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Executives

Maury Gallagher – Chairman and CEO

Andrew Levy – President and CFO

Analysts

Bill Greene – Morgan Stanley

Mike Linenberg – Bank of America/Merrill Lynch

Duane Pfennigwerth – Raymond James

Jim Parker – Raymond James

Helane Becker – Jesup & Lamont

Daniel McKenzie – Next Generation Equity Research

Dave Fintzen – Barclays Capital

Steve O'Hara – Sidoti & Company

Bob McAdoo – Avondale Partners

Allegiant Travel Company (ALGT) Q4 2009 Earnings Call January 26, 2010 12:00 PM ET

Operator

Welcome to the Allegiant Travel Company's fourth quarter and full year 2009 financial results conference call. We have on the call today Maury Gallagher, the company's CEO and Chairman and Andrew Levy, the company's President and CFO.

Today's comments will begin with Maury Gallagher's, followed by Andrew Levy. After their prepared remarks, we will hold a short question-and-answer session.

We wish to remind the listeners to this webcast that the company's comments today will contain forward-looking statements that are only predictions and involve risks and uncertainties. Forward-looking statements made today may include, among others, references to future performance and any company – or any comments about our strategic plans. There are many risk factors that could prevent us from achieving our goals and cause the underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed in or implied by our forward-looking statements.

These risk factors and others are more fully discussed in our filings with the Securities and Exchange Commission. Any forward-looking statements are based on information available to us today and we undertake no obligation to update politically any forward-looking statements whether as a result of future events, new information, or otherwise. The company cautions users of this presentation not to place undue reliance on forward-looking statements, which may be based on assumptions and anticipated events that do not materialize. The earnings release as well as rebroadcast of this call are available at the company's investor relations site, ir.allegianttravel.com.

At this time I would like to turn the call over to Maury Gallagher for opening remarks.

Maury Gallagher

Thank you very much. Good morning, everyone. It's a pleasure again to talk with you. As the operator said today joining me is Andrew Levy. Pleased with the outcome of the just completed quarter, some highlights. We achieved a 13.4% operating margin, a decline certainly from a breakout Q4 last year. Revenues actually grew year-over-year by 10%. This is the 20th consecutive profitable quarter. This is our fifth quarter in a row in double-digit margins.

Year-over-yea, our TRASM for the quarter was down 9.8%, but December's TRASM was down just at 2.5%. December's combined scheduled service average fare grew nicely again sequentially, increasing to $115 per passenger from $100 in October, 15% increase in the past 60 days. December's 2009 scheduled service average fare was also greater than last year's December fare.

As I mentioned, last year's fourth quarter was a breakout quarter, a 23% operating margin. We earned $28 per passenger on revenues that quarter of $120.50 per passenger. This year, we earned $14.79 per passenger on revenues of $110.40.

Interestingly enough, in both quarters our fuel cost was $2.07. However, our cost per passenger this year was up $3.35. $1 of that was from fuel, because our stage length increased 3% and thereby increasing our gallons per passenger from just below 18 to 18.2 gallons. The non-fuel cost per passenger increased $2.35. And that was driven by higher maintenance cost from heavy C-checks, as we mentioned in our release and one-time adjustments for inventory values.

The largest influence in 2009's fourth quarter results was a decline in revenues. $10 drop in that quarter represented 75% of the overall $13 decrease in our profit per passenger for the quarter. So looking forward, it will be difficult for us to top our Q1 2009 results because of the $1.46 in fuel cost that we had during that time. However, it appears first quarter scheduled service average fare and TRASM in totals should exceed 2009's Q1 totals of $109 and $10.83 or $10.83, respectively.

This past year was a watershed year for us, the transitional year in our profitability results. We achieved a 22% operating margin overall for the last year, a record for the company and something we can certainly be proud of. We achieved these results while we grew 23% in ASMs and 22% in departures and in spite of a drop of over $12 per passenger in our system unit revenue year-over-year. Certainly, we're helped by declining fuel prices, particularly in the first half of the year.

Regardless of how we got there, these results have raised the bar. Our target operating margin percentages today all begin with a two. It's an ambitious goal but one we believe is attainable. We are focused on maintaining this level of operating profitability.

So what are the components necessary to maintain these lofty returns on a sustained basis? Certainly a low-cost structure for one, particularly in non-fuel area is critical. In each of the past three years since 2007, we've had a cost per passenger ex-fuel of just over $50. In 2009 and 2008, we had virtually the same cost per passenger excluding fuel, $50.80. And this year, we did maintain that in spite of higher maintenance costs and the one-time adjustment of inventory.

With respect to fuel, our $1.76 cost per gallon in 2009 generated a $31 fuel cost per passenger, a big contributor to our 2009 22% margin. It doesn't appear, I might add, we will return to these fuel prices in the coming year. Expectations for 2010 from industry experts suggest $80 per barrel as a target price, which translates into the low $40 per passenger for fuel in our system.

But offsetting this increase in fuel should be increasing unit revenues.

As we discussed in our release, we saw an excellent recover in our third quarter – in our selling fare for the fourth quarter with $67 in October, increased to $83 by December. Ancillary also has remained strong. In fact, 2009 actually saw an increase in overall ancillary revenue per passenger versus 2008 from 29.42 in '08 to 33.07 this year, a 14% increase.

While selling fares were in freefall last spring, ancillary held up quite nicely, hitting a low in the second quarter of 32.27, just below our $33 average for the year.

All in all, we have repeatable model. We are currently serving 136 routes and 69 total cities, 58 of which we call small cities. We have been in many of our cities for a number of years, since 2002, 2003 in certain instances. We are a known product in the communities we serve, trusted and reliable.

On the competitive front, we have just eight routes of the 136 with direct competition. This low number of competitors is not new or unique to our situation at this point. We've had minimal direct competition on our routes since we began in 2002.

But while this number has always been single digit and has remained fairly constant, our number of routes has increased substantially, thereby providing us further protection from competitive influences and their ability to impact our results.

As you're aware, over the years we've had a great deal of focus on ancillary revenues. We have been a leader in developing both air related ancillary offerings or unbundling of the product as some say, as well as third party products offered to our customers to enhance their vacations.

Since our earliest days we have been focused on generating additional revenues. Initially, we wanted to provide our customers coming to Las Vegas a hotel offering. We approached our automation partner, CMS, about developing a customized hotel product to go with our air travel to Las Vegas which would be integrated into our Web sales engine. This was turned on in February of 2002.

Beginning in 2004, we began unbundling the air-related services associated with the trip, allowing customers to self-select additional products that have value when they travel. We weren't quite sure what or how we should approach these different offerings, but through continued efforts, we developed what is today an integral part of our model. As you can see from our financials, we generated $163 million of ancillary revenues or 29% of our total revenues for 2009.

Third-party sales efforts, which we began through our hotel offering in early 2002 represents the second key component of our ancillary mix. In 2009, we netted $19.7 million of what is essentially operating income from sales in this area. This amount represented a 16% total – of our total operating income for the year, certainly a meaningful contribution by any – from oh-by-the-way idea in early 2002.

The gross amount of the third-party sales leading to this $19.7 million of net income was $73 million including hotel, transportation and attraction sales. Going forward, we will begin putting additional emphasis on third-party products. So not being an instant growth, but with additional resources and emphasis we hope to show steady, meaningful improvement over the coming years.

Bottom line, we have a reasonably large loyal group of customers. We think they will be interested in additional offerings from Allegiant, including enhanced travel products as well as other possible Web offerings.

To make this effort possible, we've recently purchased from IBM upgrades to our hardware and database platforms. We will be installing them during the coming quarters. We will begin enhancing our software to enable us to offer these additional products.

In closing, I want to comment on the durability of the model we have built. We have been profitable in the past 12 quarters. Moreover, we've had double-digit operating margins in all but three of those quarters, two of which had fuel at approximately 3.50 per gallon, in the other, fuel was north of 2.50. We believe we have the ability to sustain this type of performance.

The increases we are seeing in our selling fare, the predictability of our ancillary revenues, the minimal competition we have experienced over the years are all key components of this belief. Lastly, I want to once again congratulate our team members for another terrific effort. Everyone has worked exceptionally hard to build this company into what it is today.

Let me turn the mic over to Andrew Levy. Andrew?

Andrew Levy

Thanks, Maury. Let me first highlight our balance sheet and liquidity. We ended the quarter with unrestricted cash and short-term investments of $231.5 million, up from 222.4 million at the end of the prior quarter and $174.8 million at the end of 2008.

Excluding air-traffic liability, cash increased slightly to 140.9 million from 138.1 million at the end of 3Q '09, despite $9.9 million for the prepayment of hotel rooms as part of a favorable business deal we executed with a key hotel partner in Las Vegas, $9 million in principal repayments of aircraft mortgage debt and $6.0 million in capital expenditures.

As compared with year-end 2008, we grew cash ex-ATL by 35.1 million despite 31.7 million in CapEx, 24.4 million in share repurchases, 18.9 million in principal repayments of aircraft mortgage debt and the $9.9 million in prepayment for hotel rooms described above.

We ended the year with 45.8 million in debt, down from 54.8 million at the end of the prior quarter and from 64.7 million at the end of 2008. We expect our debt at year-end 2010 to decline to approximately 22 million, assuming we continue to finance our growth through funds generated from operating cash flow.

Our leverage ratios continue to improve with our debt-to-equity ratio now at 33% and our interest coverage now at 19 times. Finally, we continue to have industry leading return on equity and return on capital of approximately 25%.

Our cost management continues to be outstanding. During 2009, our cost per passenger excluding fuel was flat compared with 2008 and our CASM, ex-fuel was up only 1%, remaining under $0.05. These figures are especially good considering that our fourth quarter had unusually high expenses in the maintenance and repairs and the other categories, as described in more detail in the earnings release.

Our 4Q '09 cost per passenger excluding fuel increased 4.2% to $57.93 from $55.57 in 4Q of '08. And our cost per ASM excluding fuel was up 1.1% to $0.0545 from $0.0539 in 4Q of '08. As we indicated in the earnings release, we expect our cost per passenger ex-fuel to return to the $50 range beginning this first quarter 2010 and to remain there through 2010 for the full year.

The fuel story is not as good. Our 4Q '09 cost per gallon of $2.07 was materially higher than the full-year 2009 average of $1.76. This past quarter, fuel cost per passenger was $37.69 up 2.7% from $36.70 during 4Q '08 due to a 3.4% increase in stage length. This same increase in stage length drove down a corresponding reduction in fuel CASM, down 0.6% to $0.0354 from $0.0356 in 4Q '08. We expect higher prices in 2010. And for the first 25 days of January, our cost per passenger is running slightly more than $37.

I'll end as we usually do with comments on capacity. As noted in the release, capacity growth in the first quarter of 2010 is modest. When we initially planned the first quarter, we were still a little shell-shocked from the unit revenue declines we experienced in the summer of 2009, coupled with the rise in fuel costs that began in June. As such, we were very conservative in our capacity decisions.

On a same-store basis, our capacity in the first quarter is slightly negative, the same as it was in December 2009. What growth we're showing in the first quarter is coming from markets we were not in last year during the same period.

We expect our capacity restraint, coupled with a stronger pricing environment, should result in first quarter of '10 producing the first positive year-over-year TRASM comps since the first quarter of '09 and the first positive year-over-year air RASM comp since the first time since 4Q '08.

We recently extended our schedule through September, but we are still adjusting capacity. So the current schedule, which shows very modest growth in the second and third quarters, is not final. As such, we will not provide capacity guidance until our work is more complete. However, if pricing momentum continues and fuel remains stable, we will have an upward bias towards capacity.

We also mentioned in the release some specific route planning initiatives we plan to make, including more seasonal service into Myrtle Beach, South Carolina. This performed well last year and we were excited to expand this opportunity. We also plan to announce another aircraft base that is not one of our leisure destinations, but is instead one of our larger small cities. We did this in 2008 in Bellingham, Washington and it has worked very well. Basing aircraft in a small city gives us cost-effective scheduling options to destinations where we do not yet have bases in place.

Additionally, as stated in the earnings release, we are thrilled at the response we have received in the 10 small city markets we have moved from Orlando-Sanford International Airport to Orlando International Airport. Our first flight into Orlando International is on February 1 and all our flights in these 10 markets will have shifted over by mid-March. Our bookings have been well ahead of our expectations, so we are very pleased about our decision to move some of our Orlando service to MCO.

Of course, perhaps the most important news of late was our contract for the purchase of 13 additional MD-80 aircraft from SAS, which we will introduce into the fleet starting in second quarter of '10 through 2011. This deal also includes the purchase of five additional aircraft which will support our sparing and engine programs.

We ended 2009 with 46 aircraft and we will have 48 in service by the end of the first quarter. We plan to put the first three of the 13 aircraft into service by this summer, which in combination with the planned retirement of one MD-87 aircraft early in the second quarter will have us operating 50 aircraft going into the summer peak period.

We have reiterated our guidance of at least 52 aircraft in operation by the end of 2010. But obviously we are in the fortunate position of having an inventory of very high quality MD-80 aircraft to put into service almost as we please. So again, if the revenue environment continues to improve and if fuel prices remain stable, we will again be biased to finish the year with more than 52 aircraft in service.

Thanks. And we're ready to take any questions you might have.

Question-and-Answer Session

Operator

(Operator instructions) And we'll take our first question from Bill Greene with Morgan Stanley.

Bill Greene – Morgan Stanley

Hi. Good morning. I just wanted to ask a little bit more detail on these ancillary initiatives. You highlighted them at your Investor Day and you've given us some more breakout here, which is great. As we look at how these will roll in, I assume it's safe to say not a lot of it was in the fourth quarter, if any of these initiatives you talked about in November. But how do we think about that? Is this a multi-year process or just a multi-quarter process in terms of when we can see these numbers start to show up in ancillaries?

Maury Gallagher

I'll have a couple comments and then Andrew can certainly come in. It is going to be multiyear, is the more conservative approach, Bill. This is Maury. You have to develop the automation, you have to see the products that work, don't work. So historically we've had pretty good luck with the products we rolled out over the years. But we want to make sure that we don't get the expectations too far ahead of what our capabilities are. It's going to take a while, I might add to upgrade our systems. That will probably be a minimum of a six-month process, best case to nine months to a year. And then hopefully contemporaneously we'll be doing some automation work as well, concurrently. But we just have to get all these things lined up and then start looking at different products to offer.

Andrew Levy

Yeah. Bill, this is Andrew. There is no silver bullet here. This is just blocking and tackling and just simply putting more emphasis in this area and just simply trying to do a better job of selling more of the things that we already sell. So no, I don't think you should expect any kind of material uptick in net ancillary revenue. We intend to grow it, but I don't think you're going to see a 20% increase year-over-year or anything like that between now and the end of next year. Maybe it will probably go up with capacity, hopefully a little more so than with capacity. But it's going to be slow and steady.

Bill Greene – Morgan Stanley

Do you think that going to places like LA will change the mix in a way that sort of dilutes it as we see it on a per-passenger basis, but might grow in absolute? Do you know what I'm saying? Like in other words, maybe we buy less packages to LA than we would to Vegas.

Andrew Levy

Well, I think that certainly that's part of what we've seen over the last several years as we've expanded away from Las Vegas. The revenue per passenger of these third-party products has declined and that's really because Las Vegas is where we really sell the majority of the hotels in our business and the hotels are largest contributor to this category of product, it's not the only one, by any means but it is the largest. So what we need to do is try to sell the hotel with more frequency in other locations, LAX and other locations, which we believe we can do, but at the same time introduce other products and services that people do want to purchase in these different locations, whether they be cars or tour experiences unique to the particular destination. So, it's a high degree of focus on our end and you have some visibility you haven't seen before. But we're – it's blocking and tackling. I think that's the best way to put it.

Bill Greene – Morgan Stanley

Okay. You didn't mention in your comments a new jet type. Is that off the table now or what is the update there?

Maury Gallagher

At this point in time, Bill the SAS airplane addition is going to be sufficient for our growth. What we're doing here and the MD-80 does a fine job and given the capital markets and things out there, it's just appropriate for us to keep going down the same road at this point.

Bill Greene – Morgan Stanley

All right. Thanks for the time.

Bill Greene – Morgan Stanley

Yeah.

Operator

And we'll take our next question from Mike Linenberg at Bank of America/Merrill Lynch.

Mike Linenberg – Bank of America/Merrill Lynch

Hey, good morning, guys.

Maury Gallagher

Good morning.

Mike Linenberg – Bank of America/Merrill Lynch

Two questions here. Andrew, you talked about the bookings over at Orlando International, you're pleased and things are booking up well. Can you talk about just the fare quality, maybe how it compared to over at Sanford and mix? And are you seeing any difference in purchase decisions by customers booking out of Orlando International than what you saw when those flights were out of Sanford?

Andrew Levy

Mike, I don't think we want to get into that level of detail of commentary, especially at this stage. I mean, we're – we haven't even moved our first flight over. So I think that – I don't know if we will ever want to get into that level of detail, but we certainly aren't prepared to get into that level of detail at this point in time.

Mike Linenberg – Bank of America/Merrill Lynch

Okay. And then just my second question. If we look over at the gross ancillary revenue, I mean, I appreciate the fact that you are breaking it out. You know, you kind of said, hey look, we're not looking for 20%. The game plan here is maybe to – the run rate to be maybe similar to capacity growth, maybe a little bit better. When we think about modeling this forward, I mean, I know it was down in the fourth quarter and I know a lot of times that's seasonal and it could be whether or not you are doing the hotel promotion. So if you can talk about just the fact that gross was down 4% in the fourth quarter, give us some insight on that? And then gross margins going forward, it looks very steady, mid to high 20s. Is that the gross margin that we should think about this type of business throws off going forward?

Maury Gallagher

A couple of thoughts. The margins have been pretty constant over the years at the mid-20s to possibly as high as 30% depending on how we price, Michael.

Mike Linenberg – Bank of America/Merrill Lynch

Okay, okay.

Maury Gallagher

The reason you're seeing the gross down this year is just because pricing has come in so much, particularly on the hotel side here in Las Vegas. Our average room rate that we were getting was certainly over $120 a year ago and it's – the current selling rate has certainly come in from that. So you're seeing a drop in total revenues.

Mike Linenberg – Bank of America/Merrill Lynch

Then just color on the fourth quarter and down 4%?

Maury Gallagher

Well, fourth quarter I think is going to be indicative of – for a quarter or two more probably, until we see the pricing turn up. While air fares are coming up nicely, I'm not sure we can say the same about Las Vegas hotel rates. City Center coming on, that's another – was it 7,000, 8,000 rooms that have just hit the market here in December. The city is recovering but not at the pace I think the industry – airline industry is recovering.

Mike Linenberg – Bank of America/Merrill Lynch

Okay, okay. So then just for modeling, if we think about the first half of 2010, it looks like that ancillary revenues are actually going to be down a little bit because of the hotel rates coming down. That's fair, then?

Maury Gallagher

Hard to say at this point in time.

Andrew Levy

The hotel rates aren't going to change, Mike. I don't think we expect to see any increase in hotel rate. I mean obviously, we're growing the business at the same time, so you have a few different drivers moving in different directions there. So I think that you shouldn't expect any meteoric quarter-over-quarter growth in any of areas in this third-party section.

Mike Linenberg – Bank of America/Merrill Lynch

Okay. Good. That's actually very helpful.

Andrew Levy

Relatively steady.

Mike Linenberg – Bank of America/Merrill Lynch

Okay. Good. Okay, thanks. Good quarter, guys.

Operator

We'll take our next question from Duane Pfennigwerth at Raymond James.

Duane Pfennigwerth – Raymond James

Hi. Thanks. Good morning. So positive air RASM, I'd say that's modestly surprising given your capacity growth and certainly comps that are better than the industry in the first part of the year and a longer stage length. Can you just help us understand sort of what your view is on a month by month basis? What you are seeing so far in January? And then just along those lines, can you give us any data in terms of the contribution from new markets in that RASM growth versus existing markets year to year?

Andrew Levy

Duane, we are not going to get into that level of detail. January is always a soft month and January is January. It's behaving as it normally does. Obviously, the strength in the quarter starts in the middle of February and runs through the end of March. And at this point, we feel very good about the quarter, the revenue we are seeing, the pricing that we're able to capture. So at this point, we feel pretty good about the quarter. But as far as new markets versus old markets, we're just not going to get into that area and level of detail. When you produce the kind of margins that we've produced for the last five quarters, albeit this quarter was lower because of some unusual high-cost areas, you can't – you have to have pretty good strength across the board to do it. And I think that I will just leave it at that.

Duane Pfennigwerth – Raymond James

Fair enough. And then, your stage length looks like it's up about 9% in the first quarter. So I assume that means passenger growth should trail capacity growth. How do we think about that dynamic going forward? And then I think Jim may have a follow-up. Thanks.

Andrew Levy

Well, I think that's probably likely that passenger growth will trail. The stage length is extending because we've put more capacity in places that have typically longer haul flights, which is Phoenix, Las Vegas and then of course Los Angeles, which we didn't have a year ago. So all those things contribute to a lengthening stage length. So, I'm not sure what else to really comment on that particular point. But I think that that will certainly be the case in the first quarter and probably see a little bit of the same in the second quarter, depending on how Florida performs. If Florida starts to improve again, then we will probably be more biased to put some more shorter-haul capacity in and out of Florida which might bring that stage length back down. But, anyway, I don't know if Jim has anything.

Jim Parker – Raymond James

Yeah. I do, Andrew and Maury. Just regarding maintenance, of course, you have a middle-aged to older fleet. And it would appear as it gets a little bit older each year that perhaps that naturally drives up maintenance. And this return to normal, perhaps normal is kind of a step up. So there's a couple of questions in that regard. One, are these SAS aircraft that you are going to get, are they older, younger or about the same age as your current fleet?

Andrew Levy

They're about the same age, Jim.

Jim Parker – Raymond James

Okay. Now, will you explain as well, you are getting some great deals on aircraft and engines. But we are seeing some write-downs on parts. So if you get these great deals, why we are we seeing these write-downs? And is that going to add volatility to the earnings stream as you do more of this going forward?

Andrew Levy

I would say it's the other way around. I would say that part of the reason that we are getting the deals we are getting is because the values have come down. And because the values have come down, we benefit from additions to the fleet of aircraft engines, parts, et cetera, which are cheaper now than they were ever before. But at the same time, parts that we are holding for sale, particularly on the engine side of the house, because of that same phenomenon we had to write down the value of those parts.

So I guess if MD-80 values decline another step down a year from now, then I guess we will probably have to do something similar for the parts that are held for sale. I can't imagine that it will decline more than it has. I mean these assets are already trading at scrap value and scrap value keeps going down.

So no, I think it's all in all a very positive story. The only reason we have parts for sale is because engines are so inexpensive that it makes more sense in most cases for us to buy another replacement or another engine to replace one that fails. And when we do that and make that decision, the engine that we remove we break up into parts and those parts are sold on the aftermarket. So we do have inventory of those parts and that's what we had to write down the value of due to just the fact that the market value of these assets has declined.

So don't expect this to be a continuing thing. It could happen again, I suppose it could. But I think this is more of a one-time item and we are the beneficiaries of it because we're buying a whole lot more of these assets then we have on the books for sale.

Maury Gallagher

Yeah. Jim, one other point. This is a phenomena of the last year, year and a half, with the economy. And certainly, a lot of the engines that we are talking about for adjustments were dealt with – they were purchased back in and appraised, so to speak, in their core values back in '07 and '08. And we put them on the book slip then the market value of the core value. But with the current economy and particularly with no cash out there in the marketplace, a lot of people we were bidding against for engines in particular don't have the money to buy them.

So it's a real positive, as Andrew said, to be able to buy these engines for now probably down 20%, 30%, maybe as much as 50% to what we were paying 24 months ago. So it's hard to believe they can go much lower.

Jim Parker – Raymond James

Okay. Thank you.

Operator

We'll take our next question from Helane Becker at Jesup & Lamont.

Helane Becker – Jesup & Lamont

Thank you very much, operator. Hey, everybody. I noticed in the statistics that came out last week from McCarran that your traffic through Las Vegas was down about 10% in December year-on-year. Is there something that out of the norm that accounted for that decline?

Andrew Levy

Helane, this is Andrew. No, I don't think so. We ran very high load factors, just like we did system-wide. The difference was that we constrained our capacity in the month of December. December in Las Vegas is not a particularly good month, other than right around the end of the year period. And we generally had a very conservative bias on capacity. So we really limited the amount of seats we sold in Las Vegas and system-wide. So, no, I don't think that's any new trend. In fact, Las Vegas is one of the bases where we are adding the most capacity in the first quarter. So don't expect that to be the beginning of any kind of new trend. There is still very strong demand into Las Vegas.

Maury Gallagher

Helane, just as a general statement, I think after the last couple years, I think people have come to recognize that compared to the traditional industry which puts their schedule in and leaves a D for kind of a six-day week, we don't fly half a day Saturday and Sunday, but otherwise we are flying the same schedule six days. We've gotten very, very detailed in how we schedule the company and certainly we schedule down to the day of the week and certainly to the week of the month. And more importantly, we react to economic conditions. We react to where we anticipate things are going and those types of things. So you're probably going to see from us up and down capacity within different markets as we go forward.

Helane Becker – Jesup & Lamont

Okay. No. That's okay. I just saw that number and most of the months your traffic is always up in and out of that market. I was just wondering if it meant anything and clearly it doesn't, really, by virtue of your explanation. So thank you very much. I appreciate it. That was my only question.

Maury Gallagher

Thank You.

Operator

We'll take our next question from Daniel McKenzie at Next Generation Equity Research.

Daniel McKenzie – Next Generation Equity Research

Hi. Good morning, guys. Thanks. A couple questions here. I guess the first is really just housecleaning. It looks like unit labor costs were down pretty significantly, maybe 19% or so. And I'm just wondering how we should – first of all, what drove that and then how we should think about that going forward?

Andrew Levy

Yeah. Hi, Dan. It's Andrew. Dan, it was down for a number of reasons including reduced profitability which lowers the accrual that we take for bonuses paid out once a year. As well as just less activity, which reduces the amount of labor expenses tied to flying airplanes and things of that nature. So there are certain things that drove that to be lower. We think that we continue to manage that line item really well and expect that it will continue to be fairly constant as we go forward. And one of the big drivers is just the level of profitability of the company, which drives up or down the accrual that we take for the payment of bonuses, which has been paid out to every employee the last couple years.

Daniel McKenzie – Next Generation Equity Research

Okay. Good. That's helpful. Thanks. Then my second question, I guess in light of the move to MCO, Orlando International and I guess even the presence at LAX, wondering if a code-share with another low-cost carrier makes sense at some point. And then separately, would Allegiant's IT system even support that kind of a move?

Maury Gallagher:

Well, the second one would be the biggest issue irrespective of the business decision. We're just not geared to deal with that and selling other people's inventory, loading schedules. It's not that it couldn't be done, but we have just never contemplated that, Dan, in past times. Again, most of our traffic is generated in the smaller cities southbound, plus we have that out-and-back approach to life. I'm not sure how much connecting traffic – certainly maybe beyond stuff from LA – is possible or MCO. But it doesn't seem to really spark a lot of possibilities right now, particularly given the walls you would have to climb to get the automation in place.

Daniel McKenzie – Next Generation Equity Research

Understood. Okay. Well, that will do it for me. Thanks a lot.

Operator

Our next question comes from Gary Chase, Barclays Capital.

Dave Fintzen – Barclays Capital

Hey. Good morning, guys. This is Dave Fintzen with Gary Chase. A question. I'm just trying to weed through on the 1Q TRASM guidance. Just weed through what is seasonality and what's really demand improvement. If I look at flat TRASM really would be something like a 4% improvement sequentially. It looks a lot like 2007. Does 2007 kind of set up as what we should think about in terms of seasonality? Or is there a year that kind of gives us a feel for seasonality?

Andrew Levy

Dave, that's a good question. I think '07 is the last quote unquote, normal year, 2008 being dominated by the incredible rise in fuel prices, which by the way really started in the fourth quarter of '07, so in many respects maybe even '07 isn't clean, so to speak. And then '09, obviously the story is the big recession. So I think '07 is probably as good a baseline as any. And we do believe that we can get our revenues back up to those types of levels that we saw in '07, certainly by sometime this year, assuming that we continue to see the strong trends in demand that we're seeing at the moment.

So there is – certainly, first quarter is historically our best quarter. Second quarter is just right behind it. So, first quarter should be a strong quarter. This year we are seeing – we've seen better than normal seasonality in the last several months, really since July. So in looking at it month-over-month sequentially, starting with July, we've seen better than normal seasonality differences in terms of revenue since that time. And we expect that trend to continue through the first quarter.

Dave Fintzen – Barclays Capital

And that's on a TRASM basis or a RASM basis?

Andrew Levy

That's on an air RASM basis. I mean, TRASM I think – right now, we've expected and I think we have stated this before, we think ancillary is going to remain relatively constant. There is no product that's coming out or no one thing that we believe we're going to introduce anytime in the near future that's going to make that jump up in some kind of a step function.

This year, I think the story is going to be about air RASM and about passenger – about yields. With the ability to recover some of the massive declines that we saw in 2009, beginning in 2010 and hopefully, get back to average fares that are closer to where they were in '07, which is north of $80. I'm not suggesting we are going to be there in the first quarter, but we are optimistic that we can get there sometime this year.

Dave Fintzen – Barclays Capital

Okay. Then on the capacity front, looking a little further, the SAS planes that you are getting, are those – are you getting access to those fairly quickly? Is that a situation where you're going to have a bunch of these aircraft that you may or may not fly sort of sitting, that you can dial up if you choose to?

Andrew Levy

Yes.

Dave Fintzen – Barclays Capital

Okay.

Andrew Levy

We will take possession of all of those aircraft by the early part of the third quarter and it's just kind of a steady stream of deliveries that begin later this first quarter. So yeah, we will be a long on airplanes and have the ability to dial up. Now, I don't think we can do more than 50 going into this summer. We will have more, but there is a pace at which you can move to bring these into service, both from a maintenance perspective as well as from pilot hiring and training. But certainly, it gives us flexibility to have more units in place going into the fourth quarter than the 52 that we have suggested is our minimum that we would expect at this point in time.

Dave Fintzen – Barclays Capital

Okay. And then I think, obviously, it's a very fluid environment, looking back I think the best you've done on utilization or I should say the highest you have done on utilization is like 7.4 hours or something like that. Is there – it would be a high-quality problem if we're in an environment where fuel is materially lower from here, demand is materially better. Is there a cap in terms of how much utilization you can spool up over the next few months? Or is it substantially higher than that?

Andrew Levy

Well, I think there is a cap. There's two caps. One is maybe more relevant, which would be the amount of crew resources you have. So I think that's a cap. And you can certainly add more, but it takes a good amount of time to do that. I think the other cap, though, is one of just simply – can you envision a scenario where you can profitably fly 7.4 or more hours per day? And I have a hard time personally envisioning a scenario where that would be – that would result in the optimal outcome in terms of profitability.

Because you are starting to fly more on off-peak days which will drive more revenue, but in many cases can often dilute overall profitability. So, I think there is a natural cap even if we were unconstrained by pilot resources. I don't know what it is, but I think 7 is probably on the higher end and a little less than 6 is on the lower end, as we've seen this past quarter, where we've been down at those levels.

Dave Fintzen – Barclays Capital

Okay. That's great color. Appreciate it, guys.

Andrew Levy

Thanks.

Operator

And we'll take our next question from Steve O'Hara at Sidoti & Company.

Steve O'Hara – Sidoti & Company

Hi. Good afternoon. I just had a question on the hotel arrangement mentioned in the prepared comments. I think I missed the amount. And is this centered on a specific location, specific operator? And is this a change from the merchant model you guys have used in the past?

Andrew Levy

Steve, it's $9.9 million in Las Vegas. It is with a specific operator. I am not going to name names. It is not a departure from the merchant model. It is essentially a prepayment of rooms. But it is not – I should just add more color to that I guess – it is not that we're taking inventory risk. We are simply paying in advance what we would owe after the fact, after our customers stay at a particular hotel. And in exchange for that, we receive some very favorable economics. So that's what that is.

Steve O'Hara – Sidoti & Company

Is there any stipulation on the time frame?

Andrew Levy

No. And we will have exhausted that – the inventory that it will take to sell, to take that number down to zero, we will have sold that in about half the time that we initially anticipated. So any exposure to that will be eliminated sometime in the first half of this year.

Steve O'Hara – Sidoti & Company

Okay. And then, when you're in both SFB and MCO, is that – I assume there is a decision coming in terms of the right airport to be in. It doesn't seem like a great thing to have two airports so close together. Can you comment on that at all?

Maury Gallagher

Steve, we are waiting for the data to do the commenting. We have been very pleased with the way the advanced selling is working. But we need to get a little time under our belt to see what we are going to do and how we are going to proceed.

Steve O'Hara – Sidoti & Company:

Okay. Then lastly, on the CapEx guidance you gave, you'd mentioned the IT in the press release. How much of that might be IT and how much of that is the fleet additions and so forth?

Maury Gallagher

IT is a very nominal percentage of the overall number. I think we put $80 million in there and that's – we don't spend a lot at this point in time on IT.

Steve O'Hara – Sidoti & Company

Okay. All right. Thank you very much.

Andrew Levy

Yes. Steve, the vast majority of this is the airplane deal with SAS. I mean that's obviously a lot of it. If we were to give you 2011 CapEx, it will be far, far lower because we're basically buying all these airplanes this year and many of them will not go into service until 2011. So that's why it's unusually high, I think.

Steve O'Hara – Sidoti & Company

You guys have made comments I think at the Investor Day that the source of the aircraft is getting – isn't as robust as it was. Is that still the case? I mean is there still not as many high-quality aircraft available and three new provider.

Maury Gallagher

While a lot of good MD-80s are made, there's certain points where everything gets limited.

Steve O'Hara – Sidoti & Company

Right.

Maury Gallagher

Obviously, having the premier provider, they still have more airplanes actually which we could look at. There's other sources out there, but they aren't as robust as they were four or five years ago, certainly. Okay, great. Thanks.

Operator

And we'll take our next from Bob McAdoo at Window Partners

Bob McAdoo – Avondale Partners

Hi. Just a couple of quick questions. You do make this comment about a major initiative for upgrading the IT systems. If it's not going to be CapEx, does that mean we are going to see a bubble on the expense line go through for a quarter or two while you do this upgrade? Or what kind of numbers are we talking about?

Maury Gallagher

Some of it is CapEx, Bob and some of it will be expensed. Typically, the labor to write software is expensive and that is in our budget right now. We may hire an outside consultant, so there could be a couple extra bucks coming through for that to do some of the work. But the hardware and things like that you certainly capitalize and there will be some of that.

Bob McAdoo – Avondale Partners

I mean, are we talking about a number that's going to affect the economics for a quarter or two while you put this stuff together?

Maury Gallagher

We will give you some color on that later if we think it's important. But –

Bob McAdoo – Avondale Partners

At this point, you don't think it's that big a deal?

Maury Gallagher

Not that big of a deal at this point.

Bob McAdoo – Avondale Partners

Okay. As we hear the big airlines talk about adding to bag fees, I know in times past when they jumped their bag fees you jumped yours. Is that likely to be happening here?

Andrew Levy

We are studying the issue and that's certainly a possibility. But we are not prepared to, I guess –

Bob McAdoo – Avondale Partners

You have not yet anyhow done it?

Andrew Levy

We haven't as of yet.

Bob McAdoo – Avondale Partners

Okay. As we hit February 1 and you have these first batch of flights going into MCO. What is the kind of split now? Is it 50-50, half at one airport, half at the other? Or is this just a small slice, relative, that you've moved over?

Andrew Levy

It's pretty – it's about 50-50, Bob. I think that there is still a slight majority of the operations are operated out of Orlando-Sanford, which by the way has been a terrific airport for us. And those bookings look very strong as well. So – but, yes, it's a little more than 50% of the activity has moved over or a little less that's moved over.

Bob McAdoo – Avondale Partners

A little less you said, yes, yes.

Andrew Levy

A little less has moved over, a little bit more than 50% remains at Orlando-Sanford.

Bob McAdoo – Avondale Partners

Okay. But a city is either at one airport or the other in terms of a small originating city?

Andrew Levy

That's correct. At this point, you are either going to one or the other.

Bob McAdoo – Avondale Partners

Okay. All right. That's what I've got. Thanks a lot.

Andrew Levy

Thanks, Bob.

Operator

(Operator instructions) We'll take a follow-up question from Mike Linenberg with Bank of America/Merrill Lynch.

Mike Linenberg – Bank of America/Merrill Lynch

Yes. Hey, guys. Just a quick one. Just on the bag fees, Andrew, what is the breakout now? I mean – you have what? It is tiered, right? Do you have different rates for different distances? Can you just update us on that?

Andrew Levy

Yes. I think that at this point, Mike, I believe we have two tiers right now and this is for prepaid bags on the Web. It's a different fee if you do your business at the airport at the time of travel. I believe –

Maury Gallagher

There is no distance sensitivity though on the bags.

Andrew Levy

No. There is, there is. Right now, we have short halls are at $15 and I can't tell you what that break is as far as the distance.

Mike Linenberg – Bank of America/Merrill Lynch

Okay.

Andrew Levy

But the vast majority are $20. But some of our shorter hauls, we've cut down the price because we're trying to find that optimal bag RASM point. I mean, certainly, there are some cost savings that we generate by not carrying bags. So – but, yes. So we're experimenting with a couple different ideas, but most of what we're selling right now is $20.

Mike Linenberg – Bank of America/Merrill Lynch

Okay. That's helpful. Great. Thank you.

Operator

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

Maury Gallagher

Thank you all very much. Appreciate your interest and we will talk at you in the next 90 days. Have a good day. Thank you.

Operator

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

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