Spirit Airlines Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: Spirit Airlines (SAVE)

Spirit Airlines (NASDAQ:SAVE)

Q1 2014 Earnings Call

April 29, 2014 10:00 am ET

Executives

DeAnne Gabel - Director of Investor Relations

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

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

Mark Kopczak - Vice President of Network Planning

Analysts

John D. Godyn - Morgan Stanley, Research Division

Hunter K. Keay - Wolfe Research, LLC

Michael Linenberg - Deutsche Bank AG, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Joseph W. DeNardi - Stifel, Nicolaus & Company, Incorporated, Research Division

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

David E. Fintzen - Barclays Capital, Research Division

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

David van der Keyl - BofA Merrill Lynch, Research Division

Kevin Crissey - Skyline Research LLC

Daniel McKenzie - The Buckingham Research Group Incorporated

Michael W. Derchin - CRT Capital Group LLC, Research Division

Stephen O'Hara - Sidoti & Company, LLC

Operator

Welcome to the first quarter 2014 earnings release conference call. My name is Angela, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to DeAnne Gabel, Director of Investor Relations. DeAnne, you may begin.

DeAnne Gabel

Thank you, Angela. Welcome to Spirit Airlines' First Quarter 2014 Earnings Conference Call. Presenting today will be Ben Baldanza, Spirit's Chief Executive Officer; and Ted Christie, our Chief Financial Officer. Also joining us are Thomas Canfield, our General Counsel; John Bendoraitis, our Chief Operating Officer; and Jim Lynde, our Senior VP of Human Resources. Remarks during this conference call will contain forward-looking statements which represent the company's current expectations or beliefs concerning future events and financial performance.

Forward-looking statements are not a guarantee of future performance or results and are based on information currently available and/or management's belief as of today, April 29, 2014, and are subject to significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements, including the information under the caption Risk Factors included in our annual report on Form 10-K and quarterly report on Form 10-Q. We undertake no duty to update any forward-looking statements.

In comparing results today, we will be adjusting all periods to exclude unrealized hedged gains and losses and special items. Please refer to our first quarter 2014 earnings press release for further details regarding our assumptions for the reconciliation to the most directly comparable GAAP measures. And now, I'll turn the call over to Ben.

B. Ben Baldanza

Thanks, DeAnne, and thanks to everyone for joining us. Today, we reported that our first quarter 2014 profit increased 15.4% year-over-year to $37.8 million or $0.52 per diluted share. Operating income grew nearly 13% to $60.1 million, resulting in an operating margin of 13.7%. Our team did a great job serving our customers while overcoming the challenges caused by numerous severe winter storms, as well as managing to the new crew duty and rest rules, and I thank them for their contributions. Revenue in the first quarter grew 18.2% compared to the first quarter last year.

In the first quarter last year, Spirit had 59 weather-related flight cancellations compared to 256 in the first quarter of 2014, negatively impacting revenue for the quarter. Total revenue per ASM declined 2.4% year-over-year. The calendar shifted Easter, occurring April this year compared to March of last year, had an estimated 1.5 percentage point impact on RASM.

Additionally, our average stage length increased 6.3% year-over-year resulting in an estimated 3 percentage point drag on RASM year-over-year. Our ticket revenue per passenger segment decline of 1.6% was offset by a 3% increase in non-ticket revenue per passenger segment such that our total revenue per passenger segment was about flat at just over $134. We're just fine with this trade off and actually prefer it. We are committed to operating low based fares with lots of options that allow our customers to choose what they value.

Our total fares, that is base fare plus all the options customers select are, on average, about 40% lower than our primary competitors when adjusted for differences in length of haul. Our low fares allow us to grow the population of travelers and the destinations we serve, and when coupled with our low cost, are a recipe for profitability and create an opportunity for our customers to go more places, more often at the lowest fares possible.

Some of you me have seen the report using DOT data showing that the average industry U.S. fare for the fourth quarter of 2013 was $381. When you look at this compared to our prices, it's not surprising why our planes are so full. The increase in non-ticket per segment for the first quarter 2014 as compared to the first quarter of last year was driven in part by the run rate benefit of an adjustment we made in April of last year to our passenger usage fee.

Also, during the first quarter, we introduced the ability to select the seat assignment at our kiosk, which increased the component of non-ticket revenue associated with seat selections. Our network continues to perform well and our team has done a great job in improving our operational reliability.

Numerous weather events affected our overall completion rate for the first quarter, but our controllable completion factor was 99.8%. Given our low frequency of purchase scheduling, if we are in the position of deciding between running our flight a little late or canceling it, we believe our customers are better served if we run the flight a little bit late rather than canceling it.

Last week, we announced we will begin serving Kansas City International Airport in August this year. We are pleased to welcome Kansas City to our list of destinations. We anticipate we will add 1 or 2 more DOTs to our route map in 2014 but the primary focus of our growth this year will be to add new routes that make connections between destinations we currently serve.

Last week, we announced new service between Fort Lauderdale and Houston and New Orleans, between Houston and San Diego, New Orleans and Atlanta and between Kansas City and Chicago, Dallas, Fort Worth, Detroit, Las Vegas and Houston. We currently estimate for the full year 2014 our capacity growth will be up 17.8% year-over-year versus our previous estimate of up about 17%. We are able to improve aircraft utilization for the latter part of 2014 by optimizing our heavy maintenance schedule.

Before I turn it over to Ted, I noticed there's some chatter in the news about Spirit DOT complaint rate. We care about our customers and work hard to deliver what they value most: safe, reliable transportation at a lower cost than other airline. The number of complaints to the DOT is very small for all airlines, including Spirit. The industry averages about 2 complaints for every 100,000 customers while we currently average about 5 complaints per 100,000 customers. That means that 99.995% of our customers did not file a complaint, yet we're still not satisfied. We know some customers are surprised by our a la carte model that's why we're committed to helping all of our customers better understand Spirit while continuing to improve our operational reliability.

There's one thing we won't do. We won't add cost for things that most customers don't value just to reduce the complaints of a very few. Doing that would prices for everyone. We will continue working to help our customers get where they want to go, safely and reliably for less money and stay tuned to learn shortly about some of the creative ideas we've developed to help our customers understand our a la carte model better while saving money on airline travel transparently and consistently. With that, here's Ted.

Edward M. Christie

Thanks, Ben. And again, thanks to all of you for joining us today. Thanks to all our team members, your hard work and dedication is appreciated. Through your contributions, we are delivering on the promises to our customers and our shareholders. CASM ex-fuel for the first quarter of 2014 came in at $0.0606, up 0.3% year-over-year.

Compared to the first quarter of last year, an increased number of scheduled maintenance events resulted in higher depreciation and amortization expense and higher maintenance material and repairs expense per ASM. We estimate additional pilot cost as a result of FAR 117 contributed approximately 1 percentage point to our first quarter CASM ex-fuel. These expenses were partially offset by lower passenger reaccommodation expense driven by improved operational reliability. The company also benefited from lower aircraft rent per ASM as a result of the lease extensions we've completed last summer.

We ended the year with $544 million in unrestricted cash and with no debt on the balance sheet. During the first quarter, we took delivery of 2 new A320 aircraft, bringing our total fleet as of March 31 to 56. And we have 9 additional new aircraft scheduled for delivery by year end 2014. We have sale-leaseback financing in place for 5 of these deliveries and are in discussions with third parties to finance the remaining 4 delivering in 2014 and 11 of the aircraft delivering in 2015 under secured debt arrangements.

In our investor update to be filed after the call, we will provide an update to our guidance for aircraft rent, capital expenditures and depreciation and amortization to reflect these potential transactions. As we move forward to more definitive documents, we will refine our guidance going forward. This is an important milestone for Spirit and one that we believe will provide tremendous value to our shareholders.

In other fleet news during the quarter, we made a few changes to our fleet schedule, affecting deliveries scheduled between 2015 and 2019. First, we converted 5 A320ceo aircraft to A321ceos and converted 5 A320neos to A321neos. Second, we accelerated the delivery of 1 converted A321ceo from 2016 to 2015. And third, in addition to some other tweaks, we further smoothed our delivery schedule by shifting 2 A320ceos from 2017 to 2018. A copy of our revised fleet plan will be included in the investor update to be published following the call today.

Turning now to our 2014 guidance. Based on the forward curve as of April 24, 2014, we estimate our fuel price per gallon for the second quarter will be $3.12. As Ben mentioned, capacity for the year end 2014 is expected to be up to 17.8% with capacity up 17.3% in the second quarter, up 14.6% in the third and up 18.8% in the fourth.

Sequentially, slower growth rates for the second and third quarters as compared to the first quarter, together with the cost pressures as we ramp for growth in 2015 may create some lumpiness to the CASM ex-fuel changes each quarter. For the second quarter of 2014, we estimate our CASM ex-fuel will be up 2% to 3% as a result of the timing of some expenses push from the first to the second quarter. For the full year 2014, we maintain our previous guidance of up 1% to 2% year-over-year.

For the second quarter on a per ASM basis, we estimated that pilot cost related to FAR 117 and depreciation and amortization will again contribute 2 percentage points of increase compared to the second quarter of 2013. And as we have previously mentioned, towards the end of the second quarter, we anticipate some cost pressures as we begin to ramp for growth in 2015.

As for offsets, we'll have some benefit in aircraft rent per ASM related to the run rate benefit from the A319 lease extensions which were effective in June of last year, and we expect to continue to see benefits from running a better operation. We feel very good about our cost structure and continue to believe that with our focus on controlling our operating costs, which includes the benefit of cost effective debt financing on our 2015 deliveries, we can manage CASM ex-fuel to be about flat over the 2-year period of 2014 and 2015 and sustain or even grow our relative cost advantage. With that, I'll turn it back to Ben.

B. Ben Baldanza

Thanks, Ted. Our solid operations and financial performance in the first quarter is a great start to the year and provides a firm foundation as we grow our business and bring our low fares to more people in more places. It's an exciting time to be part of Spirit. We've successfully managed our growth over the last several years, and I am confident that our team has the critical thinkers necessary to continue to successfully grow our business. And as we grow, we are focused on helping our customers learn how to save money when traveling by air and to appreciate how our unbundled product saves them money.

For the second quarter 2014, we are currently estimating that our operating margin will be between 17.5% and 18.5%. For the full year 2014, we are comfortable raising the low end of our operating margin target such that our new full year 2014 operating margin target range is 16.5% to 18%. Our full year target assumes the demand environment remains similar to what we experienced in 2013 and that fuel price per gallon averages $3.13. Now back to DeAnne.

DeAnne Gabel

Thank you, Ben and Ted. We are now ready to take questions from the analysts. [Operator Instructions] Angela, we are ready to begin.

Question-and-Answer Session

Operator

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

John D. Godyn - Morgan Stanley, Research Division

First of all, I just wanted to ask about the margin profile in 2015. The team has done a phenomenal job maintaining very robust margins while growing. But I still get a lot of questions from investors about the extent to which the significant growth in 2015 might be margin-dilutive. I'm just hopeful, Ben, that you could sort of expand on that idea.

B. Ben Baldanza

Yes, I mean, it's certainly understandable why some might think about it that way with a fairly hefty growth rate in 2015, 30%, that -- obviously, that's a lot of new flying and new flying has start-up costs associated with it. It has slope and of the market building and we know that markets in there, later time do better than where they first start. But that all said, we're very early in the growth phase for Spirit Airlines. And there are a lot of markets that can get benefit from our service and that our margin can benefit from serving. And they -- we have a slide in our Investor Deck that shows this. And so we feel very confident that we have a lot of great places to fly our airplanes. And we have a lot of positive margin opportunities that -- so the high-growth rate on its own doesn't necessarily suggest margin pressure although certainly, in a 30% growth year, we will have more than the normal amount of start-up and sloping up of new routes.

John D. Godyn - Morgan Stanley, Research Division

Okay. And just to follow-up on a separate topic. In the past, we've talked about Frontier and I think sometimes people look at Frontier as perhaps a future competitive threat. We saw Barry's recent appointment. I'm just curious to sort of have that conversation again. Any thoughts that you'd like to share on this idea of Frontier one day emerging as a competitive threat, and as a part of that, is there -- obviously, Barry didn't work at Spirit at this time, but is there any sense that there could be poaching or any concerns like that?

B. Ben Baldanza

Well, Barry's a good friend of mine, and I wish him well. But going to Frontier doesn't materially change how we think of Frontier as a potential competitive threat to Spirit. We're very confident in our cost structure. We're very confident in our ability to maintain or even improve our cost structure over time. And they're just in a different place than we are. And they're starting -- a stated transition could be something different from a different place than Spirit started. So we see this market as very, very large. We -- by the end of this decade, we'll account for less than 5% of the traffic in the United States. Ryanair, on its own, carries almost 11% of the European traffic and they have clones. So we think there's a lot of room. But we think Frontier still has some work they've got to do before they can truly be competitive with Spirit. And we've got a lot of growth ahead of us.

Operator

Our next question is from Hunter Keay.

Hunter K. Keay - Wolfe Research, LLC

Ben, a little bit of follow-up on John's question about Frontier. I expect that they're going to see the same -- use the same math that you guys did about liberating 500 high fare markets with lower fares. And at a certain point, you guys will presumably have the potential to sort of bump into each other, and maybe it's 5 years down the road, maybe it's 10. But as you think about them long term, if you guys find yourself facing them in head-to-head battles, do you envision a situation where one of you guys might actually turn to products as a potential source of differentiation? I mean, you compared yourself to Ryanair a few minutes ago, we didn't see Michael O'Leary soften up a little bit and talk about this new focus on customer service and the like. And obviously, they've been around a lot longer than you have, but do you envision, down the road, let's call the next 2 to 3 years, competing with Frontier on product will always be, you think in your mind as far as you feel like thinking about in the future, just based on low fares and price?

B. Ben Baldanza

Well, our business model is based on offering the lowest total price to customers. And we believe we can attract new business and grow markets and attract the largest amount of new traffic with having the lowest total price. They may choose a different path. They've got a different market in Denver. They've already have TVs on their airplanes, like they're in a different space. So I'm not sure what they're going to -- how they're going to choose to compete long term. We're going to compete by having the lowest total price. Now that said, we do think it's important that customers understand our differences and understand how our differences help them save money. And so we're just a couple of weeks away from announcing some pretty interesting things about how we're going to use a creative approach to help customers better understand what we're doing. And I alluded to that. I said that in my prepared remarks. And so we do think it's important that customers understand Spirit. That's not saying that Spirit is changing its focus to be a product-centric seller. We're going to attract customers because we have today and intend to continue to have the lowest total price for them to get from A to B.

Hunter K. Keay - Wolfe Research, LLC

Okay, it's interesting. I'll stay tune on that announcement, I guess. But okay, I'll leave than one alone. In terms of the mix of ancillary and passenger revenue. You guys are about 40-60 now. I think you've talked before about getting to 50-50. That's about a $300 million revenue difference, roughly speaking. Should I think about that gap being closed by holding everything else equal, ancillary revenues increasing by $300 million or would it be ancillaries increasing by $200 million and passenger revenues coming down by $100 million? How should I think about getting to that longer-term 50-50 target?

B. Ben Baldanza

Well, to be honest, you're thinking about it more than we are. We think about that as kind of an aspiration when we look outside the industry and we see other businesses that have sort of an entry price and ways to solve things other people we've seen examples, included in the cruise line business where companies can get up to 50% of their revenues from something other than maybe the entry price. So we think we can get there. But we're going to obviously make what we believe are the best decisions, best investor-friendly decisions on our -- both our ticket price and our ancillary revenue and the percentage that comes from which will be whatever the math ended up being, we're not going to force it to something as a higher percentage. What we're going to do is continue to try to grow our ancillary, make as many things optional as we can, give customers as much choice as we can and manage our ticket prices to the supply and demand dynamics of any given day or season. And then whatever that percentage is, it is.

Operator

Our next question is from Michael Linenberg.

Michael Linenberg - Deutsche Bank AG, Research Division

Just a couple of questions here. Ben, it looks like the cancellations, the weather cancellations were up close to 4 times from a year ago. Obviously, it was a tough winter for everybody. But then, what I noticed, it looked like you had lower passenger reaccommodation expense. What was driving that? Why so much better on the reaccommodation expense and yet you had significantly more cancellations?

B. Ben Baldanza

I mean, we had a higher controllable completion factor. We had more cancellations but we also just managed the whole operation a little better. And when we are faced with the decision that we can't make something work the way we have planned it to work, we're just making better decisions and have a good team that's handling it well. So it's a cost line we manage just like everything else.

Michael Linenberg - Deutsche Bank AG, Research Division

Great. And then, looking at all the new markets that you're adding later this year, how has -- how has the ramp up changed? The ramp-up to profitability, I looked at a lot of these markets and what's interesting about them is that in many cases, it's just connecting the dots. These are cities that you already have service to. Maybe, not only is it just connecting the dots, but then when I think about the flow through of the aircraft, airplanes may hit some of these markets or cities and they may all be on the ground for 30 or 40 minutes before they go onto an established segment. How -- is that -- where -- how does that -- the quickness in ramping up to profitability, have you seen a noticeable impact in that as you -- as your network has become more dense, is what I'm asking?

B. Ben Baldanza

Well, basically, we tend to ramp up very quickly in part, because we pick markets intelligently, a place that -- where the fares are high enough that with our lower fares, we're going to generate the kind of volume we need. And since we're picking the price, we pick a price where we're going to be able to earn our target margin through that service. In a higher fare environment, like the industry has been seeing, that's allowed us to actually reach sort of our steady state even more quickly in recent times. Because the fares are higher to start with. So lowering a higher fare, it's still a higher fare than you would've had otherwise. We start selling months before the fare goes in place. And like you said, most of our connectivity, since we already fly to over 80% of the large cities in the United States as it is today, most of our new services is connecting places already served, we already have customers, FREE SPIRIT members, $9 Fare Club members, so on, in those cities so it's a little easier to generate the traffic. So our markets pull up quite quickly. And we don't have -- we don't expect that, that should change as we continue to grow.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay. Just one last quick one. Just the deferral of some of the A320ceos to 2018. Is that the last year that those airplanes are going to be built? 2018, 2019? Is that the end of the production?

Edward M. Christie

Yes, I believe it's -- Mike, I believe it's 2018 is the last year.

Operator

Our next question is from Duane Pfennigwerth.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Just with respect to your EBIT margin guidance. I wonder if you could backtrack a little bit. Did you disclose what you thought adverse weather impacted your EBIT line in the first quarter?

B. Ben Baldanza

No.

Edward M. Christie

No. We didn't.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Would you care to now?

Edward M. Christie

No, I don't think we'd speculate because it's difficult to arrive at a perfect number. We did provide some clarity on what at least Easter does which should give you some idea of what the shift at least from a unit perspective and thereby translating the EBIT quarter-over-quarter.

B. Ben Baldanza

And we showed you the difference in the number of cancellations also.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

I mean, it looks like you're implying a little bit of modest expansion here, which, I guess, is surprising and maybe it speaks to conservatism. But given the Easter shift and what appears to be a strong fare outlook from larger legacies, can you just comment about what you're assuming in sort of the underlying revenue environment and if maybe, this is a function of a lack of visibility into June as opposed to maybe this is a starting point?

B. Ben Baldanza

I mean, we generally feel good about the second and third quarter are good quarters for us in general. And just in terms of where we fly and the type of travel we carry. And we're in a good environment right now, as the whole industry is right now. Fair -- fair, discipline and strong. And capacity and discipline across the industry is pretty stable. And we, like, I'm sure everyone else, is sort of waiting to see what the new American management team is going to do with their combined network. But overall, we feel good about the crystal ball that we can see going forward for the second quarter certainly.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay. And then just a follow-up. I'm not going to ask you about Frontier or a hypothetical competitive question, 5 years from now. I find it hard to believe that 1% of the market and 1% of the market are going to trip all over each other. But, in terms of the other 98% of the market, can you talk about the competitive environment today, maybe where it's getting better and where it may be getting a little bit worse?

B. Ben Baldanza

Well, overall, I would say the industry is just in a better shape today. The consolidations that have happened have resulted in fewer carriers. But there also seems to be sort of leadership certainly here at Spirit and at other carriers that are interested in making money and you sort of hear that from other carriers as well. So we feel good generally about that environment. We don't try to steal anybody else's traffic. When we go into a new market, we put in a lower fare point, which tends to price in people who've been priced out of that market. So the people on our airplanes are generally -- some of them would've been on an airplane but for our fare. So in that sense, I don't think we're naturally -- we're the kind of carrier that most of the other 98% in the industry is overly worried about because we're not actively trying to take people out of the 98% business class cabins or their more frequent business traveler. That's not just -- that's not our market. We're on a different segment of the business. And that segment of the business doesn't really naturally compete with that other high percentage that you talked about.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay. I guess, could you just -- maybe your planning focus. I mean, we see competitive capacity cuts across your market. So I wonder if you could just speak sort of broad stroke about where you're seeing that, if you are.

B. Ben Baldanza

Basically, the world right now is a world of fewer, loss of flight and seats over the last couple of years for the industry and that's resulted in higher fares. And our low cost models are really good fit in that world to be able to come in and sort of reprice into the market some of the traffic that's been priced out. So if you're an airline with high costs, looking, just think about where to profitably deploy your airplanes, in some cases, that's going to be where we fly. In more cases, it's probably going to be we're not flying because we're picking a market that have a lot of the discretionary traffic in them.

Operator

Our next question is from Joe DeNardi.

Joseph W. DeNardi - Stifel, Nicolaus & Company, Incorporated, Research Division

I'm just wondering on the growth going forward between domestic and international. Obviously, the focus is on domestic now. Can you just help me understand, are you seeing opportunities internationally that meet your threshold but the opportunities on the domestic side are just better or is that not the case?

B. Ben Baldanza

Yes, I wouldn't even really say, Joe, that it's a focus on domestic. I would say it's a focus on net income. And we forecast for each deployment of our airplanes, how we can add most positively the company's returns. And more often than not, in the current environment, those are the domestic opportunities. But that's different than saying we're focused on the domestic as a growth point. Wherever we can put the planes that are going to make the highest return, or the highest return is where we'll put the plane. And we certainly believe that certainly over the next 2 years, we have both domestic and international growth opportunity. And we'll continue to exploit both on a prioritized basis for the next deployment, what are we going to do best with it. And if that's domestic, it will be a domestic deployment. If it's international, be it international. But I would expect certainly over the next few years, you're going to see growth in both domains for us.

Joseph W. DeNardi - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then on a stage length impact on the RASM, when does that start to subside? It looks like the comps' getting are getting better in the second half. So should we be thinking about that as a tailwind for RASM in the back half of the year?

Edward M. Christie

I think the stage year-over-year does start to get closer in the -- as we go out 2, 3, 4, of those quarters, second, third and fourth quarters. So I would think about it that way, yes.

Operator

Our next question is from Savi Syth.

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

Just on the -- I was wondering if you could elaborate a little bit on the cost puts and takes for 2014 and 2015. Just on FAR 117, was that just a first quarter item or are you showing that throughout the year? And just help us think about what the ramp-up cost might be this year, which we might not be seeing next year.

Edward M. Christie

Sure, Savi. No, we don't -- FAR 117 is not just a Q1 item. It's the entire year. And our estimate of the impact of that was 1 percentage point on CASM for the full year. And so that being the case in every quarter. So if we think it estimated our unit cost ex-fuel by 1 point in Q1 and we estimate that will be the case again this quarter, as well as for the full year. And so we lap it again beginning in 2015. We also indicated that the depreciation and amortization expense related to heavy maintenance on the airplanes year-over-year is contributing about 1 point as well. So -- and that would have been the case in the first quarter as well in the second quarter also for about the full year. So if we're saying that our view on CASM ex-fuel for the full year 2014 was up 1 to 2, excluding the effects of those 2 things, we would've said down 1 to flat, right? And so that's the way we thought about 117 and the other bigger take, I guess, for 2014. There are clearly pressures in the latter part of this year related to the ramp-up heading into 2015. No one particular item that I would call out, there's clearly some higher related expenses and because of the throughput we have on training, we have to bring people on line sooner than the aircraft arrived. The good news is that's partially been mitigated with some of the news we announced here, where we're able to find some additional aircraft time in the fourth quarter and increased our view on capacity guidance for full year from 17 to 17.8. That was good efficient use of existing assets and first it helped defray some of the overhead related drag in building for 2015. We were able to deploy some of the crews that we thought we weren't going to be able to deploy until later in the year. So that's helpful in that regard. And we're very excited about that piece heading in the latter part of the year. So there is little components throughout the cost structure, nothing major that I would point you towards. And then, we start to hit -- in 2015, we start to lap the effect of FAR 117 and the growth really comes online. And that's why we felt very good about saying that over that 2-year period, unit cost, kind of in a flat range, is where we think we're headed. And we have a number of things that we continually work on where we always look to improve upon that. But that's what we feel about as kind of our base case where we're headed.

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

That's very helpful. Ed, secondary question on -- if you can share some updated thoughts on the use of cash?

Edward M. Christie

Sure. So I mentioned in my comments that we've been in discussions already with some secured to net debt financiers for 4 aircraft this year and 11 next year which is a pretty dramatic change for the company in financing the way -- or financing its fleet going forward and we'll consume some capital as we think about the -- how we would finance some of the loan advance and what type of equity we reported. And then there will be some update in that in our investor update. So that's -- as we've been talking about since I got here and even prior to that, we've been preparing ourselves for the growth that the company is going to take. And using our cash balance as an important weapon in making sure that we attack that financing of our fleet cost effectively and efficiently. And this is yet another rung in that ladder. This is the first deployment of that, and we're very excited about it. We think it's going to be extremely accretive and beneficial to both the bottom line as well as our unit costs. And so it gives you at least a view as to why we've been careful with our cash balance and what we plan to use it for it. That's not the only thing we would do. But it is an example of what we've been prepping for.

Operator

Our next question is from Dave Fintzen.

David E. Fintzen - Barclays Capital, Research Division

Question for, I guess, Ben. Not to get ahead of the sort of announcements around educating the consumer but if we can just take a step back, your marketing efforts have historically has been very creative. But I would imagine also very inexpensive. As you're getting bigger and as you ramp into this growth, do we need to see maybe a more traditional but also more expensive kind of marketing push to get the brand out more broadly over the coming years? Has that become a cost pressure over time?

B. Ben Baldanza

No, we don't think so. And Dave, that's a great question, actually, but no. One of the things that we have been good at over the last couple of years is being able to market our fares with a very low cost kind of approach and keep our distribution cost very low. We believe we can apply some of that knowledge and just apply it to a different opportunity, which is educating our customers about the consumer benefits of our a la carte models. So we're not going to -- we're not a traditional advertiser in that sense. You're not going to see cost pressure along that line. And like everything we do, we're going to do this very efficiently but hopefully, effectively as well.

Edward M. Christie

And Dave, let me add to that. When looking for examples where the company believes it can drive scale benefits, this is a perfect example of that. We do not intend on changing the way we view our cost structure from an advertising perspective. And as we get bigger, it's actually going to be beneficial, we believe.

David E. Fintzen - Barclays Capital, Research Division

Okay. I appreciate that. That's helpful. And maybe just a quick one. With the secured -- potential secured debt financing. Is 4 aircraft this year enough to start to materially impact the cash tax rate presumably if you do the full 4 and 11 next year, you would start to have a material accelerated depreciation benefit I would imagine, right?

B. Ben Baldanza

Yes, materiality would be tough for me to gauge, what you mean by that. But there's -- assuming we do the transaction that I alluded to, there will be a cash tax benefit in 2014. But you're right, with 4 aircraft at the back half of this year and 11 at least next year, next year is going to be a real -- would be when you have a real cash tax benefit.

David E. Fintzen - Barclays Capital, Research Division

And is that big enough to really take out the bulk of the cash taxes? Or is just too soon to know?

B. Ben Baldanza

I don't think it would take out the bulk of it, I mean all of the cash taxes. But it is too soon for me to guide you all the way. I mean, when you see the volume we're talking about, you'll be able to arrive at the number pretty quickly. But it's not going to eliminate cash taxes.

Operator

Our next question is from Helane Becker.

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

Just a quick question, Ben. I know you guys fly in and out of DFW. And I saw where Virgin America has announced they're moving from DFW actually to Love Field later this year. Can you just talk about how you think the benefit will -- or how that will benefit you as they move around?

B. Ben Baldanza

I don't think it has any material impact on us at all. I mean, they're trying to attract a completely different customer than we are. If you read the same announcement I read about their moving to Love Field, they quoted all kinds of things about how it's better for the Dallas business and that's close into Dallas business and things like that. And we're carrying the Dallas family that wants to get to Chicago to see a White Sox game or go to their family reunion in Oakland.

Operator

Our next question is from David van der Keyl.

David van der Keyl - BofA Merrill Lynch, Research Division

Ted, sounds like you're going to be financing aircraft with debt relatively soon. Can you just talk about the cost of ownership for owning versus leasing right now and then maybe what kind of savings we can expect over the next few years?

Edward M. Christie

Sure. And there'll be some -- you can piece together from the information we already provided as well as the update we're going to give you afterwards as to what we view as our cost of ownership from a leasing perspective, at least what hits the P&L, as well what we think will hit the P&L related to the ownership of aircraft in the form of depreciation and amortization expense and interest expense on whatever debt we might take down. So you'll be able to kind of keep that together. But our view all along and it remains the same, is that we would plan to take aircraft on our balance sheet or invest in an airplane only when we felt we would deliver the kind of return that was expected for us to invest in any asset. And the financing market today is very opportunistic and right for our type of credit. And we feel that the benefits of ownership are real from a cost of capital perspective, not just optical from a location on the income statement perspective. And so we intend to do this and improve the company's financials and deliver a return which is what we've been indicating all along. Or we wouldn't have done it. The leasing community is still very efficient. But we've found a place in the market where we think we can deliver real value. So that's been part of our view all along and part of the benefits of that have contributed to our bullishness and why we feel so good about the cost structure over this 2-year period.

Operator

Our next question is from Kevin Crissey.

Kevin Crissey - Skyline Research LLC

Can you talk about what additions to personnel or systems or changes you're making generally to accommodate the growth of the carriers that found that rate of growth to be challenging from an infrastructure perspective?

B. Ben Baldanza

Overall -- this is Ben, I'll start and then Ted can certainly add in here. Overall, we've been thinking about our growth rate for the last number of years. And we've been building the infrastructure of the company to manage our -- to derisk that growth by building the infrastructure. It starts with the people of the airline then we have a management team, not just the senior team but beyond that who worked at bigger companies and who understand sort of what it means to work at an airline with 100 or 200 airplanes. And that's important. So we've got the right mindset. Like this year, we've been operating on the SAP system for our enterprise reporting system for the full year. And that's a scalable system that can grow with us and that can certainly support companies much larger than we are today. And we have, in our capital plans, the next phases of that kind of IT infrastructure growth. Ted, you want to add anything to that?

Edward M. Christie

To clarify on that we -- our infrastructure is in a place today where we could -- we are in an optimization phase more than anything else. So the company is in a good spot. Where we can invest in infrastructure and use that investment to deliver real return. And so, there will be tweaks to our IT infrastructure to more efficiently deliver the growth. We think we can deliver it today. But this is just improvement upon that. There are human capital that the company has to invest in the form of crews and maintenance personnel as part of that. But we've been prepped for that for years. We knew this growth has been coming for years and we've prepped for that from the crewpit perspective. I mean, we have the appropriate training personnel on board. We know how many stimulators we need. What kind of sim time we need. All of that is baked into the plan, and so I hear you on your point that there is concern about a stumble or whatever you might call it with regard to a large growth. And we believe -- we've known about this for long time. And we feel very ramped up and ready to deliver a longer-term growth profile. And when we think about that, 2015, 2016, 2017, this is a long-term play and a long-term CAGR. And we're still much in line with what our long-term growth plans were all along. 15% to 20%, just moving within the years doesn't change our view in that at all.

Operator

Our next question is from Dan McKenzie.

Daniel McKenzie - The Buckingham Research Group Incorporated

A couple of questions here. First question is really just a clarification. In the past, you've highlighted cost in revenue initiatives that were underway. Without a whole lot of clarifications and this morning we got pretty good clarification on the fleet financing opportunities. But just as investors think about all the initiatives that you have underway, should we -- is there still some initiatives that could perhaps transpire, that would impact 2014 or it's just primarily we're looking at 2015 at this point?

Edward M. Christie

Well, I'll start, Dan, this is Ted. If it relates to cost, there's nothing specific that I would tell you about right now. We have a list of items that we work on all the time. And until those items reach some level of maturity that we're comfortable discussing them, then we would not speculate. But to say we don't have anything in the works would make us a bad management team, and we're not that. So we're clearly working all the time to improve on our cost structure. And we've got some real items that we focus on. On the revenue side, I'll say a couple of things and let Ben jump in, too. And we alluded to it in our comments that an example of that is that we've changed the way we sell seats. If they appear minor to -- in the grand scheme of things, but those are the types of items that we layer in all the time to make refinements for the way people book through our booking engine or make refinements to the way they check in on our kiosks. All of those was an intent on optimizing the revenue. And we think that, that one works in that regard. And there is -- I don't know, 100 or so of those on our list that we're constantly looking to improve on.

B. Ben Baldanza

Ted nails that. I mean, that's exactly right. We've put up guidance for a full year margin, which is great to be able to do in April and full year CASM on a year-over-year basis. And those numbers reflect what we believe we can, what we expect to be able to deliver to you and to the investor group this year.

Daniel McKenzie - The Buckingham Research Group Incorporated

Understood. The second question actually reverts to, I guess, this year, your prior comment on the seat, the changes you made on the selling seats. And the transfer Spirit seems to be an 87% load factor, which is a deficit to the other unbundled product out there that targets 90%. So you must be concluding that it would be margin dilutive to fill the planes slightly more. But what's intriguing is that a key peer has reached a different conclusion. So I'm wondering if you can provide a little bit more perspective just in general on revenue management philosophy and what the right optimal load factor really is.

B. Ben Baldanza

I think we're much more similar to the peer you're talking about than you're putting it out. And then in many ways, they're not our peer. If we flew our planes 6 hours a day, then I think we would have a 90% load factor. When you weighed in -- when you fly 13 hours a day, like we do, or 12.8 for the year on average, and you fly on Tuesdays and you fly to international markets and you fly to lots of places, being able to operate 86%, 87% on a year-round basis is an astounding kind of load factor number and it says that your full every time this wide demand is in your favor. That's the math of the yield management world. And we yield manage very actively. We try to fill our planes and our low fares create a lot of volume and create a lot of demand. But clearly, with 40% of our revenue coming from non-ticket sources, empty seats are very high opportunity cost to us. So basically, when we fly in the middle of the night, our loads might not be as high as they might be during the day. But -- and so maybe that brings an average annual from 90% down to 87%. But it's still very accretive kind of flying. So on a flight-by-flight basis, our planes are as full as we believe they can be.

Operator

Our next question is from Mike Derchin.

Michael W. Derchin - CRT Capital Group LLC, Research Division

So maybe I'll ask 2 questions then. The first question relates to Kansas City. I'm curious about that as a new opportunity because, I think Southwest is, well, I guess, the largest carrier there. And I look at their cost structure or at least their cost structure and fare structure, and bags fly free and all the things they throw in and it would seem to me that you're -- the difference between yourselves and them is a lot closer, even though you're a lot lower but still a lot closer than it would be for the traditional network guide. I'm just curious about Kansas City as an opportunity.

B. Ben Baldanza

I'll let Mark Kopczak, our route [ph] planner, respond for that.

Mark Kopczak

Kansas City has been -- the airfare's -- we've seen a lot of cities out there where we're seeing overall capacity cuts that have driven fares up in many markets and Kansas City is like many of those locations. Despite the fact that it has a lowest fare service from Southwest Airlines, we saw several opportunities with some core markets where there was a pricing differential and a capacity that are -- passenger differential that created an opportunity for us to commit as we seize that opportunity in the market that we felt made the most sense for us, for our customers.

Michael W. Derchin - CRT Capital Group LLC, Research Division

Okay. And I'll ask one more and this is a little bit off-the-wall. I think for a while, you're trying to get authorization to fly into Venezuela. And I think you're probably happy that it hasn't come your way, given the freeze on cash and so on. But what is your position regarding some of these Latin American countries where the political situation is so unsettled and you could run into some major problems like the airlines are today?

B. Ben Baldanza

Well, our -- I know it kind of sounds like a broken record here. But we deploy our airplanes where we think we can get the highest return on that investment. And certainly, flying to a country or a city that has more than the normal risks, in terms of being able to repatriate the money or something like that, goes into the equation of whether or not what that return potential is. And so, we're not in Venezuela today. And it's a big market, certainly from South Florida where we're based. But we've got better opportunities for our airplanes than flying into Venezuela right now. And we'll fly to Venezuela if and when the legal opportunity to do so creates itself. And that proves to be better than the next best opportunity we could fly an airplane. And that would certainly be weighted into sort of what the issues are flying there.

Operator

Our next question is from Steve O'Hara.

Stephen O'Hara - Sidoti & Company, LLC

I was just curious if you could maybe talk about why the change in -- in terms of maybe better educating the consumer or kind of making that push. I mean, are you seeing a detrimental impact from maybe the headlines or something like that or I mean, are you better able to maybe track your return to customer base? And is that underperforming or is that just kind of an evolution of the business?

B. Ben Baldanza

No. We think it's a good evolution of the business. In fact, the business is performing great. I mean, our planes are full. We're providing good returns, we're growing. We're providing good employment to our team members. And so the business is going great. What we see is an opportunity that when we look at customer feedback and the customers who really like us, and there's a lot of them, and that's why our repeat rate is actually quite high, even though we don't disclose the actual amount, the -- when you look at the customers, they like us. They like us because they can save money on us. And they know how to save money on us. They know how to use our price structure and use our optionality of a low upfront fare plus options that ought to pay for what you want to their benefit. And then we have other customers who buy a ticket on us but don't understand our difference. So get frustrated by some of those, by some of the things we do that other airlines don't do. So we see an opportunity to make sure -- help make sure that everyone who buys a ticket on Spirit understands the value of buying on Spirit and understands the positive trade-off they're making of paying a lower price to get where they're going and the trade-offs that they make, that they're choosing to make to get that lower price. And so we see it as an opportunity, an evolution of the model. And we think it only makes us better and stronger. We don't think it's something we have to do for risk of the enterprise or anything like that. We think it's a good, positive, next step move as we get bigger and bigger.

Stephen O'Hara - Sidoti & Company, LLC

Okay. And then, earlier, you mentioned you're not going in the markets to steal market share and so forth. And I mean, I guess, I think that's largely true. You are obviously stealing market share, I would think. But I guess, have you seen any difference, I mean, I think you've talked about in the past how airlines can determine how they react to you. Have you seen any changes there recently or do you kind of expect any change at all in the next several months?

B. Ben Baldanza

We haven't really seen any change in the last year or so. So we don't -- the industry -- everybody is following their business model to try and optimize their business model. And for the last year or so, that's meant that we've not seen a lot of direct competitive reaction to what we do. But again, you said, you made the statement of course we're stealing shares. I don't know if that's true, of course. I mean, we started serving Dallas in 2011. And if you look at total traffic in and out of Dallas airport today, it's a lot larger than when we started. But it's even larger than the amount of traffic we carry. So our single largest competitor in Dallas, if you want to call that American Airlines, has also grown during that same period. So I don't know -- I don't know that it's essential. I don't know that you've got to say of course we're stealing share. We're putting in significantly lower fares. It's a highly elastic market at every point of the price curve. It's more elastic at lower price points obviously than at higher price point. But the elasticity is real. And Southwest Airlines grew for 30 years based on that elasticity. And Ryanair has grown for the last 20 years in Europe based on that and we're at the very beginning of that kind of cycle right now.

Operator

Our next question is from John Godyn.

John D. Godyn - Morgan Stanley, Research Division

Ben, when I look at the fleet plan for 2015 through 2017, you have quite a few A321s coming in. And when we think of what you've done, in terms of the fleet configuration of the A320s and basically maxing out, I was just hopeful that you could talk about how accretive these aircraft are going to be. I mean it seems like they have to be significantly accretive. And to what extent do the A321s also maybe change the mix on ancillaries. I'm not sure if you can have more big front seats. Anything you're willing to offer there will be helpful.

B. Ben Baldanza

Sure. Well, you know, we like the 321 obviously. And we've made a bet on that airplane in the sense of ordering both ceo and neo version of that airplane. And in many ways, I think a good way to think broadly about our fleet plan, although it's not exactly, is we're slowly moving from an A319, A320 airline over time into a 320, 321 airline. And that larger gauge is consistent with lower costs, lower unit cost, it's also consistent with what you see a lot of industry doing is gauging up you don't see as many 50 seaters flying now right? I mean, this is the same kind of effect. But the A320 is 8% to 10% more unit cost efficient than the 319. And we see on a similar kind of ratio between the 321 and the 320. So we expect it to be a lower unit cost airplane. We will certainly fly it quite dense. We've been working with Airbus on ways that we can maintain maximum density in the plane but still offer the big front seat product. And we feel we're very encouraged that we'll to be able to offer big front seats to our A321 customers as well without sacrificing density on airplane. So we're excited about the plane and if you look at our whole fleet plan, and you look at sort of the number of planes, where we'll be in 2021, if we took delivery of everything and retire what comes off lease will be 140-ish airplanes, with a little over 30 of them being A321. And on a ratio of 320 to 321, we like that ratio generally.

Operator

We have no further questions at this time.

DeAnne Gabel

Great. Thank you, Angela, and thank you, all, for joining us on the call today. This will conclude our first quarter 2014 earnings conference call.

Operator

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

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Spirit Airlines (SAVE): Q1 EPS of $0.52 beats by $0.01. Revenue of $437.99M (+18.2% Y/Y) in-line.