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Spirit Airlines, Inc. (NASDAQ:SAVE)

Q2 2012 Earnings Call

July 24, 2012 1:00 pm ET

Executives

DeAnne Gabel – Director, Investor Relations

Ben Baldanza – President and Chief Executive Officer

Ted Christie – Chief Financial Officer

Barry Biffle – Chief Marketing Officer

Thomas Canfield – General Counsel

Analysts

Michael Linenberg – Deutsche Bank Securities

Jim Parker – Raymond James

Duane Pfennigwerth – Evercore Partners Inc.

Ray Neidl – Maxim Group Securities

Hunter Keay – Wolfe Trahan & Co.

John Godyn – Morgan Stanley & Co. LLC

Bob Mcadoo – Imperial Capital, LLC

David Fintzen – Barclays Capital

Glenn Engel – Bank of America/Merrill Lynch

Stephen O’Hara – Sidoti & Company

Stephen Trent – Citigroup

Helane Becker – Dahlman Rose & Co.

Operator

Welcome to the Spirit Airlines Second Quarter 2012 Earnings Conference Call. My name is Sandra, and I will be your operator for today's call. 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 call over to Ms. DeAnne Gabel. Ms. Gabel, you may begin.

DeAnne Gabel

Thank you, Sandra, and thanks to all of you for joining us this afternoon, and welcome to Spirit Airlines second quarter 2012 earnings conference call. Presenting today will be Ben Baldanza, Spirit's President and Chief Executive Officer; and Ted Christie, our Chief Financial Officer. Also joining us are Chief Marketing Officer, Barry Biffle; Chief Operating Officer, Tony Lefebvre; General Counsel, Thomas Canfield; and Senior VP of Human Resources, Jim Lynde.

Ben and Ted will discuss our second quarter results and current business trends. We will then open the call for questions.

Our remarks during this conference call will contain forward-looking statements, which represent the Company's current expectations or beliefs concerning future events and financial performance. Forward-looking statements are not a guarantee of future performance or results. Forward-looking statements with respect to future events are based on information available at the time those statements are made and/or management's belief as of today, July 24, 2012, and are subject to significant risks and uncertainties that could cause actual results, performance to differ materially from those reflected in the forward-looking statements, including the information under the caption 'Risk Factors' included in our 10-K for the year ending December 31, 2011. We undertake no duty to update any forward-looking statements.

In our remarks today, we will be comparing second quarter 2012 to second quarter 2011 results adjusting all periods for proforma items and excluding unrealized hedge gains and losses of special items. Please refer to our second quarter 2012 earnings press release for further details regarding our assumptions for pro forma results and for the reconciliation to the most directly comparable GAAP measure for our non-GAAP measures discussed.

Unless otherwise noted, when we discuss our results, we will be excluding special charges, loss on disposal of assets, and unrealized mark-to-market losses on fuel hedges. These items as well as our pro forma adjustments for the second quarter 2011 are detailed in our earnings release.

And with that I will turn the call over to Ben Baldanza, Spirit's President and Chief Executive Officer.

Ben Baldanza

Thank you, DeAnne, and thanks to everyone joining us for the call today. We're pleased to report our second quarter profit of $35.3 million, this 35.4% year-over-year increase in adjusted net income was achieved while lowering our base fare per segment, to just $81.06. Offering low base fares is a key highlight of our business model, as it gives consumers more pricing power and grows the traveling market.

We increased our operating margin by 1.5 points year-over-year to 16.3% and achieved an EBITDA margin of 27.6% for the second quarter. Over the last six quarters, we have achieved our target of growing the business 15% to 20% per year, without depressing our margin and we are confident we continue to do so for the next several years.

I want to thank the hard-working Spirit team, for their contribution to the success. Thanks to the efforts of everyone from the front-line to the flight maintenance crews, to our back-office, Spirit is a profitable, successful airline and I'm pleased to be part of your team.

Total operating revenue increased 25.5% year-over-year to $346.3 million on a capacity increase of 16.5% and a total operating yield increase of 9.1% year-over-year. Our ancillary revenue per passenger segment in the second quarter was $51.47, up 18.6% year-over-year, primarily due to per segment increases, in passenger convenience fee and bag fees.

We believe there are many opportunities ahead to expand the source of revenue. During the second quarter 2012, we launched nonstop service on ten new routes and last week we announced even more new city pairs that we plan to liberate from high pairs, including eleven new route that of Dallas/Fort Worth airport, bringing our total cities to be served for DFW to 26.

We continue to see smart value conscious consumers respond favorably to our low fares, as evidenced by both our new and mature markets performing well. This ongoing expense of the network is proving excellent for our margins, but it is also creating some cost pressures that Ted will comment on his remarks.

Looking ahead, we expect capacity to be up 22% year-over-year in the third quarter with our average state links down about 2% year-over-year to 890 miles. Fourth quarter capacity is expected to be up 30.2% with full-year 2012 capacity up 21.6%.

Overall, we're pleased with how the third quarter shaping up. Our booking curve is fairly short, so we don't have visibility post Labor Day, but July and August booking levels look stable. While we are prepared to give a forward-looking outlook for RASM, it should be noted that our year-over-year RASM comps gets much more difficult quarter-to-quarter. In the third quarter last year our total RASM was up 28.4% year-over-year, largely driven by our network re-orientation last summer, where we had a capacity to Dallas-Fort Worth, Chicago and Las Vegas, along with the one-time benefit of our decision to pass along Federal excise tax holiday savings to our customers.

With that I'll turn the call over to Ted.

Ted Christie

Thanks, Ben. In the second quarter our total operating expenses increased 23.3% to $219 million, primarily due to expenses associated with increase capacity, including a 14.6% increase in fuel block. Other drivers included higher average airport and crew-related cost, related to network scope changes. Excluding fuel, our CASM increased 11.8% year-over-year to $6.05. Stage length decreased 3.2% year-over-year, which contributed 1.8 points to the year-over-year increase. Another primary driver of CASM ex-fuel in the quarter were start-up costs related to our seat maintenance program, which contributed of approximately two percentage point to CASM ex-fuel.

We incurred approximately $3 million of start-up costs related to our seat maintenance program in the second quarter, and estimate we will incur $4.5 million in the third quarter of 2012, bringing the total start-up costs related to this program to an estimated $7.5 million.

It is possible that some of the work will slide into the fourth quarter, but we are working towards completing the program by the end of the third quarter and have fully burdened our third quarter cost guidance accordingly. We believe proceeding with this program is the right long-term decision, as it will improve our product standards, a way to better manage seat maintenance costs in the future.

Providing reliable transportation is among our top priorities, and our second quarter performance was not up to our usual standards, and we are implementing the necessary changes to improve our operational reliability. Passenger re-accommodation expense related to irregular operations in the second quarter, contributed about two percentage points to the year-over-year variance in CASM ex-fuel.

Other expense drivers in the quarter included maintenance expense related to the maturing of our fleet, hailstorm damage repairs to the aircraft damaged in April and additional rent expense for the aircraft leased for the summer months from a third-party provider.

Our outlook for the third quarter of 2012 is for CASM ex-fuel to be up 5.2%, a 6.1% year-over-year, driven by cost pressures similar to what we experienced in the second quarter. For fourth quarter of 2012, we estimate CASM ex-fuel will be down mid-single digit year-over-year, as we get beyond the one-time in nature costs impacting the second and third quarter.

Turning now to fuel. For the third quarter, we estimate our economic fuel price will be $3.15 per gallon based on Gulf coast jet fuel curve as of July 19. This includes our estimated impact from realized fuel hedges. We have approximately 19% of our third quarter 2012 projected fuel volume hedged using jet fuel collars. We also have hurricane protection hedges in place for the 2012 hurricane season designed to shield refining exposure.

Additional details are included in the investor update we plan to file this afternoon. Our cash position remains strong, and we ended the quarter with $415 million in unrestricted cash.

In closing, while pleased with our overall second quarter results, we are disappointed with our cost performance for the quarter, even though on a comparison basis to our peers, we are likely to look very competitive. Our cost advantage is one of our most powerful tools and being able to continue to offer low base fares, stimulate growth, achieve higher returns, and deliver value to our shareholders.

We intend to keep this advantage. There are a number of things that we know are true. One, we are amongst the lowest cost operators in North America. Two, our annual growth rate over the next five years to seven years gives us tremendous leverage from a unit cost perspective. And three, our growth is driven not only by show count, but also by larger gauge aircraft, which will further supplement our cost improvement.

Therefore, it is clear to me that our CASM ex-fuel will be lower over time as illustrated by our fourth quarter expectation. And it is our mission to accelerate the reduction with aggressive management of the tools available to us.

With that, I'll turn it back to Ben.

Ben Baldanza

Thanks, Ted. While (Inaudible) our second quarter EBITDA margin is 27.6%, our second-quarter operating margin is 16.3%, our last 12 months pretax return on invested capital of 30.3%, the business model is clearly working, and we are excited about our future growth prospects. And just like we have done for the last six quarters, we are confident we can achieve that growth without compromising our margins.

Now back to DeAnne.

DeAnne Gabel

Thank you, Ben and Ted. Sandra, with that, we are ready to begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question is from Michael Linenberg from Deutsche Bank. Please go ahead.

Michael Linenberg – Deutsche Bank Securities

Hey, good afternoon, guys. I guess two questions here. One, when I look at your capacity plan for the year, Ben, you provided it, just over 21%. It seems like that that's come down a little bit. I want to say may be three, six months ago may be we were as high as 25% and then may be 23% and now 21%. Is some of that just intentional given the fact that energy prices, yeah, they've come down, but they’re still very volatile, is it may be thoughts on the economy or is it just more the vagaries of the schedule?

Ben Baldanza

I think it's closest to the latter, Mike. I think its just schedule tweaking. At the beginning of the year, everything was prospective. We now about almost seven months behind us, so we have that actual to put into the full year. As we go to the rest of the year, it’s just trimming the schedule here and there making tweaks to the right routings and things like that. It's not a systemic approach to say we want to file lesser than they’ve got, it's kind of the way the numbers work for the year.

Michael Linenberg – Deutsche Bank Securities

Perfect. And then just my second question is, when you go to your website and you have the math where we fly and it's fascinating because if I think back about six months there was a lot of white space on that map. And now I look at that map and I realize that while I think in the past you really haven't focused on connectivity, there’s got to be a time where maybe it does make some sense, and I realize from some of the VFR markets coming up from whether it's Mexico or South America there maybe some connectivity there. But is that something that as you think about the model as it matures that we're going to see more and more connections and maybe by accident rather than by design. I mean what are your thoughts on that?

Ben Baldanza

Well, we’re principally a point-to-point airline and we still have less than 10% of our itineraries connect. But the expansion has been very good for us. Let me let Barry Biffle, our chief route planner sort of give you his thoughts on that too.

Michael Linenberg – Deutsche Bank Securities

Good. Hey, Barry.

Barry Biffle

Hey, how are you doing? We've announced a lot of new cities recently and we've started a lot this year. And I think what's important to note is if you take the top 25 metros in the U.S., we now service over 80% of the population of those top metros. So, as you would see from here on out and Ted kind of alluded to this is for the infrastructure, now that we have those bases, yes, we can connect the lot of dots and we've begun to do that and you've seen it open the things we started this year as well as some of the recent announcements. So yes, you're starting to see less wider grace base on the map as a result. And it's just driven by the popularity of the brand and we're really being accepted in the new markets very well.

Michael Linenberg – Deutsche Bank Securities

Okay, very good; thank you.

Operator

And the next question is from Jim Parker from Raymond James. Please go ahead.

Jim Parker – Raymond James

Good afternoon to all.

Unidentified Company Representative

Hi, Jim.

Jim Parker – Raymond James

Barry, I guess this question is for you, when you did your IPO in for several months thereafter, you all talked about the 300 overpriced markets, where Spirit could go in and cut the fares 25% and realize a real nice profit margin. And recently, I guess a month or so ago, you increased that 400. So, I’m curious where the additional 100 came from and was the original analysis flawed? And how many aircraft, I think on the 300, you said 100 to 130 additional aircrafts now on to 400, what is that, 150 or…?

Barry Biffle

Let’s start with if you refer back to the road show for the IPO that data lagged, it's DOT data, and at the time we were operating on effectively 2010 average fares for the industry. So as we've now seen 2011 fares for the industry as we've noted, RASMs have gone up across the industry that just makes more opportunities for Spirit, and even though we've added a lot of new routes, we haven't put it in 400 new route opportunities. So it's just that the opportunities are getting better than they were even a year ago.

Jim Parker – Raymond James

So Barry, how many aircraft will need to serve those 400?

Barry Biffle

Well, if you do the math that we did before on roughly 130 goes 300 assuming similar stages, that's going to be a lot closer to 200.

Ben Baldanza

And the important thing, Jim, its more airplanes than we have committed on order right now, which means the order book is as pretty low risk to it.

Jim Parker – Raymond James

Yup. And so in the quarter these scope-related expenses, meaning, scope of the operating system, you're now kind of nationwide, and I'm curious about spare aircraft to cover maintenance, and whether cancellations and putting these people up in the hotels, do you have people base there, how long are these expenses, and unusual weather related maintenance cancellation, how long is that going to go on?

Ben Baldanza

Our expansion has created some cost pressures that both me and Ted alluded to. But some of that has been station start-up cost, we've opened a number of new cities, as Barry mentioned, we’re thin in a lot of places right now, but as we’re building out both the maintenance and crew infrastructure in other locations, outside of our traditional East Coast basis that gives the ability to react to a little bit more quickly. In terms of spare aircraft, the way we think of it is not necessarily the number of dedicated airplanes sitting around waiting to fly something if something else isn't working, it's more of the available time in the schedule, and how much available aircraft time is available to our operators throughout the day and throughout the week to be available. And we work to ensure sort of industry, sort of standard for our low cost carrier around 4% range of spare capability, and we build that into the schedule, not necessarily a plane and crews sitting around waiting to fly, but with enough schedule flexibility make that happen. So as we continue to grow and moving to next year, even as Barry suggested, as we built density in a lot of the cities we're already in, that's just going to make all those sort of cost that were sort of start-up for 2012, get a little over and be able to deal with things even a little bit more efficiently as we move to in our opening fewer cities on a percentage basis by connecting more dots. And that's why we said by the fourth quarter, you'll start to see CASM drop in again.

Jim Parker – Raymond James

Okay, Ben, just quickly, your non-ticket usually rises from the first quarter to the second quarter over the past several years, but this year it didn't. It was essentially flat down little bit in the second quarter, is there something going on there, that seasonality or were you moved a capacity or what's causing that?

Barry Biffle

Jim, it’s Barry. I think it’s just coincidence, maybe if you look in the past of when initiatives have been launched and may be we kind of match that up and launched the things earlier last year, which caused it. There wasn't a lot of change; there was no change to our business from the first to the second quarter. What did change was, if we look at what caused it, there’s a little bit of a stage reflective in there, not a lot, but a little bit. Also, we had the credit card, we launched a new program with Bank of America last year in April and we kind of double dipped if you will on the last year of the Barclays program, it had a tail we're getting revenues from both bank. And so we have had that in the first quarter, but not in the second quarter. Again, these are measured in pennies, but the three of them add up, and then the third thing was the 24-hour rule by the DOT did hurt change the revenue. So those kind of three things combined together did hurt the non-ticket. But in general, I mean you see our total revenue, that's how we generally manage it. So we look at the revenue per flight segment and so we feel really good about it, but there was just no new initiatives launched in the second quarter that would have changed it.

Jim Parker – Raymond James

Okay, thank you.

Operator

Thank you. The next question is from Duane Pfennigwerth from Evercore Partners. Please go ahead.

Duane Pfennigwerth – Evercore Partners Inc.

Hey, good afternoon.

Unidentified Company Representative

Hi, Duane.

Unidentified Company Representative

Hey, Duane.

Duane Pfennigwerth – Evercore Partners Inc.

Just on your CASM guidance for the fourth quarter, can you talk about, I mean I guess we haven’t seen your revised capacity schedule, so some of that is capacity growth acceleration. I think the last update was kind of up 23 3Q, up 27 4Q. But I guess more importantly, I’m interested if you can give us sort of, is that a better indicator, is that how we should be thinking about next year?

Ted Christie

Hey, Duane, it’s Ted. As I alluded to in my comments, that's our view. We don't want to overstate and put you on a trend. But the truth of the matter is that there have been a lot of items that have been part of our growth in the recent quarters as well as the one-time stuff that we've been talking about seat maintenance related expenses being most notable, but to penalize CASM here in the near-term that should start to spin-off as we head into the fourth quarter and then the next year and as Barry alluded to, once we start getting to that scale in these various locations, then we can start to really reap the benefit on unit cost perspective. So I think that’s our view, that’s our objective, is to start seeing that type of trend that we see in the fourth quarter more into 2013.

Duane Pfennigwerth – Evercore Partners Inc.

Okay, thanks. And then I just want to ask you one on changes in your network. It feels like that has at least a big of an impact on your revenue trends as changes in the economy. We can dig through the DOT data, but frankly, it's pretty noisy. So Barry wonder if you could comment on the implied fare increase year-to-year that should result in your new route. So I guess from a different perspective how much higher are the fares in the markets you are entering versus your system average today?

Barry Biffle

Are you talking about the industry average fares before we enter them or what they are once we start?

Duane Pfennigwerth – Evercore Partners Inc.

I mean there is a reason you are entering these markets I assume. And your growth at DFW specifically, so what do you think is a better read on your forward revenue trends, the general economy or fare trends in the markets that you are entering?

Barry Biffle

I would say the fare trends in the markets we are entering have played a bigger factor. I mean obviously if you look at the last call it five quarters, you can see the changes that we made to our network far outstripped anything that was happening in the industry from a fare perspective. So we see and have seen in the past and continued to see the best ways to improve your RASM or better well managed network. And so we continue to focus on above average fare routes to deploy a new capacity. But we don’t actually target is this going to be an 18% higher, or is this 10% higher. But, yes we look for the top quartile of average fare markets and that’s where we look to grow.

Duane Pfennigwerth – Evercore Partners Inc.

Thanks. I mean I guess the general point here is given your limited scale today and higher fare markets that you are entering, should we assume by the fall that capacity your acceleration will be dilutive to RASM, this fourth quarter down five and your RASM should we by default be assuming negative RASM in line?

Barry Biffle

I think that would be premature to make that conclusion.

Duane Pfennigwerth – Evercore Partners Inc.

Okay, thank you.

Operator

Thank you. And the next question is from Ray Neidl from Maxim Group. Please go ahead.

Ray Neidl – Maxim Group Securities

Yeah, a couple of quick things here. Just came out not too long ago that your appeal to the court about concerning the ads with the total cost of your pricing has been rejected. Is there any big thing or is that just a minor annoyance that you were addressing there?

Thomas Canfield

This is Thomas Canfield. First of all, we’ve been in compliance with these rules, which have been in effect for a quite a number of months now. Obviously, we disagree with the decision but I don’t expect this will change in any great way what we’re doing.

Ray Neidl – Maxim Group Securities

Okay, great. That’s what I thought. The second thing is you're really building up DFW airport, you're kind of going into the den of the lion there, American Airlines as they restructure. Basically is there any danger there when American comes out of bankruptcy as a stronger entity with what you’re trying to do in DFW? And secondly, even though the culture is entirely different, American is looking for a localized partner, is there any way you can partner up with American?

Ted Christie

I can’t really comment on the second piece, they’ve got a lot of things to work through. We could be with American for long time here in South Florida. So we know what American is about, they know what we’re about. They know we’re not chasing their business customers, they’re all about chasing business customers. So our growth in Dallas, there is high fares there and there is a good market for us to expand in. We fly basically once a day, in a couple of cases twice a day to most of the markets, and that’s creating a bigger market in Dallas, that would otherwise be there. It’s not directly related to American bankruptcy, it’s related to the sort of market opportunity.

Ray Neidl – Maxim Group Securities

Okay, great. And then finally, it was like the economy slowing further, maybe going into recession with the tax slip in January, I know that your models different, how would you react to a recession, big economic slowdown or recession, would that potentially slow your growth or do you see there's an opportunity to grow even more?

Ted Christie

If you look back to 2009, there was a pretty major recession for travel, and that's the Sprit had its highest earnings from a margin standpoint. At a highest margin operation like McDonald's, or like Wal-Mart, or like other commodity kind of players in their space, in a recessionary environment more a larger percentage of the traveling population or the buying population looks for the value play. So we actually believe our model is somewhat countercyclical in that sense and while we're not certainly wishing for recession for lots of reasons we wouldn't wish that, we don't think that it changes the view of the business model, and in fact shouldn't change our view that we can continue to grow and not compress our margins.

Ray Neidl – Maxim Group Securities

Great, thanks guys.

Operator

And the next question is from Hunter Keay from Wolfe Trahan. Please go ahead.

Hunter Keay – Wolfe Trahan & Co.

Hi, thanks everyone. Ben, first of all I appreciate all the color on the non-fuel CASM stuff, I think that's really important and I appreciate it. But love to sort of flush out a little more color from you, if you could. Is there some sort of longer-term target that you think about maybe on an absolute basis. And I realize that the absolute numbers are going to change based on the capacity changes. But as you think about the delivery schedule over the next few years, and you have a reasonable idea what capacity of work is going to be, you're going to be coming around $0.06 on CASM fuel in all likelihood this year, is that a reasonable target to think about sort of how you guys think about driving your cost down to some sort of target level on an absolute basis? Is there something you think about, Ben, like longer-term that maybe you want to share?

Ben Baldanza

We think of lower than fixed certainly, and we aspirationally we think to like to get half a cent or full cent of that, right, we (inaudible), but let me see if Ted has any more color he has about it. But we are not fantasied with the current ex-fuel CASM performance of the airline. And as Ted said, we've got a lot of reasons we believe that number has come down.

Ted Christie

Yes, that’s what I was going to say 200. As I mentioned in my comments, we’re reporting the numbers we’re reporting, but we’re not happy about it, right. And we need to start seeing the benefits of some of the thing that we’ve been going through recently that have been inflator, so that cost which we expect to start to realize in the fourth quarter and so Ben's right, we certainly are going to set a target for ourselves that I don’t know that we would share with you, but it’s not going to be a number that got to fix on it, and we feel like we have the tools we need to make sure and go after that.

Hunter Keay – Wolfe Trahan & Co.

That’s great. Thank you, Ted. And may be another one for you, Ted, as you think about the cash stockpile you’re sitting on, obviously you’re on a high growth mode, we can appreciate that. You are investing it back in the business, but is there anything preventing you from may be buying back a lot of the stock that’s held by private equity right now to remove any potential overhang on the share or anything like that, anything be prohibitive that we should be aware of?

Ted Christie

No, I talked about this before. We went and raised that capital for a lot of good reasons. We’ve a lot of growth coming for the airline that we have to be thoughtful about how we plan it, plan to finance that and digest all of that. And having the capital available to us gives us a lot of flexibility in that regard. So, we are going to be focused on deploying at the right way and the smart way for now.

Hunter Keay – Wolfe Trahan & Co.

Okay, thank you.

Ted Christie

Thanks.

Operator

And the next question is from John Godyn from Morgan Stanley. Please go ahead.

John Godyn – Morgan Stanley & Co. LLC

Hi, everyone. Thanks for taking my question.

Ted Christie

Hi, John.

John Godyn – Morgan Stanley & Co. LLC

I was hoping to dig a little deeper into the comment that July and August booking levels remain stable. Can you just give us a sense of how much of July and August is booked a month or so in advance and specifically what you are seeing in close-in bookings? I guess the bigger picture question is just is there anything in your demand trends that reflects the bearish macro environment we are seeing in other industries?

Barry Biffle

This is Barry. As far as July, I mean at this point there is not much left, so majority of that is booked. August is, we’ve got not quite half a picture of August yet. But we’ve seen nothing that suggests some major economic downturn. And there is a lot of noise, I mean, Ben mentioned, last year, we did have the changes to the network and of course that’s in the base this year. There is a little bit of a question on the FET tax holiday we had last year. And so it was difficult at the time to isolate that because we had so many other changes to the revenue side of the business and it’s still difficult at this point. That does make the comps more difficult. But as far as a downturn in the economy, we haven’t seen anything like that and we’re pretty close-in. So maybe there is something out in the future that we’re not seeing, but in terms of real demand and people going on vacations and traveling for leisure this summer, we just haven't seen it.

John Godyn – Morgan Stanley & Co. LLC

Okay. Thanks. I was hoping we could just put a finer point on the answer to Duane’s questions on CASM ex-fuel. I’m not looking for precise guidance, but if I understand the comments correctly, in the fourth quarter, CASM ex-fuel is down considerably, as we look into early 2013, comps stay really easy from a cost perspective. Should we be thinking about CASM ex-fuel to be down year-over-year in 2013, just to put some boundaries around it; is that the right way to think about it?

Unidentified Company Representative

We did real close to starting to give guidance there and we are not going to do that. But I think we’ve been pretty clear about what our goals and what we feel good about those goals going into both 2013 and beyond, and Ben showed us some numbers out there, attrition number is out there and that’s management’s job. We’re going to go and tackle those things. We think we’ve got what we need from a gross perspective to go after that stuff.

John Godyn – Morgan Stanley & Co. LLC

Okay, thanks. And just sort of a last quick niche, can you just give a general update on financing of aircraft deliveries going forward? Have you made any more decisions on any financing? Thanks.

Ben Baldanza

Sure. So we've been in the market to finance the remaining 2012 and all of our 2013 deliveries, and we're in the process of awarding that business as we speak.

John Godyn – Morgan Stanley & Co. LLC

Thanks a lot.

Ben Baldanza

Yep.

Operator

And the next question is from Bob Mcadoo from Imperial Capital. Please go ahead.

Bob Mcadoo – Imperial Capital, LLC

Hi, just a couple of quick things. You’ve given us a whole list of cities that you anticipate opening up out into next year. And making the assumption that everything that you have opened now continues to function okay. Does this use up all the capacity that you’ve got, are there still more airplanes that need to be scheduled or is this the list of cities that would be flown. If everything else continues to work, these are lows and that’s where we’re looking at for the first part of next year.

Barry Biffle

This is Barry. Yes, this is about as far as we have scheduled the airline and announced new services. But we’ve done that in order to make sure that we have the infrastructure in place and have the customers in place to buy those tickets. But in terms of, do we have any aircraft left, we have the ability through the front half of next year, through June to add a couple of more routes. But the majority of the new service through the front of next year has been announced, and obviously they’d be more capacity in the back half of ’13, but again the majority of everything new that we’re going to do has been announced.

Bob Mcadoo – Imperial Capital, LLC

Okay, and then one last thing. We talked about the re-accommodation issues, maybe I missed it, but I didn’t see specifically cancellation and completion factors, how bad was that or could you go back through that a little bit again for us in terms of what was it that drove all the disclosures about flight cancellations or whatever? How bad did it get or what was that you dealt with that you don’t anticipate continuing?

Ben Baldanza

It’s just basically that because of the seat maintenance program that we talked about, we’ve added two airplanes going through that, that’s given us a little bit less free time of non-flying airplanes to be able to recover more quickly, and that’s generated some incremental irregular operations cost, one-time cost that we believe for the second and third quarter. Also at the same time, as we’re opening new cities, we have maintenance and crews in Las Vegas now, but we’re still in the process of building up the infrastructure in Dallas and Chicago. And so the airline is spread out and the infrastructure is sort of catching up with that. With the (inaudible) schedule and without as much spare airplane availability because of the seat maintenance program, it just put us in a position where we’ve had some irregular operations, we’ve spent a little more money than we would expect. But we see that as part of the one-time, second and third quarter cost of that all program and by the fourth quarter that sort of should be back in a steady-state level that we’re comfortable operating at.

Bob Mcadoo – Imperial Capital, LLC

No, I understand all that. That wasn’t the question.

Ben Baldanza

Sorry.

Bob Mcadoo – Imperial Capital, LLC

The question was, did your completion factor get down to 98%, 97% what kind of number was it?

Ben Baldanza

The completion factor for the quarter was 98.5% and it was 99.4% the year before. So down a little less than a point.

Bob Mcadoo – Imperial Capital, LLC

All right, that was (inaudible). Okay, thanks a lot.

Operator

The next question is from David Fintzen from Barclays Capital. Please go ahead.

David Fintzen – Barclays Capital

Hey, good morning, everyone or good afternoon, everyone. Just a question on the ancillary side you mentioned, I think it was Ben or Barry mentioned that you probably had more to go on the passenger bag fees, but I’m curious in the past you’ve talked about taking more wallet share and travel. I’m just curious what kind of initiatives you think could fit into that bucket and how does the sort of network evolution in building out the bigger footprint, does that lead to more opportunities to get into cars, hotels, et cetera or is that how should we thinking about it?

Unidentified Company Representative

Well, so, Las Vegas and our growth there obviously enabled our ability to sell hotels and so forth, and we just really started that this year. There’s been a number of functionality improvements that we had to launch in Phase 2, 3, 4 of that. And we’re very close to kind of completing the packaging. So that’s obviously a growth opportunity for the company. But the network, the scope service from the network, it really feeds two things that we don’t talk a lot about, but the FREE SPIRIT MasterCard, as well as the $9 Fare Club, those are more about the population that we reach than it is the routes we fly from a given city.

So for example, when I mentioned earlier that we are now in over 80% of the population weighted top 25 metros that is going to enable us to sell a lot more credit cards and a lot more $9 Fare Club membership, whereas before, I’m not saying we have everybody in Fort Lauderdale, but we have pretty much everybody that’s going to get a $9 Fare Club membership or a credit card

So the growth in DFW, the growth into, even at Chicago, where we had limited service a year ago, those things are now enabled where we didn’t have the ability. I mean we’re talking about earlier. Last week I flew from DFW to Phoenix, Phoenix to Las Vegas and Las Vegas to Denver, all on Spirit, and none of those routes were there six months ago, and of course Phoenix and DFW and Denver weren’t even there as cities we served a year ago. So, all of those new credit cards and new $9 Fare Club memberships will be incremental. The one thing I would caution is that the revenues from those things are spread out over a year, so for example, the way we book, the 59.95 is we divide by 12, so it will take time for those things to materialize and impact the number.

David Fintzen – Barclays Capital

Okay and then, obviously understand you get the scale in DFW but how do that work in, not the right way to call them, but scope markets like a, Portland Springs to mine, if you such a smaller city and now you have three, four destinations, is that enough to then begin and drive that on the other side as well outside of the big DFW, Chicago type markets?

Barry Biffle

I think it's a good example, I mean Denver is probably one we just launched that in May, we started at day one with six flights, and four nonstop routes and so that is kind of the minimum we need to get to, you need to fill out basically at gate, so we’d like to have six to eight flights, kind as a minimum base in an operation to feel like we are getting any kind of scale benefit.

David Fintzen – Barclays Capital

Okay, and there is one left on the cost, in terms of the crew overnight, is there something from our advantage point we should be looking for, I mean I’m thinking, you have a crew base in Vegas, but here should we be watching for crew base in Dallas or something there change in that base, that would begin to facilitate sort of reducing those overnight or optimizing the crew pair-ins or is that just something evolves over time that we won't have any visibility from the outside?

Ted Christie

The crew overnights are one aspect of the overall pilot scheduling, cost optimization, and flying the operation efficiently operation, it’s one piece of it, its not the only thing, so as the network grows and as the network has gotten geographically broader, we were working through the best ways to serve that network from both the crew and maintenance standpoint to really fly reliably and with a low cost position, and we’re not commenting on where there maybe future based of anything going forward, but we’re going to do it right and we’re going to make sure that we have planes well maintained and crews ready to fly them wherever we fly.

David Fintzen – Barclays Capital

Okay great. I appreciate all the color guys.

Ted Christie

Thanks.

Operator

Thank you. And the next question is from Glenn Engel from Bank of America. Please go ahead.

Glenn Engel – Bank of America/Merrill Lynch

Hi, good afternoon. If you look at markets that are new that means within less than 12 months, what percent were those in the second quarter, where has that been in the past few quarters, where is that going in the next several quarters and if I looked at the established markets, how did they perform year-over-year relative to the overall system?

Barry Biffle

This is Barry, so in any given quarter, if we have 50% growth or 20% growth from here on out with the few exceptions we expect the most of that will be all new capacity in new markets. Last year was a little bit of an anomaly, in that we reduced our non-growth flying or mature if you will, we reduced some of that capacity to improve the margins and kind of right-size the network, if you will, and so that caused and have normally high, we’re in the 30 percentile in new markets, in the back half of last year. But we pretty much lapped that now and so if you see our growth it’s unless we decide to redeploy something it will closely mirror our overall capacity growth.

Glenn Engel – Bank of America/Merrill Lynch

And the established markets, how do they perform year-over-year relative to the – did they perform better or worse than the average RASM gain that you have?

Unidentified Company Representative

We don’t actually disclose that, but I think we do talk about our target margins and if our existing markets aren’t getting that we’ll remove capacity.

Glenn Engel – Bank of America/Merrill Lynch

And finally you mentioned the stage was down a little bit in the third quarter in the fourth quarters, what the stage look like?

Unidentified Company Representative

It’s up slightly, I don’t have.

Glenn Engel – Bank of America/Merrill Lynch

That’s good enough. Okay, thank you very much.

Operator

And the next question is from Stephen O’Hara from Sidoti &company, LLC. Please go ahead.

Stephen O’Hara – Sidoti & Company

Hey, good afternoon. You guys talked about kind of some of your qualifications for looking at markets to see whether it make sense, talk about some of that where you guess thinking you can lower the fare by 25% or more. I mean do you have a sense for in order to stay in a market, stay relevant and maybe grow market share or stay as if out of the (inaudible). How far below the legacy carriers or common carriers in the market you have to be in terms of average fare?

Ted Christie

That’s different by every market, but we expect to be the lowest priced option for a traveler anywhere that we fly. And so as a general rule, we like to think where we fly based on our ability to make our target margins with fares that is 25% less than the prevailing fare. That doesn’t mean that for ever that we use that as a benchmarked price whether or not the market making money or not. We backed every market to make money or we expect every airplane to make money. And we’re going to manage the markets where that happens and in some cases that will mean adding more capacity and in some cases that will mean reducing capacity.

We use that as an overall guideline but it really depend market-by-market where the fares are. And the deployment of capacity as we said a number of times publicly is set to carry the growth that we expect to create with the lower fares. So when we enter a new market we lower the prevailing fare that grows the market and we size the number of frequencies we put in to carry that growth not to carry the existing market.

Stephen O’Hara – Sidoti & Company

Okay. Thank you, and then in terms of your non-ticket revenues, I guess, on a unit basis, I mean does that the inability or ability to grow that on a unit basis, have a big impact on your ability to lower fares?

Ted Christie

Well, certainly, the higher our ancillary revenue is the more that connect as a subsidy against our base fare. So, in an ideal world for us, we will continue to grow, make more of the fare optional and let customers choose, whether they pay it or not based on whether they want the services or not and have a lower and lower entry point. But we manage the airline to total unit revenue and total revenue per aeroplane. And so what's going to happen is that as ancillary revenues change and evolve that will give us either more or less flexibility in the base fares. But the ideal world for us is if you pay a very, very low base fare you pay your actual fuel price, and then you buy whatever options are important to you in. That's our pricing long-term…

Stephen O’Hara-Sidoti & Company

Okay, and then last question, quickly. You mentioned the start-up cost. Can you just define what those are exactly?

Ted Christie

Generally, when you go into a new city, it’s wiring up the airport so that we can check people in and meet all the security requirements, and other things there, it’s whatever sort of commitments we have to make in terms of gate and ticket counters and things like that, whatever contracts you have to make with the provider in most cases to do our ramp handling into ticket counting handling, it sort of setting all those things up in advance of actually creating revenue there, that become the start-up costs for the operation. But in many cases, we choose where to go based on where that start-up cost is going to be proportionate. What we think, the market opportunity is and sometimes we get support, and now being lower those costs or mitigating those costs someway. So it’s a one-time cost, but their part of the whole decision is to whether we add service to XYZ city or not.

Stephen O’Hara – Sidoti & Company

Okay, thank you.

Operator

Thank you. And the next question is from Stephen Trent from Citi. Please go ahead.

Stephen Trent – Citigroup

Hi, good afternoon everybody, and thanks for taking my questions.

Unidentified Company Representative

Hey, Stephen.

Stephen Trent – Citigroup

Hi, just the first question actually to some extent, I’ll follow-up on my friend, Ray Neidl’s question, looking at 2009 when you saw there’s kind of downward migration to people looking for cheaper fares. To what extent, have you seen a similar trend over 2012 so far, is it kind of maybe a small portion of traffic coming from that or have you not noticed that trend versus what had occurred three years ago?

Barry Biffle

This is Barry. We haven't seen that yet, and again we're not warranting that there is not a recession coming. But we just haven't seen those leading indicators yet to say that we’re entering that phase. I will echo what been said though. While we’re not excited about a recession we wouldn’t wish that on the economy. We’re not afraid of it at all given our track record in that type of environment.

Stephen Trent – Citigroup

Great, great, terrific. And just one more question for me. When you think about the potential medium-term competitive challenge, I mean, not just Spirit Airlines, I mean the whole U.S. airline industry coming from some of these regional carriers like Republic that are out there that have orders for bigger planes and that LOI is for essentially mainline aircraft. To what extent, do you think about the potential threat coming from those carriers? Do you think it’s something that you're going to face in the future, do you think this is maybe more a problem for an Allegiant that has a pension for secondary airports versus the way you guys operate?

Ted Christie

Yeah, we don't really think about it too much to be honest. I mean, we evaluate our growth opportunity and our aircraft deployment opportunity based on where we think the market can be bigger than it is today with a lower fare proposition. As we look out over the landscape, we don't see in any meaningful quantity other airlines making their planning decisions on that basis. And so the order books of public or whatever pick your favorite, smaller airline in the U.S., and what they are doing doesn't really affect our view at all.

Stephen Trent – Citigroup

Okay. Exactly what I was looking for. Thank you very much.

Ted Christie

Thanks.

DeAnne Gabel

Sandra, we have time for one more question.

Operator

Thank you. And the last question is from Helane Becker from Dahlman Rose. Please go ahead.

Helane Becker – Dahlman Rose & Co.

Thanks operator. I feel very bad, because most of my questions have been asked and answered. But I notice that there is a fare increase yesterday that went into effect by some of the other airlines. Is that something you would have matched or can you offer any comments on fare trends?

Barry Biffle

We don't line up with every fare increase, I mean lots of times those fare increases get a lot of people excited, and I remember conversation last year there was a series 7 or 8, $5 increases, and I said oh, well, so, that's a great news, does that mean everybody’s up by $40, and the answer is no. They are designed for people that raise their full fares, and they have a lot of business customers and so forth. And what we generally watch, and what the promotional fares are in the marketplace, because that's what major customers are buying. And so we tend to watch what happens kind of the knock-on effect, if that has an increase on the promotional fares, then that will change things, but if you’re just talking about, what they call ‘core fares’ or ‘structural fares,’ that’s not really meaningful. I’d argue to us or the industry, so with this we don’t really follow those.

Stephen Trent – Citigroup

Okay, so should we think about $81 as being your base fare going forward?

Barry Biffle

Well, actually, I mean, you should look at the total revenue per passenger.

Stephen Trent – Citigroup

That’s right.

Barry Biffle

That’s what matters. Look at the total revenue per passenger or say it again, we continue talk about it. You can’t talk about non-ticket without talking about the toll and you can’t talk about the fare without talking about the toll. So the best way to model us is to think about the total revenue per flight segment.

Ben Baldanza

With our $51 of waste down as ancillary, we wouldn’t have had the $81 fare. And so as ancillary changes base fare change.

Stephen Trent – Citigroup

Okay, all right. That’s good, thanks very much Ben.

Ben Baldanza

Thank you all.

Operator

Thank you. That concludes our call. Ladies and gentlemen, thank you for participating. This concludes today’s conference. You may now disconnect.

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