Spirit Airlines Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.30.13 | About: Spirit Airlines (SAVE)

Spirit Airlines (NASDAQ:SAVE)

Q3 2013 Earnings Call

October 30, 2013 10:00 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

John D. Godyn - Morgan Stanley, Research Division

Hunter K. Keay - Wolfe Research, LLC

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

Richa Talwar - Deutsche Bank AG, Research Division

Helane R. Becker - Cowen and Company, LLC, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

David E. Fintzen - Barclays Capital, Research Division

Kevin Kaznica

Bob McAdoo - Imperial Capital, LLC, Research Division

Stephen O'Hara - Sidoti & Company, LLC

Operator

Welcome to the Spirit Airlines Third Quarter 2013 Earnings Release Conference Call. My name is Ellen, and I will be operator for today's call. [Operator Instructions]

I will now turn the call over to DeAnne Gabel, Director, Investor Relations. Ms. Gabel, you may begin.

DeAnne Gabel

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

Remarks during this conference call will contain forward-looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. Forward-looking statements are not a guarantee of future performance or results. Forward-looking statements with respect to future events are based on information currently available and/or management's belief as of today, October 30, 2013, and are subject to significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements, included in the information under the caption Risk Factors included in our 10-K for the year ending December 31, 2012, and subsequent 10-Q filings. We undertake no duty to update any forward-looking statements.

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

And now, I'll turn the call over the Ben Baldanza, Spirit's Chief Executive Officer.

B. Ben Baldanza

Thanks, DeAnne, and thanks to everyone for joining us. Today, we reported that our third quarter profit increased 130% year-over-year to $57.9 million or $0.79 per diluted share. Operating income grew 129% to $92.8 million, resulting in an operating margin of 20.3%, a year-over-year improvement of 8.5 percentage points.

We had a strong peak summer travel period, and I thank all of our team members who contributed to our success. It is becoming increasingly clear that Spirit's customers understand that our ultra-low fares plus optional services offer them a total price that's tough to beat.

Revenue for the third quarter increased 33% to $457 million, compared to the same period last year on a capacity increase of 22%. RASM increased 8.9% year-over-year, as a result of higher load factors and higher average passenger yields due to demand strength across the entire network.

On the operational front, we announced that we are transitioning our service at Mesa, Arizona, over to Phoenix Sky Harbor Airport, which allows us more growth opportunity while maintaining our cost efficiency. And we announced we will be expanding our service offerings at Minneapolis-St. Paul by adding services to Los Angeles, Orlando, Phoenix and Tampa.

We had several recent leadership changes that I want to acknowledge. Following the sale by Indigo Partners of its equity interests in the company, Bill Franke, our former Chairman of the Board and John Wilson, both from Indigo Partners, resigned from the Board of Directors. We thank Bill and JR for their support and leadership over the last 7 years. The board subsequently elected H. McIntyre Gardner as Chairman of the Board. Mac has been a member of our board since July 2010. Mac's strong leadership skills and business acumen will benefit our company as we continue to implement our growth strategy.

Last week, John Bendoraitis joined us as our Chief Operating Officer. John has an extensive airline career with nearly 30 years of industry experience, and we are delighted to have him join the Spirit team.

In other key member news, during the quarter, we reached a mutually beneficial and competitive 5-year agreement with our flight dispatchers, who do a great job for the company and are represented by the Transport Workers Union.

As we look ahead to the fourth quarter, there are a few factors that will have an impact on the year-over-year and sequential quarter comparisons. Last year's fourth quarter results were negatively impacted by Hurricane Sandy, causing some noise on a year-over-year comparison basis. In addition, over the last several years, we have diversified our network footprint in the Continental U.S. And as a result of this diversification, we are seeing the trend toward more seasonal strength in the spring-summer period versus the following winter. As such, we are expecting our fourth quarter results to be more similar to our first quarter results rather than our second and third quarter seasonal peak results.

In the latter half of September, we experienced stronger-than-expected yield strength for closing bookings. We believe that the industry as a whole saw demand strength throughout September, driven by continued capacity restraint during this period and as a result, there was less downward pressure on price in what is typically one of the weakest periods of the year.

In October, we have seen a return to more normal seasonality for the off-peak period, but there's continued strength for bookings during peak holidays in the fourth quarter.

And now, here is 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 achieving these outstanding third quarter results. In addition to very strong revenue results, our team did a great job managing our nonfuel remitted costs. Excluding fuel, our CASM decreased 2.7% year-over-year to $0.586 in line with our guidance for the quarter, despite higher-than-expected revenue-related costs. The decrease was primarily driven by lower aircraft rent and lower other operating expense per ASM.

In the second quarter of 2013, the company negotiated lease extensions at reduced rates for 14 of its A319 aircraft, which was the primary driver of the decrease in aircraft rent per ASM.

Additionally, last year, we had $1.3 million of third-party aircraft lease expense, which we didn't incur this year. The decrease in other operating expense per ASM was primarily driven by the in-sourcing of certain contract work, as well as lower software consulting costs related to the company's ERP implementation. Partially offsetting the benefit of these items was higher depreciation and amortization expense related to the amortization of heavy maintenance events.

During the quarter, we took delivery of 1 new A320 and ended the quarter with 51 aircraft in the fleet. We took delivery of an additional new A320 last week and have 2 new A320s scheduled for delivery before year end.

We ended the quarter with $540 million in unrestricted cash and with no debt on the balance sheet. As was earlier reported, in October we had an aircraft that experienced an engine failure shortly after takeoff. Our crew did a very professional job taking care of our customers. We are in the midst of our investigation and -- to determine the cause of the failure. And until such time the investigation has been completed and the total cost and cause can be determined, it is difficult to assess precisely what the financial impact will be. However, based on our initial view, we have added $10 million of estimated expenses in our forecast. This estimate includes the accelerated amortization of the heavy maintenance related to the previous overhaul on the engine, as well as an estimate for additional expenses to repair the damage to the engine and the aircraft.

Depending on the determination of cause, it may be that some, or all of the repair expense will be recoverable. But even if that were to be the case, it is unlikely we will be able to make a determination before year end, in which case the repair cost will be booked as a fourth quarter expense, with the reimbursement, if any, booked in the period that is probable and estimable to be recovered.

Including that assumption, we estimate fourth quarter CASM x fuel will be up 4% to 5% year-over-year as compared to the fourth quarter last year. And for full-year 2013, we now estimate CASM x fuel will be up about 0.5% year-over-year. As in the estimated cost of this event and the incremental revenue-related expenses due to our positive revenue results, we would've been on track to deliver our targeted CASM x fuel reduction of 1% for the full year 2013.

We are working diligently to return the damaged aircraft to service. To date, we have been, and expect to continue to be able to cover our operating schedule.

For the fourth quarter, we estimate our economic fuel price will be $3.17 per gallon based on the Gulf Coast jet fuel curve, as of October 22, 2013. This includes our estimated impact from realized fuel hedges. We have about 21% of our fourth quarter jet fuel craft volume hedged using swaps. Additional details about our hedge positions will be included in the investor update we plan to file this afternoon.

As we begin to solidify our plan for 2014, here's our thinking about it: we currently have 7 aircraft -- 7 scheduled aircraft deliveries next year, which translates to a 2014 capacity growth rate of about 15%. In 2015, we have 18 aircraft scheduled for delivery. So we expect our average growth rate over the 2 years will be about 22% per annum.

As we are now in the midst of developing our 2014 operating plan, it's too soon to give an all-in CASM estimate for 2014. But we know we'll have some advancement of expenses towards the end of 2014, as we ramp for the growth in 2015, along with continued regulatory-related expenses associated with complying with FAR 117.

So looking at it over a 12-month period, we may have some modest CASM challenges. But over a 24-month period, given the phasing of our growth, we remain very bullish about maintaining our long-term cost structure.

We'll be able to give you a more precise target for 2014 when we update you in February next year. We continue to believe that by leveraging our growth, scale and efficiency benefits, fuel-saving strategies and by maintaining our overall diligence to keep costs low, we can sustain and even grow our relative cost advantage.

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

B. Ben Baldanza

Thanks, Ted. Based on our strong year-to-date results, we are comfortable raising our operating margin guidance for the full year 2013 to 15% to 16% from our earlier guidance of 13% to 15%. We are very pleased with how well the business is doing and remain committed to maintaining our low-cost, low-fare and high choice strategy. Spirit is known for doing things differently than other air carriers, and we celebrate those differences because they allow us to offer our customers the freedom to pay for only what they value, while earning a return for our shareholders.

Now I'll turn it back to DeAnne.

DeAnne Gabel

Thank, you, Ben and Ted. Ellen, we are now ready to take questions. [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Godyn with Morgan Stanley.

John D. Godyn - Morgan Stanley, Research Division

Ben, I wanted to follow-up on some revenue commentary. I thought I heard you say that fourth quarter passenger revenue, and I wasn't sure if this is kind of a PRASM metric it's going to be similar to what it was early in the year. Is that the right way to think about it? Kind of like the $0.07 per ASM number? Is that what you were getting at? Or were you communicating something different there?

B. Ben Baldanza

No. That's not what we were getting at. Basically, we are just talking about the general demand seasonality of the airline and the earning seasonality of the airline, being stronger in sort of the higher leisure demand periods that are represented in the second and third quarter, whereas the fourth and first quarters of the year look more similar to each other and the second and third quarter look more similar to each other. That was the comment we were making, it wasn't specifically on revenue or PRASM or anything that. It was an earning seasonality comment.

John D. Godyn - Morgan Stanley, Research Division

Okay, that's helpful. And then if I could just sort of ask another question on the general revenue trend and tie it to some of your margin commentary. I think, this year, when we think about 2013, where we were surprised to the most, upwardly on margins throughout the year was more on RASM, on total RASM growth -- rather than cost. So when we think about kind of the big drivers of margin improvement this year, you mentioned some potential headwinds, slight headwinds into 2014. I think you said modest cost inflation. But what are the chances -- I mean, how do we kind of benchmark the idea that this sort of surprising RASM strength that we've been seeing continues. If the cycle generally continues from here, should we see that RASM growth continue to exceed your cost growth significantly? I mean, it seems like that might be likely, but I know there are a lot of moving parts. So I was hoping you could just kind of speak to that broadly.

B. Ben Baldanza

Well, there are a lot of moving parts. The crystal ball isn't that clear, very far out obviously when it comes to revenue. But overall, we feel comfortable and generally bullish about the overall revenue environment and the general capacity discipline that the industry is putting out right now. And that gives us -- that gives a generally positive feeling about revenue as we look out over the coming quarters. Again, the further you get out, the more uncertain that becomes a thing. On the cost side, as Ted told you, we had -- up until the engine event we had, we were tracking toward about a 1% decline in CASM year-over-year and -- but for that engine event, we would -- could be hitting that. So we believe that in Spirit's particular case that while we certainly want to take any PRASM increase we can take over time, we are -- we simply maintain sort of consistently focused on the cost structure and not only maintaining or improving our own cost structure but also increasing the relative cost GAAP we have to our primary competitors.

John D. Godyn - Morgan Stanley, Research Division

And just last follow-up on this topic. Just on -- in terms of the margin outlook, you sort of gave an updated margin guidance number for this year. You used to speak to a margin guidance number for the very long term, what you thought was multiyear guidance. Is there any update to that number?

B. Ben Baldanza

Well, we did that once and all I can say is, when we talk again in February, if we are -- if we feel comfortable in providing that kind of guidance for 2014, we'll do it then.

Operator

The next question comes from Hunter Keay with Wolfe Research.

Hunter K. Keay - Wolfe Research, LLC

Hey, just a little more on -- a little bit of a follow-up to John's questions. Ben, I knew you talking about the seasonality of your demand, but again, were you talking about -- renew the full-year margin guidance of, would you say was 15% to 16%.

B. Ben Baldanza

15% to 16%.

Hunter K. Keay - Wolfe Research, LLC

Right. Okay. So if I put the 1Q margin on your fourth quarter margin, which is 14.4%, you're basically at 17% margins for the year. So why -- so first of all, is that math correct? I think it is. But were you not talking about margins? Again, were you talking about the volume of your demand when you talk about fourth quarter looking like first quarter, and what am I missing there with that full-year margin guidance?

B. Ben Baldanza

We were talking about the general margin performance of the airline in a 90-day period in which there are fewer high peak leisure kind of days in it. In that sense, fourth quarter looks more like first quarter. But if you just look at, again, if you think about seasonality not just by quarter but by week or even by day, and you look at the shape of the fourth quarter and the shape of the first quarter, they look more alike than either of them look like the second and third quarter. But the fourth quarter look exactly like the first quarter. That's I think -- that's the right way to think of it. While I don't have the math in front of me to say whether your overall margin math was right, you're good at math, so...

Hunter K. Keay - Wolfe Research, LLC

Yes, sometimes. Okay, that's cool then. In terms of the -- sort of the way, you're -- I'm looking for a little more color from you on how the yields sort of metered up toward the end of the quarter. You clearly -- it seemed like there was a little bit less discounting going on from some of your bigger competitors. It seems to me that, that would imply some trade down to Spirit from some of the other guys who might've been stealing some of the traffic because the fares were so high. If that's the case, do you find yourself taking more market share than really you feel comfortable with? Because the Spirit business model, as I sort of understand, it's sort of about stimulating demand. So do you find yourself in sort of an uncomfortable position where you're taking market share from bigger competitors? Is that something that you want to do? Because obviously, you might incur, as irrational as it may be for them, a competitive response. So are you comfortable taking market share, if that is what's driving some of the incremental demand?

B. Ben Baldanza

Well, let me comment on that first, and I'll ask Graham Parker to comment on the general PRASM strength in the near term. No, I mean, our business model is not about taking share. Our business model is a stimulative model based on growing the volume of travel demand by allowing people who, otherwise, either couldn't afford to fly or not fly as often to be able to fly at the price points we can offer them. And they recognize that in exchange for that, they get a little tighter seat pitch and they pay extra for bags and seats and things like that. That's the whole play. So in any given quarter or any given period, there may be stronger or weaker kind of demand times. The key for us is that our prices are -- stay low, that we use the stimulative effect of those prices than in an overall higher price environment, when all prices are high for every airline. In some cases, the value proposition Spirit offers looks even more attractive when everything is expensive, saving a little more money in that environment can be even more important for some folks.

Graham Parker

Yes, this is Graham Parker. Just to add to what Ben said, I think what we saw in third quarter was that's -- to address your market share question, is that we were just able to get out of the stimulative market at a slightly higher fare because of the pricing rationality, of the capacity rationality in the marketplace. Going into fourth quarter, it looks a lot more like a normal sort of fall period. But the Thanksgiving and Christmas holiday periods were particularly strong. So...

Operator

The next question is from Jim Parker with Raymond James.

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

Regarding this engine blow-up or accident, whatever it was. Just so that's an expense item that's going to come -- all of that $10 million will come in the fourth quarter. And if you get -- if the insurance covers it then that's going to come in a future quarter, is that correct?

B. Ben Baldanza

Yes, that's right, Jim. With regard to the damage incurred -- and it's still early in the phase here, so we're estimating $10 million. We're trying to be conservative in that regard. So to give us all some clarity about what we're seeing -- and we'll give you more information throughout the course of the quarter as we get more information on the event. But what you said is correct, in my comments, is that we would incur the expense now. And if there is a recovery, either in a form of an insurance claim or warranty or whatever that might be, which we don't know yet, that in all likelihood would happen in a later period.

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

Okay. Is there any related-revenue impact? I believe you've indicated maybe there wasn't. As you've flown the schedule, is there any related-revenue impact?

B. Ben Baldanza

No, we don't believe there will be. We'll continue to fly the schedule as it is.

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

Okay. Just one more question. Of course, you have a rather large bubble in aircraft deliveries in 2015, why do we have this bubble? And exactly, well, best you could tell us, what are you going to do with all of those aircraft coming in 1 year?

Edward M. Christie

Well, I can talk about why they're there. And then, Ben and I get to talk about what we're trying to do with them. Yes, we -- in smoothing out our delivery cycle, we've engaged Airbus in a number of times in negotiations to change delivery positions, to add new aircraft. Obviously, this summer we ordered the 321, which we're very excited about, we think it's the right airplane for this airline. And so they come -- sometimes when they're available, sometimes when we really want them, and we try to fit them into those slots as best we can. So next year we have 7 airplanes. The year after that, we have 18, and so that's obviously what you're referring to. But we're okay with that overall trend. We see the opportunity regardless of when they come, and we're working our way through making sure that we're thoughtful about how we build up the infrastructure as necessary and appropriate from a rational perspective to adjust for that. So that's why the airplanes kind of fall where they fall. And Ben, I don't know if you want to add any more to it.

B. Ben Baldanza

Ted's right. And I think if we asked the guys who drive the revenue of the company that they believe they'd want more planes next year. But they're just not coming next year, in terms of the current schedule where they are. So we know we have to manage toward the calendar because that's what we all do. But the business, the business flows over the course of years. And when we look out over the next 24 months, that 22% overall growth rate we feel very good about, the ability for Spirit to continue to enter new markets and growth, restimulation and be able to earn the kind of return to earn, we feel very positive about that, and we'll be a little held back from that in terms of the rate in 2014, but we'll catch up by the end of 2015. That's the way we see it.

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

Okay. So if you do a 20% operating margin that year with those aircraft, yes, that will be a nice return.

B. Ben Baldanza

That's true. [indiscernible]

Operator

The next question is from Michael Linenberg with Deutsche Bank.

Richa Talwar - Deutsche Bank AG, Research Division

It's actually Richa Talwar filling in for Mike. Just 2 quick ones. First, I noticed that your average ticket revenue per passenger flight segment increased 15% this quarter, and I feel like you typically try to keep that line item low as a means to help stimulate more demand. So I was hoping you could talk to what drove that, was it just a really strong revenue environment that you saw an opportunity to increase base fares and still stimulate strong demand or if there was anything more to that, that would be helpful to hear.

B. Ben Baldanza

Well, we do think it's important that our fares are low and low fare stimulate more traffic. But that's a relative figure, that's not an absolute figure. So in a very strong travel period like the third quarter was, and with industry fares moving up higher, we saw the ability to take our ticket prices up a little bit yet remain -- yet keep them with the stimulative effect of still being the lowest fare possible for consumers during that high demand period.

Richa Talwar - Deutsche Bank AG, Research Division

Okay, great. Very clear. And then second, just a more high-level question, on the topic of partnerships. Can you comment on the potential for you to add partnerships with other carriers, whether it be domestic or international in the near future? Just remind us on your thoughts about interlining, coaching, et cetera, sometime down the road as a means to enhance your profitability.

B. Ben Baldanza

In general, that's not really in our game plan, at least for anytime in the near future. Alliances can be good for some things, but they tend to be expensive, they add cost, they add distribution cost. We run a very high load factor. So it's not -- we don't really have a lot of extra seats on our airplanes to carry alliance traffic. So then we would be making a revenue play and maybe saying we'd get higher yield. But that's a little different business model than we have. To add certain expense, known certain expense of being able to administer the co-chair against the prospect of maybe a higher yield on the plane, that's a different model than we operate. So we don't really see partnerships as consistent with the way we run the business.

Operator

The next question comes from Helane Becker with Cowen.

Helane R. Becker - Cowen and Company, LLC, Research Division

Just on the costs to move to Phoenix. Can you just talk about which quarter is that coming in? And are those costs included in your current guidance?

B. Ben Baldanza

Yes, the move is happening this quarter, Helane. And it is included and it's not material.

Helane R. Becker - Cowen and Company, LLC, Research Division

Okay. And then, I don't know if I asked you this question before, but have you talked about the increase in healthcare costs for 2014? And what that does? Or is that included in the numbers that you're seeing for FAR 117?

Edward M. Christie

FAR 117 is not related to healthcare. So we haven't talked about healthcare-related expenses. I assume you're either talking generically about healthcare inflation or are you talking specifically about the effect perhaps of the government healthcare regulation or what specifically are you talking about?

Helane R. Becker - Cowen and Company, LLC, Research Division

So I guess, I'm talking about both, and I think -- I guess, I was figuring like when you're adding up cost for -- total cost you can just kind of lump them into 1 category. But I know FAR 117 has nothing to do with healthcare costs. I guess they were 2 separate questions.

B. Ben Baldanza

Okay,.

Helane R. Becker - Cowen and Company, LLC, Research Division

So you have already given us 117 indications but could you just talk about the healthcare issues.

B. Ben Baldanza

What we see -- I can speak I guess generically about how we see healthcare inflation just like everyone does. Every year, the effect of the Health Care Law -- we don't believe it will have an effect on us. But nonetheless, for everyone in the country, healthcare-related expenses are going nowhere but up. And we're -- we work continuously to figure out ways to try to manage that, either in our plane construction or in the way we optimize the share between what the company pays and what the employee pays. So I don't think that's new for '14. I think we saw that this year. I think we saw that in '12. That's kind of a natural pressure.

Operator

The next question comes from Duane Pfennigwerth with Evercore.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Can you just comment -- I mean, rather than conceptually, maybe actually, the competitive environment in the fourth quarter and the first quarter because when we look at OA [ph] capacity on your routes, it actually looks much better than the industry, generally.

B. Ben Baldanza

Yes, Duane, it's a great question. I think you're right. I think that we have a slightly less pressure on our capacity than other people but I think in general, the industry is being pretty diligent about optimizing their own capacity right now. And we like that environment.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

How about a quick comment on the change in stage length that you expect for the fourth quarter?

B. Ben Baldanza

Basically, the fourth quarter is going to be up a little bit, up 7% in the fourth quarter on a year-over-year basis.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay. And then, just given the cash production now of the business, I guess, like 7, 40 [ph] in net cash per share. Any new thinking on share repurchase, when do you think the company is in a position to consider that?

Edward M. Christie

Hey, Duane. No, as we said before, for now, we're not -- that's not on the table because we're still in the midst of a pretty robust growth cycle. And cash is important to us, not just as we evaluate our options with regard to aircraft and capital financing, but it gives us a lever as we're negotiating those various options. So at some point, it's entirely possible that all the things will be on the table that might be anything you would consider in the form of capital deployment. But for right now, we're focused on making sure we have adequate resources to finance the growth, to take advantage of what we see is a very strong position from a financing perspective.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay. And I appreciate all of the kind of qualitative commentary on the revenue environment. But it just looks like your comps get a whole lot easier on a full quarter basis.

B. Ben Baldanza

Yes.

Edward M. Christie

That comes and goes.

B. Ben Baldanza

Yes, I would act on what we said before, which is -- you're right about the year-over-year effect, Sandy not being there, we hope. Don't know yet but we hope. But seasonality certainly muddles the water a little bit too. So that's probably -- that sums up at least how we're thinking about it.

Operator

The next question is from David Fintzen with Barclays.

David E. Fintzen - Barclays Capital, Research Division

Just a quick mix, just to be completely clear, the 15% to 16% up margin for the full year, that is inclusive of the $10 million hit on the engines, correct?

B. Ben Baldanza

It is. It is. That's correct.

David E. Fintzen - Barclays Capital, Research Division

Okay. And then, just a follow-up, Ted, on your comments around some cost pressures as you get later into '14 as you're ramping up the growth. Is that a function of a -- presumably it's a function of you're going to be hiring, you're going to be training, so we should expect labor cost pressure as you're ramping ahead of that. But maybe help me understand, are we going to see the network kind of spread out into a lot of new cities, where maybe you're not getting airport productivity, are we going to see -- and maybe you're not getting pilot utilization because you're away from crew basis. Are there some operational complexities, kind of like we saw, what was that, last year, as you grew into Dallas. Is that the kind of thing we should expect too?

Edward M. Christie

No. Like we've said before, we're in most of the big -- we're still missing a few but we're in most of the big markets domestically and so the focus this year as you've seen, has been more on connecting those dots rather than growing into new cities. And I would expect that to be a general trend for us in the near term. So I don't anticipate the same pressures that maybe we saw as the network expanded rapidly in '11 and '12. But to address your earlier comments, yes, as you -- if you have a stair step in growth like we experienced and remember, years are just arbitrary cutoffs, so it's hard to think about things that way. But if you stair step from what would be 15% to a much larger number in 2015, we have to prep for that. And that comes throughout the course of 2014. And some of it's hiring and some of it's infrastructure and we're going to be typical Spirit about that, which is very rational and very thoughtful about making sure we stay very much in line. But nonetheless, it's going to -- it will be a little bit of a year-over-year kind of bump there.

And we saw, Dave, we saw a little bit of that this year and it's in the numbers we presented to you as it relates to ramping up pilots for the FAR 117. We're going to need more pilots to run the airline with the new regulation next year. And some of the expense in getting ready for that is being incurred right now and that's in our numbers. Same idea.

David E. Fintzen - Barclays Capital, Research Division

Okay. And then, no. That's helpful. And then are there IT projects, are there systems enhancements that you need to do to sort of fiscal -- is that next quarter growth or is that side pretty well nailed down?

B. Ben Baldanza

As you know in '12, which launched in '13, we've launched a new financial reporting system, our new ARP system. And we're evaluating all of the kind of biggest or bigger pieces of our IT infrastructure. And there may be some additional work we want to do, it would be something that we think is a good idea from a return perspective to do, which could -- with any return project yields over time, right? But to make sure that we can deliver the kind of results we internally here expect to deliver, that may have forced us to do a few things on the infrastructure side, too. So there could be some of that as well.

Operator

The next question comes from Stephen Trent with Citigroup.

Kevin Kaznica

This is Kevin Kaznica filling in for Stephen Trent. Lot of very, very helpful color on the call. We just kind of wanted -- we were wondering what kind of trends are you guys seeing in terms of aircraft lease rates. And do you see any potential that the rates could be declining over the long-term?

B. Ben Baldanza

Well, we've financed our aircraft for 2014 on sale-leaseback operating leases, and those were negotiated earlier this year. And the environment is generally favorable for airlines and more specifically, for Spirit, as our credit has improved dramatically over the last 4 years. So we feel that those rates were very attractive, and that was the reason we decided to continue to lease, heading into 2014 as we saw that. Heading forward, I would be speculating just like you would about what lease rates look right now going forward because we're not in the markets trying to price airplanes right now. But I've heard rumors that they're stabilizing and maybe that means something or not. But beyond that, I couldn't comment.

Kevin Kaznica

Okay. Just I guess, another quick question. Now with the government shutdown not lasting long offer kind of being [indiscernible] than you'd normally in the politics, a lot of posturing. Did you guys notice any nuances in demands or changes in advance booking trends over this period or is this just kind of a lot of noise for not really a lot of effect with you guys?

B. Ben Baldanza

We saw -- we noticed nothing from the government shutdown as related to passenger demand. No.

Operator

The next question comes from Bob McAdoo with Imperial Capital.

Bob McAdoo - Imperial Capital, LLC, Research Division

Just -- can you just kind of give us any sense of how the 2015 aircraft will be spread through the year? Are they kind of -- can we think about them as evenly or are they early in the year, late in the year ...

B. Ben Baldanza

I would think about them as evenly, Bob. They're kind of given that number. They're coming 1 or 2 a month every month.

Bob McAdoo - Imperial Capital, LLC, Research Division

So there'll be some in there for the summer?

B. Ben Baldanza

Yes. Oh yes.

Bob McAdoo - Imperial Capital, LLC, Research Division

Roughly half of them in there for the summer.

B. Ben Baldanza

Yes, exactly. And some of the 2014 come late in the year also. So they are effectively 2015 kind of capacity.

Bob McAdoo - Imperial Capital, LLC, Research Division

Yes. Got it. Yes, understood.

Operator

The next question comes from Steve O'Hara with Sidoti & Company.

Stephen O'Hara - Sidoti & Company, LLC

Can you just talk about where you see further potential in flurry opportunities and then, maybe going forward, where you expect the -- or where do you think the revenue growth comes from, I mean, it seems like it would come from I guess the flight side as opposed to the ancillary side. Just wondering if you could comment on that.

B. Ben Baldanza

Well, we -- let me say -- let me start off by saying that we manage the total revenue per ASM and that's the statistic that we measure our revenue performance against. So to some extent, our ticket prices are going to be a function of what we're able to generate on the ancillary side. The more we can grow ancillary, the more flexibility we get with our ticket pricing and that's good for us. But we do see continued growth in ancillary -- in ancillary revenue as well. Principally, from a couple of things. One, as we talked about before, applying revenue management techniques that are more well understood on the ticket side but applying those to the larger ancillary products like bags and seats. Today, bag and seat pricing tend to be more statically priced than the dynamic nature of tickets, moving those products to a little bit more demand base, dynamic pricing will improve the revenue of that ancillary stream without charging for new things but being smarter about the way we charge. The other thing is we're getting better and we're continuing to grow in our packaging business, in our third party business of selling more things to more customers. So not just unbundling of what used to be included in the ticket but actually selling more things and getting a bigger share of that travelers' total travel wallet. Obviously, when people buy an airline ticket they tend to buy a lot of other things as well and when we can be the sales portal for them, we can make money that way. And that in turn helps us offer an even lower fare upfront. So we see growth in ancillary and the growth in the ancillary -- or the way ancillary gross will absolutely affect what our ticket pricing will be.

Stephen O'Hara - Sidoti & Company, LLC

I guess -- and then maybe as a follow-up, I mean, that seems to be -- and I guess it's been a recurring theme for airlines for a while now, is getting a bigger share of customers' wallet. What type of pushback have you seen from those who typically get that share. And is that -- do you expect that to get maybe tougher going forward, if you could answer that, it would be great.

B. Ben Baldanza

Well, we're not a huge player in that space. We're not really seeing pushback in that. But the reality is, is that airlines are in a good position for that kind of business because customers tend to choose both where to go and which airlines they're going to fly before they picked which hotel they're going to stay in or which car they're going to rent or even necessarily, what specific things they might do when they're there. So the airline is sort of in an early mover position of knowing the behavior and desire of that customer and so in that sense, I think the airlines are a more natural place for a lot of this kind of these transactions that happen. Not just in Spirit, but any airline.

Stephen O'Hara - Sidoti & Company, LLC

Okay. And then I'm sorry, just one last one. I mean, in terms of the change with the consumer rule and everything else, I mean, what's been the detrimental impact that you've seen? And then, is there something else coming down the pipe that maybe we should be concerned about as well?

B. Ben Baldanza

Is there a particular consumer rule you're referring to? The -- you mean, the full fare rule, you mean putting taxes in with the --

Stephen O'Hara - Sidoti & Company, LLC

Yes.

B. Ben Baldanza

Okay. No, i mean, in general, I think higher taxes mute economic activity in general. And so, it's a transparency issue. Spirit fares, with or without taxes, are lower than other carriers' fares, with or without those taxes as well. So our fares are oftentimes lower. We don't -- because Spirit customers don't pay more tax than the other guy when they go and since some of that tax as a percentage of a fare, they could sometimes pay less. So we don't like the rule because we think it's not transparent and we believe in transparency. So we do a good job, I believe on our website, of breaking out for consumers how much of the total price they see is going to the airline to cover their travel cost and how much is being sent to the government for their taxes and we like that transparency and we'll continue doing that. But in general, we'll continue to support regulation where we can that encourages transparency and to all consumers so that they know exactly what they're spending and what they're spending it on.

Operator

The next question is a follow-up from Hunter Keay with Wolfe research.

Hunter K. Keay - Wolfe Research, LLC

What is the load factor like on the big front seats?

B. Ben Baldanza

I don't think we report that separately. We don't sell that product as a fare. It's sold as a seat assignment. So when you buy a ticket on the airline, you can then choose to pay to sit in specific seats on the airplane and generally, you'll pay a little bit more to sit in a big front seat than you will if you sit in another seat. In general, overall, we like that cabin to be completely full and in most of the cases that tends to be true, because it's usually a pretty good value compared to sitting in a seat in the back of the plane. But managed that seat assignment today, if you go back to the commentary I made about ancillary becoming a little bit more dynamic. I think when we give you a little bit more dynamic about pricing seats, that will be even be more available to the big front seat product maybe than the average seat product.

Hunter K. Keay - Wolfe Research, LLC

So then, how is that sold? Do you sell most of it on your website? Do you sell most of it at the kiosk? Do you have flight attendants selling most of it on board? And what sort of IT that you have now is holding you back from improving the take rate on those things?

Edward M. Christie

We don't think there's IT really holding us back on that now, other than the generic idea of being able to dynamically price a little more. But in terms of -- most of it is bought online before, some of it is bought at the kiosks and a minority is sold on the airplane. Obviously, we don't like it to be sold on the airplane because then we have an empty seat in the back when somebody moves up. It's better than not selling it but we'd rather have it sold before the plane backs out. Again, and just so -- I think you know this, but it's not a first-class product. There's no -- it's a bigger seat in the front of the plane. But there's no other product attributes to it. There's no curtain, there's no flight attendant, there's no free drinks, there's no special checking, there's no ability to upgrade. It’s just a seat assignment. And some people might like a window seat, some people might like an aisle seat, some might like a wider seat up front and that's the way we position the product.

Hunter K. Keay - Wolfe Research, LLC

Yes, sure. It's just that, that we found that's a better experience than sitting in coach on a lot of the network airlines. And it's still -- the price of that is still well below, in many cases, where the coach fares are on the network airlines. So it just seems like there's opportunities to raise prices on that particularly, even without getting into the dynamic component of pricing on it.

Edward M. Christie

Well, we price it today on sort of the length of haul basis, and when we can find ways to add a few more of those seats without removing seats from the airplane, we would look to do that as well for the same reason you just mentioned. We're not going to take seats out to do that but if we can find ways to put more big ones in, we would do it.

Operator

We have no further questions at this time.

DeAnne Gabel

Great. Well, thank you, all, for joining us again today. And that will conclude our call.

Operator

Thank you, ladies and gentlemen. This concludes Spirit Airlines' Third Quarter 2013 Earnings Release Conference Call. Thank you for participating. You may now disconnect.

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