Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ALGT > SEC Filings for ALGT > Form 10-Q on 1-Nov-2016All Recent SEC Filings

Show all filings for ALLEGIANT TRAVEL CO

Form 10-Q for ALLEGIANT TRAVEL CO


1-Nov-2016

Quarterly Report


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

The following discussion and analysis presents factors that had a material effect on our results of operations during the three and nine months ended September 30, 2016 and 2015. Also discussed is our financial position as of September 30, 2016 and December 31, 2015. 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, 2015. This discussion and analysis contains forward-looking


statements. Please refer to the section below entitled "Cautionary Note Regarding Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.

THIRD QUARTER REVIEW

Financial highlights:

Total operating revenue increase of $33.5 million over third quarter 2015,

operating margin of 23.0 percent,

$2.75 earnings per share (fully diluted),

operating 337 routes as of quarter end versus 271 at the same point in 2015, and 29 new routes currently scheduled to begin within the next two quarters,

payment of quarterly recurring cash dividends of $11.5 million during the quarter, $28.2 million year to date

Overview

In September 2016, we appointed John Redmond as President of the Company. Mr. Redmond served as an independent member of our board of directors since 2007 (excluding one year while attending to business obligations overseas) and will continue to serve as a member of the board. His prior experience as chief executive officer of MGM entities and extensive experience with other premier leisure organizations provides valuable travel industry knowledge.

Also in September, we launched the Allegiant World MasterCard issued by Bank of America. This is a co-branded credit card program that provides cardholder benefits and generates points based on dollar spend which can be converted into purchases for items sold on our website such as flights, hotel rooms, car rentals and show tickets. This program gives our customers more opportunities to travel, and we expect it will be accretive to earnings in the long-term.

In July 2016, we signed a purchase agreement to acquire 12 newly manufactured Airbus A320 series aircraft expected to enter service in 2017 and 2018. Although these aircraft will have higher purchase prices, we expect the benefits of a greater number of seats, better fuel efficiency, lower maintenance costs, and longer depreciable lives will make these aircraft efficient additions to our fleet.

The tentative agreement reached with the International Brotherhood of Teamsters ("IBT") for a collective bargaining agreement with our pilots was ratified in July 2016 and became effective on August 1, 2016.

Capacity grew by nearly 19 percent over third quarter 2015 as a result of market growth, in addition to opportunities for increased profitable off-peak flying due to lower fuel prices. Our average number of aircraft in service also increased (all Airbus aircraft) by 12.4 percent, as we continue our move toward a single fleet type. Operating expense per available seat mile ("CASM") decreased quarter over quarter, largely attributable to the decrease in system average price per gallon of fuel as well as the improved fuel efficiency of our fleet.

AIRCRAFT

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

         September 30, 2016    December 31, 2015    September 30, 2015
MD83/88                  48                   51                    51
B757-200                  4                    5                     6
A319 (1)                 15                   10                     7
A320                     16                   14                    10
Total                    83                   80                    74

(1) Excludes 12 A319 aircraft on lease to a European carrier until 2018.

We have solidified our plan for the full retirement of our MD-80 fleet in 2019 as we continue to transition to a single fleet type of Airbus A320 series aircraft. As of September 30, 2016, we have firm commitments to purchase 33 new and used Airbus A320 series aircraft which we expect to be delivered between 2016 and 2020. In addition, we expect to add to our operating


fleet 12 owned Airbus A320 series aircraft currently on lease to a European carrier. We will continue to purchase used Airbus A320 series aircraft on an opportunistic basis.

Fleet Plan

The below table indicates the number of aircraft expected to be in service by
the end of 2016 based on currently scheduled additions to, and retirements from,
our operating fleet.

         As of December 31, 2016
MD-80                         48
B757-200                       4
A319                          17
A320                          16
Total                         85

NETWORK

The following illustrates our network as of the dates indicated (includes cities served seasonally):
[[Image Removed: algt2016q3_chart-02070.jpg]]

Our network as of the end of third quarter 2016 represents a 24.4 percent increase in the number of routes flown compared to the end of the same quarter in 2015. Mid-sized cities (included in number of under-served cities in chart above) served as of December 31, 2014, December 31, 2015 and September 30, 2016 were zero, 17 and 19, respectively.

Including recent service announcements, we were selling 366 routes at September 30, 2016, including one new destination: San Juan, Puerto Rico (while discontinuing service to Palm Beach, Florida) and one new under-served city:
Trenton, New Jersey. We also announced our move from Akron-Canton Airport to Cleveland Hopkins International Airport to better service the Cleveland, Ohio area.

TRENDS

We are systematically retiring our MD-80 and Boeing 757-200 fleets as we transition to the Airbus A320 series aircraft as our single fleet type. Our ability to grow service and profitability during the period of fleet transition will be limited. Although this fleet transition will result in operating cost pressure in the short-term, we expect the long-term benefits of better fuel efficiency, lower maintenance costs, and longer depreciable lives of an all-Airbus fleet will more than offset the additional costs incurred in the transition. We plan to place two additional A320 series aircraft into service prior to the end of 2016, and retired one MD-80 and one Boeing 757-200 aircraft in third quarter 2016.


Although Airbus aircraft are significantly more fuel efficient than our other fleet types, in the long-term, fuel costs remain uncertain and volatility could materially affect our future operating costs.

The collective bargaining agreement with our pilots was ratified in July 2016, and provides for enhancements to pay scales, benefits, and work rules conducive to our unique operating schedule. Estimated incremental expense in the first year of the contract is expected to be approximately $44.5 million and an estimated increase in total cost of $290.0 million is expected over the five-year agreement term which became effective on August 1, 2016.

In August 2016, our flight attendants, represented by the Transport Workers Union, reached a tentative collective-bargaining agreement with us. The flight attendants chose not to approve this agreement and the parties will continue negotiations. Any labor agreement reached following negotiations would likely increase our operating costs.

In October 2016, our flight dispatchers voted in favor of representation by the IBT Local 986. We are in the initial stages of the process and a negotiating committee has yet to be formed.

In the current low-cost fuel environment, we expect competitive capacity trends will continue to put pressure on our yields in competitive markets. Based on published schedules by us and other carriers, we expect there will be mainline competition on 66 of the 360 routes we expect to be operating by the end of 2016.

RESULTS OF OPERATIONS

Comparison of three months ended September 30, 2016 to three months ended September 30, 2015

Operating Revenue

Scheduled service revenue. Scheduled service revenue for the third quarter 2016 increased by 4.3 percent compared to 2015. The increase was primarily driven by a 21.8 percent increase in scheduled service passengers, offset by a 14.4 percent decrease in scheduled service average base fare which was adversely affected by capacity growth into newer markets and increased off-peak flying to capitalize on the current low-cost fuel environment.

Ancillary air-related charges. Ancillary air-related charges for the third quarter 2016 increased 18.4 percent compared to 2015, due mostly to the increase in scheduled service passengers resulting from capacity growth. These effects were diluted by a 2.9 percent decrease in ancillary air-related charges per passenger as items such as bag fees tend to decrease in correlation with reduced stage length.

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

                                                Three Months Ended September 30,         Percent
(dollars in thousands)                              2016                 2015            Change
Gross ancillary revenue - third party
products                                     $        36,701       $        31,319         17.2  %
Cost of goods sold                                   (25,163 )             (21,148 )       19.0
Transaction costs (1)                                   (279 )                (281 )       (0.7 )
Ancillary revenue - third party products     $        11,259       $         9,890         13.8
As percent of gross ancillary revenue -
third party                                             30.7 %                31.6 %   (0.9) pp
Hotel room nights                                    114,185               103,750         10.1
Rental car days                                      399,859               305,750         30.8  %

(1) Includes payment expenses and travel agency commissions.

Ancillary third party revenue increased 13.8 percent for the third quarter 2016 compared to 2015 as a result of our increase in scheduled service passengers, which was offset by a 6.5 percent decrease in ancillary third party revenue per passenger largely attributable to a quarter over quarter decrease in hotel revenue margin.


Fixed fee contract revenue. Fixed fee contract revenue for the third quarter 2016 increased $4.5 million from 2015 due mostly to the Apple Vacations charter which began in December 2015 as well as increased flying for the Department of Defense. The effects of this activity were slightly offset by the discontinuation of Peppermill Resorts charter service in January 2016.

Other revenue. Other revenue for the third quarter 2016 increased slightly compared with 2015, due mostly to foreign currency exchange rates impacting aircraft lease revenue related to 12 Airbus A320 series aircraft.

Operating Expenses

We primarily evaluate our expense management by comparing our costs per passenger and per ASM 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. The table also presents operating expense per passenger, excluding fuel, a statistic which gives management and investors the ability to measure and monitor our cost performance absent fuel price volatility. Both the cost and availability of fuel are subject to many economic and political factors beyond our control.

                                                  Three Months Ended September 30,       Percent
                                                       2016                2015          Change
Aircraft fuel                                   $           23.58     $      28.20        (16.4 )%
Salaries and benefits                                       24.98            24.36          2.5
Station operations                                          10.97            10.93          0.4
Maintenance and repairs                                      8.94            10.48        (14.7 )
Depreciation and amortization                                8.81            10.06        (12.4 )
Sales and marketing                                          1.92             1.67         15.0
Aircraft lease rentals                                       0.16             0.29        (44.8 )
Other                                                        7.96             6.08         30.9
Operating expense per passenger                 $           87.32     $      92.07         (5.2 )%
Operating expense per passenger, excluding fuel $           63.74     $      63.87         (0.2 )%

The following table presents unit costs on a per ASM basis, or CASM, for the indicated periods. As on a per-passenger basis, excluding fuel on a per ASM basis provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility.

                                  Three Months Ended September 30,      Percent
                                           2016                2015      Change
Aircraft fuel                                        2.22     2.63    (15.6 )%
Salaries and benefits                                2.35      2.27       3.5
Station operations                                   1.03      1.02       1.0
Maintenance and repairs                              0.84      0.98     (14.3 )
Depreciation and amortization                        0.83      0.94     (11.7 )
Sales and marketing                                  0.18      0.16      12.5
Aircraft lease rentals                               0.02      0.03     (33.3 )
Other                                                0.75      0.55      36.4
CASM                                                 8.22     8.58     (4.2 )%
Operating CASM, excluding fuel                       6.00     5.95      0.8  %

Aircraft fuel expense. Aircraft fuel expense increased 1.5 percent for the third quarter 2016 compared to 2015, as the system average fuel cost per gallon decreased by 13.7 percent, offsetting the effect of a 17.8 percent increase in system fuel gallons consumed (resulting from a 20.2 percent increase in system capacity).

Additionally, ASMs per gallon increased over third quarter 2015 as Airbus aircraft flew 49.0 percent of scheduled service ASMs in the third quarter 2016, compared to 32.5 percent for the same period in 2015. We anticipate our fuel efficiency will continue to improve as we transition to an all Airbus fleet.


Salary and benefits expense. Salary and benefits expense increased 24.5 percent for the third quarter 2016 when compared to the same period last year. The increase is primarily attributable to a 23.9 percent increase in the number of full-time equivalent employees needed to support an increase in aircraft in service and the transition to a single fleet type. A quarter over quarter decline in our stock price led to a $3.1 million decrease in stock compensation expense.

The collective bargaining agreement for our pilots also went into effect on August 1, 2016, increasing salary and benefits expense for this work group by approximately $4.5 million over the same quarter 2015. Salary and benefits expense is expected to continue to increase at a higher rate than employee growth due to the increased costs associated with this agreement.

Station operations expense. Station operations expense for the third quarter 2016 increased 21.9 percent compared to the same period in 2015 due primarily to a 23.4 percent increase in system departures.

Maintenance and repairs expense. Maintenance and repairs expense for the third quarter 2016 increased by 3.5 percent compared to the same period in 2015 despite a 12.4 percent increase in the average number of aircraft in service, due to fewer MD-80 aircraft major maintenance events quarter over quarter. Additionally, major maintenance events for the MD-80 aircraft are expected to continue to decline as we retire aircraft consistent with our fleet retirement plan.

Depreciation and amortization expense. Depreciation and amortization expense for the third quarter 2016 increased 6.3 percent compared to 2015, on a 12.4 percent increase in the average number of aircraft in service. The effect of the increase in fleet size was diluted due to reduced depreciation on our MD-80 fleet as it nears full depreciation. However, we expect depreciation expense to increase in the fourth quarter 2016 and full-year 2017 as a result of our condensed MD-80 retirement schedule.

Sales and marketing expense. Sales and marketing expense for the third quarter 2016 increased $1.6 million compared to the same period in 2015. This is primarily due to increased advertising efforts for our expanding network, as well as expenses related to a national advertising campaign to support new market growth. The full effect of these increases was slightly offset by a decrease in credit card fee expense. We charge for credit card fee reimbursement, at zero margin, which is applied as a reduction to sales and marketing expense, and the net amount paid by us for credit card fees is reduced. Credit card fee reimbursements for the third quarter 2016 and 2015, were $6.2 million and $5.6 million respectively.

Other operating expense. Other operating expense for the third quarter 2016 increased $8.7 million compared to 2015. The increase is due to flight crew training needed to support our growing operating fleet, information technology expenses, increased property taxes, as well as additional crew costs due to irregular operations.

Income Tax Expense

Our effective tax rate decreased slightly quarter over quarter, at 36.0 percent for the three months ended September 30, 2016, compared to 37.1 percent for the three months ended September 30, 2015. The effective tax rate for 2016 differed from the statutory federal income tax rate of 35.0 percent primarily due to state and foreign taxes, the early adoption of ASU 2016-09 related to share-based payments, as well as executive compensation deduction limitations. The effective tax rate for the same period in 2015 differed from the federal tax rate due to state and foreign taxes, the effect of which was reduced by a one-time tax benefit related to the liquidation of a subsidiary.

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 applicable to such income. Discrete items during interim periods may also affect our tax rates.

Comparison of nine months ended September 30, 2016 to nine months ended September 30, 2015

Operating Revenue

Scheduled service revenue. Scheduled service revenue for the nine months ended September 30, 2016 increased 2.0 percent compared with 2015. The increase was mostly the result of an 18.3 percent increase in scheduled service passengers offset by a 13.8 percent decrease in scheduled service average base fare, which was affected by capacity growth into new markets and increased off-peak flying to capitalize on the current low-cost fuel environment.
Ancillary air-related charges. Ancillary air-related charges for the nine months ended September 30, 2016 increased 15.6 percent compared with 2015 due mostly to the increase in scheduled service passengers. These effects were diluted by a 2.3


percent decrease in ancillary air-related charges per passenger as items such as bag fees tend to decrease in correlation with reduced stage length.

Ancillary third party products. 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:

                                                 Nine Months Ended September 30,         Percent
(dollars in thousands)                              2016                 2015            Change
Gross ancillary revenue - third party
products                                     $       112,309       $       104,612          7.4  %
Cost of goods sold                                   (76,915 )             (71,798 )        7.1
Transaction costs (1)                                   (912 )              (1,151 )      (20.8 )
Ancillary revenue - third party products     $        34,482       $        31,663          8.9
As percent of gross ancillary revenue -
third party                                             30.7 %                30.3 %     0.4 pp
Hotel room nights                                    339,504               362,592         (6.4 )
Rental car days                                    1,168,544               939,888         24.3  %

(1) Includes payment expenses and travel agency commissions.

Ancillary third party products revenue for the nine months ended September 30, 2016 increased $2.8 million over the same period in 2015. This was due to the increase in scheduled service passengers and offset by an 8.0 percent decrease in ancillary third party products revenue per passenger, largely attributable to lower hotel room take rate.

Fixed fee contract revenue. Fixed fee contract revenue for the nine months ended September 30, 2016 increased $10.7 million compared with 2015, due to increased charter services for the Department of Defense and the commencement of charter service for Apple Vacations (contract began in December 2015), resulting in a combined $14.5 million of revenue during the first nine months of 2016. The effects of these agreements were partially offset by the discontinuation of Peppermill Resorts charter service in January 2016.

Operating Expenses

The following table presents operating expense per passenger for the indicated
periods:

                                                  Nine Months Ended September 30,       Percent
                                                       2016               2015          Change
Aircraft fuel*                                  $          21.76     $      30.39        (28.4 )%
Salaries and benefits                                      25.11            23.97          4.8
Station operations                                         11.45            10.47          9.4
Maintenance and repairs                                     9.75             9.87         (1.2 )
Depreciation and amortization                               9.03            10.31        (12.4 )
Sales and marketing                                         1.99             2.37        (16.0 )
Aircraft lease rentals                                      0.11             0.29        (62.1 )
Other                                                       6.94             6.64          4.5
Operating expense per passenger*                $          86.14     $      94.31         (8.7 )%
Operating expense per passenger, excluding fuel $          64.38     $      63.92          0.7  %

*Includes effect of $8.3 million fuel tax refunds in the second quarter of 2016.


The following table presents unit costs, defined as Operating CASM, for the indicated periods:

                                  Nine Months Ended September 30,      Percent
                                          2016                2015      Change
Aircraft fuel*                                      1.97     2.78    (29.1 )%
Salaries and benefits                               2.27      2.19       3.7
Station operations                                  1.04      0.96       8.3
Maintenance and repairs                             0.88      0.90      (2.2 )
Depreciation and amortization                       0.82      0.94     (12.8 )
Sales and marketing                                 0.18      0.22     (18.2 )
Aircraft lease rentals                              0.01      0.03     (66.7 )
Other                                               0.62      0.60       3.3
CASM*                                               7.79     8.62     (9.6 )%
Operating CASM, excluding fuel                      5.82     5.84     (0.3 )%

*Includes effect of $8.3 million fuel tax refunds in the second quarter of 2016.

Aircraft fuel expense. Aircraft fuel expense decreased 15.7 percent for the nine months ended September 30, 2016 compared to the same period in 2015. Excluding the effect of one-time $8.3 million in fuel tax refunds, fuel expense decreased 11.9 percent compared to 2015. The system average fuel cost per gallon declined by 24.2 percent compared to 2015 (excluding the fuel tax refunds), which was offset by a 16.1 percent increase in system fuel gallons consumed due to an increase in total system capacity of 19.0 percent.
ASMs per gallon increased 2.6 percent for the nine months ended September 30, 2016 compared to the same period in 2015 as Airbus aircraft flew 47.4 percent of scheduled service ASMs in the first nine months of 2016, compared to 30.2 percent for the same period in 2015. We anticipate our fuel efficiency will continue to improve as we transition to an all Airbus fleet.
Salary and benefits expense. Salary and benefits expense increased 23.4 percent for the nine months ended September 30, 2016 compared to the same period in 2015. The increase is mostly attributable to a 23.9 percent increase in the number of full-time equivalent employees associated with an increase in average number of aircraft in service and the transition to a single fleet type. A year-over-year decline in our stock price led to a $6.4 million decrease in stock compensation expense.
The collective bargaining agreement for our pilots also went into effect on August 1, 2016, increasing salary and benefits expense for our pilots by approximately $4.5 million over the same period in 2015.
Station operations expense. Station operations expense for the nine months ended September 30, 2016 increased 28.8 percent compared to the same period in 2015, which outpaced a 20.2 percent increase in system departures. Station expense per departure increased 7.2 percent year over year partially because we are serving more medium-sized cities in 2016 compared to 2015, and these airports typically have higher ground handling fees than the smaller airports we serve. We have also experienced overall rate increases at numerous stations and increased inconvenienced traveler expenses due to irregular operations this summer.

Maintenance and repairs expense. Maintenance and repairs expense for the nine . . .

  Add ALGT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ALGT - All Recent SEC Filings
Copyright © 2017 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.