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Spirit Airlines Incorporated (NASDAQ:SAVE)

Q3 2012 Earnings Call

October 31, 2012 11:00 am ET

Executives

Misty Pinson – Communications Director & Head-Media Relations

B. Ben Baldanza – President and Chief Executive Officer

Edward M. Christie – Senior Vice President and Chief Financial Officer

Barry L. Biffle – Executive Vice President and Chief Marketing Officer

Tony Lefebvre – Senior Vice President and Chief Operating Officer

Analysts

James D. Parker – Raymond James & Associates

Duane Pfennigwerth – Evercore Partners

John D. Godyn – Morgan Stanley & Co. LLC

Hunter K. Keay – Wolfe Trahan & Co.

Isaac B. El Husseini – Barclays Capital, Inc.

Helane R. Becker – Dahlman Rose & Co. LLC

Bob McAdoo – Imperial Capital LLC

Robert Pickels – Manning & Napier Advisors LLC

Steve O’Hara – Sidoti & Co. LLC

Michael J. Linenberg – Deutsche Bank Securities, Inc.

Operator

Welcome to the Third 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. Misty Pinson, Director of Corporate Communications. Ms. Pinson, you may begin.

Misty Pinson

Thank you, Sandra, and thanks to you all for joining us this morning and welcome to Spirit Airlines third 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.

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, October 31, 2012 and are subject to significant risks and uncertainties that could cause actual results or 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 year ending December 31, 2011. We undertake no duty to update any forward-looking statements.

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

And now I’ll turn the call over to Ben Baldanza, Spirit’s President and Chief Executive Officer.

B. Ben Baldanza

Thank you, Misty, and thanks to everyone joining us for the call today. Before I begin, I’d just like to say that our hearts go out to everyone who has been affected by Hurricane Sandy and the terrible damage that storm has created. All of the airports that Spirit serves with the exception of LaGuardia are operational as of this morning, and so once LaGuardia eventually opens, we will get our operations totally back to normal hopefully soon.

Earlier today, we’ve reported a third quarter profit of $25.2 million. We grew our top line revenue 18.6% year-over-year while lowering our base fare per segment to just $71.85. During the quarter, we grew our passenger segments 23.2%, keeping pace with our seat growth demonstrating once again the simulative effect of being the low fare leader in the markets we serve.

Total RASM for the third quarter 2012 was down 3.4% year-over-year against a very strong third quarter last year. As we mentioned in the third quarter last year, Spirit elected to pass along to our customers the benefit associated with the Federal Excise Tax holiday, which created significant incremental demand. This allowed us to discount less last year in what is seasonally a weaker period. But for this unusual item, we estimate our third quarter 2012 RASM would have been up slightly year-over-year.

Our ticket revenue per passenger segment for the third quarter 2012 decreased 12.1% to $71.85 due in part to the FET benefits from last year as well as our continued strategy to offer low base fares while increasing revenue from optional non-ticket revenue sources.

Our ancillary revenue per passenger segment in the third quarter was $49.80, up 11.5% year-over-year, primarily due to per-segment increases in passenger convenience fees. As compared to the second quarter 2012, ancillary per passenger decreased slightly, driven by the revenue benefits from our previous credit card partner steadily decreasing, as we lapped the period in which we ended that partnership.

In addition, we continue to collect less change fee revenue as a result of the DOT 24-hour hold rule implemented in January of this year. As a reminder, we account for our $2 Department of Transportation Unintended Consequences Fee, which helps offset the negative impact from the DOT rule changes as passenger revenue rather than as non-ticket revenue.

Our total revenue per passenger segment for the third quarter was $121.65. I believe that in most cases, our total fares are less than the traveler’s next best option at the time of purchase. This is by design as our goal is to just stimulate new demand by offering low base fares that appeal to a segment of the population that has been priced out of the market. Our ancillary revenue model allows us to do this by letting customers pay only for the extras they value rather than having all customers subsidize the cost of providing extra products and services. We believe a large part of our success with this model is tied to our goal of being the transparency leader.

Some might say we’ve taken a pounding in the press over our announcement of $100 carry-on bag fee. But we’re pleased with the publicity about this change, as it assists us making customers aware of it, and more importantly, how to avoid paying it. We don’t want anyone to pay this fee, but believe this fee will be an incentive for customers to pay for their bag before they get to the gate, which in turn helps us to achieve our goal of a speedy boarding process. We’ve talked a lot about this coming change and feel that our being very transparent on this and on all of our fees will allow for our customers to make an informed purchasing choice.

We added Houston to our route map during the third quarter 2012 when we transitioned our service at Reagan National over to Baltimore/Washington. We’re excited about both of these opportunities. The move to Baltimore/Washington allows us to continue to provide services to the Greater Washington metro area while gaining more schedule flexibility than DCA allowed. And with the launch of Houston, we have liberated 80% of the population in the top 25 US metro areas in the US from high fares.

In addition, we announced that we will be opening a flight attendant and pilot crew base in the Dallas/Fort Worth area in early December. This new base will be home to over 250 crew members by summer of 2013. We’ll also be growing our DFW maintenance base, which we opened earlier this year. It’s important to expand our infrastructure to support our growth at DFW, and we are pleased to be creating jobs while stimulating new economic activity.

Looking ahead, our fourth quarter capacity is expected to increase 29.2% year-over-over. Full year 2012 capacity is expected to be up 21.5%, and for the full year 2013, we are targeting capacity growth of 18% to 22%. Over the last couple of years, Spirit has added a lot of new destinations and we are pleased with the performance of our new routes. On routes we’ve served less than two years, our average load factor is 84% and many times we see this level of load factor within just the first few weeks of service.

Our mature routes, those we’ve served for five or more years, also continue to do well as evidenced by our average load factor of 86%. Our loyal, smart value-oriented customers continue to return to take advantage of the low fares we offer, and when we enter a market, our low fares help our new routes to mature quickly.

Turning to our outlook for the fourth quarter revenue, as a reminder, our October results last year also benefited from the FET holiday contributing a couple of percentage points to our fourth quarter 2011 RASM. In addition, our stage length this year increases 5.6% year-over-year to 934 miles in the fourth quarter, which negatively impacts RASM by 2.6%.

Prior Hurricane Sandy, we are forecasting that on a stage length adjusted basis, RASM would have been up slightly or down year-over-year on an absolute basis. Unfortunately, Hurricane Sandy is expected to have a significant negative impact on the quarter. We started seeing an impact on sales, as the storm moved to the Caribbean, and as the storm moved north, the impact was exacerbated by customers rebooking travel plans to avoid the storm.

We are allowing customers affected by the storm to rebook without a fee and without a change in fare through November 14. It will take us several weeks more to handle all the passenger re-accommodations and to assess the revenue impact in the fourth quarter, but we do believe it will be significant. We will update you as we move through the quarter.

With that, I’ll turn the call over to Ted.

Edward M. Christie

Thanks, Ben. In the third quarter, our total operating expenses increased 24.4% to $301.8 million primarily due to expenses associated with increased flight volume including a 19.3% increase in fuel volume. Excluding fuel, our CASM increased 4.9% year-over-year to $0.0602, which is in line with our revised guidance, but slightly below the low end of our initial guidance for the quarter primarily due to about $1.5 million of costs associated with our seat maintenance program being deferred to the fourth quarter. The year-over-year increase in CASM ex was primarily driven by higher passenger re-accommodation costs related to flight cancellations

Other drivers included $1.3 million of rent related to the aircraft we wet-leased during the summer and $2.3 million of start-up costs associated with our seat maintenance program. In addition, we are in the process of implementing an Enterprise Resource Planning system, and the cost associated with that implementation also contributed to the CASM ex-fuel increase.

Stage length decreased year-over-year in the third quarter by 1.9%, contributing a point to the year-over-year increase in CASM-ex. As Ben mentioned, we have not fully assessed the impact from Hurricane Sandy, but adjusting capacity for the 136 flights cancelled through today, our outlook for the fourth quarter 2012 is for CASM ex-fuel to be down 2% to 3% year-over-year, including the previously discussed $1.5 million of seat maintenance expense that was deferred to the fourth quarter, which is a noted change from our prior guidance.

Turning now to fuel, for the fourth quarter, we estimate our economic fuel price would be $3.28 per gallon based on the Gulf Coast jet fuel curve as of October 30. This includes our estimated impact from realized fuel hedges. We have approximately 20% of our fourth quarter 2012 projected fuel volume hedged using West Texas intermediate fuel collars. We also have hurricane protection hedges in place for the remainder of 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 remained strong and we ended the quarter with $399 million in unrestricted cash. As we’ve discussed previously, over the next three years, we expect to perform a greater number of heavy and routine maintenance events that have an effect on our aircraft utilization. In order to achieve our targeted capacity growth of 18% to 22% next year and improve schedule reliability, we have signed a letter of intent to lease an additional three used A319 aircraft. We plan to take delivery of the first of these aircraft in mid-December of this year and the other two in January of 2013. In addition, the LOI contemplates that we will lease five A320neo aircraft from ILFC.

These are in addition to the 45 NEOs we currently have on order with airbus. Our selection of an engine type for the NEO will drive our delivery slot positions for the aircraft to be leased from ILFC. We are still working on final documentation, but we are excited about increasing the number of A320neos in our fleet, which will allow us to further improve the efficiency of our fleet. We ended the third quarter with 42 aircraft in service. Including the announced 319 additions, we have three aircraft deliveries scheduled for the fourth quarter and nine aircraft scheduled for delivery in 2013.

As a side note, we have committed financing for the two new A320s delivering in the fourth quarter of this year and for the seven new A320s delivering next year. We estimate our aircraft rent for the full year of 2012 will be $144 million and for 2013 to be approximately $175 million. We estimate depreciation and amortization expense will be $15 million for the full year of 2012 and approximately $40 million to $45 million for 2013.

In closing, I want to remind everyone that we are working aggressively to lower our cost structure. Our annual growth rate over the next five to seven years gives us tremendous leverage from a unit cost perspective. I’m confident this leverage along with our continued focus to be more efficient and to increase productivity and cut costs will allow us to offset the CASM ex-fuel pressures we face, primarily from increasing depreciation and amortization expense related to the amortization of heavy maintenance.

Fuel remains unpredictable, but on a per-seat basis, we have the most fuel-efficient fleet in the US, which gives us the natural built-in hedge against volatility, and we are keenly focused on reducing our fuel burn rate.

With that, I’ll turn it back to Ben.

B. Ben Baldanza

Thanks, Ted. Over the last couple of quarters, we’ve observed some unexpected cost pressures, which have impacted our operating margin. But the core business continues to produce very strong results. Despite these one-time in nature cost splits, we are still able to achieve a pre-tax return on invested capital of 27.7%. We also delivered on our annualized EBITDA margin target of 24% to 26% and remain on target to achieve this goal for the full year 2012. This is also our annual EBITDA margin target for 2013.

I’d like to thank all the hardworking Spirit team members who serve our customers every day, making our business successful. With that, I’ll turn it back to Misty.

Misty Pinson

Thank you, gentlemen. We are now ready to take questions. Sandra, we’re ready to begin.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question is from Jim Parker from Raymond James. Please go ahead.

Jim Parker – Raymond James & Associates

Good morning, Ben and Ted.

B. Ben Baldanza

Hi, Jim.

Jim Parker – Raymond James & Associates

Just a couple of questions. One, I know that you don’t reveal specifics regarding your $9 Fare Club numbers, but can you talk about how this is growing? Is it growing in line with passenger volume?

B. Ben Baldanza

Well, Jim, this is Ben. We just don’t release information about the $9 Fare Club. It’s a proprietary club that today we continue to be very satisfied with the results of the club, but beyond that, we just don’t say anything about it.

Jim Parker – Raymond James & Associates

So you are not inclined to say whether or not it’s growing?

B. Ben Baldanza

We are not inclined to say that. We’re not saying.

Jim Parker – Raymond James & Associates

Okay. And regarding your trip length, of course, the fuel prices are rising sharply. You had, I think, to pull back and the trip – the stage length has been decreasing. What does it look like in 2013? Are we going to be flat or decline or up? What’s happening there?

Barry L. Biffle

Jim, this is Barry. And if you look at the fourth quarter, and we mentioned this a moment ago, but we’re going to be up slightly in the fourth quarter and we expect that that will continue into next year on a year-over-year basis.

Jim Parker – Raymond James & Associates

Okay. All right. Fine. Thank you.

B. Ben Baldanza

Thanks, Jim.

Operator

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

Duane Pfennigwerth – Evercore Partners

Hey, good morning.

B. Ben Baldanza

Good morning, Duane.

Duane Pfennigwerth – Evercore Partners

So you gave some detail in the release about – I guess about $3 million in the quarter related to the seat maintenance program in terms of incremental cost. My question is, what was the revenue impact related to this program? It seems like – and granted, it’s not much of your capacity, but with taking steps like wet-easing an aircraft with a different configuration, it seems like there would’ve been some top line impact as well. So, as we think about next year, what do you think the full impact of this program has been?

Edward M. Christie

Hey, Duane, it’s Ted. Obviously, we haven’t disclosed anything about any kind of a revenue impact and it would be difficult for us to give you guidance on what the estimate of that would be. Obviously we operated – with that wet-leased aircraft, our intended schedule through the summer. The notable impacts we had with regard to the operation were more on the cost side regarding interrupted trip-related expense or cancellation-related expense.

B. Ben Baldanza

And the cost of that wet lease.

Edward M. Christie

That’s right, and the cost of that wet lease. So, beyond that, we haven’t provided any formal estimate as to whether or not the seat program impacted revenue.

Duane Pfennigwerth – Evercore Partners

Okay. And then I guess just a competitive question, as you look across the set of usual suspects, did you notice any change in pricing strategy in terms of how folks respond to you in the third quarter? I guess the general question and then specific to Southwest specifically? Thanks.

Barry L. Biffle

Duane, this is Barry. On the competitive pricing, we have not seen any material change in the way people behave plus or minus against us and we consider the marketplace continuing as it’s been.

Duane Pfennigwerth – Evercore Partners

Okay. Thanks.

Operator

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

John Godyn – Morgan Stanley & Co. LLC

Hey, thanks a lot for taking my questions.

B. Ben Baldanza

Hi, John.

John Godyn – Morgan Stanley & Co. LLC

I just wanted to follow up on some of the 2013 commentary. First, Ted, I think last quarter, if I remember correctly, there was a little bit of sort of a debate and a sense that CASM ex-fuel for the full year in 2013 could be flattish or even down. It sounds like with some of the commentary you gave on aircraft rents and D&A, that would be very difficult. Am I missing a moving part, or should we be thinking about 2013 CASM ex-fuel growth as sort of more consistent with normal inflationary levels?

Edward M. Christie

I think – thanks for the question, John. I think what we talked about last quarter, we’re consistent with. Meaning, we still – even with those items that we mentioned, we still feel reasonably optimistic about our ability to manage the pressures associated with that on our CASM ex-fuel. I think what we said last quarter was, we would target a goal to have our CASM ex-fuel decrease. And again still our goal, but we don’t see it being a massive pressure on our CASM going forward into 2013.

John Godyn – Morgan Stanley & Co. LLC

Okay. But is it fair to say that it’s a goal, it’s a target, but that’s not your guidance for 2013, to see CASM ex-fuel fall?

Edward M. Christie

We haven’t officially guided yet for 2013. So we can probably give more visibility to that after the fourth quarter call.

John Godyn – Morgan Stanley & Co. LLC

Okay, got it. Thank you. And Ben, if we could just talk about the margin, the capacity guidance that they gave for 2013 and the sensitivity to macro assumptions, when we think about I guess the capacity guidance first, is there a situation where the high end is what we see if macro improves and the low end is what we see if macro gets worse, or is that not really – is the capacity side not really sensitive to macro? And then similarly, how do we think about the margin guidance range versus whatever your macro view is as we go into 2013?

B. Ben Baldanza

I think the range is what we think the airline can reasonably produce and what we’ve actually been producing for the last number of years. And so there’s not sort of a big assumption about what’s going to happen in the macro economy that drives whether 24% versus 25% or 26% on the EBITDAR side. We look at probably the biggest thing that’s in that overall number is fuel price and we’re just looking at the fuel curve, as it exists today, to predict what fuel might be for next year. I mean, fuel curve is just a forecast and we know that’s not going to be the actual fuel price for next year, but if the fuel is decidedly more or less expensive, that could move us up or down within that range or even beyond the range a bit.

But in terms of the macro economy, in terms of capacity and such, we’ve made no specific assumptions. We’re not assuming that there’s further rationalization of capacity or that there’s more mergers or anything like that. It’s just sort of, as we see the world going forward, this airline has been very consistent about producing a mid-20s EBITDAR margin for the last couple of years. And as we grow, we believe we can keep that going.

John Godyn – Morgan Stanley & Co. LLC

Okay. That’s great. And just last one really quick, have you noticed any change in American’s behavior, just sort of as they get farther along in their process of moving towards the mergence?

Barry L. Biffle

This is Barry. We’ve seen no change in their competitive behavior, and we competed with American Airlines I guess in our history more than any other airline with obviously with Fort Lauderdale, near Miami, and now obviously with our growth in DFW. But we’ve seen no change in their behavior.

John Godyn – Morgan Stanley & Co. LLC

Okay. Thanks a lot, guys.

B. Ben Baldanza

Thanks.

Operator

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

Hunter Keay – Wolfe Trahan & Co.

Hey, thanks a lot. Can you guys give us some of your baseline assumptions for – I don’t know if you want to call it pay grade or not, but what you’re expecting from the amount of pass-throughs that are being subject to new – the $100 carry-on bag fee structure. I mean, do you think – I’m not seeing any guidance on how to model it per se, but what do you expect to happen maybe more qualitatively with the amount of people that are impacted initially and kind of how it meters through 2013, and then what do you expect to be in the longer-term for that?

B. Ben Baldanza

Well, Hunter, this is Ben. We don’t want anybody to pay that fee and we’re working hard to ensure that people don’t pay it. This is that $100 carry-on bag fee is an operational issue for Spirit; it’s not a revenue issue for Spirit. We’re trying to clear the gate, make our departures go quickly, make the boarding happen really quickly, decrease our turn times which will add more utilization of the fleet though higher op – through higher utilization. And it’s all about taking that transaction away from the gate and making it happen before it ever gets to the gate.

So it’s an incentive essentially for customers to say, buy your carry-on bag online, buy at a kiosk or buy it from a ticket agent, but before you go through security. And so if we do this right and we inform and we maintain our transparency leadership on this and signage at the airport and e-mails to customers and things, we hope that nobody actually pays this fee.

Hunter Keay – Wolfe Trahan & Co.

So do you not expect a big increase in – to that end, do you expect a little bit of a pop in non-ticket revenue in the fourth quarter or is it – I mean, how are you thinking about that?

Barry L. Biffle

Hunter, this is Barry. There’s been a lot of talk about the $100 bag, but let’s talk about all the changes to the bag fees that take place on November 6. So we actually have talked over the last year or so about how we would be incorporating revenue management principles, and in this case, we’re putting in effectively advance purchase requirements on the bag. So, Ben mentioned, for example, we prefer you buy it when you buy your ticket, buy it online. Worst case, buy it 24 hours before when you check in online. It becomes more expensive once you go to the airport just at the ticket counter and then again it goes up even more once you get to the gate.

So we have less than 1%. It’s not a significant number of actual people that pay at the gate today, but those few instances do cause us operational challenges. So we want to avoid that. But there will be an increase in the ticket counter as well. And again, this is aligned with making our cost lower.

So it’s cheaper for us for you to do it online. It’s cheaper for you to do it in advance. If you want to do it at the ticket counter, it’s more expensive for us and so we’re charging appropriately for that, and that incentivize the customers. So there will be an uptick principally in the ticket counter revenue, but the gate revenue, we won’t see it because there wasn’t a lot to begin with. We’re trying to provide the incentive that there will be no one do that.

Hunter Keay – Wolfe Trahan & Co.

Okay. Thanks, Barry. And maybe, Ted or Ben, a little more on the CASM ex, because I think this is just a critical to find characteristic of your company, not to mention your stock price. I’m having trouble figuring out how I can model CASM ex down next year, or even flat. I mean, based on what you said about D&A and landing fees, given the changes in your distribution channels, you could see you’re shifting more to the GDSs. If you are going to keep this flat or even bring it down on 20% capacity growth, how is that going to happen? I mean, which line items in the P&L are we talking about, because if you just model everything pretty much even a little bit less than the capacity growth rate, you’re probably looking at another year-over-year growth in CASM ex. So how should I think about you guys keeping that CASM ex down? Where specifically is it going to come from?

Edward M. Christie

Well, I’ll talk a little bit, it’s Ted, and then maybe Ben wants to jump in. But you made a couple of comments when we should flush it out. I mean, we do have – we’ve said already we plan to grow 18% to 22% next year, which will provide us with a lot of momentum heading into next year from a unit cost perspective. We’ll be taking new aircraft, additional new aircraft into our fleet next year, which obviously helps leverage down maintenance expense as part of that growth, which is going to help us in addition to that. And I think, as Barry already mentioned, our stage, we plan that to get a little bit longer on a year-over-year basis as well. All of which from a structural perspective is contributory to keeping CASM low and managing those pressures we expect.

In addition to that, we’re going to be doing the same diligent behavior the company has always been engaged in, looking at ways to both optimize our cost structure from a management perspective as well as incentivize our customers to help us optimize our cost structure. So I think the combination of all those things kind of spread across the entire cost structure will help us to manage that cost pressure that I talked about earlier such that our goal of keeping costs at or below where we are today, we think, is achievable.

Hunter Keay – Wolfe Trahan & Co.

Okay.

B. Ben Baldanza

This is Ben. Ted’s exactly right. The other two sort of points I would add to the whole thing is that we are growing again with the larger gauge airplane. And we’ve said before that the A320 is about 8% more unit cost efficient than the A319s for us. And most of our growth in the next year is going to be with the 320, that the mix – the ratio of A320 to 319 is improving through 2013, which is a unit cost good guy for us.

And the last thing, as I mentioned in my printed remarks or my scripted remarks, we’re now serving 80% of the population in the top 25 US metro areas, which means that in the last year we’ve opened – the last year and a half, we’ve opened a lot of new cities. That activity will probably slow down a little bit, since we’re already in most of the places we want to be. It will be more connecting though somewhat. So you see all of those kind of effects more than offsetting, we believe, the D&A and some of the other pressures.

Hunter Keay – Wolfe Trahan & Co.

Okay. Thanks a lot.

B. Ben Baldanza

Sure.

Operator

Thank you. And the next question is from David Fintzen from Barclays. Please go ahead.

Isaac El Husseini – Barclays Capital, Inc.

Hey, this is actually Isaac Husseini in for David. Good morning, guys.

B. Ben Baldanza

Hey, Isaac.

Isaac El Husseini – Barclays Capital, Inc.

Hey. Just had a quick question maybe for Ben and then perhaps Barry. Ben, you mentioned in your prepared remarks that adjusted for the FE tax holiday from last year that you guys would have been up slightly. Wondering how that compares to your initial plans starting in the beginning of 3Q? I’m just trying to get a sense of what has changed during the quarter in terms of weakness in certain regions or certain months in the quarter?

B. Ben Baldanza

Well, when we started – when we planned the year and when we looked at the third quarter, I mean – and we’re looking at sort of what happened year-over-year, a couple of things happened in 2011. We knew the FET holiday was big for us. But we really didn’t understand how much of last year’s – 2011’s performance was related uniquely to the FET until we could look at the booking information this year leading up into when the FET holiday started through the period when it was active and after it ceased last year. And what we saw, with perfect hindsight basically, was that booking behavior prior to FET was kind of what we expected.

During the FET, not nearly as much is driven by the buying. After the FET, we’re right back to what we had sort of expected. And that made us realize that the FET had an vigor impact uniquely than we had thought. And once we were able to do that year-over-year comparison, that’s when we gained – that’s when we were able to quantify it the fact that, hey, without this, our RASM would have been a little lower last year than it was, but year-over-year we have been a little better. And so we think that that was really a one-time thing, and quite honestly, we’re not sure how the rest of the industry saw the FET benefit. We reacted to it in a way that was more unique than most of the industry in the sense that we gave it back to the customers and that created more demand and less discounting.

Isaac El Husseini – Barclays Capital, Inc.

Okay. I guess a follow-up that I have for – maybe for Ted on cost guidance for 4Q, does that cost guidance, and I know maybe it’s a bit early, but does that have any cost back into it that’s associated with Hurricane Sandy? And if not, is that something that’s material or immaterial in your mind?

Edward M. Christie

So what we assumed, Isaac, in the cost guidance was, as I mentioned in my comments, was more about how the capacity reduction would affect the existing cost structure. So just on a unit basis, we pulled it half way out to reflect it. And what else is specifically included in there is the seat maintenance cost that kind of leapt over the third quarter and into the fourth quarter, which is different than our previous guidance.

So the effect of both the capacity pullout, which related to our cancellations and that seat maintenance, not previously been in our guidance, would have changed the number back in line with what we were previously saying, which was kind of mid-single digits. So, as it relates specifically to the storm, we haven’t – like we said earlier, we haven’t fully evaluated what’s happening on both the revenue and cost side, but we don’t anticipate there being material kind of costs in addition to what we’ve already discussed.

Isaac El Husseini – Barclays Capital, Inc.

Okay. Thank you so much.

Operator

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

Helane Becker – Dahlman Rose & Co. LLC

Thank you very much, operator. Hi, everybody.

B. Ben Baldanza

Hey, Helane.

Edward M. Christie

Hi, Helane.

Helane Becker – Dahlman Rose & Co. LLC

So just two questions. One, so, assuming that LaGuardia opens tomorrow, which may be a big assumption, are you going to have issues getting jet fuel and are there other issues getting jet fuel at the other airports that have been closed?

Tony Lefebvre – Spirit Airlines, Inc.

Hi, Helane. This is Tony Lefebvre, the COO. From what we understand right now, LaGuardia, they have enough fuel for four days of normal operation. So I would say there is going to be plenty of jet fuel, and if we – for operating to LaGuardia and all of other markets that we operate in the Northeast, I’m not anticipating fuel issues.

Helane Becker – Dahlman Rose & Co. LLC

Okay. All right. That was one question. And then just the other question I had with respect to – as you’re looking at your forward bookings for the holidays and kind of into the – I don’t know how far in advance you can look to see – are you seeing kind of the same load factors that you are referring to earlier, kind of mid-80s, or has there been any weakness throughout the holidays? I mean, what can you say about what you’re seeing with respect to bookings?

Barry L. Biffle

Helane, this is Barry. As far as the holiday bookings leading up to Sandy, we had been seeing very stable, looks very similar to last year, and I’m speaking specifically to Thanksgiving as well as the Christmas, New Year’s holiday period. And we felt very, very good about it. Obviously, when people don’t have power or they’ve been distracted over the last few weeks, they may still be planning on traveling, but you will have a slowdown, but we don’t see a major change in the holiday at this time even with the storm.

Helane Becker – Dahlman Rose & Co. LLC

Okay. Thank you.

Operator

Thank you. And the next question is from Bob McAdoo from Imperial Capital. Please go ahead.

Bob McAdoo – Imperial Capital LLC

Just a quick cost question. A couple of places, you mentioned passenger re-accommodation expenses that normally isn’t something that’s, excuse me, a big enough number that people spotlighted. Can you talk a little more about what it was that caused that and was there – at what line does that show up on?

Edward M. Christie

Yes. Hey, Bob, it’s Ted. It’s shown up in other operating. And as we discussed in the previous call, I think on our second quarter earnings call, we had some operational disruption throughout the summer. So it kind of persisted from beyond just the second quarter into the beginnings of this quarter as well. That caused the number of cancellations to be higher than what we would have traditionally experienced, and that’s why the expense associated with that re-accommodation was noteworthy. That’s why we called it out.

Bob McAdoo – Imperial Capital LLC

What kinds of things do you do for people, when you have these kind of situations? Just trying to understand your product and how you define what it is you guys do for somebody thinking about it relative to a traditional airline?

B. Ben Baldanza

Right. Well, I’ll make a comment and let Tony, our COO, also comment. But obviously we’re looking to maximize re-accommodation on our existing network. So we always look to try to re-accommodate our passengers within the existing network. And then under some circumstances, obviously we’re forced to put them on other carriers, which is where we would incur the vast majority of our expense. So, Tony, I don’t know if you have anything more to add, but that’s generally the way our policy works. We’re trying to push people obviously through our network, but given the way our network exists, there are going to be some times where that’s our maximum possibility. And so at that point, we’re pushing people on other carriers.

Bob McAdoo – Imperial Capital LLC

And because you don’t have interline relationship with everybody else, it’s been just kind of you go buy a walk-up ticket typically?

B. Ben Baldanza

Yes, we have some limited relationships with the few carriers, but yes, in those instances where we don’t, then we are buying a ticket.

Bob McAdoo – Imperial Capital LLC

Okay. Very good. Thanks.

B. Ben Baldanza

Thanks.

Operator

Thank you. And the next question is from Robert Pickels from Manning & Napier. Please go ahead.

Robert Pickels – Manning & Napier Advisors LLC

Good morning. Thank you for taking my question. If I look at a lot of the airlines are in negotiations with their unions, it looks like costs are moving higher and most of your competitors, and yet you’re talking about labor cost – unit cost being flat to down. How do you think about taking advantage of that situation? That’s sort of the first question. My second question is, I know you don’t have a new labor contract until 2015. But what sort of inflationary costs are built into that if you can comment? And the third question is, on the wet lease of the aircraft, is that – is it more expensive or less expensive than or the same expense as some existing claim that’s in your fleet?

B. Ben Baldanza

Hi, well, Rob, this is Ben. Having low costs is a principal feature of the business model. We’re a point in our growth and our size of the airline that through growth, we can continue to lower unit costs. We believe over the next coming years, as we gain, as we get the scale efficiencies that all of our competitors already have in their costs, but we don’t yet have in our cost structure.

So our ability to hopefully lower CASM next year versus this year, as Ted talked about and I did a little earlier on the call, is consistent with the business model and the combination of low cost and making more of the revenue stream optional for the customers to only pay for what they use, will continue to allow us to push fares down and have lower fares, which will create more stimulation, bring more people into the travel marketplace, and that’s what the business model is all about. So that’s how we’ll sort of use the cost structure. Ted, do you want to talk about some of the wet lease…?

Edward M. Christie

Yes. I mean, as it relates to the aircraft, obviously when you – third-party wet lease an airplane, it’s going to be a little – it would be more expensive than if you had one in your fleet. I mean, the third-party has obviously got a margin involved there. So it’s not an optimal sort of circumstances and we only use that in a very limited set during the summer to kind of offset some of the pressures we’re seeing during that difficult operating period.

Robert Pickels – Manning & Napier Advisors LLC

Okay. I mean, I guess what I’m getting at with the cost advantage, it appears that your cost advantage is widening. Do you – would you prefer to growth faster or have better margins, or if there is a preference for how do you manage a widening cost advantage, what would it be? Or maybe you don’t want to comment, I don’t know.

B. Ben Baldanza

Well, we have commented publicly before and we’ll do it again now, Rob, which is that we expect over the next few years to be able to grow the airline 15% to 20% a year while maintaining or sustaining our relatively high margin position that we’ve been operating over the last three years. And that’s because we’ll be able to continue to exploit, both low cost, high ancillary revenue and the growing fleet to make that happen.

Robert Pickels – Manning & Napier Advisors LLC

Okay. Well, thank you.

B. Ben Baldanza

Thank you very much.

Operator

Thank you. And the next question is from Steve O’Hara from Sidoti & Company. Please go ahead.

Steve O’Hara – Sidoti & Co. LLC

Hi. Just quickly on the depreciation expense. It sounded like you said $40 million to $45 million, so if I had that wrong, just correct me. And I’m just wondering about the mechanics of that. I mean, is there any estimate changes in there on your part in that number and how does the maintenance depreciation work, is that a straight-line basis or is this kind of something we should kind of expect to increase at this rate into the future? Thanks.

Edward M. Christie

Yes, this is Ted. Your number is correct. It is what I said. And the mechanics of it, there’s no change in our estimate by the way. That’s all kind of a known part of the business. The mechanics of the way maintenance depreciation works is that when we have a heavy event and we book it to the balance sheet, we do straight line the amortization of that expense until the next scheduled heavy maintenance events relative to that particular – so if it’s an engine that comes off, it gets amortized until that engine is scheduled to come off the next time. That’s the mechanics or the way it works.

Steve O’Hara – Sidoti & Co. LLC

Okay. Thank you. And then lastly, I guess in terms of your growth, I think most of your recent growth has been domestic, and again, correct me if I’m wrong in that, and what opportunities do you – I mean, do you see that kind of a growth platform? Where do you see the better growth opportunities, international or domestic?

Barry L. Biffle

This is Barry. On the growth opportunities, we literally just look at where the yield environment is most favorable when you compare that to competitive cost structures flying those routes. And if you look back over the last few years, the domestic marketplace due to consolidations and mergers has created a much more favorable domestic fuel environment and we don’t see that changing anytime in the near future. If at a time that it does change, what we like is the fact that our footprint across the Caribbean and Latin America allows us to exploit that just as easily when the time changed. But right now, we’re principally focused on domestic because of the yields and that’s where you’ve seen our growth deployed.

Steve O’Hara – Sidoti & Co. LLC

Okay. Thank you.

Operator

Thank you. And the next question is from Mike Linenberg from Deutsche Bank. Please go ahead.

Mike Linenberg – Deutsche Bank Securities, Inc.

Hey. Hey, guys. I have a…

B. Ben Baldanza

Hi, Mike.

Edward M. Christie

Hey, Mike.

Mike Linenberg – Deutsche Bank Securities, Inc.

Just a couple of questions here. The sale of the slots, the DCA slots, when I look at the special credit that you got, the $8.3 million, how much of that is attributable to the DCA slot and then what were those slots on your books point?

B. Ben Baldanza

Yes. We obviously – because of the nature of the pickup, we didn’t have it on our books so that that should tell you that. I don’t know that we’ve discussed publicly anything about this particular sale yet other than we recognized the gain, and what we disclosed within our financial statement is kind of to the extent of what we discussed.

Mike Linenberg – Deutsche Bank Securities, Inc.

Okay. Fair enough. So it sounds like that $8.3 million is the majority of that tied to the gain on the sale, the four slots?

B. Ben Baldanza

Yes.

Mike Linenberg – Deutsche Bank Securities, Inc.

And was that four slot pairs or is that just four slots in total?

B. Ben Baldanza

Two pairs, so…

Mike Linenberg – Deutsche Bank Securities, Inc.

Perfect.

B. Ben Baldanza

Yes.

Mike Linenberg – Deutsche Bank Securities, Inc.

Okay. So that sounds like that’s in range where we had a couple of sales recently. So that’s basically in sync, which is good. And then my second question, you went through – I mean, it’s interesting how for many of the carriers, they got the RASM hit from a year ago, the difficult comps. You guys had the difficult comps as well, you’re predominantly discretionary. So it does make sense that you saw a lot of stimulation a year ago. If we look across your network though, was there – were there any sectors or any regions where some part of your business maybe underperformed? I mean, I thought it was helpful that you gave us the load factors, for that the new stuff and also the core. But is there anything you can say about RASM performance or profitability? Because when I look at your year-over-year change in margins, I know some of it’s the seats and some of it you’re out there leasing some airplanes. So that accounts for some of it, but it feels like that there may be something – maybe, it’s new markets versus old markets. Any additional color you can give on that, that would be great. Thanks, guys.

Barry L. Biffle

This is Barry. On the RASM side, last year, we were up 28% year-over-year in the third quarter. And as Ben mentioned, because of the fact we had obviously an environment that was good across the industry, I mean, the industry was up not in the 28% range, but they were up and that was one component. Another component was, we had made a pretty big network shift. So when you couple the shift plus the growth, roughly a third of the airline was in brand-new markets last year, and those markets did perform very well. And at the same time, we had the FET. So it was difficult of those three big components to isolate each one’s share.

In hindsight, as Ben mentioned, we were able to isolate it with a few points different, but that is the difference year-over-year. When you look at the new route performance, we continue to be very pleased and have not seen a change in new route performance being better or worse. They seem to be very much in line. And so when we look at the year-over-year change, at least from a revenue line, it was all due to the FET holiday and not having that benefit to stimulate. Ted wants to talk about the costs.

Edward M. Christie

I think we’ve kind of hit that pretty hard. So…

Barry L. Biffle

Jim (inaudible).

Mike Linenberg – Deutsche Bank Securities, Inc.

Okay. Very good. Thanks, guys.

B. Ben Baldanza

Thanks.

Edward M. Christie

Thank you.

Operator

Thank you. And the last question will be a follow-up question from Hunter Keay from Wolfe Trahan. Please go ahead.

Hunter Keay – Wolfe Trahan & Co.

Thanks a lot. Just a couple of quick follow-ups. Barry, can you talk a little bit about what happened in Vegas, Mesa? You guys were in there and you’re out. Obviously you liked to have a dilutions that didn’t work out. Can you explain to me the dynamic of what you thought was going to happen, what actually did happen, and how it might serve as a template going forward and how you think about competing with guys like Allegiant?

Barry L. Biffle

I think it has more than just the Allegiant impact. Obviously, we started the route at the same time Allegiant did. Obviously when we originally planned it, we didn’t presume that Allegiant was going to fly that route. They did. There was also a reaction that we haven’t seen a buck for that route over Sky Harbor. So we saw a lot lower yields out of Sky Harbor. So you didn’t get the normal stimulation. I think the market – once we see the public data, we’ll see that the market stimulated, but a lot of the stimulation didn’t end up out at Mesa Airport. But we haven’t seen that reaction in many of the other markets out of Mesa or anywhere else across the system.

So it’s kind of a unique situation, and so I wouldn’t say that – us competing against Allegiant, I wouldn’t read too much into that. We’ve competed with them and continued to be with them on a number of routes, but if we just – one of these things that – as we stated over and over, we have a very high success rate with our new routes, but if things don’t work, we will eliminate routes that don’t make money. And once we saw that it wasn’t going to make money and we are not going to sit round and wait for a year or two to get something strategic works.

Hunter Keay – Wolfe Trahan & Co.

Right. Yes, no. Thanks, Barry. And on the three new planes that you’re taking, the used aircraft that you’re going to be leasing, why now? I mean, you’re still in your targets, but ROIC decelerating margins are compressing at least on equal level. Fuel is high. What are you seeing right now that makes these aircraft – that makes you run your aircraft so quickly right now? Is it a competitive thing? I mean, any kind of color, the timing of it will be helpful.

B. Ben Baldanza

Sure, Hunter. As we have been doing our planning for 2013, we’ve realized that we have more maintenance needs on the airplanes. So, essentially we’re going to have more airplanes not flying, going through their scheduled maintenance events in 2013 that we had in 2012. We also have a few FAA mandated airworthiness directives that have to start in 2013 that’s going to pull some.

And frankly, we’re a little disappointed with the way the airline landed somewhere operationally and we want to have a great operational year next year. So the combination of those three things suggested that we’re going to need a few more airplanes dedicated to support the infrastructure of the broader geographic network and the maintenance vis-à-vis airplanes. What we had in these three airplanes, if you remember back in 2008, Spirit returned seven airplanes to – seven A319s to ILFC. And the three airplanes that are coming back to us are airplanes that used to be Spirit airplanes.

Hunter Keay – Wolfe Trahan & Co.

Got it.

B. Ben Baldanza

In 2008 and earlier. So they have a very low threshold in terms of commonality. I think they’ve got, that’s our cockpit, that’s our configuration and such. So the ability to be able to bringing that capacity, meet the maintenance and schedule operational infrastructure need to the airline and still grow 18% to 22% was very appealing to us, because again, we’re making good money, our growth is making good money. So, no reason to sort of short change the growth just because the airplanes have to be maintained.

Barry L. Biffle

And Hunter, let me just add one comment too. We believe it’s a unique opportunity for us to add those airplanes, given what Ben just said. And we believe that the costs associated with those airplanes, I mean, the rents associated with the airplanes is very attractive, combined with the costs that we know we’re not going to incur next year, because we’re going to run a better operation. We were actually excited about the opportunity as it presented itself to us, and part of the reason we jumped at that time. We made a comment that one of the things we should be thinking about was compressing margins, and I think we’ve been pretty consistent in our approach in saying that the margins are consistent, not compressing, and we feel good about that being the case going forward as well.

B. Ben Baldanza

We said not compressing or – and a better way to say that would be sustaining.

Hunter Keay – Wolfe Trahan & Co.

Right. On the EBIT margin, I mean, there’s a lot of cautious into the D&A, which is your EBITDA margin that…

Edward M. Christie

Okay.

Hunter Keay – Wolfe Trahan & Co.

I hear you. I hear you on that.

Edward M. Christie

Okay. Yes, okay.

Hunter Keay – Wolfe Trahan & Co.

But can I ask one more? I’ll just ask in the queue. Can I ask one more?

B. Ben Baldanza

Sure, yes.

Hunter Keay – Wolfe Trahan & Co.

Okay. The DOT is now – looks like they’re at it again out there writing some new rules about disclosure of ancillary fees. Two part question. Could you give us some color on this and how that impact you guys? And second of all, I know it must be early, but are you planning on potentially appealing this, litigating it again like you did the last time? And thanks a lot for all the time.

Barry L. Biffle

Sure. Hunter, this is Barry. On the disclosure of ancillary fees, it’s very prescribed, and we’re going through our first year of that, that started – there’s been a couple phases of that, but by February, all carriers I believe will complain. The kind of the dialog that you’re referencing, we’ve been pretty close to that conversation in Washington, and the issue surrounds third-party distribution and disclosure of ancillary fees and then a dovetail to that would be the potential requirement that airlines distribute ancillary products through third party distribution.

And so we will take part A. Today, the third party realm is not required to disclose at the same level that the airlines are. For example, on the home page of spirit.com, we have a large monitor at the top of the page that says Optional Fees. If you go to the booking process, we (inaudible). If you go to buy on an online travel agency, for example, then you’ll see the flight opportunities there. Some of them may just say Other Information. It may not necessarily call out the fees.

You then may have to click several times to actually see that there are fees and how much they are. That environment has led to a suspicion that airlines are hiding fees, and the reality is that we just don’t have the same disclosure requirements in the rule-making for all channels, but the airlines themselves are. And I think that’s better understood, as we sit here today, versus where it was maybe even 30 days ago. And so we feel very good about that. And what was the second part of your question?

Hunter Keay – Wolfe Trahan & Co.

Yes. You’re planning on it early, but I mean, if it turns out that it’s having more of an adverse impact than you saw, that you’re planning on going through the appeals process again like you did the last time?

B. Ben Baldanza

Well, we don’t believe it’s good policy to impose higher costs for all customers in order to benefit a few customers, which is what some of these rule do. And so we are now evaluating what the next best step for the airline will be, given that some of the new DOT rules do just what I said, we believe.

Hunter Keay – Wolfe Trahan & Co.

Thanks, everybody. I appreciate it.

B. Ben Baldanza

Thanks, Hunter.

Operator

Thank you. And the next question is from Bob McAdoo from Imperial Capital. Please go ahead.

Bob McAdoo – Imperial Capital LLC

Yes. Just a quick one. The three used leased airplanes that you’re bringing on, how long lease term is that for?

B. Ben Baldanza

Bob, we’re keeping those relatively short-term. Those are 40-month leases.

Bob McAdoo – Imperial Capital LLC

Okay.

B. Ben Baldanza

There’s essentially a bridge to the needles that we leased from ILFC.

Bob McAdoo – Imperial Capital LLC

Got it. Thanks.

Operator

Thank you. This concludes the question-and-answer session of today’s call. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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