Spirit Airlines, Inc. (NASDAQ:SAVE)
Q2 2016 Earnings Conference Call
July 29, 2016 09:00 AM ET
DeAnne Gabel – Senior Director, Investor Relations
Ted Christie – Chief Financial Officer
Robert Fornaro – Chief Executive Officer
Thomas Canfield – General Counsel
John Bendoraitis – Chief Operating Officer
Theodore Botimer – Senior Vice President of Network and Revenue Management
Edward Christie – Chief Financial Officer & Senior Vice President
Savanthi Syth – Raymond James & Associates
Rajeev Lalwani – Morgan Stanley & Co.
Richa Talwar – Deutsche Bank Securities, Inc.
Matt Morris – Wolfe Research
Julie Yates – Credit Suisse
Jamie Baker – JPMorgan
Joseph DeNardi – Stifel
Helane Becker – Cowen Securities
Duane Pfennigwerth – Evercore Partners
Dan McKenzie – The Buckingham Research Group
Stephen Trent – Citigroup
Hunter Keay – Wolfe Trahan
Welcome to the Second Quarter 2016 Earnings Conference Call. My name is Sophia [ph], and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
I will now turn the meeting over to DeAnne Gabel. DeAnne, you may begin.
Thank you, Sophia [ph]. Welcome to the Spirit Airlines second quarter 2016 earnings conference call. Ted Christie, our Chief Financial Officer will review our second quarter performance and forward outlook followed by Bob Fornaro, Chief Executive Officer, with closing remarks. Also joining us for the Q&A session today are Thomas Canfield, our General Counsel; John Bendoraitis, our Chief Operating Officer; Ted Botimer, our Senior Vice President of Network and Revenue Management, and other members of our senior leadership team. This call is being recorded and simultaneously webcast. A replay of this call will be archived on our website for 60 days.
Today's discussion contains forward-looking statements that 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, July 29, 2016, 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 special items. Please refer to our second quarter 2016 earnings press release for the reconciliation of our non-GAAP measure.
And now I'll turn the call over to Ted.
Thanks, DeAnne. Thanks to everyone for joining us. For the second quarter we reported net income of $78.5 million or $1.11 per diluted share and an operating margin of 22.3%. While our bottom line results were in line with expectations we are disappointed with the yield performance. We saw a slight sequential year-over-year improvement in domestic TRSAM for the second quarter but despite our efforts yield were and continue to be pressured by more fare discounting by our competitors in what is typical for our peak summer travel period.
International accounted for approximately 12.5% of our capacity in the second quarter and TRASM for that region underperformed our system average. While the international beach destinations are doing fine, many of the VFR markets continue to be negatively impacted by macro-economic conditions in the region. We've pulled several of our red eye international flights from the fall schedule which should help our international TRASM performance going forward. This should also contribute to better operational performance as it will provide additional time for operational recovery and maintenance.
Total revenue for the second quarter 2016 increased 5.5% on capacity increase of 23.1%. Total revenue per passenger segment for the second quarter 2016 declined approximately $18 year-over-year to $104.19 primarily driven by a decline of $15 in ticket revenue per segment. Non-ticket revenue per passenger segment declined about $3 year-over-year to $51.32 in line with our expectations. We continue to experience modest pressure on take rates for certain ancillary items which we believe are co-related to fare compression. We have several new initiatives we will begin rolling out by year-end which should help mitigate some of these pressures. Given our booking curve we anticipate there will be a one to two quarter lag post implementation before we start recognizing the value of these initiatives.
Non-ticket is a stable strategically important part of our model. However it is worth reiterating that we managed the total revenues. We highlight this reminder because as we add more short haul routes to our network it is likely to have a negative impact on non-ticket revenue per passenger segment. Take rates for certain ancillary items are strongly co-related to stage length therefore on shorter haul routes it is anticipated that non-ticket revenue per segment will be less than the system average. Conversely, passenger yields on short stage routes especially in market we are targeting that have less competition are expected to be higher than system average and should more than offset any drag from lower non-ticket yields on these routes. The change in our mix of routes will be gradual so this isn't something that will be noticeable immediately but it is something to keep in mind as our network evolves.
Turning now to costs, for the second quarter 2016 CASM ex-fuel decreased 8.6% year-over-year to $0.053. The primary drivers of this improvement were lower aircraft rent per ASM primarily driven by a change in the mix of leased and purchased aircraft as well as lapping the higher expense in the second quarter last year related to an unusual number of flight cancellations and delays. The company purchased one 319 aircraft, formerly under a lease arrangement and negotiated four 319 aircraft lease extensions during the quarter, which also contributed to the lower aircraft rent for ASM. Keeping some of our 319s in the fleet will enhance our deployment flexibility. Including the transactions completed in the quarter and during the month of July, year-to-date we have purchased six 319 aircraft off-lease, extended the leases of five 319s, and now we are in negotiations to purchase or extend the leases on a couple of additional 319s currently in our fleet. During the second quarter we took delivery of one new 320 and three new 321s, ending the quarter with 87 aircraft in our fleet.
Under the share repurchase authorization approved last October, we spent $51.3 million during the second quarter repurchasing approximately 1.2 million shares. Since we began our share repurchase program through yesterday, we have spent a total of $173.8 million and repurchased over 3.2 million shares or approximately 4.5% of shares outstanding. We ended the quarter with an unrestricted cash balance of $1 billion, an average net debt to EBITDA ratio of 1.35 and a pre-tax return on invested capital of 27.6%. We have proven that our cost structure coupled with our low fare plus ancillary model positions us to deal with a wide variety of macro environments. We believe this will prove valuable as we head into the latter part of this decade and into changing economic cycles.
We have recently announced several network changes. We are adding Akron-Canton, Ohio and Newark, New Jersey as new destinations for the route map. Akron-Canton will be the first among several mid-size cities that we have identified to add. Newark, New Jersey will be a great way for us to grow in the New York area, supplementing our New York LaGuardia service. Additionally, we are delighted to have been granted provisional approval to offer service between Fort Lauderdale and Havana, Cuba. We have also announced new service from Orlando starting in the fourth quarter to Boston, Philadelphia, Newark, Akron-Canton, Kansas City, Niagara Falls and Flatsburg.
Other changes will include an increase in seasonal markets to better maximize peak travel periods. For example, we've identified several existing markets including four touching Dallas that we will seasonally reduce for their non-peak winter season but resume again in the spring. In addition some of our new markets, such as Akron-Canton to Fort Myers and Akron-Canton to Tampa will be served in the winter to align with their peak travel season.
Turning now to our third quarter and full year 2016 guidance, scheduled capacity is expected to be up 16% in the third quarter. We continue to target a capacity increase of about 20% for the full year 2016. On a demand front, domestic leisure volumes are strong. However, yields remain soft. Towards the end of the third quarter we'll begin to lap the initial impact from the domestic fare structure change last year and our system capacity growth drops from up 24% in the second quarter to up only 16% in the third. Based on current pricing demand and capacity trends we expect TRASM to be down approximately 9% year-over-year, a significant sequential improvement compared to the down 14.3% in the second quarter 2016.
Based on actuals to date and the forward curve as of July 28, 2016 we estimate our economic fuel price per gallon for the third quarter will be $1.52. For the third quarter 2016 we estimate our CASM ex-fuel will be up about 3% year-over-year. Higher maintenance expense driven by the timing of events is the largest driver of the expected increase. Offsetting some pressure from maintenance expense will be lower aircraft rent per ASM. We currently estimate our CASM ex-fuel will be up mid to high single digits for the fourth quarter, again, primarily related to the timing of maintenance events. With all that said we remain on track to achieve adjusted CASM ex-fuel of about flat for the full year 2016. This includes the economic impact from the recently ratified agreement with our flight attendants which adds approximately 100 basis points to the year-over-year change in CASM x this year.
Our long-term goal remains to produce stable to declining costs throughout our growth cycle. We are confident we can achieve this goal. However it should be noted that do to the timing of maintenance events and/or new labor agreements we are likely to see volatility either up or down in any given 12 month period, but again the long-term accumulative average trend for CASM x on a stage adjusted basis through our growth cycle is stable to declining. As the company moves into markets with a shorter stage it mathematically increases absolute CASM. However, maintaining and growing our relative CASM advantage in short, medium and long-haul markets is the true goal and one that we remain 100% committed to. Taking into account July revenue performance, current pricing and booking trends the current outlook for the industry capacity and our CASM ex-fuel estimate you get to a third quarter operating margin of about 21%.
With that I'll turn it over to Bob.
Thanks Ted. On the revenue front we are seeing some sequential improvement. The recovery as – is at a slower pace than we had hoped for. During the quarter we pushed through several structured fare increases. This was a first for Spirit. Although we are strong proponents of low fares heading into the peak travel period we felt the pace of our bookings implied that our fare levels were suboptimal for the peak demand period. Unfortunately the benefit of these increases was a large diluted by aggressive competitive actions during that period. However thanks to our ultra-low cost structure, we are still able to deliver solid profits and among the highest in the industry.
Our team continues to execute well on cost performance and remains focused on maintaining and improving upon a relative cost advantage which is even more important in this low fare environment. Operationally, our team has made good progress during the quarter. I want to thank and congratulate our team members for achieving the highest second quarter on par performance in the last five years. We still have a lot of work to do to achieve consistent reliability and improve our customer's overall experience, but the changes we are making are beginning to take hold.
We are pleased to have reached the five-year contracts during the quarter with the association of flight attendants who represent our flight attendants as well as the international association of machinists who represent our ramp service team members at Fort Lauderdale. ALPA, who represent our pilots applied for mediation and we joined them in their request. Our pilots do a great job for us and we look forward to working with the NMB and union leaders to reach a mutually beneficial agreement. The focus of our discussions will be on pay rates, benefits and productivity.
We will not be commenting further on this call about the status of our negotiations. In addition to the near-term changes to the network as described, we are working on finalizing the next round of changes to be announced soon. Broadening the array of types of markets we serve should make us less susceptible to negative impacts when other carriers have pricing skirmishes. In summary, we feel confident about our competitive position and believe the changes to our network along with our operational improvements further solidify our competitive advantage.
Thank you, Bob, and Ted. We are now ready to take questions from the analysts. We ask that you limit yourself to one question. If you have additional questions or follow-ups you are welcome to place yourself back in the question queue and we will allow for additional questions as time permits. Sophia, we are ready to begin.
Thank you. We will now begin the question and answer session. [Operator Instructions] And our first question comes from Savanthi Syth.
Hey. Good morning, guys. I was wondering if you could appreciate the color on the drag from international. I was wondering if you can provide a little bit more on just how long that drag has been and what that trend is like and a little bit more maybe color on the domestic market and how the fare weakness progressed through the summer. I it seems like maybe throughout the summer it’s been weak with higher level of fare activity-or fare sale activity. But a little bit more color would be greatly appreciated.
Sure Savi, it's Ted. I'm going to comment on international. I'll let Bob handle the domestic but I think as we mentioned last call we did see some weakness in a few of the currency driven countries. Most notably in Colombia and a few places in Central America where we've had some weakness associated with probably their micro related currency issues. That persisted again into this quarter and I think drove some of the performance we saw in LatAm. Caribbean was performing well, so this is more about what we've seen in more VFR type markets. We've made some adjustments as I've mentioned going into the fall and to next year that we think will adjust capacity the right way into those markets and we're optimistic that we can start to see some improvement from that going forward. So with that, Bob you want to comment?
Sure, Savi. Going back to the domestic, first of all we've had a lot of color from previous calls with other carriers but I think actually, around early May we began a look at the quarter and we actually felt comfortable, are putting in some structured peak off-peak pricing changes and as we get into the middle of June, a $5 across the board fare increase. And quite frankly, we expected June which is obviously the strongest month in the summer to play out as you might guess. Carriers trying to sell up in close and exactly the opposite happened. In fact, the last say two weeks of the quarter we saw a lot of discounting, primarily by Southwest in markets like Atlanta, Minneapolis, those types of markets which are important markets to watch. We saw, to be frank we actually had to lower our fares because their fares were below ours which is not typical.
So we didn't get to see the strength in the back half of June that you would have expected and a lot of that competitive dynamic continued into early July. As I say now towards the end of July, I'd say the situation is better. And I think perhaps the third quarter play out more normally where during peak days and very peak demand there's sell-off opportunity. So there's a little more stability today in the marketplace than what we were looking at the very end of June. Okay?
Sophia, we're ready for the next question.
Our following question comes from Rajeev.
Hi, guys. Thanks for the time. You've been adding a number of routes in midsize cities as per your strategy, so obviously delivering on that, but could you just talk about performance initially and how you've been able to make it work just given the model that you have with higher frequency, higher load factors, et cetera. And then if you could maybe now give us more color on maybe the mix overtime of midsize cities as you look forward?
Sure. In terms – it all basically starts with the cost structure and for the most part we have relatively dense airplanes. So we have to take it from our perspective. So we've got dense airplanes and a low cost structure. So we tend to look for generally high demand markets and perhaps a lot of markets that create seasonal opportunities for us. When you look at it from that perspective, there's a lot of root opportunities either on an annual basis or on a seasonal basis. One thing and I will- you'll hear more and more, we seasonally will make more adjustments in our network. As the market remains competitive which we assume it will, we will be more tactical on a seasonal basis and take advantage of those seasonal valleys. Perhaps when we were looking out for the fourth quarter we actually might have moved to a greater degree, the small cities. But a couple of things have happened in the last three or four months.
The opportunity to fly to Havana came up. We didn't anticipate that necessarily for the fourth quarter and we were able to get a tentative award and more recently Newark. For a carrier like Spirit, we had been closed out of Newark. We're presented with an opportunity, we announced our schedule yesterday, so there's two airplanes that will be flying to Newark in the fall that perhaps we might have used in other places.
So we will continue to move on, let's call those random opportunities that we may or not be able to predict. There is always going to be issues with let's say space in airports and what we don't want to do is forgo those types of opportunities. So we have a lot of flexibility baked in, and like I said I think you're going to see a balance of long and short routes, and with all that, again more focus on seasonality. One area that we look at the announcements is quite a bit of Orlando and Orlando is actually a very good place for mid-size city opportunity and I think relative to the breadth of service that we have we were probably a little bit smaller in Orlando than one might expect and you'd have to see a lot of activity in Orlando going into the fourth quarter of this year.
Our following question comes from Mike.
Oh, hey, everyone. It's actually Richa Talwar in for Mike. Good morning. So first I was hoping you could put a finer point on the progress you've made around operational improvement from a financial perspective. We'd of course expect better operational results to be a solid net contributor to the bottom line but it does come with associated cost. So I wanted to see if you could tell us the total benefit after considering the pluses and minuses the improvement has had financially, be it on margin or earnings or any financial metric you're willing to shed light on? Thanks.
Hey. Good morning. It's Ted. So first of all we're very pleased with the operational performance in the second quarter, as Bob mentioned, very good on time performance. The work that the team has been doing, and there is a considerable amount has really started to already bear fruit and that's a very positive sign when we head into the fall when we have a real opportunity to look at the way the network is structured to help the operation. From the puts and takes perspective one thing I would say is the way entered the quarter thinking about unit costs and the way we exited the quarter thinking about unit costs, I would say it was gently positive. So I we're actually encouraged that better operational performance over time will yield cost benefit.
There are investments in the business that we make in order to produce those better operational results, but as we've talked about before we're feeling like that could at the very least net itself out over time or perhaps provide a tailwind. And while the tape is not fully in yet on this project, it's still early. The progress we've made and the results the team is able to generate with the kind of network tweaks that we've been doing. As you've seen from our network instruction there's nothing significant that would appear on the outside. These are just tweaks that we've been able to make. We're encouraged about that. The real kind of step function or best move that we'll make will come in the fourth quarter when we'll really have a chance, as I said earlier to take a look at network construction and how that's going to make the operator's job a little bit easier. So hopefully that helps. We're encouraged by the results and we're also optimistic about what it means to our cost structure.
Next question comes from Hunter.
Hey, guys. It's actually Matt Morris for Hunter Keay. Thanks for the time. Bob, you commented last quarter about expecting some ancillary initiatives in the $1 to $2 dollar range, at the earliest, 3Q. Today you said you expect to see those in by year-end, so I'm wondering if that push out coincides with the decision to maybe pursue a new reservation system like Navitaire? Is it fair to assume a new reservation system would be a needle move for a first CASM? Thanks guys.
Well, I mean obviously we're in the process of renegotiating our deal with Navitaire, and so I'll just kind of leave it at that. But in terms of initiatives and the ancillary initiatives, I like to make, as typically these things always take longer than we would like and I think our experience, ultimately we always have a tendency to underestimate when these projects are going to be alive. It looks like November, December, we will be rolling the new initiatives, and so we're really going to see the benefits as we move into 2017. Again, the website, the redesign we do expect in the fourth quarter. That will allow improved merchandising. And I think we'll have some dynamic pricing opportunities and in ancillary as well. And things will start to roll out but the real benefits are going to come after that. Okay.
The next question comes from Julie.
Good Morning. Thanks for taking the question. Wanted to ask a couple of questions on the new service announcements. How are you determining the level of demand on these routes to support the new service? And what are your assumptions in terms of competitive response where you're entering a market that's currently served by only one other player?
Well, let's take, you know this, Akron, which we've announced four new city pairs. There has been 10 to 15 years of continuous service, initially with AirTran and later Southwest. That was actually fairly easy to predict because there is a base of service and we expect competition anywhere. There is, I believe Allegiant is in the market in a small way and there is competitive activity in Cleveland, we're also in Cleveland, my own experience is there is some overlap between the two markets but also there are some very separate business pockets of demand for each airport. So that's actually one where it's more easy. In other markets that are smaller, you use various relationships and perhaps other comparable cities and experience and so I think, we think for example the new services in St. Plattsburgh and Niagara are actually very low risk because they're coming at a time of year where there's a huge snowbird activity. So those kinds of markets I think are generally easy to define.
None of these routes are routes where the customer base is 20 to 30 a day and you're trying to push it on two days. Those aren't the kind of markets, but yeah, midsize markets are different than, I'd say small markets that have never had any service. These markets are actually- have been fairly well served over time. Now we think there's quite a few of them out there, and those are the kind of routes that again, you could fly on an annual basis and again the fit the mold of allowing us to do seasonal adjustment as well because they also tend to peak in the winter when certain east-west markets are weaker.
Okay. Great. And then just on RASM as we think about the prospects for further improvement into fourth quarter can you just give us your view on kind of the seasonality as we get into more of the off-peak and whether we should expect this sequential improvement to continue into the fourth quarter?
I mean obviously, you can't read your bookings really to tell us what's going on in the fourth quarter but we certainly believe there will be continued sequential improvement going through the fourth quarter. You know as we look forward, the third quarter is a little different. The strongest month of the quarter is July and that's largely done. September is generally one of the weakest months of the year across the industry, but fortunately it will also contribute the least. But looking out we see strong sequential improvements as I think people would expect.
Our following question comes from Jamie.
Hey there. Good morning. I have a variation on Julie's first question. In a situation where you're deciding between two routes, so let's say identical stage lengths, identical P-dos et cetera, the only difference being who your nonstop competitor is going to be. First does that influence which of those two routes you would hypothetically choose and if it does, what sort of competitor do you prefer in the current environment? Another ultra-low cost carrier or an aggressive mega-carrier that's flush with fuel savings?
That's a heck of a question. You know I don't think you could just kind of group everything into sort of the one stable current- I would just say this. There are first of all, certain routes which you can kind of go under the assumption that, let's say there's an incumbent, it's a very important route, likely they'll never adjust their capacity. If that's someone's hub route where they've got seven or eight flights to L.A. you can just kind of view that as on that's going to be competitive. There may be a route where your competitor only has one flight, and that's why there's not, let's say a hub market. It could be a point-to-point market. There's always the possibility that the other carrier could withdraw. So there's a number of criteria but I think when you look, we think there's going to be a mix of all kinds of routes. In Chicago, In Dallas, in Atlanta, we view those markets as big enough where- and in Houston where we can establish a position right alongside of incumbent competitors who are always going to keep those service levels. But I think because of our cost structure there's always going to be some pricing opportunities for us.
So the key thing for us is we've established those positions and actually, they're going to be very important to us going forward and over time we always have the opportunity to continue to grow those or keep them stable. Right now in terms of certain leisure markets, it can be Las Vegas, it could be Florida, a little bit more in Tampa. But those markets, I don't want to use the words less important but the fact is those are markets where the cost structure could create advantages for us because I think at the end, a legacy carrier, or a high cost carrier is less likely to stay in a midsize leisure route than a strength market in one of their hubs. I think that would- and beyond that I would just say every route, we'll judge on its own merits but I think in terms of structure, we don't anticipate when we're going to Chicago west coast or Dallas west coast that either American or United is going to change or reduce. Okay.
The following question comes from Joseph.
Yeah. Thank you. Bob, sorry to focus on Akron here, but you mentioned that Allegiant's there on a relatively small presence. I mean I think they do that because they thing that twice weekly is where the demand lies. So do you think that you can stimulate more demand to justify daily service or is the strategy to go in and try and take share by offering a lower schedule or a lower price? I think that's a pretty specific question. Is the strategy to take your share or stimulate new demand?
Sure, I actually think Akron is actually an easy one. And I actually think that's an airport that Allegiant hasn't served on an optimal basis. That route for more than a decade had nonstop service to several foreign destinations daily. And so that's the basis of the opportunity. And we're very comfortable that all the information proves it out. So different companies can have different views, but like I said, that's one from personal experience. There is a decade of flying at AirTran and double digit margins. And I think that our cost structure is even better and I think we're going to have exceptional margins. So I'm very comfortable with that first small new city.
Our following question comes from Helane.
Thanks, operator. Hi, guys. Thanks for the time. So my first question really is when you think about, like Newark. Bob, you knew this market, its horrible air traffic control, it's actually raining today, ceilings are low, flights are delayed. You've made such great progress on on-time performance and operations. Does it make sense to go into a market where you're knowingly going to have issues right off the bat? A, and more, maybe- or you've got to dedicate the two aircraft to the market so they just go back and forth all day?
Well that's a really good question and we both know Newark pretty well and it's just another LaGuardia which is also again a challenging market for us because we're not an airline that has commuters and who can cancel our commuter flights to keep our mainline flights on time. But we've been – you know airport capacity is – it can be a challenge. When the opportunities open up, we really can't wait for the ideal situation. And Newark is going to be what it is. I don't necessarily view it as a huge city for us, but it can make a difference if we can get a gate or two to our network. And that will pay dividends, because it will create opportunities for us going forward. So we have to really grab the opportunity, because we don't know when the next one will be. And so like I said, we're prepared to adjust our schedule, and we're going to do our best to build in buffers on this flight. So if we – if we take the anticipated delay in the four o'clock hour, we're going to try to create recoverability. So I would just say that that's actually an area where we are committed. We're going to make sure that we build in some buffers at recoverability to allow us to take advantage of the opportunity. So I guess that we have to always balance off the operational issues versus the revenue opportunities and kind of try to find a path between the middle of those two points. Okay?
The following question comes from Duane.
Hey, thanks. It sounds like Helane may have been talking from personal experience there in Newark. Anyway, I wondered have you studied what Ryanair is doing with respect to bundling seat assignment, bag fees, priority boarding into new fair categories, what they're calling leisure plus? And [audio gap] the inverse of basic economy for the legacy carriers, low cost carrier re-bundling if you will, simplifying the experience for some customers that are willing to pay for that. Have you studied this opportunity? And what would it take from a systems perspective for you to attack it? Thanks for the one question.
Hey, Duane. It's Ed. Yeah, we have looked at that, and have been following a little bit about what Ryan has been doing. For us the un-bundle strategy has proven very successful over the years. We're still a big proponent of that idea, but there are going to be some customers over time who value a bundled book. So what we were thinking through right now is how that might work with our structure such that we don't – that we keep the pricing optimal for the customers who want un-bundled service, and who want bundled service, which is a nice way of saying you don't want the two things to work against each other or cannibalize each other.
And so we have the necessary expertise to modify the systems to make that work. This is more of a strategic discussion, internal to Spirit and trying to evaluate how that might play out over time. So I wouldn't give it any specific timeframe right now. We are focused on a number of ancillary initiatives right now which we're excited about as we head towards the end of the year and the benefits that they may produce going into the next year. We talk a lot about dynamic pricing on some of our initiatives and while that has appeared to be a very long pole in a tent we're actually really excited about the progress we've made over the last six months and feeling very encouraged that we're going to have some real stuff to talk about in the fourth quarter of this year.
Next question comes from Dan.
Oh, hi. Good morning, guys. Bob, as you look at the sources of weakness around the system, you've highlighted Latin American flying, but the majority of Spirit's flying really touches larger markets and as you shift to more midsize cities and as you reset the operation, I'm wondering if there might be a need to further trim service from some of these larger markets looking ahead. I'm just wondering if you could share some thoughts along those lines.
No, right now when we think about large markets, go under the assumption that we are talking about say, the Chicago's, the Dallas', those kinds of markets. Let's use Dallas as an example. I think right now we've had about the same service levels in Dallas for a couple years. Yeah, there's some things that- you've been in the business long enough one thing you'll realize is very peaks in the summer. And again we're a leisure carrier and the opportunities for us are dramatically better in summer than they are in the winter. Maybe two years ago when our prices weren't being matched you could do very well in January, but that's not the case anymore. We've got a much more competitive environment.
So what you need to do is actually be more flexible about your approach. And so in that regard, we all have a schedule next summer in Dallas very similar to what we have this year because our numbers are exceptional. However, in the winter that's not the case. For the same capacity level in the summer versus the winter does not produce the same results and then we're able to utilize those midsize cities that we're talking about, that's Plattsburgh, the Niagara's, the additional Canton-Akron service. So that's the way to balance out the network is to do it on a seasonal basis.
Same thing in Chicago, very strong market generally year round, although the peak winter is a little softer. We'll have a little bit more seasonality. So there is going to be more movement within the network during the year and I think we'll produce better results and you know, it's easy to do. I think we're pretty good at it. We understand it. So that's actually the way we're managing the network and if there's a route that's not doing well and, for example some of our red eye flying from Houston to Central America, if it's struggling in the summer, for sure it's not going to do well in the winter and so those will disappear. But I think generally speaking we're pretty happy with the core level flying and we'll make our adjustments on a seasonal basis and I think it will produce better profitability for us going forward.
The following question comes from Stephen.
Hi, good morning everybody and thanks for taking my question. I actually just had a follow up question on what you mentioned about some of the Caribbean and LatAm routes. When you think about the trends you've seen so far and maybe what you may have been expecting with respect to a potential impact from Zika virus. Have you seen any impact at all or has the impact been somewhat less than you'd anticipated when you think about some of these regional routes you've cited? Just wanted to get your take on that.
I just think, it's actually really isn't all that complicated. I don't think we've seen the Zika issues in our network. I think the bulk of it is the local currency issues. These are actually markets that historically have produced exceptional profits for us and we're taking a hit. It's always hard to predict the bottom. This has been going on for about a year. It really started last summer we've been seeing a deterioration. It's kind of approaching, hopefully approaching the bottom but they're important markets for us going forward. It's not a large part of our network and so fortunately we can offset it, but we do see opportunities down in these various Latin America markets going forward and we're pretty comfortable sticking it out because they've been very good routes for us and none of it has anything to do with the competitive dynamics. It's really more tied to economic and currency issues. All right.
Our following question comes from Hunter.
Hey guys. Thanks for the follow up. I just wanted to get your thoughts back on Savi's response. You said that you'd seen some lighter discounting by Southwest so I was just curious. You said that happened at the end of July. Did you also see some of the network carriers reselling low fares across each other’s hub? Thank you.
Well I think probably the big end is going to go back in the latter part of June. Let's say about the first week of July which- and the latter part of June is really the strongest part of June. You know, we saw a lot of discounting and I would say, in Chicago, Minneapolis, Atlanta, Some of those advantage fare markets where like I said, we had set a summer structure that was higher because we thought the demand was there and we saw a lot of discounting and again, that forced us to lower our prices for a couple week period of time.
And like I said, I think the marketplace is more stable and again- my own guess is generally when you see discounting like that in close, probably the way carriers might organize and setup their revenue management, they might not have sold enough seats for those periods of time when we're really forced to scramble at the end. Because a lot of airlines, a lot of airlines including us I think, missed their revenue projections in the last two weeks of the month. And again, that's just my guess because traffic at the end of June is fairly predictable. And we saw the most discounting in the quarter in that period of time which is not typical. But as I said, I think going forward, again, this can always change. I think there's a lot more stability in the marketplace right now.
Our following question comes from Joseph.
Yeah. Thanks. Bob, just from an M&A standpoint, now that you see more opportunities in the small and medium market, does that change the value that you think a combined Allegiant, Spirit network would create?
You know, again I'd actually just again to really separate the issues and I think generally, I think you could look at market opportunities a number of ways. It could be M&A, it could be route additions. I would say we think there is plenty of growth opportunities out there. And like I said I think, to be honest I feel better about those today than I did six months ago because I think it allows us- this company is naturally flexible, very nimble and just doing what we're good at we see maybe even more opportunities at least, than I thought six months ago. Like I said, even though we're comfortable with our growth opportunities today, so if we're ever able to look at a transaction we'd have to see more benefit and more synergies than perhaps we're seeing today as a stand-alone carrier. I feel better that there are more root opportunities than I thought coming in the door and our job is also to evaluate all opportunities as they become available. I think you can be assured that we're going to be responsible to our investors. Okay?
Our following question comes from Jamie.
Hey. Thanks. Bob, just some additional color on the fare increases that you mentioned that you took in the quarter. I'm not looking for any route specifics or anything like that but basically how did your passengers respond? I know you were disappointed with the result. Was it that PAX traded down to lower fare buckets, did it flatten out the booking curve, did loads drop, or was it simply that competitors opened buckets that were below your elevated levels? I'm just trying to understand better how your unique passenger demographic responded to a $5 one-way increase that we were pretty bullish on?
I think your last point, competitors open buckets below ours.
I think that's largely where it was. If you look at our average fares, they're down quite a bit versus two years ago. These have been substantial declines almost for two consecutive years. We saw at one point the customers could and would pay more. It's just, towards the end of the quarter we saw buckets open up with substantial inventory below ours and it just put us in an awkward position where we were not competitive. The fact is, for us we compete on price and we actually saw prices substantially below ours and we basically had to put more inventory out there at those prices. So again, our load factors were fine, but obviously we didn't get the yields that we would have expected in the strongest part of the quarter and some of that is perhaps the overall elevated level of capacity in the industry. That creates it and therefore the dynamics when capacity is elevated, they play out in different ways. Like right now I think again the marketplace isn't I'd say more stable, a lot more stable than it was about a month ago.
Our following question comes from Dan.
Yeah. Hey, thanks for the follow-up. Bob, you installed a new flight dispatch system in the first quarter, and I'm wondering if you can talk about to what extent if any have benefited second quarter from either a cost or revenue perspective?
I would way it's actually too early. We've got a number of things actually right now it's actually helping us, but we have a lot of initiatives going on at really the same time. And it's going to be really hard to tell for a while where the benefits are coming from. Like I said, we have a number [audio gap] initiatives for the summer, again, that are helping. The larger initiatives are coming. And then what we're going to do is stop and let the airline run for a few months. And so our goal is to kind of get where we want to go, and kind of next year at this time. You'll see a lot of improvement before that, but what we don't want to do – again, part of the reason why we're doing it this way is this is – we are not throwing huge chunks of money at it. This is basically, it's mostly around teamwork and focus and actually aligning our objectives. This is not necessarily about money. What we don't want to do is, again, create an airline that drives too much costs. We take a lot of it as our own discipline. And so we want to take it in steps. But the fact is the potential for the flight – manager, I think it's actually going to be a good one for us, but it's just one of many things that actually we're doing. So I, if perhaps by the time we get to next quarter's call we'll be able to take you through all the initiatives, because at that point in time we'll be starting that November schedule where most of this is going to happen. Okay?
Following question comes from Duane.
Thanks, Bob. I really appreciate your commentary on inventory allocated to lower fair buckets, because I think mix has actually been a much more important driver of fairs than this focus on headline fare increases and – which really has been noise, frankly. I wonder if you could comment on advanced purchase requirements which is a much more subtle thing that's harder for us to see from the outside. Have you seen any carriers try and restore those at their lowest fare buckets and is there one party that's still kind of reluctant to follow there? Thanks for taking the follow up.
You know I think when we go back to the – I know there's been a lot of commentary about fences and generally what we would consider a fence is what's going to be Saturday space and advanced purchases for the most part held carriers, because once it gets into pure inventory, all of this stuff is harder to control. Going back I think Delta was the most aggressive, I thought from our perspective trying to keep or maintain fences and eventually some of those things broke down because of all the fare competition that we saw.
Again for us, and our approach is different. Our plan has not been to necessarily follow along with what everybody else, again, we are a price driven carrier. We are not a hub carrier, we're not a market share carrier and for us, managing inventory is actually critical for us. And it's ultimately up to the others to decide what's the best approach for them. I think everything is harder when the absolute industry capacity is up 4.5%, 5%. That makes everything more difficult and like I said, I think as overall capacity comes down, every one of those efforts to create fences will have a much better chance of success.
But most of it is still all a good stat of supply and demand and that can be on a broad basis that could be on a route basis. But I think again, 5% industry domestic capacity when the economy is growing 1%, 1.5% it's going to create- you know in effect more competition.
We have time for one more question and that question comes from Rajeev.
Hi, guys. Thanks for squeezing me in again. Bob, a question for you. Do you think that, in this sort of supply and demand environment and when Spirit is growing 15% to 20% that it's possible to get to a place where rather than is a bit more flattish and stable, maybe just from all of the initiatives you have and the impressive efforts that you've made over the last several months?
Do I think it's possible? You know I do. I don't have a forecast for it but I think that we've had a -- at some point you'll see inflationary pressures and quite frankly inflationary pressures will help higher oil and I think -- we think quite frankly it will be better for us. And so, you know I think over time, again, we've had two almost, like, two years of this call it PRASM, TRASM declines. You know actually fairly substantial ones. I'd say, however, even after that we've got 20%-plus margins which quite frank is very impressive. And I think at some point, I think, it will turn. It's slowly turning. It's turning because we're kind of hitting the bottom of these long two-year period declines but at some point it will turn it. And a lot will have to do with again the strength of the economy and overall industry capacity. And again, and finally at some point oil's around 41, 42 today. I'm not sure that's in everybody's long-term target, but at some point we'll see it.
Great. Thank you all for joining us today and that concludes our second quarter 2016 earnings conference call.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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