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ALGT > SEC Filings for ALGT > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for ALLEGIANT TRAVEL CO


7-Aug-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 and six months ended June 30, 2013 and 2012. Also discussed is our financial position as of June 30, 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.

Second quarter 2013 results

During the second quarter of 2013, we achieved a 16.8% operating margin resulting in net income of $25.7 million on operating revenues of $255.8 million. We increased net income by 2.0% year-over-year achieving $1.34 earnings per share on


a fully diluted basis. Results for the second quarter 2013 were driven by a 20.2% increase in scheduled service available seat miles ("ASMs"), a 10.8% increase in scheduled service passengers, our ancillary revenue per passenger performance and a reduction in fuel cost per ASM.
We increased our average number of aircraft in revenue service by 8.9% from 59.3 aircraft during second quarter 2012 to 64.6 aircraft during second quarter 2013. The increase in average number of aircraft and the combination of increased seats in our MD-80 fleet, use of six Boeing 757-200 aircraft during the second quarter 2013 compared to use of two for the majority of the same period of 2012 and a 6.3% increase in our scheduled service average stage length drove a 14.6% increase in total ASMs year-over-year.

Our total operating revenues in the second quarter of 2013 increased $24.7 million or 10.7% year-over-year due to a 10.8% increase in scheduled service passengers and a 4.0% increase in total average fare to $134.25. In addition, we increased our ancillary revenue per passenger by 16.6% primarily from the implementation of a carry-on bag fee, a higher take rate on checked bags and an increase in advance seat assignments. Operating revenue per ASM ("RASM"), which declined 3.4% from 12.41 to 11.99, was impacted by an increase in system average stage length and larger gauge aircraft.

Our operating expense per ASM ("CASM") decreased 1.8% from 10.16 for the three months ended June 30, 2012 to 9.98 for the same period of 2013. Our fuel trends continued into the second quarter with a decline of 10.1% in our year-over-year fuel cost per ASM. Our ASMs per gallon increased 9.4% for the three months ended June 30, 2013 compared to the same period in 2012, as we operated larger gauge Boeing 757-200 aircraft and additional seats in our MD-80 fleet. In addition, we experienced a reduction in refining crack spreads which drove our average fuel cost per gallon from $3.14 for the three months ended June 30, 2012 to $3.08 for the same period in 2013. Non-fuel cost pressures during the quarter, primarily from depreciation and amortization expense and maintenance and repairs expense, resulted in a 6.3% increase in CASM, excluding fuel, which offset the effect of the improved fuel cost per ASM performance.

As of June 30, 2013, we had $391.3 million in unrestricted cash and investment securities. Our liquidity position continues to provide us opportunities to invest in the growth of our fleet, with $63.9 million in capital expenditures during the second quarter. During the quarter, we purchased and took delivery of our first two A320 aircraft under existing purchase agreements and purchased and took delivery of one A319 aircraft.

In April 2013, the Board of Directors increased the authority under our stock repurchase program to $100.0 million, During the second quarter, we repurchased 106,190 shares at an average cost of $91.37 per share for a total expenditure of $9.7 million.

During the quarter, we entered into a contract extension with Peppermill Casinos, Inc. for fixed fee flying for its casino properties in Wendover, Nevada.

Aircraft

Operating Fleet

As of June 30, 2013, our total aircraft in service consisted of 56 MD-80
aircraft, six Boeing 757-200 aircraft, and two Airbus A319 aircraft. During the
second quarter of 2013, we placed one leased Airbus A319 aircraft into service
and retired one MD-80 aircraft. The following table sets forth the number and
type of aircraft in service and operated by us as of the dates indicated:

                       As of June 30, 2013                 As of December 31, 2012                As of June 30, 2012
                   Own                                                                        Own
                  (a)(b)     Lease     Total (a)     Own (a)(b)      Lease     Total (a)     (a)(b)     Lease     Total (a)
MD82/83/88s          55         -            55          56             -            56         56         -            56
MD87s (c)             1         -             1           2             -             2          2         -             2
B757-200              6         -             6           5             -             5          3         -             3
A319                  -         2             2           -             -             -          -         -             -
Total                62         2            64          63             -            63         61         -            61


(a) Includes the following number of MD-80 aircraft (MD-82/83/88s) modified to a 166-seat configuration: June 30, 2013 - 51; December 31, 2012 - 45; June 30, 2012 - 26.
(b) Does not include aircraft owned, but not added to our operating fleet as of the date indicated.
(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. 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 the sellers under these existing agreements. Of the seven A320 aircraft under contract, two were acquired during the second quarter 2013 and five are expected to be acquired in the second half of 2013. During the quarter, we leased out one of these aircraft on a short-term basis to a third party with a lease expiration in September 2013. We expect to place all seven A320 aircraft into revenue service in fourth quarter 2013.

In April 2013, we entered into a purchase agreement for one A319 aircraft. We 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:

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

Network

At June 30, 2013, we offered scheduled service on 201 routes into our 14 leisure destinations. We now serve 89 cities in 37 states (including small cities and destinations) in our route network. Network changes during the quarter included the addition of our second route to Reno, Nevada (identified as leisure destination below), a new route from Little Rock, Arkansas (new small city) to Orlando and a new route from Provo, Utah to the San Francisco Bay area.

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 December 31,    As of June 30,
                               As of June 30, 2013           2012                2012
Leisure destinations                           14                    13                12
Small cities served                            75                    74                67
Total cities served                            89                    87                79
Total routes                                  201                   195               182

Trends and Uncertainties

Our system average cost per gallon for the second quarter of 2013 was $3.08, the lowest quarterly average cost per gallon since the fourth quarter of 2011. The 1.9% decline in the system average cost per gallon compared to the prior year was attributable to a decrease in crack spreads which was partially offset by an increase in crude oil prices. In addition, our fuel efficiencies continued in the second quarter as additional seats in our MD-80 aircraft and our larger gauge Boeing 757-200


drove a 9.4% year-over-year increase in ASMs per gallon. 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. Even though we expect continued fuel efficiencies, crude oil prices have risen significantly in July, and could impact our fuel cost per gallon in the third quarter. Long-term fuel costs remain uncertain and fuel cost volatility would materially impact future operating costs.
During the second half of 2013, we expect to take delivery of five Airbus A320 series aircraft under our purchase agreements, with significant capital expenditures for the purchase and subsequent induction into our operating fleet. We believe the addition of these Airbus aircraft to our existing fleet will meet our aircraft needs to support our planned growth in 2013 and 2014.
During the second quarter of 2013, we continued to make substantial progress on our automation projects including the consolidation of multiple distribution channels on our new platform. Although these 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. We continue to expand our route network with focus on serving residents of small cities and expect to announce a number of new routes and cities to begin service in the second half of 2013. We believe our route network provides numerous opportunities with our available aircraft, and further introduction of Airbus aircraft, but we expect to continue aggressive capacity management in our markets to maintain acceptable fares and profits.

RESULTS OF OPERATIONS

Comparison of three months ended June 30, 2013 to three months ended June 30,
2012

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

                                 Three months ended June 30,
                                   2013               2012
Total operating revenues            100.0 %             100.0 %
Operating expenses:
Aircraft fuel                        37.9                40.8
Salaries and benefits                15.5                14.4
Station operations                    7.9                 8.5
Maintenance and repairs               7.9                 6.5
Sales and marketing                   2.1                 2.4
Aircraft lease rentals                0.5                   -
Depreciation and amortization         7.0                 5.7
Other                                 4.4                 3.6
Total operating expenses             83.2 %              81.9 %
Operating margin                     16.8 %              18.1 %

Operating Revenue

Our operating revenue increased 10.7% to $255.8 million for the three months ended June 30, 2013, up from $231.2 million for the same period of 2012 primarily due to a 29.2% increase in ancillary revenue and a 9.0% increase in scheduled service revenue. Scheduled service revenue and ancillary revenue increases were primarily driven by a 10.8% increase in scheduled service passengers and a 4.0% increase in our total average fare from $129.10 to $134.25.

Scheduled service revenue. Scheduled service revenue increased 9.0% to $165.3 million for the three months ended June 30, 2013, up from $151.7 million in the same period of 2012. The increase was primarily driven by a 10.8% increase in the number of scheduled service passengers, offset by a 1.6% reduction in the scheduled service average base fare. Our ability to maintain a relatively flat load factor with larger gauge aircraft drove a 5.7% increase in average number of passengers per departure. These factors coupled with a 4.5% increase in the number of scheduled service departures produced the 10.8% increase in number of scheduled service passengers. The use of larger gauge aircraft was the result of the completion of our MD-80 seat reconfiguration program in the first quarter 2013 (as we had 51 aircraft operating with 166 seats in our scheduled service network as of June 30, 2013, compared to 26 aircraft with 166 seats as of June 30, 2012) and having all six of our


Boeing 757-200 aircraft flying for the second quarter 2013 while we had two in revenue service for the majority of the second quarter 2012.

Ancillary revenue. Ancillary revenue increased 29.2% to $86.9 million for the three months ended June 30, 2013, up from $67.3 million in the same period of 2012, driven by a 16.6% increase in ancillary revenue per scheduled passenger from $39.67 to $46.25 and a 10.8% increase in the number of scheduled service passengers. The increase in our ancillary revenue per scheduled service passenger of $6.58 was primarily attributable to the implementation of a new carry-on bag fee, higher take rate on checked bags and increase in the sale of advance seat assignments. The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

                                                  Three months ended June 30,
                                                      2013              2012         % Change
Air-related charges                             $         40.73     $    33.90          20.1  %
Third party products                                       5.52           5.77          (4.3 )%
Total ancillary revenue per scheduled service
passenger                                       $         46.25     $    39.67          16.6  %

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 June 30,
(in thousands except night and day amounts)               2013               2012          % Change
Gross ancillary revenue - third party products      $      33,883       $      32,909          3.0  %
Cost of goods sold                                        (23,095 )           (21,909 )        5.4  %
Transaction costs (a)                                        (418 )            (1,218 )      (65.7 )%
Ancillary revenue - third party products            $      10,370       $       9,782          6.0  %
As percent of gross ancillary revenue - third party          30.6 %              29.7 %     0.9 pp
Hotel room nights                                         170,086             204,327        (16.8 )%
Rental car days                                           238,791             201,605         18.4  %

(a) Includes payment expenses and travel agency commissions.

During the three months ended June 30, 2013, we generated gross revenue of $33.9 million from the sale of third party products, which resulted in net revenue of $10.4 million. Net third party products revenue increased 6.0% primarily due to the impact on our margin from lower transaction costs. Since the introduction of our debit card discount option in the second quarter 2012, we have experienced an increase in debit card usage as form of payment. The increase of 18.4% in sale of rental car days was primarily 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 more than offset a reduction in the sale of hotel rooms. The reduction in hotel room sales, primarily in the Las Vegas market, was driven by a change in approach for certain promotional activities. Fixed fee contract revenue. Fixed fee contract revenue decreased 68.5% to $3.1 million for the three months ended June 30, 2013, from $9.8 million in the same period of 2012. The decrease was driven by a 72.1% 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 $0.6 million for the three months ended June 30, 2013 compared to $2.4 million in the same period of 2012, primarily from lease revenue for aircraft and flight equipment. We leased out one A320 aircraft for one month during the three months ended June 30, 2013, while leasing out two Boeing 757-200 to third parties on a short-term basis for the majority of the same period in 2012. The lease term for the A320 aircraft ends in the third quarter 2013 and upon return will be placed into our operating fleet.

Operating Expenses


Our operating expenses increased 12.5% to $213.0 million for the three months ended June 30, 2013 compared to $189.3 million in the same period of 2012. 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 June 30,        Percentage
                                                      2013             2012            Change
Aircraft fuel                                   $        50.88     $     52.49           (3.1 )%
Salary and benefits                                      20.78           18.51           12.3
Station operations                                       10.59           10.90           (2.8 )
Maintenance and repairs                                  10.66            8.41           26.8
Sales and marketing                                       2.83            3.06           (7.5 )
Aircraft lease rentals                                    0.72               -             NM
Depreciation and amortization                             9.38            7.33           28.0
Other                                                     5.79            4.75           21.9
Operating expense per passenger                 $       111.63     $    105.45            5.9  %
Operating expense per passenger, excluding fuel $        60.75     $     52.96           14.7  %

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 June 30,           Percentage
                                            2013                  2012        Change
Aircraft fuel                          4.55                      5.06        (10.1 )%
Salary and benefits                    1.86                       1.78           4.5
Station operations                     0.95                       1.05          (9.5 )
Maintenance and repairs                0.95                       0.81          17.3
Sales and marketing                    0.25                       0.29         (13.8 )
Aircraft lease rentals                 0.06                          -            NM
Depreciation and amortization          0.84                       0.71          18.3
Other                                  0.52                       0.46          13.0
Operating expense per ASM (CASM)       9.98                     10.16         (1.8 )%
CASM, excluding fuel                   5.43                      5.10          6.5  %

Aircraft fuel expense. Aircraft fuel expense increased 3.0% to $97.1 million for the three months ended June 30, 2013, up from $94.2 million in the same period of 2012. This change was due to a 4.7% increase in total system gallons consumed from 30.0 million to 31.5 million, offset by a 1.9% decrease in our average fuel cost per gallon from $3.14 to $3.08. The increase in gallons consumed is attributable to a 9.4% increase in total system average stage length, offset by a 3.6% reduction in total system departures and by better fuel efficiency. Although we produced a 20.2% increase in scheduled service ASMs during the quarter, we required only 10.5% more gallons for scheduled service operations as a result of the use of larger gauge aircraft and a 6.3% increase in scheduled service average stage length.

Salary and benefits expense. Salary and benefits expense increased 19.3% to $39.7 million for three months ended June 30, 2013 up from $33.2 million in the same period of 2012. The increase is primarily attributable to a 9.7% increase in the number of full-time equivalent employees, higher pilot pay scales as a result of our increased profitability and increased stock-


based compensation expense. The increase in the average number of 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. As a result of pilot compensation being tied to our overall margin performance, we experienced higher pilot pay scales for the three months ended June 30, 2013 compared to the same period in 2012, with most recent adjustment to pay scales in November 2012. Stock-based compensation expense increased from the impact of the rise in our stock price on the revaluation of our outstanding liability awards.

Station operations expense. Station operations expense increased 3.3% to $20.2 million for the three months ended June 30, 2013 compared to $19.6 million in the same period of 2012. The increase was primarily attributable to increased fees at several airports where we operate despite a 3.6% reduction in system departures. We continue to experience cost pressures in the major destinations we service, primarily in Las Vegas, where we have limited ability to reduce costs.

Maintenance and repairs expense. Maintenance and repairs expense increased 34.7% to $20.3 million for the three months ended June 30, 2013, compared to $15.1 million in the same period of 2012. The maintenance and repairs expense per aircraft during the period was $105,000 per month for the quarter with the average monthly cost per aircraft during second quarter 2012 having come in at approximately $85,000 per month. The increase in total expense was primarily attributable to a significant increase in heavy airframe check expenses, with an increase in number of planned events and more costly work scope. Our maintenance and repair costs can vary significantly from quarter to quarter as a result of these factors.

Sales and marketing expense. Sales and marketing expense decreased 1.6% to $5.4 million for the three months ended June 30, 2013, compared to $5.5 million in the same period of 2012, resulting in a 7.5% decrease on a per passenger basis. 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 percentage of scheduled service and ancillary revenue. This trend continued in the second quarter 2013 as we had a 1.6% decrease in sales and marketing expense despite a 15.2% increase in our scheduled service and ancillary revenues.

Aircraft lease rentals expense. We had $1.4 million in aircraft lease rentals expense for the three months ended June 30, 2013 and no expense in the same period of 2012. During the three months ended June 30, 2013, we operated two Airbus A319 aircraft under operating leases for the majority of the period.

Depreciation and amortization expense. Depreciation and amortization expense increased 35.9% to $17.9 million for the three months ended June 30, 2013, compared to $13.2 million in the same period of 2012. The increase was driven by an 8.9% increase in the average number of operating aircraft, depreciation expense related to the MD-80 seat reconfiguration project and accelerated depreciation resulting from announced MD-80 aircraft retirements and a change in the estimate of residual values and remaining useful lives for our MD-80 engine pool. As of June 30, 2013, we had 65 owned aircraft (including six Boeing 757-200 aircraft and 51 MD-80 aircraft reconfigured to 166 seats) compared to 61 owned aircraft (including three Boeing 757-200 aircraft and 26 MD-80 aircraft reconfigured to 166 seats) at June 30, 2012.

Other expense. Other expense increased 29.5% to $11.1 million for the three months ended June 30, 2013 from $8.5 million for the same period of 2012. The $2.6 million increase was primarily attributable to non capitalizable information technology development costs, crew training for our Airbus fleet and costs to support a seasonal operating base in Los Angeles.

Other (Income) Expense

Other (income) expense remained relatively flat at $1.9 million net other expense for the three months ended June 30, 2013 compared to $2.0 million net other expense for the same period in 2012.

Income Tax Expense

Our effective income tax rate was 37.2% for the three months ended June 30, 2013 compared to 36.8% for the same period of 2012. While we expect our tax rate to be fairly consistent in the near term, it will vary depending on recurring items such as the amount of income we earn in each state and the state tax rate . . .

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