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Executives

DeAnne Gabel - Director, Investor Relations

Ben Baldanza - President, CEO, and Class II Director

Ted Christie - Senior Vice President and Chief Financial Officer

Barry Biffle - Executive Vice President and Chief Marketing Officer

Tony Lefebvre - Senior Vice President and Chief Operating Officer

Thomas Canfield - Senior Vice President, General Counsel, and Secretary

Jim Lynde - Senior Vice President, Human Resources

Analysts

Michael Linenberg - Deutsche Bank

John Godyn - Morgan Stanley

Helane Becker - Dahlman Rose

Duane Pfennigwerth - Evercore Partners

Jim Parker - Raymond James

Hunter Keay - Wolfe Trahan

Dave Fintzen - Barclays

Stephen Trent - Citi

Bob McAdoo - Imperial Capital

Steve O'Hara - Sidoti & Company

Glenn Engel - Bank of America

Spirit Airlines, Inc. (SAVE) Q4 2012 Results Earnings Call February 19, 2013 11:00 AM ET

Operator

Hello. And welcome to the Spirit Airlines Fourth Quarter 2012 Earnings Conference Call. My name is Manisha, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

I will now turn the call over to Ms. DeAnne Gabel. Please go ahead.

DeAnne Gabel

Thank you, Manisha. And thanks all of you for joining us today and welcome to our fourth quarter 2012 earnings conference call. Presenting today will be Ben Baldanza, Spirit’s President and Chief Executive Officer; and Ted Christie, our Chief Financial Officer. Also joining us are Chief Marketing Officer, Barry Biffle; Chief Operating Officer, Tony Lefebvre; General Counsel, Thomas Canfield; and Senior VP of Human Resources, Jim Lynde.

Our remarks during this conference call will contain forward-looking statements, which represent the company’s current expectations or beliefs concerning future events and financial performance. Forward-looking statements are not a guarantee of future performance or results.

Forward-looking statements with respect to future events are based on information available at the time those statements are made and/or management’s belief as of today, February 19, 2013, and are subject to significant risks and uncertainties that could cause actual results or performance to differ materially from those reflected in the forward-looking statements, including the information under the caption Risk Factors included in our 10-K for year ending December 31, 2011. We undertake no duty to update any forward-looking statements.

In our remarks today, we will be comparing fourth quarter 2012 to fourth quarter 2011 results adjusting all periods to exclude unrealized hedge gains and losses and special items.

Please refer to our fourth quarter 2012 earnings press release for further details regarding our assumptions for the reconciliation to the most directly comparable GAAP measure for non-GAAP measures discussed.

And now, I’ll turn the call over to Ben Baldanza, Spirit’s President and Chief Executive Officer.

Ben Baldanza

Thank you, DeAnne, and thanks to everyone joining us for the call today. 2012 was a year of many accomplishments for Spirit. We added 29 new markets during the year, bringing the total markets that we have elaborated from high fares to 110.

Our commitment to profitably grow our business by offering low base fares resulted in a record full year results with an average base fare of only $75 per segment. I want to thank all of the Spirit team members that contributed to our success.

As evidence by our results including our continued high load factors, there is an ever increasing acceptance and awareness of the business model. In 2012, we grew our topline 23.1% to $1.3 billion and generated operating income of $166.5 million, resulting in an operating margin of 12.6%.

Our fourth quarter and full year result include the impact of Hurricane Sandy, which we estimate had a $25 million net negative impact on revenue and a $24 million negative impact on operating income.

Spirit canceled 136 flights as a result of the storm but the largest revenue impact was from the lingering effects on demand for travel in the effected regions. Our team did a tremendous job in quickly resuming full operation following the storm. Unfortunately, the wide spread damage in the New York and Atlantic City regions led to a significant decline in demand for travel following the storm.

In addition to directly impacting demand for travel tour from New York and Atlantic City the impact spread beyond just the direct flights to the area as these markets are among the largest Fort Lauderdale gateway flow markets in our network. We estimate our operating margin for the full year adjusted for the storm would have been 14.2% which is comparable to last year.

In addition to our profitable growth, we added crew and maintenance bases in Las Vegas, Nevada and Dallas/Fort Worth Texas creating more than 450 new jobs. Our expansion has provided more than 10 million customers new ways to save money by offering low base fares and the freedom to pay for only additional products and services they value.

Now turning to our fourth quarter details, our net income for the fourth quarter was $19.5 million or $0.27 per diluted share. Total operating revenue increased 19.8% year-over-year to $328.3 million. Total RASM increased 6.6% driven, I’m sorry, decreased 6.6%, driven by the negative impact of Hurricane Sandy and a 5.3% increase in our stage length.

We continued to be pleased with the results of our focus to increase ancillary revenue while driving base fares lower. With each day we gain a better understanding of the power of letting customers choose what they value for their travel experience, using our transparent disclosures, customers can decide if they value the extra options we have available and if not they don’t pay to subsidies somebody else’s choice, which allows them to save money. This business model continues to work very well for us and we are excited about the opportunity to deliberate even more cities from high fares.

Looking ahead, we expect our first quarter capacity to increase 21.1% year-over-year and our full year capacity to increase 21.5%. Much of our growth this year will be focus on growing network by adding new routes between our existing destinations creating a more concentrated spider web route network by adding new market connections to cities we already serve, we improve our ability to increase cost efficiencies by more fully utilizing our airport assets and leverage knowledge of our product in markets we already serve.

As for our first quarter revenue outlook, we are prepared to give a precise RASM range but given that we are growing capacity 21% year-over-year in the first quarter while increasing our stage length and adding in the lingering effects of Sandy in the form of many Northeast Schools cancelling their winter breaks, flight would be up when all this is considered. So while we still have over half of marks left to sell and realizing that many things could change we feel pretty good about the demand environment.

With that, I’ll turn the call over to Ted.

Ted Christie

Thanks Ben. And again thanks to all of you for joining us today. I joined Ben in thanking all our Spirit team members for their contributions to our success. In the fourth quarter our total operating expenses increased 25.5% to $296.4 million on a capacity increase of 28.3%. Excluding fuel, our CASM decreased 2.5% year-over-year to $5.93, in line with our guidance for the quarter.

Primary drivers of the decrease included lower labor expense per ASM year-over-year due to lower overhead unit costs and lower distribution expense per ASM as a result of a decrease in credit card fees, all along with an increase in average stage length.

These benefits were partially offset by $1.4 million during of the start-up costs related to our seat maintenance program, and higher depreciation and amortization expense related to amortization of heavy maintenance events.

We ended the year with $416.8 million in unrestricted cash and with no debt on the balance sheet. As of December 31st, we had 45 aircraft in the fleet and have nine aircrafts scheduled for delivery in 2013, which includes seven new A320s and two used A319s. The used A319s will be direct leased from a lessor.

We have negotiated sale leaseback transactions for the seven new aircraft deliveries in 2013 at rates commensurate with our credit position. In addition to imply favorable financing rates, thanks to our pristine balance sheet we are now in a position to negotiate better overall terms and conditions.

I’ll now turn to our unit cost guidance excluding fuel for the first quarter and the full year of 2013. As we discussed on our prior call, on a unit basis our largest cost driver this year will be increases in depreciation and amortization related to the amortization of heavy maintenance events. But we hope to mitigate much if not all of this pressure by leveraging our growth, increasing efficiencies through the system and improving our operational reliability.

For the first quarter of 2013, we estimate CASM ex-fuel will be about flat to plus or minus 1%, and for the full year of 2013 we are targeting our CASM ex-fuel to be down about 1% year-over-year. We feel very good about our relative cost position and believe our unit cost advantage will continue to expand overtime.

In 2012 on a stage length adjusted basis, the unit cost of our largest competitor was 66% higher than ours. Despite this clear advantage Spirit is 100% committed to producing stable to declining unit cost excluding fuel during our growth cycle and we are currently evaluating additional opportunities to reduce our cost structure further.

For the first quarter, we estimate our economic fuel price will be $3.42 per gallon, based on the Gulf Coast jet fuel curve as of February 14, 2013. This includes our estimated impact from realized fuel hedges.

Fuel cost continue to remain high and we are keenly focused on improving our fuel burn efficiency, having a fuel efficient fleet is our best fuel hedge and in March of this year will be the first U.S. carrier to take delivery of an A320 aircraft provision with Sharklet.

We have approximately 20% of our first quarter 2013 projected fuel volume hedged using U.S. Gulf coast jet collars. Additional details about our hedge positions are included in the Investor update we plan to file this afternoon.

Before I close, I have a couple of housekeeping items for 2013. We estimate our aircraft rent for the full year 2013 will be $175 million, and depreciation and amortization will be approximately $40 million.

As per working capital, we estimate our cash, capital expenditures from 2013 will be about $22 million, which includes the purchase of one spare engine which we will finance using a sale of leaseback transaction.

Pre-delivery deposits net of refunds will be a cash draw of about $30 million. We’ll pay approximately $72 million for heavy maintenance events and our pre-paid maintenance reserves net of reimbursements are estimated to about $11 million.

In closing, while we are pleased with our relative cost advantage, we will continue to aggressively pursue opportunities to lower our cost structure and I’m confident that we will successfully leverage our growth over the next several years to drive efficiencies throughout the business.

With that, I’ll turn it back to Ben.

Ben Baldanza

Thanks Ted. Last quarter we gave a preview of our targeted EBITDA margin for 2013, based on current fuel price projections and our current outlook, we are raising our EBITDA margin target for the full year 2013 to 25% to 27% from 24% to 26%.

2012 was a very good year for Spirit, our traffic growth kept pace with our capacity, we maintained our commitment to low base fares, achieved record full net income and delivered a pre-tax return on invested capital of 26.5% or 28.8% if you adjust for Sandy.

Our 2012 results further solidify our strong foundation for future growth and we remain committed to running this airline as a business providing value to our customers and delivering strong returns for our shareholders.

Now back to DeAnne.

DeAnne Gabel

Thank you, gentlemen. We are now ready to take questions from the analysts. We do ask that you limit yourself to one question with one follow. If you have additional questions you would like ask, you are welcome to place yourself back in the question key and we will allow for additional questions if time permits.

Manisha, we are ready to begin.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is Michael Linenberg with Deutsche Bank. Please go ahead with your question.

Michael Linenberg - Deutsche Bank

Oh! Hey, guys. Just a couple questions here. Ben, I get your view on wanting to bring down, your average ticket prices and obviously, you want to take up the non-ticket, you’ve been focused on that. But what I look at this last quarter, your average, if we sort of look at the ticket revenue per passenger flight segment that’s down close to 9% and yet, you have a 5% longer stage length, fuels up 3%? You think that, you’re going to stimulate by lowering that, but at the very -- we see try to offset the fact that maybe you are flying further or fuel prices are higher?

And so, I’m looking at that, I’m just, I’m wondering if it’s under pressure because its there is a lot, there was -- in the mix there was a lot of start up routes or maybe you are seeing some competition in some of the markets, maybe other carriers are responding to you more aggressively?

Like why should that be down as much as it is, I mean, when you at least want to recapture the run up in fuel and the increase in stage length? Do you feel like maybe you are leading too much on table and it maybe, just maybe a question for Barry, I -- however, you guys want to answer it?

Ben Baldanza

Yeah. Mike, it’s a good question, but I think in a way you are almost over thinking it. The answer to your whole question is Hurricane Sandy, because but for Sandy I don’t think you would have seen that drop in the average fare…

Michael Linenberg - Deutsche Bank

Okay.

Ben Baldanza

… but we had a lower prices in order to get plane for more quickly and to stimulate a market that wasn’t in the mood to travel in Sandy.

Michael Linenberg - Deutsche Bank

Okay.

Ben Baldanza

And I think but for that event I think you would have seen exactly what you are saying, of course, we are look to keep pace with fuel changes and so on, and while we overtime certainly want to push down average prices and put more of the pricing decision in the consumers hand through optional thing. It’s really Sandy that drove the whole issue you are talking about.

Michael Linenberg - Deutsche Bank

Okay. Very good, Ben. Then just my second question, when I look at the future schedule changes, you do a lot of seasonal changes and I understand that? When I look at the Fort Lauderdale market, it looks like that some of the cuts were little bit deeper than what we’ve seen in the past and I didn’t know if that was a function of some of the new markets that you’ve moved into maybe performing better and you want to reallocate capacity into some of those new markets or some of that response to some of the competition that we are seeing in the Fort Lauderdale market, because it does look like both JetBlue and even American when you look at some of the capacity that they’ve been adding out of Miami that’s having any sort of effect in driving that decision?

Barry Biffle

Mike, this is Barry.

Michael Linenberg - Deutsche Bank

Hi, Barry.

Barry Biffle

When we look at our capacity deployment, when we look at every schedule change when we go into the future, we take the information we have at the time and we look for the highest return on capital. And so, the reality is, is that South Florida yields are just not what we see in other parts of the U.S. and other parts of our network. So it just a fair decision on, we chase return on invested capital, so if other people are chasing those yields, they may have a lower hurdle in that regard.

Michael Linenberg - Deutsche Bank

Okay. Very good. All right. Thanks.

Operator

Our next question is from John Godyn with Morgan Stanley. Please go ahead.

John Godyn - Morgan Stanley

Hey, guys. Thanks for taking my question. Ben, I just wanted to follow up on the 2013 EBITDA margin guidance revision. I was hoping you can elaborate on the sources for that revision, is it because you now just feel more comfortable about costs versus where -- what you were thinking before or are you seeing something on the margin in terms of demand that just makes you more comfortable on the revenue line or is there some an ancillary initiative in that number, I’m just trying to get to the bottom of the revision?

Ben Baldanza

Yeah. It’s principally John, it’s a principally because we are -- we went forward with sort of more -- with guidance for the full year on unit cost and we feel better about the cost structure of the airline going to the full year. Obviously, we feel good about the demand environment, we said that, but we wouldn’t be base full year EBITDA change based on something that is so changeable and variable just earlier in the year. So really is based on our little better clarity on the cost position for the year.

John Godyn - Morgan Stanley

Great. And when we think about sort of the longer term margin, when we think about your earnings collars, 25% still the right number or should we think about it as, look, any year where you guys feel comfortable on cost, any year where you can generate, down unit cost year-over-year, is the year where you could get north of 25% not unlike how you are feeling about 2013 right now?

Ben Baldanza

Well, it’s a good question, I mean, we’ve said that, we are growth company, and we are planning to grow the company 15% to 20% a year over the next couple of years with a fleet order that supports that, and we’ve said that sort of an ability to grow while sort of maintaining or not compressing our EBITDA margin that are targeted around the 25% range is our target and that’s where we are.

All that said, when we can find opportunities to produce more for our investors we are going to do that. But in an environment of high growth of 20-ish% kind of per year, we think sort of been able to target that sort of high EBITDA margin is what most investors are going to be looking for.

John Godyn - Morgan Stanley

That’s helpful. Thanks. And Barry, can I just ask a quick one on revenue? We’ve seen other carriers that have leisure exposures sort of complain about I guess holidays being canceled and school schedules and things like that attracting leisure demand just in the wake of Hurricane Sandy. And looking deeper Easter, so when we took about this two factors just any cancelations in holidays and then, how Easter impacts you? Any thoughts on those two things would be helpful? Thanks.

Barry Biffle

Obviously the lingering Sandy affects had some challenges in northeast and specifically in Atlantic City where we have a large operation there and was pretty much with the epicenter of the storm. We had some challenges and the winter break being canceled is obviously a testament.

We proactively removed some flying out of Atlantic City in order to kind of navigate that environment, but as you can expect moving that capacity at which some more that we weren’t planning on and it was loaded late. So it’s not just completely fixed by moving the capacity. It is unfortunate, when you have a mature part of your network that you had to reallocate that is doing well. But having said that, the Easter shift does improve a little bit from March obviously and as Ben mentioned earlier, despite our 21% growth, the length in stage, we feel pretty good about the quarter itself.

John Godyn - Morgan Stanley

Thanks a lot, guys.

Operator

Next question is from Helane Becker with Dahlman Rose. Please go ahead.

Helane Becker - Dahlman Rose

Thanks very much, Operator. Hi, everybody. Thanks for the time. Just on the latest storm, Nemo. Can you just -- I don’t think that affected Atlantic City at all. I didn’t see any smell when I was down that part of the world, but did it affect the New York operation at all?

Tony Lefebvre

Yeah. Helane, this is Tony Lefebvre. Now, I mean the overall impact was about 20 flights that we had canceled but it wasn’t significant impact. The New York had -- I mean Boston had the longest closure but not Atlantic City.

Helane Becker - Dahlman Rose

Okay. And then just on some of your new markets, can you just comment on what’s surprising you in terms of either acceptance for non-acceptance rates?

Ben Baldanza

In general, Helane, what we were seeing new markets is what we’ve been seeing for the last two years is consumers love low fares and they love the optionality to sort of pay for what they want and not pay for what they don’t want, and we’ve seen that in virtually all of our new markets. So while, every market doesn’t necessarily stimulate in the same way, some stimulate a little more, some stimulate a little less.

Overall, we’ve been very happy with the performance of the new markets and they’ve been performing the way new markets have been working for us for a while, which is going with lower price points and bring back some traffic that’s been placed out of the markets.

Helane Becker - Dahlman Rose

Got it. Okay. Thank you very much.

Ben Baldanza

Thanks, Helane.

Operator

Our next question is from Duane Pfennigwerth with Evercore Partners. Please go ahead.

Duane Pfennigwerth - Evercore Partners

Hey. Good morning, guys. Given your cost position relative to the industry, which I think actually gets a little bit better here in ’13 and ’14 and probably ’15, we feel this year you have longer-term attractive growth prospects whether or not there was consolidation. It looks like to some extent you’ve been choosing new markets, assuming American and U.S. Air were going to emerge. My question is now that it is here, how does this change your growth opportunity and to what extent does it change your thinking about where to grow?

Ben Baldanza

Duane, good question. I don’t think it changes our views really at all. The latest merger announcement, we see as kind of trend in where the industry has been going not as a one-off new thing. And our selection of markets has been a function, as we said before where there is people traveling but paying very high fares, and where there are likely more people who can afford to fly that could benefit from the Spirit alternative. And so, we all know that our deployment has been sort of assuming that merge is going to happen, although I will say that merger happening in terms of overall industry stability is probably good.

Duane Pfennigwerth - Evercore Partners

Okay. Thanks. Sorry if I missed it, can you offer any preliminary estimate for Sandy into the first quarter?

Ben Baldanza

No. We haven’t provided any specific other than sort of just the non-RASM guidance that we gave in my comments.

Duane Pfennigwerth - Evercore Partners

Okay. Fair enough. And just lastly, can you give us an update on where your analysis stands regarding increasing the fleet density on your existing fleet?

Tony Lefebvre

It’s ongoing.

Ben Baldanza

It’s ongoing, that’s right.

Duane Pfennigwerth - Evercore Partners

I mean, what are the odds that you move forward with something like that this year?

Ben Baldanza

Well, our A319s, they are at FAA max density on the airplanes right now at 145 seats, that’s the FAA max, among the A319 -- on the 320s, we have 178 seats. The FAA maximum amount on that plane is 179 and on the 321s, the FAA maximum is 219 and we have 218. So while we are looking at opportunities, it’s not a huge issue because we are already almost there.

Duane Pfennigwerth - Evercore Partners

Okay. That’s helpful. Thanks for taking the questions.

Operator

Next question is from Jim Parker with Raymond James. Please go ahead.

Jim Parker - Raymond James

Good morning to all.

Ben Baldanza

Hi, Jim.

Jim Parker - Raymond James

Just your list and your release portion, we see this press release is speaking frequently about new markets open. Can you tell us if you closed any new markets in the fourth quarter or even in the third and what might have transpired in those markets to cause you to leave?

Barry Biffle

We discontinued service in the Las Vegas to Phoenix market, and it was a simple case of the demand did not stimulate at the level that we had expected and we removed the flight.

Jim Parker - Raymond James

Where there any others, Barry?

Barry Biffle

That we’ve canceled?

Jim Parker - Raymond James

Yeah.

Barry Biffle

We took some more out seasonal that weren’t seasonal before, but we have also in Mesa or part of Mesa, we have eliminated that route as well.

Jim Parker - Raymond James

Thanks. Now, I noticed that several airlines are increasing capacity in the Caribbean to South Florida and to upper South America, particularly Colombia and we see JetBlue doing some things also American, I guess is increasing and perhaps that’s longer haul. But the LAN is putting in a 767 from Boeing we talked, the Fort Lauderdale I believe. So, what is your game plan for your LatAm business given that competition is increasing there?

Ben Baldanza

Jim, this is Ben. I will sort of repeat in concept what Barry said little earlier. We don’t have a game plan for LatAm that’s distinct from our game plan for domestic U.S. or any else. We have a game plan to return to create high return for shareholders and we are going to deploy capacity consistent with that strategy.

So if there is capacity or yield pressure in South Florida that’s making it difficult for us to make those kinds of returns despite the fact that we have the lowest cost of any other competitors you are talking about, all that says that we have a different investment hurdle than they do and I would think that our shareholders would appreciate that.

Jim Parker - Raymond James

Okay. Thank you.

Operator

Our next question is from Hunter Keay with Wolfe Trahan. Please go ahead.

Hunter Keay - Wolfe Trahan

Hi, everybody. Hey, how much is stage length driving the estimated decline in CASM ex in 2013? And if your stage lengths are up low mid single digits, should we assume that those longer flights are carrying with it higher fares?

Ted Christie

I’ll take the first piece. Hunter, this is Ted.

Hunter Keay - Wolfe Trahan

Hey, Ted.

Ted Christie

Stage is contributing to some of the CASM benefit that we will see into 2013. As we mentioned before, the D&A number -- the depreciation number is a big number going the other way. So we have a number of leverage points that we are using to get CASM to be lower year-over-year. Stage is one of those pieces but, so is scale and a number of other cost initiatives that we have in place. I don’t know if we’ve described a specific number yet just for stage where we can and certainly talk about that a little bit more later.

And then on the revenue side, obviously the further you fly, the more you expect to get paid. I mean, this is not a huge change in that regard but you do expect a higher revenue bearing the longer you fly.

Hunter Keay - Wolfe Trahan

Okay. In terms of your -- you don’t give guidance on stage lengths on 1Q than at the very least until you are right?

Ted Christie

We’ll talk about stage in 1Q at the investor update yet.

Hunter Keay - Wolfe Trahan

Investor update.

Hunter Keay - Wolfe Trahan

All right. Okay. Thanks. And in terms of distribution expense, which was up. I think you guys mentioned some changes in how you are selling tickets? But how should we think about that going forward in 2013? I mean, I think you have a partial-content agreement with the GDSs [linux] pretty unique. But those I think were generally better quality tickets that you tend to sell were more profitable than tickets that you sold on your website. Are you planning on driving that down or up going forward as you think about 2013 and beyond and how that would impact, specifically the distribution expense line would be hopeful there too?

Ted Christie

Hey, Hunter. It’s Ted, again.

Hunter Keay - Wolfe Trahan

Hey.

Ted Christie

We have a -- certainly, we are predisposed having people who use our distribution channels, which are the vast majority of our customers do. But we also are generally encouraged by the type of traffic we book on our third-party partners as well. So, I don’t know that we are skewing one way or the other necessarily and I think generally we feel it is positive to the bottom line wherever we get our bookings.

So if you're looking at kind of trying to find a trend, I would say it’s -- what we are seeing today is kind of stable, what you would expect.

Ben Baldanza

Now that we signed up, Expedia, we weren’t selling an Expedia for seven years. Now that we’ve signed up, Expedia and are selling through Expedia that sort of brings us to a kind of that stability that Ted talked about.

Hunter Keay - Wolfe Trahan

Okay. Thanks a lot.

Operator

Next question is from Dave Fintzen with Barclays. Please go ahead.

Dave Fintzen - Barclays

Hey. Good morning, everyone. Question for -- I guess, Ben or Barry. Ben, you mentioned sort of demands geared up. I’m just curious, how you guys think about or if you’ve done and you look at sort of income demographics as you shift into sort of places like Dallas and Houston and some of these other markets away from the Caribbean?

I mean, we see sort of macro issues like payroll tax or fuel prices going higher and kind of squeezing maybe lower income consumers. Do you get any benefit in that network shift in terms of different kind of consumer or and just in general, how do you think about some of those macro pressures?

Barry Biffle

Yeah. This is Barry. Absolutely, we’ve seen a change in the demographics and it is kind of related to the conversation we’ve had on a couple of questions about, why are we not growing Florida versus Texas. And the reality is whether it, be the all environment and the energy economy and so forth what is going on in Texas, you got a really great economy. You got really good incomes there and that generates all better things from their own perspective, both in absolute demand and yield themselves.

So when you think strategically about where you deploying your assets, it is not a coincidence that we are going after the better performing parts of the economy rather than chasing some of the ones that are more average like South Florida.

Dave Fintzen - Barclays

And do you think now that you had enough time and obviously you’ve been in Dallas for a while, in Houston you are starting to ramp-up. Do you feel like you have enough sort of visibility to see how some of these macro issues could play through over the next few months, or does that create a little more RASM uncertainty than maybe you’ve had in the past?

Ben Baldanza

This is Ben. I think it’s a little premature to say that, although we can say that in an environment where -- if you look over the large number of years in environments where individual consumer, confidence and spending where our ability to spend is constrained, we tend to do pretty well in that environment.

If incomes are down or if people have little less money to spend, our offer of the very low fare with options to save money if you behave in certain ways like take fewer bags and things like that becomes even more appealing. 2009 was the record example of that, with basically recessionary airline demand, but we ran very high margins in that year as people sort of bought down looking to save money. So, I wouldn’t say that we are scared or nervous about the overall macro environment, but it is certainly what people can pay affects how often they are going to travel.

Dave Fintzen - Barclays

Okay. That’s helpful. And then maybe just a quick on that. Barry, you mentioned sort of a quicker spill up of new routes when you try to get a presence in a city. Is that something I think in the past you sort of said like, a year to two years to sort of spill up, maybe more like a year? I mean, does that materially change that development cycle of the next new route into it like Dallas or is that still reasonably close?

Ben Baldanza

Well, as far as maturing true-up that we’ve seen, I mean there's not really an improvement after the 12th month. I mean, we don’t measure new route performance in years. We look at it in months and we’ve talked about this several times. But basically we look to be making cash in the first 60 days and we look to be fully allocated break-even within the six to eight month timeframe with it being profitable on run rate basis.

So we haven’t really seen any of that change, I mean, there is a dynamic even take Texas for example, I’m sure there are some persons that are squeezed by some of these things but I’ll point you to Ben’s comments, in those types of environments, like we’ve seen in the past in ‘09 in particular, you see people that they maybe still want to travel but can afford as much. So we’ve become an even better option for them in that type of environment.

Dave Fintzen - Barclays

Okay. Great. That’s very helpful. Thanks for the time.

Ben Baldanza

Thanks.

Operator

Our next question is from Stephen Trent with Citi. Please go ahead.

Stephen Trent - Citi

Thank you, Operator, and good morning, everybody. And thanks for the time. Just one question for me, you guys have been so good about cash generation and I noticed you also continue your activity on the sale and leaseback transactions. Any thoughts about potentially offering a dividend at some point down the line even if it’s a small one, just the opportunity out there to attract some incremental investors. It could be an advantage and I’m wondering how you're thinking about that?

Ted Christie

Thanks, Stephen. It’s Ted.

Stephen Trent - Citi

Hi Ted. How are you?

Ted Christie

We’re a growth company. So right now, we’re not spending a lot of time focused on that type. We’ve got a good deal of growth ahead of us that’s going to require investment in capital expenditure and that sort of thing. So I think that right now we are keenly focused on how do we optimize our cost of capital in deploying that growth. And that’s what the balance sheet is affording us to do.

Ben Baldanza

And Steve -- this is Ben. As you know, there is a lot of ways you can reward shareholders and our view is the best way to reward shareholders is keep high growth with high returns going for a while.

Stephen Trent - Citi

Okay. Fair enough. Well, I appreciate the color. I’ll now let some one else ask the question.

Ben Baldanza

Thanks.

Stephen Trent - Citi

Thank you.

Operator

Next question is from Bob McAdoo with Imperial Capital. Please go ahead.

Bob McAdoo - Imperial Capital

Hi. Just a couple of questions on airplanes. I see you said you’re getting two used airplanes from leasing company. Curious, are those relatively short-term leases a year or two or they’re going to be longer-term?

And secondly, kind of, related to that since we are seeing the used A320, A319 market lease rates come down enough to toss, guys like to lead, whatever to move over into that type of airplane and we also hear that people talk about how expensive these airplanes you’re getting with the new models coming.

Curious, does that cause you think about expanding faster, bringing on more leased airplanes in terms of used airplanes. What would you view new versus used mix, anything along that line will be helpful to know?

Ted Christie

I’m sure, Bob, the three used 319s that we took in more and relatively short-term financings, 40-month financing. And to your point about the attractiveness of that asset in the market place, say, which is one of the reasons we struck the deal we did was that we felt like we got a good opportunity for us to actually add a little bit of growth heading into 2013 at attractive financing or ownership rates.

And so to the longer term question, would we consider that going forward as well, the answer is yeah, we’re going to evaluate all opportunities. But you have to remember that we today -- I have a decent size order book that we put out there that we have our growth plan for us and so we weigh those opportunities against that existing framework of an order that we have.

Bob McAdoo - Imperial Capital

Okay. Thanks.

Operator

Next question is from Steve O'Hara with Sidoti & Company. Please go ahead.

Steve O'Hara - Sidoti & Company

Hi. Good morning. I’m just curious. I mean in terms of your ability to grow, I mean, it seems the big risk to your story is your ability or inability to control your cost. Can you just talk about what leverage you can pull going forward other than growth in stage lengths, raising the stage lengths. What leverage you can kind of pull and maybe some of the areas that you might be more concerned about in terms of a lever that might raise that ex-fuel unit cost?

Ted Christie

Yeah. I’ll take the first piece. I’ll let Ben comment as well. As we discussed, one of the bigger drivers of unit cost into 2013 and probably beyond will be the amortization of our heavy maintenance. So we’re going through the cycle right now and so our ability to manage through that cycle and keep our cost is flat to down is a pretty important -- a pretty important objective for us.

And so the leverage we’re pulling to your point, growth is an extremely powerful one as stage is a contributor as well. But we’re relatively small company when compared to our competitors and so we haven’t -- we don’t believe we haven’t achieved even the level of scale that would be normalized. And so we’re going to get benefit out of that as well from a fixed cost perspective.

And so there is a number of things and it works around here that we’re plugging away at that we believe will help us manage through that cycle and deliver upon the targets we discussed in my formal comments. Ben will help you.

Ben Baldanza

Yeah. This is Ben. And the other thing I would add is, the other sort of advantage that most of our competitors have, that you don’t see in our cost yet is general financing efficiency. Most of the planes that we are flying for us today were financed in an environment earlier when the airline didn’t have the sort of balance sheet that we have today, the cash position that we have today.

And so as we continue to grow, we’ll also be bringing lower in our average cost of capital as we grow. And that’s another piece of the cost structure that’s going to not benefit strictly from scale but strictly from having a better or stronger balance sheet and a stronger credit position as we enter the capital markets to bring in new equipment.

Barry Biffle

And I’ll add one important thing that’s worth noting, we look at our unit cost a lot on just an absolute basis, meaning, where we look versus ourselves on a year-over-year basis. But to Ben’s point, if you’re looking at us compared to the rest of the industry because of the very nature of the way we finance our assets, 100% of the cost of our financing is included in our operating expense and for the vast majority of the airlines, that’s not the case. And so there is a different comparison for us as well.

Steve O'Hara - Sidoti & Company

Okay. And then just as a follow-up, I know it’s very early but I mean, in terms of depreciation and amortization for 2014. I mean, is this kind of a reasonable -- we shouldn’t be expecting this to double or triple again in 2014, right. I mean, is this something that kind of slows down?

Barry Biffle

What we said was for 2013, this is definitely a step function year because of the number of aircraft heading through that cycle. As fleet grows, you’re always adding more aircraft and you’re depreciating as well. So there will be movements in those numbers. I don’t think you will see like a step function we saw this year but there could still be an increase in some of the ideas beyond that.

Steve O'Hara - Sidoti & Company

Okay. Thank you.

Operator

Next question is from Glenn Engel with Bank of America. Please go ahead.

Glenn Engel - Bank of America

Good morning. First question on new routes. Was the percentage of new routes much larger than normal in the fourth quarter and how has that tended to range overtime?

Barry Biffle

Well, the percentage of new routes is almost equal to our growth rate. For the most part, when we’re entering new routes, we’re flying on average one daily flight. So we’re growing at that rate. So if we add 20% capacity and we get 20% in new routes (inaudible) in our average.

Glenn Engel - Bank of America

Okay. So the percentage of new routes versus adding to its existing routes can really change very much this year?

Barry Biffle

No.

Ben Baldanza

No.

Glenn Engel - Bank of America

Fuel gallons per ASM were down about 5% in the fourth quarter, what drove that and is that something I should continue to see looking good in 2013?

Ben Baldanza

Well, there is a couple of contributing factors to that. One is the gauge -- we’re gauging up, so more of 320s are delivering. That's helping your ASM measure there on a fuel burn basis. In addition to that, for the older aircraft in our fleet of 319s are actually going through their engine overhaul cycle and when you put an engine through an overhaul though expensive, it also helps you from a fuel burn perspective. So we will see some of that benefit.

Glenn Engel - Bank of America

Your aircraft utilization, at what point does growing make it harder to keep utilization as high as it is?

Ben Baldanza

For the next few years, we don’t see that. I mean, again we feel pretty bullish about our growth opportunities and flying high utilization is a feature of what this airline, how this airline works and what we do to help produce the kind of return we produce. So as we grow certainly over the next couple of years, we don’t see any meaningful change in our utilization on the downside for sure.

Glenn Engel - Bank of America

And finally, you’re taking a couple of used A319s, can you talk about the trade-offs between new and used and what would cause you to do more used?

Ben Baldanza

The three airplanes that we’re taking, the two that are coming this year and one that came last year, our plane that Spirit used to fly, if you remember back in, while maybe, you don’t but some of you well on the call, move back in 2008, we reacted more quickly and more deeply even most of the industry to the rapid increase in fuel prices and we returned seven airplanes prematurely to one of our less orders.

The three airplanes we’re bringing back are three of those sevens. So they are in Spirit configurations and their airplanes that were originally brought in under by Spirit. So while they doesn’t -- they flew it on carriers and there are still issues in terms of reconfirming them to our maintenance program and things like that. It’s a smaller issue than just going out and getting an airplane that had been used and that we had never seen before.

So we were comfortable with those particular airplanes. Beyond that, I’ll go to what Ted said earlier. We also see the pricing in the used airplane market and that’s encouraging. But we do have a growth plan with airplanes, new airplanes coming and we’ve got good ability to finance those air planes. So we’ll have to balance all that to manage growth going forward and we’re kind of sticking with sort of our 15% to 20% per year growth rate over the next couple of years.

Glenn Engel - Bank of America

Thank you.

DeAnne Gabel

Operator, we have time for one more question.

Operator

Our last question is from John Godyn with Morgan Stanley. Please go ahead.

John Godyn - Morgan Stanley

Hey, thanks for taking my follow-up here. Ben and maybe Barry, I think investors, of course, see how successful you’ve been with your unbundling strategy. And as a result, it’s pretty rare to have a meeting with one of your large competitors without somebody in the meeting, pushing them to get more aggressive on ancillaries.

Just hypothetically, if a large airline started to mimic your aggressiveness on ancillaries and fees, is that a negative or neutral to you just from a competitive perspective or is there some silver lining that actually might make it a positive. And does it matter if it’s a large legacy airline or a large low-cost carrier moving in that direction?

Ben Baldanza

I think it will generally be a positive, let’s say like that because what they would -- while they maybe encouraged by the revenue generation on the fees, I don’t -- we don’t think they’d have the discipline to also lower the fare at the same time. And so if you’re charging high fares and then you’re adding a lot of fees, the whole sort of problem of nickel and dime in Aberdeen which becomes a real issue.

With Spirit, since we have every time we’ve added sort of an unbundled option or charged for an unbundled option, we’ve correspondently lowered the base fare, which is why in the fourth quarter we add $75 average segment fare. And so if without sort of offsetting the incremental fee with a lower price structure, I think that’s a risky kind of strategy for another airline.

The other thing is that the more other airlines charge for things, the more that becomes in vernacular and people just understand that those things, all have price points to them. So for every reason, I think it would be positive as someone did, the way you suggested.

John Godyn - Morgan Stanley

Got it. Thank you.

DeAnne Gabel

That concludes our call today. Thank you all for joining us.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you all for participating. You may now disconnect.

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