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ALGT > SEC Filings for ALGT > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for ALLEGIANT TRAVEL CO


8-May-2013

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 month periods ended March 31, 2013 and 2012. Also discussed is our financial position as of March 31, 2013 and December 31, 2012. You should read this discussion in conjunction with our unaudited 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, 2012. 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.

First quarter 2013 results

During the first quarter of 2013, we achieved a 19.2% operating margin resulting in net income of $31.9 million on operating revenues of $273.0 million. Our first quarter 2013 operating margin, the highest since the first quarter of 2010, resulted in record earnings per share of $1.65 per share on a fully diluted basis. Our performance in the first quarter was driven by our highest quarterly ancillary revenue per passenger of $47.45, a 25.7% increase compared to the prior year, and a year-over-year reduction in our fuel unit costs of 6.0% attributable to our increased available seat miles ("ASMs") per gallon resulting from our use of larger gauge aircraft.

We grew our average number of aircraft in revenue service by 10.1% from 57.5 aircraft during first quarter 2012 to 63.3 aircraft during first quarter 2013. The increase in average number of aircraft and the combination of increased seats in our MD-80 fleet, greater utilization of our Boeing 757-200 aircraft with 223 seats and a 4.9% increase in our scheduled service average stage length drove a 17.0% increase in ASMs year-over-year.


Our total operating revenues in the first quarter of 2013 increased $35.1 million or 14.8% year-over-year due to an 8.4% increase in scheduled service passengers and a 9.3% increase in total average fare to $144.99. We grew our ancillary revenue per passenger year-over-year by 25.7% which was primarily attributable to an increase in charges for bags resulting from the implementation of a new carry-on bag fee and new boarding procedures implemented in second quarter 2012. Our capacity growth, driven by an increase in system average stage length and larger gauge aircraft, continues to pressure our unit revenues. Despite a scheduled service revenue per ASM ("PRASM") year-over-year reduction of 4.9% from 9.04 to 8.60, our total scheduled service revenue per ASM ("TRASM") increased 1.2% from 12.64 to 12.79, as a result of our ancillary revenue performance.

Our operating expense per ASM ("CASM") decreased 3.0% from 10.52 for the three months ended March 31, 2012 to 10.20 for the same period of 2013. Our fuel efficiency trends continued into the first quarter with a decline in our year-over-year fuel cost per ASM, as the Boeing 757-200 aircraft and additional seats in our MD-80 aircraft provided us additional capacity over which to spread our fuel costs. Our ASMs per gallon increased 9.6% for the three months ended March 31, 2013 compared to the same period in 2012. Our fuel efficiency drove a year-over-year reduction in CASM as non-fuel unit costs were flat. Although our non-fuel costs were flat year-over-year, we experienced a 15.5% decrease in maintenance and repairs expense with less engine repair expense offset by increases in other non-fuel expense line items including a 41.1% increase in depreciation and amortization expense driven by changes in our owned fleet.

As of March 31, 2013, we had $431.8 million in unrestricted cash and investment securities. During the quarter, we were able to grow our unrestricted cash position by $79.1 million, or 22.4% as cash generated from operations of $107.8 million more than offset $23.2 million in stock repurchases.

During the quarter, we completed our MD-80 aircraft seat reconfiguration program which began during the third quarter of 2011. As of March 31, 2013, we operated 51 MD-80 aircraft with 166 seats in revenue service. As we have previously announced, we plan to retire seven MD-80 aircraft which have not been reconfigured to 166 seats. We retired one during the first quarter of 2013, with the six remaining to be retired through the first quarter of 2014.

During the quarter, we successfully added Airbus A320 family aircraft to our operating certificate. We introduced our first Airbus aircraft into revenue service during the quarter. We incurred costs related to the introduction of this aircraft family along with additional training and pre-operating costs which had an impact on other operating expenses.

Aircraft

Operating Fleet

As of March 31, 2013, our total aircraft in service consisted of 57 MD-80
aircraft, six Boeing 757-200 aircraft, and one Airbus A319 aircraft. During the
first quarter of 2013, we placed one owned Boeing 757-200 aircraft and one
leased Airbus A319 aircraft into service. In addition, we retired one MD-80
aircraft in January 2013. The following table sets forth the number and type of
aircraft in service and operated by us as of the dates indicated:

                               As of March 31, 2013                            As of December 31, 2012                           As of March 31, 2012
                   Own (a)(b)         Lease (b)       Total (a)       Own (a)(b)         Lease         Total (a)       Own (a)(b)         Lease        Total (a)

MD82/83/88s                 56                 -              56               56              -               56               56              -              56
MD87s (c)                    1                 -               1                2              -                2                2              -               2
B757-200                     6                 -               6                5              -                5                1              -               1
A319                         -                 1               1                -              -                -                -              -               -
Total                       63                 1              64               63              -               63               59              -              59



(a) Includes MD-80 aircraft (MD-82/83/88s) modified to a 166-seat configuration: March 31, 2013 - 51; December 31, 2012 - 45; March 31, 2012 - 17.

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

(c(c((c) Used almost exclusively for fixed fee flying.


Airbus aircraft

In August 2012, we entered into lease agreements for nine Airbus A319 aircraft with expected deliveries through the second quarter of 2015. We accepted delivery of two of these aircraft during the first quarter of 2013. We placed one of these two aircraft into revenue service in March 2013. In April 2013, we placed our second A319 aircraft into revenue service.

In December 2012, we entered into purchase agreements for seven A320 aircraft. We also have certain rights with respect to the purchase of two additional A320 aircraft from sellers under our existing agreements. We expect to take delivery of the seven A320 aircraft under contract during 2013 and expect they will be placed into revenue service in the fourth quater. The additional two aircraft are currently expected to be acquired in 2014.

In April 2013, we entered into a purchase agreement for one A319 aircraft. We currently expect to place this aircraft into revenue service in the third quarter of 2013.

The following table provides the expected number of operating aircraft in service at the end of the respective quarter based on scheduled deliveries of aircraft and MD-80 announced retirements:

                         June 30,       September 30,      December 31,
                           2013             2013               2013
MD-80 (166 seats)               51                  51                51
MD-80 (130/150 seats)            5                   1                 1
B757-200                         6                   6                 6
A319                             2                   3                 3
A320                             -                   -                 7
Total                           64                  61                68

Network

At March 31, 2013, we offered scheduled service on 198 routes into our 13 leisure destinations. We now serve 88 cities in 37 states (including small cities and destinations) in our route network. Network changes during the quarter included the addition of three new routes to serve Honolulu, Hawaii. We began our Hawaii service in July 2012 and as of March 31, 2013 we now serve 10 routes into Hawaii, with nine routes serving Honolulu and one route serving Maui. Also, with our previously announced expansion out of Punta Gorda, Florida, we added three new routes during the quarter, increasing our total routes to serve Punta Gorda to 11.

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 March 31,       As of December 31,       As of March 31,
                              2013                    2012                   2012

 Leisure destinations                  13                       13                    11
 Small cities served                   75                       74                    65
 Total cities served                   88                       87                    76
 Total routes                         198                      195                   171

Trends and Uncertainties

Oil prices remain stable during the first quarter of 2013. Our system average cost per gallon of $3.37 for the three months ended March 31, 2013 is up 2.7% year-over-year and was the highest quarterly average cost per gallon we experienced since the second quarter of 2008, when crude oil prices reached peak levels. We have made significant strides in fuel efficiency as additional seats in our MD-80 aircraft and our larger gauge Boeing 757-200 aircraft have driven a 9.6% year-over-year increase in ASMs per gallon. This resulted in a 6.0% year-over-year decrease in fuel cost per ASM. As we continue to add Airbus aircraft into our scheduled service network, we expect further fuel efficiencies given the newer engine technology of these Airbus aircraft. Long-term fuel costs remain uncertain and fuel cost volatility would materially impact future operating costs.

During 2013, we expect to accept deliveries of Airbus A320 series aircraft under operating lease agreements and purchase agreements. We will incur significant capital expenditures over the remaining quarters in 2013 as we accept deliveries of the A320 aircraft under purchase agreements and prepare them to enter our operating fleet. We believe the acquisition of these Airbus aircraft and the use of all six of our Boeing 757-200 aircraft in service will meet our aircraft needs to support our planned growth in 2013 and 2014 despite the retirement of our MD-80 aircraft not being reconfigured to 166 seats.


We continue to make substantial progress on our automation projects including the migration to our new booking engine and distribution platform. We successfully converted 100% of our customer web traffic to our new booking engine in November 2012. Although enhancements to our technology infrastructure will continue to require a significant capital investment, we believe these efforts will provide additional revenue opportunities by allowing us to capitalize on customer loyalty with additional product offerings.

Looking ahead, our fleet growth and larger gauge aircraft will provide ASM growth without departure growth. We expect to continue aggressive capacity management in our markets to maintain acceptable fares and profits. We are focused on operating a higher percentage of our flights during peak windows and lower percentage of flights during off-peak windows. For example, during the third quarter of 2013, our published schedule reflects our decision to seasonally discontinue all Hawaii routes with the exception of Las Vegas and two Bellingham routes. We believe this approach, along with our ASM growth, primarily in our Florida markets, will contribute to the achievement of our profitability goals in the current operating environment.

RESULTS OF OPERATIONS

Comparison of three months ended March 31, 2013 to three months ended March 31,
2012

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

                                            Three months ended March 31,
                                              2013                2012

          Total operating revenues                100.0 %             100.0 %
          Operating expenses:
          Aircraft fuel                            39.7                43.1
          Salaries and benefits                    15.1                14.0
          Station operations                        7.1                 8.2
          Maintenance and repairs                   6.6                 9.0
          Sales and marketing                       2.1                 2.3
          Aircraft lease rentals                    0.1                   -
          Depreciation and amortization             6.2                 5.0
          Other                                     3.9                 3.1
          Total operating expenses                 80.8 %              84.7 %
          Operating margin                         19.2 %              15.3 %

Operating Revenue

Our operating revenue increased 14.8% to $273.0 million for the three months ended March 31, 2013, up from $237.9 million for the same period of 2012 primarily due to a 36.2% increase in ancillary revenue and an 11.3% increase in scheduled service revenue. Scheduled service revenue and ancillary revenue increases were primarily driven by increases in both base fare and ancillary revenue per passenger (contributing to a 9.3% increase in our total average fare from $132.70 to $144.99) and an 8.4% increase in scheduled service passengers.

Scheduled service revenue. Scheduled service revenue increased 11.3% to $179.9 million for the three months ended March 31, 2013, up from $161.6 million in the same period of 2012. The increase was primarily driven by an 8.4% increase in the number of scheduled service passengers and a 2.7% increase in the scheduled service average base fare for the three months ended March 31, 2013, compared to the same period of 2012. Passenger growth was attributable to a 7.2% increase in the average number of passengers per departure and a 1.4% increase in the number of scheduled service departures. During the quarter, we completed our MD-80 seat reconfiguration program, with 51 aircraft operating with 166 seats in our scheduled service network as of March 31, 2013, compared to 17 aircraft with 166 seats as of March 31, 2012. The first quarter of 2013 was also the first quarter of flying with all six of our Boeing 757-200 aircraft in our operating fleet, as we placed our sixth 757-200 aircraft into service in early January 2013.

Ancillary revenue. Ancillary revenue increased 36.2% to $87.5 million for the three months ended March 31, 2013, up from $64.3 million in the same period of 2012, driven by a 25.7% increase in ancillary revenue per scheduled passenger from $37.75 to $47.45 and an 8.4% increase in the number of scheduled service passengers. The increase in our ancillary revenue per scheduled service passenger of $9.70 was primarily attributable to the implementation of a new carry-on bag fee in April 2012 and a higher take rate on checked bags. The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:


                                                     Three months ended
                                                          March 31,
                                                    2013             2012         % Change
Air-related charges                              $     41.64      $    32.39            28.6 %
Third party products                                    5.81            5.36             8.4 %
Total ancillary revenue per scheduled service
passenger                                        $     47.45      $    37.75            25.7 %

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
                                                              March 31,
(in thousands except night and day amounts)              2013           2012         % Change
Gross ancillary revenue - third party products        $   34,327     $   32,868             4.4 %
Cost of goods sold                                      (22,962)        (22,443 )           2.3 %
Transaction costs (a)                                      (648)         (1,303 )        (50.3) %
Ancillary revenue - third party products              $   10,717     $    9,122            17.5 %
As percent of gross ancillary revenue - third party         31.2 %         27.8 %           3.4 pp
Hotel room nights                                        156,466        184,844          (15.4) %
Rental car days                                          250,099        209,338            19.5 %



(a) Includes payment expenses and travel agency commissions

During the three months ended March 31, 2013, we generated gross revenue of $34.3 million from the sale of third party products, which resulted in net revenue of $10.7 million. A major contributor to our 17.5% increase in net third party products revenue was the result of margin performance on the sale of these products, primarily hotels and the sale of car rental days, and lower transaction costs. The increase of 19.5% in sale of rental car days was driven by an increase in scheduled service passengers to those markets where more rental car days are typically sold, such as Florida and Phoenix, and increased promotions with our rental car partner.

Fixed fee contract revenue. Fixed fee contract revenue decreased 46.1% to $5.2 million for the three months ended March 31, 2013, from $9.6 million in the same period of 2012. The decrease was driven by a 62.1% reduction in fixed fee block hours flown, slightly offset by a higher per-block hour rate. The significant reduction in our fixed fee block hours flown was primarily due to the expiration of our contract with Caesars Entertainment, Inc. in December 2012.

Other revenue. We generated other revenue of $0.3 million for the three months ended March 31, 2013 compared to $2.3 million in the same period of 2012, primarily from lease revenue for aircraft and flight equipment. We leased out three Boeing 757-200 aircraft to third parties on a short-term basis during the three months ended March 31, 2012, while no aircraft were leased out during the same period in 2013.

Operating Expenses

Our operating expenses increased 9.5% to $220.6 million for the three months ended March 31, 2013 compared to $201.5 million in the same period of 2012 despite a 12.9% 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
                                                           March 31,               Percentage
                                                      2013             2012          Change
Aircraft fuel                                     $       57.70     $    56.93            1.4 %
Salary and benefits                                       21.89          18.49             18.4
Station operations                                        10.29          10.86            (5.2)
Maintenance and repairs                                    9.64          11.93           (19.2)
Sales and marketing                                        3.09           3.03              2.0
Aircraft lease rentals                                     0.16              -               NM
Depreciation and amortization                              8.98           6.65             35.0
Other                                                      5.56           4.14             34.3
Operating expense per passenger                   $      117.31     $   112.03             4.7%
Operating expense per passenger, excluding fuel   $       59.62     $    55.10             8.2%

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
                                                  March 31,           Percentage
                                              2013          2012        Change
        Aircraft fuel                            5.02        5.34        (6.0)%
        Salary and benefits                      1.90         1.74            9.2
        Station operations                       0.89         1.02         (12.7)
        Maintenance and repairs                  0.84         1.12         (25.0)
        Sales and marketing                      0.27         0.28          (3.6)
        Aircraft lease rentals                   0.01            -             NM
        Depreciation and amortization            0.78         0.62           25.8
        Other                                    0.49         0.40           22.5
        Operating expense per ASM (CASM)        10.20       10.52        (3.0)%
        CASM, excluding fuel                     5.18        5.17          0.2%

Aircraft fuel expense. Aircraft fuel expense increased 5.9% to $108.5 million for the three months ended March 31, 2013, up from $102.4 million in the same period of 2012. This change was due to a 2.9% increase in gallons consumed from 31.2 million to 32.2 million and a 2.7% increase in our average fuel cost per gallon from $3.28 to $3.37. The increase in gallons consumed is attributable to our larger gauge aircraft and a 7.8% increase in total system average stage length, offset by a 5.1% reduction in total system departures. Although we produced a 17.0% increase in scheduled service ASMs during the quarter, we required only 7.5% more gallons for scheduled service operations as a result of the use of larger gauge aircraft (148 passengers per departure for the three months ended March 31, 2012 compared to 138 passengers per departure in same period of 2012) and a 4.9% increase of scheduled service average stage length.

Salary and benefits expense. Salary and benefits expense increased 23.7% to $41.2 million for the three months ended March 31, 2013 up from $33.3 million in the same period of 2012. The increase is primarily attributable to 10.8% increase in the number of full-time equivalent employees, adjustments to our pilot pay scales as a result of our increased profitability and increased stock compensation and bonus expense resulting from our higher profitability. The increase in the number of average full-time equivalent employees was driven by a higher headcount for flight attendants as we increased the gauge of our aircraft, and the hiring of additional technology staff to support our ongoing commercial activities. The first quarter 2013 marked the first full quarter of higher pilot pay rates for our pilot group. Pilot compensation is tied to our overall margin performance, and has been since May 2010. In November 2012, our margin performance resulted in a pay increase for all pilots. The next measurement periods for our pilot group are May and November 2013.

Station operations expense. Station operations expense remained relatively flat at $19.3 million for the three months ended March 31, 2013 compared to $19.5 million in the same period of 2012, as a result of a 5.1% reduction in system departures, offset by a 4.4% 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. We continue to experience cost pressures in the major destinations we service, primarily in Las Vegas and Honolulu, where we have limited ability to reduce costs.

Maintenance and repairs expense. Maintenance and repairs expense decreased 15.5% to $18.1 million for the three months ended March 31, 2013, compared to $21.5 million in the same period of 2012 despite a 10.1% increase in average number of aircraft. The decrease was primarily attributable to a $2.8 million reduction in engine overhaul expense from the prior year. The first quarter 2012 marked the completion of a substantial engine refurbishment program which decreased the overall age of our engine portfolio.

Sales and marketing expense. Sales and marketing expense increased 6.4% to $5.8 million for the three months ended March 31, 2013, compared to $5.5 million in the same period of 2012. Since the introduction of our debit card discount option in the second quarter 2012 we have experienced an increase in debit card usage as a form of payment. This increase in debit card take rate has resulted in a reduction of our transaction costs as a percent of scheduled service revenue. This trend continued into the first quarter 2013 as our scheduled service and ancillary revenues increased 18.4% which outpaced our 6.4% increase in sales and marketing expense.


Aircraft lease rentals expense. We had $0.3 million in aircraft lease rentals expense for the three months ended March 31, 2013 and no expense in the same . . .

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