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Allegiant Travel Company (NASDAQ:ALGT)

Q1 2008 Earnings Call Transcript

April 29, 2008 1:00 pm ET

Executives

Maury GallagherCEO, President

Ponder HarrisonManaging Director of Sales & Marketing

Andrew LevyCFO, Managing Director of Planning

Analysts

Mike LinenbergMerrill Lynch

Duane PfennigwerthRaymond James

Jim ParkerRaymond James

Bob McAdooAvondale Partners

Operator

Welcome to Allegiant Travel Company's first quarter 2008 financial results conference call. We have on the call today, Maury 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 Maury Gallagher, followed by Ponder Harrison, then Andrew Levy. After the presentation, we'll 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 are only predictions and involve risks and uncertainties. Forward-looking statements made today may include among others references to future performance and comments about our strategic plans. There are many risk factors that could prevent us from achieving our goals and cause the underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed in or implied by our forward-looking statements. These risk factors and others are more fully discussed in our filings with the Securities and Exchange Commission.

Any forward-looking statements are based on information available to us today, and we undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information, or otherwise. The company cautions users of this presentation not to place undue reliance on forward-looking statements, which may be based on assumptions and anticipated events that do not materialize. The earnings release as well as a rebroadcast of this call are available at the company's Investor Relations site at ir.allegiantair.com.

At this time, I'd like to turn the call over to Maury Gallagher for his opening remarks.

Maury Gallagher

Good morning, everyone. Thank you for joining us today. As Lori mentioned, joining me today are Andrew Levy, CFO and Managing Director of Planning, and Ponder Harrison, our Managing Director of Sales and Marketing. They will be commenting each after I have finished with my brief remarks. I will take you through some of my general thoughts and beliefs, Ponder will comment on our revenue results, and Andrew will wrap up with comments on aircraft plans, our network activity, expenses balance sheet and such.

As I said in our press release, we had a terrific quarter. Our revenues increased 58% to $133 million. On a 48% increase in departures and non fuel expenses were up only 42%. These are the types of increases I thoroughly enjoy between revenues and expenses. We were able to accomplish these results with our two new destinations, Phoenix-Mesa and Ft. Lauderdale, which we inaugurated in the last quarter of 2007. They generated 18% of our scheduled service revenues this quarter.

Also for the first time, our revenues in Las Vegas were less than 50% of our scheduled system. 44% to be exact. Last year at this time, they were 60%. To show you how fast we've been moving, Las Vegas represented our only scheduled service revenues in mid-2005. This percentage is to be expected given the growth in Florida and Arizona during the past three years. Orlando revenues in particular were up strong, 53% on a 51% increase in departures, and St. Pete's revenue growth was even more impressive, 43% on only 21% increase in departures. In Q1 Orlando represented 27% of our scheduled revenues while St. Pete was 11%. As you can see from these numbers Florida is performing extremely well. We have truly become a national company, diversified across the entire country. We have told you consistently during the past two years that we'll add just capacity to fit market requirements.

During the past six months in response to escalating fuel prices, we've indeed reduced our planned capacity growth. This reduction has allowed us to maintain our selling fare if not increase it slightly during the past year. Unit revenue growth has been the driver of our profitability, particularly our ancillary revenues. Our commitment to developing this secondary revenue source has allowed us to move away from depending solely on the selling fare. The effort by Ponder and his team during the past three years has produced almost a fourfold increase in our employee revenue per passenger, from $7 in 2005 to just short of $26 in our most recent quarter. During this year's first quarter, ancillary revenues increased 36% to almost $26 from $19 in Q1 '07.

Ponder will have further comments and other information in a moment. We have also improved our revenues this quarter by increasing load factors. We have told you during the second half of last year we were focusing on flying full airplanes. Our Q1 '08 year-over-year scheduled service load factor increased 4.4 load factor points to 86.9%. High ancillary revenues and high load factors go well together in the revenue game. With our $25-plus per passenger ancillary rate, the benefits of high load factors are obvious. High load factors also facilitate our cost management. During Q1 last year, our non-fuel cost per passenger was $51.60 and during Q1 this year, it was just under $48, at $47.87, a 7.2% decline.

On the fuel front, we consumed only 19 gallons per passenger this quarter versus 21 gallons last year, due again to higher loads and somewhat shorter stage length. Clearly, our efforts to reduce long-haul flights, to shorten our stage length and to fly fuller aircraft have been worth the effort. These are unprecedented times. The increased fuel costs, the pace at which they have come on are forcing the entire industry to retool itself to survive. Survivors, first and foremost, must have strong balance sheets and particularly cash reserves. As of March 31, we had almost 46% of our trailing 12 months of revenue in cash; the highest in the industry. Survivors should and will have low cost as well. We are among the lowest cost providers currently operating. If high fuel prices persist, the industry is going to reduce capacity dramatically in the next 12 to 24 months. It has no other choice.

In Las Vegas alone, seat capacities for the back half of this year has been reduced 7% year-over-year according to published schedules now available. Throughout our history, as you know, we've had minimal direct competition. Going forward, it appears we'll have even less. Additionally, growth opportunities should improve substantially in the coming years in my opinion with the recent fall-out. The leader sector has already seen the demise of four carriers. Aloha, ATA, Champion, and SkyBus. Sun Country as well has announced upcoming substantial cutbacks. Legacy carriers are daily announcing new domestic capacity reductions, something we think will only accelerate if the expected consolidation occurs.

In our opinion, small cities will see a significant percentage of the upcoming reduction. 50-seat RJs have had questionable economics in the past few years. $120 per barrel oil makes 50-seat aircraft and their economics almost unbearable for their legacy sponsors. Already, Delta has announced its intent to eliminate 70 RJs. Frontier just unwound a deal with Republic for up to 17 aircraft. In particular, this reduction will help our Midwest and Mountain State markets for Las Vegas.

Near-term, we've had an impact to our earnings from fuel costs and they will continue given the current place where fuel is. However, we're bullish about our opportunities looking forward. We feel we can manage in a fuel environment as long as it is reasonably stable. We will have more quarters like the one just past with even better margin.

In closing, we've a maturing national story. We have the best ancillary revenues. We continue to have good to very good growth prospect. Yes, we the lowest costs. With that let me have Ponder comment on revenues followed by Andrew's comments.

Ponder Harrison

Thanks, Maury. As Maury mentioned, this year's first quarter revenue results were nothing short of spectacular, an important driver was our strategy of continuing to push higher loads on to more departures with the aim of increasing total absolute and unit revenues as measured on both a per passenger and an available seat mile basis. For the first quarter of 2008, total scheduled revenue per passenger increased by more than $7 or 7% to just over $112 per passenger. Totaled schedule service revenue per ASM or TRASM, which is the acronym that we've created, grew year-over-year by over 16%, generating $0.106 per ASM versus $0.914 per ASM in the first quarter of 2007. Couple this with nearly a 57% increase in scheduled passengers and that is a winning revenue formula by virtually any standard.

Now, let me hit some of the scheduled system highlights and then dig just a bit deeper into the ancillary revenue results. Total system revenue increased year-over-year on the first quarter by an impressive 58% as scheduled service, fixed fee contract flying and ancillary revenues all demonstrated good year-over-year improvement. Scheduled service revenue comprised 69% of total system revenue for the quarter. Year-over-year scheduled service revenue grew by approximately 58% on 44.1% increase in capacity.

As Maury mentioned, for the first time ever, Las Vegas was less than scheduled air revenue, coming in at 44% in the first quarter of 2008. This demonstrates the continuing strength, diversity and maturation of our system network in general and our Florida routes in particular. In line with Las Vegas, Sanford air revenues increased 53% and St. Pete grew by 42%. During the fourth quarter of 2007, we introduced our two newest world-class leisure destinations, Phoenix-Mesa, and Ft. Lauderdale. First quarter 2008 was their first full quarter in the network and they both performed quite well, though Phoenix was significantly stronger, we believe than Fort Lauderdale. Overall, demand for our product was extremely strong in the first quarter. As such, we were able to generate the highest scheduled domestic on-board load factor result of any reporting U.S. carrier.

For the quarter, our scheduled system flew almost 87% full, representing a year-over-year increase of over four load factor points. With the Easter holiday shifted into March, we were able to break the 90% load factor mark in March for scheduled service, an increase of 3.5 load factor points year-over-year for that particular month. As part of our ongoing effort against escalating fuel prices we also continued to reduce our scheduled service stage length, which tapered to 907 miles versus 926 miles year-over-year, a slight reduction of just over 2%. 2.7%, to be specific. Shrinking our stage length even slightly generally allows for more departures assuming constant utilization levels of our aircraft. In the first quarter this was indeed the case, with scheduled departures climbing year-over-year by 46%. More importantly, we increased scheduled passengers by 57%, which drove our passengers per departure, as Maury mentioned, up 7% from 119 passengers to 127 passengers per departure.

Passenger air yield also increased year-over-year at 3.8%, moving to $0.0943 per mile versus $0.098 in the previous year. Average airfare also grew slightly increasing just half a percentage point to $87 per passenger. Coupled with a slight reduction in stage length, this combination produced positive air RASM growth of 9.3%, highly credible, given that many believe we're currently in a recession. Specifically, I'd like to thank some of our key groups that helped achieve these numbers. Our pricing and revenue management team, the ancillary products group, corporate communications, advertising, PR group, plus all of our software developers and hardware technicians have done an outstanding job delivering these particular results. Each and all accepted the challenge of building traffic without sacrificing unit revenues, and after this call, I am sure they'll want to collect on the dinner bet that we made and, given the results, I guess I am only too happy to pay.

And now, let me move on to ancillary revenues, the gift that keeps on giving. I am pleased to report that the positive ancillary trend continues and per passenger rates continue to move upward. Some key points from first quarter. During the quarter, total ancillary revenue increased over 112%, producing just north of $27 million versus $12.7 million in 2007. On a unit basis, ancillary revenue per passenger increased by 36%, moving up $7 to a final level of almost $26 versus $19 in the first quarter of 2007. Third, ancillary revenue per ASM increased 47.5%, moving up from $0.0164 to $0.0242. Fourth, sequentially, the first quarter ancillary revenue per passenger climbed over $1.50 versus the fourth quarter of 2007. Last, as a percent of the first quarter average airfare, ancillary revenue rose 8% growing to a level of 30% of our average airfare for the first quarter.

In our experience, ancillary revenues are predictable and thus far have only increased. The positive movement in the first quarter ancillary unit values can mainly be contributed to refinement of several product categories such as trip flex, revenue from advertising on our web site, increases in our checked baggage fees and stronger demand for rental cars in Florida. While hotel rate surveys suggest Las Vegas in general is showing some weakness relative to previous years, we've done quite well on our Las Vegas flights. In particular, we've had great success driving higher take rates to our Las Vegas hotel partners. In part, we attribute this to our ability to offer lower rates across all of our Las Vegas hotel categories. We're also seeing very good demand from agricultural states, perhaps because farmers are benefiting from the commodities boom.

In terms of new ancillary efforts, we've just this quarter begun to revenue manage pre-assigned seating by seat types such as exit rows. Early returns from this particular initiative appear to be very positive. I should note that revenue management of ancillary items is in its infancy, so there may well be gains to be had from this particular activity. Further, just two weeks ago, we doubled our checked baggage fees for new web bookings from $5 to $10 for each of up to two bags. At the airport, checked baggage fees were also doubled from $10 to $20. In this regard, we're pleased to see that the legacy airlines and some of the other low-cost carriers are also imposing such fees because we believe it further legitimizes such charges in the eyes of the consumer. There are a number of other ancillary initiatives under development currently and we expect they will be introduced throughout the remainder of the year. In that regard, it's a good opportunity I think to remind you that we've full programming and development control of our reservation system and passenger processing software. This permits us to quickly implement new products and/or to make changes to our current ancillary offerings. This is an important advantage over virtually all others in the industry who do not directly control their reservation software application development.

Going forward, we expect the revenue outlook to remain quite positive. Thus far, demand for the second quarter is in line with our expectations, and pushing higher passenger load through our scheduled system remains our primary objective. All the while, however, we have to balance our demand priorities with our capacity realities, particularly in the current fuel environment.

With that said, I'll turn it over to Andrew to review our market planning activities as well as our financial and balance sheet details. Andrew?

Andrew Levy

Thank you, Ponder. We are proud to report our 21st consecutive quarter of economic profits and an increase in our economic earnings per share of almost 24% to $0.47 from $0.38 during the first quarter 2007. Our 10.8% operating margin and 11% pretax margin leads all our U.S. industry peers. Except for the sharp increase in fuel expense, we would have substantially improved on last year's operating margin performance despite a 48% increase in departures. We continue to do an excellent job managing our costs and protecting our industry-leading cost structure. Our cost per ASM excluding fuel increased year-over-year, only 4.3% to $0.0435 despite an 8.1% reduction in average stage length to 854 miles. Including fuel, cost per ASM increased 24.5% to $0.0935, driven by a 49% increase in fuel cost per ASM to $0.05.

Our ability to continue to drive high load factors has enabled us to better spread our costs on a per-passenger basis. Despite the substantial increase in fuel costs, our operating expense per passenger rose only 10.6% to $103 as our cost per passenger excluding fuel declined 7.2% to $48. Aside from fuel, maintenance and repairs expense also increased at a faster pace than revenues. This increase was due in part to a one-time expense associated with the change in our accounting treatment for low-value, high-usage expendables.

We have historically accounted for these as inventory items and expensed them when used. We recently changed this treatment, and now expense these items when purchased, this changing the accounting process to incur a one-time expense of about $500,000, resulting from the expense of inventory items during this transition.

Our balance sheet is also one of our core strengths. We ended the quarter with $188.2 million in unrestricted cash and short-term investments, and debt of only $71 million, leaving us with negative net debt of over $117 million. During the quarter, we introduced four more aircraft into our fleet and in April, we placed our 37th aircraft into service. Also in April, we completed the purchase of six MD-80 aircraft currently on lease to a European airline. We expect these aircraft to be placed into service in Allegiant Air's fleet starting in early 2009. These aircraft will support 2009 and 2010 growth. As previously disclosed, during the third quarter, we've committed to purchase two aircraft currently in our fleet under operating leases. We have no other aircraft commitments at this time.

Let me briefly touch on our plans for the remainder of 2008. Year-over-year comparisons will continue to be difficult. Our second quarter 2007 operating margins of 15.9% with a fuel price of $2.23 per gallon. Through April 28, our estimated month to date fuel price per gallon is about $3.25, up 46%, and up $0.51 or 19% from the $2.74 per gallon we paid just two months in February. As stated in our press release, if fuel prices remain it at this level, we'll fall short of matching last year's second quarter financial results. We want to remind you that we've consistently stated our priority is to lead the industry in profit margins and that we'll sacrifice capacity growth to protect margin performance.

Our assumption is that $120 crude is here to stay and we're making capacity and network planning decisions with this in mind. To that end, we're in the process of adjusting our schedule for the fourth time since October of last year, to right-size capacity in line with current fuel prices. In particular, we've decreased frequencies on many of our routes in order to drive higher average airfares. Our schedule is currently selling through the end of August and we're flying 61 routes that we also operated during last year's April through August period. Of these 61 routes, we've decreased capacity on 30 during the second quarter and on 36 during the July and August period.

On other routes, we've suspended service during seasonally weaker periods. For example, we're suspending several routes to Phoenix-Mesa during the summer months. In other cases, we've eliminated routes we believe cannot be profitable in the near term with current fuel prices. The end result will be slower growth during the second and third quarter of this year than we anticipated even just a few weeks ago. We are also planning slower growth during the fourth quarter unless fuel prices decline materially. Unfortunately, as we've repeatedly seen, fuel prices can move up but capacity planning decisions takes a month or two to implement. We are in the middle of such a period due to the recent run-up in fuel we've seen since mid-March and mid-April. When fuel prices stabilize, almost regardless of the price we remain convince we can adjust our business to thrive in just about any environment barring an unexpected severe deterioration in demand.

Lastly, let me comment on our network. As noted above, we've suspended and/or eliminated several routes, but we've also announced the following new routes which will start during the current quarter. Santa Barbara, California to Las Vegas. Monterey, California to Las Vegas. Greensboro, North Carolina to Ft. Lauderdale, and Bellingham, Washington to both San Francisco and San Diego. We have also extended our seasonal service from Bellingham to Palm Springs to run year round on a (inaudible). Also during the first quarter, we established a two aircraft base in Bellingham, Washington, one of our larger small cities. The base in Bellingham permits us to add new routes, including cities that are not among our current five world class leisure destinations such as San Diego and San Francisco, while not abandoning our low-cost scheduling philosophy. Assuming the Bellingham base proves to be successful, we'll likely establish bases in some of our other larger small cities in the future.

This concludes our prepared remarks. Moderator, we're ready to take questions.

Question-and-Answer Session

Operator

We will now begin our Q&A session. (Operator instructions) We'll take our first question from Mike Linenberg with Merrill Lynch.

Mike Linenberg – Merrill Lynch

Hey, good morning. Good afternoon. I guess a couple questions here. You gave us the capacity I think for the June quarter. Did you give us ASMs for full year? Could you just give that, what the fourth quarter looks like?

Andrew Levy

Yes, Mike, we did not. We have previously guided for full-year capacity number, and we decided this time that with all the uncertainty in the market, particularly as it relates to fuel prices, that we just didn't feel comfortable putting any guidance out there because we've had to change it so many times. So the guidance we've given you is for the second quarter, and beyond that, we're going to let you guys make your own assumption.

Mike Linenberg – Merrill Lynch

Okay. And then just my second question, just regarding Bellingham, in this case you're going from, a small city to two big cities. In the past, you historically went from very small cities to major leisure destinations. So is this potentially a harbinger of eventually turning I am sort of going to turn it around the other way that San Francisco and San Diego, because they do fit that world-class destination status, that ultimately, you have service from those markets to some of the smaller cities that you currently serve?

Maury Gallagher

Well, I'll make a comment, Michael. Andrew can go further since he's driving the planning. This is just a great outgrowth of what is a terrific market for us in Bellingham, and so we wanted to leverage that. We also like to experiment. This is a good combination for us certainly. So we'll play with it, see how the results come in, then we'll react accordingly. Andrew has I am sure further comments, but stay tuned, we'll see what the future holds here.

Andrew Levy

Yes, I think, Mike, to Maury's point, we like to try different things and certainly San Diego and San Francisco are pretty big leisure destinations, certainly seasonally, year round as well. But, certainly the summer season is peak season. And so, I think it's certainly fair to say that if we like the results that we could perhaps do more San Diego and San Francisco to other small cities.

Mike Linenberg – Merrill Lynch

Okay. Just as a follow-up to that, the fact that you are establishing a crew base, you are going to put some aircraft there, you are going to put some more employees there in Bellingham, as you indicated that down the road, if this works, if you're looking to establish other bases in, call it your larger smaller cities, does this at all deviate away from the original model, at least as it relates to cost in the sense that historically, you have been able to get people home, your employees overnight in markets like Vegas and Sanford and Tampa? Do you all of a sudden run the issue that you're starting to set up all these crew bases and does that result in cost creep? Just your thoughts on that.

Maury Gallagher

Mike, the reason to do that is to avoid the cost that comes with overnights because when you set these bases up, you put the pilots, the flight attendants, maintenance personnel are there at the bases. So in Bellingham, we now after crew base, and we've those support mechanisms in place. But it gives you the ability now to reach out from Bellingham and the local population with the best economics over time. I am not going to sit here and say two airplanes are the most efficient, but if you can get yourself to three or four you're in pretty good shape.

Mike Linenberg – Merrill Lynch

That's what I was looking for. What do you need to get to be somewhere close to critical mass? Because it seems like, as you said, two is not going to get you there.

Maury Gallagher

Two is not bad. Don't get me wrong. It's not as good as 15 perhaps, but 2, it works very well. But, those are the places we're going to play with this formula. Where the demand arises, we'll go there.

Mike Linenberg – Merrill Lynch

If I could do one more. Route suspensions, you talked about some of the new markets. Maybe I just missed it, I was asleep at the switch here. Did you mention some of the markets that you are pulling out of?

Maury Gallagher

You weren't asleep. One doesn't like to forecast where they leave, or tell where you we're going. We pulled a lot of long-hauls down. Knoxville to Las Vegas.

Ponder Harrison

There's a bunch that were eliminated. Some of the season seasonal suspensions that I think that I referenced are tied to Arizona with long-haul trips like Green Bay, Rockford, Peoria, (inaudible) Arizona, ones that we're simply not going to fly during the time of year that we expect demand to be weaker.

Mike Linenberg – Merrill Lynch

Very good. Nice quarter.

Maury Gallagher

Thanks, Michael.

Operator

Our next question is from Duane Pfennigwerth with Raymond James.

Duane Pfennigwerth – Raymond James

Thanks for taking the questions.

Maury Gallagher

Hello, Duane.

Duane Pfennigwerth – Raymond James

Just a question on Vegas, if you could give us any qualitative sense for sort of same-store RASM from your mature markets.

Maury Gallagher

We're looking quickly at our sheets. Ponder probably has that as quick as anybody.

Duane Pfennigwerth – Raymond James

If you could give us any sense for how that take rate changes with lower price points in Vegas.

Maury Gallagher

As far as hotels?

Duane Pfennigwerth – Raymond James

Yes.

Maury Gallagher

Let me comment first on the hotels. What we're seeing now is that prices are really starting to kick in. We have seen drops as much as 20% to 25% in room rates. I think it's no secret that Las Vegas has seen a softening in their traffic. I think the locals will tell that you the drive traffic particularly is down, and they kept the number of rooms around, in particular for that last minute person that would show you up their car from southern California. As we go forward, we'll see what the evolution of this floor rate will be to us, but it certainly can't be anything but a positive. There's a couple ways to approach it. Increase margins is a possibility; keep margins the same but drive volume. Those all become nice alternatives to have. Ponder?

Ponder Harrison

Couple things, Duane. One of the aspects we've seen kind of in the back half of the first quarter and perhaps moving forward as we sell into future quarters is, the price reductions on room rates in Las Vegas enables our customers to move up the food chain in terms of quality of hotel. We're selling slightly more in terms of total volume of customers but we're doing it at really price points that are equal to, in some cases if not higher on a year-on-year basis. It's just that the customer is able to upgrade to a much nicer property for a price point that they could afford, where as in previous years it would not have been the case. One of the other things I think you asked about, same-store sales in Vegas, the comparative on Vegas, we did pull some long-haul flying out, back in the fourth quarter so we're starting to see that come through in the first quarter. Vegas is very positive. And I think the positive results from Vegas, as with most of the other entities in the system is attributed to the load factor levels too. We were able to really drive strong volume on a year-over-year basis in Vegas and as a result, unit revenues, by virtually any metric, were up well, and that's good, and I think of it lot of that too, we manage to capacity. We kind of know what the price point is that we think the market will absorb, then we adjust capacity accordingly, which is pretty much backwards from how the rest of the industry goes trying to skin that cat.

Maury Gallagher

Our RASM was up year-over-year in Vegas on our selling fare.

Duane Pfennigwerth – Raymond James

Thanks for the color. Just in terms of some of the small town airports that have been oft orphaned by SkyBus and some of the other bankruptcies, can you talk about growth opportunities that are sort of now on your horizon that weren't previously, and along those lines, also on the charter segment, do you see sort of incremental opportunities given some of the bankruptcies? Thanks.

Andrew Levy

Duane this is Andrew. On your first point, there's really not a lot of what SkyBus did that we find interesting. Punta Gorda would be an exception. That is an airport that could be an interesting destination for the Southwestern part of Florida so we're talking to the airport. St. Augustine as well. Those are both low-cost airports, and obviously that's something that we do like. That's maybe the one thing that we and SkyBus did similarly is focus on airport costs. As far as the fixed fee side of the business, yes, there are opportunities that are presenting themselves, especially with the demise of Champion, who did a lot of that flying. We're in advanced stages of negotiations with a company that's currently Champion and will be using them until they wind down operations at the end of May. We're hopeful that in the coming weeks we'll be able to announce that we've reached a firm agreement to put an airplane with their customer. There's another opportunity there, similar situation, much earlier stages of negotiation but suffice to say with less capacity out there, we're getting more opportunities on the fixed fee side, whether it be track programs or ad hoc last-minute types of opportunities.

Duane Pfennigwerth – Raymond James

Thanks. Congrats on the quarter.

Andrew Levy

Thanks.

Maury Gallagher

Thank you.

Operator

Our next question is from Jim Parker with Raymond James.

Jim Parker – Raymond James

Hi, guys. Just a question regarding the proportion of your markets that may be in agriculturally dominated communities, where that business is very strong, you're obviously outperforming the industry in a big way. Do you have an idea of what proportion of your smaller outlying markets are in agricultural communities?

Maury Gallagher

Never really looked into it in any kind of quantitative basis. You can look at the map between the Rockies and the Mississippi. Particularly the upper part is going to being agricultural, I'd guess, but we haven't quantified it that X percentage is laying any eggs on it, if you will.

Jim Parker – Raymond James

Why is your business so much stronger than the rest of the industry?

Maury Gallagher

Good management. I haven't paid a lot of attention to the outside world but bottom line, we've been able to drive revenues. It comes down to, I think someone said it very well, gosh, a year ago, we had pricing power, as compared to the rest of the industry in this two-tiered approach we've taken is very powerful for us as we keep pushing through things that are away from that main selling fare which has got all the neon lights on it, the secondary stuff is the attractive we're able to get those purchases done by our customer base, so it's very powerful for us.

Jim Parker – Raymond James

Thanks.

Maury Gallagher

Thank you.

Operator

(Operator instructions) We'll go next to Bob McAdoo with Avondale Partners.

Bob McAdoo – Avondale Partners

Hi, guys. I know you I understand your concept about not really knowing for sure what you're going do the latter half of the year in terms of ASMs, and whatever, did I miss what you said about second quarter? You said you gave guidance on it. What is that number?

Andrew Levy

Yes, Bob, you can see it is it in the press release, but I will give to you right now. We are coming out with 33% departure growth in the second quarter, or increases of 33% on a year over year basis, and ASM growth of at least 25%.

Maury Gallagher

I think the other thing, if you want to take some hints as to what we've said, we've suggested we'll have 37 air planes at the end of the year versus 40 in our last quarter's comments.

Bob McAdoo – Avondale Partners

Okay. And could you go back? You kind of rushed through the comments. I am just curious as to what you're going to do in Phoenix in the summer. I know you said – you mentioned some things, but the way you said it, it wasn't clear to me what you were really trying to say in terms of how much capacity you're still going to have in Phoenix this summer, and what are some of the things that you think will work in the summer versus those that you're maybe not willing to take a risk on in the summer?

Andrew Levy

Bob, I'd say, this is Andrew, I'd say that the ones we think are going to work are the ones that we're still selling. You can go to our web site and see those. We have essentially cut we've gone from two very heavily utilized airplanes down to call it 1.5. So we've eliminated a few routes that we just didn't feel comfortable with in the summer. A couple others that we just didn't feel comfortable with period [ph]. There were a couple in California that we just didn't like the results and that's less of a seasonal suspension and more of simply an elimination of routes. But, we're continuing to sell I think about six or seven different routes through the summer period.

Bob McAdoo – Avondale Partners

And then going back into Phoenix next fall, basically most of the cities you will restart, maybe a couple that didn't work and you probably have some other alternatives that you'll stick on there, is that the deal?

Andrew Levy

Yes, and there's also some of the better performing ones. I think that it's reasonable to expect we'd add more capacity. We're finalizing our plans right now and obviously a lot of it is going to be dictated by where fuel prices are. So we expect to load a schedule that will take us through October within a matter of days and we're just going to wait before we load the November and beyond periods. And I think that you will see some of the flights that we suspended come back. I think you'll some new markets, and I think you will see some additional frequency in some of the other markets.

Bob McAdoo – Avondale Partners

Okay. You said month-to-date fuel was $3.25. Given the way that oil has jumped around this month, what is the equivalent of $119? When we got to the highest days, $118, $119, what does that turn into from a fuel price point of view?

Maury Gallagher

Obviously I don't have a good number at the top of my head as to how the barrel of oil has fluctuated month to date. It's the end of the month, and the question is…

Andrew Levy

Bob, I think that I can give you the crude price.

Ponder Harrison

$3.54 with a $30 crack.

Andrew Levy

If you take a $100 crude and put a $30 crack spread on there, which is actually high…

Ponder Harrison

It's $3.50.

Andrew Levy

It's $3.50. We also have a $0.25 differential that we've disclosed many times that takes into account taxes, fees, etc., that we see across our system. So, the other thing would be to keep in mind, our fixed fee contract flying is fuel protected and so we enjoy the reimbursement of fuel expense above certain price points and that tends to lower the overall system fuel cost per gallon below what we're paying in our at-risk scheduled service system.

Bob McAdoo – Avondale Partners

Since the vast majority obviously is at risk…

Maury Gallagher

Correct.

Bob McAdoo – Avondale Partners

If I am saying, "Gee, trying to think going forward, if we're kind of it at an ugly time where we've got $119, $120, should we use $3.50 plus $0.25 to make it $3.75?" Is that what you said?

Andrew Levy

I wouldn't use that. Currently we're using I think about $3.20 in our own internal forecasting.

Ponder Harrison

It's $3.30 with a $20 crack.

Andrew Levy

I think we're using $3.17 currently, all-in, but your guess is as good as ours.

Maury Gallagher

Stay tuned. We'll change it tomorrow.

Bob McAdoo – Avondale Partners

Yes. Unfortunately. Okay. That's all I got. Thanks.

Maury Gallagher

Thanks, Bob.

Operator

Thank you. That does conclude our Q&A session. I'd now like to turn the call back over to Maury Gallagher for final comments.

Maury Gallagher

Thank you all very much. Appreciate your interest. I have seen the stock price is up $6 and change. I wish we would have done it last week. We look forward to talking to you in a couple months. Thank you very much for your interest and support.

Operator

Thank you. This does conclude today's teleconference. You may disconnect at any time. Have a wonderful day.

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