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Executives

Deanne Gabel - Director of Investor Relations

B. Ben Baldanza - Chief Executive Officer, President and Director

Edward M. Christie - Chief Financial Officer and Senior Vice President

Barry L. Biffle - Chief Marketing Officer and Executive Vice President

Misty Pinson - Director of Corporate Communications

Analysts

Helane R. Becker - Cowen Securities LLC, Research Division

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

John D. Godyn - Morgan Stanley, Research Division

Hunter K. Keay - Wolfe Research, LLC

Stephen O'Hara - Sidoti & Company, LLC

Michael Linenberg - Deutsche Bank AG, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Bob McAdoo - Imperial Capital, LLC, Research Division

Stephen Trent - Citigroup Inc, Research Division

David E. Fintzen - Barclays Capital, Research Division

Spirit Airlines (SAVE) 2013 Analyst Conference May 20, 2013 9:30 AM ET

Deanne Gabel

Well, good morning, and welcome to Spirit Airlines 2013 Analyst Conference. Thank you for joining us today. I also want to say thank you to the Spirit and NASDAQ team members who helped me with this event. We're going to start with presentations by Ben Baldanza, Spirit's Chief Executive Officer; followed by Ted Christie, our Chief Financial Officer, then we'll have a short coffee break. Then Barry Biffle, our Chief Marketing Officer; will have a presentation, then we'll come up with some closing remarks, and then we'll have a group question-and-answer session. We are asking that you hold all your questions until the group panel session, in which time we'll address those. And if you've been to the movies lately, you know not to leave until the final credits roll after we do lunch today. Now [indiscernible].

Our remarks today may contain forward-looking information, now that sucks you off. Actual results could differ materially. We encourage you to read the risk factors in our annual report on Form 10-K and other SEC filings. Please note that this presentation, including the Q&A session, will be recorded and [indiscernible] webcast via our website. The replay of today's presentation will be available on our website under the Investor Relations section for the next 30 days.

And now I'm pleased to turn over to Ben Baldanza, Spirit's Chief Executive Officer.

B. Ben Baldanza

Thanks, Deanne. [indiscernible] is working, so that's good. I really thank all of you for taking some of your day-to-day and spending it with us. We're happy to be here and happy to talk about the company, and maybe a little bit broader terms than we're able to do in our earnings calls, a little bit more about where the cost structure is going, how we're growing, things like that, and so that will be very good. I also say that it's -- we're basically 2 years since we went public. We went public in May of 2011. And so we've been public for 2 years now and the stock price has done well, in that time obviously, with an ideal price of $12, and now we are north of $28. Yet, if you go to our offices, there's still sort of a frustration with angst, then why isn't it better way and why are the costs lower, and why aren't the revenues higher, what isn't the stock at $50, and things like that, and I think that's really good, that's a real positive energy in that we believe so much in the business model. We are so bullish about the growth of the company, where we can go, that it keeps us focused on trying to make sure that everything works really well.

And that focus, principally is, on shareholder returns, and that's what we try to do, by pushing our ROIC calculations and keeping earnings high and being willing to move the schedule to keep the model working where it goes.

So as you most of you probably know, we are absolutely the lowest cost producer in the markets we serve. We have the highest margin performance against all of our primary competitors, and yet, a I'm too [indiscernible] we have a very disciplined growth strategy. Barry and his team do a very methodic, quantitatively-based job of deciding where the next place to go will be, the level of frequency, the gauge, whether it'd be a 319 (sic) [A319] or a 320 (sic) [A320], and that has resulted in positive net margins over the 5 -- last 5 years even though we got oil go to $147 a barrel or economic recession, at least for business travelers, or even in 2010, in the case of our own pilot strike where we didn't operate for 5 days, and yet still in that year, we still led the industry in EBITDA margin.

We now have 49 airplanes, the biggest Spirit has ever been at this point, serving 125 markets, and yet, we have a lot of growth in front of us, and Barry's going to talk about sort of our formula for thinking about that growth.

We're also growing at a rate of 15% to 20% a year, so we're a company earning high margins, with high return on capital and growing to being 20%. That's the core of why we believe this is an investment strategy that people can be excited about and should be excited about.

On top of that, the IPO expunged the balance sheet of all debt, so we have no debt on the balance sheet. Of course, we have lease obligations for our airplanes, and at some point, I think the accounting rules will put that back on the balance sheet but there is no debt on the balance sheet today and we have a very high cash balance. And if you look at the ROIC targets, as you can see, the 2011, 2012, the last 12 months to now, sort of 28% to 30% pretax return on invested capital. We're very proud of this. It's the kind of numbers we like to produce. And we're also proud of the little tiny role that Spirit -- we think has helped play in encouraging this kind of metric to be used more broadly, as a measure of industry health and industry economic activity. This is -- a couple of airplanes have talked about the return on capital here and there, but we're seeing it more and more and we like to think that because we push it, that's helping that trend somewhat.

If you think about our route network, this is as generically as you can think about it. But if you look at the green circle and the green arrow, this is pretty much what Spirit was back in 2005, before we were the model that we are today, mostly in East coast of Florida Airline at that point. Between 2005 and 2010, most of the growth was sort of in that corridor. There was a lot of expansion into the Caribbean, into North and South America, and Central America in that time, but still basically building on the strength of the company as a North/South carrier traffic from big cities like Boston, New York, Philadelphia area, Chicago, Detroit, Washington and so on.

While all that was going on, other changes were happening in the industry. As you know in Delta with Northwest merged and that changed the dynamics a little bit, certainly for cities like Memphis and Cincinnati. And then United and Continental merged and then AirTran bought -- I mean, Southwest bought AirTran. And now you see US Airways and American getting together. And the result of that has been obviously positive for the industry, as all of you can model, it's resulted in less total capacity, fewer competitors per market payer, and generally, a more stable higher fare environment, that's been good for the industry. In 2012, the industry made money with almost the same kind of fuel prices as the industry had in 2008, when the industry docked $10 billion. So clearly, something good is happening structurally in the industry but that same effect has created an enormous growth runway for Spirit. Because when it's gone, it's as fares get higher and as the industry is able to more sustainably attract the kind of payers to support their high-cost structures. At Spirit, it gives us the ability to come in underneath, price more and more markets at a lower rate, repricing to the market that traffic that has been priced out because of higher fares and carry that growth. So the same consolidation that has stabilized the industry has also created more growth opportunity for Spirit. And I can tell you, an airline that we all know and love in Southwest, they were the low-fare airline for many, many, many years, in the '80s and '90s, even in the early 2000s. You see they don't talk about fares so much anymore because their fares are actually quite high. And if you look at their most recent ads, they're very exciting to us, because you see their flight attendants dress in a very professional attire and you see them talking about, we're the airline for the business traveler and things. And that's great because essentially, what Southwest appears to be doing, is just seeding to someone else, and that would be us, the sort of that discretionary, leisure kind of marketplace that they carried for the first 20 to 30 years of their existence. And we don't really see anybody else running to take that space and yet that's the space we're in. So we feel very bullish about the growth because the macroeconomics are right for it, the industry restructuring supports it, and even the single -- what you might think of as the single biggest threat of that is that the Southwest Airlines seems to be moving in another direction, and saying, the true leisure guys, that's not really our business anymore, but that is our business. And that's why you see this red circle, and that's why over the -- since 2011, our domestic is -- I mean, our growth has been more domestically focused, not because we're tired of the international market, not because the international markets don't produce positive worth, but the lower fruit on the tree right now is in the domestic U.S., as the industry have consolidated and created those opportunities.

So this is the actual route map today and basically through the rest of this year and really into next year, we're going to be focused more on connecting places that we already serve. We already serve over 80% of the biggest places in the United States. We're in Chicago, we're in the Bay Area, we're in LA, we're in Dallas and Houston, we're in New York, Boston, Philly, Washington, so we're in the big places today. So connecting these is going to be more the goal rather than adding a lot of new cities. This year, we added Philadelphia and New Orleans to the map, 2 good cities that can go a lot, so we can fly to from many more places than we fly right now. But you can see that, we're not really a national airline today, in a service sense, even though we tend to fly just 1, sometimes 2 flights a day. So again, if you're the kind of customer who's paying for your own ticket, if you're not traveling on a tiny sensitive schedule going to a business meeting or having to get home to see your family from the business meeting or something, we are the best value out there. When you look at the total price that customers pay on Spirit, their fair, plus the extras that they actually buy, and you compare that to the total price on JetBlue, Southwest, American, United, Delta or anyone else, our fares are always the lowest.

Now low fares are what attract the customer and low fares are what win the customer base and grow the market for us. But we also believe, that the company needs to operate better and better from an operational excellence standpoint. And this is good for 2 reasons. One, it improved our customer service because when we have fewer delays, fewer cancellations, obviously, we're meeting our commitment to the customer in a better way. It also meets our cost strategy because running an airline efficiently is less expensive than running an airline late or with delays. From a pilot cost standpoint, from a fuel burn standpoint, from an airport fee standpoint, from a lot of ways.

So if you look right -- if you look today, 3 big metrics that we look at our On-time Performance, Completion Factors -- Completion Factor and Mishandled Bags. And they're all important. And if you look at sort of, for the first quarter, where we are for the DOT our -- by DOT, we mean, if we reported to the DOT today, these are the numbers we would be reporting because they report -- we report domestic opportunities, not total system. And we have been at 99.1% Completion, 68.8% On-time for the first quarter, and a Mishandled Bag ratio of just over 1 bag per 100,000 bags.

And so great on Bags, great on Completion, maybe not so great on On-time. If you look at system there, then can see what you the industry does. So the industry is running almost a point less than Completion. The industry's running a 10 or 12 points, 10 or 11 points higher on On-time, and they're losing 3x as many bags as we are or mishandling 3x as many bags as we are. So if you're looking at Completion and Bags, we're doing awesome versus everyone. And if you look at On-time, you say, well, why are we at 80%? But there's a logic here, and I'm not telling you we're happy about being 11 points behind the industry. And we, in fact, we're doing a lot of things to improve that number, we'll talk about that in 1 -- in the next slide, actually. But the reality is, for Spirit, when we fly just 1 or 2 flights a day, canceling a flight is the absolute worst thing we can do for a customer because our ability to protect them on another Spirit flight isn't until the next day. And because we run such high load factors, in many cases, we can't get them out for a couple of days. So we're looking into doing something terrible for the customer, saying, it's going to take you 3 or 4 days to get where you thought you're going to get in 3 hours, or we do something terrible for our own cost structures and say, all right, the way we can solve this is to buy tickets on the competitor at their walk-up rates. And even though our customers pay us an average of $75 plus their extras, we're paying $800 and $1000 to put them on the other flight. So canceling flight is very expensive for us either from a P&L standpoint or from a customer service standpoint or both cases. So we biased the airline toward Completion. So we will run late rather than cancel, and that's what drives our On-time lower than the rest of the industry. I could tell you, I mean, work for US Airways and Continental and American, when you are on a schedule that is a high-frequency schedule, you can cancel a flight, reprotect everyone 2 or 3 hours later, and you just go with the flow and that works. It doesn't work that way at Spirit. So we've made a conscious decision that we're going to operate all of our flights. We're not going to cancel and we'll take the penalty for On-time. In the meantime, what we'd like to see happen though is that the On-time -- the Completion stays right where it is, and the On-time moves up, the sort of industry average. And we're doing a lot of things to try to make that happen. But in the meantime, we understand why these numbers look way -- this way and it's the right thing. And as Barry was saying earlier to a couple of you, the reality is, if you're traveling for fun, whether you arrive on time or 20 or 30 minutes late isn't as important as if you're taking that trip for a business meeting. I'm not going to say that leisure customers don't care about on-time, of course they do. But the decision to say, complete the flight rather than cancel, at the expense of some On-time has been a very positive decision for us and our customers.

Now if you look at sort of how we operate, the reality is that the company has grown geographically in a pretty big way. Dallas/Fort Worth is now the second largest station in the system, wherein just a couple of years ago, we didn't even fly there. It's an amazing growth in Dallas, amazing successful -- amazingly successful growth in Dallas. We've also grown in Las Vegas, we've grown some in Chicago. But if you remember that green North/South arrow, all of the company's infrastructure to support the operations, meaning, mechanics who know how to fix the plane, pilots who are based there, so if a pilot calls in sick, another one could show up, all of that was on the East Coast, in places like Detroit, Atlantic City and Fort Lauderdale. Over the last 6 to 12 months, we built that infrastructure in Chicago, in Dallas and in Las Vegas. Because all of those stations, all became operational from maintenance and crew. So now what happens is an airplane that never sees Fort Lauderdale and Detroit in a couple of days still has a mechanic available to it when the playing sits at the end of the night, we can clear out MBLs, go to the logbook. We still have pilots based there now. We should say, we have pilots based there now so that when there is any pilot irregularities or a pilot calls in sick or some, we can still operate the flight and so it's working much better. The other thing we're doing for this summer that should absolutely help the operational reliability, which again, is a positive customer service and positive on the cost structure, we're going to do less nighttime flying. We'll still be flying at night but what we've done is really, for the first time, since we've been scheduling the airline, but certainly, the first time in the growth mode that we've been in, we've coordinated the schedule flying effort with the operational efforts to make sure that when the plane sits, there is actually a mechanic who is capable and able to -- with the tools and the inventory to be able to fix the plane. We're in the position last year where we had a number of either overnights or times of plane was available, but the maintenance wasn't lined up with where the plane was. So the plane might have had time here but the mechanic over here has time but if it's not in the same place, you don't get the work done. We've done a much better job of that this summer, so a little less nighttime fly, we've got the crew based in Dallas, Las Vegas and Chicago, as I mentioned. And all of these sort of worked together so the results is going to be an improved reliability but we don't suffer aircraft utilization as a result. So the first thing that I say is, well, if you're flying less at night, your utilization coming down, but it's not. In 2011, we ran 12.7 hours a day, for the year. In 2012, 12.8. This year, we'll have to make -- we're going to run 12.8. So again, to run almost 13 hours a day all year when you're flying on Tuesdays, when you're flying at night and day, when you're flying in September, means that we're running 14, some -- maybe almost 15 hours in peak time, so that requires an efficient operation and the airline's now built for that. And we're very excited about this summer of bringing this kind of reliability to the thinness in the network. And that's very encouraging.

So with that, I'm going to turn it over to Ted Christie. He's been our CFO for a little over a year now. We're very happy Ted's here. He's been doing a great job in terms of keeping the group focused on cost, and efficient financial processes, reporting and such. So Ted, the floor is yours.

Edward M. Christie

Thank you, Ben. Can everyone hear me okay? Okay. Thanks everyone for coming today. I get the unbelievably sexy topic of talking about costs. But in our case, in Spirit's case, we actually do consider this a bit of a sexy topic because we're so focused in such a core piece of what we're about, and we'll talk a lot about how we're planning to improve our cost advantage versus our competitors, and where those areas of focus are, because we hear a lot of feedback from you all and from our investor partners about how Spirit plans to adjust as we grow, how we plan to mitigate costs creep for lack a better way to say it, so we can talk some about that today.

First, we call ourselves low cost by design and that may sound like a soundbite, but in fact, there are a number of pieces, as to what that means for us. First, we' all about keeping it simple. The business is designed in a very simple way, and I'll tell you a little bit about that in a slide or 2 as to how we've made the transition from where Spirit was in 2006 until today. Our model with our customers is, a la carte, so that, that by itself, incentivizes low-cost behavior, whether it's -- they bring less bags on board or we incentivize them to do more self-service type activity, all of that drives our cost lower. We're keeping our asset utilization very high, both in the air and on the ground. So Ben already talked about high aircraft utilization, but the same time, we're focused on success at utilization, meaning locations and real estate, and how we maximize that as well.

And then it kind of goes without saying, but it's worth saying that we keep a very low-cost mindset. Everything about the business, and that includes the commercial team and the operating team, along with the finance team working together, everyone is focused on how do we lower our cost structure even further. And the reason for that is, we recognize that the cost structure is what drives our products. It allows us to offer the very, very low base fares, and that's, that's the most important piece to Spirit's strategy. And so we know that the team is unified in our efforts to keep the low-cost mindset. So from the time the ULCC model was introduced at Spirit, we've -- what we've done here is a graphic to show the movement of our unit costs from that period to now, and so we've fuel adjusted the 2006 stage length adjusted CASM and waterfall to down, for lack of a better way to say it, to where we sit today. Now in 2000 -- late 2005, excuse me, Spirit was still a low-cost carrier and we'll show you in a slide as to where we stack up against the industry. These number at 12.07 was a relatively low cost number, but we've made a number of structural changes to the business that have further drew up -- driven that number down by over 20%, and they're listed out here. And the reason we put it in this way is to show not just the effort and the commitment that the business has to low-cost, but this, somewhat access a barrier to entry. There are a number of things that we do hear that can't be done by flipping a switch. You have to design your business that way, either in the form of density or the way you incentivize your customers to behave or your overall overhead position, or whatever those things might be, we don't make decisions at Spirit to drive revenue. We make decisions to keep our costs low and let the revenue come.

So here is a comparison point which we've showed before, as to how we stack up against our competitors on a full CASM basis. This is trailing 12 months through the first quarter and you can see where we sit and we sit in the right side of this, the correct side of this ledger, versus all of our competitors. And I'd pointed out on the earlier slide that the work we've done taking this cost structure from a $0.12 operator to a $0.10 operator, I've said it before, we were already a low-cost carrier so there's a lot of effort to get you that extra mile that this company has gone through. But this, this is important chart for us, one that we measure ourselves everyday so that we can make sure that we're still able to offer the fares that we offer and keep our competitive advantage.

So we hear -- like I said earlier, we hear a lot about, what is Spirit going to do to make sure that it keeps that cost structure where it's at and we've talked some over the last -- certainly in the year that I've been here about the costs that are part of the airline as we grow, some growth-related costs and some that are more structural in nature as the airline ages. We start to have to do more maintenance on our airplanes and that sort of thing. And so one of those things that clearly pops out that we've talked a lot about publicly is the effect of maintenance on our depreciation and amortization expense because we employ the deferral method for accounting. And so I thought it was helpful to just illustrate without numbers, so I can't use the slide to calibrate your models or anything like that. But just to illustrate that, we know we have a number of initiatives in our pocket, about ways we plan to offset some of these creep-related items. And those are both on the fuel side, as well as on the non-fuel side. I'm going to talk some about that today. But we know, we feel very comfortable and this is why we feel very comfortable that we can use those tools to offset the effect of that creep. So what are we going to do, to both maintain and even widen our cost advantage? And we think this is an important part to our long-term strategy. And we, this year, went out and told you all that we are targeting a unit cost, excluding fuel to be down 1% year-over-year. And that compares with most of our competitors in the industry showing cost inflation on the ex-fuel basis and some as high as 6% and it ranges. So our objective here is 2 pieces: One is to keep our costs structure very low and to drive it down even further; and that leads to the second objective, which is to continue to widen that advantage that we have versus our competitors.

So we think we have 5 tools available to us to help offset some of that cost inflation. And first is scale, we're still a reasonably small carrier today at 49 airplanes. And as we grow, we're going to achieve more scale, which is going to help us on the fixed base, and capacity growth of 15% to 20% per year not only helps us dilute the fixed base but also brings in a younger component to our overall cost structure, both in the form of aircraft, as well as in the form of crews and that sort of thing which is going to continue to keep our unit costs low, then talk a lot about reliability and this has been an important piece to the airline over the last year, it's been focused on driving reliability, not just because of the customer perception but because of the effect, as we mentioned, that it has on our P&L and our cost structure. And all the moves that Ben talked about in his presentation were well-thought out, and we've put a lot of analysis behind that, and we know that those moves drive our cost structure lower. The idea of keeping reliability very high will offset a lot of the expenses associated with keeping that reliability high.

During the growth period, the company has opened a lot of new cities in North America, and we've seen the dots added to the route network over the last 12 to 18 months. And part of what's going to happen now is we're going to start to connect more of those dots. And that's going to drive further optimization throughout the network, once again, in the form of the expenses we incur on the ground being more optimized going forward.

The last 2 components, the last 2 tools available to us, I'll spend a little bit more time on, but our fleet today, and I'll explain where we think we have avenues to continue to drive our unit fleet related -- unit ownership related expense down going forward, as we take on new airplanes, as well as we evaluate the financings on our existing fleet. And then fuel burn is such an important part to our business nowadays with comprising -- fuel comprising north of 40% of our total expenses. We spent some good time thinking about how we're going to improve that as well, and we'll talk a little bit about the tools we have available to us there.

But first, I thought it was helpful, and this is more for my benefit than anyone else, but to explain what we know to -- that exists which is a bit of an optics problem in our cost structure, really versus everyone else in the U.S. space and because of the fact that we lease 100% of our aircraft, 100% of the ownership expense of our airplanes sits in our cabin today. If you own airplanes, something else happens, you get the depreciation effect, which is obviously stretched out over the full useful life of the airplane, as opposed to just the term of the lease, and then the interest component of that is moved below the line. And so we don't compare favorably against our competitors on an optics basis, not a cash basis. And it's worth pointing out with the size of that comparison we drive. So we've done a few, just quick scenarios to show, if we own a 1.5 quarters or 3 quarters of our airplane today, what would happen to our unit costs? And you can see, 2% to 6% would immediately peel out. Now this is full CASM, this is not CASM x fuel. If you think about it on an x fuel basis, the right hand number is closer to 10% or 11%. But if you look at those examples, for example, US Airways owns about 29% of their fleet, so they're kind of sitting in that bucket. And in the middle, you have JetBlue in the 50% to 60% range and on the far right, you have Southwest that owns somewhere between 70% to 75% of their aircraft. And so it's helpful for us, as well as you would understand the differences in ownership because it's notable.

But with that said, we have some real concrete ways we believe that we will be driving the unit related ownership expense of our fleet down. The first is that at -- since we've gone public, the company's credit position has improved materially. And we've started to recognize the benefit in our ownership expense and what we're seeing as we take new airplanes, the ownership expense we're seeing is down about 5% on a unit basis. And so that's just comparing the differences between a pre-IPO finance aircraft, new delivery, and a post-IPO finance delivery. So we should continue to see that benefit going forward, and it will become a larger and larger component of our fleet with each incremental delivery. The second is that, we have a number of aircraft that were financed early in the transition phase of this business, so 2004, '05, '06. Most of those are A319 deliveries, and we have 29 A319s today, that we are all financing the company within a clearly in a different position, I think the market was in a significantly different position and those that never been touched. And so we see this as a clear opportunity for us to adjust some of the ownership expense for those aircraft. And in fact, the example we gave here today, we have an agreement in principle on a number of our existing leases to gently stretch out the term of those leases that helps us smooth out the redelivery schedule as those aircrafts come off, off lease, but at the same time, lowers the overall lease rate. And we're seeing examples of those in the neighborhood of 20%. So we see some real benefit here to optimizing the size of our fleet, as well as the financing of the existing aircraft, that is going help us manage our unit costs going forward. And third, we give an example, as we grow our -- as you all know our order is firm it's for A320 aircraft, and we do have optionality in the neo order on 321 (sic) [A321] to more evaluating that aircraft. And we know that the ownership expense on a A321 is going to be further diluted on a unit basis because of the incremental seats. So we have some real tools available to us that were -- most of these who are already employing, as ways that we're going to manage our costs on the ownership side.

Next, for fuel burn, and we spent a good amount of time on this. We have the -- a fuel burn committee that spends a lot of time thinking about ways and some of them are not worth mentioning because they're small rounding errors but each little bit adds up for us. But going forward, as we bring more A320s into our fleets and those A320s from here forward, the current engine option A320s will all be equipped with sharklets. And we transition then in the latter part of this decade to the neo-aircraft, we think that our price neutral fuel CASM will continue to decline. And so we give a few examples of those reasons and the first is JH, that's the most of the pretty obvious. But as we stretch out the size of our average aircraft, we are getting more seats on the airplane and we're becoming more and more fuel efficient with each A320 delivery. The second, the Sharklets I mentioned earlier, we anticipate that a Sharklet on a current engine delivering airplane will provide somewhere between 2% to 3% fuel burn advantage over a legacy winglet. We've taken -- as I said, we've taken one delivery thus far and so it's a very, very small sample size and that airplane's been operating in our fleet now for about 1.5 months and the performance of that airplane has actually outpaced our expectations, so that's a good new story for us as we think about the return of the investment in the Sharklets. And then, we'll be transitioning, as I mentioned earlier, in the latter part of the decade to neo aircraft. Neo aircraft, we have 50 aircraft on order and those will all be coming in 20 -- well most of them will be coming in 2018 and beyond, but we have some that may come at a different point with an agreement we have with an operating lessor, but those neos are supposed to provide 15-plus percent fuel burn advantage over the classic equipment.

And in there, in addition to that, we're looking at other ideas in flight management, and the most -- I'll give one example here, which is cost indexing so that's managing the difference between block time and fuel burn or speed of the aircraft. And we're looking at avenues there that will also provide us meaningful fuel burn reduction opportunities. And the combination of all of these things, we think by the time we get to the end of 2015 can give us somewhere in the neighborhood of 0.5% to 2% advantage on our fuel CASM, which is a real impact to the bottom line, in one that we spend a lot of time on.

So all of this cost discipline, all of these opportunities available to us to mitigate the effects of non-fuel related cost increases and to drive down our further -- our fuel related expenses, you'll hear Barry talking a little bit about the opportunity and the size of the opportunity. And most of you have seen our slide that talks about the 400-plus opportunities, and the concept here is that, as we grow and we widen the CASM advantage over time, as we manage our costs flat-to-down, and the industry is starting to see more and more inflation, that opportunity is that -- starts to grow as well because we become more and more competitive against them. And so, is it possible for that 400 to grow to 500? Well, we think so. With each move of a gap for ourselves versus the industry of about 2%, we see some pretty meaningful increases in the size of the opportunity. And so we look at this as, as I said earlier, we look at this cost structure initiative, as really the core of the business. It's the most important part of our business and we're focused on it from bottom to top, and to make sure that we maintain the advantage we have today, and continue to grow it. And the good news is, that we think we have the tools available to us to make that happen, and certainly, over the near-term.

So with that, I'm going to turn it back over to Deanne.

Deanne Gabel

Thank you. Before we go to the coffee break, well, I would remiss in introducing this nonpresenting Spirit team members. We have Thomas Canfield, he's our General Counsel, he'll be here with us for lunch today; as well as Ed Miranda, our Vice President and Controller; we have Scott Haralson, our Vice President of Financial Planning and Analysis, and Simon Gore, our Treasurer; in the back, we have Misty Pinson, Director of Communications; and then Executive Assistant Extraordinaire Denise Masella, who will be here and you can talk to them during the break and at lunch. And after that, we will have a 15-minute coffee break.

[Break]

Deanne Gabel

All right. If everyone wants to go ahead and take a seat, we'll go ahead and get started again.

With my pleasure to introduce Barry Biffle, our Chief Marketing Officer.

Barry L. Biffle

Can you all hear me? All right. Thanks, again. So I'm sure I've gotten a little bit of feedback from folks this morning as we've been mingling around and a lot of people are wondering why I'm wearing a suit, and hey, he's a fun guy, where is the toga? So I can understand that, why am I dressed like I'm going to a funeral, and the reason is, is we're dead serious about profits, and so we'll make sure that you understand that.

It might be a little fun along the way, so we'll see how we get there. So we'll show you the slides that many of you have seen over and over again and we're going to show it to you one more time because it's very, very important. We look at the marketplace where we have an operating license, from the domestic US and nearshore international that we can fly. And we look at all those opportunities, we look at markets that have at least 200 people a day flying, and they have really high fares, and presumably, in most cases, really high-cost for the incumbent carriers there. And when we look at that, we find today that there's over 400 markets that we believe that we can enter, stimulate the market, reach our target margins and grow. So again, I'll leave it up there because that is very important when you start to think about the growth of Spirit Airlines and what we have in front of us.

So we're very paranoid about making money. We're very paranoid about deploying assets and we've looked at where carriers have failed in the past. I personally spent a lot of time thinking about this. So not only do I want to make sure that I put the aircraft in the best possible eyes to be successful. But once we put the assets in place, we closely monitor what's going to happen to the profitability. And as you can see on this graph, this is kind of -- this is not the average per se, but this is very typical of what we see in a Spirit Airlines' new route. So obviously, we start -- not necessarily making money just yet. Generally, we'll find in 69 days, we're making cash. And then within the 6 to 8 month timeframe, we start making money. And there's a lot of confusion about this. People say, they make money in 6 months. Well, no, we didn't make money for the whole first 6 months, but we're starting to make money. And then by the end of the year of its first year, we do expect for the thing to have made money and be on a run rate for making it.

Now it's really important to pick good opportunities. And we have hundreds of great opportunities and we constantly reprioritize those. We don't just look at it and it's a snapshot in time, that 400 that I showed you in the previous slide, it constantly changes. Some fall out, new ones get added. So as fares go up, maybe a market starts to come on the list, as maybe some competitive things happen in one particular route, maybe that opportunity falls off. So we constantly resource that. We're taking aircraft all the time. So what we're doing is saying, okay, where is the best and highest return that we can get at this moment in time now, that I'm about to deploy this asset? We'll look at it about 3 schedules a year is kind of how we look at it. And right before we lock it, we look at what we can do. That's really, really important.

But really, the most important thing is if you're not hitting this curve, you can have the best plan in the world, but the best trait to have, from a network planner is to admit when it didn't work. Don't stick to it because it's strategic or market share or something that you hear from other carriers, that's just not true. That's not what our shareholders are interested in. They're not interested in us flying somewhere that I like personally. They're not interested in us flying somewhere so that we can have 100 flights a day out of a city. They're interested in us making money. So if we see any one of those opportunities and we do this a lot, we've been growing around 20% for several years, and we only run about 1 flight a day in most new routes. So we see this a lot. We have are extremely high hit rate, but we will drop losers and we'll drop them fast. And that's what ensures that we can maintain our margins.

And so here, on this slide, I'll show you how it's worked over the last couple of years. So in 2010, we have our core -- you see on the top left, the core mature, and I'll explain what that is. This is principally your daylight flying. This is between 6:00, 7:00 in the morning, 10:00 at night. And this is what you have the asset for. This is our core flying and this is where we look to make the most money.

In 2010, we were at 7% margins, by '11, 13%, and in 2012, 16%. And a lot of that was driven by not only the mature was doing well, but where we were adding was doing well in addition. So then you look at the next line, the green line, that is the core new, so the new assets that we deployed, where did we deploy them, and how did they do? So obviously, in 2010, you saw that curve from a while ago and I'm paranoid about that, so yes, we didn't do quite as well on those. In 2011, we cleaned those up and the new ones performed even better than the year before. In 2012, same progression. Then we've also got in the yellow, this is our utilization flying. This is principally your red eye flights that we have and there's only a handful that actually drive this and we look to make 20% on this. So obviously, we're more than achieving our 20%. This is a cash return, had we parked the airplane, what would have it generated versus that. And then if you look at the new, 24%, 26%, 20%. So even in the new utilization, we're still hitting our target and the core is really, really well. And this is a testament to the methodical thinking that we put into our network planning that Ben mentioned, and how serious we are about making money.

So let's talk about non-ticket. In 2006, we really started spending a lot of time thinking about non-ticket, and obviously, we look at Ryanair, and they were kind of the global standard at the time and we were just excited, "Hey, could we get to $20? We're going to get to $20 here." And so we started deploying a lot of different ideas and through the years, we've had hundreds, literally hundreds of ideas. I mean we're not perfect. But the main thing was that we tried a lot of things. But along the way we learned, okay, we can get to $20. Now we can get to $30, now we can get to $40, we started getting better at things, and we're not the best we can be, but we are number one. And in the first quarter, we hit $54.75. Yes, that's dollars, not pesos.

And we think, now the next place for us to go to is $60. Because again, that's kind of how we've been thinking. But I'm not going to talk about $70, I'm not going to talk about $80, I'm going to talk about, we want to get to $60 just because it's the next thing. And it is getting harder, don't get me wrong. It's getting harder, we've done a lot of easy things but we're getting better in a lot of those things that were -- we already have. For example, on our bags, just in the last year, we introduced a new advance purchase dynamic, similar to how you would revenue manage your ticket themselves. And so, it's cheapest if you buy it online, at the time you buy your ticket, a little bit more if you wait to the time of departure, a little bit more at the gate and so on. And that is driving people to deliver things to us that generate more money. But for the customer, it saves them more money if they behave in ways that saves us money. So it really fits the costs, as well as the revenue and it's really good for our customers.

Good front seat, we continue to get better at monitoring that and coming up with the right price points. Our Free Spirit MasterCard with Bank of America that we launched almost 2 years ago, doing very, very well. We launched packaging with Spirit vacations about 1.5 years ago, and it's really starting to pay dividends, but we're nowhere near done, and we're nowhere near to best in class. $9 Fare Club, which has been around since '07, continues to be of great value for our customers, and we're learning better and better ways to merchandise that. And we've got over 30 different categories of non-ticket revenue that we focus on and we're trying to do better merchandising, better price points and constantly trying to improve it.

But let's talk about some things you may or may not know about. So in the second quarter, we did launch a new call-center provider and are -- we partnered with C3. And some of you may have heard about the fact that we got rid of our 800 number, but we actually did that the first of the year. But it didn't really get out, we actually had no negative feedback until about 2 weeks ago when the LA Times reported that we no longer had an 800 number. And we kind of view it as that's really so '90s. Everybody's got long-distances from their landline, and everybody has a cellphone, and that's why, for months, no one complained. It didn't change our performance, it didn't change the volumes. In fact, our call center performance is actually better year-over-year right now than before.

But we were able to save $800,000 a year by getting rid of the 800 number. So it's something that our customer, as well as us, are able to say and it wasn't value in that chain, so it makes sense for everybody involved. That is out there. But the most important thing for non-ticket is the fact that with our new provider, we have the ability to sell the packaging products with the Spirit Vacations, hotels, cars and so forth, and that's really, really early but we're starting to get traction with it.

We've also got some new Free Spirit MasterCard partnerships. Today, our partnership with Bank of America is only for domestic U.S. citizens. And so what we're looking to do is to launch that with our footprint that we have internationally, even though we can't take them everywhere they want to go. If you go to Latin America, one of the top places they want to visit obviously is South Florida. So in Central America, we are launching a partnership that will be kind of a Pan Central America. And then at the largest city that -- our the largest country that we fly to in South America with multiple destinations in Columbia, and that partnership is coming up as well.

In addition, we're actually redesigning our travel agency portal to actually enable them to sell packaging. They can sell tickets on Spirit Airlines today at spirit.com through the TA portal. But in the future, they're going to be able to sell not only flights, but also hotels and so forth, and they'll be able to earn commissions in a name-your-own commission-type product that we just recently announced a few weeks ago.

More channels that we're opening up. The kiosk, we're going through a kiosk redesign right now. We expect that by the end of the year. That will enable more products to be sold at the kiosks a little more than just check you in for your flight, we'll be able to sell other products there. We've also got a bundled fare product that would be available in third-party, in the GDS and so forth. Today, you can only buy a flight. But in the future you'll be able to by flight plus bags and so forth. And we hope to be able to announce that very, very soon. And we've got other things in the works. So, again, we are $54.75, and we're done in yet.

So with that, I'll turn it over to Ben and he'll talk about understanding our customers.

B. Ben Baldanza

We hope a lot of you have questions and we're just a few minutes away from being able to do that.

So I am going to wrap up with talking about our customers. I'm going to tell you a quick story that happened just last week, and if I made up this story, and I went to Ted or Barry or Thomas, that I've got this idea for a story, they say no one will believe you so just give it up, that's how unreal this story was.

But Thomas and I had some meetings in D.C. So we don't fly to D.C. anymore because we moved our Washington area service to Baltimore. Because at Baltimore, we could be more flexible, we can fly to Las Vegas in the middle of the night, we can flex the capacity up and down based on seasonality, we couldn't do any of that at D.C. So I flew JetBlue [indiscernible] because they fly D.C. Fort Lauderdale.

And on the flight coming back, this was last Wednesday, were they Thomas? I think it's Wednesday? And from sitting in the little hold area in Terminal 1 at DCA, and there's a guy who clearly wasn't dressed like a business traveler but who had bags and there were Spirit tags on his bag. And I thought that's kind of cool. It's a guy like, maybe fly [indiscernible]. But he starts talking to the people around him that he was traveling with in a fairly loud voice of how upset he was that the fares between D.C. and Fort Lauderdale have gone up so much since Spirit left and what can the airport do to get Spirit back, and I really miss those guys.

And had I made that story up, no one would believe me, but it actually happened and I was just -- flabbergasted that like someone would be that vocal, still have the tags on his bag and everything. And so the reality is our customers do like what we do. They understand what we do. But that doesn't mean that we can't be even better. So that's what we're going to talk about here.

This is a survey that was done on elliott.org, which is a consumer -- pro consumer kind of website. But anyone could do the survey and you're going to get the exact same answers. This has been true for a long time. When you ask customers what's the most important thing when they choose the airline they fly, price overwhelmed everything else. All they care about is price. Not only is price the number 1 thing that people care about, but look at some of the other things and what -- how they really don't care that much about it. Doesn't mean they don't want it, but are they willing to pay for it?

And if you look out, it's like 800 people survey, over 80% said price. But even reputation of airline service, very few say that matters, legroom isn't that big a deal. Now maybe if you're flying 13 hours to the Middle East, it is a big deal. But if you're flying 2.5 hours in the U.S., not that big a deal. Frequent flyer benefits to those that matters. Business-class availability, a very, very small segment of the market, based on that.

So the reality is, is that price above all means more than you above all. And when you can price the product lower at a lower price point, more people travel. So this is another one of Barry's famous graphics, which is a graph with no numbers. But -- so when the price is free, a lot of people go. You charge $1000 or more, fewer people go.

So the point is we're in a volume game in our segment of the business. And the lower we can make that fare, the more people we can stimulate, and because price is what most customers are thinking about. Now that may not be true for the small subset of travelers who are corporate business travelers where somebody else is buying their ticket, and that may include everybody in this room by the way. Right? But somebody else is buying your ticket, we all know that the choices we make are probably different than when we're making those decisions for ourselves or our family. And what we care about and what we're focused on is attracting that customer base, the 99% that care about price, not the 1% who have somebody paying for them.

So to do that, we're a different airline, right? We attract customers with the lowest price, with the super low startup. But not only the low price upfront but the lowest total price. When you look at market by market where Spirit flies against everyone else and the total price they pay, their fare plus their fees, we're always less than the other guy. And so the lowest total price is important. We also operate the airline to offer the lowest price by having the lowest cost, we talked about this, the density, the simple rules, treat everyone the same, high utilization, but create those options for customers if they want a better service or if they want something better versus just getting from A to B. But we also offer choices to help them address things they want, the frills only for people who value them. There's no cross subsidization going out of the airlines. You're not paying for somebody else's choices. And that allows them to create an experience from sort of almost legacy.

So this is a numbers game. And this is our view of us versus everyone else in the industry. So you can have a no frills, unbundled product which is kind of your lowest price, or you can be super high touch and offer a lot of things that people want. You can also add very high prices or very low prices. And then you can look at your cost structure and see where you breakeven. Our break even is up at the top because we have low prices at the top, right? So we can have a very low price and still breakeven.

Most of the industry is competing right here. They're competing on some sort of touch basis with high fares and everybody's competing with that space. Look at the way the legacies advertise and promote themselves, look at the JetBlue or Virgin or increasingly Southwest promote themselves, it's all high touch, high price, that's what the whole industry is doing. Nobody is attacking their customers market really except for us and Allegiant to some extent in sort of some of the smaller markets. When the big guys or when the high-touch guys try to unbundle, they just get a lot of anxiety and a lot of friction from their customer base because if I'm paying $850 for my ticket, it's annoying to pay $25 for a bag, it's just is.

When you're paying $70, the bag charged, in the scope of things, isn't as a big a deal because your total price is still less than your next best option. So the reality is, on Spirit, we can attract the customer who wants to pay the absolute lowest price and is willing to behave in a way to keep this the lowest price. Glenn Engel is telling me that he took a flight out of Spirit with a goal to try to not pay any extras. And I love it, that was fantastic, right? That's what we want our customers to know they have that possibility, right? And if they can travel with only a small carry on, and you don't eat or drink on the plane, and you buy from the website and you print your own boarding pass, and even go to the airport and pay in cash, right? If you did all those things, you'll pay less.

And then if you want to do that, you can. But the reality is, if you want to do more than that, if you want to fit in an extra seat, you've got a shorter line at the airport, if you want eat or drink on board, if you want to buy some from a third party, if you want a human being to do something for you that you can't do yourself, we can have almost all those options, too, Now we don't get all the way over to high touch because we don't offer you a business class, we don't offer you a lounge in the airport, we don't offer you a frequent flyer program that will get your family to Hawaii. So we don't get all the way over there -- and it's too expensive, too. But the reality is Spirit's market potential is just huge, it's enormous and it's bigger than everybody else who are flying.

So we recently undertook a detailed survey of our customers and that might surprise some of you. We have a bit of a reputation of maybe not caring about our customers, which I find a little funny actually because the core of what we do is as customer-centric as possible. Find a way to get you where you're going for less money, that's an extremely customer empowering and customer positive kind of message. Yet we have this perception, to some extent, that we don't really care about our customers too much, which isn't true. So we surveyed our customers and asked them what they thought about us. And the reality is what they told us they really like us, they love our low fares. Many of them commented that they like our fun marketing. And they also mentioned that we go to good places. And the reality is with the international network and focus on a number of leisure places a well, our network is kind of exciting for discretionary travel.

They also don't like some things about us, and I realize it's right on the line there. I think you can read that but it says, customers dislike some of these. They comment about our seat pitch and our comfort or lack thereof, they comment about having to pay separately for seats and bags, they talk about overall our reliability when we're late or when we're canceled. And sometimes, they get the sense that our employee put our policies ahead of our compassion.

And the reality is we can address all of the issues that they dislike, keeping the things they like without changing our cost structure one iota and without turning this company into JetBlue or Southwest. And the way we do that is we think about who our customers are. There are leisure customers, friends and family who generally value fun and excitement. When customers walk into our store, they're generally walking in with a smile on their face. They're going on vacation. They're going to see friends. They feel good about the travel they're about to take because it's a choice that they made, not that their company imposed on them to go do.

So we start out with a good guy. Just they come in happy, keep them happy, right? They buy their own ticket, so we win them because our price is number one and the total price, even after the extras they choose is number one. But they expect us to be 100% reliable and they expect not to be annoyed in the process. So what we're on is we're not is we're not in the business travel airline as everybody else is fighting for that. So we now have this mantra internally that we say we're going to have lower prices than Ryanair, which really means lower cost than Ryanair and a better perception than Southwest Airlines. And you say, that's impossible, right? No one can have a better customer reception than Southwest Airlines, they're the customer-friendly airline.

Let me explain what that means. We set for ourselves what we believe is the most aggressive airline cost benchmark in Ryanair and the most aggressive airline customer perception method in Southwest, and the reality is we're pushing the airline in both directions to beat both of those. And let me tell you what I mean by better perception than Southwest.

We're careful not to use the word better service than Southwest because service is also a physical delivery that we don't get always deliver. The reality is, if you fly Southwest and your flight is canceled, they're unlikely to have another flight leaving sometime in the next couple of hours to put you on. We will not have that option, our schedule doesn't have that flexibility in there.

If you fly Southwest, they're going to give you a Coke to drink, right? Included in the price, they're going to include your bags in the price, right? We don't do those things, right? So it's not that the absolute physical delivery of the service, but people feel a certain way about everything they buy, right? You buy a car, you feel that it was a good or bad buy after you've driven the car for a little while and based on what you paid. You go out to dinner, that's the place I want to go back to again or I'm not going to go back there anymore because the total value proposition wasn't so great.

So the reality is maybe Stephen flies Southwest and pays $250 and goes where he's going, and have a certain feeling about whether that was a good flight or not, whether it was a good buy, whether he would do that again. And then Duane flies on Spirit and he pays $70 and he buys a bag for $25, he pays $95 in total, and he has a certain feeling about how he's treated, and whether that was a good experience, and whether he'll fly Spirit again. Our goal is if Duane feels better about his buy and stay with us.

It doesn't mean that Stephen didn't get the free Coke, doesn't mean that Stephen didn't have to pay for his bag but Duane did, not a service issue, but you feel a certain way about your product, and you feel a certain way about things you buy. And we absolutely believe that we can move this needle significantly over the next 12 months to where the customers who fly Spirit understand and react to the value that they're getting and the trade up they're getting and feel really good. And one of the reasons I'm so bullish is that we know a lot of our customers already think that way. We had CBS news in our operation last week, and then this Wednesday I'm going to be on CBS this morning with Peter Greenberg, the travel writer, and Charlie Rose, as a follow-up to that, where they're going to be showing some of the things that they recorded.

But one of the things they did was interviewed customers who got off the airplanes. And they said, "What do you think about your flight?" And I think what they were really hoping to hear was, "Oh, that was terrible, I'm never going to fly that airline again." I think that's what they were really hoping to hear. You know what they actually heard from everyone? "You know, it was kind of uneventful flight, seats were kind of tight, but in only 2.5 hours, awesome fare, couldn't gotten any cheaper." Right? I found them talking to the guys again, "This is great." That's what they heard from everyone getting off the plane.

So we know that we mess things up at times, and we know there's times that our employees aren't as empathetic as they could be, especially in irregular operation situations, we can fix that. And we know that when we cancel a flight, we don't have a lot of great options, as I mentioned earlier, so we're fixing that and we told you about that. So the reality is we understand what our customers want. And when we take that dual approach, lower costs than Ryan, better customer perception than Southwest, I think we're going to get there in both pieces.

So we're taking a lot of steps to do this. We're taking our shock marketing, which is threw in on the customer side, right? We've got some of the ads running on the screens back here, and you guys all know some of the ads we run. But that has worked really well and customers really talk about that as a positive thing about the airline, right? And getting our fares out to customers, but we've not used that same approach and explain our business model. But we absolutely can, and over lunch, Barry is going to show you a fun presentation about how we're thinking about that. The reality is you can feel better -- we're not going to change our seat pitch so that people say, I don't like our seat pitch. But we can make you feel better about your seat pitch. We can remind you that you're burning less fuel than the other guy, that you're paying a lower fare than the other guy, right? And so that will work.

We're clearly moving our terminology from being a low-fare airline to being lowest total price. We find that we say low-fare, what we often get back, especially with the media, yes, but then I get to pay for all these extras so you're really the same price as the other guys. That's not true. The facts don't show that to be true. So talking about lowest total price is about the game is very important, you'll you see that more and more in what we do. We also have started a process a little while ago and we're doing it, where we're moving -- where we're pushing back at accusations of being a nickel and dime or hidden fee. The reality is we don't nickel and dime anybody. We save people nickels and dimes. We don't nickel and dime. We have no hidden fees. I like to joke, although it's not that relevant anymore, that our fees are more transparent than a pair of lululemon tights.

But the reality is when -- by pushing back, and that what I mean is, when we see an article or a blog that uses that, either Misty Pinson, who's here, or [indiscernible] depending on the source, they'll call those people, and they'll say, that's not right, why [indiscernible] the realities over time, you push back, a number of other people start talking about it in little different ways. And we need to reinforce the messaging of a la carte pricing, which people see in everything they buy and realize that when it's on the airline, it's not this freakish thing, it's just like every any else you buy, it's a la carte. And message strong the idea of freedom versus subsidization. You pick the total price you pay because you decide what's important to you, but you're not paying for the choices of others.

We're also continuing to improve the operational performance, we talk about that a lot. We're also recognizing our people, they're the core in the customer experience. So we're changing the way we recruit people, we're changing the way we train them upfront, and the way we incent them to provide the kind of free smile kind of approach we talked about. And we're also developing the metrics to sort of track customer response of would I recommend this product to others on a scale of 0 to 10, using that and continue to measure the customer base against that.

So saying all that, if all you think that like I had a really bad meal last night or all of a sudden Ben's lost all of his mojo, that's not true at all. The reality is we're going to end this presentation on a very technical kind of slide here but I think that's appropriate. We can fix this issue, or I should say, we can move the needle significantly on this issue without having to change the business model at all. We're not going to take seats out of the airplanes to make people feel better about the seats. We're not going to start refunding non-refundable fares so that people won't complain about nonrefundability, right?

What we're going to do is be smarter about it. So we identify an issue that customers are showing frustration about, and then we'll ask ourselves, is there a better total cost or revenue solution, total P&L solution than what we're doing today. Let me give you an -- a working example of something today, that will give you a mindset idea. So today, we issue vouchers when things go wrong at times and we'll give you a voucher of that that's good for future travel, but you have to use that voucher in the next 60 days, right? You have to -- you can buy a ticket for as far out as Roselle, but you've got to actually redeem the voucher in 60 days. At day 59 you can buy a ticket for 1 year from now with that voucher. But you've got to -- after 60 days, the vouchers aren't good anymore. We've gotten push backs from our customers on that because here's what happened. It gives today 60, and customers call us and they say, my voucher's expiring, what can you do? And you know what we tell them, we can't do anything, you let the voucher expire.

And that ticks them off, right? And so -- so here's what we're doing to fix the problem. We're going to shorten the voucher time. We're going to go from 60 to 45 days, but internally, we're going to let our people recognize the 15-day grace period. So now, you call at day 45 and say, my voucher's expiring, what can you do for me, and instead of saying you have expired, say, "Well look, can you make your decision the next couple of days? I can work with you if you do that. You think [indiscernible], but I can help you out if you would in a couple of days." So we're not going to give up on this 60-day breakage and the 60-day economics at all, but we can be a lot friendlier to customers and not cost us 1 dime more. So we have a lot of ideas of that type that will not change the model at all but let us be smarter. So if there's an answer, there's a better cost and revenue decision, let's do it. And then do we have to message it better, well then, let's do that, too. Maybe there isn't a better answer. We're not going to take seats off the airplane, for example. So then the answer is, how do we position it better, and how do we message it better and how do we train our own team members and our customers essentially to feel better about this or understand it better and implement it and then measure the success.

So the reality is, is we know we win customers with the lowest total price. We know we retain a lot of our customers today because they come back for the lowest total price. But we believe that we can retain an even greater set of customers when they walk in happy and we keep them happy as part of the process just by delivering with consistency and with some kind of empathy the exact kind of airlines that we want to deliver this. So we're not turning into a full-service airline, we're not turning into a touchy-feely airline at all, but we can be a smarter airline and that's exactly what we're doing.

So with that, I thank you, all. And I think at this point, all -- Barry and Ted and I are all going to come up and we're happy to take whatever questions you have.

Question-and-Answer Session

B. Ben Baldanza

Just like everything in Spirit, we do all the stuff ourselves.

Deanne Gabel

Yes. We do have microphones, so if you want to ask a question, if you'd wait of a microphone to come so the people on the webcast can hear the question. Helane, you had your hand up, go ahead.

Helane R. Becker - Cowen Securities LLC, Research Division

Helane Becker with Cowen Securities. So 2 questions for you. One is, are you going to go with fare aircraft this summer to improve the reliability factor? And the other question is are you concerned at all about the government getting involved in your pricing structure any more than it already has by coursing changes to the bags or any of the other fees that you have?

B. Ben Baldanza

I'll address both of those. The reality is we've been operating this year with a theory of having 2 spare airplanes, which for our size and utilization -- and those -- that spare ratio is measured in the 12.8 utilization that we mentioned. That's not exclusive of that number. And so this summer, we actually are going to have what we believe is an appropriate spare ratio, I know to be full wonderful, too. Barry, do you have...

Barry L. Biffle

Yes. What we're going to do is we're going to take the 2 aircraft that we have dedicated for kind of backup, if you will. And we're going to have one dedicated, and then what we've done with the other one is we've actually taken that time and spread it around the system. We have a lot more overnight. So we're going to have about a 50% to 60% increase in overnight maintenance coverage. And so if you think about a spare, a spare is really when you didn't maintain the best you could possibly and you're backing up. So what we're going to do is take that time from the spare, put it back into giving us more time to touch the aircraft, so we're close to half of our aircraft every night that we'll have maintenance coverage there with parts and maintenance staff, and so that is a huge increase plus the full-time spare. And we believe that, that is going to deliver the best reliability that we've had in our history, along with maintaining the high utilization.

B. Ben Baldanza

Now on the DOT side, it's no secret that we've been frustrated as a company with some of the consumer regulatory moves of the DOT. We, along with Southwest and Allegiant, sued the DOT regarding their sort of full fare advertising rule and the 24-hour mandatory refundability of ticket. We lost that suit. And unfortunately, the Supreme Court made the decision not to hear that. So while we feel sort of a little bit of a setback on that, we think that we've done a pretty good job of making our case to the DOT. We don't -- overall, we think it's important to work well with the DOT. We will continue to push back against regulation that tries to homogenize the airlines, make everybody look the same. We think choice is really important. We think it's really important to let consumers vote with their fees about the company they want to support and those that they don't, and that the marketplace is really efficient in weeding out those that don't provide good customer service overall. So we're going to push -- we're going to continue to push the DOT when we see regulation that pushes against that. That said, we can also see areas where DOT regulations can be helpful. I could tell you right now, if you go to spirit.com and you buy a ticket, you see with a lot of transparency what our charges are for bags and which your options are for seat assignments and such. But you go to a third party and you buy Spirit and sometimes you can be a little afraid that the other charges may apply. So we get people who come to our airports who are surprised that they have to pay for their bags or surprised that they have -- that we have the a carry-on bag charge, and in almost every case of that surprise, is because they bought their ticket in another site that doesn't have the same regulation about how they need to disclose their fares. So the DOT says, "Airlines, you have to disclose in a certain way but [indiscernible] that you guys who are selling airline ticket, you don't have to disclose the same way." And then they sort of threw those balls out and let the consumers react, and that's kind of crazy, too. So our view is they have to have a level playing field, everybody be transparent on what you do, and we'll do just fine.

Barry L. Biffle

I'd like to add to that, too. Now quite 1 year ago, I joined Thomas Canfield, our General Counsel, and we went to a hearing with DOT. And it was one of the first ones that I've gone to, and actually, we're going to another one tomorrow when we leave here. But it was -- the industry, and I'm talking about industry as a whole, not just Spirit, the industry didn't really help itself, okay? You had a lot of consumer interest-type of standing up and saying all these hidden fees and all these stuff, and there's a lot of misinformation about that. We're very transparent. You know what you're buying, you know what you're getting. But some in the industry, not so good, but generally, a lot better than it was years ago, but you still have a lot of these chirping people saying that. And then the airline industry sends a bunch of attorneys to these meetings. I mean, we look like big tobacco, I mean, to be blunt. All right? We weren't helping ourselves, and so Thomas and I stood up and spoke at that particular hearing, I followed up and went to a symposium where there's a lot of the same people in the consumer groups kind of listened to us and we explained our story. I actually took my iPad out and explained to people. And after that, we've even kind of been semi-endorsed by one of these groups saying, you know, if everyone would do it like Spirit, there wouldn't be a challenge. So I think it's that understanding and we have more and more meetings, and I think we've kind of changed our posture and we're really trying to work with them and they've seen that we're doing great things for consumers, I think it's starting to change the landscape a lot.

Deanne Gabel

Next question. Denise, here on the second row.

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

Jim Parker with Raymond James. You pointed out in your 10-K that bags don't fly free. Of course, they don't. I guess my guess is very few of your customers read 10-Ks. And so do you have an intention of targeting a specific airline to advertise against them when we all know that's Southwest? Are you -- do you remain silent in that regard and just make that statement about we've break out the fees?

B. Ben Baldanza

Well, at lunch, we're going to show you some ideas we have on this. But in general, we're not going to spend $100,000 -- $100 million to sponsor the NFL or something to tell people that bags don't fly free, and Southwest either, right? We're going to -- we're a good marketing organization and that we understand our marketing spend and where it's leveraged. So the important thing we think to focus on is that the total price on Spirit is less than when you fly Southwest or any other airline. So all of the sudden, the bags that you guys fly free at Southwest, but you're paying it $250, isn't so great when your fare plus your bags at Spirit is still $120.

Deanne Gabel

Next question.

John D. Godyn - Morgan Stanley, Research Division

John Godyn, Morgan Stanley. Ben, a lot of the commentary that we're hearing today, a focus on perception than reducing costs, taking advantage of opportunities created by consolidating the industry and then guiding to down CASM ex-fuel. I mean it sounds like a recipe for margin expansion. But as you know, you guys have been reiterating a sort of margin guidance for some time, even though it seems like there's a good case to be made for margin expansion from current levels, is it unfair to be interpreting what you're saying as a case for margin expansion? And if not, how do you relate that to the long-term guidance?

B. Ben Baldanza

That's a good question. I'll ask Ted to follow-up in case he has some thoughts on this as well. But clearly, if we can expand our margin, we want to expand our margin. And clearly, we're going to push the company as hard as we can push it in the directions we talked about, lower costs, better customer perception, higher ancillary revenue, lower total ticket prices, and certainly, lower entry prices. But the reality is, Barry also showed you a chart that showed as we grow, we got this 6 months ramp up and so on a -- in any given year, when 20% of the airline is in that ramp, and that may be dragging down the core of the airline that maybe is seen from this margin expansion, it's unclear sort of where the total goes when you've got a bunch of new stuff coming in. If we were growing, I would tell you that -- what we're telling you is absolutely a recipe for margin expansion. But given that we're growing at sort of this 20% a year, this year almost 22% of -- and putting that in while the core is sort of benefiting from these lower costs, better perception, things like that. At the same time, we're building in sort of the long-term sustainability of new stuff, that's why we've sort of kept the guidance where it is. And then said, "Look, we think it's a pretty strong investor story to be the airline with the highest -- one of the highest return on invested capital, some of the highest pretax operating margins, growing at the fastest rate." And when all those things are true, it'd be awesome if we could expand the margin beyond that. But you don't even need that to believe there's still a lot of upward movement in the market value of the company. I don't know Ted if you want to add anything?

Edward M. Christie

Yes. I mean I think you hit most of the points. To be fair, we did walk our margin up a little bit this year. We started out the year at 24, 26 on an EBITDAR basis, we're now at 25, 27. So I think we're just being careful about all the good things we talked about today, the CASM ex-fuel kind of benefit that we're expecting to see. But for the reasons and illustrated in, for fuel that remains unpredictable, we want to knock it ahead of things.

John D. Godyn - Morgan Stanley, Research Division

Got it. And Barry, if I could ask a question on non-fare revenue, you mentioned that you sort of keep moving the -- I guess the hurdle higher as a kind of find out new ways to innovate. Is there a world that when we look out, I don't know, 5 years from now, where non-fare revenue per passenger actually exceeds average fare per passenger? And that might be average fare coming in a little bit, too. But just as a concept, would we see that balance actually shift beyond that kind of 50-50 mark?

Barry L. Biffle

It's very possible. But in order for that to happen, we believe that you're going to have to do 2 things, 1 of 2 things, or both. You're going to have to get a greater share of total travel spend. So to get more of the hotel portion, I mean, we're less than a couple of percent by the hotel through us even though we know the majority of them are purchasing in a hotel. So if you could get a greater share of their other spend, that could happen. And then one of the ways that we've been doing in the last year is introducing revenue management practices that you see on the fare, that you don't see in the non-ticket environment. I mean, the reality is when you look today, if you're looking around $70-some-odd per average, but that varies widely by season. A Tuesday in September versus the 23rd of December, 2 totally different demand environments. So you're going to have to be able to introduce a lot of those revenue management practices into bags, into seats, into the other products and services that we sell in addition to the fare in order to ensure that you get the seasonality in that demand captured. That's what you got to do in order to see any airline kind of pierce that 50%.

Deanne Gabel

In the back here Denise, if you want to get...

Hunter K. Keay - Wolfe Research, LLC

Hey, it's Hunter, Wolfe Research. So if you think about maybe your ancillary revenues going up $10 per passenger, just hypothetically, how much of that $10 will be bag-related in any shape or form, incremental from here?

Barry L. Biffle

From here, probably a small portion.

Hunter K. Keay - Wolfe Research, LLC

Okay. All right. And if we're to think about a scenario where Southwest adopts -- you're saying they going up direction, but just for 1 minute here, if we go through a scenario where Southwest adopts the more unbundled products, whether it's a change fee for some of their -- a certain fare class or a bag fee for a second checked bag, is that good or bad for you? Or is it good or bad, especially in the scenario where they would lower their base fares in conjunction with that?

B. Ben Baldanza

I think it's net probably good for us. And I'll tell you why I think that. I mean I think the fact that Southwest spends so much money promoting very unique attributes of the fact that they're not charging incrementally for bags and they're big enough as total carrier and there is enough big market [indiscernible] that and they spend money everywhere, that they sort of promote this idea that they continue to sort of reinforce in people who want to believe that that's something I'm entitled to. And if they walked away from that some way, I think it's probably net good for us and the industry to realize there's costs associated with all different aspects of your air travel and some people who stress that part of the system pay and people who don't, don't, is probably a better long term. That said, when they start to -- if they use those things to lower their fares more, then they become even more competitive, right? Then any Southwest fares are high. They're higher than ours. We have a cost advantage and we have an absolute ticket sale advantage to them and that gives us a really nice price point advantage versus them. But if they start to pressure that, what it's going to mean is it's going to temper our growth areas that maybe are a little less Southwest focused. I don't know, Barry, if you want think about that in a way or?

Barry L. Biffle

Yes. I don't know. I think that the fact is when you look at our growth rate, I mean they haven't done it yet. I mean there's rumors of it and there's people in this room that push them on every earnings call it seems. But they haven't done it yet. And if you look at our growth rate and you look at the gauge, we believe that we're going to have a sizable cost advantage against Southwest. So at the end of the day, I actually think it'd be great for us. Let's go lockstep, adopt everything that we have, and then we're still going to have a lower price. So that's going to be better for consumers, and that's going to allow us to win. But the thing is, even though they're the biggest, it's still a big market. And the reality is if they can continue to grow and we can continue to grow, and we don't have to bump in to each other. I think the bigger challenge is that's going to be a real issue for the legacy carriers, because when they start adopting a very similar to them, that is going to make transparency that they are better priced than many of the other big guys. And I think that's a bigger challenge for them. But for us, it's just so far away that in our growth rate for us to have a challenge with it, it's really move point this time.

Hunter K. Keay - Wolfe Research, LLC

So then I guess you do -- this is the last follow up. Do you factor in what, not just Southwest, but all your competitors do in terms of their fees, that maybe don't make you as willing to sort of embrace the risk of doing it like for example, Southwest restart charging for carry-on fees, just something at your sleeve, that you think is so wild right now, that you would even dare to try because Southwest is out there with these bundled-products strategy. I mean, what are other things that you think are on the table right now that you just don't feel the world is not ready for? Do you know what I mean?

Edward M. Christie

Well, I thought that years ago, but several things we've done have been copied and ripped off. Nothing surprises me anymore. But the reality is, there are things we thought about, about our -- the way we sell our products and things like that, then would be maybe I don't know that anything will ever get the reaction with the carry-on bags and see original, but that would be of that type in terms of, wow, we didn't think that you can go in this way. There are several things that we thought that don't fit that category.

Barry L. Biffle

Some of you guys might find this funny, but about 2 years ago, I went -- I have to walk up and by -- literally, walk up and buy a ticket on another carrier, a large carrier based in Dallas. And they charged me like $1,200 and then I had -- I was on a personal trip and had to come back to business trip and I had to check all this stuff and they hit me for -- to charge me for a bag, and I was pissed. You think, okay, the guys from Spirit had started this whole thing but the truth was that emotion was real because I just paid them $1,200. And that's the fact that you got to understand. You can do these things and you can make things optional. But you can't do it on a really high fare, you've got to have a really low price point. On $39, $49, $59, you can expect to pay other things. You start paying it in the $,1,000 range, you kind of think things are included. So that's really the issue that all of our competitors have when they start adopting our practices. So we love it because it just further makes it transparent what a great value we are, and customers get that.

Deanne Gabel

Next question, over here in the back, Misty.

Stephen O'Hara - Sidoti & Company, LLC

Steve O'Hara from Sidoti & Company. I was just wondering can you talk a lot about customer perception and/or maybe it's media perception, I guess you're able to grow, your margin seemed fine, I guess, why do you care so much? I mean, it seems like you don't have a problem with growth, customers that actually fly you seem to enjoy the product and the fare. Is it a pure regulatory issues where somebody kind of takes up a fight for no reason, or is it a maybe up here that a customer perception will change based on the media that you're getting, maybe wrong?

Edward M. Christie

It's a good question, but I don't think any of it has been sincere. It's out of fear they say it all. I think it's a positive opportunity for us. We believe we can -- when we talk to customers know what they like and what they don't like, they like about us the thing they care most about, which is the price. So we're in a great place in that sense. The things that they don't like are all seems around the edges and the way we talk about, is the way we handle the base, we think we can make better at no additional problem, without reducing these utilization airplanes, without sort of major changes and so we can do that, maybe that means whereby any given planes. They say any given plane, there's 3 prices they are paying. There's a $20 fare, a $40 fare and a $60 fare. And today, maybe we're selling 1/3, 1/3 and 1/3, maybe when we can retain an even higher percentage of customers that we already do, and we do a pretty good job [indiscernible], maybe we can go to only 10% being the lowest fare, and that helps to find the revenue times. It's not from a fear that something's going to go wrong if we don't do it, it's from an upside opportunity that we think we can be better than we are today while still meeting our goals of lower cost than [indiscernible] pushing the margins, pushing the profitability. So it's the right thing to do, we can be an even better company and even more positive customer service company without sacrificing the return on invested capital, the margin, the growth rate, the cabin, without sacrificing any of that, then why not do it? We see it as a positive thing, not because we're scared something like a lot like that.

Barry L. Biffle

I think -- think about it this way, 20 years ago, let's imagine we're all sitting there, and we were representing a company that made fake fur and we're doing well, great margins and so forth, but it doesn't feel as good as the real fur. And would sit around, we said, I think we can come up with a way to make it politically incorrect to wear real fur and it will really help our margins. That's what we're saying and I will say, hold your thoughts until lunch.

Deanne Gabel

Mr. Linenberg.

Michael Linenberg - Deutsche Bank AG, Research Division

Michael Linenberg with Deutsche Bank. Just two, I want to begin on reliability and you'll hear from some carriers that when completion factors off a point or so that could be as much as a margin point, when I look at your on-time, you're running with whatever 12 or 13 points below the industry.

Edward M. Christie

11 or 12.

Michael Linenberg - Deutsche Bank AG, Research Division

11 or 12, rounding matters. The fact is if you were to close that gap, what is the margin upside or is a lot of that eroded by the amount that you have to spend to fix the problem like adding a bunch of A319s to spare capacity?

Edward M. Christie

We don't think we have to spend a lot of money to fix that problem. We think we just need to be smarter about the way we run the airline. The reality is and while none of us here are really proud to admit it, the reality is our geographic expansion ran out a little ahead of our ability to operationally keep up with it. We started pacing planes in Dallas, steady in the West Coast, where they never came back to Fort Lauderdale or Detroit for 4 or 5 days and all of a sudden, that plane can't be fixed and we have problems, right? So I would love to tell you that we have been operating on -- we have 12 full cylinders so perfectly that the [indiscernible] to the airline is kept days just in time with the growth, but that isn't true. The growth got a little ahead of that and now we're quite catching up to that. So I think we'll be back to where we need to be and by just doing things smart. I don't think we have to spend more money. In fact, I think operating more reliably will be a lower-cost solution because when we look through the P&L today and the weekly meetings of test runs about where we sort of essentially rebudget the airline every week and drive it safely above the outlook and what's happening by topline, the 2 big things that happen to that meeting is we get a B at whether revenues coming in stronger or we feel that we thought, and if the cost issues is almost always related to something irregular. It's not that we're spending more on this contract to buy this part that we thought. It's not that our rates and our flight attendant deal and our pilot deal, I'm surprise to be there, it's all these. When we canceled a flight here, it causes a lot more than [indiscernible] or we got to pay more synthetic [ph] on the pilot because the operations have been running late and we got to mess up the group rates. It's all disruption really. So I'm convinced and I think that is true that running more reliably is a lower-cost solution. I don't know.

Barry L. Biffle

Yes, I think the point we made like 2 was Ben made a lot of -- we trial both and talk a lot about completion factor and the value of that and you were talking also that on time. And I think they're linked too. So the focus on completing the flight, investments to companies making in this infrastructure in that serving not only enhance our ability to complete, but they enhance our ability to be on time because the bases themselves will allow you to eliminate cancellations, but with cruising in the right place at the right time, we can react more to those interruption and operate the flight both -- operated and on time, and so I think they are linked, I think that's the point.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay, great, and just my second, Ted, you had a couple of slides up there, interesting to see. You have alluded the fact that on a CASM basis, you're somewhat overstated, given the fact that you lease 100% of your airplanes but you also had some commentary about the improved credit profile of Spirit and the fact that you're seeing some savings there. When you look at, you take those 2 issues or those 2 points that you brought up, and you sort of look at what's going on in the marketplace and carrier such as US Airways and Hawaiian, some of them now borrowing below 4%, we're seeing some of the lowest foreign cost since the 1960s, I mean, at what point is it compel you to go to the public markets and use that as a source of financing, your taxpayer, you think about where your ROEs could potentially go, are we there? What's holding you back? Is this a Board decision? Just your thoughts on that?

Edward M. Christie

Yes, it's all good commentary, and obviously, stuff we've talked about with some regularity both on our calls with you all as well as internally, and with the Board, and I think our answer has been consistent, and I still believe that we look at that investment like we look at any investment around here. And whether or not we could drive the return that makes the most sense, so if we're going to buy an airplane or we're going to open a crew base or we're going to change the way he sells the products, any of those things are all investments that have to drive a return. And so we've been fortunate post-IPO that we think we can finance those airplanes the way we're financing them today and it's highly efficient for Spirit when you factor in all of those considerations. The truth of the matter is we're always going to be looking at ownership as an option, you are a taxpayer, there's a lot of reasons for us to consider that as a possibility and that's an active dialogue with the Board as well. But we've been doing a good job and doing a better job using -- since the IPO is getting more and more efficient on the operating lease side. And we feel pretty good about those financing, not to say that wouldn't change in the future, but I would tell you that there is a hurdle and we look at it that way.

Barry L. Biffle

I would also add, Mike, that there's a -- there's something happening in the fleet side that nobody knows what the real word is going to be, which is the A320 is going to ultimately be replaced by what we're calling the A320neo. And the A320neo is promising, largely because of the engines, mostly engines and 15% better fuel burned and so on. And you're going to be making the A320, and we're going to be taking, delivering the A320 through 2018 or so, and the neo start coming for the industry around 2016 and we'll go on and eventually we'll stop making it part of the original plan, and only make the neo. But what happens to residual values and modernize the plane is really uncertain. No one can tell you what's going to happen there. So the reality is I actually think when we carry -- when we can sort of leverage the balance sheet strength of the airline today to get a superefficient lease feel. It's probably less risky for the organization when we're buying to at least buying a 12-year asset versus buying maybe a 20- or 25-year asset, if we buy it right in the middle of this sort of [indiscernible] happening. I think we're going to have a clearer Crystal about whether that for airplanes is a good investment decision when we have some clarity about what the residual of the 320s is going to be versus the neo.

Deanne Gabel

Duane Pfennigwerth.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Duane Pfennigwerth with Evercore. Just a follow up here on, Ted, on your 20% lower ownership costs on 319s, when did those really start to kick in, can you give us kind of a water fall on those fleet changes?

Edward M. Christie

Yes. The opportunity that we saw there with regard to the older aircraft in our fleet and the way those were financed and they were financed at a time when this was a different company and the market was clearly at its peak, we've been discussing opportunities with some of our operating lease partners about optimizing the return of those aircraft-s and perhaps stretching out the terms and to match our desired return aid. And in exchange for that, we can reevaluate the cost associated with that. And the idea that we gave you there was we have some deals actually agreed to that are in that range. And the concept would be that we would see an immediate benefit in that neighborhood and on our lease rate, where our GAAP rent -- the amount of rent that we expense, once we've signed the transaction. So when we're talking to you guys about how we are focused on x fuel costs and focused on x fuel cost and targeting being down 1%, we're thinking about all of those things, and this being one of those things. And I would expect that the deals that we are contemplating today and that we've agreed to, in principle, would start to roll out immediately by the next quarter.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

And just one for Barry, we're coming out of this curve ball of March and April and some holiday shifts, can you give us any comment today in terms of what you're seeing industry pricing-wise, May and June, and any changes there?

B. Ben Baldanza

Yes, sure. So the Easter shift, having it really early, across the industry, seemed to have some challenges for both. And I think we were probably a little better prepared for it. I mean, we deal with leisure, our travel. So we saw, we carefully look when spring break is, when Easter is and so forth. And I think what happened, again, this is from our point of view and what we've heard, I think a lot of folks were up in the higher buckets. And corporate walkup fairs have gotten very expensive. And I think a lot of folks, I think they're getting ready going spring break or go for Easter, that was more than what they're willing to pay from a leisure perspective. 2 weeks later when the corporate travel is about going, they'll pay it. And that caused a lot of people to have some challenges, they have lower fares and so forth and that cost them volatility in the marketplace. They kind of stretch on into -- it started in March, stretched into April and most everything we've seen across the industry, not necessarily our markets, but just across domestic U.S., it's pretty much cleaned itself up, most of them if they're still out there, they're going to last traveling sometime in June. So it's stabilizing. And quite honestly, if you look back in '08 and other years with a similar Easter position, it's very stable. It looks very similar to those years. So it may look different year-over-year and some people are having some challenges explaining that. But historically, given the holiday position, it's very normal. We won't be -- you won't see us publicly throwing our revenue management up and under the bow, competitors did.

Misty Pinson

Next question?

Bob McAdoo - Imperial Capital, LLC, Research Division

Bob McAdoo. A couple of questions, you talked about wanting to be more efficient or lower cost than Ryanair. Could you go into a little bit about what this seeing your network go all over the country, what that's done to your cost structure in terms of complexity, I mean, what are the things, obviously, that you're also thinking about in a lot sense in the same kind of thought process with both Allegiant and Ryanair talk a lot about we have all the pilots and flight stewardess go every night, we have no overnights and all that, what have you had to do as you spread all over the network, your network all over the country to try to keep your costs where they are?

Edward M. Christie

Well, I'll start this and I'll ask Barry to sort of follow up on sort of the actual scheduled planning side as well. But the reality is when we're looking more and more like Ryanair in terms of the basing of our airplane. Now, it doesn't mean that a plane that leaves Dallas in the morning arrives or an overnight to Dallas that night, but it might mean that a plane that leaves Dallas with a specific flight and cabin crew, gets back to Dallas before that flight and cabin crew time out, so maybe it's about 2 days later in Dallas, or 3 days later in Dallas. So in that sense, our crews aren't necessarily home every night. But they're ending their trip in the same base states follow more and more, and that's possible because we built the crew and make them stay over the last 1.5 year in the places where the planes are out flying like Dallas made it to Chicago, in addition to the historical basis of Lauderdale, Atlantic City and Detroit. So I think that the network is recognizing that. The other thing that I think the network recognizes is that there's a certain critical mass within a city that allows us to operate in an efficient cost structure in that city. So when we entered Denver, for example, we entered Denver with soon as the 4 different cities but no more than 2 flights a days at any one city. But Denver was fairly efficient as an operation on day 1, because about 8-or-so operations, secret operations of a day, we didn't operate with just 2 flights a day, that would've made Denver too expensive for those 2 flights. So as we hook up more big cities to the network, when Barry thinks about whether or not we should fly to New Orleans or not, or whether we're flying to Philadelphia or not, it's whether we have a vision that in the relative near term, we can build that vision to a total flight capacity that makes it an efficient station operation branch. It doesn't mean that we necessarily have to between any 2 cities.

Barry L. Biffle

And I think if you look at Ryanair, we spent a lot of time studying them and we know they studied us, and so forth. The biggest thing when you think about schedules and how you design a network, you've got to understand geography in Europe is totally different than here. We have a really big country, okay? And when you've got a pilot that can't fly more than 8 hours, it's hard to get them back home. I mean, they can fly 3, 4, 5 segments with the same crew and get back home. And that's just not as easy here in the U.S. And so we have a different dynamics. In addition to that, we have a different work rules for our pilots and so forth. And so we don't look at whether or not they spend the night at home. We look at how much can we get out of them. We got to pay them 72 hours a month, so we're very concerned about getting the highest productivity. And we will choose many times to put them in a hotel because that's the cheaper solution, we look at the total cost solution, and what is the best way to get the lowest cost there? And I think when you think about we mentioned reschedule and so forth, we spent a lot of time last summer with a challenge and we were frustrated by that. We spent a lot of time on the infrastructure, but we mentioned a while ago, the sparing, Ryan and Southwest do something that we don't. All the airplanes dip at night, they're all back in the base. So even if you have a challenge on day 1, that rarely trends in to day 2. In our case, running the Spirit 24 hour operation, we might have airplanes that operate literally for 3 days with never more than an hour or 2 on the ground. So if it gets behind, it's behind for days. So what we did, by taking roughly half the aircraft, is they're going to be in a maintenance base at night, as a far break that we didn't have in the past. And we think that that's going to deliver lower cost too. So again, you've got to take your geography, your regulatory environment, your work rules and figure out what is the lowest cost solution that you can come up with that delivers the best results. And that's what we believe we've done.

Bob McAdoo - Imperial Capital, LLC, Research Division

On the same line, when you're thinking about opening up a station, do you typically use your own people in a station? Or do you have a certain side station where you have your own people that actually worked at the base or whatever.

B. Ben Baldanza

We have our own people in a few stations where 1 of 2 things have been true. Either our size makes it cheaper for our own people, that's an example of Fort Lauderdale. Or whether there's no option to outsource them, which was the case at Atlantic City where we're the only commercial operator there. And we can say all day we want to outsource too but there's no one to do it. So we have to have our own people. So we have our own people in those 2 situations. The vast majority of our stations have less than one Spirit employee, and the reason I say that is they either have station manager but in some cases, that station manager oversees a couple of stations. So sort of maybe 0.9 of an employee or the fact that they do a couple of things. So most of our stations are outsourced above and below.

Bob McAdoo - Imperial Capital, LLC, Research Division

So the place like DFW where you've gotten as big as you have, that's still mostly an outsource operation?

Edward M. Christie

Yes.

Bob McAdoo - Imperial Capital, LLC, Research Division

And for one final thing, can you tell us what Glenn Engel said he was able to do in terms of getting by without fees?

Edward M. Christie

Say that again?

Bob McAdoo - Imperial Capital, LLC, Research Division

Could you tell us what Glenn Engel said he was able to do about getting by without having to pay fees?

Edward M. Christie

Glenn would have to tell you. I don't know. But he didn't say he wouldn't fly, and he said it was a couple of hundred dollars cheaper than [indiscernible].

Stephen Trent - Citigroup Inc, Research Division

Steve Trent from Citi. Just 2 questions for me. The first is when I think about the U.S. Airlines space, some of that consolidation we have had for the past 2 decades, now fewer airlines out there, and you guys have certainly grown a great deal, are you seeing the airport authorities in the U.S. that have ganged [ph] the extra carriers that you -- they just recently privatized the airport in Puerto Rico? Fewer players going to fewer places, perhaps they're dangling lower landing fees and what are you guys seeing in the [indiscernible] in terms of what you're hearing on that front?

Edward M. Christie

So this is an interesting question. So the airports, particularly in the U.S. have had an interesting last 20 years. Obviously, we had to go forward in that recession and some things got good. And even though things were bad for airlines, kind of 911-ish .com bust, that sort of thing, the advent of RJs really kind of, from a movement's perspective, that actually filled in a lot of gaps for them. And then you have all the cheap money in the early to mid-2000s and people liked to build stuff that helps to get people elected, and so all kinds of projects kind of came out of that era. And now you fast-forward to today, you got all these consolidation, less flights, people go into bigger gauge [ph] and then somebody has to pay for all these. And so it's created an interesting challenge format, I think you started to see, like you mentioned, you started to see airports start to get it like uh-oh, the ones with the more vision are realizing okay, I don't have a dozen airlines all with a bunch of growth aircraft coming. So I've got to get a little more aggressive and be realistic about what I'm providing. But I still think, close to half if not more than half are still stuck 5 to 7 years ago, and I think there's going to be some challenges for them. I mean, we've been fortunate that we won't go to an airport that's not with the new world. And most everyone like DFW, for example, they've made investments and they're keeping up data and they're not overdoing it. And so and they talk our language, they understand we're about love of coffee, they understand that our customers couldn't afford to fly if it weren't for us, so it doesn't matter what the airport experience is if they can afford it. So I don't know, it's going to be interesting to see what happens in the airport side in some communities, and they're going to have to figure out somebody to pay for it. And probably not the airlines and the customers in some cases.

B. Ben Baldanza

Barry speaks to a lot of airport managers that there is and he tells them, and I think it's funny to be telling them, he tells them there's 2 types of airports in the country, those who have screwed-up costs, and the rest who are on their way of getting there. And that sort of shocked the ones who get it better, and they end up reacting in a kind of good way. And what you got to help them understand is that construction job is great today. But if that causes you do have to increase your PFCs by another buck and, put another a couple hundred dollars per turn on an airline, your costing yourself thousands of jobs in the future. So be careful about a construction job versus real economy sustainable job. And be careful about an airport managers that PFCs are free and they don't cost anything. You know it's not true.

Stephen Trent - Citigroup Inc, Research Division

And my second and last question. As you guys have also identified a great deal of potential growth in the U.S. market, has it all affected your thinking and how you might utilize 5th and 6th street [ph] of air traffic rights to Bogota?

Edward M. Christie

We've looked at that and in fact, we have applied for some of those services. The challenge right now is that again, as we stated a while ago, and I was very clear about it. We look at all the opportunities at every moment, and we're going to deploy the assets for where we believe we can get the highest return on capital. And right now, because of the environment in the domestic U.S., things have changed. It's not 2005 anymore. Latin and Caribbean yields not necessarily inter-region, but definitely to and from the U.S., to Latin America and Caribbean, those yields aren't what they were relative to the domestic U.S. 5 to 7 years ago. So we're looking at some of those and we're interested in it, but -- and I'm glad we were fortunate to have the flexibility we have with our footprint. But right now, in the near term, domestic U.S. is where its at.

Misty Pinson

I think we're going to wrap it up and we'll finish [indiscernible]

David E. Fintzen - Barclays Capital, Research Division

Dave Fintzen from Barclays. Barry, you mentioned sort of a target of 60 on the non-fare per passenger revenue, then up to 70 you also mentioned the travel wall, I mean, are we at a point where the majority of that incremental revenue non passenger revenue really needs to come from the broader travel wallet versus the sort of unbundling of that, largely run its course? And then second, when you're out, as part of this -- when you're out sort of starting to build the Spirit Vacations, et cetera, what's the sort of -- what's the kind of response you get from potential partner either OTAs, hotels, car rentals, how do they look at that your network, how do they look at your customer base, and sort of what you could kind of offer in a relationship to start driving some of that bundled traveler?

Barry L. Biffle

Well, I think -- okay, so couple of things, several questions I guess. So as I stated awhile ago, there's 2 ways we believe from where we are to continue to grow. One, is to introduce revenue management practices in a lot of things we already provide. And that's kind of your next uptick of existing products and services. And then I mentioned a greater share wallet, particularly hotels, cars, that sort of thing. And we believe that is where the future is. If you think about the providers, obviously, an OTA they're in that business. So they're probably not happy about it. On the providers themselves, the hotels, the cars, we've seen pretty good reception. Because at the end of the day, there's only so many people that are going to pay then showed you the chart. There's only so many high-priced, high-touch customers out there, if you want the volume, you need the lower price customers, and they see us as an outlet for that. And we can introduce them to people that maybe haven't been to their destination and definitely haven't stated their properties. So it's a marketplace, and there's a lot more of those products out there than there are high-end, 4-season, that sort of thing, and so not just in four seasons. It's just they're not knocking our door down, but a lot of your properties in Las Vegas, a lot of properties in Florida, DFW, even in New York, there's a lot of properties out there that can benefit from our distribution and we're seeing a lot of traction there.

David E. Fintzen - Barclays Capital, Research Division

Are you taking inventory or is it just an agency model when you're bundling the travel?

Barry L. Biffle

We don't actually, we're not on risk, if that's what you mean. We have not done anything like that. But we do have direct relationships with a number of hotels providers.

Unknown Analyst

Just a couple of questions on -- [indiscernible] from Raymond James, a couple of questions on the cost side, you showed that as you increased the number of aircraft-s, you reduced your CASM, is there a point where the scale stopped? And then the follow-up question is on the flight attendant side -- I know that's ongoing, I wonder where the gap is between what you're looking for and where the flight attendants are looking for?

B. Ben Baldanza

I can handle the scale. Yes. So is there -- the question was there a point at which scale starts to kind of curve off. I think there is, but I don't think we're anywhere near that, that 49 airplanes. We estimated in the deck that we think each incremental add has a certain percentage dilution effect on the overall CASM and we expect to enjoy that for a while through the growth cycle here. By the end of the decade, we're forecasting to have somewhere in the neighborhood of 110 to 115 airplanes, and I think we'll see the benefits of scale really start to accelerate over that period of time. Both on the fixed states as well as the way our operation works, we've talked something about that, the connecting the dots, and that sort of thing.

B. Ben Baldanza

On the flight attendant side, we continue to get closer and closer to a deal, we just can't physically meet until the mediator can be -- they were frustrated with the fact that we came close and we can't meet again for 8 weeks. I think so. That to some is the way the process works. But in general, our approach [indiscernible] they notice too, and they been working with us, in a very productive way, is that our flight attendants' job responsibility in the contract that is being revised here is not -- doesn't reflect the airline we run. So if you were a flight attendant for Spirit, and you didn't show up for work on time, there are things in the contract that allow us to help manage that later, to talk to you, to counsel you, if it gets extreme, they even fire you, right. I wanted to get to that point, hold on, but we can. If you are part of Spirit today that doesn't tell anything on Board, there's nothing the contract allows us to do. We can't get you off the plane and train you for sale. We can't give you goals to say I want you to sell -- you're in the bottom quartile today, we want you to move up in the second quartile, in next week. But we didn't do anything of that, because it's not their job responsibility today to sell them doughnuts. It's not their job responsibility today to support quick terms. It's not their job responsibility today in the contract to keep the airplane clean, which in more cases, requires [indiscernible] cleaner, extend the turn time to clean the planes. So this contract with our flight attendants has, from the beginning, always about we absolutely want to pay you more, you do a great job, you look good, you provide good service, and I can tell you, in fact, actually, that's true. I fly a lot, and I fly Spirit, and I fly other airlines and our flight attendants do really good job. And we can absolutely pay them more, we just want them to see their job responsibility to be the complete low fare airplane responsibility, keep the plane clean, get -- help the quick turn happen, and sell, sell, sell on board. And so the new contracts is about that trade off. You accept these things as your job responsibility, we're happy to pay you more. And on that basis, I feel very good that we're going to get a deal. And we're just -- now, we're in the final stages of talking around the edges. I feel pretty good about it. And I think they would probably say the same thing, even though, publicly, everybody have some [indiscernible].

Deanne Gabel

Well, thank you, everyone. We are now ready for lunch in the drum area [ph], if you want to move on down there just pick up your food on the way in to the room. And this concludes the webcast portion of our presentation. Thank you.

B. Ben Baldanza

Thank you, all, very much and we'll be around at lunch time. And like Deanne said, please stay.

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