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ALGT > SEC Filings for ALGT > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for ALLEGIANT TRAVEL CO

Form 10-Q for ALLEGIANT TRAVEL CO


8-Aug-2014

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, 2014 and 2013. Also discussed is our financial position as of June 30, 2014 and December 31, 2013. 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, 2013. 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 2014 results

During the second quarter of 2014, we achieved a 19.4 percent operating margin resulting in net income of $33.5 million on operating revenues of $290.5 million. Diluted earnings per share were $1.86 or 38.8 percent higher compared to diluted earnings per share of $1.34 for the same period in the prior year. Results for the second quarter of 2014 were driven by a 6.4 percent increase in scheduled passenger revenue per available seat mile ("PRASM") and a 12.4 percent increase in scheduled passengers. We increased our scheduled service departures by 11.5 percent while only increasing our gallons consumed by 5.1 percent. Our fuel efficiency metrics continue to improve as we operated ten Airbus A320 series aircraft which are approximately 25 percent more fuel efficient on a per block hour basis than our MD-80 aircraft.

Our total operating revenues in the second quarter of 2014 increased $34.7 million or 13.6 percent compared to the same period in the prior year. The second quarter of 2014 was our 18th consecutive quarter of year-over-year increases in total average fare, which increased 0.5 percent to $134.86 for the three months ended June 30, 2014. We generated a 5.8 percent increase in total scheduled service revenue per available seat mile ("TRASM") on same store routes, which are those routes operated in both the second quarter of 2014 and 2013.

Our operating expense per ASM ("CASM") increased 2.5 percent from 9.98 for the three months ended June 30, 2013 to 10.23 for the same period of 2014. Fuel expense per ASM remained relatively flat year-over-year while fuel efficiency, as defined as ASMs per gallon, increased 2.5 percent to 69.5 ASMs per gallon for the three months ended June 30, 2014 compared to 67.8 ASMs per gallon for the same period in 2013. These results were driven by our ten Airbus A320 series aircraft which accounted for approximately 21.9 percent of our ASMs during the quarter. CASM, excluding fuel, during the second quarter was impacted by approximately $3.4 million of nonrecurring expenses in the form of aircraft sub-service, crew training and passenger displacement costs related to training and crew availability delay.

In April 2014, we prepaid in full the $121.1 million balance of our Term Loan originally due March 2017. At the same time, we borrowed $45.3 million under a loan agreement secured by 53 MD-80 aircraft. In April and May 2014, we also prepaid in full the $8.5 million balance owed on our note payable secured by two Boeing 757-200 aircraft originally due in July 2016. In May 2014, we borrowed $40.0 million under a loan agreement secured by our six Boeing 757-200 aircraft under an amortizing variable rate note due in installments through May 2018 when a balloon payment will be due. In June 2014, we completed an offering of $300.0 million principal amount of 5.50 percent unsecured Senior Notes with interest payable semi-annually until maturity in July 2019.

In June 2014, we entered into separate agreements to acquire the ownership interests in twelve special purpose companies each owning one Airbus A320 series aircraft currently on lease to a European carrier until 2018. The purchase price for the special purpose companies was approximately $236.1 million, of which approximately $142.0 million was by assumption of debt secured by the aircraft with the remaining balance of $94.1 million funded by cash. The notes payable assumed bear interest at LIBOR plus 3.08 percent and are payable in monthly installments through May 2018 when a balloon payment is due. We performed a fair value assessment of the assumed debt and the in-place leases and determined both to be at fair value. We intent to bring these aircraft into our operating fleet upon the expiration of the current leases in 2018. Currently, we recognize lease revenue and incur minimal administrative costs to maintain the leases during the term these Airbus A320 series aircraft are under lease. Lease revenue and administrative costs related to this transaction are reflected in our results of operations. Additionally, interest expense and depreciation expense related to the assumed notes payable and asset ownership of the acquired Airbus A320 series aircraft since their acquisition in June 2014 are reflected in our results of operations.

As of June 30, 2014, we had $548.2 million in unrestricted cash and investment securities and $619.4 million of total debt, including current maturities. Our liquidity position continues to provide us with opportunities to return excess capital to shareholders and invest in strategic corporate initiatives, fleet growth, and our IT infrastructure. Our cash and non-cash capital expenditures totaled $257.0 million during the first six months of 2014.


Aircraft

Operating Fleet

As of June 30, 2014, our total aircraft in service consisted of 53 MD-80
aircraft, six Boeing 757-200 aircraft, three Airbus A319 aircraft, and seven
Airbus A320 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, 2014           As of December 31, 2013          As of June 30, 2013
                   Own       Lease     Total     Own (b)     Lease     Total    Own (b)     Lease     Total
MD82/83/88s (a)      53         -        53          52         -        52         55         -        55
MD87s (c)             -         -         -           -         -         -          1         -         1
B757-200              6         -         6           6         -         6          6         -         6
A319                  1         2         3           1         2         3          -         2         2
A320                  7         -         7           5         -         5          -         -         -
Total                67         2        69          64         2        66         63         2        64

(a) Includes the following number of MD-80 aircraft (MD-82/83/88s) modified to a 166-seat configuration: June 30, 2014 - 53; December 31, 2013 - 51; June 30, 2013 - 51.
(b) Does not include aircraft owned, but not added to our operating fleet or temporarily stored as of the date indicated.
(c) Used almost exclusively for fixed fee flying.

Airbus Aircraft

In August 2014, we entered into an agreement to purchase eight Airbus A320 series aircraft which we had previously committed to lease. As of June 30, 2014, we have two of these leased Airbus A320 series aircraft in revenue service. We expect to take possession of the remaining aircraft under these purchase agreements in 2014 and 2015.

In June 2014, we acquired the ownership interests in twelve special purpose companies each owning one Airbus A320 series aircraft currently on lease to a European carrier until 2018. The aggregate purchase price for the special purpose companies was approximately $236.1 million, of which approximately $142.0 million was funded by assumed debt secured by the aircraft.

In May and June 2014, we entered into purchase agreements for two Airbus A320 series aircraft. We expect to acquire these two Airbus A320 series aircraft in the second quarter of 2015 and first quarter of 2016.

In August 2013, we entered into purchase agreements for two Airbus A320 aircraft. We expect to acquire these two Airbus A320 aircraft in the fourth quarter of 2014 and place them 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 quarters:

                  September 30, 2014    December 31, 2014
MD-80 (166 seats)                 53                   53
B757-200                           6                    6
A319                               3                    4
A320                               7                    7
Total                             69                   70


Network

On June 30, 2014, we offered scheduled service on 236 routes into 13 leisure destinations. On June 30, 2014, we served 85 small cities in 39 states (including small cities and destinations) in our route network. Network changes during the second quarter included the addition of 12 new routes and a new seasonal base in Myrtle Beach, SC which started in May 2014.

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, 2014           2013           As of June 30, 2013
Leisure destinations                       13                   14                      14
Small cities served                        85                   86                      75
Total cities served                        98                  100                      89
Total routes                              236                  226                     201

Trends and Uncertainties

Fuel cost volatility has significantly impacted our operating results in prior years but crude oil prices stabilized during 2013 and remained largely unchanged in the second quarter of 2014. Our system average fuel cost per gallon increased slightly by $0.09 from $3.08 for the second quarter of 2013 to $3.17 for the same period of 2014. Our fuel cost per ASM remained relatively flat year-over-year despite a 3.0 percent decrease in the average system stage length. Our fuel efficiency metrics continue to improve as we operated ten Airbus A320 series aircraft during the quarter which accounted for 21.9 percent of our total ASM production. Fuel costs in the long-term remain uncertain and fuel cost volatility could materially affect our future operating costs.
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, the ten Airbus A320 series aircraft in service and the contracted acquisition of additional used Airbus A320 series aircraft will meet our aircraft needs to support our planned growth through 2015.
Our network grew from 201 routes as of June 30, 2013, to 236 routes at June 30, 2014. We began operating 12 new routes in the second quarter 2014. We expect to continue to aggressively manage capacity in our markets in an attempt to maximize profitability. TRASM improved to 12.71 in the second quarter of 2014 compared to 12.11 for the same period in 2013, primarily due to continued strength in our base fare. CASM, excluding fuel, was impacted by approximately $3.4 million of nonrecurring expenses in the form of aircraft sub-service, crew training and passenger displacement costs related to training and crew availability delays. 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.
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 employee base. We are currently in various stages of negotiations for collective bargaining agreements 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.


RESULTS OF OPERATIONS

Comparison of three months ended June 30, 2014 to three months ended June 30,
2013

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

                                 Three Months Ended June 30,
                                   2014               2013
Total operating revenues            100.0 %             100.0 %
Operating expenses:
Aircraft fuel                        36.0                37.9
Salaries and benefits                16.3                15.5
Station operations                    6.9                 7.9
Maintenance and repairs               7.4                 7.9
Sales and marketing                   2.3                 2.1
Aircraft lease rentals                0.7                 0.5
Depreciation and amortization         6.8                 7.0
Other                                 4.3                 4.4
Total operating expenses             80.7 %              83.2 %
Operating margin                     19.3 %              16.8 %

Operating Revenue

Our operating margin increased to 19.3 percent for the three months ended June 30, 2014 compared to 16.8 percent for the same period of 2013. Our operating revenue increased 13.6 percent to $290.5 million for the three months ended June 30, 2014, up from $255.8 million for the same period of 2013 primarily due to a 14.4 percent increase in scheduled service revenue and a 9.8 percent increase in ancillary revenue. Scheduled service revenue and ancillary revenue increases were primarily driven by a 12.4 percent increase in scheduled service passengers as total average fare per passenger was relatively flat. In addition, we increased other revenue to $3.0 million for the three months ended June 30, 2014, up from $0.6 million for the same period of 2013 as a result of lease revenue recognized in June 2014.
Scheduled service revenue. Scheduled service revenue increased 14.4 percent to $189.2 million for the three months ended June 30, 2014, up from $165.3 million in the same period of 2013. The increase was driven by a 12.4 percent increase in the number of scheduled service passengers and a 1.9 percent increase in the scheduled service average fare. Passenger growth was attributable to an 11.5 percent increase in the number of scheduled service departures as we continued to grow our network.
Ancillary revenue. Ancillary revenue increased 9.8 percent to $95.4 million for the three months ended June 30, 2014, up from $86.9 million in the same period of 2013, primarily driven by 12.4 percent increase in scheduled service passengers. Our air-related ancillary revenue per scheduled service passenger decreased $0.08 primarily attributable to a decrease in bag fees per passenger. Third party products revenue decreased primarily due to lower hotel revenue.

The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

                                                Three Months Ended June 30,       Percentage
                                                   2014               2013          Change
Air-related charges                          $         40.65     $      40.73         (0.2 )%
Third party products                                    4.58             5.52        (17.0 )%
Total ancillary revenue per scheduled
service passenger                            $         45.23     $      46.25         (2.2 )%


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,       Percentage
(in thousands except room nights and rental
car days)                                          2014               2013           Change
Gross ancillary revenue - third party
products                                     $      32,362       $      33,883         (4.5 )%
Cost of goods sold                                 (22,184 )           (23,095 )       (3.9 )%
Transaction costs (a)                                 (521 )              (418 )       24.6  %
Ancillary revenue - third party products     $       9,657       $      10,370         (6.9 )%
As percent of gross ancillary revenue -
third party                                           29.8 %              30.6 %   (0.8) pp
Hotel room nights                                  136,485             170,086        (19.8 )%
Rental car days                                    245,033             238,791          2.6  %

(a) Includes payment expenses and travel agency commissions.

During the three months ended June 30, 2014, we generated gross revenue of $32.4 million from the sale of third party products, which resulted in net revenue of $9.7 million. Net third party products revenue decreased 6.9 percent primarily due to a reduction in hotel room nights partially offset by an increase in the sale of rental car days. The 2.6 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 revenue decreased as our previous pre-purchase agreement for discounted rooms in Las Vegas concluded in the third quarter of 2013 and was renewed with rates which are not as attractive as the prior deal due to the improved Las Vegas hotel market.
Fixed fee contract revenue. Fixed fee contract revenue remained relatively flat, decreasing by $0.1 million to $3.0 million for the three months ended June 30, 2014, compared to the same period of 2013. Our fixed fee revenue is largely generated from charter flying for a casino operator.
Other revenue. Other revenue increased $2.4 million to $3.0 million for the three months ended June 30, 2014 compared to the same period of 2013. This was primarily due to the aircraft lease revenue related to the 12 Airbus A320 series aircraft acquired in June 2014 on lease to a European carrier. Operating Expenses

Our operating expenses increased 9.9 percent to $234.1 million for the three months ended June 30, 2014 compared to $213.0 million in the same period of 2013. 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
                                                      2014              2013          Change
Aircraft fuel                                   $        48.75     $      50.88         (4.2 )%
Salary and benefits                                      22.06            20.78          6.2
Station operations                                        9.40            10.59        (11.2 )
Maintenance and repairs                                  10.00            10.66         (6.2 )
Sales and marketing                                       3.10             2.83          9.5
Aircraft lease rentals                                    0.89             0.72         23.6
Depreciation and amortization                             9.21             9.38         (1.8 )
Other                                                     5.81             5.79          0.3
Operating expense per passenger                 $       109.22     $     111.63         (2.2 )%
Operating expense per passenger, excluding fuel $        60.47     $      60.75         (0.5 )%

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
                                               2014                2013             Change
Aircraft fuel                                      4.57             4.55            0.4  %
Salary and benefits                                2.07              1.86            11.3
Station operations                                 0.88              0.95            (7.4 )
Maintenance and repairs                            0.94              0.95            (1.1 )
Sales and marketing                                0.29              0.25            16.0
Aircraft lease rentals                             0.08              0.06            33.3
Depreciation and amortization                      0.86              0.84             2.4
Other                                              0.54              0.52             3.8
Operating expense per ASM (CASM)                  10.23             9.98            2.5  %
CASM, excluding fuel                               5.66             5.43            4.2  %

Our overall cost per ASM increased 2.5 percent for the three months ended June 30, 2014 compared to the same period in the prior year as decreases in station and maintenance expenses were more than offset by increases in salary and benefits expense. Fuel expense per ASM remained relatively flat year-over-year. CASM, excluding fuel, was impacted by nonrecurring expenses in the form of aircraft sub-service included in aircraft lease rental expense, crew training and passenger displacement costs related to training and crew availability delay. Sales and marketing expense per ASM increased as a result of higher credit card fees attributable to higher revenues and advertising expenses to support the launch of 12 new routes in the second quarter of 2014.

Aircraft fuel expense. Aircraft fuel expense increased 7.6 percent to $104.5 million for the three months ended June 30, 2014 compared to $97.1 million in the same period of 2013. A 4.7 percent increase in total system gallons consumed as well as an increase of 2.9 percent in our average fuel cost per gallon from $3.08 to $3.17 contributed to the increase in aircraft fuel expense. The increase in gallons consumed is attributable to a 10.5 percent increase in total system departures offset by improved fuel efficiency. Fuel efficiency increased predominantly from the introduction of used A320 series Airbus aircraft into our operating fleet which accounted for 21.9 percent of our ASMs during the quarter. As a result of these factors, our aircraft fuel per passenger decreased by 4.2 percent while remaining relatively flat on a per ASM basis, only increasing 0.4 percent, for the three months ended June 30, 2014 when compared to the same period of 2013.


Salary and benefits expense. Salary and benefits expense increased 19.3 percent to $47.3 million for the three months ended June 30, 2014 up from $39.7 million in the same period of 2013. The increase is primarily attributable to a 16.8 percent increase in the number of full-time equivalent employees. Headcount growth was mostly attributable to flight crews, flight operations and maintenance staff to support a 5.3 percent increase in the average number of aircraft in revenue service year-over-year and increasing Airbus A320 series aircraft operations. Additionally, we incurred nonrecurring expenses of $1.2 million associated with an "early out program" to encourage flight attendant retirements and higher bonus expense due to our higher profitability for the three months ended June 30, 2014 compared to the same period in 2013. Station operations expense. Station operations expense remained flat at $20.2 million for the three months ended June 30, 2014 and June 30, 2013. A 10.5 percent increase in total system departures was offset by an 11.2 percent decrease in station operations expense per passenger from $10.59 for the three months ended June 30, 2013 to $9.40 for the same period of 2014. In September 2013, we changed gates at McCarran International Airport in Las Vegas, Nevada, which led to decreased cost per departure as we lease less square footage at our new gates.

Maintenance and repairs expense. Maintenance and repairs expense increased 5.4 percent to $21.4 million for the three months ended June 30, 2014 compared to $20.3 million in the same period of 2013. The increase was primarily attributable to a 5.3 percent increase in average operating fleet size from 64.6 aircraft for the three months ended June 30, 2013 to 68.0 aircraft for the same period 2014. During the three month periods ended June 30, 2014 and June 30, 2013, our maintenance expense per aircraft per month remained relatively unchanged at $105 thousand.
Sales and marketing expense. Sales and marketing expense increased 23.1 percent to $6.7 million for the three months ended June 30, 2014, compared to $5.4 million in the same period of 2013 due to higher credit card fees driven by a 12.9 percent increase in scheduled service revenue and increased marketing support to launch 12 new routes.
Aircraft lease rentals expense. We had $1.9 million in aircraft lease rentals expense for the three months ended June 30, 2014 compared to $1.4 million in the same period of 2013. During the three months ended June 30, 2014, additional costs related to contracting for sub-service were partially offset by a reversal of an outstanding accrual for supplemental rent in the amount of $2.0 million as we entered into an agreement to purchase the Airbus A320 series aircraft from operating lease.

Depreciation and amortization expense. Depreciation and amortization expense increased 10.4 percent to $19.8 million for the three months ended June 30, 2014, compared to $17.9 million in the same period of 2013. Our average number of owned aircraft in service increased by 5.3 percent to 68.0 aircraft for the three months ended June 30, 2014 compared to 64.6 aircraft for same period in 2013. In addition, in the quarter, we began to depreciate the 12 Airbus A320 series aircraft purchased in the second quarter 2014 but currently leased to a European carrier.
Other expense. Other expense increased 12.6 percent to $12.4 million for the . . .

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