ALGT
#<UNK>, it's <UNK>.
Keep in mind that we operate mainly in environments where we don't have any direct competition, so for the most part no.
And that's reflective of our 7% decline in TRASM for the second quarter and our guide for the third as well.
Keep in mind that same-store sales without any growth we would be down about 4% just based on what we've done with the credit card surcharge, [shift from D], the debit card discount, and baking in the taxes that have increased in the third quarter last year.
So 4 percentage points of the 7% decline is just associated with other things.
And then we are growing pretty rapidly right now, so a 3% decline in TRASM is a pretty good demand environment considering 20% growth.
We are catching up from growth that we wanted to do, but weren't able to do with the pilot shortage that ended in April of this year.
And also we are adding a lot of off-peak flying opportunities that now work in the environment with more A320s in our fleet and low fuel prices.
So those two events ---+ the opportunity to change the network in response to those two things is going to slow down our growth as we bake that in on a comp basis.
So we will not be growing over 20% for very long.
I think a more stable growth would be seven ---+ as we've always said, seven, eight airplanes a year, mid-teen ASM growth annually.
Those obviously we like to keep close to the vest, but we are working very hard both sides to move forward, see if we can get something done here.
In fact, we are meeting today as we speak.
Here talking about a number of areas.
First contracts, as we've said before, always take longer because you have to touch every area and so that's just a laborious process to get through all that.
But I think both sides are looking for movement and getting something done.
So we're pleased with the progress.
I think that there's more work to do certainly, but it's moving along nicely.
I don't want to go there.
That's one forecast that I wouldn't want to hazard a guess at this point.
Yes, both coasts, all-in, we are paying about $1.80.
It's higher on the A320s; we can say that definitely.
But keep in mind that as we introduce the A320 into the fleet, we try to deploy it on routes that use it the most.
We are cherry picking still, so it's not really accurate to compare margin differential between the two types.
I would say that where fuel prices are today it still makes sense for us to substitute the MD80 with used A320 equipment at the prices that we are transacting on today.
So fuel prices relative to where they were last year haven't changed our fleet outlook.
Not for a long time, <UNK>.
It would be ---+ I think the way to think about it is we can't really take more than one plane a month on a sustained basis, because of the challenges of originating and inducting used equipment.
We intend to grow the airline in this environment, obviously, so if half of those are for growth and half of those are for replacement, we got 53 MD80s and some 75s.
We are still in this plane seven years from now.
It will depend upon the availability of aircraft, but the CapEx of this year and last year should be higher than what we see going forward, because ---+ primarily because we did the big deal on the leased airplanes that are on lease to EasyJet.
We did that deal last year, so brought forward a lot of the CapEx that is going to happen; would otherwise have happened in 2018 and 2019.
We are investing in the future.
We are bringing forward a lot of the CapEx so I think we're going to see CapEx go down.
And then there's the big question of how many and what price.
I think it will be lower than the $300 million that we ---+ on a steady-state than we've experienced this year and last year.
I can't give you a real definitive answer on that, but I think a good number is 20% to 30% less unit revenue on a flight that is on a Tuesday, Wednesday, or Saturday relative to the same week on a Thursday, Friday, Sunday, or Monday.
So as we grow off-peak flying, which would be those three days that I mentioned, we are going to continue to put pressure on our unit revenues and you'll see that in our utilization.
One of the real great things about our business model is that as fuel price comes down we can fly more with the same assets because we have underutilized assets during those off-peak periods.
And to give you an idea going forward, off-peak day flying, day a week flying in the second quarter was about 36% growth.
In other words, 2014 over 2015 we grew off-peak flying by 36% in the second quarter.
In the third quarter that number is 66%.
So it's a big catalyst for our growth to be able to take advantage of these off-peak opportunities and it does put pressure on our unit revenues.
It increases earnings.
No.
It makes third-party product sales harder, in general.
Generally speaking, third-party conversion is correlated to fare.
I wouldn't correlate that to utilization increase.
What's happening there is that we introduced some new technology for pricing at the end of last year and that's been really accretive, and then you're seeing network shift towards the East Coast.
And so the unit revenue production of our car rental business has greatly increased from those two factors.
It doesn't really have much to do with off-peak flying.
Yes, sure.
I think, as demonstrated by our recent opportunities in the spot market that we've taken advantage of, we continue to find Airbuses in sufficient quantities and prices to meet our growth.
And I don't see that changing.
I think the market is moving towards this.
We've had more and more interest from sellers than we've had this same time last year.
I think the market is coming our way.
It's an operational limit, yes.
The debate we are having now is there's no economic constraint to grow in the Company.
We have plenty of opportunity.
We have availability of airplanes.
We have markets we want to serve and passengers that we want to serve.
It's really about us balancing how quickly we can grow the airline with how much strain we can put on the operation.
<UNK>, it's <UNK>.
Just a follow-up to that.
one of the things I admired about Southwest over the 40-some years they've been doing this is, while they were a growth phase, they were doing 10% to 15% a year.
And the organization ---+ it's a stress to jump it up to 20%, 25% and then to come back to 5% to 10%.
You'd much rather kind of standardize around a pace that the organization can gear up to and deliver consistently.
Certainly you can push things, like we are doing this year.
But operations, every time we go to a new level we have more requirements for just the volumes and things like that, and we want to be mindful of that.
Predominately it will come from the same kind of growth that we've had over the last 12 months, which is underserved markets on less than daily service.
And the A320's performance capabilities won't really impact our network planning.
So we're not adding airports that are in challenging places, hot or high, nor are we flying longer.
It's really about ---+ with the A320 it's really about utilization, so we are flying more often on the margin.
But if you look at the recent announcements, it's all been relatively larger cities.
I would expect that trend in those size cities to continue.
One of the big catalyst for our growth over the last 12 months has been Cincinnati and markets like it; Indianapolis and Memphis more recently and Austin is growing.
We are really looking hard at those kind of markets and I think that's going to be the story for the next 24 months or so.
So like we said the last four years, it's next year.
Sure, yes.
It has many of the same characteristics of all our markets, which is that there's no low-cost, daily alternative.
And so if you want to go between those two city pairs or travel in that city pair you need to have traffic over a hub and it's not priced appropriately for a nonstop customer that pays with their own wallet.
We view that as a great opportunity for us.
If you look across the midsize market space, there's not a lot of connectivity between those markets.
And if there is, then the incumbents won't really be hurt by us because we'll travel on days of week where there's spill traffic already existing.
So, yes, we think it's a great opportunity and doesn't hurt anybody or compete with anybody else.
It's a service no one's providing.
Yes, <UNK>.
It's always kind of a nice badge of honor to be investment grade, particularly in this industry.
Has Alaska made investment grade now.
Are they up there.
But, frankly, you need that under traditional metrics because the industry didn't produce any cash and you're always borrowing, and so it was a self-fulfilling problem that without making any money you weren't ever going to be investment grade to begin with.
But the interesting place we find ourselves, we don't need a lot of capital.
We are producing our own capital, buying used airplanes; able to borrow at oh my God rates with today's environment.
We just borrowed 1.7 over LIBOR for used airplanes.
So in many ways I'm telling our Board that what we have today is the same model we started with, the MD80.
The only difference is we are putting $5 million or $6 million of capital into an Airbus airplane and borrowing $10 million, $12 million, whatever the number is.
But that package is the same package in many ways that we had with the MD80; you just look at the debt as part of the asset and the economics.
So the model ---+ while we need some capital from a debt side and should use it, I'm not sure investment grade gets us much better rates unless maybe we wanted to go to the unsecured market.
And what was ---+ Ryan Air like 1.78 or something for $500 million, $800 million.
That would be nice to have, but we just ---+ we're fine where we are at right now from a capital deployment perspective.
I think, candidly, the other side is we're too small to be investment grade.
We've been told that numerous times.
They are just looking for size and scope more so than perhaps we have at this point, too.
<UNK>, it's <UNK>.
No, it's primarily driven by flight crews and you're going to see the number of FTEs related to those outpace growth, whether its aircraft or ASMs or however you want to measure it.
And that's been a consistent trend.
Yes.
<UNK> can give you some more color, but it's hard to beat 29%, <UNK>.
That's something, that's rarified atmosphere for us here and I certainly ---+ while I'd like to maintain it, I'm not going to sit here and tell anybody we can.
But there is complexity when you have multiple airplane types, there's no doubt about it.
I'm not sure we can increase the margin much beyond where we're at but ---+ <UNK>.
The thing to consider on those airplanes is that there's one-time maintenance events coming up on those dates that would otherwise need to be run through the P&L, so by retiring them we won't necessarily get a benefit, nor ---+.
It will be basically neutral to where it is now, because we're not doing that maintenance today.
The Hawaiian network is performing really well.
It's the biggest beneficiary of the decline in fuel prices in our network because of the length of haul.
But we continue to look at the 75 and as those events come up our best guess is reflected in that fleet plan, which shows them retiring.
Maybe I will take the loyalty question and turn it over to <UNK> for costs.
This is <UNK>.
Today, just to be clear, we don't have a loyalty program nor a fare club.
We've talked about it for several years to our investors, and as we sit today, we would plan on launching a loyalty program which is based on a co-branded credit card in about the middle of next year.
So we are working towards that goal today.
The growth that you've seen in our ancillary production has come from air ancillary products, primarily; and I think that's going to slow over time as far as a year-over-year increase, but we continue to focus on it.
We want to take down the airfare to make travel more available to our passengers and we do that by raising ancillary in some ways.
So that's loyalty.
And we really don't ---+ we really are in a position to give you any guidance on how effective or how productive our loyalty program will be.
Stephen, on the cost side, if you take the midpoint of where we just guided, down 13 down to 11, that puts you roughly at $0.058.
Without getting into too much detail, the expectation was you'd see a nice size reduction into 2016 as well.
A couple of the areas, D&A I think we have the most aggressive policy out there.
Our book value in our MD80 fleet will be substantially reduced.
Maintenance it appears it will be a fairly light year, although we haven't got into any of the CFM motors yet, so we'll see those in the next couple of years.
But, in general, it should be a really nice cost story as we go forward.
That's correct.
I'll talk about the scheduling side of it.
I think you're right; it does cause a challenge to route or schedule a flight between two cities that we don't have a base in, but we are very capable of doing that on an inside turn or a triangular pattern.
So I don't think we are constrained in growing those markets as we sit today significantly, but I think that you're right.
It's going to force us to make some adjustments and I think that's going to come in the form of more mid-continental-based airplanes.
And so we've announce ---+ (multiple speakers).
They're not necessarily in a destination market, but they will be in a city that we have significant presence in.
We've recently announced basing airplanes in Cincinnati and that's an indication.
Now we have 10 markets from Cincinnati and it starts to get difficult to route all those markets without putting a base there in Cincinnati to better serve that community.
(multiple speakers)
Yes, we don't have any significant scheduled overnights anywhere in the network today.
It's still an out-and-back pattern.
Absolutely.
That's important for us to maintain that as best we can.
Just keeps it simple and allows our people to understand what the basics are, so that's critical in what we do going forward.
No, it hasn't changed.
If anything, we continue to move towards a fully-outsourced model.
The only two bases that have any sizable Allegiant presence would be St.
Pete and Bellingham.
We partner with four or five major ground service providers across the nation.
Just to give you an order of magnitude, we have maybe 140 direct station personnel.
Those are folks above and below wing that would actually touch the plane.
So 95% of what we do is outsourced.
Yes.
Lukas Johnson and his team spend a lot of time thinking about that.
And from my perspective, we are just about willing to try anything.
We just really need to be honest with ourself about the potential of any given market and be willing to cut anything, and then have the flexibility in all our contracts to do so.
So as I sit here today, relative to where we were, say, last year, I think our growth potential is much increased based on the success we've had in some of our midsize markets, which wasn't really part of our strategy as recent as two years ago.
And so going into midsize markets provides the ability to fly a fuller calendar on more days of week and to more destinations, and now, as Michael [talked] about and mentioned earlier, now we were experimenting connecting those midsized communities.
We've had great success doing all of that and if that continues on, then, yes, there's four to five years of growth just exploring that strategy.
And that won't change the proportion of our routes that have direct competition, because we continue to look at connecting markets that don't have any nonstop service today.
<UNK>, you want to touch that.
We are midway right now through about a four-month project to rewrite our hotel back-end that will open up some automated pricing technology that will give <UNK> the ability to add breadth of hotel inventory underneath, which I think is important as the network shifts out of Vegas.
Again, <UNK>, it's a Vegas-centric market with hotel.
It just stands out to a much greater degree than any other city, and as we add more capacity, most of which has gone to the East, you're just going to have pressure on those per-passenger numbers.
We are real pleased the cars have stepped up and we are holding our own on a per-passenger revenue basis now, which is good.
The network is going to continue to challenge unit revenue for hotels and that's going to be because more of our passengers are coming from bigger communities that have, in general, lower take rates.
And also less often will those passengers be destined for Vegas as a proportion of the network.
So we are going to continue to see ---+ And revenue declines; I will bring out our third-party production in the second quarter on a dollar basis is the best it's ever been.
Mention Canada, too.
So it continues to be a very important part of our business.
And <UNK> nudged me to remind you that Canadians and Mexicans tend to have the highest take rate as a demographic, and we are carrying less of those folks proportionately and that continues to be the case.
Our Canadian markets are particularly challenged because of the exchange rate.
Thank you all very much.
Appreciate the questions and the interest.
If you have any follow-up, obviously go through Chris and the IR team and we will be glad to try to answer them as best we can.
We'll talk to at the end of next quarter.
Thanks again.
Have a good day.
