Spirit Airlines Incorporated (SAVE) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.24.13 | About: Spirit Airlines (SAVE)

Spirit Airlines (NASDAQ:SAVE)

Q2 2013 Earnings Call

July 24, 2013 11:00 am ET

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

Graham Parker - Vice President of Pricing and Revenue Management

Analysts

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

Duane Pfennigwerth - Evercore Partners Inc., Research Division

David E. Fintzen - Barclays Capital, Research Division

Helane R. Becker - Cowen Securities LLC, Research Division

Stephen O'Hara - Sidoti & Company, LLC

John D. Godyn - Morgan Stanley, Research Division

Hunter K. Keay - Wolfe Research, LLC

Daniel McKenzie - The Buckingham Research Group Incorporated

Operator

Welcome to the Second Quarter 2013 Earnings Release Conference Call. My name is Adrienne, and I'll be your operator for today's call. [Operator Instructions] I'll now turn the call over to DeAnne Gabel. DeAnne Gabel, you may begin.

DeAnne Gabel

Thank you, Adrienne, and welcome to Spirit Airlines' Second Quarter 2013 Earnings Conference Call. Presenting today will be Ben Baldanza, Spirit's President and Chief Executive Officer; and Ted Christie, our Chief Financial Officer. Also joining us are General Counsel, Thomas Canfield; Senior VP of Human Resources, Jim Lynde; Vice President of Pricing and Revenue Management, Graham Parker.

Our remarks today during this conference call will contain forward-looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. Forward-looking statements are not a guarantee of future performance or results. Forward-looking statements with respect to future events are based on information available at time those statements are made and/or management's beliefs as of today, July 24, 2013, and are subject to significant risks and uncertainties that could cause actual results or performance to differ materially from those reflected in the forward-looking statements, including the information under the caption, Risk Factors, included in our 10-K for the year ending December 31, 2012, and subsequent quarterly reports on Form 10-Q. We undertake no duty to update any forward-looking statements.

In our remarks today, we will be comparing second quarter 2013 to second quarter 2012 results, adjusting all periods to exclude unrealized hedge gains, losses and special items. Please refer to our second quarter 2013 earnings press release for further details regarding our assumptions for the reconciliation to the most direct comparable GAAP measure for non-GAAP measures discussed.

And now, I'll turn the call over to Ben Baldanza.

B. Ben Baldanza

Thanks, DeAnne, and thanks to everyone for joining us. Today, we reported that our second quarter profit increased 29.6% year-over-year to $45.8 million, or $0.63 per diluted share.

Operating income grew 29% to $72.6 million, resulting in an operating margin of 17.8%, a year-over-year improvement of 1.5 percentage points. And our pretax margin for the quarter was also 17.8%, the highest second quarter pretax margin in our company's history. In the second quarter, we liberated over 3 million passengers from high fares and had an average base fare of only $77.51. We are pleased that even after they add the extra options they care about, our customers almost always pay a total price that is less than what they would pay on other airlines.

Revenue for the second quarter increased 17.6% to $407.3 million compared to the same period last year. Our RASM decreased 2.8% year-over-year, due in part to the calendar shift of Easter occurring in March this year, as compared to in April last year.

During the second quarter, our ancillary revenue per passenger segment increased $1.96 year-over-year to $53.43. The increase was primarily driven by various changes to the pricing structure for ancillaries, such as advanced purchase restrictions on bags. On a sequential quarterly basis, first quarter 2013 to second quarter 2013, our non-ticket revenue per passenger segment decreased primarily because we launched a lot of new markets. And in new markets, we initially attract customers via third-party channels, which are not as effective at selling ancillaries as our own website. I'm pleased with how our new markets are performing. And as evidenced by our strong results, our core markets also continue to do very well.

Operationally, it was a challenging quarter, and we were impacted by an unusually high number of storms. When operational disruptions occur, it is more difficult for us to recover than typical hub-and-spoke carriers. We've made some infrastructure changes, such as adding more daylight flying, which provides for more efficient maintenance time with the aircraft. We are also allocating our spare aircraft time differently throughout the system, and we are growing our new crew and maintenance bases in both Chicago and Dallas. We understand the stress points in our system and are making changes that will help us to better recover from operational disruptions without compromising our high-asset utilization model.

I want to give a special shout out of thanks to all of our hard-working frontline team members. They're doing a terrific job managing through a very heavy travel period, which has been complicated by adverse weather, and I thank them for their hard work and commitment to serve our customers and run a safe airline.

During the second quarter, we announced an order for 20 new Airbus A321 aircraft with delivery scheduled between 2015 and 2017. We have also elected to convert 10 of our existing A320 aircraft orders, two A321s, with delivery scheduled in 2017 and 2018. The A321 is a great fit for our fleet and network strategy, and it nicely compliments our fleet of A319 and A320 aircraft. These changes, together with the extension of some of our A319 leases, which Ted will discuss in further detail, produced expected capacity growth in line with our target for the next several years and will help us to further lower our unit costs.

As our investors understand, we do things differently and succeed. We also want our workforce and customers to understand why we do things the way we do, and we have continued our communication efforts to do just that.

Looking ahead, we expect our third quarter and full year capacity to increase 21.9% year-over-year. We expect the strength and demand we experienced in June to continue throughout the summer. Closing booking volume and yields have been strong. In addition to a favorable demand environment, we are also seeing a change in the seasonality of our network. Over the last several years, we have diversified our network footprint with most of our recent growth being in the Western part of the U.S.

Our north/south routes are still a very important part of our network. But as we have diversified our network, we are seeing a trend toward more seasonal strength in the spring and summer periods versus winter and fall. We remain very specific about when and where we add capacity. And due to the type of customer we target, we have the luxury to be much more flexible than our peers in shifting capacity to follow demand. So while it's very early in the quarter, and we don't have much visibility in September yet, we feel pretty good about how the third quarter is shaping up.

And now, here's Ted.

Edward M. Christie

Thanks, Ben. And again, thanks to all of you for joining us today. I join Ben in recognizing our team for doing a great job managing through what has been a challenging operational environment.

Our load factor for June averaged over 88%, and we are on track to top that in July. In the second quarter, our total operating expenses increased 15.4% to $334.7 million, primarily due to fuel and other direct expenses related to a capacity increase of 21%. Excluding fuel, our CASM decreased 0.8% year-over-year to $0.06, in line with our guidance for the quarter. One of the drivers of the decrease was lower aircraft rent expense. During the quarter, we entered into lease extensions covering 14 of our A319s at rates that reflect our improved credit position compared to when the original leases were negotiated. The reduced rent for the extended period is spread over the entire remaining lease term, which provides near-term cost benefit.

Last year, we had start-up costs related to our seat maintenance program, which we didn't have this year, and we had fewer operational disruptions related to unscheduled maintenance events, which drove lower passenger reaccommodation expense, which is recorded within other operating expense. The aggregate decreases in the quarter were partially offset by a higher depreciation and amortization expense related to amortization of heavy maintenance events.

In the second quarter, we reached a preliminary agreement with Pratt & Whitney and IAE to power and maintain the A320neos and remaining A320ceos we have on order with Airbus. The maintenance agreement will also cover the 5 A320neos previously announced that we planned to lease from ILFC. The first of those neos is scheduled for delivery in 2015, with the remaining delivery scheduled for 2016. Our neos on firm order with Airbus are scheduled to begin arriving in 2018.

During the quarter, we took delivery of 1 new A320 and ended the quarter with 50 aircraft in the fleet. We also took delivery of an A320 earlier this month and have 3 additional new A320s scheduled for delivery before year end. In regards to the 7 A320 aircraft scheduled for delivery in 2014, we have reached preliminary terms with operating lessors for the sale and leaseback financing of these aircraft and are working on definitive documentation. We ended the quarter with $525 million in unrestricted cash and with no debt on the balance sheet. We plan to leverage our strong cash balance to fund our growth opportunities and to optimize our cost structure.

Looking ahead to the third quarter, we estimate CASM ex-fuel will be down 2% to 3% year-over-year. For the full year, we've lowered our estimates for 2013 aircraft rent and appreciation and amortization to $170 million and $35 million, respectively. These benefits are offset by several cost pressures including the estimated impact on crew and training expense as a result of a revised crew rest and duty limits recently announced by the FAA as part of FAR 117, which will take effect in January 2014. We have also updated our view on health care-related expenses, which have been trending higher than originally anticipated. And revenue-related expenses, which have also been trending higher. After tallying the puts and takes, we are comfortable with maintaining our CASM ex-fuel target for the full year of down about 1% year-over-year.

For the third quarter, we estimate our economic fuel price will be $3.32 per gallon based on the Gulf Coast jet fuel curve as of July 18, 2013. This includes our estimated impact from realized fuel hedges. We have about 17% of our third quarter jet fuel volume and about 46% of our jet fuel crack volume hedged using a combination of collars and swaps. Over the last few months, crack spreads have dropped dramatically, which has helped mitigate the rise in crude oil prices. But as a result, we are currently projecting we will have a realized loss on our third quarter hedges. Additional details about our hedge positions are included in the investor update we plan to file this afternoon.

In closing, we are pleased with our record second quarter performance. We are confident we maintained our position as the lowest-cost producer in our markets versus our primary competitors. We are committed to keeping a low-cost mindset, and we have many tools in our arsenal to further improve our cost structure. Our capacity growth is a near-term buffer for cost pressures as each new aircraft is dilutive to unit costs due to scale, gauge, fuel burn and use benefits. Additionally, we are taking action to improve our operational reliability, which has the potential to drive benefits throughout the cost structure. As we grow, our network is becoming more dense, which drives optimization of crew reserves, spare parts and base costs. It is for all these reasons we believe our relative cost advantage will continue to expand over time, further solidifying our competitive advantage.

And with that, I'll turn it back to Ben.

B. Ben Baldanza

Thanks, Ted. Given our strong second quarter and our expectations for the third quarter, we are once again, increasing our 2013 EBITDA margin guidance from the previous 25% to 27% range to a new range of 26% to 28%. Our revised EBITDA margin range equates to a 2013 operating margin between 13% to 15%. We continue to see a growing acceptance of our business model as more and more customers come to appreciate the value in our low cost, low fare and high cost -- high-choice strategy. We know our low fares, combined with operational excellence, will keep our customers coming back. We also recognize we aren't the airline for all passengers, but we are the choice for a growing population of smart, value-conscious consumers. And Spirit is uniquely positioned in the Americas to serve this population while delivering value to our shareholders.

Now back to DeAnne.

DeAnne Gabel

Thank you, Ben and Ted. [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] And we have Jim Parker online with a question.

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

Question for Ted. What was the amount of the amortization, the year-to-year change amortization for heavy maintenance in the second quarter versus second quarter a year ago?

Edward M. Christie

Hang on a second, Jim. Total amortization for the 3 months for this year was 7.6. And last year, it was 3.3.

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

So that's for the heavy maintenance, is that correct?

Edward M. Christie

That's for all D&A, Jim. So that includes nonmaintenance-related depreciation. I think the heavy component is the vast majority of that though.

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

And I think you had given us earlier, maybe what you thought it was going to be in 2013 versus '12? The year...

B. Ben Baldanza

Yes, I said in my comments, we expected aircraft rent to go to $170 million. I wasn't updated what we told previously. And D&A is now $35 million for the year.

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

Okay, and all right. Ben, there may not be an answer to my question here, but I better give it a shot anyway. Since we're getting near hurricane season, is there anything you can do to be better prepared in terms of operations and so forth to mitigate, at least somewhat, the impact of hurricanes, which we may have again this year?

B. Ben Baldanza

Yes. We can certainly try to answer that, Jim. I mean a couple of things. As Ted has reported and as we put in the investor outlook, we have done some hedging of the crack spread essentially to protect against supply disruption in the event that a hurricane sort of affects refinery capacity in the Gulf Coast. We've done that for the last couple of years, and that's sort of one tactical way we can sort of try to protect the business a little bit against that piece of hurricane risk. The reality of what's happened with Spirit is over the last few years, we've actually, in some ways, increased our risk of getting hit by any one hurricane, but dramatically reduced our risk of any one hurricane significantly hurting the airline. Because we are -- our network has expanded so much. So while we serve a wide brand of markets in the Caribbean and the East Coast and Mexico, the Yucatán, [indiscernible] all of which have some hurricane risk, we're in so many places now that the hurricane affecting any one of those isn't likely to be a major economic hit to the airline even though it may disrupt operations in Jamaica or in Cancun or something. But the airline is now at a geographic presence that makes overall hurricane risk less risky to the whole enterprise.

Operator

And our next question comes from Duane Pfennigwerth.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Well, as far as I know, hurricanes hit New York around Halloween every year so we should probably just count on that. Can you -- I came a little bit late to the call. Can you just repeat what revenue commentary you gave about the third quarter, if any? And just I guess, caution us a bit because it just looks like the comps get a whole lot easier. And I realized some of this is a 2 year comp issue with the tax holiday in '11. But from 2Q to 3Q, it just looks like you have substantially easier comparisons. So help us think about that and maybe refresh the revenue commentary, thanks.

B. Ben Baldanza

Okay, sure. I'll read the 1 short paragraph that I had said earlier, which is we expect the strength in demand we experienced in June to continue throughout the summer. Our close in booking volume and yields have been strong and in addition to favorable seasonal -- favorable demand environment, we're seeing a change in the seasonality of our network being a little more focused in spring and summer versus winter and fall as we've expanded throughout the geography of the U.S. That's the commentary that we made. We didn't give any range or any specific quantitative forward guidance on revenue.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay, fair enough. Maybe a longer-term question in that regard. I don't know if you spend much time looking at Ryanair's results. But surprisingly, over the last few years, they've had good success in sort of pushing fares higher and yields higher, which you might not expect from a low fare, low-cost carrier that's actually growing a fair amount. As you look out over kind of '15, '16, how should we be thinking about sort of your base fare levels? And given your limited scale, do you think it's reasonable to think about actually RASM expansion over time?

B. Ben Baldanza

That's a good question. I think you have to think about our fare levels in sort of 2 ways. One is we manage the total revenue, not just fare. So to some extension, the fares we offer are a function of what we're able to generate on the ancillary side. The more we can generate in ancillary, the more that becomes a subsidy to the base fare. We could charge lower base fares and stimulate more traffic. Obviously, if we're having pressure on the ancillary side, the base fares will be higher to manage the total. The second thing is that while we are a low-fare carrier, and we expect that customers who fly Spirit, the total price they pay will be less than they would pay at any other airline, that's a relative thing. It's not an absolute thing. And so as industry fares move up, our fares have the ability to move up as well. What's important to us is the relative price you pay on Spirit, not the absolute price you pay on Spirit. So if the macro environment is supportive of higher fares and we're successful that then we'll see our base fares go up, correspondingly, the more successful we are on the ancillary side, that could put some downward pressure on fares. So we tend to look at it as total revenue per passenger, but we'll certainly allow fares to increase if the environment will allow that as long as the total price customers pay on Spirit is less than they would pay on the competitors because that's the basis of our business model, and that's the fundamental basis of the value proposition we make to our customers.

Operator

And we have Dave Fintzen online with a question.

David E. Fintzen - Barclays Capital, Research Division

Let me try to ask a joint network cost question. You've had some -- last 6 to 9 months, you've had some pretty concentrated growth in Houston and Dallas, and you're starting to get some CASM benefits of airport scale around the system. Obviously, you're also getting the crew bases sort of set up. What I'm curious about is, as you look out over the next couple of years, and I know you can't talk specifics about routes or would you? But is the growth, are the growth opportunities in Dallas, Houston or in other very specific places enough to kind of keep that CASM scale going? Or do we get to a point in the next few quarters where the geography is again kind of having to get wider? And so we've got some incremental unit cost pressures as you kind grow into a new set of territories. I'm just curious, how we should sort of think about sort of wider or deeper as you build out the industry, and what are -- or build out the network and what are the cost ramifications?

B. Ben Baldanza

Well, sure, I can sort of expound on that a bit. We've said in the past that we now serve over 80% of the largest metro areas in the U.S. So there's not many big cities in the U.S. or large population centers that we don't have some access to today. There are a few, but not many. That suggests that you'll see more depth in our schedule over time, rather than breadth in the sense that we'll connect more dots because we're in most of the big places. So I actually expect that as the network expands over the next couple of years, we will see continued cost efficiency out of the network as we reach sort of critical mass scale at every city we serve or be able to negotiate better terms for volume and things like that. Ted, I don't know if you have any comment at all, but...

Edward M. Christie

The only thing I'd add to that is setting aside airport costs, when you look at other infrastructure-related costs that we talked some about, which is basing costs and spare parts cost and that sort of thing, regardless of where you go -- you grow in particular cities, as long as the geography is generally in the same area, all those things support broader geographic growth. So as we've grown West, we've had to build that infrastructure. But additional expansion in the Western U.S. feeds off of that. So I think there is real benefit going forward.

David E. Fintzen - Barclays Capital, Research Division

Okay. So you think about dots that are being connected to multiple big cities to get scale and then as long as it's not a real shift in geography, okay. That's very helpful. And then just maybe a quick one on the revenue side. You mentioned sort of carry -- I think the wording was carrying the strength of June through the third quarter. Just to kind of follow-up on what Duane was asking. Can you give just a little color how demand sort of trended through the quarter, and how we should think about that June strength as the run rate in the three Qs. Anything you can add would be helpful.

B. Ben Baldanza

I'll asked Graham Parker to comment on that.

Graham Parker

Yes. We're seeing continued strength through the summer, but we need to sort of caveat that with a little bit of summer is sort of the third week in August ends for the airline business. And September is September. But July and August are very strong this year. They're very solid. And the demand and price environments are stable right now.

Operator

And we have Helane Becker online with a question.

Helane R. Becker - Cowen Securities LLC, Research Division

So this is my question. I know you had talked at your Investor Day, and you just made a comment a few minutes ago about opening maintenance bases around the system to kind of improve the service. And I was -- you have some numbers and I know it's probably hard to do given the weather. But if you break out weather and just look at other events, have you noticed a meaningful improvement in achieving that goal?

B. Ben Baldanza

In general -- we are seeing more -- I mean the sort of key measure is that when a plane is on the ground overnight and not scheduled to fly, is there a trained mechanic there with the parts and with the knowledge to be able to do anything that plane needs while it's there, right? And if you think about that metric, yes, we are seeing continued improvement of the fact that the available non-revenue flying time of the airplanes have an increasing percentage of maintenance availability to them. And that's a metric we track as we build out the bases and the places where the planes naturally remain overnight, like Chicago and Dallas, where we built out these bases, we're seeing improvement there. And there's more to go, but it's moving absolutely in the right direction.

Helane R. Becker - Cowen Securities LLC, Research Division

Okay. Another question is, I think you said or Ted said that you were -- had arranged for leases on some of the new aircraft, and you're building this huge cash position. You have no debt. I mean are you kind of getting to the point where you're going to rethink whether you own more aircraft versus leasing aircraft? Or what do you do with all that cash, or do you let it keep building?

Edward M. Christie

Helane, it's Ted. As we've said before, we're a growth company, right? And a reasonably high-growth company. And so as is evidenced by the moves we discuss today with regard to fleet, which includes some extensions of existing aircraft, but also the acquisition of additional airplanes. Those are our capital consumers, and we want to make sure we have adequate resources available to us to ensure we can fund that growth. And so we -- to answer your question directly, we are thoughtful about how we finance our airplanes on any given basis, and we spend a lot of time looking at the range of options available to us if they're lease financing or some type of ownership financing. And for now, we still feel good about the efficiencies provided by the operating lessor market, at least going into 2014, but we remain open to looking at all options.

Operator

And we have Steve O'Hara online with a question.

Stephen O'Hara - Sidoti & Company, LLC

I just had a question in terms of the CASM guidance. I mean it still looks down 1%, I think. And I think in the past, you kind of guided to a similar amount, or I thought that was within the expectation and with the decline in cost you're expecting in rent, and I think, depreciation. So I mean what's kind of the negative pushing the other way on that? I mean it looks like your capacity growth is going to be a little more than expected as well.

Edward M. Christie

Hey, Steve, it's Ted. The -- you're right. We've said again that we believe we're going to be on target for our year-over-year decrease in unit cost, excluding fuel for the full year of about 1%. We're not talking about third quarter, but down to the full year. And when we thought about setting that target for ourselves, we knew we had certain things that were in the hopper. Items that we were working on that would help us contribute to that number, of which, the lease extensions were one of those types of things. So as we've said since the beginning of the year, working against us is the depreciation and amortization expense associated with more heavy maintenance on the airplane, amongst other things. But there are puts and takes for going both ways. Those are just 2 of them. But even with all of those things considered, and we generally have most of those things considered when we gave out our guidance, we still feel good about being down year-over-year.

Stephen O'Hara - Sidoti & Company, LLC

Okay. And then I don't know if -- I mean can you -- based on the new leases and your kind of holding period that you expect now, is there any way you can give us an idea what depreciation looks like next year?

Edward M. Christie

Not yet. We'll be updating you guys towards the end of the year or the beginning of the following year, when we usually do, we give out a full year guidance as to what we see in both depreciation-related expenses and rent.

Operator

And we have John Godyn online with a question.

John D. Godyn - Morgan Stanley, Research Division

When I think about sort of the out-performance year-to-date and the factors that have triggered upward revisions to 2013's margin guidance. They don't feel to me like one-timers or anything like that. It feels like it's a good cyclical backdrop and strong execution on your part. So I guess the question is, why wouldn't recent run rates, why wouldn't 2013 margin guidance be the right number to kind of think about for the next couple of years if we believe that the cycle will continue to be robust and you guys will continue to execute.

B. Ben Baldanza

Well, John, we appreciate those comments. And I guess you could say that's a reasonable thing if you believe the macro environment is as strong as you say it is. I mean we like the current environment we're in. As I said at the end of my comments, we believe we're sort of uniquely positioned in the space to sort of serve that value conscious, price-conscious customer. Most of the industry is out chasing sort of a higher ticket price paying corporate traveler. And we've given up -- we don't chase that market. We're chasing the discretionary play, and we see ourselves kind of uniquely positioned to be able to do that for the bulk of that demographic in the U.S. So I think you've laid out a fairly reasonable hypothesis.

Operator

And we have Hunter Keay online with a question.

Hunter K. Keay - Wolfe Research, LLC

Can somebody give me the update of the sales mix by distribution channel in the quarter? And if you want to give me all 3, at least tell me how much was done through online travel agencies or third-party travel agents, I guess you call it.

B. Ben Baldanza

Hang on 1 second.

Hunter K. Keay - Wolfe Research, LLC

And as you're looking that up, I'll ask another question that relates to it. You don't have to...

B. Ben Baldanza

I mean the general [indiscernible] which haven't changed ever since the last quarter much is that we're about 2/3 direct and 1/3 third party. And we're in a couple of percentage points of that ratio being accurate. And as we said in the notes, when we fly new in a pair of cities, we tend to see a higher percentage of third party for a while until customers learn us and then learn they save money when they buy on the website.

Hunter K. Keay - Wolfe Research, LLC

Okay, yes, that make sense, Ben. I mean correct me if I'm wrong, but you do not have full content agreements with the OTAs. So if you're unhappy with the lack of ability to unbundle through these guys, is there anything preventing you from being able to pull content from these third-party travel agents and sort of using your own discretion whenever you want, or are you kind of locked in contractually at a certain base amount of tickets you have to sell through them?

B. Ben Baldanza

No. We're basically happy with the agreements we have with our third-party providers. And they allow us the kind of flexibility we need to run our business and allow them the access to the low fares we provide. And they're good deals from our standpoint, and we think they must think the same thing.

Hunter K. Keay - Wolfe Research, LLC

Right, okay. In terms of the fuel guide, I'm sorry if I may have missed this. You said you were expecting fuel hedge losses in the quarter. Can you tell me how much you're expecting on a cost per gallon basis from hedge losses of the $3.32?

B. Ben Baldanza

So we guided to $3.32 for the quarter. And I think it will be about $3.17 without the effect of those hedges.

Operator

And we have Dan McKenzie online with a question.

Daniel McKenzie - The Buckingham Research Group Incorporated

I'm wondering if you can provide a little bit more ancillary revenue detail around the major buckets, and where the opportunity is going forward? And I guess, just looking ahead, what are the biggest obstacles to rolling out on new products?

B. Ben Baldanza

As we've said before, our biggest categories of ancillary include baggage-related fees, change fees, our passenger usage fee and seat assignment fees. And as we've seen some improvement as we've started to apply some sort of ticket-based revenue management strategies toward the ancillaries being a little more dynamic in terms of the way we charge for bags and seats and things like that. And that is starting to prove beneficial, and we'll see a little more of that. So we're becoming smarter about the way we're pricing the things we already sell. We also have been growing our packaging side of the business. That's a business that only started recently for us, and we're still not a big player in that space, but we see a lot of upside there. And we're also increasing the channels in which we sell the ancillaries putting more saleability, for example, in our kiosks, not just at the airport counter. So in all those ways, we see continued growth in the overall ancillary side of things, and we're pretty encouraged by the fact that we have improvement opportunity across a couple of different dimensions there.

Daniel McKenzie - The Buckingham Research Group Incorporated

Yes, I see, okay. And then if I could just shift to a network question here. It seems like growth for Spirit is pretty focused domestically, particularly Dallas. But you guys have all found a pretty nice niche, pardon me, in the smaller Latin American markets. But I'm not seeing that LatAm strategy, I guess, rolled out in any meaningful way outside of Fort Lauderdale. So I guess I'm just wondering what barriers, if any, exist to executing on a similar Latin American strategy outside of Fort Lauderdale?

B. Ben Baldanza

Well, I'll point out to you that we now serve 3 cities in Mexico from Dallas. One of those, Cabo San Lucas, we don't serve from Fort Lauderdale. So as we've grown Dallas up to 26 nonstop markets, 3 of those are Latin. And so we -- it's not Fort Lauderdale in the sense of that kind of Latin percentage, but we've continued to look South when there are opportunities. Our growth strategy is very formulaic in the sense that we look at where's the next best place we can fly to generate the highest return for our shareholders, and the general economic positioning of the industry today and the fare environment today has made domestic deployments more beneficial in the near-term than Latin deployments. Not because Latin is losing money, or not because Latin doesn't create more good growth opportunities for us. But if you got a new deployment and we can make more money flying domestically, that's what we're going to do with the plane. And I think if you think over the next couple of years, you'll see more domestic growth, and you'll see continued Latin expansion, you'll see both. And the metering of that is going to be a function of what is going to produce the most net income for our shareholders.

DeAnne Gabel

Adrienne, we have time for one more question.

Operator

Okay. We have Dave Fintzen online with a question.

David E. Fintzen - Barclays Capital, Research Division

I just want to follow-up on the margin sort of comment. Obviously, margins are going up. You're growing 20 plus percent, and there's 7 aircraft for next year. I mean how are you looking at sort of the used aircraft market, or is it the new sort of last run 320s. Is there a shot you can start to accelerate that? What do you need to see in the aircraft market to sort of up that growth for '14?

Edward M. Christie

David, it's Ted. We -- as we talked abut, we made some moves this quarter to do just that. With broadening out our growth into the delivery stream by extending some of our existing airplanes, and we ordered 20 more airplanes and up-gauged 10 of our existing aircraft. So we feel we've done some moves to kind of continue to round out the delivery schedule and are fairly confident with where we are today that it meets with what we said publicly as our expectation for growth coming down to the end of the decade. Now, there are opportunistic times to look at used airplanes. We've done that in the past, and we would always do that going forward. But we actually feel pretty good right now with our fleet plan.

David E. Fintzen - Barclays Capital, Research Division

Is it the right thought process to sort of, if margins are sort of steadily going higher to think maybe growth rates in the future tick up? I mean is that the right way to think about the relationship?

Edward M. Christie

It's possible. [indiscernible]. I mean there's so many factors affecting that, including our desire to take on incremental growth and digest as well. So we -- we're thoughtful about that as part of that, too.

B. Ben Baldanza

As you know airplanes, under almost any arrangement are relatively long-term assets. And so I mean I don't think we would look to get another 12 year lease for an airplane because of what we saw as a 9 or 12 month upside, for example.

David E. Fintzen - Barclays Capital, Research Division

All right, that's very helpful. It's obviously a high-quality problem.

DeAnne Gabel

Thank you, everyone, for joining us today. This does conclude our second quarter '13 earnings conference call.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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