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ALGT > SEC Filings for ALGT > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for ALLEGIANT TRAVEL CO

Form 10-K for ALLEGIANT TRAVEL CO


28-Feb-2014

Annual Report


Item 7. 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 years ended December 31, 2013, 2012 and 2011. Also discussed is our financial position as of December 31, 2013 and 2012. Investors should read this discussion in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this annual report. This discussion and analysis contains forward- looking statements. Please refer to the section entitled "Special Note About Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.

2013 results

During 2013, we completed our 11th straight profitable year, with net income of $92.3 million or $4.82 earnings per share (diluted) on operating revenues of $996.2 million. Net income was 17.0 percent higher compared to 2012 results of $78.6 million. Earnings per share of $4.82 were 18.7 percent higher in 2013 when compared to 2012 results of $4.06. Operating revenue in 2013 grew by 9.6 percent compared to operating revenue of $908.7 million in 2012. We achieved an operating margin of 15.5 percent in 2013 primarily driven by our highest ever annual ancillary revenue per passenger of $45.73, an 11.0 percent increase compared to 2012.

Our total operating revenue in 2013 increased $87.4 million or 9.6 percent over 2012 due to a 7.8 percent increase in scheduled service passengers and a 5.6 percent increase in total average fare to $137.43 in 2013 from $130.10 in 2012. Total average fare rose as ancillary revenue per passenger increased by 11.0 percent and scheduled service average base fare increased by 3.1 percent. An increase in charges for bags resulting from the implementation of a new carry-on bag fee in April 2012 which was in effect for the full year during 2013, the ability to sell additional assigned seats as all of our in-service MD-80 aircraft were reconfigured to 166 seats, and new boarding procedures were the main drivers of the increase in ancillary


revenue per passenger. Our load factor remained relatively unchanged at 88.9 percent in 2013 compared to 89.4 percent in 2012. TRASM improved to 12.23 in 2013 from 12.14 in 2012 despite capacity growth driven by an increase in our average number of aircraft, larger gauge aircraft and a longer stage length.

Our average number of aircraft in revenue service increased by 4.5 percent from 60.2 aircraft during 2012 to 62.9 aircraft during 2013. We added additional capacity with the introduction of used A320 series Airbus aircraft into our operating fleet, additional seats from our MD-80 seat reconfiguration program and having six Boeing 757-200 aircraft in revenue service for the majority of 2013. We had two Boeing 757-200 aircraft in revenue service for the majority of 2012 compared to six in 2013. Year-over-year, the additional capacity coupled with a 3.7 percent increase in our scheduled service average stage length drove a 13.5 percent increase in scheduled service ASMs. This ASM growth was despite a year-over-year 3.5 percent decline in our overall fleet average block hours per aircraft per day. Our fuel cost per ASM declined 6.3 percent from 5.05 in 2012 to 4.73 in 2013 as a result of larger gauge aircraft, which are more efficient on a per seat fuel basis, and the introduction of the Airbus A320 series aircraft in our fleet which led to a 7.3 percent increase in ASMs per gallon of fuel.

CASM, excluding fuel, rose by 5.3 percent due to a decline in our aircraft utilization rate, and the de-funding of the US government starting October 1, 2013 until October 16, 2013. The FAA shutdown delayed us from placing A320 Airbus aircraft into service as anticipated and also delayed the progress needed to train the necessary number of crews to operate our full flying schedule. The delayed placing of Airbus A320 series aircraft in our fleet resulted in higher aircraft lease rental expense as we contracted with other carriers for sub-service to fly scheduled flights, reduced crew productivity for in transit crews, and increased expenses to temporarily assign flight crews to bases to support unplanned MD-80 flying in place of planned Airbus A320 series flying.

As of December 31, 2013, we had $387.1 million in unrestricted cash and investment securities. Our liquidity position continues to provide us opportunities to invest in the growth of our fleet, with $177.5 million in capital expenditures during 2013. In 2013, we purchased and took delivery of seven Airbus A320 aircraft and one Airbus A319 aircraft under existing purchase agreements. This use of cash was practically offset by proceeds received from total borrowings in 2013 of $106.0 million secured by eight Airbus aircraft and our new headquarters property. We also used $22.7 million of these proceeds to prepay certain existing debt obligations on Boeing 757-200 aircraft.

During 2013 our board of directors declared a special cash dividend of $2.25 per share to shareholders of record on December 13, 2013, paid in January 2014. Total capital distribution for the declared dividend was $41.8 million. In addition, under our approved stock repurchase program, we repurchased 913,806 shares at an average cost of $91.33 per share during 2013 for a total expenditure of $83.5 million.

During September 2013, a compliance concern was identified with respect to evacuation slides in as many as 32 of our MD-80 aircraft. These MD-80 aircraft were temporarily removed from service until all slides could be reinspected. Reinspections were completed in September 2013 and all MD-80 aircraft that were inspected were found to be compliant. All of the temporarily removed MD-80 aircraft were returned to service by the end of September 2013.

During 2013, fixed fee contract revenue declined to $17.5 million. The decrease was mainly due to the expiration of our largest fixed fee flying contract in December 2012. Effective January 1, 2014, we entered into a three-year contract extension with Peppermill Casinos, Inc. for flying for its casino properties in Wendover, Nevada.


Aircraft

Operating Fleet

The following table sets forth the number and type of aircraft in service and
operated by us as of the dates indicated:

                    As of December 31, 2013         As of December 31, 2012         As of December 31, 2011
                  Own (b)     Lease     Total     Own (b)     Lease     Total     Own (b)     Lease     Total
MD82/83/88s (a)       52         -        52          56         -        56          52         2        54
MD87s (c)              -         -         -           2         -         2           2         -         2
B757-200               6         -         6           5         -         5           1         -         1
A319                   1         2         3           -         -         -           -         -         -
A320                   5         -         5           -         -         -           -         -         -
Total                 64         2        66          63         -        63          55         2        57

(a) Includes the following number of MD-80 aircraft (MD-82/83/88s) modified to a 166-seat configuration: December 31, 2013 - 51; December 31, 2012 - 45; December 31, 2011 - seven.
(b) Excludes aircraft acquired but not yet in revenue service or temporarily stored as of the date indicated.
(c) Used almost exclusively for fixed fee flying.

MD-80 aircraft

As of December 31, 2013, 51 MD-80 aircraft had been modified to 166 seats as part of our seat reconfiguration program. We plan to complete the seat configuration for two additional MD-80 aircraft and place these aircraft in revenue service in the first quarter of 2014. We expect our MD-80 aircraft fleet to remain at 53 aircraft during 2014.

Airbus aircraft

In August 2012, we entered into lease agreements for nine used Airbus A319 aircraft with expected deliveries through the third quarter of 2015. As of December 31, 2013, we have inducted two of these leased Airbus A319 aircraft into revenue service. We expect to take possession of the remaining aircraft under these lease agreements in 2014 and 2015.

In December 2012 and August 2013, we entered into purchase agreements for nine used Airbus A320 aircraft. Of the nine Airbus A320 aircraft under contract, two were acquired in the second quarter of 2013 and five were acquired in the third quarter of 2013. Five of the Airbus A320 aircraft were placed into our operating fleet in the fourth quarter of 2013 and two additional Airbus A320 aircraft were placed in revenue service as of February 1, 2014. The final two Airbus A320 aircraft under contract are expected to be acquired in the fourth quarter of 2014 and placed in revenue service in 2015.

Fleet plan

The following table provides the expected number of operating aircraft in service at the end of the respective year based on scheduled contracted deliveries of Airbus aircraft and the reinstatement of two MD-80 aircraft which had been temporarily placed in storage:

                  December 31, 2014    December 31, 2015
MD-80 (166 seats)                53                   53
B757-200                          6                    6
A319                              4                   10
A320                              7                    9
Total                            70                   78


We continually consider other aircraft acquisitions on an opportunistic basis.

Network

As of December 31, 2013, we operated 226 routes into our leisure destinations, including service from 86 small cities, compared to 195 routes from 74 small cities as of December 31, 2012. During 2013, we added one leisure destination to our route network.

The growth in network in 2013 was primarily on the East Coast with seven new routes to each of St. Petersburg and Orlando Sanford and ten new routes to Punta Gorda, Florida. The majority of our new markets and routes were announced in late third quarter of 2013. We do not currently expect to add many new markets and routes in the first half of 2014 as we will let our new routes mature.

The following shows the number of leisure destinations and small cities served as of the dates indicated (includes cities served seasonally):

                                                As of          As of          As of
                                             December 31,   December 31,   December 31,
                                                 2013           2012           2011
Leisure destinations                                 14             13             11
Small cities served                                  86             74             65
Total cities served                                 100             87             76
Total routes                                        226            195            171

Trends and Uncertainties

Although fuel cost volatility has significantly impacted our operating results in prior years, crude oil prices stabilized during 2013, and we experienced a slight year-over-year increase in our system average cost per gallon from $3.18 in 2012 to $3.20 in 2013. Our fuel cost per ASM declined 6.3 percent from 5.05 in 2012 to 4.73 in 2013 due to a 7.3 percent increase in ASMs per gallon. We added additional capacity over which we spread our fuel cost with the introduction of used A320 series Airbus aircraft into our operating fleet, having six high capacity Boeing 757-200 aircraft in revenue service and additional seats from our MD-80 seat reconfiguration program. Fuel costs in the long-term remain uncertain and fuel cost volatility would materially affect our future operating costs.

For over a two week period in October 2013, all nonessential government functions were shut down when the United States Congress failed to approve funds for the ongoing operation of the federal government. As a result of the furlough of FAA personnel deemed nonessential during this period, we experienced delays impacting our scheduled service expansion. FAA approval was required for recently hired and trained crews, operation of purchased Airbus A320 aircraft and completion of certain activities necessary for operation at recently announced airports. The FAA shutdown delayed us from placing Airbus A320 aircraft into service as anticipated and caused increased aircraft lease rental expense as we contracted with other carriers for sub-service of scheduled flights for which we originally planned to use Airbus A320 aircraft. The FAA shutdown also reduced crew productivity and increased expenses to temporarily assign flight crews to bases to support unplanned MD-80 flying in place of planned Airbus A320 flying. We expect additional costs in the first quarter of 2014 but otherwise do not believe these setbacks will have a significant impact on our financial results as we implemented alternatives to mitigate the risks of the FAA delays. Currently, we are not anticipating additional costs associated with the aircraft and crew training delays will extend past April 2014.

We have three employee groups which have voted for union representation; pilots, flight attendants, and flight dispatchers. These three employee groups make up approximately 50 percent of our total employees. We are currently in various stages of negotiations for a collective bargaining agreement with the labor organizations representing these employee groups. Any labor actions following an inability to reach collective bargaining agreements could materially impact our operations during the continuance of any such activity.

During 2013, we acquired and placed into service three Airbus A319 and five A320 Airbus aircraft under operating leases and purchase agreements entered into in 2012. We believe the introduction of these Airbus aircraft into our operating fleet will provide a good fit for our existing business model. When compared to our MD-80 aircraft, we expect the additional cost of ownership of these aircraft will be offset by cost savings from increased fuel efficiency and the ability to generate


additional revenue with the higher capacity Airbus A320 series aircraft. During 2013 we incurred costs related to the introduction of the aircraft and incurred additional training and pre-operating costs as we added the aircraft type to our operating certificate.

During 2013, we removed five MD-80 aircraft from service, comprised of one 130 seat MD-87 aircraft and four 150 seat MD-83 aircraft. Two of the MD-83 aircraft and the MD-87 aircraft were permanently retired. The remaining two MD-83 aircraft were placed in temporary storage. As of December 31, 2013, 51 MD-80 aircraft had been modified to 166 seats as part of our seat reconfiguration program. In the first quarter of 2014, we expect to complete the seat reconfiguration for two additional MD-80 aircraft at which time, they will be returned to revenue service. We expect our MD-80 aircraft fleet to remain at 53 aircraft during 2014. We believe our six Boeing 757-200 aircraft, our MD-80 aircraft fleet, and the purchase and acquisition of used Airbus A320 series aircraft will meet our aircraft needs to support our planned growth through 2015.

Our network grew from 195 total routes as of December 31, 2012, to 226 total routes at December 31, 2013, and we have announced additional service to increase the number of routes to 231 routes by the end of the first quarter of 2014. We expect to continue to aggressively manage capacity in our markets in an attempt to maximize profitability. TRASM improved to 12.23 in 2013 compared to 12.14 in 2012 despite our significant capacity growth in 2013, primarily due to increased ancillary per-passenger revenues. CASM, excluding fuel, rose by 5.3 percent due to a decline in aircraft utilization, costs related to the operational disruption in September 2013 and the effects of the FAA shutdown relating to the delays in flying our Airbus A320 aircraft in the fourth quarter. We continue to focus on operating a higher percentage of our flights during peak windows and a lower percentage of flights during off-peak windows. We believe this approach with our planned departure and ASM growth, primarily in our Florida markets, will contribute to the achievement of our profitability goals in the current operating environment.

Our Operating Revenue

Our operating revenue is comprised of both air travel on a stand-alone basis and bundled with hotels, rental cars and other travel-related services. We believe our diversified revenue streams distinguish us from other U.S. airlines and other travel companies.

Scheduled service revenue. Scheduled service revenue consists of base air fare.

Ancillary revenue. Our ancillary revenue is generated from air-related charges and third party products. Air-related revenue is generated through charges for baggage, carrier usage charges, advance seat assignments, travel protection product, change fees, use of our call center for purchases, priority boarding and other services provided in conjunction with our scheduled air service. We also generate revenue from third party products through 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. We recognize our ancillary revenues net of amounts paid to wholesale providers, travel agent commissions and payment processing fees.

Fixed fee contract revenue. Our fixed fee contract revenue is generated from fixed fee agreements and charter service on a year-round and ad-hoc basis.

Other revenue. Other revenue is primarily generated from aircraft and flight equipment leased to third parties.

Seasonality. Our results of operations for interim periods are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations. We can be adversely impacted during periods with reduced leisure travel spending. Traffic demand for our business historically has been weaker in the third quarter and stronger in the first quarter.

Our Operating Expenses

A brief description of the items included in our operating expense line items follows.

Aircraft fuel expense. Aircraft fuel expense includes the cost of aircraft fuel, fuel taxes, into plane fees and airport fuel flowage, storage or through-put fees. Under the majority of our fixed fee contracts, our customer reimburses us for fuel costs. These amounts are netted against our fuel expense.

Salary and benefits expense. Salary and benefits expense includes wages, salaries, and employee bonuses, sales commissions for in-flight personnel, as well as expenses associated with employee benefit plans, stock compensation expense related to equity grants, and employer payroll taxes.


Station operations expense. Station operations expense includes the fees charged by airports for the use or lease of airport facilities and fees charged by third party vendors for ground handling services, commissary expenses and other related services such as deicing of aircraft.

Maintenance and repairs expense. Maintenance and repairs expense includes all parts, materials and spares required to maintain our aircraft. Also included are fees for repairs performed by third party vendors.

Sales and marketing expense. Sales and marketing expense includes all advertising, promotional expenses, travel agent commissions and debit and credit card processing fees associated with the sale of scheduled service and air-related charges.

Aircraft lease rentals expense. Aircraft lease rentals expense consists of the cost of leasing aircraft under operating leases with third parties.

Depreciation and amortization expense. Depreciation and amortization expense includes the depreciation of all fixed assets, including aircraft that we own.

Other expense. Other expense includes the cost of passenger liability insurance, aircraft hull insurance and all other insurance policies excluding employee welfare insurance. Additionally, this expense includes loss on disposals of aircraft and other equipment disposals, travel and training expenses for crews and ground personnel, facility lease expenses, professional fees, personal property taxes and all other administrative and operational overhead expenses not included in other line items above.

RESULTS OF OPERATIONS

2013 Compared to 2012

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

                                For the Year Ended December 31,
                                    2013                2012
Total operating revenues             100.0 %              100.0 %
Operating expenses:
Aircraft fuel                         38.7                 41.6
Salaries and benefits                 15.9                 14.7
Station operations                     7.9                  8.6
Maintenance and repairs                7.3                  8.1
Sales and marketing                    2.2                  2.1
Aircraft lease rentals                 0.9                    -
Depreciation and amortization          7.0                  6.3
Other                                  4.6                  4.0
Total operating expenses              84.5 %               85.4 %
Operating margin                      15.5 %               14.6 %

Operating Revenue

Our operating revenue increased 9.6 percent to $996.2 million in 2013, up from $908.7 million in 2012, primarily due to a 19.6 percent increase in ancillary revenue and an 11.1 percent increase in scheduled service revenue. Scheduled service revenue and ancillary revenue increases were driven by a 7.8 percent increase in scheduled service passengers and a 5.6 percent increase in our total average fare to $137.43 in 2013 compared to $130.10 in 2012.

Scheduled service revenue. Scheduled service revenue increased 11.1 percent to $651.3 million for 2013, up from $586.0 million in 2012. The increase was driven by a 7.8 percent increase in the number of scheduled service passengers and a 3.1 percent increase in our scheduled service average base fare. Passenger growth was attributable to a 5.0 percent increase in


the average number of passengers per departure, associated with a 5.4 percent growth in scheduled service seats per departure, and a 3.0 percent increase in the number of scheduled service departures. We added 44 new routes in 2013 which increased the number of passengers as our load factor remained relatively unchanged at 88.9 percent in 2013 compared to 89.4 percent in 2012.

Ancillary revenue. Ancillary revenue increased 19.6 percent to $324.9 million for 2013, up from $271.6 million in 2012, driven by an 11.0 percent increase in ancillary revenue per scheduled passenger from $41.20 to $45.73 and a 7.8 percent increase in the number of scheduled service passengers. The increase in our ancillary revenue per scheduled service passenger of $4.53 was mainly attributable to an increase in charges for bags resulting from the implementation of a new carry-on bag fee, introduced in April 2012 and in effect for the full year during 2013, and sales of assigned seats as the completion of our MD-80 modification program allowed us to sell additional assigned seats on these aircraft. The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

                                               For the Year Ended December 31,      Percentage
                                                    2013               2012           Change
Air-related charges                          $          40.52     $      35.72         13.4  %
Third party products                                     5.21             5.48         (4.9 )%
Total ancillary revenue per scheduled
service passenger                            $          45.73     $      41.20         11.0  %

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:

                                                    For the Year Ended December 31,       Percentage
(in thousands except room nights and rental car
days)                                                  2013                 2012            Change
Gross ancillary revenue - third party products  $       120,730       $       119,027          1.4  %
Cost of goods sold                                      (81,904 )             (78,979 )        3.7  %
Transaction costs (a)                                    (1,797 )              (3,924 )      (54.2 )%
Ancillary revenue - third party products        $        37,029       $        36,124          2.5  %
As percent of gross ancillary revenue - third
party                                                      30.7 %                30.3 %     0.4 pp
Hotel room nights                                       595,697               690,116        (13.7 )%
Rental car days                                         844,858               763,353         10.7  %

(a) Includes payment expenses and travel agency commissions

During 2013, we generated gross revenue of $120.7 million from the sale of third party products, which resulted in net revenue of $37.0 million. Net third party products revenue increased 2.5 percent primarily due to the impact on our margin from lower transaction costs. The 10.7 percent increase in rental car days sold was driven by an increase in scheduled service passengers to those markets where a higher percentage of rental car days are typically sold, such as Florida and Phoenix. Hotel room nights sold in 2013 decreased by 13.7 percent compared to 2012. In the fourth quarter of 2012, we phased out offering an air discount tied to hotel sales in order to generate higher levels of overall company profitability. Hotel net revenue in 2013 excluding the effect of an air discount increased 25 percent compared to 2012.

Fixed fee contract revenue. Fixed fee contract revenue decreased 59.3 percent to $17.5 million in 2013, from $42.9 million in 2012. The decrease was driven by a 66.7 percent reduction in fixed fee block hours flown, slightly offset by a 22.3 percent higher per-block hour rate. The significant reduction in our fixed fee block hours flown was mainly due to the expiration of our fixed fee flying contract in December 2012.

Other revenue. We generated other revenue of $2.5 million for 2013, compared to $8.2 million in 2012, primarily from lease revenue for aircraft and flight equipment. Aircraft previously leased in 2012 were added to our fleet and placed into revenue service in 2013 which led to the decrease in other revenue for the current year. We leased out three Boeing 757-200 aircraft to third parties on a short-term basis for the majority of 2012 while we leased out one A320 Airbus aircraft in 2013 with a lease term from June through September. We took possession of the A320 Airbus aircraft from lease expiration and placed it into our operating fleet during the fourth quarter of 2013.


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