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ALGT > SEC Filings for ALGT > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for ALLEGIANT TRAVEL CO

Form 10-Q for ALLEGIANT TRAVEL CO


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents factors that had a material effect on our results of operations during the three and nine month periods ended September 30, 2012 and 2011. Also discussed is our financial position as of September 30, 2012 and December 31, 2011. You should read this discussion in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q and our consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 31, 2011. This discussion and analysis contains forward-looking statements. Please refer to the section below entitled "Special Note About Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.

Third quarter 2012 results

During the third quarter of 2012, we achieved a 13.3% operating margin resulting in net income of $16.9 million on operating revenues of $216.9 million. Results were driven by a 14.7% increase in capacity, a 9.4% increase in scheduled service passengers, our unit cost performance for the quarter, with a 6.2% reduction in our operating expense per ASM ("CASM") from 10.97 to 10.29, and an increase in our ancillary revenue per passenger to $42.64. The third quarter is typically our weakest quarter of the year, but these results produced the highest third quarter earnings per share in our company's history.

Our average fuel cost per gallon of $3.11 was down slightly from $3.14 in the second quarter of 2012 and comparable to our third quarter of 2011 average fuel cost per gallon of $3.12. Our CASM, excluding fuel, decreased 5.6% from 5.69 to 5.37, mainly attributable to a 14.7% increase in system capacity which outpaced an 8.3% increase in non-fuel operating expenses. The lower increase in non-fuel cost performance reflected a 13.1% decrease in maintenance and repairs expense as we had less engine repair expense due to the completion of our 2011 engine overhaul program.

Our total operating revenues in the third quarter 2012 increased $25.3 million or 13.2% over third quarter 2011 due to a 9.4% increase in scheduled service passengers and a 3.6% increase in total average fare. We grew our ancillary revenue per passenger year-over-year by 19.5% from $35.69 to $42.64, which more than offset a 3.1% decline in our scheduled service average base fare. The increase was primarily attributable to the implementation of a fee for carry-on bin bags in April 2012.

We grew our average number of aircraft in revenue service by 18.4% from 52.3 aircraft during third quarter 2011 to 61.9 aircraft during third quarter 2012. The increase in average number of aircraft and the combination of increased seats in our MD-80 fleet, utilization of our Boeing 757-200 aircraft with 223 seats and a 2.0% increase in our scheduled service average stage length drove a 15.3% increase in scheduled service ASMs during the quarter.

During the third quarter of 2012, we continued our progress with our MD-80 aircraft seat reconfiguration program. As of September 30, 2012, we had 36 MD-80 aircraft with 166 seats in revenue service. These additional 16 seats have allowed us to grow capacity without adding incremental aircraft into our operating fleet. Our strategy is to convert each base to 166-seat MD-80 aircraft as soon as possible to optimize the selling effort in that particular base. Currently all of our MD-80 aircraft based on the west coast (Las Vegas, Bellingham, Phoenix-Mesa, Los Angeles and Oakland) have been reconfigured to 166 seats with completion of the reconfiguration of our MD-80 aircraft serving Orlando expected to take place during the fourth quarter of 2012.

In July 2012, we implemented a cash discount to customers paying with debit cards in an effort to offer lower ticket prices and drive higher debit card usage to reduce our transaction costs. The higher debit card usage contributed to lower transaction processing costs in the third quarter 2012.


Aircraft

Operating Fleet

As of September 30, 2012, our total aircraft in service consisted of 58 MD-80
aircraft and four Boeing 757-200 aircraft, with one of our Boeing 757-200 being
placed into service during third quarter 2012. The following table sets forth
the number and type of aircraft in service and operated by us as of the dates
indicated:

                   As of September 30, 2012                                As of December 31, 2011                                 As of September 30, 2011
               Own (a)(b)               Lease        Total (b)       Own (a)(b)               Lease (c)         Total(b)       Own (a)(b)               Lease         Total(b)

MD82/83/88s             56                     -             56               52                         2             54               48                     2             50
MD87s (d)                2                     -              2                2                         -              2                2                     -              2
B757-200                 4                     -              4                1                         -              1                1                     -              1
Total                   62                     -             62               55                         2             57               51                     2             53



(a) Does not include aircraft owned, but not added to our operating fleet as of the date indicated.

(b) Includes MD-80 aircraft (MD-82/83/88s) modified to a 166-seat configuration: September 30, 2012 - 36; December 31, 2011 - seven; September 30, 2011 - one.

(c(c((c) In December 2011, we exercised purchase options on two MD-80 aircraft and took ownership of these aircraft in January 2012.

(d) Used almost exclusively for fixed fee flying.

Boeing 757-200 Aircraft

As of September 30, 2012, we owned six Boeing 757-200 aircraft, of which four were in revenue service and two were leased out to third parties on a short-term basis. We expect the remaining two aircraft currently leased out to be returned off lease during the fourth quarter of 2012 and added to revenue service by the first quarter of 2013.

Network

At September 30, 2012, we offered scheduled service on 176 routes primarily into
our six major leisure destinations. We now serve 78 cities in 40 states
(including small cities and destinations) through our route network. The
following shows the number of destinations and small cities served, and routes
operated as of the dates indicated (includes cities served seasonally):

                                               As of September                              As of September
                                                     30,            As of December 31,            30,
                                                    2012                   2011                  2011

Leisure destinations                                        12                       11                  11
Small cities served                                         66                       65                  61
Total cities served                                         78                       76                  72
Total routes                                               176                      171                 159

Trends and Uncertainties

Our scheduled service base fare decreased year-over-year in both the second and third quarters of 2012 as we added significant capacity in both quarters. Our ancillary revenue performance has allowed us to offset current softness in the base fare environment and increase total fare levels. Our total average fare increased year-over-year by 3.4% to $128.98 for the nine months ended September 30, 2012. In the third quarter of 2012, we achieved our 11th consecutive quarter of year-over-year increases in total average fare. We grew ancillary revenue to our quarterly record of $42.64 per passenger during third quarter 2012, driven by the introduction of a charge for carry-on bin bags and with growth in other ancillary offerings such as the sale of third party products. If base fares continue to languish, we hope to maintain total fare levels with strong performance from existing ancillary products and with the introduction of new products in the future.

In July 2012, we announced our intention to acquire 19 Airbus A319 aircraft with 156 seats each. In August 2012, we signed eight-year leases for nine of these aircraft with expected deliveries between the fourth quarter of 2012 and the second quarter of 2015. We are in the process of negotiating a definitive agreement to purchase the other 10 A319 aircraft. We believe the introduction of the A319 aircraft into our operating fleet will support our future growth opportunities and is a continuation of our existing business model. We believe the environment to acquire the Airbus 319 aircraft presents similar opportunities as we experienced when we began adding MD-80 aircraft to our fleet many years ago as other carriers are seeking to replace existing A319 aircraft with newer technology aircraft. We believe the additional cost of ownership of these aircraft will be more than offset by cost savings from fuel efficiency and reduction in maintenance costs when compared to our MD-80 aircraft.


We continue to expand our route network and extend our national footprint with the focus on serving residents of small cities and exploring new opportunities. Our national footprint is well balanced and is not dependent on any one particular market or geographic region. We currently provide service on two routes to Honolulu, and we have announced commencement of service on eight other routes to Hawaii (one of which is to Maui) to begin in November 2012 and February 2013. We have also announced the commencement of service on 15 other routes within the continental U.S. to begin in fourth quarter 2012 and first quarter 2013. Based on our current published schedule through April 15, 2013, we expect to operate 199 routes into our leisure destinations, including service from 76 small cities.

Oil prices stabilized during the third quarter of 2012. Our system average cost per gallon of $3.18 for the nine months ended September 30, 2012 is up 3.6% year-over-year and up 6.7% compared to the full year system average cost per gallon of 2008, when crude oil prices reached peak levels. However, our fuel cost per ASM declined in the third quarter 2012 as the higher capacity Boeing 757-200 and additional seats from our MD-80 seat reconfiguration program have provided us additional capacity over which to spread our fuel costs. For the three months ended September 30, 2012, compared to the same period in the prior year, our ASMs per gallon of fuel increased 7.1%, as a result of the additional capacity from these seats. As we introduce the A319 aircraft into revenue service in 2013 and after, we expect further increases in our ASMs per gallon of fuel as a result of fuel efficiency of this aircraft type.

We continue to make progress on our automation projects including the upgrade of our current system platform and the transfer to our new website. We are currently utilizing our new website for a portion of our website traffic and expect to fully integrate all our traffic to the website during the fourth quarter 2012. We expect the continued improvement to our website and other automation enhancements will create additional revenue opportunities by allowing us to capitalize on customer loyalty with additional product offerings.

In August 2012, we received results from the union vote of our pilots who have elected for representation by the International Brotherhood of Teamsters, Airline Division. We continue to negotiate with the TWU for an agreement with our flight attendants. If we are unable to reach agreement on the terms of collective bargaining agreements in the future, or we experience wide-spread employee dissatisfaction, we could be subject to work slowdowns or stoppages. Any of these events could have an adverse effect on our future results.

RESULTS OF OPERATIONS

Comparison of three months ended September 30, 2012 to three months ended
September 30, 2011

The table below presents our operating expenses as a percentage of operating
revenue for the periods indicated:

                                          Three months ended September 30,
                                            2012                     2011

      Total operating revenues                   100.0 %                  100.0 %
      Operating expenses:
      Aircraft fuel                               41.5                     43.8
      Salaries and benefits                       15.2                     15.4
      Station operations                           8.6                      9.0
      Maintenance and repairs                      8.4                     11.0
      Sales and marketing                          1.9                      2.6
      Aircraft lease rentals                         -                      0.2
      Depreciation and amortization                7.2                      5.6
      Other                                        3.9                      3.7
      Total operating expenses                    86.7 %                   91.3 %
      Operating margin                            13.3 %                    8.7 %


Operating Revenue

Our operating revenue increased 13.2% to $216.9 million for the three months ended September 30, 2012, up from $191.5 million for the same period of 2011 primarily due to a 30.7% increase in ancillary revenue and a 6.0% increase in scheduled service revenue. Scheduled service revenue and ancillary revenue increases were primarily driven by a 9.4% increase in scheduled service passengers and a 3.6% increase in our total average fare from $120.63 to $124.94.

Scheduled service revenue. Scheduled service revenue increased 6.0% to $133.1 million for the three months ended September 30, 2012, up from $125.5 million in the same period of 2011. The increase was primarily driven by a 9.4% increase in the number of scheduled service passengers, offset by a 3.1% reduction in the scheduled service average base fare for the three months ended September 30, 2012, compared to the same period of 2011. Passenger growth was driven by a 5.1% increase in the average number of passengers per departure and a 4.5% increase in the number of scheduled service departures. The increase in average number of passengers per departure was attributable to a 7.3% increase in average number of scheduled service seats per departure as a result of the additional seats from our Boeing 757-200 aircraft and the MD-80 seat reconfiguration program, offset by a 2.1% decrease in our scheduled service load factor.

Ancillary revenue. Ancillary revenue increased 30.7% to $69.0 million for the three months ended September 30, 2012, up from $52.7 million in the same period of 2011, driven by a 19.5% increase in ancillary revenue per scheduled passenger from $35.69 to $42.64 and a 9.4% increase in scheduled service passengers. The increase in our ancillary revenue per scheduled service passenger of $6.95 was primarily attributable to increased bag fees from the implementation of a fee for carry-on bags in April 2012. The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

                                                    Three months ended
                                                       September 30,
                                                   2012             2011           % Change
Air-related charges                            $      37.05      $     30.38             22.0 %
Third party products                                   5.59             5.31              5.3 %
Total ancillary revenue per scheduled
service passenger                              $      42.64      $     35.69             19.5 %

The following table details the calculation of ancillary revenue from third party products. Third party products consist of revenue from the sale of hotel rooms, ground transportation (rental cars and hotel shuttle products), attraction and show tickets, and fees we receive from other merchants selling products through our website:

                                                   Three months ended
                                                      September 30,
(in thousands except night and day amounts)       2012            2011           % Change
Gross ancillary revenue - third party
products                                       $    28,311     $    27,315              3.6 %
Cost of goods sold                                (18,475)         (18,395 )            0.4 %
Transaction costs (a)                                (800)          (1,078 )         (25.8) %
Ancillary revenue - third party products       $     9,036     $     7,842             15.2 %
As percent of gross ancillary revenue -
third party                                           31.9 %          28.7 %            3.2 pp
Hotel room nights                                  163,401         164,593            (0.7) %
Rental car days                                    183,278         149,450             22.6 %



(a) Includes payment expenses and travel agency commissions

During the three months ended September 30, 2012, we generated gross revenue of $28.3 million from third party products, which resulted in net revenue of $9.0 million. A major contributor to our 15.2% increase in third party products revenue was the sale of rental car days, which grew year-over-year by 22.6% and outpaced our scheduled service passenger growth of 9.4%.

Fixed fee contract revenue. Fixed fee contract revenue increased 24.9% to $12.1 million for the three months ended September 30, 2012, from $9.7 million in the same period of 2011. The increase in fixed fee contract revenue is a result of a 20.0% higher per-block hour rate and a 4.1% increase in total fixed fee block hours flown. Fixed fee flying during the quarter under our agreement with Caesars Entertainment, Inc. ("Caesars") and under ad-hoc agreements were at a higher per-block hour rate than in the prior year. The total number of fixed fee block hours increased primarily due to ad-hoc flying block hours, which was offset by a reduction from our longer term agreements with Caesars and Peppermill Resorts, Inc. The long-term agreement with Caesars will expire at the end of 2012.


Other revenue. We generated other revenue of $2.7 million for the three months ended September 30, 2012 compared to $3.5 million in the same period of 2011, primarily from lease revenue for aircraft and flight equipment. In the first quarter of 2011, we leased three Boeing 757-200 aircraft to third parties on a short-term basis. In April 2012, one of these leased out aircraft was returned to us. The expected return dates of the remaining two leased out aircraft are in the fourth quarter of 2012.

Operating Expenses

Our operating expenses increased only 7.6% to $188.1 million for the three months ended September 30, 2012 compared to $174.8 million in the same period of 2011 despite a 14.7% increase in system capacity. We primarily evaluate our expense management by comparing our costs per passenger and per ASMs across different periods, which enables us to assess trends in each expense category.

The following table presents operating expense per passenger for the indicated periods ("per-passenger costs"). The table also presents operating expense per passenger, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by the number of passengers carried. This statistic provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility. Both the cost and availability of fuel are subject to many economic and political factors beyond our control.

                                                       Three Months Ended
                                                          September 30,             Percentage
                                                      2012             2011           Change
Aircraft fuel                                     $       52.07     $     53.28          (2.3) %
Salary and benefits                                       19.03           18.70              1.8
Station operations                                        10.77           10.87            (0.9)
Maintenance and repairs                                   10.60           13.35           (20.6)
Sales and marketing                                        2.43            3.12           (22.1)
Aircraft lease rentals                                        -            0.19          (100.0)
Depreciation and amortization                              9.09            6.76             34.5
Other                                                      4.93            4.44             11.3
Operating expense per passenger                   $      108.92     $    110.71            (1.6)
Operating expense per passenger, excluding fuel   $       56.85     $     57.43           (1.0)%

The following table presents unit costs, defined as Operating CASM, for the indicated periods. The table also presents Operating CASM, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by ASMs. As on a per passenger basis, excluding fuel on a per ASM basis provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility.

                                         Three Months
                                     Ended September 30,       Percentage
                                      2012           2011        Change
Aircraft fuel                            4.92         5.28        (6.8)%
Salary and benefits                      1.80          1.85          (2.7)
Station operations                       1.02          1.08          (5.6)
Maintenance and repairs                  1.00          1.32         (24.2)
Sales and marketing                      0.23          0.31         (25.8)
Aircraft lease rentals                      -          0.02        (100.0)
Depreciation and amortization            0.86          0.67           28.4
Other                                    0.46          0.44            4.5
Operating expense per ASM (CASM)        10.29        10.97        (6.2)%
CASM, excluding fuel                     5.37         5.69        (5.6)%

Aircraft fuel expense. Aircraft fuel expense increased $5.8 million, or 6.9%, to $89.9 million for the three months ended September 30, 2012, up from $84.1 million in the same period of 2011. This change was due to a 7.1% increase in gallons consumed from 27.0 million to 28.9 million, as our average fuel cost per gallon remained relatively flat from $3.12 to $3.11. The increase in gallons consumed is attributable to a 4.4% increase in our total system departures and a 1.8% increase in total system average stage length. On a per passenger basis, our fuel costs decreased 2.3% from $53.28 to $52.07 as the percentage increase in scheduled service passengers outpaced the percentage increase in this line item.


Salary and benefits expense. Salary and benefits expense increased 11.3% to $32.9 million for the three months ended September 30, 2012 up from $29.5 million in the same period of 2011. The increase is primarily attributable to a 14.9% increase in the number of full-time equivalent employees offset by a 3.1% reduction in salary and benefits expense per full-time equivalent employee. The number of full-time equivalent employees increased from 1,545 at September 30, 2011 to 1,775 at September 30, 2012 to support the growth of our aircraft fleet, our ongoing significant information technology enhancements and other company growth activities. The decrease in salary and benefits expense per full-time equivalent employee was attributable to lower pilot base pay scale in effect during the quarter. The pilot base pay scale is variable based on our operating margin which was lower in the prior periods on which the quarter's pilot base pay scale was based. Additionally, the increase in our full-time equivalent employees was in line with the growth of our aircraft fleet with our full-time equivalent employees per aircraft comparable between periods at 29.2 for the three months ended September 30, 2011 and 28.6 for the three months September 30, 2012.

Station operations expense. Station operations expense increased 8.4% to $18.6 million for the three months ended September 30, 2012 compared to $17.2 million in the same period of 2011, as a result of a 4.4% increase in system departures and a 3.9% increase in station operations expense per departure. The increase in station operations expense per departure was attributable to increased fees at several airports where we operate.

Maintenance and repairs expense. Maintenance and repairs expense decreased 13.1% to $18.3 million for the three months ended September 30, 2012, compared to $21.1 million in the same period of 2011 despite an 18.4% increase in average number of aircraft and a 14.7% increase in ASMs. The decrease is primarily attributable to a reduction in engine overhauls, offset by an increase in heavy airframe maintenance events. We experienced $4.2 million more in engine overhaul expenses during the third quarter 2011 as a result of our 2011 engine overhaul program. Throughout 2011, we made a substantial investment to increase the reliability and reduce the overall age of our engine portfolio. We believe this has contributed significantly to our lower maintenance and repairs expense during the quarter.

Sales and marketing expense. Sales and marketing expense decreased 14.8% to $4.2 million for the three months ended September 30, 2012, compared to $4.9 million for the same period of 2011 despite a 9.4% increase in number of scheduled service passengers. Sales and marketing expense per passenger declined by 22.1% from $3.12 to $2.43 primarily due to a reduction in payment processing costs per passenger as a result of recently effective debit card legislation and increased debit card usage, along with a reduction in advertising expenses.

Aircraft lease rentals expense. We had no aircraft lease rentals expense for the three months ended September 30, 2012 compared to $0.3 million in the same period of 2011. In early January 2012, we took ownership of two MD-80 aircraft for which we exercised purchase options in December 2011 and which we were operating under operating lease agreements. Subsequent to taking ownership of these two aircraft, we did not have any in-service aircraft under operating leases in 2012.

Depreciation and amortization expense. Depreciation and amortization expense increased to $15.7 million for the three months ended September 30, 2012, from $10.7 million for the same period of 2011. The increase was driven by an 18.4% increase in the average number of operating aircraft, MD-80 seat reconfiguration costs, and the acceleration of depreciation from a change in estimate of useful lives for a limited number of MD-80 aircraft we expect to retire in 2013. As of September 30, 2012, we owned 62 aircraft in service (including four Boeing . . .

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