Spirit Airlines (SAVE) Q4 2016 Results - Earnings Call Transcript

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Spirit Airlines, Inc. (NASDAQ:SAVE) Q4 2016 Earnings Call February 7, 2017 9:00 AM ET

Executives

DeAnne Gabel - Spirit Airlines, Inc.

Robert L. Fornaro - Spirit Airlines, Inc.

Matt Klein - Spirit Airlines, Inc.

Edward M. Christie - Spirit Airlines, Inc.

Analysts

Hunter K. Keay - Wolfe Research LLC

Jamie N. Baker - JPMorgan Securities LLC

Rajeev Lalwani - Morgan Stanley & Co. LLC

Savanthi N. Syth - Raymond James & Associates, Inc.

Brandon Oglenski - Barclays Capital, Inc.

Helane Becker - Cowen and Company, LLC

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Raymond Wong - Evercore ISI

Michael J. Linenberg - Deutsche Bank Securities, Inc.

Kevin Crissey - Citigroup Global Markets, Inc.

Dan J. McKenzie - The Buckingham Research Group, Inc.

Andrew George Didora - Bank of America Merrill Lynch

Operator

Welcome to the Fourth Quarter 2016 Earnings Conference Call. My name is Jason, and I'll be your operator. 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 DeAnne Gabel. You may begin.

DeAnne Gabel - Spirit Airlines, Inc.

Thank you, Jason and welcome all to the Spirit Airlines' fourth quarter 2016 earnings conference call. Bob Fornaro, our Chief Executive Officer, will give a brief – a few brief opening comments, followed by Matt Klein, our Chief Commercial Officer, who will review our third quarter revenue performance and fourth quarter outlook. Then Ted Christie, our Executive Vice President and Chief Financial Officer, will discuss our cost performance, followed by Bob with closing remarks.

We will have a Q&A session for sales side analysts following our prepared remarks. Also joining us in the room today are Thomas Canfield, our General Counsel; John Bendoraitis, our Chief Operating Officer, and other members of our senior leadership team. This call is being recorded and simultaneously webcast. A replay of this call will be archived on our website for 60 days.

Today's discussion contains forward-looking statements that represent the company's current expectations or beliefs concerning future events and financial performance. Forward-looking statements are not a guarantee of future performance or results and are based on information currently available and/or management's belief as of today, February 7, 2017, and are subject to significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements, including the information under the caption, Risk Factors, included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. We undertake no duty to update any forward-looking statements.

In comparing results today, we will be adjusting all periods to exclude special items. Please refer to our fourth quarter 2016 earnings press release for the reconciliation of our non-GAAP measures.

And with that here is Bob.

Robert L. Fornaro - Spirit Airlines, Inc.

Thanks, DeAnne and thank you to everyone for joining us. Before we begin discussing the fourth quarter and full year 2016 results, as Fort Lauderdale Hometown Airline I want to take a moment to let the victims' families and friends affected by the Fort Lauderdale airport shooting to know that our thoughts and prayers are with them. I also want to commend all Spirit team members as well as employees from other airlines that joined first responders and local law enforcement in providing aid and assistance.

Earlier today, we reported our results for the fourth quarter and full year 2016. Throughout 2016 we made solid progress towards our goal of achieving consistent reliability. We improved our DoT on-time performance by over five percentage points versus 2015 with nearly all that coming in the last seven months of the year.

We also made great progress in lowering our number of complaints reported to the Department of Transportation. We started the year with a high complaint ratio of over 11 per 100,000 customers and by year-end we reduced the metric by over 60% to under four per 100,000. We expect the progress to continue throughout 2017.

We are not interested in quick fixes. Our goal is to run a quality airline while expanding our industry-leading cost structure. Our team accomplishes, while maintaining their focus on controlling costs and improving revenue to deliver solid financial results. For the full-year, we reported an operating margin of 20.9% and net income of $291 million or $4.13 per diluted share.

I want to thank the entire Spirit team for those efforts and dedication to achieve these operational and financial results. We still have a lot to accomplish but thanks to the contributions of our team members, we are solidly on the path to achieving consistent reliability improving the overall travel experience for our customers and improving returns for our shareholders.

Before I turn the call over to Matt Klein to discuss our revenue results in more detail, I want to congratulate Ted Christie on his promotion to Executive Vice President. Ted has been a valuable member of the Spirit team for nearly 5 years leading our financial group. In addition to continuing to serve as Chief Financial Officer Ted will be heading the commercial functions including pricing, revenue management, network planning and marketing under his umbrella of responsibilities.

With that, here is Matt Klein.

Matt Klein - Spirit Airlines, Inc.

Thanks, Bob. While I've only been a part of the Spirit team for a short period of time, we've already made quite a few changes to have the potential to make a real difference. I've been delighted to see how eager everyone is to think about the business in a different way, to think about the way new analytics can drive different outputs and it's especially refreshing to see the willingness of the team to innovate and adapt.

During 2016, we brought our Bare Fare plus Frill Control product to Seattle, Akron-Canton, Newark and Havana in Cuba. And just a few weeks ago, we announced we will start service to Hartford in late April bringing the number of communities we serve to 60.

Thus far, we've announced 17 new routes to launch in 2017 and plan to announce 10 to 15 more before the end of the year. The number of markets meeting our threshold for growth continues to far exceed what we can capture within the next five years. We have prioritized and identified our target markets for the next five years, but will of course remain flexible and opportunistic as the competitive environment changes.

Now turning to our fourth quarter results. Total revenue for the quarter increased 11.3% to $578.4 million on a capacity increase of 15.4%.

Total revenue per available seat mile or TRASM for the fourth quarter 2016 decreased 3.6% year-over-year. This equates to 340 basis points sequential improvement in year-over-year TRASM from the third-quarter 2016 and was in line with our initial projections for the fourth quarter.

However, the components turned out to be slightly different than we had anticipated. The trough period in December was weaker than we initially expected but the holiday period was stronger than we had expected.

During the peak holiday travel period we realized benefits from our continued efforts to push fares higher which helped offset the longer off-peak effect. Total revenue per passenger segment for the fourth quarter 2016 declined approximately $3.67 year-over-year to $108.11 driven by modest declines in both ticket and non-ticket revenue per segment.

We are very focused on driving revenue improvement through additional product and pricing innovation. With that in mind we recently reorganized our pricing, revenue management and marketing departments to better align with the responsibilities and strengths of our team members and we've also added some key analytical roles as well. This is especially helpful as we continue to move towards dynamic pricing of ancillary products.

On that note, last quarter I mentioned that we were moving forward with the testing and learning phase of our new dynamic pricing capabilities for certain services. The testing and learning phase is going well and we will continue it for several more months in a select set of markets before we begin rolling it out to other markets.

In terms of newer products, we now have paid expedited security lanes in 12 airports and while it is still in its infancy we are pleased with the early results. Additionally, in January we launched the availability of TSA Precheck to further enhance the airport experience for those customers with TSA Pre.

On the passenger revenue side we continue to see success with being opportunistic in pushing yields up where and when we can and there is good momentum for continued sequential passenger yield improvement in the first quarter.

In terms of expected load factor estimates for 2017 we should note that the growth of our airline via A321s which represent 11 of our 2017 deliveries will have an initial negative impact on load factor and TRASM. However the significantly reduced unit cost benefit of the aircraft is accretive to earnings and offsets the headwinds of the added capacity.

One other item of note is that the number of markets in a spool-up period has an impact on load factors and TRASM. In Q1 of 2016, we only had 1% of markets in their initial spool-up period. This year we'll have 8% of markets in their initial spool-up period.

Turning our attention to Q1 revenue guidance, we estimate that Easter occurring in the second quarter this year compared to being in the first quarter last year, negatively impacts TRASM in the first quarter by approximately 150 basis points and benefits second quarter TRASM by at least that amount.

Another item to include in your Q1 models for Spirit is the impact from the recent tragic event at the Fort Lauderdale airport which caused a number of cancellations and subsequent refunds during the strongest part of January.

And that same weekend, winter storm Helena also drove an unusual number of cancellations across our network. We estimate these events together negatively impacted total January revenue by approximately $7 million to $8 million and had about a full point drag on January load factor as the impacted period had higher than system average loads.

For the first quarter this equates to a negative TRASM impact of about 75 basis points. So what does this all mean for Q1 TRASM? Including the impact from the calendar shift of Easter, January actuals and what we currently have on the books for February and March, we believe total RASM for the first quarter 2017 will be down approximately 2.5% year-over-year.

Sequential improvement continues in Q1 and our preliminary view on Q2 is that TRASM will be positive year-over-year and remain positive on a year-over-year basis throughout the year. Our ability to deliver the amount of capacity growth that we produce and move TRASM in a positive direction is clearly a sign of the strength of our model.

With that, here is Ted.

Edward M. Christie - Spirit Airlines, Inc.

Thanks, Matt and thanks to everyone for joining us this morning. And again a thank you to our team members for their contributions in making 2016 a successful year.

For the fourth quarter 2016, CASM ex-fuel increased 5.6% year-over-year to $0.0544 driven primarily by higher other operating expenses and salary, wages and benefits per ASM, partially offset by lower aircraft rent per ASM.

During the fourth quarter, we took delivery of five new leased A320neos and purchased one new A321ceo aircraft ending the year with 95 aircraft in our fleet. We ended the year with unrestricted cash, cash equivalents, and short-term investments of $801.1 million which is net of the $100 million share repurchase.

Turning now to our first quarter and full year 2017 guidance. Scheduled capacity is expected to be up 15.2% in the first quarter and up about 18.5% for the full year 2017. Our capacity growth for 2017 assumes the addition of two used A319s that we plan to begin operating during the second quarter of 2017.

Based on actuals to-date and the forward curve as of February 3, we estimate our economic fuel price per gallon for the first quarter will be $1.81.

For the first quarter 2017, we estimate our CASM ex-fuel will be flat to up 1%, and for the full-year 2017 we are targeting CASM ex-fuel of flat to down 1%. The largest cost headwind that we expects in 2017 is higher depreciation and amortization driven by an increased number of heavy maintenance events, as well as aircraft depreciation related to purchased aircraft.

To put the heavy maintenance pressures in perspective, in 2016 we performed five engine shop visits while in 2017 we plan to perform over 25 engine shop visits. We estimate most if not all of this pressure will be offset by lower aircraft rent per ASM, driven by a change in the mix of leased and purchased aircraft and lower wages, salaries and benefits per ASM driven by scale and efficiency benefits.

Within the other operating expense line, we anticipate solid improvement in lower interrupted trip expense as we continue to improve our operational reliability. However, there will be offsets from other inflationary costs such as increased ground handling rates driven by higher wage rate pressures. As a reminder, we outsource our ground handling at all stations other than Fort Lauderdale. So these wage pressures show up in OOE rather than wages, salaries and benefits.

There may be some variability in our CASM-ex profile this year due to the timing of the heavy scheduled maintenance events. But in general, we expect CASM-ex will be up mid-single-digits in the second quarter and down low-digits in the third and fourth quarters. Our 2017 CASM-ex estimates does not reflect any impact of open labor negotiations.

If you're trying to peak your peaks and softer troughs continues throughout 2017, our margins in the second and third quarters should be materially higher than they are in the first and fourth with the third quarter being the peak as it has the most peak leisure days.

With that said and it's early in the year, a lot could change. Our outlook is based on current trends holding steady. With that, I'll turn it back to Bob.

Robert L. Fornaro - Spirit Airlines, Inc.

Thanks, Ted. We've made very good strides forward in 2016 on our customer service initiatives, but as I said earlier, we still have a long way to go. In 2017, we will remain committed to driving higher revenues through innovation as well as leveraging tools, people and processes to better maximize our revenue on each and every flight.

We're also going to invest in soft skills training for many of our customer facing team members. In our recent employee engagement survey, this scored as one of the most often asked for items and aligns well with our goal to improve the overall Spirit experience for our customers.

We will remain focused on maintaining and growing our cost structure while making further improvements in our operational reliability.

As I mentioned in my earlier remarks, our goal is to improve our service quality the right way, deliver steady improvements in all service metrics while keeping our cost structure intact. And we will remain committed to driving earnings growth for our shareholders by growing the business.

With that, back to DeAnne.

DeAnne Gabel - Spirit Airlines, Inc.

Thank you, Bob, Ted and Matt, Jason, we are we are ready to begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. [Operating Instructions] And our first question comes from Hunter Keay. Your line is open.

Hunter K. Keay - Wolfe Research LLC

Hey. Good morning.

Robert L. Fornaro - Spirit Airlines, Inc.

Good morning.

Hunter K. Keay - Wolfe Research LLC

A question for Matt and maybe Bob, if you want to chime in too, that's fine and I'll just ask one. You said you've made some changes obviously Matt just taken over sort of the network planning role little bit but I am kind of curious to know if the market criteria selection has evolved just iteratively, I'm not saying overhauled.

But you know you guys used look at like DOT per due data and put some sort of few adequate discount on the average fare and made some assumptions on demand simulation.

But I am wondering if you have sort of evolved that analysis a little bit to think about strategic responses that may not make a whole lot of economic sense in theory but factor in some of the lessons learned that you've seen as you've grown over the last couple of years.

Robert L. Fornaro - Spirit Airlines, Inc.

Yeah Hunter I will take the question. And again in thinking about it as I said I think I've been here about a year and one of the things I'm supposed to do is rethink everything that we are doing. So let's put the markets aside. The competitive environment has changed dramatically.

Prior to the summer of 2015 for the most part the competition didn't match many of Spirit's prices. Certain markets outside of Florida have always been competitive but a lot of mid and end markets our pricing was ignored and we had – we were viewed as a small carrier and with all the restructuring going on, again we were ignored in many of those markets. I mean that's changed. And basically today we see heavy competition across our whole network.

So again prior to 2015 there was a competitive environment that quite frankly just about everything worked. And today in a more competitive environment what you see across the industry is see lower margins today across all carriers because the competition is very, very aggressive. And so, it's under that assumption that we assume we're going to face competition everywhere. We never make the assumption that will be ignored. So that's a much different philosophy versus where we were a couple of years ago.

So again now as we look at markets, we are just as willing – we focus on obviously numbers that we think we can bring value to – big or small. So I think – I mean, I would guess versus what we were doing several years ago we were investing heavily in – for the most part in legacy carrier hubs we're still doing that. But you are seeing a broader array of markets – it could be Newark – it could be Canton Akron – a market like Hartford. So – the selection is wider. Again – but the underlying assumption today is we will face competition wherever we go. Right.

Hunter K. Keay - Wolfe Research LLC

Thank you.

Operator

Next we have Jamie Baker. Your line is open.

Jamie N. Baker - JPMorgan Securities LLC

Hey. Good morning, everybody. Following up on that when you look at markets where you compete with airlines that offer basic economy and I guess so far that's really just shorthand for Delta, is there any RASM conclusions that you can draw yet? I'm not asking whether these markets are stronger or weaker than average. I am really just curious how your RASM might have changed? How it might have progressed as the competition brought basic economy into the prevailing fare structure. Any color on that? Or is it still too early to tell?

Robert L. Fornaro - Spirit Airlines, Inc.

Jamie, it's too early to tell. Again, first of all – Delta rolled out its fare offering without a lot of fanfare. And I wouldn't necessarily – again even though it's relatively broad it didn't come out in the same way that perhaps the United and American are being talked about. And again they just kind of rolled it out in the normal competitive environment. But I would say for the most part like I said it – from Delta's perspective this is just one way they are going to compete. Not necessarily a radical way but it was one more tool in their tool just to compete with Spirit.

You know- it's – what American is about to do or United to some degree, I mean it's taken – it's been talked about for two years. There's been a lot of fanfare going on. And like I said, again, we really haven't seen much yet. But my summary right now is we really can't tell. I mean we compete well with Delta in the markets that where we see it, but it's too early to predict anything else.

Jamie N. Baker - JPMorgan Securities LLC

Okay. I appreciate it. I will get back in the queue. Thanks.

Matt Klein - Spirit Airlines, Inc.

Thanks.

Operator

Next we have Rajeev Lalwani. Your line is open.

Rajeev Lalwani - Morgan Stanley & Co. LLC

Thanks for the time. Just going back to some of the comments you made on RASM and the improvement into 2Q going forward. Can you just talk about what gives you the confidence that things are going to get that much better? Is it just the Easter dynamic? And I'm just wondering how you offset things like growth and capacity throughout the year, Florida growth (20:56), comps et cetera.

Matt Klein - Spirit Airlines, Inc.

Yeah, sure. So, yes. So for Q2 we do have confidence about the Easter shift. We also know there's going to be a lot more peak days, Q2 should be – and a lot of Q2 should – we should see some pretty good RASM improvements there. Don't know that we want to give a lot of specific guidance on how loads versus fares will come out. But for example, we are confident in Q2 and the rest of the year mainly because we had, I would say some new strategies and things that we are doing now. We're implementing that we didn't have in the past and we're also simply expecting a lot of our growth and things to continue to mature. Granted we will have many routes, we're going to be adding more new routes, we are very confident in where we're going to be adding that we're going to see some success there.

Robert L. Fornaro - Spirit Airlines, Inc.

And just a follow-up a little bit further. Again, we – as time goes on, our efforts to push fares up we think we will gain traction. As we said in the off-peaks, it may impact load factor, but we're generally comfortable with that.

One of our biggest capacity initiatives, which began last year, was Orlando. And we basically went from two gates to five gates. It's a fairly large initiative. We've already begin to see the benefits of the Orlando push near March and the second quarter. So I think we have more exposure to Florida this second quarter than we've had in prior second quarters. And that will be reflect very positively, I think, on our overall RASM numbers.

Rajeev Lalwani - Morgan Stanley & Co. LLC

Thank you.

Operator

Next we have Savi Syth. Your line is open.

Savanthi N. Syth - Raymond James & Associates, Inc.

Hi, good morning. Just a quick follow-up on the kind of puts and takes for – for unit revenue in the quarter. I was just wondering for 4Q the initial expectation was maybe kind of a 0.75 drag. Is that what you ended up seeing? And then also was there any kind of benefit to the first-quarter from kind of return travel in January?

Matt Klein - Spirit Airlines, Inc.

Sure. So the overall holiday impact ended up sort of being a wash. We did see – we did see some more negative in that holiday shift. The weaker days of that was little weaker than we expected- we initially expected and but the stronger days were stronger than we had initially expected. So it kind of washed out there in Q4.

For Q1 we were expecting to see some – some of that benefit heading into January, especially that return weekend which is unfortunately when a couple of the events that we had mentioned in the remarks occurred and that's where – that's why we saw such a negative impact in the beginning of January which we would have normally have seen some results on.

Savanthi N. Syth - Raymond James & Associates, Inc.

That's helpful. And if I may take a – take a step back, Bob, I was just looking at Spirit the pre-tax margin. Excuse me, it's less than a point higher than what it was in 2014 versus your U.S. competitors have seen kind of a maybe more meaningful improvement.

So maybe two of them have higher margins than Spirit. And just kind of stepping back, I was wondering if this is a function of a structural change or as we seek maybe perhaps margins coming in for the industry do you think there is kind of any reason to believe that there will be less pressure on Spirit versus kind of competitors outside of kind of the labor cost timing?

Robert L. Fornaro - Spirit Airlines, Inc.

Again, I actually really do want to go back to pretty much any period before 2015. For the most part – again maybe we'll ignore Florida, but in many places around the country our fares weren't matched. And in an environment like that, that's something that – a condition that we can't create. That's something that the competitors have to decide to do or not.

And so if you're being ignored by the competition, you're going to produce better numbers. And so I don't – 2014, the numbers were high. I don't see those numbers coming back unless the competition decides to walk away. But again the reality is that had to with do the way competitors matched us.

I mean I would say today the underlying profitability is better today. But we face competition everywhere. And so – and that's the way we plan the airline. We expect to be competed against heavily everywhere we go. If the competition decides to walk away from us, well that's a high-class problem. But again it's not one that we can control. So it's not something that I really worry about.

Savanthi N. Syth - Raymond James & Associates, Inc.

Bob, on that point, you've talked about self-help initiatives. I mean how far along are we on that? And – how much of that could you offset or maybe just wash out with the initiatives that you are doing?

Robert L. Fornaro - Spirit Airlines, Inc.

Well, so let's go back. I think we probably have had negative TRASM drops for 10 quarters in a row, maybe this will be 11th. It's going to turn positive in the second quarter, that's our forecast and we believe it's going to stay positive. And that's for an airline that's growing 18%. Now – just think about – so that mean – if you are growing 18%, your unit revenues will naturally go down. So we expect to turn positive. That means the self-help initiatives are already occurring and you'll start seeing even more of it in the second quarter when we turn positive.

Savanthi N. Syth - Raymond James & Associates, Inc.

Okay. Got it. Thanks, Bob.

Robert L. Fornaro - Spirit Airlines, Inc.

Okay.

Operator

Next we have Brandon Oglenski. Your line is open.

Brandon Oglenski - Barclays Capital, Inc.

Hey. Good morning and thanks for taking my questions. So I wanted to come back to the first one from Hunter, Bob. I mean, if you are still compounding growth close to 20% here, you have more competition. It does look like margins will be down for three years in a row now. I mean, as you look at the company going forward, should we expect lower growth as we get into 2018, 2019, 2020? Or do you think you can maneuver in this environment and still maintain high-teens growth?

Robert L. Fornaro - Spirit Airlines, Inc.

Yeah, again to go back to base everything on 2014, again if you want to go back to the competitive environment would be – the industry is different than 2014. And it's different for every carrier out there, including us. And so, I mean there was a snapshot when we look back but again those are, again, conditions. I would go back and say what would our margins look like if we faced the same level of competition in 2014 versus today?

You know, in terms of the growth rate, 2019 is the period of time I suspect where we can actually – we want to make big changes in the growth rate, it will be then. I guess right now our underlying rate in 2019 to be 9% to 10% I think. And we'll have to make some decisions either this year or early next year about whether we're going to increase that or not. And a lot of that we'll do in regarding how we feel about our cost structure. But we have some of those decisions to be made. But right now we are pretty comfortable with our growth rate. We think we're going to have a pretty good year given the way the competitive dynamics are flowing out.

And I would go back to one comment that Ted made. I think that maybe the distribution of the margins will be a little bit different kind of going forward where we expect the second and third quarters to be higher relative to the first quarter and the fourth quarter. But I think you pull it all together to produce nice results.

But the peaks, again, will be stronger and the marketplace is still very, very competitive, and that will mean all carriers. The underlying off-peaks still have some pressure around the industry. But I think going forward we feel pretty good about where we are at and I would say it's going about as I expected, and again I haven't seen anything that's changed my mind about that.

Brandon Oglenski - Barclays Capital, Inc.

Thank you.

Operator

Next we have Helane Becker. Your line is open.

Helane Becker - Cowen and Company, LLC

Thanks, operator. Hi, guys. Thanks for taking the time.

Robert L. Fornaro - Spirit Airlines, Inc.

Sure.

Helane Becker - Cowen and Company, LLC

So just a couple of things. I think Ted, you mentioned the engine maintenance, the big increase in engine maintenance this year versus last year. Is that also true for airframes or just for engines?

Edward M. Christie - Spirit Airlines, Inc.

There is some airframe effect too, Helane. The big numbers are the engines though, because the cost overall a motor might be 2X or 3X to do one whole airframe, so that's why we called it out as it's more meaningful. But there is incremental airframe maintenance too.

Helane Becker - Cowen and Company, LLC

Okay. Is that – just for clarification, is that in-house or do you send that out?

Edward M. Christie - Spirit Airlines, Inc.

No, it's all outsourced with – on our engines we have a long-term PBH with the OEM and then our airframes we have a contracted provider that helps us do our heavy maintenance of those.

Helane Becker - Cowen and Company, LLC

Okay. And then just – so you called out in the press release the fact that you are still negotiating with your pilots, and actually yesterday they sent an email out to people with a note that they want to, I guess, meet up with the analysts or something to let us know what they are doing versus what maybe – what they want versus maybe what you're willing to give them. And I don't want you to negotiate obviously in public but this is an open contract for a while now. I mean what can we expect? Usually you guys have been known, especially Bob, in prior life getting these contracts done in a timely fashion. So what can we think about in terms of time of getting this one done?

Robert L. Fornaro - Spirit Airlines, Inc.

Hi. Good question. First of all, we are in mediation and if you go back, we've been in mediation since last summer. And the pilots requested mediation and we opted to join them. And mediation naturally slows down the process. I think we've completed about 20 of 31 sections. But we have not hit the difficult ones, mostly the ones around money.

And eventually we're not that far away from getting in there. And over this period of time the ask of the pilots has gone up several times. And our position is, and we understand the pilots are going to get a substantial increase, but we also know if you want what are the relevant wage rates, we've got to have similar or equal work rules.

And we have a relatively unproductive contract, again negotiated 10, 12 or 13 years ago when we were a much different airline. And it's very difficult to scale an airline like ours to an agreement that was signed many, many years ago. So we have to again we have to accomplish a number of things in the agreement. But when we're done, we expect the pilots to get a substantial increase and we expect to get an improvement in work rules that are necessary and are typical across the industry. So again, we're at it pretty hard.

Helane Becker - Cowen and Company, LLC

Thank you for that. It was more than I thought I was going to get.

Robert L. Fornaro - Spirit Airlines, Inc.

Okay.

Helane Becker - Cowen and Company, LLC

Just on hiring levels, are you still finding it easy on a relative basis to attract quality applicants to the pool?

Robert L. Fornaro - Spirit Airlines, Inc.

We feel pretty good about it. And we have got a growth rate of 18%. And yes, we are going to meet those targets. So I think it's – I think the outlook here is positive from that perspective.

Helane Becker - Cowen and Company, LLC

Thank you very much.

Operator

Next we have Joseph DeNardi. Your line is open.

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Yeah. Thank you. Ted, just on the utilization in the quarter was down quite a bit year-over-year, maybe there was something specific to call out there. But if not, that's just never to improve reliability. Can you just talk about the impact that that's having on unit cost? Or the kind of the re-accommodation expense offsetting the lower utilization or is that really kind of an investment now with the hope that that's accretive to margins in the future?

Edward M. Christie - Spirit Airlines, Inc.

Yeah, Joe you're hitting the points part of what we have been talking about for the past year is doing that mathematical exercise to arrive at where we think the right balance is between fleet utilization and the re-accommodation expenses. You know the theory we have been testing over the last year is that by pushing the expense into different buckets or moving it from fixing problems after the flight to improving the conditions of the flight, we believe can leave us in a cost neutral position on a unit basis and improve the product, which is good for the customer. Right? So we get a winning customer solution and we get a neutral to, we hope, improving cost benefit.

And as I said on our last call, the early returns are telling us that's very much in line with our hope and expectations. So yes, utilization and some of the utilization timing, by the way, may be due to when aircraft deliver and when they go into the schedule. So even though we're still growing 18%, we take a couple three shells every quarter. Where those actually land can add spare time inadvertently, depending on when they deliver. But we have intentionally brought utilization in some in order to offset the negative impacts of disruption. And again, as we said earlier, we feel really good about how that's playing out and our cost guide should give you that comfort.

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Great. Thanks, Ted. I will get back in the queue.

Robert L. Fornaro - Spirit Airlines, Inc.

Thanks.

Operator

Thank you. Next we have Duane Pfennigwerth Evercore. Your line is open.

Raymond Wong - Evercore ISI

Good morning. This is Ray actually filling in for Duane. Could you speak qualitatively about the new market performance and more specifically mid markets like Akron-Canton from larger new markets like Newark?

Matt Klein - Spirit Airlines, Inc.

Yes. So I would say the new markets are producing as we expected. New markets take some time to spool up. Having said that, like every new market some do better than others right out of the gate. But we're happy with where we're at. It's not changing our thoughts on how we pick new routes and we're pretty satisfied with what we've seen so far.

Raymond Wong - Evercore ISI

And any color on markets such – mid market such as Akron-Canton or some of the larger markets like Newark?

Robert L. Fornaro - Spirit Airlines, Inc.

I mean, in terms – I mean, you're going to have a different variability. I don't know that we need to get into individual specific routes. Well, some are doing better than others, like anything else we'll adjust if we see that there's issues – if we do see issues moving forward. But as of right now we are pretty happy with what we have. So I guess overall, I would say, sort of the midsized routes are performing fine and the larger routes are performing fine based on whatever thinking they should be right now.

Raymond Wong - Evercore ISI

Okay, great. Will see you tomorrow.

Robert L. Fornaro - Spirit Airlines, Inc.

Sure.

Operator

Next we have Mike Linenberg. Your line is open.

Michael J. Linenberg - Deutsche Bank Securities, Inc.

Hey. Good morning, everybody. Just I guess a couple here. Matt, just maybe going back to the ancillary piece, you know that kind of peaked maybe a year ago and it's come down a little bit. And I recognize and or I appreciate that some of that is just mix and the fact that you are flying shorter markets. You talked about a lot of different revenue strategies and things that you're probably going to implement over the next year or so. Does that plateau and do we start to see that number move backup or is it going to be more impacted by market selection? You know, the fact that maybe you're moving into some of these shorter haul markets where you just don't get as much ancillary uptake, can you talk about that?

Matt Klein - Spirit Airlines, Inc.

Sure. So it's a little bit of both actually. But the reality is there are some things that we believe that we're working on here internally. Things that we've had under works for a little while where we think we can move the needle on, we mentioned about how we're trying to test out dynamic pricing of ancillary services. Not unlike traditional yield management happens on the base fare, the bare fare itself. So we believe there is a lot of opportunity there, and that will help us up.

Obviously something that we should do in terms of the future is also to think about how we're redesigning parts of our website. We are moving forward with slowly putting pieces out step-by-step on our site. We don't – I don't think we're comfortable saying exactly right now when we're going to push those pieces out. But as those pieces push out throughout this year, we will be able to start to see better merchandising activity there and we'll be able to also have better ways that we talk to our customers. Quite frankly, it's things that as an e-commerce business, we're very excited about and we expect when that starts to rollout we will start to see some results from that as well.

Michael J. Linenberg - Deutsche Bank Securities, Inc.

Okay, great. And just one more and it's either Matt or feel free to chime in, Bob, post the executive order signed two weeks ago, did you guys see anything, any noticeable impact to bookings? And look, I realize that you don't some of the markets that matter and it's not just the seven markets but with some of visa issues and some of the visas tied to visa countries and some of these waivers, there may have been unintended consequences and I just – I was curious if some of those headlines had some impact on some of your international flows or you didn't see anything?

Robert L. Fornaro - Spirit Airlines, Inc.

No. We really haven't seen anything from that at all. I mean we- obviously we are following it and we've heard all the story and we are following, let's just say that. But we haven't seen any impact from what we've heard from customers. We haven't had calls or emails to our customer relations group either. So we feel pretty comfortable that it really hasn't had an impact on us.

Michael J. Linenberg - Deutsche Bank Securities, Inc.

Glad to hear. All right. Thank you.

Matt Klein - Spirit Airlines, Inc.

Thanks, Mike.

Operator

Next we have Kevin Crissey. Your line is open.

Kevin Crissey - Citigroup Global Markets, Inc.

Hey. Good morning. Thank you for the time. Could you talk a little bit about what you're seeing in the Caribbean?

Matt Klein - Spirit Airlines, Inc.

Sure. It's performing well. We don't really see any issues there moving forward. We are actually quite pleased with what we have.

Kevin Crissey - Citigroup Global Markets, Inc.

So relative to your performance in the rest of your network, it was similar result?

Matt Klein - Spirit Airlines, Inc.

The Caribbean itself, yes. That's right.

Robert L. Fornaro - Spirit Airlines, Inc.

You know I think actually in terms of South America we've actually seen the bottoming actually starting to improve. Again, the Caribbean, which is actually a positive because for almost a year straight with mostly driven by currency we saw fairly large drops but it's starting to turn up. So that's a slight positive going forward.

Kevin Crissey - Citigroup Global Markets, Inc.

Okay. Thank you very much.

Operator

And next we have Dan McKenzie. Your line is open.

Dan J. McKenzie - The Buckingham Research Group, Inc.

Hey. Good morning. Thanks guys. Bob, can you talk about the on-time and completion rate pre and post network rebuild in November? I am just wondering what kind of improvements you saw. And then tied to that, just more broadly, I'm just wondering if a single frequency data across the network is the right network strategy or do you perhaps need more frequencies to ultimately get to the operational reliability that you'd like to see?

Robert L. Fornaro - Spirit Airlines, Inc.

Right. Let's go back to the second part first. I think for, again, an airline like Spirit, essentially over time the airline began in a large push to the West with generally low frequencies. And if you kind of look at the structure, we're in all the weather cities, you know Chicago, New York airports and Atlanta. So you do have an underlying amount of vulnerability.

We had high utilization. We had low turns. And so we're pretty much set to run on good weather days and for the most part we would struggle on more challenging days. And what we are doing actually is really combining the marketing point and the operational plan we are kind of putting them together. And we have got everybody involved. And so everybody's got the same mission. You know it's cost low, revenue improvement, operational integrity. And frankly, that wasn't the case across all the parties (44:00). So that – everybody has got the same mission.

I think in terms of really what we do, first of all, we're not going to add weak routes to improve the network but we certainly by building more densities and routes that we want to be in, like the Orlando operation will actually help our network because we get a little bit more dense in the East Coast. So we're trying to do things like that.

When we look at industry on-time performance, again I think – I don't know the final number for the industry but it was – the industry round numbers was probably 81% to 82% on-time for the year and we are about 75%. In the first quarter, we were about 17 points behind the pack. We had a very difficult first quarter. The second quarter in May is when we started to make the changes and we were about seven points behind the average. In the third quarter we were about three points behind the average. In the fourth quarter about 1.5 behind the average. And I think the progress is going to continue.

And we're trying to do this with real effort. And quite frankly, we are not going to necessarily put in all the pad (45:30) that a lot of carriers are doing. Basically our goal was to make gradual improvements. And we think we can improve the cost structure at the same time if we make it gradual and we do it very, very smartly. And like I said, I think we are tracking probably slightly better than where I thought. I'd say it's probably the most – the key thing ultimately is really combining all the functions into one direction. The marketing plan supports the cost plan and everybody has got an operational goal as well. Right?

Dan J. McKenzie - The Buckingham Research Group, Inc.

Okay, understood. Matt, following-up, what was the take rate on the Shortcut Security where it was offered, so in terms of percent passengers that chose to pay for it? And then more broadly with respect to e-commerce, where are you at with respect to car rentals and hotels? What is the take rate today and what should it be? And as you talk about merchandising capability, at least those are two of the things that come to my mind, and maybe I'm missing some other low hanging fruit that you might be looking to monetize. But just wondering if you can elaborate a little bit more on Shortcut Security take rates and how you are thinking about more broadly on e-commerce?

Matt Klein - Spirit Airlines, Inc.

So, I think your comments about more broadly on e-commerce are correct. In terms of actual take rates, we're not going to really comment on that or talk about that. I would just say – I will say about Shortcut Security, which is the name of the product. It has launched out and we're happy with it. And right now about 55% of our passengers have access to it today in 12 airports. And I think I'll just leave you with those couple statistics but we're not really comfortable commenting further beyond that.

Dan J. McKenzie - The Buckingham Research Group, Inc.

Okay. Thanks for the time, you guys.

Matt Klein - Spirit Airlines, Inc.

Sure.

Operator

Next we have Andrew Didora. Your line is open.

Andrew George Didora - Bank of America Merrill Lynch

Hi, good morning everyone. Bob, just wanted to follow-up on the basic economy question that you got earlier on in Q&A. And I ask this in the context of knowing that you have a lot of company specific opportunities on the revenue management side. But were any of the changes that you made in terms of the revenue or marketing, staffing or changes that you talked about that went on in those parts of the company due to address the threat of basic economy?

And then my follow-up to that is with all the legacies thinking that this new product will help industry revenues, what do you think is the biggest risk to industry pricing from this new product? Thanks.

Robert L. Fornaro - Spirit Airlines, Inc.

Again, a good question. I think first of all in terms of addressing – I mean, what we're trying to do is basically run a quality airline. I think perhaps the coach product on those airlines is, first of all, not quite as good as perhaps they say it is. And I think frankly if – with the right training we can certainly beat them on friendliness. And I think we can match their quality from an operations perspective. But we have to do those things and we haven't been doing that. Again we've lagged in every operating metric.

So the first step of everything we're trying to do is be able to improve our quality. And ultimately over a very long period of time we'll – maybe we will improve our reputation as well.

Again, so going back to the basic economy, again I view this as basically it's competition and ultimately from a pricing perspective how many low fare seats are in the marketplace.

Today there is plenty of fare matching in head-to-head markets. It's not that much different than it was six, seven months ago. There is some upward movement in pricing driven by fuel prices. But for the most part it's pretty competitive.

And I guess the basic economy again starting, (50:09) it's a way for those carriers to continue to compete with us because quite frankly although it had a big impact, and I've been asked on this call about 2014, 2015, we weren't matching and carriers decided to aggressively match us beginning in mid-2015.

What they also found is they took big revenue hits and margin hits as well. So what they are trying to do is address their on profitability but at the same time putting pressure on us.

So I think it's going to boil down to their ability to execute. Their benefit is going to come from less seats. If they keep the same amount of seats out there as they have today, they're going to have the same number results. So, and their goal is to try to sell up. But at the same time my guess is Spirit of 2017 will be a much better run and offer much better quality than we did in 2015. So we are getting better as well.

And the competition knows it. They can see our results. And we expect them to continue. But ultimately it boils down to the number of seats they keep in the marketplace. And so we don't know at the end of the day if to some degree – my guess is, if they are doing better because of the product, we will do better. If things don't change much, that's because there is still a very, very high inventory of I'd say discount seats.

So again, I think we will improve as they improve. And we can debate at the end of day who does better. I guess that doesn't really matter at the end of day, we are worried about our own results and they have to worry about theirs.

So again we're optimistic. Costs are going up at many carriers. Fuel is going up. That should kind of create an upward bias on sell ups in the marketplace. Right?

Andrew George Didora - Bank of America Merrill Lynch

That's great. Thank you, Bob.

Operator

And next we have a follow-up from Joseph DeNardi.

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Yeah. Thank you. Bob, I think on the last call you talked, and sorry if I missed this if you addressed it earlier but I think you mentioned, maybe looking at taking up your capacity growth up to 20%, wonder if you could just update us on where you stand with that?

Edward M. Christie - Spirit Airlines, Inc.

Hey Joe, it's Ted.

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Yeah.

Edward M. Christie - Spirit Airlines, Inc.

So we reiterated we're still looking at around 18.5%. Admittedly things do bounce around just because of the way our aircraft deliver and where we move gauge on individual flights will have an impact. So smaller airplanes on longer flights changes the capacity a little bit here and there. But based on what we are seeing right now, we are still staying around 18.5%. It may move depending on when aircraft deliver and how we view sparing and utilization in the back half of the year. But that's kind of where we are landing.

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Okay. Okay. And then just on the non-ticket side, can you just give us an update on kind of when you think the year-over-year decline turns around and may be when that gets back to positive on a year-over-year basis just based on the timing of rolling out some of the new initiatives?

Matt Klein - Spirit Airlines, Inc.

We think that as we roll through this year, we should start to see things start to stabilize – continue to stabilize, not start. And then once we hit the back half of the year, we will start to see incremental improvements.

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Okay. Thank you.

Operator

And next we have a follow-up from Hunter Keay.

Hunter K. Keay - Wolfe Research LLC

Thanks, again. Ted, I'm really putting you on spot with this one here. So sorry in advance buddy, but if you look at your distribution CASM in 2012, it was down like 10%.

Do you know if that was driven by the Durbin Amendment to the Dodd-Frank act which effectively cut your processing fees on debit card transactions? I know you're laughing. Maybe just ask a question, but that was a big tailwind.

If you try to quantify, the numbers can get pretty big. So I may ask you a couple different questions, you can pick which one you want to answer. Do you know what percentage of your customers use a debit card to buy tickets?

Are you factoring in any sort of headwind in the event that Dodd-Frank goes away and this processing fee maybe goes a up a little bit to sort of be in line with what you pay at credit card vendors? Any one of these questions feels free to answer. I'm trying to get a sense of cost headwind potential.

Edward M. Christie - Spirit Airlines, Inc.

Yeah. I got you.

Hunter K. Keay - Wolfe Research LLC

You know what I mean?

Edward M. Christie - Spirit Airlines, Inc.

Thanks. Yeah. You are right, in 2012 it definitely had an impact. I think our mix of debit to credit does flow throughout the year, believe or not. So as you approach the holidays and then come out of the holidays, we do see a shift from people using credit cards to debit cards. But it can get as high as 40% on debit as I recall. So if there is a repeal, and it does change that, there may be an impact. But we'll have to see how the legislation comes out on that.

Hunter K. Keay - Wolfe Research LLC

Okay. You wouldn't quantify it by any chance how much of a benefit you had in 2012? We can talk about it later if you want.

Edward M. Christie - Spirit Airlines, Inc.

I think I will have to go back to you on that one.

Hunter K. Keay - Wolfe Research LLC

Okay. Thank you.

Edward M. Christie - Spirit Airlines, Inc.

All right.

Operator

And next we have follow-up from Jamie Baker.

Jamie N. Baker - JPMorgan Securities LLC

Hey, thanks. Bob, earlier you mentioned RASM turning positive and staying positive. I'm curious for how long. And I'm not asking for the sake of my earnings model. I'm really asking about the business model because positive RASM for ultra low cost carriers, that tends to be the long-term exception rather than the norm. I think most owners view LCCs accept this, whether we are talking Spirit, Wizz (56:32) somebody else. Was your comment on positive RASM meant to imply that the changes you are making to your operation will potentially allow you to grow RASM in perpetuity or were you just pointing out that for the next several months the comps are easy, so investors shouldn't expect a long-term relationship with positive RASM, maybe more of just summertime flying?

Robert L. Fornaro - Spirit Airlines, Inc.

No. It's a good question. And I'm certainly not making a call on the long-term. I will make a call on 2017. And it goes back – in a lot of this – we've had some this question before. In years like 2013, 2014, Spirit had exceptionally high capacity growth rates and still grew its TRASMs and again that was in a period of time where we're relatively small, somewhat ignored by the competition, and we had a rarity, again TRASM going up and with high growth.

Jamie N. Baker - JPMorgan Securities LLC

Yeah.

Robert L. Fornaro - Spirit Airlines, Inc.

And we've now had 10 or 11 quarters of deterioration. And I think the way I view it, Jamie, is in that decline, which has been a couple of dollars on TRASM, about $30 on fare, there is some opportunity to get back some of it by some of the improved processes that we actually are beginning to implement.

So, again – so another way of saying it is – again there is some level of catch-up that we – I think we started to latch on to in the latter part of the year, and we will continue to see some of that catch-up going forward. I don't know how far it ends, but again it's kind of based on my own experience.

Some of the drop maybe perhaps could have been avoided if we were perhaps doing different things. So, we're just kind of looking out through the year, and obviously by definition there's an assumption that oil is staying in the $50s and not going back to the $30s because there is some industry effect going on here as well.

Everybody needs to raise their average unit revenues to some degree. So it's unique to 2017. And will there be more upside in 2018? It's just way too early to talk about it or think about it. Right?

Jamie N. Baker - JPMorgan Securities LLC

That helps. Thanks Bob, I appreciate it.

Operator

Thank you everyone for joining the call. With that, we're out of time. I again thank you for joining and we'll catch you next quarter.

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