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Executives

Maurice J. Gallagher - Chairman and Chief Executive Officer

Andrew C. Levy - President, Chief Operating Officer and Director

Scott D. Sheldon - Chief Financial Officer and Senior Vice President

Jude I. Bricker - Senior Vice President of Planning, Secretary and Treasurer

Analysts

Hunter K. Keay - Wolfe Research, LLC

John D. Godyn - Morgan Stanley, Research Division

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Michael Linenberg - Deutsche Bank AG, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

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

Bob McAdoo - Imperial Capital, LLC, Research Division

Glenn D. Engel - BofA Merrill Lynch, Research Division

Daniel McKenzie - The Buckingham Research Group Incorporated

Stephen O'Hara - Sidoti & Company, LLC

David E. Fintzen - Barclays Capital, Research Division

Allegiant Travel (ALGT) Q4 2013 Earnings Call January 29, 2014 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Allegiant Travel Company's Fourth Quarter and Full Year 2013 Financial Results Conference Call. We have on the call today Maury Gallagher, the company's Chief Executive Officer and Chairman; Andrew Levy, the company's President; and Scott Sheldon, the company's Chief Financial Officer. Maury Gallagher and Andrew Levy will provide us with brief commentary, then we will begin the question-and-answer session.

First, we wish to remind listeners 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 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 the 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 publicly 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 the rebroadcast of the call are available at the company's Investor Relations site, ir.allegiantair.com.

At this time, I would like to turn [ph] the call to Maury Gallagher.

Maurice J. Gallagher

Good afternoon, everyone. Thank you again for joining our call. Per our practice at this point, we've done away with our prepared remarks. So we're prepared to start with questions. So right away, operator, if you could queue up the questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Hunter Keay with Wolfe Research.

Hunter K. Keay - Wolfe Research, LLC

I was wondering if you could maybe elaborate a little on these 2 nonairline initiatives that you're talking about, when -- where and when should we start to see the revenue -- associated revenue start to flow through the income statement?

Maurice J. Gallagher

Good question, Hunter. We've had our little skunkworks going on here for a bit. At this point, I don't want to give any specifics out there. We are excited about the opportunities that they're going to present over the next year. I would say, we should start to see some interest and benefit that we can start talking about. But we just wanted to put it out there as a nonproductive asset in the sense of ASMs but, certainly, a lot of future potential, we think.

Andrew C. Levy

Yes, this is Andrew, Hunter. Let me just echo, also, that these are very small, new startup ventures. So I think that as far as benefits through the income statement, don't assume you're going to see a material impact to the overall results from it. But as Maury mentioned, we want to call that out because it is a significant portion of the increase in cost per ASM. And again, these things don't create ASMs. And so, we just want to at least highlight that.

Maurice J. Gallagher

And last comment, Hunter. We're pretty conservative. We put most of this stuff through the P&L. So we're seeing the current impact that the benefits hopefully will be accrued to the future earnings.

Hunter K. Keay - Wolfe Research, LLC

Okay, thanks for that. Sort of on that, I understand you don't want to give too much detail on that. I mean, is this something that's core to the operation? Is this something you guys have experience with before? You guys are not afraid to take chances, which is one of the things that's great, but also it can get some companies in trouble when they stray a little bit too far away from their core competencies. So I guess, I understand size the magnitude of this, but is it something that, over time, you expect -- maybe this is a multiyear thing to get, potentially, very big, and again, if you could just comment on this as something you have experience in this area before, and is it core to the airline?

Maurice J. Gallagher

Is it core to the airline? It's not involving flying more airplanes, specifically. But do we think it can succeed? Yes. Can it be meaningful? Potentially. One of the projects is not so much a revenue-oriented project as a promotional project. So stay tuned. We'll have more for you in on the coming meetings.

Hunter K. Keay - Wolfe Research, LLC

Okay, thank you, Maury. And maybe if you could provide a little more color on the TRASM guide, Andrew, or anybody. It was a little bit lighter than we were expecting. Is there any kind of commentary you can provide on maybe what's driving that. Is it yield? Is it loads? Is it a particular market? Is it Hawaii? Is it Vegas? Maybe just a little bit of color on what the moving parts are? And is it Easter? Anything that, maybe, we should know about, to sort of not run rate that into the following quarter?

Maurice J. Gallagher

Yes, Hunter, this is Andrew. I think that, without getting into details about specific markets or otherwise, first of all, let me say, we think the revenue environment is very strong, and we're looking to have a [indiscernible] going to be a big strong quarter on the revenue side. Probably the biggest impact maybe relative to your expectations, I don't know, is the Easter shift. The peak season is, obviously, real important for us for leisure travel. And the fact that, last year, Easter was in March makes this year's March a little tougher comp versus last year's March. And conversely, this year's April should be a much easier comp. So I think that, again, not knowing what your assumptions were, that's just a general statement about how the revenue is going to flow over the next few months just simply due to changes in the calendar.

Operator

Your next question comes from the line of John Godyn from Morgan Stanley.

John D. Godyn - Morgan Stanley, Research Division

I just wanted to clarify the -- in the release with these -- with the startup expenses, they're flagged for the first quarter, but they're not quantified for the full year. Do they stop after the first quarter? They're not -- they don't affect the forward quarters? Just a little clarification, please.

Andrew C. Levy

John, they -- no, they don't stop after the first quarter, but the effect in the first quarter is more significant than, let's say, on a full year basis. And when we look at the factors that are driving the increase in CASM ex, we want to highlight the larger factors in the order of importance. And so that's why we want to put that out there. But yes, it's going to have an effect throughout the year. But it's a -- we think -- I think, at this point, you can say it's biggest in the first quarter.

John D. Godyn - Morgan Stanley, Research Division

Okay, that's helpful. And you did quantify sort of the impact of the delays, the A320 delays and the nonairline activities. And then the impact on the inflation in the first quarter. But again, sort of similar question, I mean, when I look at the full year CASM ex-fuel guidance, even trying to exclude the bump in the first quarter, it does strike me as a bit high. I'm not sure if there's -- if there are other impacts, other kind of one-timers that we should be thinking about that linger throughout the year as we're trying to adjust your cost guidance for what might be like a normalized level or a level that's more reflective of the run rate for 2015 as we continue to model forward.

Andrew C. Levy

Well, that's why we try to provide that information to kind of be able to separate kind of recurring core economics versus other stuff. I think that we called it out in the release. Maintenance getting back to a more normalized rate is the biggest impact year-over-year, on a per ASM basis. And then, we talked about a couple of other things, and this is really -- we really put it down there in order of effect. On a full year basis, the issues with the delays in the A320s, the effect of that is less than the items that we called out. So it's just a combination of things.

John D. Godyn - Morgan Stanley, Research Division

Okay. Okay. We'll take a look at that. On the TRASM trend, I appreciate that there's this date shift. And certainly, with your passenger base, the holidays play a very big role. Bigger picture though, as we look towards the end of the year, should we get back to this trend that we've seen in the past except for the last few quarters, where TRASM growth tends to outperform PRASM growth. Is that the right way to be modeling the world towards the end of the year?

Andrew C. Levy

I'm not sure. I'm not sure, John, historically, TRASM has accelerated when we've introduced new ancillary products and -- like, for instance, the charge for carry-on bags, which were implemented, I guess, it was last year, right? So -- and we're not going to discuss any potential new products at this point. So on a current run rate, I think that there's probably more leverage on the passenger RASM number than on the TRASM number. And at some point, that may change. But for now, I think that you'll probably see -- I think you'll probably see PRASM growing at a slightly faster rate than T or Total RASM.

John D. Godyn - Morgan Stanley, Research Division

Okay, great. And if I could just ask one last one on capital returns. And I know that is something that's sort of ever-present on your minds, and you certainly have accelerated capital returns to shareholders over time. I'm just curious, as we look forward, is there a world or is there a chance where, perhaps, we get maybe a payout ratio or a more regular sort of program for capital returns that we can anchor to as we model the company going forward?

Maurice J. Gallagher

John, that's a reasonable question. At this point, we're not committing to anything. We've had a buyback program going on for, what, 3 years now?

Andrew C. Levy

[indiscernible]

Maurice J. Gallagher

We've produced a lot of return there, and we'll continue with that. Regarding the dividend program, we like the, candidly, the flexibility that comes with what we've been doing historically. And the future portends that we should be able to continue to do more of that, theoretically. But we don't want to commit to anything on a regular basis, if you will.

Operator

Your next question comes from the line of Savi Syth from Raymond James.

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Just curious on the cost side. One, I thought 2013 was more of a normalized maintenance? And if you could remind me, maybe, what the 2013 levels were? And secondly, now that you've had the A319 in service for some time and maybe early indications with the A320, I was wondering how the cost of trending versus the slide that you provided, initially, when you were rolling out the A320 strategy?

Andrew C. Levy

Savi, this is Andrew. I think the maintenance expense -- if you look over the last few years, we always guide to it on a per aircraft, per month basis. And 2013 was particularly low and a little bit outside of the kind of longer term trend. This year, we expect to be back in the $100,000 to $110,000 per aircraft per month range, which is a little more similar to what we've seen if you look back, say, 4, 5, 6 years. So I would say that last year was a little lower. This year is going to be higher than last year, and primarily, this year, we just have a lot more maintenance events scheduled. It's just the way the C checks roll. And since we still have a smaller fleet relative to, say, many other carriers, you're going to see continued volatility and lumpiness in maintenance and as you get more and more aircraft, and that kind of tends to show less volatility. But that's on the maintenance line. Forgive me, what was the second part of the question?

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Just on with that you're now having the A319s in service for a while...

Andrew C. Levy

Oh, yes, the A319s. Yes, they're coming in exactly as we thought. If anything, the fuel burn is coming in lower than what we had forecast on presentations we've made. So now, we're really -- we're very, very pleased with the performance of those airplanes, both in terms of reliability, as well as the economics that [indiscernible] substantially more efficient aircraft, from a fuel perspective.

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Andrew, just -- I guess, when does that -- when does those cost efficiencies really help offset some of these other cost increases? I guess, I would've thought more of a benefit in 2014. But is it a ramp-up issue and then it helps more in 2015?

Maurice J. Gallagher

Well, I mean, I think that we have provided total CASM year-over-year guidance partly for that reason to make sure people understand that CASM ex is, obviously, really important. It's a lot of controllable expenses, and we've put a lot of focus on it. But the benefits of having these airplanes are going to start to, we believe fuel prices being equivalent, is going to lower overall cost per ASM as we enjoy the benefits of that. So that's why there's a pretty nice spread between our forecasted total CASM for the year versus our forecasted CASM ex-fuel for the year. And that's in the guidance. That's something new. We've never provided that before. We're also giving you the fuel price assumption that we're using to come up with that number.

Operator

Your next question comes from the line of Michael Linenberg from Deutsche Bank.

Michael Linenberg - Deutsche Bank AG, Research Division

Just 2 questions here. Andrew, just looking back at the full year number for CASM ex-fuel versus CASM, and thanks, I appreciate you providing the full year and both pieces of information. When you look at that performance, whether it's ex fuel or even if it's all in, and you look at the fact that you're up -- your capacity is going to be up 9% to 13%. I realize that as you have gone through on some of the prior questions, there's obviously some issues in the March quarter. That's -- which are obviously inflating that, but it still seems that with that type of capacity growth, you would have better performance on your CASM on an annual basis. And so, are you being conservative here as we move through the year? Is that how we should think about it? Or is it just that it's going to take some time as you induct these new airplanes, as you train the pilots, you're probably dealing with FAR 117. That's probably having some impact. Like what's going on in keeping that not getting into a negative CASM for the year?

Andrew C. Levy

Well, I think there's a few things. We did talk about the maintenance. That's the single biggest increase on an equalized basis of CASM ex. We'll see more depreciation expense from both IT and aircraft. We -- the rest, I know we talked about the nonairline-producing subsidiaries that don't generate ASMs, and then, as you confirmed, again, the bump in the first quarter. And so all of those things are in effect [ph]. A lot of the other things, Mike, is just continued investment in the business. Having -- adding more IT resources to speed up development of critical systems, more infrastructure and management in certain key areas in the operational part of the business. And it's not any one thing. It's just a variety of small things, and it's part of us just making sure we have the foundation appropriate for the business today and also for the business that it will become with growth as time goes on.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay, now that's a...

Maurice J. Gallagher

Mike, it's Maury. Probably, in the big picture, we've been doing this for, like, the last 3 years with different airplane types. The IT is certainly a big investment for us, a good-sized investment for us. And hopefully, we'll kind of peak, if you will, with a lot of this transition during 2014, and we don't have any more events coming, such as adding 757s and having to become an ETOP-certified carrier and putting on the Airbus and things of that nature. We'll be disclosing our existing activities, and I sense that we have to make investments in the business in our systems and operationally and just to get ready to go to the next level. So those -- costs money.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay, now that makes sense. It seems like that this is a peakish year. And as you guys said earlier, you run it through your P&L, I mean I guess, some of these things you could capitalize, and we could have numbers that look better. But the fact is you take it up front, and so it should -- 2015 is probably a year where you get the benefit of a tailwind as it relates to these types of investments.

Maurice J. Gallagher

I think that's a fair summary. I wouldn't disagree with that. I think the other thing, too, is we've got a focus on cash flow as much as we do EPS now. And so you're seeing some good cash flow coming out of the organization. We've been very conservative with our depreciation. That's up noticeably. But I kind of add back and look at some of the other items without the depreciation, those are not that bad of numbers.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay, good. And then, just my second question on just the ancillaries. Some of those were down. I mean, the hotels, noticeably. But then in the release, you talk about removing an air discount. Is that what's maybe impacting those numbers?

Andrew C. Levy

Yes, Mike, we think that's the biggest impact is reducing the air subsidy has led to fewer hotel sales. But we are convinced that it's also generated higher levels of profitability. So it benefits the passenger RASM, I guess, number over what it would have been had we continued to do air discounts, and we get a little less revenue from the sale of hotels. But on a net-net basis, we think it's a very positive thing, and that's why we mentioned it. It's actually, if you exclude the air discount, that's an internal number that we have and have used. But it's -- we saw a 25% increase in net revenue associated with hotels. So, yes, obviously, that laps itself. And so, as we move forward, it will become more of an apples-and-apples comparison going forward, and we certainly want to continue to drive, over time, hotel growth. And we have a couple IT initiatives that have rolled out just recently that we think will be helpful in terms of being able to sell both one-way hotel packages, which we couldn't do in the past, and also being able to sell a land-only product on a go-forward basis. So we're hopeful that those things as well as some additional tools we expect to roll out in the first couple of quarters of this year are going to enable us to reverse the trend in volume and continue to, over time, drive that number much higher.

Michael Linenberg - Deutsche Bank AG, Research Division

So we should just -- Andrew, we should expect just to see a negative or a number that's facing up against a difficult comp, what had started in the March quarter of 2013, and so once we get to 2014, we will -- it will be behind us?

Andrew C. Levy

Yes, I think we may see a little bit of a lingering in the March '14 quarter, this quarter, just because some of the sales were made before we eliminated those discounts. But as we go through the year, our hope is that we'll start to see increases in both hotel net revenue as well as hotel volume.

Operator

Our next question comes from the line of Duane Pfennigwerth with Evercore.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Just in terms of your fleet, I wonder if you could help us quantify -- obviously, there's fleet that you're trying to bring on and some transition expense related to that. But for fleet that you already have, maybe idle aircraft or aircraft that you're not utilizing maybe as much as you could, how much is that holding back your cost structure? And have you contemplated any type of fleet restructuring?

Andrew C. Levy

Well, to give you an idea, Duane, in the first quarter, I don't have numbers for full year, but we've had to reduce our flying from what we had anticipated doing. And that, in and of itself, represented almost a $0.002 on an ASM basis. So it has a material effect in the first quarter. But that's a temporary issue. So we like our fleet. We're adding a couple MD-80s. And as we get past our training issues here, with, particularly, the A320s and we are able to more productively use our flight crews, we'll be able to ramp up utilization to where we'd expect it to be. So now, we think we have the right size fleet for what we're doing, and we have more aircraft coming at the very end of this year and then throughout 2015.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay, that's helpful. And then, just on new ancillary initiatives. Can you just give us an update on credit card, branded credit card and travel club? And your thoughts on sort of which are the more kind of material in the near term?

Andrew C. Levy

Well, I think we're actively working on the credit card and the loyalty program that does -- going to kind of fit underneath it. And we expect to be able to start offering that to customers sometime in the first half of this year. I don't want to try to predict anything more precise than that at this point in time, but we're actively working on it and looking forward to being able to do that. Travel club is something we keep knocking around, and so at this point, I don't want to forecast anything there as far as what we think that's worth to us or when we may, or if we may, put out a product that is a travel club-type product. But we -- a lot of this is just dependent on IT. And you got to just queue it up, and one thing rolls out after the other, and you just can't do everything that you'd like to do at the same time. So we're optimistic that we're going to continue to get more of these capabilities, and it is going to enable us to drive additional revenues.

Operator

Your next question comes from the line of Helane Becker with Cowen.

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

I just have actually one question, and that's on the jet fuel line. I'm kind of surprised, given the forward curve, that it's as high as it is. So maybe you could explain to me why that's the case?

Maurice J. Gallagher

Well, I'm going to let Andrew talk, but first, Helane, you're talking to the most surprised guy in the world that jet fuel, or oil, is still at the price that it's at. So we've been forecasting downward trends given -- at least I have, I shouldn't say we, in the actual price of oil for years given the supply changes and everything else. But it doesn't seem to manifest itself. So there's not much kind of reason to kind of stick your neck out on fuel. Until we get the benefit, it's a tough side. Andrew?

Andrew C. Levy

Yes, No, I mean, Helane, we do this very formulaic based on building up crude plus crack and then our differential, which reflects taxes and in-the-plane fees. The nature of many of the cities we serve is that these cities, typically, they don't have as infrastructure as larger cities, and therefore, typically, the cost of fuel in these cities is typically higher than what you would find in large metropolitan areas with very large airports and lots of infrastructure. So anyway, that's just our assumption. Obviously, we hope it's lower, but we just want to explain to you what numbers we're using to come up with our expectations on CASM. And obviously, we hope that it drops from what we showed here.

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

Okay. And then, of course, I would be remiss if I didn't ask the labor question, right? How are things going with the negotiations with those flight attendants and with your pilots? Anything new to report? Maybe just say that.

Maurice J. Gallagher

Nothing of substance. The flight attendants were in mediation under supervision with the NMB, and that's -- no change in that. And we're working with our pilot group and the IBT -- going forward with preliminary negotiations.

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

Okay. And then, I just -- can I just have one point of clarification? Sorry, I didn't intend to ask a third question. But as I think about what you said about the first quarter, will I get a bump in TRASM [ph] in the second quarter because of the shift in Easter and so on?

Andrew C. Levy

I mean, I think the answer is probably, yes. We're certainly not ready to forecast second quarter. But yes, look, April -- March this year is a tougher comp versus last year, and April this year is going to be an easier comp versus last year. So, yes. The Easter shift, definitely, is -- and by the way, we also think overall, it's helpful that we think of having a longer kind of peak vacation period. This typically generates more profit. It's just spread out over more time. So the calendar is setting up well for us if you take into account Easter in April this year.

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

Okay. And then, I think, I saw somewhere Jude quoted as saying that you guys are going to grow capacity like 20% or so this year. Did you have any new markets that you were going to announce? I mean, not that I wanted you to announce them today. But did you have any new markets? Or is that just the full year effect of the A321s and the larger aircraft?

Andrew C. Levy

Yes, I don't know. I think Jude's trying to figure out where that number might have come from. He's disavowing that release. Our forecast for capacity for the first quarter and the full year is lower than what we had thought due to the issues we've already addressed in the earnings release. But it was never going to be in the 20% range. It was always going to be much lower than that.

Operator

Your next question comes from the line of Bob McAdoo with Imperial Capital.

Bob McAdoo - Imperial Capital, LLC, Research Division

As I look at the cities that you're hooking into Florida this year. There's some different kinds of things going on, and I'm wondering what kind of reaction you're getting in terms of it's not all Fort Wayne or Des Moines. There's, like, Cincinnati and Syracuse and some kind of mainline type cities. And I'm curious as to, are you finding that that's easier, meaningfully different, easier in terms of getting customers to respond? Is it as good as you would hope? And also, are you getting any kind of reaction from the competitors in terms of them responding at all or looking the other way and wishing you'd go away. How is that -- how should we think about that because, obviously, if those are working, they look like they're going to work, that obviously creates -- there's a lot of those kind of cities where -- that don't have good service to everywhere in Florida, like -- as you obviously have found out here. I'm just curious what kind of color you can give on that.

Andrew C. Levy

Well, Bob, I don't think I have ever heard Syracuse described as a mainline city.

Bob McAdoo - Imperial Capital, LLC, Research Division

There was a little airline based in Newark that used to fly from places like Syracuse nonstop to Florida, and -- absolutely full of people.

Andrew C. Levy

They had a great CFO. To get to your question, we continue to see opportunities out there. Cincinnati, we start up this quarter. Syracuse started last year. We're really good [ph] with all of the new cities we've entered into, not without exception. There's a couple of laggards. But in general, we're really pleased with it, and we think that there's continued opportunities to expand our footprint. And in general, we're going after a different customer than most others out there with maybe the one exception being Spirit, who tends to generate the same kind of customer base that we do, as far as just -- with low fares, stimulating demand and allowing people to travel. But otherwise, we'd be priced out of market. So I think most people -- I don't know if they wish we'd go away. As much as they nod [ph] and acknowledge that we're just simply carrying a different set of customers. So but yes, look, we believe for a long time, and we continue to believe, that there's enormous growth opportunities for us, and we're going continue to pursue it.

Maurice J. Gallagher

We should feel good about these things and think about that as another whole -- it seems like there's another whole level of customer, and -- not customer, another whole group of cities that, for the last 10 years or how many years it's been, that we all talked about that, that we have this little batch of cities and it just reflects -- like -- it's another cog to add into the pile.

Andrew C. Levy

Yes, we feel good about it despite the fact that there's been a lot of questions about our costs. I mean, we still have an enormous cost advantage over the industry, and we're going to maintain that. And so pricing is continuing to go up across the industry driven in part by consolidation. And we continue to take advantage of that in pricing significantly below the market and stimulating demand for travel to these places. And again, enabling customers, who would, otherwise, be priced out of the market, to go to places they want to go on their vacation travels.

Bob McAdoo - Imperial Capital, LLC, Research Division

Let me change the subject a little bit. Can you talk to us about the difference in economics between the A319 and the A320, the way you guys fly them? How many seats do you have in each one? And pluses and minuses of one versus the other, or is it just simply which are available when it comes the time to think about...

Andrew C. Levy

There's, yes, 156 seats in the 19 and 177 in the 20. The 20 burns a little bit more gas. On a per ASM basis, it's a more effective airplane. We do like the 19s though because a lot of our smaller markets -- it's just a better-sized aircraft in terms of seats. So when you look at trips in unit costs, obviously, the trip cost of a 19 is a little bit less. The seat cost of a 20 is a little better because of the seats and the small incremental costs on the maintenance and fuel line. But we like having a combination of the 2, and we expect to, over time, hopefully, add to both of those fleets of 19s and 20s as we continue to grow the business.

Bob McAdoo - Imperial Capital, LLC, Research Division

And just this one final thing, I don't know if anybody else got one, but almost exactly 2 hours ago, I got an email from some guy with the Teamsters, national office, offering me that he would come by and talk to me about operating and safety concerns at this place called Allegiant Air. Have you seen that, you've seen that letter?

Andrew C. Levy

We just saw that moments before the call, so read it quickly but don't -- I don't think at this point we're ready to comment.

Bob McAdoo - Imperial Capital, LLC, Research Division

I'm not asking you to comment. I just want to be sure that you'd seen it. That's all. It doesn't deserve a comment, does it?

Andrew C. Levy

No, not at this time. May be ever, yes. Tell us what they tell you, okay?

Bob McAdoo - Imperial Capital, LLC, Research Division

Hell, yes.

Operator

Your next question comes from the line of Glenn Engel from Bank of America.

Glenn D. Engel - BofA Merrill Lynch, Research Division

Couple of questions, rent shot up in the fourth quarter. What was that and is there more aircraft coming under rentals in 2014?

Andrew C. Levy

Glenn, this is Andrew. We tried to call that out. There's 2 aircraft under lease that contributed part of the expense in the fourth quarter, and that expense will be there for the next several years. But the bulk of the dollars in the fourth quarter was associated with sub-service arrangements we made to be able to fly our schedule as we have told to our customer base, in light of the fact that we were unable to buy as many airplanes effectively as we had anticipated. So the majority of that $5.5 million is expenses that are not -- that, I guess, are temporary in nature and don't expect to see that, certainly, next fourth quarter.

Glenn D. Engel - BofA Merrill Lynch, Research Division

When do those start to subside, and are there any aircraft coming up that are going to be included in rentals in 2014?

Andrew C. Levy

There's a third leased aircraft that shows up at the very end of this year, so mid-to-late fourth quarter. And the sub-service expenses, we expect to subside dramatically as we go into the second quarter. Hopefully...

Glenn D. Engel - BofA Merrill Lynch, Research Division

So the first quarter's still hit by them?

Andrew C. Levy

Yes. Yes.

Glenn D. Engel - BofA Merrill Lynch, Research Division

Is maintenance cost going to be more level through the year? Or is it going to remain very choppy by quarter?

Scott D. Sheldon

Glenn, this is Scott. No, the first quarter is the high watermark, and then, it goes down sequentially through the end of the year. So it's just firming it up.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And on the 757 fleet, any new ways you figured out to use those aircraft?

Andrew C. Levy

Well, I don't know about new ways. We did add a route in the fourth quarter. I believe it's started fourth quarter from Los Angeles to Honolulu, and that's off to a good start. So we're optimistic about that. We're continuing to look at what seasonal flying opportunities there are in Hawaii, specifically, since most of the markets we have served have proven to be very good but only during certain periods of time, and we continue to give any excess 75 capacity in the domestic mainland operation flying to a few different markets that have previously been flown with MD-80s.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And any reason why your tax rate should be any different in 2014 versus '13?

Scott D. Sheldon

No. 37% is a decent number or slightly above that.

Operator

[Operator Instructions] And your next question comes from the line of Dan McKenzie from Buckingham Research.

Daniel McKenzie - The Buckingham Research Group Incorporated

Just a couple of questions here. On the maintenance expense of $100,000, $110,000 per aircraft, I guess I'm just trying to reconcile that as a normalized basis because is in 2014, 25% of your fleet is going to be the newer Airbus. So it would seem to imply that the maintenance expense on the MD-80s would really spike up. And I'm just wondering if that's really the case or if there's perhaps some conservatism embedded in your -- in this, this maintenance number here.

Andrew C. Levy

Scott's pulling some sheets here, but I'll just comment on the MD-80. I mean, the vast majority of the expense on the MD-80 side, this year, is simply driven by just the way the C check calendar runs, and we just happen to have a lot more this year than we did last year. It's not anything about the day-to-day or long-term maintenance of the aircraft. We've seen that remain very steady, quite honestly, over time. So we see [indiscernible] have a lot of the maintenance events. And then, also, when we have more than average engine overhaul events for the JT8s. The Airbus fleet, you're right, because 7 A320s are new to the fleet. Those won't go into check for a while, but the check costs on those aircraft are very similar to the MD-80. There's really no appreciable difference; 75 is a little bit more, but, yes, we're not seeing any trends on the MD-80 maintenance side that, to us, make us concerned in any way at all. It's just -- maintenance is volatile and lumpy. It always has been, and until the fleet gets larger, over time, it'll continue to show volatility. Less volatility now than 4, 5 years ago when we had a smaller fleet. But we still see that volatility when we have a substantially higher number of maintenance events during the year, which is what we're going to see this year as opposed to last year.

Daniel McKenzie - The Buckingham Research Group Incorporated

Understood. Okay. And if I could just call out one of the comments in the press release, the second year that you guys have been able to grow margins. And looking ahead, we have the opportunity to continue to -- for margin improvement going forward. I'm wondering if you can just, I guess, just for clarification, it looks like we may have some margin contraction in the first quarter. Are you in fact suggesting that you could expand margins for a third year in a row on a full year basis and despite sort of some margin contraction that we may be seeing here in the first quarter. And if so, what are those opportunities that's going to drive that expansion? Is it some revenues that start to phase in relative to the project that you're working on? Is it the Airbus aircraft, of course? I'm just wondering if you could just help clarify what you really mean by that comment.

Andrew C. Levy

Well, I think we expect to see -- when we forecast our revenue, we're not adding in incremental revenue from new things. So that's all upside relative to our internal forecasts. But I think the biggest impact is just flying -- having 10 airplanes that will be operating for basically 12 months of 2014 that are substantially more fuel-efficient than the MD-80 fleet. And the benefits of that are very material. The ownership costs of those aircraft are not appreciably higher than the MD-80 in terms of -- and most of that's on the D&A line. And so the net-net is, you have aircraft that are only slightly more expensive on our ownership cost because we're looking [ph] at substantially lower fuel expense, and that's really why we're optimistic that we'll be able to see margin expansion, all things being equal, in terms of fuel cost per gallon. And that's probably the primary assumption there.

Daniel McKenzie - The Buckingham Research Group Incorporated

Okay, so if I hear you correctly, it does sound like despite margin contraction in the first quarter, you feel like that things could set up where you could actually realize some margin growth on a full-year basis in '14?

Andrew C. Levy

We don't want to -- we're not going to commit to that, but we think that that's how the numbers work.

Daniel McKenzie - The Buckingham Research Group Incorporated

Okay, that's very helpful. Just if I could ask just one more question here. In terms -- I guess, I'm just trying to reconcile strong demand with a outlook for PRASM to perhaps decline up to 2% in the first quarter. I'm just trying to reconcile that. And perhaps reconciling it with ASMs in new markets versus ASMs in existing markets if you can just help provide a little bit more color around that.

Andrew C. Levy

Yes, well, I think -- look, the first quarter, the calendar shift helped January because the holiday period was a little more extended into the first week of January. February, it was largely unchanged year-over-year, and then March this year is going to be excellent, like March always is. But it's just not going to be quite as strong as March of last year due to the Easter shift, and we'll benefit from that in April of this year. We see a good demand environment out there, and the ability to fill airplanes at good prices, and we also obviously try to be very conservative in the guidance we give you. So we'll see how the quarter goes. Obviously, we have a very, very good picture of January, since it's almost done. And we have a very good picture of February, and March is a little too early to know with certainty, but we feel really good about the revenue environment.

Daniel McKenzie - The Buckingham Research Group Incorporated

Okay, and then just ASMs in new markets versus existing markets as we look ahead?

Andrew C. Levy

We don't have numbers to share with you as we sit here right now, but I mean, we're certainly have added a lot of new routes, and those would be existing cities to new destinations as well as new cities. Yes, so the market's under development or routes under development typically lack services. But in general, the network is really good. We are seeing continued -- very strong environment in Florida and a little less strong in the Western U.S. Vegas is very good but it's just on a relative basis. Florida is continuing to show greater strength, and we continue to put more of our chips on Florida. So we're continuing to grow much faster there than in the Western U.S. In fact, I think, by about midway this year, about half of our ASMs will be going in and out of the Florida bases that we have, and that's up quite a bit from 2, 3 years ago when the network was more biased to Las Vegas and Phoenix. So we like what we see. We're pleased with where we see the year coming in. As -- based on where we sit right now. We'll get past the disruption that's going to impact our first quarter. And as we look out to the full year, we think we're set up to have a really strong year.

Operator

Your next question comes from the line of Steve O'Hara from Sidoti Company.

Stephen O'Hara - Sidoti & Company, LLC

I'm just curious. I mean, in terms of the Los Angeles route to Honolulu, I mean, is that -- do you see that helping the seasonal balance of the Hawaii flying at all? Are there other markets where you could kind of offset some of that seasonality by making them more seasonal. I think you guys have a done a little bit of that maybe with the -- some of the ski markets, I think. Could you talk about that a little bit?

Andrew C. Levy

Well, we've talked about that in the past, about our desire to find more markets that are -- that have more year-round strength and less seasonality. Las Vegas has been one of those markets and that was the reason for going to [ph] the L.A. market, and so far, we're pleased with the results. Although it's fairly new to the system. We only started flying at the very end of October. So I think it's a little too early to really form a complete opinion about whether that will be another route that -- is it a good, year-round route that can help anchor the Hawaii market, which had been supplemented with many of the other routes that are seasonal, and some of them are highly profitable markets in the summer and others are highly profitable during the winter. And we're obviously trying to drive more utilization on the 75s, as long as it's profitable utilization. And Hawaii remains a work in progress. We do a little bit in the ski markets, but very little, and our flights into Colorado are essentially subsidized. I shouldn't say subsidized. It's essentially guaranteed to certain levels of [indiscernible] from development groups in that market. So that's -- I don't know if we'd fly out if it was at risk, quite honestly. But always looking for things to do that are offpeak. We still haven't found anything good to do in September, so not sure we'll ever figure that one out. But we're going to continue to try to find things to do during offpeak periods that are incremental to profits. But if they're not, then we're going to continue to do what we've done where We have a very inexpensive fleet. We have very, very low fixed costs. The vast majority of our expenses are variable, and so we've always been and will continue to be very selective about when we fly to ensure that when we do fly we'll get earnings on returns and not just burning cash in the name of trying to increase aircraft utilization, which is something we just never believed in doing.

Stephen O'Hara - Sidoti & Company, LLC

Okay. And then, second. I think you guys have kind of ramped up the IT spending the last several years. And I'm wondering how much of that -- I don't if you'd quantify that, first, and then how much of that is maybe defensive, where you're kind of maintaining systems, updating older systems? And how much of that is offensive in terms of you expect it to generate revenue or improve revenues down the road? And what kind of returns you look on those investments?

Maurice J. Gallagher

Steve, it's Maury. Good question. There's certainly some improvements to systems. We've used an in-house system for many years in a lot of our areas like maintenance and crew scheduling and things of that nature. We adopted a new system here at the turn of the year with the trading FARs to 117, and so we brought in a third-party system for the first time, and it helped us with crew scheduling and, obviously, managing the compliance requirements. We're investing in some maintenance efforts to make sure our maintenance program is the latest and greatest. We think that'll be an excellent investment to grow a return. We haven't found anything third party that would suffice or be better than what we can develop internally, and we've always put a premium on being able to do our own automation. I know, personally, that's kind of a big effort through my years in this industry. And when you have that capability and the talent to do it, it, I think, produces a much better product that you control, and you like the outcome better, historically. That's been my experience. There's offensive efforts going on as well. We've spent a lot of money, as we told you, over the last 18 to 24 months upgrading our internal systems. We hope we will start to see that really roll out nicely in 2014. And some of that is plumbing underneath the deck, if you will, where we've had to go and work on our database structures and a lot of technical issues that needed attention. So those are substantial investments, and we hope to start seeing an outcome forward here, like I said, this year. As far as returns, we do think that those will be excellent and, again, doing this yourself is a bit of an effort, and you have to school up for it. My moniker, frankly, is we're an IT shop that happens to fly airplanes versus the other way around, and if you, again, develop that expertise, you can see some tremendous benefits from it. But we're starting to come out of that development phase. Hopefully, I could end this year, and the benefits will be substantial.

Stephen O'Hara - Sidoti & Company, LLC

Okay. And then just one last one. In terms of the question on the revenue line if you go to a fixed fee revenue, I mean -- it was up kind of sequentially. Looks like it's going to be down again sequentially in the first quarter. Is that just the Easter shift again? Or is that kind of anything else?

Andrew C. Levy

Well, our fixed fee, the big change was the -- when we stopped flying for Harrah's, which was our largest contributor to that line item, and that contract ended, I guess, at the end of 2012. We continue to have a track charter program out of Northern Nevada that is ongoing, and the amount of fixed fee opportunity in the first quarter, typically, is augmented by opportunities to fly for the NCAA basketball tournament. That's typically something that's very accretive flying. This year, we expect to do very, very little of that due to the fact that we are constrained as it relates to pilot resources due to delays in training. And so, that may explain maybe why it's a little lower than what you had forecast or what you had expected to see there.

Operator

And our next question comes from the line of David Fintzen from Barclays.

David E. Fintzen - Barclays Capital, Research Division

Just quickly, curious what you're seeing on the used aircraft market and how you're thinking about -- obviously, you got the '14 and '15 319 and 320 deliveries. But is that sort of aircraft deliveries you would like or would you be sort of opportunistically out there over the next sort of 12 to 18 months?

Andrew C. Levy

I'm going to let Jude comment a little bit, Dave. I'll tell you that, I think, that as far as '14 and '15 is concerned, I think, we're very pleased with what we've got coming. We'll always be opportunistic, but we're not really focusing on '14 and '15. Jude and his team are really focused on '16 and beyond. And I don't know if you want to add anything, Jude?

Jude I. Bricker

Nothing more to add. I think we still see some opportunities out there, and hopefully, we can take advantage of them. But like Andy said, we don't need fleet growth. We don't need free growth '14, '15, beyond what we've already committed to.

Andrew C. Levy

So we continue to just be very patient and very opportunistic, and just confident that we will grow the fleet beyond what we're showing you through the end of '15 but nothing to announce at this time.

David E. Fintzen - Barclays Capital, Research Division

[indiscernible] When you figure out sort of the timeframe for getting these deals done. They say, hey, they need you working on sort of '16 and beyond. Is that something where it's sort of early stages? I mean, these things pop up fairly close in, by fleet standards? Or is this something where you have pretty good visibility as you roll through '16, '17 before all that [indiscernible]. I'm just trying to figure out sort of pipeline, longer term in terms of fleet growth.

Andrew C. Levy

David, I think it just depends. When you play in the spot market, there's limited predictability unless you want to commit to economics that you don't like. As a result, you just have to be really patient and be able to move very quickly on transactions. We have the balance sheet to do that. And that's why it's important that we maintain a strong balance sheet with a lot of cash so we can take advantage of opportunities, and I think we are known throughout the market as people that are serious and can close very quickly with cash. And that's really helpful. But it's really hard to forecast. But we're always in the market. We're always active. We have a team of people that do this, and we're confident that we will add to the fleet above and beyond the numbers we're showing you here, assuming we are convinced that we'll continue to generate high levels of returns, which, at this point, we see us being able to do that for the foreseeable future. And that would mean years and years into the future.

David E. Fintzen - Barclays Capital, Research Division

Okay. That's helpful. I appreciate that. And then one more quick one. In terms of in-the-plane costs on the fuel line sort of 4Q over 1Q, is that -- is there anything sequential in that that's unusual? Or is sort of going through and reconciling? There's nothing seasonal in that, in-the-plane, is there?

Andrew C. Levy

No, no. There's really nothing seasonal in the in-the-plane or the taxes associated with fuel. I mean, some of them are fixed tax amounts, and some of them are tied to the underlying costs of the fuel itself. But yes, there's nothing sequentially that would change 1Q versus 4Q, or any other quarter, quite honestly. At least, when you're talking about the differential, which is what we refer to as transportation taxes and in-the-plane expenses.

Operator

And our next question comes from the line of Hunter Keay with Wolfe Research.

Hunter K. Keay - Wolfe Research, LLC

Just a little bit on cash [indiscernible]. I'm not going to lock you in to anything. You say you don't want to do that. I respect that. You guys are paying the dividend on January. That's going to be about maybe 25%, 30% of your free cash flow for the year. How do you think about maybe -- buybacks flows in the fourth quarter after a peak period in the third quarter. Can you talk to me about what drives the decision to buy back stock. Is it the price? Is it, I mean, is it just something else? I mean, and actually, when you think about your appetite for 2014, in terms of buybacks, and can you also remind me where you are in terms of what you have left in the authorization?

Maurice J. Gallagher

Yes, I'll give you some overview. Scott, can you give him some of what we did. We've created a company here that's going to produce great returns, return on investment. All those numbers that you see are so nice, if you will, relative, particularly, to the rest of the world. We want to push cash back to the shareholders, and we want to balance that, Hunter, with being opportunistic with, as Andrew just mentioned, being able to grow the company. So there's that balance that your consumer is looking at as to what your resources are. A deal has come along that you want to invest in and get your returns on future growth as -- versus returning monies to current shareholders. So certainly, the ways we've chosen, of dividends and buybacks, are, we think, the best way to go about it at this point. I think more of the same is what we'll do and regarding when we buy back, we're very, I think, responsive to price. We'd like to buy low and sell high, as the saying goes. But we also think the price of the stock is going to go up, over time, and at most even buying at this stage is long-term accretive to what we're doing. But, Scott, some of the numbers really have lessened [ph].

Scott D. Sheldon

Yes, we've got roughly $40 million left in our current authorization. If you look back to 3Q, we were very active in the markets, took $47 million off, that's roughly 490,000 shares with an average price of $95. And if you kind of look at how we chased the stock price up in the fourth quarter, we weren't very active. Roughly 32,000 shares at an average price of just under $106. So I think the other thing that we should point out is we do have a cap at which we kind of have a target. And so ...

Maurice J. Gallagher

So in total buyback program, we're at average of $53.

Scott D. Sheldon

It's $53.50, so roughly 3.4 million shares.

Maurice J. Gallagher

So we've been a good buyer of the stock with the price and things like that we think, Hunter.

Andrew C. Levy

And Hunter, this is Andrew. I want to add one other thing -- the other thing we look at is how we manage our debt. And when we look at where we believe we have excess capital, we look at all those scenarios, including paying down outstanding debt. And we do what we believe is most accretive over an appropriate time horizon. But that's certainly another option, too, is to manage the balance sheet a little differently. As far as debt levels, we've added depth, but we've also reduced some, as we noted in the release.

Hunter K. Keay - Wolfe Research, LLC

Yes. And Scott, do you know when that authorization expires?

Scott D. Sheldon

There's no term.

Operator

Ladies and gentlemen, this will conclude the question-and-answer portion of today's call. Now, I would like to turn the call back over to Maury Gallagher for closing remarks.

Maurice J. Gallagher

Thank you, all, very much. We'll see you in 90 days. Have a good evening.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all now disconnect. Have a wonderful day.

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