Allegiant Travel (ALGT) Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Allegiant Travel (ALGT)

Allegiant Travel Company (NASDAQ:ALGT)

Q2 2014 Earnings Conference Call

July 23, 2014 4:30 PM ET

Executives

Andrew C. Levy – President and Chief Operating Officer

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

Jude I. Bricker – Senior Vice President-Planning

Analysts

Joe W. DeNardi – Stifel, Nicolaus & Co., Inc.

Hunter K. Keay – Wolfe Research LLC

Savi Syth – Raymond James

Helane Becker – Cowen Securities

Catherine M. O’brien – Deutsche Bank Securities, Inc.

Duane Pfennigwerth – Evercore Partners

John D. Godyn – Morgan Stanley & Co. LLC

Dan J. McKenzie – The Buckingham Research Group, Inc.

Glenn Engel – Bank of America Merrill Lynch

Bob McAdoo – Imperial Capital LLC

Stephen O'Hara – Sidoti & Company

David Fintzen – Barclays Capital Inc.

Operator

Good day, ladies and gentlemen and welcome to the Allegiant Travel Company’s Second Quarter 2014 Financial Results Conference Call. We have on the call today, Andrew Levy, the company’s President; and Scott Sheldon, the company’s Chief Financial Officer. Andrew Levy will provide us with some brief comments, and then we’ll begin our 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 our actual results to differ materially from those expressed in or implied by our forward-looking statements.

These risk factors and others are more fully discussed in our filings with the Securities and Exchange Commission. Any forward-looking statements are based on information available to us today, and we undertake no obligation to update 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 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 now turn the conference to Andrew Levy. Please proceed.

Andrew C. Levy

Good afternoon. Maury is unfortunately traveling today on Allegiant business, and he is unable to join us on the call. I wanted to make couple intro comments and just jump into Q&A. I want to first say thanks to our team members for delivering another outstanding quarter, very proud of the numbers we’re able to put up this quarter. And but I do – second quarter cost performance as well as the updated cost guidance we’ve provided for the full year 2014.

Second quarter, CASM ex fuel came in below our initial forecast; mainly due to some maintenance expenses being pushed into the third quarter. So the second quarter was a bit lower, and the third will be a bit higher for this line item, but the full year for the maintenance line item in general remains unchanged. The lower maintenance expenses that we did experience in the second quarter more than offset some higher than anticipated expenses associated with the continued crew availability delays. We expect these crew related expenses to decline again, in the third quarter, and we do not expect any continuing expense to be seen in the fourth quarter.

Even with those elevated expenses, we did expect to be inside the range for the full year CASM ex guidance that we have previously forecasted and communicated to you all. However, we are now increasing our full year CASM ex guidance, due to the recently announced acquisition of 12 – excuse me, 12 A319 aircraft, which were on lease with another carrier.

The transaction will increase depreciation and amortization expense without the benefit however, of ASM production, since the aircraft are on lease for the next few years, however, and most importantly, we’ll recognize substantial lease income from the deal and it is immediately accretive as a result.

And with that said, we are ready to answer any questions. We have a number of folks in the room besides Scott and myself, Jude Bricker, our Senior Vice President of Planning; he is with us to help tackle any revenue related questions you might have. So we’re ready to talk about whatever you all want to talk about.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the Joe DeNardi with Stifel. Please proceed.

Joe W. DeNardi – Stifel, Nicolaus & Co., Inc.

Scott, it seems like that the cost guidance here kind of get narrowed towards the higher end of the range, if you exclude the D&A impact from the extra planes. So, can you just maybe talk about what’s changed there relative to previously?

Scott D. Sheldon

Yes. As Andrew mentioned, the lion’s share of that is the 12 airplanes, the non-ASM producing depreciation, in addition – and excuse me, the crew training delays if you look back to the first quarter and accumulate the costs associated with the restructured pipeline. The costs are pretty expensive over the full year basis. We expect the third quarter, there is going to be in effect, probably not to the extent that there was in the second quarter. So if I think we mentioned $3.4 million and ex-fuel cost related expenses, I would expect that to be down in the third quarter and relatively minor if zero in the fourth quarter.

Joe W. DeNardi – Stifel, Nicolaus & Co., Inc.

Okay. I mean if we look into 2015, I know there are a lot of moving parts with the aircraft transaction, but it would seem like you’re going to see some pretty nice comps next year, and that the very least CASM should be flat, I mean I would think it should be down, can you just kind of put into context how you think about that next year?

Scott D. Sheldon

No, I think you’re spot on. there are some pretty easy comps going into next year. we’ll be flying a larger component of the Airbus fleet, which will help in overall CASM. obviously, there’s some pretty substantial ex-fuel costs related to UNIX in 2014. So I think what you said is spot on.

Andrew C. Levy

That being said, this is Andrew, I just want to clarify, we are not in anyway prepared to address any forecast in any specific terms about 2015 costs. we’ll be ready to talk about that as the year progresses and we have more clarity about our plans for next year.

Joe W. DeNardi – Stifel, Nicolaus & Co., Inc.

Okay. appreciate it.

Operator

Our next question comes from Hunter Keay with Wolfe Research. Please proceed.

Hunter K. Keay – Wolfe Research LLC

Hi, everybody.

Andrew C. Levy

Hey.

Hunter K. Keay – Wolfe Research LLC

Thanks. so I wonder that you have an expense associated within the early-out program, Andrew, it just seems a little strange to see that from you guys, given how much you’re growing, and you’re still relatively younger for us. So can you give me some color on what that is, is this an effort to sort of take up some similarity, and do you expect there to be any kind of cost savings with that – associated with that, and can you quantify it?

Andrew C. Levy

Well, yes, clearly, we thought it was financially prudent to do. so yes, we do expect there to be cost savings over a reasonable period of time, where we felt that we are getting an acceptable return. And it was kind of a one-time opportunity for some folks. You have been here for very, very long time. Yes, we have relatively young workforce. but keep in mind; we’ve been at this for 13.5 years. and before we got involved, there was an airline there that was operating a couple of years prior.

So we gave the opportunity for some folks to decide to, if they want to do something else, and we think it was a successful program and we’re happy with the results, but it did elevate the expenses in this second quarter and that’s why we wanted to just call it out, because it is another non-recurring type of expense that will include as you indicated some benefits over time in terms of cost savings with a more junior workforce in that group.

Hunter K. Keay – Wolfe Research LLC

Okay. and can you give us just sort of an update on where you stand with Mexico, and just a little bit of a broader update on some of the changes that you made to Hawaii, and how you expect that market to sort of to trend – to trend for you guys over the next year to two years, I see have the 75s obviously in a fleet plan, still through 2016? Thanks.

Andrew C. Levy

Yes, and really, yes and I’ll answer the first one, and Jude can handle the Hawaii question, but I think that the 75s are in the fleet plan at the moment until we decide they’re not. So it’s – we’re only showing through 2016, but if we went out further, you’d still see those 75s in there. As far as Mexico is concerned, we are thinking that that’s going to be a 2015 event, it is – we view Mexico as an exciting opportunity, but it’s merely an expansion of our route network.

So while it’s valuable, we’re all excited about it, and we will go into Mexico, we don’t feel like it’s an urgent need to do and we have a lot of other competing priorities in the information technology, and it’s just a matter of putting Mexico in the right order in that priority queue and it has slipped from 2014 into 2015, I think that that’s something that was known for a while now. But we – at this point, I’m still hopeful that back half of 2015 we’ll be able to launch something and we’ll keep you posted. And as far as Hawaii goes. Yes, Jude is here.

Jude I. Bricker

Hey, Hunter, it’s Jude.

Hunter Keay – Wolfe Research

Hey, Jude.

Jude I. Bricker

So I’d characterize what we are doing in Hawaii is that has been productive. And that we don’t intend to grow it much beyond where we are today. But that were satisfied with the production we are getting out of the airplane and the revenue that we’re achieving and the returns that we’re getting in those markets. So, the airplanes today and we have year round markets to Hawaii which are out of Honolulu to Vegas and LA. And then we have five seasonal markets. And then the airplanes fly some continental U.S. service year round as well. So we’re getting the utilization of the airplane to about where we needed to be. And we are getting the revenue that we need to achieve and acceptable return. And now we are just it’s out there, some where there, so it’s more the same I think from us in Hawaii.

Andrew C. Levy

Yes, I think one thing I’ll add is that we have seen this summer very nice improvement in the performance of Hawaii, which I think can be attributable in large measure to some of the changes we have made to the route network. So we are pleased with the trends and optimistically we’ll continue to be able to see improvement overtime.

Hunter Keay – Wolfe Research

Great, thanks a lot.

Operator

Our next question comes from Savi Syth with Raymond James. Please proceed.

Savi Syth – Raymond James

Hi, good afternoon. Just a quick question on the A320 issue, could you help me understand is – what’s taking so long. And am I right that the kind of the full rents caused in the second quarter with just all related to sub lease.

Andrew C. Levy

I don’t think that’s correct, right. I mean we had a couple of months of rents of aircraft incremental expense on the leased aircraft.

Scott D. Sheldon

Yes, there is lot of moving parts in that line item, there is supplemental rents, there is rents associated with two of the 319s for April and May. But probably more importantly was the reversal of some supplemental rents related to return conditions. So it’s not as easiest as looking at the number there is a lot of moving parts there.

Andrew C. Levy

But as far as what takes that long – that’s a long discussion we could have and get into all kinds of nuances and details. But when you get behind in your crew training and you are growing and especially when you’re moving from one aircraft to another it just a very complicated situation. And we are working our way through it continuing to make progress; it’s taken longer than expected. But we’re well on our way to getting this behind us, as I indicated in my opening comments.

Savi Syth – Raymond James

Got it, Andrew. And I mean understand that when you get to the low, seasonal low that you will be able to be caught up. But when the peak picks up you think that you’d be in a good position at that point or that might be in the peaks.

Scott D. Sheldon

Well, its interesting because the fact that we’re in an off peak period and the fact that we are going to get caught up during that period in some ways they have; one doesn’t have anything to do with the other. Although I know you would think perhaps they be related but they are really not it’s more about just getting the pipeline open in doing all the different training events that need to be done. And it’s not just simply going out and hiring folks and training them, there is lot of movement from one either an upgrade from a right seat to left seat or moving from an MD-80 into an Airbus, it’s just, it’s a very complicated event to manage. And we are on our way to getting that behind us and looking forward to putting that in the past.

Savi Syth – Raymond James

Okay, understood. And then just on the – you now you talked about maybe potentially introducing – doing credit card and a frequent flyer program. So I wonder if you could provide an update on that, and kind of thinking on when that might have a impact on revenue earnings.

Andrew C. Levy

Yes, so first of all let me correct you. I think we have very, very clearly stated that we will not have a frequent flyer program. But we do anticipate building a loyalty program. And I think that’s very different and I think our program is going to look different than anything else that you would think of as a kind of “Airline” frequent flyer type program. And the IT platform and infrastructure has been constructed, where we are in the co-branded credit card which will be the very first thing that we do, is that we have all the IT work done tested ready to go.

We are working on a couple kind of our K and legal issues with the bank, which relates to some kind of changes in the regulatory atmosphere. And we expect to be able to put that with that. And get that launched later in the quarter, I think as far as an impact to revenue, I think we’ll see that as soon as we launch it. but I’d caution you to not expect there to be some material impact this is just a very beginning, building a business that we think when it’s mature in several years will be very meaningful. But it’s going to be a slow ramp and but we are excited to get going on, that for sure.

Savi Syth – Raymond James

Got it, all right, thanks so much.

Andrew C. Levy

Thanks.

Operator

Our next question comes from Helane Becker with Cowen Securities. Please proceed.

Helane Becker – Cowen Securities

Thanks very much. Hi guys, thanks for the time. Just a couple of questions. I am assuming on that there was very little if any impact from the computer outage the other day and if there was, is that not included in your guidance?

Andrew C. Levy

Helane there was very little impact from that unfortunate event. And – but it is included in our guidance. So we have, – we believe circled what the impact was and that is there so, at least for full year of course in the third quarter.

Helane Becker – Cowen Securities

Right, right. Gotcha and then just on the third party ancillaries this sort of continued trend lower year-on-year, I think you talked about it in the last quarter any changes relative to what you have previously said about that?

Andrew C. Levy

No, I think that we tried to explain where see the primary reasons for the decline particularly in the Last Vegas hotel market, which is the Las Vegas market is still the dominant portion of the hotel revenue. So I think you have the combination of declines here associated which just a less favorable contract then what we entered in to back in the really bad times when the hotels were had a little less leverage.

And in addition to that just continued shifting of the networks, so that a greater percentage of our capacity is away from Las Vegas, which is helpful on the car side, we there is no new updates as far as how we plan to reverse the trend obviously, the lasting effect of this will certainly help as far as the year-over-year comps. But more importantly is some of the IT tools that are coming some of which we have at our disposal now. And a few more that are coming and we hope to be able to use some those tools to be able to help kind of getting new trajectory going on that business volume.

Helane Becker – Cowen Securities

Okay. And then could I just ask one balance sheet related question? You guys raised a bunch of debt in the quarter and historically or at least when you guys first started, you are mostly debt free, and I don’t disagree with the idea of putting some leverage on the balance sheet, I think it’s a good idea that you’ve raised a pretty – I guess a significant amount, $85 million collateralized by most of your existing fleet, obviously, not the A320 or (indiscernible), but all the MD-80s and 757s. So can you just kind of update us on how you’re thinking about leverage and how you’re thinking about the balance sheet going forward and maybe how we should think about it?

Andrew C. Levy

Yes, I think we’re very comfortable with the leverage that’s on the balance sheet, we’re continuing to generate a lot of cash and a lot of that debt in fact, well I know it’s obviously is both, but the rest of it is advertising very quickly over the next few years. So we will – we expect to kind of delever all things been equal just by operating the business, when we have the ability to obtain debt capital at the rates that we’re able to get in the marketplace. We think that’s a great investment and well worth doing and it gives us great flexibility to either continue to invest in the business by acquiring more aircraft, which we are definitely in the market to do, or alternatively, opportunistically continue to utilize the authority under the share repurchase program we have to make investments by taking out shares of our stock.

So we like the flexibility it gives us; it was a moment in time where we thought we had a great opportunity to do a good sized transaction in the high yield space, which is the bulk of it that you’re referring to, and we’re excited about the opportunity that gives us.

Helane Becker – Cowen Securities

Great, okay. Well, thank you so much. I appreciate your help.

Andrew C. Levy

Thanks.

Operator

Our next question comes from Michael Linenberg with Deutsche Bank. Please proceed.

Catherine M. O’brien – Deutsche Bank Securities, Inc.

Good afternoon. This is actually Catherine O’brien filling in for Mike. Just one follow-up to Helane’s question on ancillary revenue going forward, it looks like your guidance is implying a similar year-over-year decline ancillary for passenger in the September quarter to what you saw in the June quarter. Should we expect that trend to continue into year-end, or are we going to see maybe a rebound that will have lapse to handle that original Las Vegas contract in September quarter, so maybe a rebound in the December quarter?

Andrew C. Levy

We’ll see, I think that that’s true as far as third-party goes, as far as ancillary as a whole, third-party is an important part without a doubt, but it’s – but if you look at total ancillary, it’s a relatively smaller percentage of the overall revenue per passenger on ancillaries. And we never like to forecast new, any kind of changes in the ancillary going forward, at least anything about new products or the benefits you may get from different pricing tools and things of that nature.

So we’re hopeful that we believe that we will continue to grow that line item, whether it’s third quarter, fourth quarter and beyond. We’ll see, we have a number of things we’re working on; one thing that is out there is we are starting on September 1 to charge people that choose to print their boarding pass at the airport ticket counter, that is new and it goes into effect on September 1. So we’ll see what the effect of that is.

And there’s quite a few others that are coming down the pipe, and we’ll see, but we’re obviously focused on trying to grow the ancillary line item, both the air related as well as reversing the declines that we’ve seen in the third-party business and the lapping effect on that one will help, but more importantly, we think we have some other ways to start to drive performance there and we are optimistic we will be able to do that by year-end.

Catherine M. O’brien – Deutsche Bank Securities, Inc.

Okay, great. And then just one on the used aircraft market, I was just wondering if you have noticed any changes in price in the aircraft market, several of your U.S. peers have also taken the view over the past year or so, that buying used makes a lot of sense from a return standpoint. Of course, it’s not really a view shared globally. So just wondering couple of U.S. peers were enough to make any difference in kind of firming up some pricing in the used aircraft market, or just overall, global desire for new aircraft kind of overwhelms that trend in the U.S.

Jude I. Bricker

This is Jude. I’m not qualified related speaking the entirety of the used aircraft market we trade specifically in the A320s clearly. And we are finding opportunities to buy the airplanes that we want at the prices that we need them to be. And that’s been consistent since we entered into this fleet. I think we’ve seen some firming certainly in newer airplanes and the ones that we typically acquire and we’ve seen a lot of financial driven investors move into used airplanes sometimes compete and drive up prices. But the planes that we are buying remain available and at prices we need them to be.

Scott D. Sheldon

And that being said they are also now widely available and that’s why we are very selective about the transactions we enter into, but we certainly believe that we will be able to continue to acquire high quality aircraft at attractive prices to fill out our fleet needs for the next few years. The 12 aircraft transaction fills in 2018 which will provide a lot of growth for 2019 and at the movement, we are really targeting fleet additions in the back half of 2016 and 2017. So we are very confident, we’ll be able to continue to acquire those types of assets at attractive prices.

Catherine M. O’brien – Deutsche Bank Securities, Inc.

Okay, great. Thanks for the time.

Operator

Our next question comes from Duane Pfennigwerth with Evercore Partners. Please proceed.

Duane Pfennigwerth Evercore Partners

Hey, guys good afternoon. I just wanted to just follow-up on these fleet transactions. Can you talk a little bit about why this specific deal made sense? I mean if you are making a bet on the current generation technology sort of going down in price. Why does it make sense to bring these on your balance sheet, if you can’t take them until 2018? And then, I just wanted to ask you all about this leasing revenue, it’s pretty material and obviously there is some accretion there as well. I am wondering is this something that you will look to grow over time, could we see Allegiant have more of a kind of a leasing segment within the business. Thanks for taking the questions.

Andrew C. Levy

Yes, Duane let me start and Jude is going to give you most of the answer. Let me point out first the main motivation is to acquire aircraft to meet our growth desires and – why this particular deal, but I’ll point out that this deal apart from being very accretive in terms of net income. It also has a very high return on capital. And we didn’t – we are not motivated to generate financial returns by trading an aircraft, that’s a secondary value because quite obviously, we will make a lot of more money with those airplanes, when we operate them. But I just want to make sure, that’s out there. The return on capital for these aircraft are little lower than the corporate return over the last 12 months. It’s extremely high, so we think it’s a great use of capital, but Jude do you want to jump in on the rest.

Jude I. Bricker

I think a couple of things. first, these airplanes are very similar to the ones that we operate today. It’s a chunk of them that we could buy altogether at the same time. We’ve recognized that we’re going to be in need of these kind of airplanes for the foreseeable future, not that we’re planning a retirement of the MD80, but we someday will. and so our need for used A320 sort of extends many, many, many years into the future. So we’re not concerned so much about the tender of the leases. And so it’s a single transaction, many airplanes are of the same type, and then finally appraises where it works in our fleet, when they come into our fleet. And as far as growing lease revenue, I’d look at buying an airplane with lease attached is just another way of buying an airplane, that’s all. So if those deals happen and they do, I think, as Andrew said, we’re glad to be operators.

Duane Pfennigwerth Evercore Partners

Okay, that’s helpful. And then as you mentioned sort of second half of 2016, as we think about the next couple of years and your preliminary CapEx guidance for 2015, high level if everything sort of runs through the way you’d hope were expected to how many aircraft per year would you be looking to add in 2015 and 2016?

Andrew C. Levy

Duane, we’re not – we don’t have a specific target. We’ve always kind of run the business completely the offset way, which is, we view ourselves first is in the four operating are asset managers and we’ll find high quality assets at good prices that make sense long-term than we’ll execute on the transaction.

So I mean if there is an unlimited supply of those deals out there. We will probably be looking to grow anywhere from, call it eight to 10 airplanes a year for the next several years. But we’ll see within the market. We have 2015 is a pretty big growth year, 2016 right now; we’re definitely looking to add, and 2017, we have no delivery scheduled as of yet, and then 2018, we have a slog of them coming. So we’ll see the number of aircraft won’t – we don’t start out with the number and then go get them.

Duane Pfennigwerth Evercore Partners

Yes.

Andrew C. Levy

We start out with the deals that make sense long-term, and now we execute on the deals and then we figure out the best use of those assets, knowing that we have lots of uses and we’re confident we can drive a very high return on capital.

Duane Pfennigwerth Evercore Partners

Okay. Thank you.

Andrew C. Levy

Thanks.

Operator

Our next question comes from John Godyn with Morgan Stanley. Please proceed.

John D. Godyn – Morgan Stanley & Co. LLC

Hey, guys. Thank you for taking my questions. Andrew, one of the peers out there. Spirit talks a lot about how the raising price umbrella in the industry keeps opening up new market opportunities that sort of have this frame work where they thought there were 300 great markets that wouldn’t dilute the margins and that’s gone up to 500. I’m just curious if you could sort of speak to this team broadly. I’m not sure if you have similar numbers, and it sounds like in your back pocket, but are you sort of seeing a similar dynamic where as you look at the marketplace, you just see more and more domestic growth opportunities for Allegiant?

Andrew C. Levy

Yes, I mean I think John, the short answer is yes. As this all have come from first type fuel prices, which drove consolidation, which has resulted in obviously, the less capacity out in the market and particularly beneficial to us is the fewer hubs and fewer RJs serving the remaining hubs, because the 50-seater really doesn’t work in today’s market with fuel prices, where they are.

So it has created enormous opportunity for us, especially with our strategy, which as you know is very different than Spirit’s, and that we’re continuing to target these secondary and tertiary markets where most often, we’re kind of the only game in town, and we can offer really unique and valuable product. And those market opportunities have just continued to expand and yes, we share Spirit’s optimism of the future and we think, it is just enormous opportunity, and seems to continue to get better. So we’ll see.

John D. Godyn – Morgan Stanley & Co. LLC

And bringing that to a little bit more of a modeling metric, there was the time where we use to think about Allegiant as a 20% ASM grower, we’ve kind of come back from that a little bit, I wonder as you think about the next five years or so. What’s the right long-term ASM growth rate and if the cycle keeps heating up, should we be revising that number upward?

Andrew C. Levy

Well, I think that – I think the answer is probably not on a five-year basis. I mean we will grow at times a little bit lumpy, because of how we approach aircraft, we don’t bother multi-year new aircraft deals within a stream that comes in and it’s a little, because we are in the spot market, it’s going to fluctuate a little bit more. I think that in the current operating condition, we can continue to grow and let’s call it; the 15% to 20% a year range that that’s a range we’re very comfortable with, certainly from a financial standpoint, we should grow much, much faster, but we’re very conscious of the fact that we are also operators and do not want to grow at a pace too fast for us to maintain the appropriate control over the growth of the business.

And so we’re somewhat limited by just considering those types of issues, and not merely chasing the financial returns, which I think would justify much faster growth. So I think 15% to 20% going forward is a good number over the next few years in today’s market. And we’ll see, but it won’t be a straight line as you know, it will vary a little bit year-by-year.

John D. Godyn – Morgan Stanley & Co. LLC

And as we bring it to the debate on international versus domestic, and it’s old news that you pushed Mexico to the right a bit, but I wonder maybe part of that – part of the deprioritization is just a fact that the domestic marketplace is still so attractive to you?

Andrew C. Levy

Yes, I mean it really is. we’ve had our eye on Mexico for probably 10 years now. and the reason that we hadn’t gotten serious about it until the last year is for that exact reason that the risk reward is just higher in the domestic U.S., you don’t have to tackle all the complexities of international, which are very manageable, but there is an incremental amount of complexity that goes along with it. We’re a little – we’re much closer to launching that now than we were years ago, because we still think the financial returns are going to be very attractive.

And we’re getting the point where we can put the focus and priority in the IT area to enable us to launch service, and it’s not anything overly complex, it’s really just kind of basic things, calculating taxes and things of that nature. but it takes time and effort, and it’s just simply a matter of putting in the right priority order amongst all of the other different IT related projects we have going on, all of which are very important.

So yes, I mean the interest in Mexico is not because there is no more growth available in the U.S. domestic market, but it will be a nice ability to grow a little more, and if it’s a success, of course you think it will be, we think there’s opportunities that go beyond Mexico into markets specifically like Las Vegas in particular.

John D. Godyn – Morgan Stanley & Co. LLC

Got it. very helpful, thanks a lot.

Andrew C. Levy

Thanks.

Operator

Our next question comes from Dan McKenzie with Buckingham Research Group. Please proceed.

Dan J. McKenzie – The Buckingham Research Group, Inc.

Hey, good afternoon, guys. Thanks for the time here. I guess just following up on that last question, Andrew I’m wondering are you guiding to a 15% to 20% growth for 2015 then, because I think the last commentary or at least the last thought that I had about growth next year would sort of be in the low teens rate, but please correct me on that?

Andrew C. Levy

No, Dan. I’m not guiding anything; I think that conversation in my mind was a theoretical growth rate over a five-year period, I mean I think that if you looked over a five-year period, 15% to 20%, I think as a reasonable assumption. But I’m certainly not – I think I made that clear in the first question, we are not giving guidance on 15% today. And the question initially was about CASM, but obviously, CASM ex is largely tied ASM growth and utilization and we’re just not ready to go there right now.

Dan J. McKenzie – The Buckingham Research Group, Inc.

Understood, okay. And I guess with respect to the fee for putting a boarding pass at the airport. Just the question is, as you think about obviously in ASM revenue, but as a change in the behavior of passengers drive a change in the headcount need for front-line employees at the airport. Is there some kind of cost ramification with this particular ancillary revenue initiative as well?

Andrew C. Levy

Yes, there is certainly is although, it’s a little bit of, I think that you have to look in two different ways for us. I think that in our destination markets, where you have a lot of scale, that is certainly the motivation is to hopefully have a lower labor expense and maybe lower ticket counter expense in some of the airports where we actually have to lease ticket counter, some cases, you pay on a per passenger basis, it kind of doesn’t matter as much. In the smaller cities, it’s probably a little bit harder to see cost savings, because you still need a certain number of folks to turn the airplane, where you’re printing boarding passes or not, but we do think overall, there is some cost savings to be had.

There’s certainly will be some incremental revenue and we’ve been looking into this charge for quite sometime to modify behavior of our customers, and we really wanted to wait until we had an alternative means of doing business with us for printing the boarding card or for getting the boarding card and we not too longer rolled out readers, TSA checkpoints in every single end of our markets. And we’re going to continue to encourage our customers to either print their boarding card at home, or to download our mobile app and check in on the app, and go through security that way. and we think that that will certainly be a result of this, with more people will in fact do that. And we do think that creates even more opportunities to leverage the app that we’ve developed in terms of incremental revenue and things of that nature. So we think it’s going to be helpful in a number of ways.

Dan J. McKenzie – The Buckingham Research Group, Inc.

Very good, and then if I could just one final question here. In a former life, I was pretty – I worked pretty closely in the aircraft leasing industry. and so I am fan of that industry, so I think the move to lease that aircraft is very interesting. but if I could just plan obviously the wrinkle to that is the credit risks associated with the lessees. And so I’m wondering if you could address what any – what kind of cash collateral you might have collected, as a result of these leasing, if you can speak to some of the credit risk and of the lease – of the lessees and for some reason, you got these aircraft back it seems like you would have a home for them, but perhaps if you could just address that as well.

Jude I. Bricker

Yes, let me make, this is Jude. Let me make three brief points, first one is that for these leases we have a really good credit on the other side. Second one is we assume debt, as part of the purchase of the aircraft and the lender and the lessee are the same entity and that provides some additional level of greater protection. And the third point is that we operate them ourselves. So we have a home for the airplane if they come early. So we are not concerned about it.

Dan J. McKenzie – The Buckingham Research Group, Inc.

Okay. Thanks very much guys.

Andrew C. Levy

Thanks.

Operator

Our next question comes from Glenn Engel with Bank of America Merrill Lynch. Please proceed.

Glenn Engel – Bank of America Merrill Lynch

Good afternoon sticking with the aircraft leases can I assume that all the insurance maintenance all the expenses have been covered by the person operating the plane and you are just depreciation and interest expense is the only thing you have to worry about?

Andrew C. Levy

That’s true, there will be some administrative costs associated with the leases themselves, but other than that.

Glenn Engel – Bank of America Merrill Lynch

Are there maintenance reserves as well?

Andrew C. Levy

They are not maintenance reserves now.

Glenn Engel – Bank of America Merrill Lynch

But they expected to give the plane back in a certain condition or?

Andrew C. Levy

They are, yes absolutely. The airplane will not require much work on them other than transition related costs when they come back to us.

Glenn Engel – Bank of America Merrill Lynch

You have mentioned 4.9 million benefits operating income but if I included the interest expense would it be closer to 3 million of a quarter?

Andrew C. Levy

Good question…

Glenn Engel – Bank of America Merrill Lynch

And you have a third quarter and can I just take the second quarter and add $5 million for this $300 million debt issue to get with interest expenses in the third quarter?

Andrew C. Levy

So, on your first question Glenn. Let us get back to you on the interest expense associated with the assumed debt on that transaction, because we don’t have number handy to give to you, your number is probably in the right zip code. As far as, coming up with a number total used in the overall incremental debt expense, the interest associated with the incremental debt that we’ve raised is that what you are asking that’s second part..

Glenn Engel – Bank of America Merrill Lynch

When I look at the second quarter, or the third quarter I should just take the $300 million at 5.5% and that’s with the third quarter expense, interest expense would be?

Andrew C. Levy

Yes, I think that’s generally right, I mean there is puts and takes, I mean we pay down the term loan we replaced with less debt at a lower rate the collateralized 70, 80’s, 757 transaction is a little lower and then the big one is of course $300 million. So I think, that’s going to get you in the right zip code.

Glenn Engel – Bank of America Merrill Lynch

Your RASM guidance up to the 4th July but zero to two for the quarter as a whole, if they are just comparisons are tougher as the quarter progresses.

Jude I. Bricker

Say the question again please, its Jude.

Glenn Engel – Bank of America Merrill Lynch

Your guidance in the third quarter was July up two to four in PRASM and fully quarter up zero to two. So that, does that just a is being softer or is it just the comparisons were usually tough in July.

Jude I. Bricker

July where there is couple of things going on first is that, third quarter as it stands capacity wise, so heavily weighted in July. Mainly, the way that the quarter goes dictated as July goes. And we are trying to grow some of the shoulder months. So you are going to see higher percentage of growth and traffic in August year-over-year than the other three months of the quarter. So we are focused on growing more of the shoulder period which is going to put some pressure on inner revenues. The other thing it had been mentioned is that we on the 21st July instituted the increase segment fee taking it from 250 per segment to 560 per (indiscernible) as we don’t have any direct competition in many of our markets in all our travelers for the most part are non-stop travelers. That’s going to put some downward pressure also on fares for us.

Scott D. Sheldon

That’s when Glenn we’re going to monitor it very closely, but we want to be conservative I think we can’t – we are not assuming that you can just simply pass that increase on with no revenue effect and so we’re perhaps been a little bit conservative knowing that’s there and we’ve had adjust our fare structure a little bit, and hopefully we can’t pass it all through, but we’re at the moment not fair to forecast that we’re able to do so.

Glenn Engel – Bank of America Merrill Lynch

Thanks.

Andrew C. Levy

And we maintain the revenue, and the growth rate is pretty good I mean the revenue environment is positive, no doubt.

Glenn Engel – Bank of America Merrill Lynch

Final question on the international side, getting the computers ready to implement the international strategy, what other mileposts are left?

Scott D. Sheldon

Right now it’s on hold Glenn. We have spent a lot of time specking out what we need to do and understanding all the different things that have to be done into the system to be able to serve any international destination, but obviously we’re first focused on Mexico as you know. So the project is sitting on hold and it just ready to be kicked in once we think it’s the right time in terms of just fitting into the other corporate priorities we have. So I’m still hopeful that this time next year we’ll be getting ready to launch and we’ll keep you posted.

Glenn Engel – Bank of America Merrill Lynch

And when if you decided to kick in today which you’re saying you are not would it be three or six months before it’s implemented. How much lead time you had to give yourself?

Andrew C. Levy

Well, I mean it all comes down to the level of resource investment, but if we made let say a full-court press from day one until the day that everything is ready and we’re ready to actually go live and start selling. I think that’s been released, it maybe about a six months we know realistically,

So we have to make that decision sometime in the first quarter of next year, if we want to try to be in the market by the end of next year.

Glenn Engel – Bank of America Merrill Lynch

Thank you, very much.

Operator

Our next question comes from Bob McAdoo with Imperial Capital. Please proceed.

Bob McAdoo – Imperial Capital LLC

Hi, guys most of my questions have been asked, but answered. A couple of things just on the guidance for the third quarter, when you have total RASM of 0% to 2% for third quarter, does that include the rental income on the 12 airplanes?

Andrew C. Levy

No, I don’t think so Bob.

Scott D. Sheldon

No, it doesn’t, that’s a scheduled service unit revenue.

Bob McAdoo – Imperial Capital LLC

That schedule service. And then down – go ahead.

Scott D. Sheldon

No, go ahead Bob; I was just going to say, yeah, that’s not a corporate kind of RASM, it’s a schedule service number.

Bob McAdoo – Imperial Capital LLC

Good. And then downward CASM, if we get the same 3% to 5%, again that does not include the interest – that does not include interest period because that’s an operating cost and then it – and also that’s is correct that would not include depreciation then on the 12 aircraft because again that’s a corporate kind of deal as opposed to schedule service kind of deal.

Andrew C. Levy

No, that one – that one is not correct, the DNA expense is part of the CASM calculation, so that does include the depreciation and amortization expense associated with the aircraft transaction and that’s part of the reason we want to kind of a big effort to show as much detail there as we could and if you look right underneath the guidance, there is a nice little table there, where we are trying to provide hopefully…

Bob McAdoo – Imperial Capital LLC

No, I saw that.

Andrew C. Levy

As much information as we can, and not to say – maybe there is not more we can provide. So the bottom line is, there is lease income revenue that will – well we started to recognize to some degree in this quarter and then it will be greater as time goes on, and that is not captured in any of the unit revenue metrics. The depreciation, amortization expense is captured in the unit metrics of cost per ASM. But obviously there are no ASMs associated with it and then as you noted, anything that’s in interest expense is obviously below the line and not part of the CASM calculation, but of course there is interest expense. Anyway so that’s where we are.

Bob McAdoo – Imperial Capital LLC

Good, that’s what I needed. Thanks a lot.

Andrew C. Levy

Thanks, Bob.

Operator

Our next question comes from Stephen O'Hara with Sidoti & Company. Please proceed.

Stephen O'Hara – Sidoti & Company

Hi, good afternoon. I was wondering, just I don’t know if you’ve addressed yet or not. But I mean in terms of the guidance that you gave for CapEx for full-year 2014, and it looks like, it shifted from 15% to 14%. Is that essentially correct or is there anything else in there that has maybe changed since the update on the guidance back when you guys did the aircraft purchase.

Scott D. Sheldon

A lot of shaking heads saying, yes. So yes, I think your assumption is correct.

Stephen O'Hara – Sidoti & Company

Okay, all right that’s about it. Thank you.

Andrew C. Levy

Thanks.

Operator

Our next question comes from David Fintzen with Barclays Capital. Please proceed.

David Fintzen – Barclays Capital Inc.

Hey, good morning everyone. Just quickly follow-up on the TSAV, you mentioned you are going to monitor it, what did you put into the guidance in terms of your ability to recapture the fund that you are willing to set?

Andrew C. Levy

I don’t think we’re going to give you anything that’s too specific. But we certainly do not expect that we can simply pass on that increased tax and have no effect on revenue. I mean I think that that would be a very aggressive assumption to take and we are not making that assumption. So we do expect there will be dilution caused by the fact that travelers now have to pay more money to travel on in the airline business, in the networks. And this particular fee is a little more impactful on us and others because as Jude mentioned all of our traffic is LMD, we don’t have any connects. And so our customers are all going to see a [$3] (ph) and change increase in total expense on every segment that they travel. So we are trying to be very conservative about that and assume that it will be dilutive and that is part of the calculation that led to the third quarter unit revenue guidance that we’ve provided.

David Fintzen – Barclays Capital Inc.

Okay, that’s helpful. And just in terms of thinking of that, that impact on the road, I mean CASM oil kind of moved around you’ve used to kind of tweak your network and take advantage of your flexibility. The TSAV potentially as a margin kind of changed the distance of routes position or some longer distance routes that you won’t necessarily – have been interested in before.

Jude I. Bricker

I think it’s too early to say David, we will see I don’t think its obviously the effect of this, look we think we’ll recapture some of the – that we’ll maintain some of our fare, we are not just going to cut to lower our prices by the $3 or they are about for segments. So we are not assuming that. So the materiality of it is not anything like the old days when fuel went up to $150 per barrel, but we are cautiously watching it and we’ll see what happens (indiscernible) might do that we described perhaps, so we’ll just have to see what customer behavior is.

David Fintzen – Barclays Capital Inc.

Okay, appreciate the color. Thanks.

Andrew C. Levy

Thanks.

Operator

We have no further questions. I would now turn the call back over to management for closing remarks. Please proceed.

Andrew C. Levy

Well, thank you everybody and we’ll talk to you again in 90 days time. Have a good day.

Operator

This concludes today’s conference. You may now disconnect. Have a great day.

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