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Allegiant Travel Company (NASDAQ:ALGT)

Q3 2007 Earnings Call

October 30, 2007 1:00 pm ET

Executives

Mauri Gallagher - President, Chief Executive Officer and Chairman

Andrew Levy - Chief Financial Officer and Managing Director of Planning

Ponder Harrison - Managing Director of Marketing and Sales

Analysts

Michael Linenberg - Merrill Lynch

Duane Pfennigwerth - Raymond James

Frank Boroch - Bear Stearns

Bob McDale - Avondale Partners

Operator

Welcome to Allegiant Travel Company's Third Quarter 2007 Financial Results Conference Call. We have on the call today Mauri Gallagher, the Company's President CEO and Chairman, Andrew Levy, CFO and Managing Director of Planning for the Company and Ponder Harrison, the Company’s Managing Director of Marketing and Sales.

Today's comments will begin with Mauri Gallagher, followed by Ponder Harrison, then Andrew Levy. After the presentation, we will hold a short question-and-answer session. We wish to remind listeners to this webcast that the Company’s comments today will contain forward-looking statements that interest 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 plan, 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 anticipated events that do not materialize. The earnings release as well as rebroadcast of this call are available at the Company's Investor Relations site at ir.allegiantair.Com.

And at this time I'd like to turn the call over to Mauri Gallagher for opening remarks.

Mauri Gallagher

Thank you, Michael. And good morning to everyone, thank you for taking the time to be with us. It's a pleasure to talk to you this morning. I'll give a brief overview, Ponder will comment on our revenue results, and Andrew will wrap up with comments on our aircraft plans, network activity, expenses and Balance Sheet.

We're pleased with the results for the third quarter. Our operating income increased 230% to $9.5 million from $2.9 million in the third quarter of last year. This comes on the heals of 191% increase in operating margin s in our Second Quarter.

We were able to generate double-digit margins 11% from what is historically our softest quarter. As we indicated to you almost a year ago, one of our key objectives was operating margins of 12-15% within one to two years.

We're pleased to report to you that our year-to-date operating margin through September 30 was just short of 15% and our pre-tax margin is approaching 17%.

Our increase in margins in the third quarter was accomplished while we grew the business substantially as well. Andrew will provide you with more detail in just a moment on our growth metrics.

On the revenue side we expanded nicely during quarter up 42% year to year to $86 million from $61 previous year. Scheduled service RASM was up just short of 10% year-over-year while the ancillary RASM increased 37%. Ponder will more fully detail these revenue results in just a moment.

We also ran an excellent operation. Everyone I'm sure is aware of the airline industries operational problems this past summer. Industry on time was a dismal travel, has become a crapshoot at best. In recent outings with friends and acquaintances they have been commenting to me over and over about the horrors they experienced in their travels during the past six months.

In contrast our schedule of operation has been extremely good. The third quarter we scheduled 6,000 scheduled service flights and completed 100% of these flights. 83% of them departed within 15 minutes of scheduled departure including all aspects and if we exclude weather and ATC delays 85% departed within 15 minutes of scheduled departure.

The reason we were able to achieve one of the highest on time performance rates in the industry include our simple schedule with no connections. Additionally our destination airport such as Las Vegas and Orlando are reasonably free. Delay free, rather.

It doesn't appear to be any near term relief for the delay problems experienced by most carriers this past Summer. Our lack of congestion, however, should continue. This on time element provides us with additional strategic advantage we believe as consumers look to avoid large city connecting complexes for our low cost, non-stop service from a small city close to their home to one of our five world class leisure destination cities.

This is hard to quantify, we believe the effect will continue to work to our advantage. Looking forward, we are optimistic about our new destinations, Phoenix, Mesa Gateway airport and Fort Lauderdale International Airport.

We launched Phoenix service this past Thursday. I was there for inaugural flight, I must tell you the reception in the Phoenix Mesa area road service was and has been exceptional.

We are cautiously optimistic we will see the same results we saw in Tampa/St. Pete earlier this year when we finished connecting 25 new routes from our existing small cities to both Phoenix and fort Lauderdale later this year.

Let's turn to the elephant as they say fuel. While our growth in both revenues an operating margins is a terrific story this has been overshadowed recently by the substantial run up in fuel prices. Since early September, we at Allegiant have seen the Gulf Coast price per gallon for jet A increase from 2.13 a gallon to 2.40 a gallon or $.27.

That represents a 13% increase in about 30 some days. Clearly there will be short-term pain from these increases. There is a benefit as well or a wise person once said that, which does not kill you only makes you stronger. We saw a similar jump in fuel price last year in second quarter of ‘06. Our average cost per gallon increased almost $0.30 from the first quarter.

Short-term, we are unable to keep up with the increase as typically 80% of our revenues are on the books as we go into the month, fast-forward a year, however. Our average price per gallon during the first three quarters of this year was comparable with the same quarters in ’06, but over the past year we absorbed these high cost, grew at a 40 % rate and more than doubled margins.

Our results to a lesser degree are being duplicated by the airline industry in general. Fuel prices increases have imposed capacity discipline this industry lacked for many years. It is rationing growth. Legacy Operators are indeed reducing capacity domestically and LCC growth is being trimmed as well. This is good for us. Existing potential competitors appear to be focused on their own internal issues and not on our success.

Lastly our best weapon has never been more important. Namely, the ability to regulate our capacity to react to market changes. During September, we reduced our scheduled service ASM's over 30% compared to July. As we reacted to the seasonal revenue slowdown in Florida in particular. Yet even with this decrease we had over an 11% operating margin for the quarter. Those results speak for themselves.

So we’ve commented previously, we do not believe in other airline has this type of flexibility to react to the dynamics of the market. This flexibility works not only for the revenue portion of our business but the expense side as well.

During the Second Quarter of 06 when the fuel prices spiked and the short time frame, we reduced capacity a number of markets particularly long haul flying until pricing can catch up with the fuel increases. Near term, we are going through the same exercise.

Additionally we began a conscience effort last spring to shorten our stays length. During the first quarter of 2006, our scheduled service averaged stage length was 1075 miles. The average for this quarter was 920 miles, a 14% reduction.

Historically, unit revenues from our selling fares have been much better on shorter hauls than the corresponding increase in CASM when stage lengths are reduced. Witness our 10% increase in RASM in this quarter with the shorter stage length yet a corresponding ex-fuel CASM that is flat to slightly down.

With this selling fair benefit has magnified greatly in our instance when ancillary revenues are added to the mix, and ancillary revenue per passenger for the most part is not distance sensitive. As a result, the overall benefit is higher margins.

At this time let me turn the mic over to Ponder and let him comment on the revenues for the quarter.

Ponder Harrison

Thanks, Mauri. As Mauri mentioned the third quarter is historically challenging, but despite the usual season of September demand downturn in our Florida markets we were able to post strong numbers across all revenue categories.

Just to recap for the quarter, total revenue was approximately $86 million, up 42% with scheduled service revenues rising 41% to just North of $62 million. The year-over-year improvement in our land O Sanford was particularly impressive. Our new destinations of fort Lauderdale and Phoenix Mesa are doing quite well as Mauri launched with the launch of Phoenix Mesa and it appears at least right now that Phoenix Mesa is slightly ahead of fort Lauderdale in terms of its booking pattern.

Overall, we’d also like to characterize our future bookings as pretty good with no signs that we can see weakness at this point. We produced another quarter of solid revenue results by appropriately tailoring our scheduled service capacity with individual market demand in order to maintain strong passenger loads while generating very acceptable average fair levels.

In Florida particularly, we significantly cut capacity in our Orlando Sanford and Tampa St. Pete destinations during late August and for the entire month of September. In both destinations when comparing the last month of the quarter against the first, ASM's were reduced by 54% through planned scheduled adjustments and seasonal flight reductions. In fact, on 15 routes, we suspended service all together during parts of the third quarter.

Reductions of this magnitude are uncommon in the industry but the MD 80 and our efficient cost structure provide the flexibility to facilitate such dramatic scheduling adjustments. Despite these capacity reductions, schedule service passengers for the quarter increased 57% year-over-year while ASM's were up 35% from the previous year.

Departures also rose 46%, as did RPM's. Based on these statistics, we once again provided or produced one of the industries highest schedule system load factor levels, cresting 86% for the quarter. This represents an increase of over six points year-over-year, and sequentially, we even exceeded our second quarter of 2007, load factor level of 85%.

We've consciously designed and structured and priced our schedule service operating system to produce very high occupancy levels while remaining vigilant not to let capacity out strip market demand. We've done this to maximize company operating margins through a focus on total unit revenue generation or total revenue per available seat mile for those of you who have looked at our numbers you'll see the term TRASM.

We think we may have created a new industry acronym, not that it needs anymore. Through our total average fare, the sum of average fare per passenger plus average ancillary revenue per passenger was down slightly year-over-year, moving from $110 to $104, a reduction of just 5%. This was expected as our schedule system average stage length also declined from 984 miles to 920 miles, a reduction of 6%.

However, from a total unit revenue or TRASM perspective we posted TRASM gains moving to $9.60 in the third quarter of '07 from $8.80 in the previous year, a substantial increase as more we said of 10%.

Similar to our results in Q2, we were pleased that several key ancillary revenue anchor points as we like to call them contributed to the strong revenue performance in the third quarter. Let me comment more specifically on a few of the important ones and on ancillary in general.

During the quarter we continue to see strong year-over-year growth and is very important category. For the third quarter we generated $16 million of ancillary revenue, up 86% from the $8.6 million produced in Q3 of 2006. Ancillary revenue per passenger increased by up to $3 year-over-year reaching a level of $21 per passenger.

This reflects an increase of 18%. And as mentioned earlier we achieved these results despite an overall decrease in schedule service average stage length of 6%, thus on a RASM basis, ancillary revenue grew by 37% year-over-year. This ancillary figure of $21 is approximately 26% of our schedule system average airfare. Both of these figures are among the highest in the world for any airline.

The ability to generate ancillary revenue at this level provides us with extremely positive pricing power as we further expand the Allegiant footprint into new small cities and new destinations. Importantly, it serves as a partial margin buffer for what seems to be the ever-ascending price of oil.

In particular, two ancillary revenue products stood out prominently in the quarter. Let me detail each very specifically and quickly.

The first is online baggage fees. Having implemented this product in the fourth quarter of 2006, November specifically, it is a new contributor to the ancillary revenue category for our third quarter year-over-year comparatives.

When first launching this initiative, we charge $2 per checked bag per one-way passenger segment. Since that time, we've tested a number of pricing combinations and effective just two weeks ago; we increased the current charge from $3 to $5 per checked bag per one-way passenger segment, for up to the first two bags.

With our extended booking curve and leisure customer profile, any ancillary product or addition or pricing change typically takes up to about six months to reach maturity. Thus, we should see additional revenue strength from this online baggage fee category during the next two quarters.

The second product, we would like to focus on is called Trip Flex. On August 1st, we introduced our own unique form of travel insurance called Trip Flex. Trip Flex is not a true insurance product per se and in fact a product that really makes sense only in the context of our customer base, which is basically entirely leisure oriented.

Trip Flex permits a customer to purchase itinerary change flexibility for a fee ranging from which $5 to $10 per one-way passenger segment depending on the itinerary type, meaning air versus a package itinerary.

We won't give a customer their money back, but we'll permit almost any other itinerary change that they can come up with. Trip Flex basically gives our customers the flexibility associated with full fare tickets of legacy airlines.

Legacy airlines of course would never give away this capability for such a modest fee because they make so much money from business travelers. We basically don't have business travelers so this is something we believe we can do and we can do profitably and accretive to the bottom line.

Going forward, we remain guardedly optimistic in our ability to improve on current ancillary revenue levels without sacrificing average airfare. As we continue to expand into new destinations, customer acceptance of certain ancillary product categories may also vary.

However, we have a self-imposed mandate to continue growing this powerful revenue line item, and to do so, we are implementing significant internal automation upgrades, which should improve our ability to sell even more third party products and services.

Those are services and products such as hotels, rental cars, tour, entertainment and attraction tickets, etc. Additionally, our retail pricing and product packaging capabilities are also going to be dramatically improved. Target dates for these automation changes remain second quarter and third quarter of 2008.

However, we also want to continue to emphasize that from here on, the ancillary comps on a year-over-year basis become much harder and we are simply not going to see the same annual increases in ancillary revenue per passenger that we have in the past.

Last, but certainly not least, let me quickly touch on the new Harrah's fixed fee agreement, which we mentioned several weeks back to the public. Harrah's has been a great long-term partner of ours and we've been operating from them in Reno dating all the way back to 2002.

In fact, in some ways, they were the foundation on which we built the rest of the Company. So, we're very honored they have chosen us to also operate on their behalf in a different geographic part of the world.

To briefly review the important parts of our agreement with Harrah's, the agreement contract period is for two year term starting in January of 2008. It's for fixed fee operations to Harrah's properties mostly located in the Southeast.

And the minimum annual revenues we expect under this new contract are $11.8 million and the new contract is in addition to what we do today for Harrah's in Nevada and it has no effect on our existing Harrah's agreements for both Laughlin and for Reno. Again, we're deeply honored by the confidence that Harrah's is showing by partnering with us in the other parts of the world.

And now, Andrew will review our expense results, our balance sheet highlights and our network planning activities.

Andrew Levy

Thanks, Ponder. We're pleased with our third quarter financial performance, our 19th consecutive quarter of economic profits. Our 11.1% operating margin was 6.4 percentage points higher than the same period a year ago. In our year-to-date, 14.6% operating margin is 6.2 percentage points higher than the same period in 2006, and is approaching our corporate goal of 15%.

However, year-over-year comparison will start to get tougher. The fourth quarter 2006 operating margin was 11.7% with fuel at only $1.94 per gallon, current fuel prices are far higher. Let me highlight a couple of items on the cost side of the income statement.

In general we continue to do a good job managing our costs. On a year-over-year basis third quarter 2007 costs per ASM increased 1% to $8.41 from $8.33 mostly due to higher fuel expense, while costs per ASM excluding fuel declined by 2% to $4.4 from $4.49 despite a $3.6 reduction in average stage length.

Compared with the second quarter 2007, our cost per ASM increased 4% from $8.06 again largely due to higher fuel expense, but costs per ASM excluding fuel increased 4% from $4.24 mostly due to higher salary and benefits expense.

A large part of the increase in salary and benefits expense is due to the hiring of employees required to execute our fourth quarter growth plans. Our low cost structures a fundamental importance to our business and our future. We will continue to focus on our cost structure with this fact very much in mind.

In addition to our cost structure, our balance sheet is one of our core strengths. We ended the quarter with 173 million in cash, and short-term investments, and debt of only 69 million, leaving us with negative net debt of 104 million.

Our interest income exceeded our interest expense by almost $1.2 million in the third quarter. Our debt is entirely aircraft related, has fixed interest rates averaging about 8%, and will be paid in full by the end of 2011. We also owned nine uncovered aircraft and eight uncovered experience into the end of the quarter. In October we purchased one more aircraft for cash.

Our off balance sheet obligations consist of four aircraft we have under operating lease. We have an option to purchase two of the aircrafts starting in the summer of 2010 and we are in the final stages of negotiations for forward purchase of the other two aircraft on the current lease expiry date next summer.

Our balance sheet ratios are excellent, key metrics worth highlighting include an adjusted debt to 12 months trailing EBITDAR of 1.5 times, debt to cash of point four times, and adjusted debt to book capitalization of 30.4%. Our strong balance sheet affords us great flexibility in how we finance our growth going forward.

In our press release we provided guidance on ASM growth for the next two quarters in 2008, fixed fee revenue, the number of aircraft we expect to operate at year-end 2007 and year-end 2008 and 2008 CapEx.

Our guidance is purposely conservative particularly in light of the sustained run up in fuel prices we have seen in the last 60 days. However, despite our conservative approach this new guidance does not represent a pull back from previous guidance.

If fuel prices continue to rises (ph) or if we begin to see any weakness in consumer demand we expect to reduce our growth in order to attempt to maintain our operating margins. Let me provide some color on our current forward hedging position. You will note that the hedge percentage of our future consumption is smaller than has been historically.

We started hedging for the use of financial derivative products in early 2002. During these six years we have utilize different hedging strategies and tactics. Our most recent approach has been to build our hedge position as similar pace to our bookings, there for about 120 days before the start of a month, we would start to enter trades and then add trades at roughly the same pace we added revenue.

By this methodology, most of our trades would be made 60-45 days prior to the start of a given month with the goal of having around 50% of our consumption hedged before we started the month. This hedging program may have resulted in less economic fuel price volatility, but we believe these benefits do not out way the many costs incurred by hedging including management time and high transaction costs especially in the jet fuel market, which is not transparent.

Furthermore, hedging will only delay the impact of rising or falling fuel prices. We instead prefer to focus our efforts on longer-term methods by which we can manage our fuel expense. For example, we believe we are better able to adapt to either rising or falling market due to our inexpensive aircraft.

We can vary our capacity to suit the market and we are able to make these adjustments quicker than most. If we had a more traditional airline high fixed cost structure, we would likely view hedging as more essential since substantial varying capacity is not as practical an option for these companies. Year-to-date, we have operated our fleet an average of 6.6 block hours per day.

If fuel prices rise sharply, we can fly less by cutting capacity in our markets, which is typically enabled us to increase our fares. Conversely, we can fly more if conditions justify even faster growth. We've also chosen to play a very active role in the fuel Supply Chain due to a belief we can reduce our fuel expense by cutting some or of the middlemen that sit between the refinery and the plane provider.

Our efforts to date have been very encouraging and we expect our fuel subsidiary, AFH (ph) Incorporated to become increasingly active. We will have more to say about this initiative during on institutional investor day on November 16th in Las Vegas. Please contact IR at Allegiant air.com if you are interested in learning more about this event.

Finally let's review our network. The Fourth Quarter will see the single largest number of new routes we've ever had in a quarter. Driving this growth will be our Phoenix Mesa and fort Lauderdale destinations with 25 new routes between them, all but one of which is to an existing small city in our network.

We'll end the year with 109 routes from five world-class leisure destinations and 55 cities. Connecting the dots in this way is a very powerful way of expanding our network without adding much infrastructure. The one new small city we're adding in the quarter is Plattsburgh, New York with service to Fort Lauderdale.

Apart from the expansion in Fort Lauderdale and Phoenix Mesa, we're also adding service from Orlando to each of bank (ph) or, Maine, Peoria, Illinois and Huntsville, Alabama. Further we're bringing back our seasonal service from Bellingham, Washington to Palm Springs, California.

Last winter we flew this from January 15th through April 15th and it was very successful to so, we decided to expand the season this year from November 15th through May 15th. Moreover, we recently announced our first two new routes of 2008.

Marion, Illinois, which is a new small city with service to Las Vegas, and Huntington, West Virginia with service to Tampa/ St. Pete. We expect at least one more new route announcement will be made before the end of the year.

And this concludes our prepared remarks. Moderator we're ready to take questions now.

Question-and-Answer Session

(Operator Instructions) First is Michael Linenberg with Merrill Lynch.

Michael Linenberg - Merrill Lynch

Yeah. Good afternoon. I guess I have two questions. First, let's see, I'm sorry, I'm just collecting my thoughts. Oh, on the quarter normally, you would make all of your money in July and August and September historically has been a month where at best maybe it would be breakeven and I realize that in the past you usually don't break out the monthly P & L but given your margin and how strong it was for what seasonally is one of your weakest quarters, were you actually able to make money in the month of September?

Mauri Gallagher

Michael. Reveal all of our inner secrets. At the end of the day, let's just say that it was an okay month. September is going to be tough to make money in any environment. We had a very strong summer though.

Michael Linenberg - Merrill Lynch

Okay, well then, maybe just in terms of qualifiers, it was an okay month relative to other months, how was it versus other Septembers?

Andrew Levy

Better.

Michael Linenberg - Merrill Lynch

Okay.

Mauri Gallagher

I think one of the things Andrew has touched on, Ponder and we all did is this capacity Management and our understanding and sophistication now in our cities now particularly in Florida we've been there gosh for going on to years in Sanford, plus we, there aren't many people that will take a market down totally for 60 days and just not show up and show back up in October right about now.

We figured out how to do that stuff and the variable cost nature of our network is such that we really see the benefit s of doing that type of thing and minimizing the revenue impacts at that point as well because we're just not flying empty airplanes around.

Michael Linenberg - Merrill Lynch

Okay. Good and then that's helpful and my second question, Mauri and to Ponder and Andrew as well, for the team, we had a slow a fare increases occur over the last four or five months, I want to say maybe it's four or five, maybe it's half a dozen.

Number one, have you participated in those fare increases and number two, this is a three part question, what is your highest walk up fare now in your system and then the third piece, as Ponder said, you're a leisure carrier, highly discretionary and yet you do offer a product that I don't think in most of your markets there is no competition and arguably maybe it's even better product because you're not connecting over congested big city airport.

So, are you seeing a leisure passenger who maybe has a more inelastic demand profile and I guess, I would have you compare your leisure passenger versus the leisure passengers that you carried at airlines that all of you have worked in the past. Is it a more inelastic demand curve, I'm curious now that you have a couple years of data?

Andrew Levy

Mike, let me try to answer at least the first two and then prospectively others we could chime in on the in elasticity or elasticity. We have participated in increasing pricing over the last say six to eight weeks in particular.

At one point we were taking our highest fares up by as much as $10 on a one-way basis. Our fares below that by as much as $5 on a one-way basis. We've been very cautious as we look at our lowest and introductory and our selling bucket pricing to just be careful how we do that.

Those were really our lead rates that we published and advertised in the market but in general when you look at our price structure, it is definitely up in terms of same-store Markets and same-store sales where we've been.

Again we're also in the process of launching 25 new routes into Phoenix Mesa as well as fort Lauderdale, so those have been priced and those prices have remained static since we launched them, but again we didn't price them until August 9th, which is the first date we’ve announced that we would be flying there, okay?

And just to be clear, we are constantly looking at the pricing movements in the market, even given that we are selling here only as well as package, we remain very, very focused on our ability to or not to increase based on the market.

And you asked our highest one way fare. I want to say with the latest $10 increase unless our Director of Pricing has changed that which he may have, it was approximately $259.

Michael Linenberg - Merrill Lynch

Okay.

Andrew Levy

And again, I may be mistaken when I say that but to my knowledge that's it.

Michael Linenberg - Merrill Lynch

Okay, good and then just on views on the elasticity or in elasticity of your passengers?

Mauri Gallagher

Thank Michael. This is Mauri. I am understand different – I was in Phoenix a couple days ago and the profile of our passenger and this is not meant derogatory fashion, the blue rinse crowd is older, I'd say they have lots of time on their hands relative to working the 9-5 gigs, and they have money.

They have discretion, and there is a real movement that we're seeing in different ways. You can categorize it into kind of two basic areas. One, it's going on a vacation of your own, a getaway if you go through Las Vegas, possibly Orlando certainly I think is all different profile in both those cases one with the kids and the other with, your adult friends.

The second movement and you see this in the Tampa, St. Petes and now Phoenix respectively, where you have this kind of two places people live. The fare is right they will move back and fourth and an anecdotal example in Phoenix was the people talking about getting from the Upper Midwest to Phoenix was very expensive and very difficult.

So they're driving their motor home down and they have to kind of drive back and fourth and now they drive their motor home down, park it and player back in fourth. I think that you've seen a lot of that -- the air effect in Europe were in Spain, other places with second homes where the airfares are so inexpensive you just see this commuting factor going on.

And I think we have some of that certainly starting to show up again in the West Coast of nor floor was very popular for the Midwest and now Phoenix is terrifically popular, Upper Midwest and the California and the upper Northwest. Andrew and Ponder have any thoughts but we don't carry that average profile, I don't believe, that you'd see on every day Americans, united --

Michael Linenberg - Merrill Lynch

Okay. Very good, thank you. Good quarter.

Mauri Gallagher

Thank you.

Operator

We have a question coming from Duane Pfennigwerth with Raymond James.

Duane Pfennigwerth - Raymond James

Hi, thanks. Ponder, wondering if we could explore a little bit where you think ancillary revenues could grow, understand that the year-to-year growth rate could moderate, but it looks like just thinking about this even sequentially with a full quarters contribution of Trip Flex.

And the increases in baggage fees, it seems like those alone could drive a 10% sequential increase. Could you help us understand going forward a little bit better?

Ponder Harrison

Yeah, I don't know how much I'm really going to able to help you with that, Dwayne, kind of we spoken for the record. I mean, Trip Flex, we are having it really only participate partially in the quarter, having it just been implemented in August.

We would like to see the full effect of it going forward. We've seen what we believe to be pretty good take rates and it appears to be very sustainable too. I mean, we would caution you as well to note that Trip Flex is a replacement product as well.

I mean historically, we've had cancellation and change fee type activities that we also include in our ancillary revenue calculation, and as such, we will see fewer of those as we move to Trip Flex as a replacement product, albeit at a higher absolute price point and at higher unit rate.

Baggage really remains kind of as a crapshoot, I guess to use Mauri's term. I mean, we continue to try to price it to see where the ultimate ceiling is or isn't and we also have to bear in mind that it needs to conform with the other products and services we're trying to sell.

At a point, can you unbundle the airline too much and that's the last thing we want to do you have that the become to agree just for customer to their, but at this point, the $5 price point is a brand new price point. We've always believed that baggage is somewhat of a price in elastic activity for many people at a certain price level, and again, we remain encouraged that we're in and around the right price points for those two product groups.

Mauri Gallagher

Dwayne, let me comment, this is Mauri. Be careful as well with adding new markets, the new destinations, we're not sure what the take rate will be on our ancillary revenues, and that mix change, well be, it's not a huge percentage of what we will be doing, it still could be a damper if we don't have the throughput in those areas.

So we just want to don't leave people with the belief that it's just going to continue to go up. I might also make another comment, it was pretty interesting Shawn Mackey and his comments on the call with Frontier having come from Canadian environments and all of the activities up there with a lot of ancillary revenues, made some comments that their automation just doesn't set up for doing anything like what he is used to in that part of the world, here in the states.

And we really want to continue to recognize that our automation really does give us a unique kind of ability to engineer our own environment and change and adjust and add product that we think we haven't found anybody else in the domestic environment even close to having that capabilities.

Duane Pfennigwerth - Raymond James

Thanks for that color. And then I don't know if it's Ponder or Andrew, could you remind us what the historical margin profile is on your fixed fee business, and how that's going to change with this latest expansion. And thanks for taking the questions.

Andrew Levy

Yeah, this is Andrew I'll handle that. Dwayne, I would say that we're not going to see a change and I think that as far as the margin, I think that it's pretty much in line with our overall corporate margins that we've been producing. One of the nice things about fixed fee find in general is that we do not bear the risk of fuel and obviously, as fuel prices keep marching up that makes that line of business particularly attractive because it is very consistent.

Duane Pfennigwerth - Raymond James

Great. And historically, how much have you flown or how much revenue have you generated relative to the guaranteed minimums?

Andrew Levy

Well, in Nevada, where we've been flying since 2002, we have far exceeded the contractual minimums, and in this new region with heroes, which it's scheduled by a completely different part of the company so we really don't yet know what to expect, we certainly hope that we'll do more than what the minimums are in the contract and we actually believe that we will, but we have no ability at this point to forecast what that would be so we've provided you what the contractual minimum states in the agreement.

Duane Pfennigwerth - Raymond James

Great. Thanks a lot.

Andrew Levy

Thanks.

Operator

Our next question will come from Frank Boroch with Bear Stearns.

Frank Boroch - Bear Stearns

Hello, guys.

Mauri Gallagher

Hello, Frank.

Frank Boroch - Bear Stearns

I was hoping now maybe you could give us an update. You've got almost a year history now of the three world-class destinations in Florida. Are you seeing any signs of any cannibalization as you connect the dots among those?

Andrew Levy

Frank, this is Andrew. I think the short answer is no, we really haven't seen that, even adding in these new destinations in some cases we’re now are flying to five different destinations from some of our Midwest Markets, and no, that's something that we haven't seen and we're certainly vigilant of it, and but no, we haven't seen anything that suggests that.

Mauri Gallagher

Frank, when you go into these markets particularly a lot in the Southeast for Florida with a very short haul of the main reasons our overall stage length has declined in the last year is the Florida short haul expansion that we did throughout the Southeast, throwing 59-$69 airfare out there is terribly stimulation.

And I think rather than thinking about cannibalization, which assumes a zero sum market, there's just a lot of untapped demand out there that if you get the price point down, people will go to see their relatives, friends, back and fourth there's a lot of reverse commuting out of Florida in the summer going up North into vacation spots.

We've had people at one of your competitors go up and be in one of our cities suggesting we have to open a city so they can get to their summer homes, that's the kind of stuff you see that's very positive and additive to the whole thing.

Frank Boroch - Bear Stearns

And Andrew, I guess I appreciate the thoughts there, on the cost side, when we look at the fourth quarter '07 relative to last year, I think you had some large increases in maintenance as an example in the fourth quarter 06. So, how should we think about the year-over-year non-fuel costs as we go forward?

Andrew Levy

Frank, I'm not prepared to give any specific guidance on that at the moment other than certainly, maintenance is the one area that can be a bit lumpy due to our accounting using the direct expense method and since we do not have any power by the hour agreements we actually have to take the expense when we do the work.

I don't expect the fourth quarter to be an unusually heavy quarter, certainly there's a number of seat checks that we're going to have, but as our fleet continues to grow, I think that will become in some ways more consistent that we'll see that kind of activity throughout the year.

There's no engine activity that we anticipate in the fourth quarter, nothing scheduled, and so I think that the maintenance expense in the fourth quarter will probably resemble fairly closely to what we've seen in the third quarter. But I don't have all of the data at my fingertips so I wouldn't want to be too certain about that.

Frank Boroch - Bear Stearns

Okay. And as some of the new markets come on line and I guess how are you looking at stage length changes next year, if we can think about it versus '07?

Mauri Gallagher

Well, we are -- as I think a number of that have mentioned, the shorting the stages is really important we think. That last hour of flying you still burn an hour of fuel, but you don't get the equivalent on the fare side.

At least it's a lot tougher to get that because the yield curve does fall away from you as you get further and further out and so we definitely have a bias toward adding more short haul flights. We've done very well with that and particularly with oil where it is now, I think it's even more important that we, if we're going to grow, that we grow by adding shorter stage lengths flights as possible.

So that being said, Phoenix to the Midwest is generally pretty decent stage length, slightly higher than the average, and to date, the Fort Lauderdale Markets are all slightly longer than the average markets in Florida or then average stages into Florida just by the nature of the geography of it.

So, we have a bit of a balancing act there, but we'll try and keep our stage length around where it is and if there is opportunities to further reduce it, we think that will make sense.

Frank Boroch - Bear Stearns

Great. Thanks, guys.

Operator

(Operator Instructions) And we'll go to Avondale Partners, Bob McDale (ph).

Bob McDale - Avondale Partners

Hi, guys. In prior meetings or some kind of presentation, you once made the comment that starting up Tampa, having already been in Orlando for as many years as you were.

Starting up Tampa, it kind of came up to breakeven or maybe even modestly profitable in 60 or 90 days if I remember right you said something like that. And the question is, was that, do I remember that right and are we seeing same kind of results or potential results in Phoenix and Lauderdale going into this Winter that within 60-90 days it should be making a contribution?

Mauri Gallagher

Your recollection is correct, Bob, as far as Tampa, St. Pete. As, I said in my comments, we're cautiously optimistic that we'll repeat those results with the two new markets. Clearly, initial bookings start off very quickly, kind of slow up frankly as we get near between the initial buzz of announcing service and then the follow on really hits the books well when we start to service, start flying, so that's going into existing Markets, small cities, creating new routes by connecting dots has worked extremely well like we said in Tampa and we hopefully will see the same thing in this environment. Ponder, do you have anything else?

Ponder Harrison

No, Mauri, I think that sums it up.

Bob McDale - Avondale Partners

Could you refresh my memory as to kind of how many markets you're starting up and I know you said you just started some of the Phoenix stuff. What are the start dates on the rest of the markets that you're opening up for the rest of these new city fares?

Mauri Gallagher

Bob, let me take a stab at that. We have one airplane in Phoenix is up and running I think seven markets are on that airplane and the second one will be up and running around November 15th.

Bob McDale - Avondale Partners

Okay.

Mauri Gallagher

The first airplane in Fort Lauderdale will be up and running again right around November 15th, and the second airplane will be up and running in the early to mid December time frame. So by the middle of December, all the 25 new routes associated with these two new world class leisure destinations will be up and running.

Bob McDale - Avondale Partners

So it's a total of four airplanes?

Mauri Gallagher

Yes, that's right.

Bob McDale - Avondale Partners

All right. Okay. Thanks.

Mauri Gallagher

Thanks.

Operator

That does conclude the question and answer session. Mr. Gallagher I will turn the call back over to you.

Mauri Gallagher

Thank you, all very much for your time today. If you have any follow on questions or want additional information, please contact myself, Andrew, Ponder or Robert Ashcroft at our offices and we'll look forward to talking to you in another 90 days. Thanks very much, have a good day.

Operator

Once again, thank you all very much for joining us today. That does conclude the presentation. Have a great afternoon.

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Source: Allegiant Travel Q3 2007 Earnings Call Transcript
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