. In fact, I think we relaunched it in November of '05 after our May launch in '06 -- or that year, and we literally started with new markets. So Hawaii is going to work. We may not need 6 airplanes, we'll see. But we certainly are going to need our fleet, and we can utilize them to do different things during the off-peaks. We're pretty creative. There's charter work, perhaps it may make more sense than doing some Hawaii in September or something like that. But stay tuned, we'll be glad to update you when we have kind of normalized environment and once we get a lot of knowledge underneath us to further understand what's best for the marketplace.

Andrew C. Levy

And Jim, let me add. This is Andrew. Keep in mind, the ownership cost of these assets is very similar to the MD-80, at least on a -- if you're going to adjust for gauge. So we don't feel any increased pressure to utilize these aircraft at a higher rate than we do with MD-80s. It's just we don't -- we see no reason we can't operate these aircraft just like we do with 80s, flying more when the demand is there less and flying less or maybe even not all at certain times a year, and it just doesn't trouble us at all.

James D. Parker - Raymond James & Associates, Inc., Research Division

Okay. I have one for Scott. Scott, would you give us an update on the cost comparisons of the 319s and 320s versus MD-80s in terms of fuel burn and maintenance cost. So those 2 items are certainly very much less. Can you provide some specifics?

Scott D. Sheldon

Yes, we're not flying them yet, but I think the numbers I gave you for full year maintenance per aircraft, that would include the flying of those units. Yes, stay tuned, there's really not much we can speak to right now.

Maurice J. Gallagher

There's pretty general knowledge out there, Jim, on gas. I mean, we're 950 gallons an hour for an MD-80 and you're probably in the high 7s for a 320, and 725 to 730, 740 gallons an hour for the 319s. Those are pretty well known industry standards that you can go see and deal to your reporting. So you're getting a noticeable savings in gas at a minimum.

James D. Parker - Raymond James & Associates, Inc., Research Division

How about maintenance?

Maurice J. Gallagher

We think it will be good, as Scott said, if we've incorporated those numbers in there. But we'll have to get some experience too.

Andrew C. Levy

Jim, this is Andrew. I mean, I think that the presentation that we've put out there that's out in our website when we announced those transactions, at least the 19, nothing has changed since we put that out there.

James D. Parker - Raymond James & Associates, Inc., Research Division

Okay. That was -- Andrew, that was the nature of my inquiry. I thought maybe there was an update to that, and I was looking [indiscernible] back and pursue with you all off-line.

Andrew C. Levy

No, I don't think there's any update there. I mean, the A320 is going to be slightly different than the A319, slightly higher fuel burn but lower on a per-passenger or per-seat basis, and the maintenance cost should be very similar to the 319. So I think if you look at those numbers, those are good numbers to use for kind of trying to model the expenses for these new aircraft.

Operator

Our next question comes from the line of Hunter Keay with Wolfe Trahan.

Hunter K. Keay - Wolfe Trahan & Co.

So I noticed there was another sort of accelerated decline on a year-over-year basis in hotel nights, and I'm trying to figure out why that is particularly given the greater mix of Hawaii flying. So what's going on there, what can you do to make it better and when do you expect that to start to turn positive again?

Andrew C. Levy

Yes, Hunter, this is Andrew. The decline is really due to trying to capture more profits. It's kind of like optimizing load and yield. I mean, it's -- that's what we're trying to do with the hotel side, and we feel that we are optimizing our profitability in the sale of hotel rooms, even if the volume is slightly lower. Of course, I'd point out that while we do have Hawaii, and Hawaii however though has very, very small numbers of passengers on a relative basis. The Las Vegas market, which is the largest driver of hotel room sales this year, passenger growth in Las Vegas for us is flat. But I think the other thing is that historically, many times we've offered a discounted air seat to go with the purchase of a hotel. We have been pulling that down and recently eliminated that in its entirety. So that benefit would be seen on the air side of having higher yields on the air side, and the end result contributes a little bit to fewer hotel volume. But we like where that business is. We think that we had a terrific quarter selling hotels this year. As far as growing and going forward, I think the additional capacity in Hawaii is helpful because it is a strong hotel market. We are trying to continue to drive hotel sales in the other markets that we serve, in Florida and Phoenix. And this year, Vegas' faster growth will probably be, again, flat to slightly down, which may put a little pressure on volume but not necessarily on overall profitability.

Hunter K. Keay - Wolfe Trahan & Co.

Okay. And a quick one on bag fees. What percentage of your bag fees are prepaid at the airport, and how do you expect that to change over the course of the next 6 to 9 months, particularly with the fee structures rolled out?

Andrew C. Levy

We don't have a specific number to give you. Certainly, the majority of checked bag fees and carry-on bag fees are paid for in advance to the extent that people choose not to do so or forget to do so or change their thoughts from the time they purchase to when they actually travel. We will be collecting some additional revenues at the airport when that increased fee begins later this year. And we'll see what that contribution will be.

Hunter K. Keay - Wolfe Trahan & Co.

Okay. And one more for you. I saw you guys bought back some stock, I think you disclosed in the fourth quarter, it's great. Can you tell me how you think about doing that? How do you value your stock? What are the triggers that you look at and say, "our stock is cheap right now based on x," or do you just buy it when it goes down? I mean, are you one of these management teams that perpetually thinks their stock is undervalued, which I understand, but is there a specific metric you look at when you make the decision to buy back stock or is it more just on what your stock is doing in the market?

Maurice J. Gallagher

Good question. I think it's a longer-term play rather than "it's a couple bucks cheaper today, let's buy some". Hunter, we are modeling the business. And just like any other management team, we're undervalued as a general statement. But we're so different in many ways with balance sheet. And as I talked about return on invested capital and things like that, that it's hard for, I think, The Street to kind of break us out of the pack, if you will. Over time though, as we keep kind of surprising people as our steadiness in our ability to continue to perform grow and maintain margins, it suggests that we're undervalued and we probably are to be opportunistically buying stock back, with the full understanding we need to keep sufficient resources around to buy airplanes and run the business. This is the airline industry at the end of the day, it can have surprises that can be unfortunate. But we are just going to be a cash machine going forward, and that gives us the opportunity and a lot of flexibility to do things.

Operator

Our next question comes from the line of John Godyn with Morgan Stanley.

John D. Godyn - Morgan Stanley, Research Division

I know you don't give margin guidance. I'm not asking for anything sort of specific numbers, I just wanted your thoughts with when we think about the margins you produced in 2012 versus your history, and of course that excludes 2009 as sort of an exceptional time, you're very much at the higher end of your historical range. As you think about all the changes in the business over the last handful of years with continued growth in ancillaries, the new markets you've opened up, the new younger aircraft types around the corner, are we now in a period of sort of sustainably higher margins on average compared to the historical range? Is that how we should be thinking about the multiyear business here?

Maurice J. Gallagher

I'll give you my thoughts. Andrew, you can comment as well. I would suggest that, yes, I hope we're on a -- and our number suggests we're on a higher end or should be able to maintain these margins if not improve some. Just a fuel benefit alone as you begin adding these 320s and 319s is a -- that's a big number when you're paying $330 a gallon, $325 a gallon. And so the other beneficial thing to us is we managed to do this with high fuel. So if fuel would ever break, we'll be pushing 2009 margins. It wouldn't take much to really create that. But our goal, John, is to definitely focus on maintaining margins. You heard Andrew talk about cutting capacity back. We're optimizing all the time on our P&L even to the point that we probably have some earning or cost drag from lack of utilization. But these airplanes with more density per departure give us greater ability to earn profits on those peak days, which we continue to reinforce that that's when we want to fly. So I'm cautiously bullish. I don't want to be making forecasts or anything like that, but you guys are good with numbers, you can sit there and put the sum together and I think you'll come out with an answer, kind of approximate our internal models as well.

John D. Godyn - Morgan Stanley, Research Division

Great. Andrew, anything to add?

Andrew C. Levy

No, I don't think so. I think that there's an enormous leverage with the younger aircraft, as Maury was talking about, and we're just replacing MD-80 flying with aircraft that are just far more efficient from a fuel burn perspective. It's going to have a very, very positive effect in terms of margin performance. So not much else to say other than that.

John D. Godyn - Morgan Stanley, Research Division

Okay. And I don't expect you to purchase a refinery or anything, but you've been pretty innovative just with vertically integrating, and I think your website is a sort of a good historical example of that. As you look at just key cost and revenue buckets and think about what opportunities your ever-growing scale might create, are there any vertical integration concepts that peak your interest from here?

Maurice J. Gallagher

Oh, gosh. Our refineries are going to be contained in these Airbuses. That's going to help our fuel burn, that will be our refinery place for the most part. That's big boy stuff. Not to say we're not reasonable size, but give Delta their kudos, as I said in the last call, I think that's a great investment for them long term. As far as other vertical integration, our kind of big picture stuff is to try and really push the third-party activities of development of automation, which again is a unique factor for us compared to the rest of the world, pushes us more in to do leisure travel space. Can we go vertical that way, can we offer our customer a kind of an all-in-one package that layers together not just a hotel on a car, perhaps, or an airplane seat. But if you need a limo or if you need show tickets, if you need anything that might be interesting, you go to Hawaii, you've got what they call an open draw, you go to Honolulu for a couple of days, take a flight across to Maui for a couple of days and come back that way. All kinds of enhancements to the product offering that certainly we can sell airplane seats but we can also sell more features than just airplane seat. And more importantly, our customers maybe could even sell a way from airplane seats as a gift to that. So we have no loyalty program at this point. That's going to be a plus for us, we think. There's lots of upside and opportunity in that vertical integration.

Andrew C. Levy

I think, John, just to add to that, I mean, distribution is really where we're focused. We were big admirers of companies like Priceline, and we'd like to look more like them as time goes on. And that's not necessarily hard assets. It's just automation, contracts, know-how and marketing.

Maurice J. Gallagher

John, for the near-term, our top line will be certainly driven by more airplanes, more revenue that way. But our margins could be enhanced greatly. This stuff that I was mentioning isn't so much a top line thing because we net stuff down for presentation purposes. But those are real bottom diamond dollars without any capital investment for the most part once we get past the automation piece and are very powerful for margin enhancement.

John D. Godyn - Morgan Stanley, Research Division

And Andrew, just to knit. I may have missed this in your prepared remarks, just as I was trying to get everything down. But last quarter I think you pointed out that the trend in TRASM was accelerating as it relates to the PRASM numbers on a year-over-year basis. I think you expected that to continue. There's been a little bit of a blip and you sort of addressed that, but is that the right way to kind of think about the model as we model the quarters throughout 2013 from here?

Andrew C. Levy

Well, I think that's probably true, at least for the next couple of quarters. Just on a steady-state basis, we're going to continue to get the benefit of the implementation of that carry-on bag fee and the associated additional checked bag revenue that came along with that. So it's nothing else. We should expect to see continued year-over-year improvements in the air-related ancillary line item just as that fee gets up to where it's becomes -- it's no longer showing the big increases because we've reached the lapping point after a full year. And as far as the passenger RASM number, as I mentioned, we're happy to trade that number lower and make it up in other ways. And I think that that trend is certainly -- it wouldn't surprise me to see it continue at least for the next few couple of quarters. Beyond that, it's hard to say. If we're able to roll out some new products in the middle of the year or some time, hopefully, first half, early second half, then we'll start to see again some additional improvement in ancillaries. So I do think that trend will continue. And at some point, we're going to start to forecast our total RASM numbers, we're just not confident yet in our ability to forecast that internally and that's why we continue to give you unit revenue in terms of passenger revenue PRASM. But hopefully sometime later this year, we'll feel really good about our ability to predict that, and then we'll start moving over to that number because obviously that's far more relevant to be able to forecast the profitability of the business.

Operator

Our next question comes from the line of Jeff Kauffman with Stern Agee.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

It's Sal Vitale on for Jeff. Just a quick question, just looking at the other revenue line, I apologize if you talked about this earlier, but that was $712,000 for the quarter, down pretty significantly both sequentially and year-over-year. Can you just describe what the impact was there?

Andrew C. Levy

Yes. The majority of the other revenue for the last several quarters has been attributable to leasing 757 aircraft to European operators while we are going through the certification process. And so, as those their planes come -- have come off lease and now all 6 of them are in our fleet, the other revenue line item has declined and they will continue to decline. There's some additional revenue that comes in that bucket, including some other smaller regions of equipment like engine and things of that nature. But we won't see the large numbers you saw in the first 3 quarters and going back into 2011, you won't see those numbers again unless we are -- unless we announce some other large leasing transaction in the future.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay. And then in terms of cost, how do we think about the profitability impact in there?

Andrew C. Levy

I don't know. You tell me. I mean, this year we're down over $2.5 million, yet profits were up. So I mean, that's not our core business. I mean, that was a transaction we did, that was a very good transaction. We generated the return on assets by leasing them out as opposed to operating them because we just weren't able to operate them at the time that we acquired the assets. Our business is not -- we're not a leasing company. So obviously, we're pleased with the results. And we'll lease other assets in the future if we have surplus equipment and if there's attractive rates of return that we can generate.

Maurice J. Gallagher

Sal, just the technical thing. There's offsetting depreciation in the DNA line, and that's how you would get net down to operating income. I might add though, it also impacts -- it makes less efficient our unit cost because we don't have any ASMs that we're producing with those airplanes. So while it certainly been a great transaction, and as we've said, we don't pay so much attention to those specific cost lines, words in profitability. It was definitely the right move for us to make and created nice operating profits, but we'll frankly make more money running those airplanes than we could have operating them a lessor.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Understood. And then just one quick question on the station expenses. At what point -- I guess maybe later in 2013, at what point do we expect that to start to abate?

Scott D. Sheldon

You're going to see the -- you're going to have a lapping effect up -- really up until Q4. So you'll see some pretty sizable differences year-over-year up until really Q4.

Operator

Our next question comes from the line of Steve O'Hara with Sidoti and Company.

Stephen O'Hara - Sidoti & Company, LLC

In terms of the rental car growth, is that due to anything you've done or is that just kind of Hawaii/ maybe of higher focus on Florida? Or is that something that you guys have done kind of internally to kind of boost that?

Andrew C. Levy

Steve, I think certainly we have been able to, by working with our partner, Alamo, offer some very attractive pricing and promotions to our customers. But I think the majority of the increase is really due to where we've grown the business this year. Most of the growth in passengers have been in markets where there's just a higher propensity to buy cars. And so just by shifting the passenger number so that there's more Phoenix and Florida, less Las Vegas on a relative basis. Hawaii, it's -- we just -- we've carried so few passengers in Hawaii this calendar year. I mean, it's just like a -- it's such a small percentage of the total passengers that I don't think Hawaii really had an impact one way or the other. But Hawaii is a good car market also. But I think it's more just the mix of the network in where our passengers are flying to. And that's why we expect to see that rate of growth continue as we put more and more seats into the Florida market as I indicated, certainly Hawaii as well and less in Vegas. And Vegas is not a car market, but that's what you'll see a faster rate of growth in cars and a little slower rate of growth in hotels. At least that's what we expected this time.

Stephen O'Hara - Sidoti & Company, LLC

Okay. And then I noticed on the press release, you have the 6 757s operating, maybe you addressed, but I mean does that imply that you're kind of up to the -- and I think it was kind of 2.4 departures per day on average to Hawaii or no?

Andrew C. Levy

Steve, I don't know what our forecast is going forward or what it was this past period. I mean, though we had 5 running at the end of the year, 3 of them are really kind of dedicated to Hawaii. I'd say 1.5 are mainland U.S. and call it a half a spare. The 6 airplane will be largely Hawaii-focused, with the start of 3 new markets in February. That will chew up essentially another -- the sixth airplane. But as far as departures per day per aircraft, I don't really have that number handy. And I'm not sure I even feel comfortable giving it to you right now because it's pretty fluid and we're making changes to capacity and we'll see how it shakes out. I think you'll certainly us fly less in off peak periods and fly more during peak periods. I'm pretty confident in making that statement though.

Stephen O'Hara - Sidoti & Company, LLC

Okay. And then finally, just in terms of the travel club, I mean, is this just more of a revenue driver or do you think about it as a way to boost take rates on -- is it something it's just kind of a sunk cost for people generally? Or do people spend for this travel club and then maybe get more interested in they have something in the game, they have some skin in the game already and they're more interested in flying again?

Andrew C. Levy

We'll see that. I mean, I think that -- I think there are details to come on the travel club concept. I mean we've had an interesting offering something like a travel club that has a recurring revenue stream attached to it for many years. Spirit Airlines has one, and our belief is that it's a very accretive product. There's another European carrier that's doing something similar. And so we, like everybody else, looks around the industry and sees things that look interesting and might have an application in our business. So as far as what that looks like and what the rules would be and things of that nature, I think it's just a bit premature. We'll provide those details once we roll something out. But we do think there's lot of potential there, and we're excited to be able to put something like that out there, hopefully right around the middle of the year.

Operator

Our next question comes from the line of Glenn Engel with Bank of America.

Glenn D. Engel - BofA Merrill Lynch, Research Division

Can you go through, in the first quarter you have guidance of down 12 roughly in January and down 7 in March, is there a big Easter impact helping you, does it improve as the quarter progress and is there any payback in the second quarter result of the Easter effect?

Andrew C. Levy

Glen, I think -- first of all, typically that's exactly what you see year-in, year-out. March is really the single best month of the year for our business. I think that there's definitely -- the Easter shift will definitely add to March and take from April. There's no question about that. So I think that it's -- certainly that I think we'll see some of that this year. I think the fact that the Easter is at the very end of March, you'll still see some bleed across into the first part of April, but certainly the peak demand period is more compressed in terms of the calendar range than it was last year as an example when Easter was closer to the middle of April. So yes, I think it's fair to say that March will be a little better as a result and April will probably a little bit weaker.

Glenn D. Engel - BofA Merrill Lynch, Research Division

But the seasonality from January to March is always the same, excluding Easter, so that would affect the absolute numbers. But your year-over-year comparisons wouldn't necessarily get better just because you get to peak season?

Andrew C. Levy

Well, I think, generally, I think you're right. Although I think as we discussed the Easter effect should make March a little better on a month-over-month basis. So this March relative to February should be a little bit stronger than last March relative to February just because of the fact that Easter is in there and there's just that much more demand in that time frame. But yes, I mean look, in general, the seasonality hasn't changed. It's just a matter of where the Easter fall and that just affects the margin March versus April or vice versa.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And can you go through some of the cost items that stayed after the fourth and first quarters? Have you talked about the Airbus and some decelerated depreciation? What are some of the things that drop-off after the first quarter in terms of cost you incurred right now and how it puts the magnitude?

Scott D. Sheldon

This is Scott. This is -- those are the primary drivers, the seller depreciation, pre-start up costs, training cost, everything that goes into getting the aircraft owner certificate are really the only ones that I'm referring to.

Andrew C. Levy

Just add onto that, that's going to -- that drops off at a time of the retirement of each individual aircraft and the fleet plan that we provided should give you an indication as to when in which quarter we'll expect to see those retirements. So the seller depreciation headwind will continue. But as more aircraft are retired, that number will get a little smaller, obviously.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And the Airbus line, is that going to be more abrupt?

Andrew C. Levy

Yes.

Operator

[Operator Instructions] Our next question comes from -- is a follow-up from the line of Duane Pfennigwerth with Evercore Partners.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Just on the fixed fuel line, can you repeat, sorry if I missed it, what is driving that reduction sequentially to sort of the $5 million level and how should we be thinking about that beyond the first quarter?

Andrew C. Levy

Duane, the majority by far and away is the Caesars agreement having expired at the end of calendar year '12. That agreement represented 3 airplanes or 2 airplanes -- 2 airplanes are flying that we do not have going into '13. And that's actually why the 2 MD-87s are being retired is there's no real suitable application for that aircraft. It's just that that aircraft just doesn't work in today's high fuel cost environment, so that's why we're retiring those 2 airplanes. One, in fact, has been retired already, and the second one we'll retire later this year. So I think that without that contract, there's no replacement charter contract out there that we think is imminent. So I think the first quarter numbers that we're giving you are going to be rough order of magnitude are pretty good number to use throughout the year on a quarterly basis.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay, that's great. And then just on the -- on your fuel efficiency, obviously that's been trending in the right direction. It picked up a bit more than we expected in the fourth quarter here. Anything specific about the fourth quarter, maybe a little bit higher utilization that we shouldn't kind of turn that out, or is that a reasonable run rate to assume going forward?

Andrew C. Levy

Yes. I don't think that's it certainly one utilization driven. It's just a larger number of higher gauge airplanes and both the 160 MD-80s, which were not done yet, those will be done in February and then obviously, the 757s that come in. And once we start bringing the Airbus aircraft, then obviously we'll continue to see improvements in fuel efficiency.

Operator

This concludes our question-and-answer session. I would now like to turn the call back over to Maury Gallagher for final comments.

Maurice J. Gallagher

Thank you, all, very much. I appreciate your interest. We'll talk to you in the end of the -- this first quarter. Have a good day.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day.

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