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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Spirit Airlines Second Quarter 2018 Earnings Conference Call. My name is Ellen and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session.
I will now turn the call over to DeAnne Gabel, Senior Director-Investor Relations. Ms. Gabel, you may begin.
Thank you, Ellen, and welcome, everyone, to the Spirit Airlines second quarter earnings call. Bob Fornaro, our Chief Executive Officer, will give a few brief opening comments followed by Matt Klein, our Senior Vice President and Chief Commercial Officer, who will review our revenue performance and outlook, followed by Ted Christie, our President and Chief Financial Officer, who will discuss our cost performance.
We'll close with – Bob will have some closing remarks before we begin the Q&A session for sell-side analysts following our prepared remarks. Also joining us in the room today are Thomas Canfield, our General Counsel; John Bendoraitis, our Chief Operating Officer; and other members of our senior leadership team. This call is being recorded and simultaneously webcast. A replay of this call will be archived on our website for 60 days.
Today's discussion contains forward-looking statements that represent the company's current expectation or beliefs concerning future events and financial performance. Forward-looking statements are not a guarantee of future performance or results and are based on information currently available and are management's belief as of today, July 26, 2018.
There could be significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements, including the risk factors discussed in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. We undertake no duty to update any forward-looking statements.
In comparing results today, we will be adjusting all periods to exclude special items. Please refer to our second quarter 2018 earnings release which is available on our website for the reconciliation of our non-GAAP measures.
And with that, let me turn the call over to Bob.
Thanks, DeAnne, and thanks to everyone for joining us today. Yesterday, we reported second quarter 2018 net income, adjusted for special items, of $75.7 million or $1.11 per diluted share, and our operating margin was 13.3%.
Despite materially higher fuel prices, our second quarter results exceeded our expectations due to strong ancillary revenue production and better-than-expected cost performance primarily driven by excellent operational performance.
For the second quarter, we achieved a DOT on-time performance of 79.6%, our best second quarter performance in the company's history, and our completion factor was 99.4%. I commend and congratulate our team members on these achievements.
The hard work and effort shown by the Spirit team has really begun to reap the benefits we expected. We are achieving better operational reliability and improved customer satisfaction, and we are doing this while improving our cost structure and driving ancillary revenue performance. All these things combined make Spirit a very strong competitor.
With that, I'll turn it over to Matt and Ted to discuss our second quarter in more detail.
Thanks, Bob. For the second quarter of 2018, we reported total revenue of $852 million. Total revenue per available seat mile decreased 6.8% year-over-year. Our second quarter 2018 TRASM result was negatively impacted by a year-over-year increase in our average stage length and by the calendar shift of Easter. Normalizing for those factors, we estimate TRASM would have been down 1.6% year-over-year.
Although we have yet to lap the passenger yield pressures from the competitive dynamics we experienced in the third quarter last year, we did offset some of the headwind with stronger non-ticket revenue. Non-ticket revenue per passenger segment that is non-fare passenger revenue plus other revenue for the second quarter was $54.57, up 3% year-over-year. This improvement is attributable to both higher take rates of certain items such as combos, bags, and big front seats, as well as our dynamic pricing initiatives.
This trend gives us confidence that we can continue to drive year-over-year increases in non-ticket revenue per segment and we are on pace to achieve our target of $55 per segment on a run-rate basis by the end of this year.
Another component of driving ancillary revenue is how we develop our network. For the last 18 months, we have been growing and diversifying our network, focusing our growth in three key areas: big cities; large leisure destinations; and international cities. Building a diverse network with a few key areas of concentration helps with our schedule flows and gives customers broader access to our entire network.
During the second quarter, we announced that in September we will begin service from Asheville and Greensboro to three of our Florida destinations: Tampa, Fort Lauderdale, and Orlando. We also announced an international expansion from Orlando to 11 destinations in Latin America and the Caribbean as well as some additional international service from big cities in our network.
By the end of the year, international capacity will account for approximately 15% of our total capacity, compared to only 9% at the beginning of 2018. We continue to be excited about the opportunity to expand our international footprint.
Additionally, as we discussed last quarter, in our post-Labor Day schedule, we've cut a lot of underperforming long-haul routes and have redeployed these aircraft on shorter-stage routes throughout our network.
Turning to capacity, we estimate ASMs for the third quarter 2018 will increase approximately 24.5% year-over-year. As you may recall, in third quarter 2017, we canceled nearly 1,700 flights due to Hurricanes Harvey, Irma, and Maria. On a schedule-over-schedule basis, our ASMs are up 21% year-over-year in the third quarter. For the fourth quarter, we expect our capacity to be up about 14%, which is 250 basis points lower than our estimate at the beginning of the year.
Now turning to our revenue outlook for the third quarter 2018; as anticipated, overall passenger demand for the peak summer period is strong and we have taken action using both price structure adjustments as well as revenue management techniques in an effort to drive yields higher.
While our international region is performing well overall, we started to see signs of softness in Cancun in the second quarter. This was a slight negative to our second quarter results, but we do estimate it will impact third quarter TRASM by about 100 basis points. We have made select capacity trims to Cancun beginning in the fall and have postponed some new additions to Cancun. We continue to monitor the travel advisory situation, which started to become an issue earlier this year, its impact on our demand for travel to Cancun, and we will review further adjustments as necessary.
Based on the current industry pricing and inventory control trends we are seeing, we estimate our total RASM for the third quarter 2018 will be up between 2% and 3% year-over-year. This takes into account a 170-basis-point drag related to a 3.4% increase in stage length as well as a 100-basis-point softness attributable to Cancun.
With that, here's Ted to discuss our cost performance and third quarter cost outlook.
Thanks, Matt, and thanks to all of you for joining us today. I join Bob in congratulating our team for their achievements in the second quarter and thank them for their dedication and commitment in providing excellent service to our guests. Based on survey results and the number of compliment letters we now receive, our guests are also noticing how we have improved. So, kudos to our team.
Moving on to our second quarter 2018 cost performance, CASM ex-fuel was $0.0517, a decrease of 11.3% year-over-year. Better operational performance was a large driver of this improvement and resulted in lower passenger re-accommodation expense and lower crew disruption expense per ASM as well as improved labor productivity and efficiency, which helped to partially offset the impact of higher wage rates.
Aircraft rent per ASM was also lower year-over-year primarily due to the elimination of lease expense related to the 14 A319 aircraft the company purchased off-lease during the quarter. With the purchase of these A319 aircraft, we now have 22 aircraft in our fleet that are unencumbered. At this point, we aren't planning on any near-term aircraft retirements, but having these unencumbered assets creates flexibility as we plan what our future fleet will look like. We are in the midst of evaluating the options for deliveries beyond 2021 and anticipate having an update on that front by year-end.
As for our cost outlook, for the third quarter 2018, we estimate CASM ex-fuel will be down 3% to 4%. We are projecting CASM ex-fuel will be up mid-single digits in the fourth quarter. Along with continued pressure from higher pilot rates, during the fourth quarter, we have headwinds from higher scheduled maintenance as well as timing of flight attendant and pilot training as we prepare for the 2019 peak schedule. Nonetheless, we are on track to achieve a full-year 2018 CASM ex-fuel of down 3.5% to 4% year-over-year.
We are just beginning our bottoms-up planning process for 2019 which starts with determining our level of operations. As we consider how well our operation has been running we are gaining confidence that we can maintain a high level of reliability while increasing our utilization in the peak periods next year, which we believe is the best time to push our assets as that is when demand is the highest.
Together with our higher completion factor trends, this means our capacity growth for 2019 will be up about 14%. As it relates to 2019 CASM ex, we've updated our initial high-level estimate to include operational trends in line with what we've recently been experiencing, and we now expect CASM ex-fuel to be flat to up 1%. There may be some improvement to this range once we go through our detailed refinement. We'll update you again on 2019 once we complete our formal budgeting process.
In closing, we are dedicated to driving earnings growth and, while higher fuel prices make this goal more difficult, we are taking action by adjusting our network, pushing pricing where we can, and producing higher non-ticket revenue. In addition to maintaining our commitment to non-fuel cost discipline, we remain focused on running a reliable, on-time airline. The benefits of doing so helps the business across the board. Our guest experience is better, our team member experience is positive, and our cost structure is strong.
With that, I'll throw it back to Bob.
Thanks, Ted. Spirit is evolving. We are making service enhancements and our operational reliability is much improved. Our cost structure remains intact and likely to widen versus our competition. Our labor agreements are set for a number of years and we believe opportunities exist for more efficiencies.
And the network has evolved as well. It is much more diverse today than it was several years ago. We have more than 20 cities in excess of 20 departures today. We're well established in key big markets, and we are now leveraging traditional leisure markets like Las Vegas and Orlando. And we have a strong international operation in Fort Lauderdale. And finally, we see plenty of opportunity in mid-to-small markets.
So, if you add that all together, we see the potential for margin improvement in the future. And as you know, the ride isn't always smooth and predictable, but the trend is slowly taking shape.
With that, I'll turn it over to DeAnne.
Thanks, Bob, Ted, Matt. Ellen, we are ready to begin the question-answer session. We do ask that everyone limit themselves to one question with one related follow-up. Ellen?
Thank you. Our first question is from Jack Atkins.
Good morning, everyone. Thanks for taking my questions. I guess to start off here with Matt; clearly, you all have been very successful over the last few quarters on the ancillary side with new product rollouts and more dynamic pricing there. Matt, I'm just curious if you could maybe comment for a moment on sort of what's left to come this year as you look at further product rollout and sort of what else you could maybe pull from a lever perspective on the dynamic pricing front this year.
Yeah, sure. Great. Thanks for the question. So, as we continue to move – as we move through this year and continue to move through the rest of this year, we've been able to put some – continue to put some newer technologies in place, allow us to make changes to some of our thoughts around how we yield manage and how we think about things like our combo of bundled products that we have on our website today.
And that's an opportunity that we see for us as we learn more and think about how we offer products to our customers. And it's not necessarily on like an individualized basis. We're thinking more in terms of how customers have similar traffic patterns. So, as customers themselves may group themselves in traffic patterns, we learn about how size of the record matters or the length of stay that the party is going to stay or where they're headed.
All of those come into play from an ancillary revenue perspective and what those customers may want in their offering. So, it's more about how we think about when to offer and how to offer. Everyone gets the same offer. It's more about the right way that we present it to them and act more as a retailer and merchandise our products.
As we think about the rest of this year and then into next year as well, we're not at this time going to be committing to a target for next year, but we do know that we have opportunity in a couple of key areas. Things that we're addressing now but they have longer lead times.
For example, our affinity card relationship we have right now is one that we know that there's upside on that, that when we created that program a number of years ago, it was disruptive and worked really well for the model and the industry as we competed in it at that time, and now it needs to be refreshed. And those are the kinds of opportunities that we know have tangible opportunity for us. Some of those have longer lead times, so it's going to take a little while for us to recognize all that. But when we think about 2019, that's where I see some exciting opportunity for us to continue to build on the trends that we put together this year.
That makes a lot of sense, Matt. Thank you. And then kind of just following up on the revenue environment, as we think about the progression on the TRASM side for the rest of the year, clearly turning positive on a year-over-year basis with TRASM in the third quarter is a great step. But looking at the fourth quarter with capacity growth coming down significantly and just thinking about normal seasonal revenue trends 3Q to 4Q, is it right to assume that you should be seeing, all else being equal, continued momentum on the TRASM side as we move forward into the fourth quarter?
So, actually, we do anticipate that we're going to continue to have good momentum. The question is really going to be on what kind of incremental basis are we talking about. We really like what we've done with the route network, how we're redeploying. We do have less growth on a sequential basis in the fourth quarter versus the third quarter, but there's a lot of puts and takes in there.
I think, Ted, maybe you have some color to add to that as well.
Yeah, Jack. The only point I would make is – by the way, we're very bullish on the trends we see, specifically in the peak, but the traction that we just discussed in Matt's prior answer that we see on ancillary gives the company a lever that we're excited to pull.
As we head into the fourth quarter, sequentially, the comp is a little more difficult. The third quarter last year was a tough quarter, I think, for the industry. And then, as you may recall, we reported some pretty strong revenue performance in the peak last year. So we faced that as a headwind sequentially going into the fourth quarter.
So I would – while we're excited about what we see and, as Bob mentioned in his preamble, the improvement we're going to see will probably come in bites, right? You'll get some movement in the right direction and we're definitely seeing it turn. And I think, by the way, regardless, the move to positive is happening in the third quarter and we feel like that will maintain itself into the fourth. And so, we're definitely going in the right direction.
That's great to hear. Thanks again for the time.
Our next question is from Susan Donofrio.
Yes. Good morning, everyone.
Good morning, Susan.
Good morning, Susan.
Yeah, my question is on technology. Could you give us an update on where you are with some enhancements to your website? And also, I know you had started to do a little bit on your app.
Yeah, certainly. So we've been deploying updates all year really to our website and that includes also better optimization of our mobile website as well for people that use their smartphones or tablets. So we've been deploying that throughout the year. We do have more deployments taking place closer to the end of this year and that will continue to give us more flexibility on our site.
From an analytics perspective, I'm very excited about the analytic opportunities that we're also going to be adding to the site, which will also be a double positive. On the one hand, we're also besides becoming more modern in the way that we deploy the website, we're also going to have the ability to do a lot more test and learn on the website as well. So, again, something that we think is going to have a big impact, not just on conversion of selling the ticket itself, but also how we learn about how better to merchandize our ancillary products.
And then in terms of the app, we did put out our app last year – late last year, which was really just a first generation tool for our guests to be able to have a more seamless flight experience, airport experience. And what we're going to be rolling out also later this year in about – in a few months actually is going to be the ability for us to go a little bit further.
Again, you're going to hear me say a lot of times about merchandizing our ancillary products. Today, we do a really good job of taking orders from our customers; what they want, we can sell them quite well. In the future, we're not only going to be able to do that, but we're also going to be acting more as a retailer and presenting the offers to them in a smarter way, maybe in a better way that we time the offer and then how we talk to our customers after they've already purchased tickets on us.
So we should start to see more specialized offers pushed out, you think, more towards the end of the year?
Yeah, towards the end of the year. It's not so much that they'll be specialized. It's more about that we're going to be able to better merchandise what we already have out there. So, for example: presenting opportunities to buy the seat assignment into our Big Front Seat product. Getting that offer out to guests who are using our app, we'll be able to get that out to them when we have open availability. We'll be able to merchandise to them in a much more efficient way and just letting them know that that opportunity is out there for them.
Today, a lot of times, you may have a seat or two that's available, people get to the airport, and then just under the normal airport experience, you may or may not be paying attention to what's going on, just the normal guest experience includes all kinds of activity at the airport. Now, we'll be able to message the opportunity to those guests and we expect the take rate to improve. That's just one example that we have out there.
Got it. Okay. Thank you.
Certainly.
The next question is from Savi Syth.
Hey. Good morning.
Good morning.
Good morning, Savi.
Good morning. First question was on the trend. I'm just trying to understand. I know the peaks have been strong and I know the off-peaks have been somewhat softer. So, are you seeing changes in how the industry is thinking about capacity as well as the adjustments that you're making that's maybe making that incrementally better? Or as you look into the fourth quarter, is it really more what you're contributing on the ancillary revenue that's driving the increase in optimism?
Well, Savi, this is Ted. I'll do my best to dive in there. Maybe Matt can jump in as well. So, it was a little bit tough to hear you, but it sounds like the question was around how we feel about revenue performance heading into the peak and off-peak and whether or not it's just ancillary contributing or the capacity moves the company's making also assisting.
I think our view is that the peak performance, like we said before, has been pretty consistent. We're using revenue management and inventory management techniques to lever that yield. In the off-peak, what has been a problem before is probably the supply/demand balance shifting in favor of the consumer more in the off-peak than in the peak.
The trajectory, however, and the commentary around broader domestic capacity would be positive to that type of setup. And we've made our own moves. We obviously previously discussed them. But we still see a large growth opportunity. So we're managing the balance between seeing a pretty sizable upside from a growth perspective and managing our own capacity to make sure we're deploying it at the right rate.
So, I think it's probably contributing, Savi, to be honest with you. But I think we're just at the beginning phases of seeing that capacity move feather through everyone's schedules into the fourth quarter.
And maybe just to reiterate, again, if you kind of dig through some of the detail of our schedule changes, there's a number of routes that, let's say, we're flying less in that shoulder period than we did last year. We're just anticipating the demand won't be there in a number of long-haul routes that we flew throughout the year. They're just going to be seasonal.
And there's an opportunity to recapture some of that business. We have many more connecting opportunities in our network today than we had a year ago. So, we see some – so it's a combination of things the industry's doing, combination of things we're doing ourselves.
That's very helpful. Thank you. And if I might, I know it's probably a little early for 2019, but how should we think about stage length versus new market, the mix there versus what you saw this year?
You asked about stage. I think it is early to set up. Our stage, historically, has hovered between 950 miles and 1,050 miles. And I think, as we indicated before, and Bob just alluded to it, longer-haul flying with little bit higher fuel is probably not as attractive as it was before. So wouldn't be surprised if the incremental adds come at slightly below average stage, which may be some of what you'll see into 2019. But we're not going to have dramatic swings in the average stage of the business going forward.
All right, very helpful. Thanks, guys.
The next question is from Duane Pfennigwerth. Please go ahead.
Hey, thanks. Was wondering if you could speak a little bit to the network changes and, specifically, the opportunity that you see out of Orlando internationally, how you're seeing RASM trends there, how much of that was flowing through Fort Lauderdale, et cetera.
Yeah. Thanks, Duane. So, as we think about Orlando in general, it's now – by the end of this year, it will be our second largest station along with Las Vegas, up there sort of neck-and-neck for second, third largest station, Fort Lauderdale being our largest station. We've had a big focus on Orlando as well as Las Vegas and continue to grow in large leisure destinations in general.
You see us add more to Myrtle Beach. We added a bunch to New Orleans as well. Those kinds of destinations work really well for us. It's where a significant percentage of vacation travelers want to go, and we're quite comfortable carrying that traffic at profitable levels. So, you'll see us continue to think about those kinds of destinations as key areas of growth for us.
In terms of international out of Orlando, the booking curves are kicking in. Just like any new routes there's some spool up in some routes that are a little slower; some are exceeding our expectations in there. So, on average, we're happy with what's going on there. It's really early in the booking curve in general, so any of the areas where we think we need to put a little more promotional work behind, we're working on that right now. But, overall, we're happy with it.
One of the decisions that we made to think about from an Orlando perspective is understanding the traffic that we were carrying through Fort Lauderdale on a connect basis already. So, we saw the opportunity in front of us, we're able to carry a lot of that traffic now on nonstop out of Orlando, and then we'll be able to back fill the Fort Lauderdale seats with other flow throughout our network as well as the Fort Lauderdale local passenger.
So, overall, it's a big incremental push to the network. And what it also allows is for customers to be able to piece different kinds of itineraries together. They can go nonstop out of Orlando south and then maybe connect through Fort Lauderdale going home if that's how their schedule meets for them.
One last thing I'd like to say about that is, as we start in Orlando, we're starting it off to the international destinations in the same way we start off a lot of routes, which is some of them are day of week where we're not going every day to most of these destinations. That allows us to build the network, build the presence, and allow us to grow off of that in future periods. So that's sort of the strategy behind how we came up with that and, right now, we like what we're seeing.
Thanks. And then just for my follow-up with respect to the 2Q CASM ex performance relative to the initial guidance. Obviously, you had an easy comp there and maybe some conservatism. But could you provide some detail on the line items that actually surprised you to the upside given a better operation? Thank you.
Sure, Duane. So, as we mentioned in our investor update, about 100 basis points of the improvement is shift going to the fourth quarter. But, beyond that, we saw market improvement across the lines in the income statement due to better operational performance. So, first of all, as you deliver on the top line ASM production from a completion factor perspective, which this operating group did better than we've ever seen, you're just going to get better unit throughput across every line.
And then, with less and less disruption, we see improvement in overtime, so salaries, wages, and benefits. We see it in ground handling related expense, which follows through our other operating line. We see it in interrupted trip related expense, which is in our other operating line. We see it in maintenance and repairs because we have, at times, had to ship parts throughout the system and pay freight when we're avoiding that type of expense. And so, it's really – we've alluded to this before. It has tendrils throughout the cost structure. And better operational performance is going to drive better cost performance across the board.
And Bob said it earlier; this is the kind of setup that we believe translates well into the future. We still have room to improve this as we refine our own staffing models, the way we look at bases, the way we look at training, all of those things now, we have a better handle on how this operation can work and it's going to help us deliver on cost line going forward.
Okay. Thank you.
The next question is from Helane Becker.
Great. Thanks, operator. Hi, everybody. Ted, that was actually a really good response to part of my question, which was actually related to as you think about expanding operations next year, right? You're talking about adding growth and maintaining that strong operational performance. Can you do that? Have you thought about how you'd do that successfully?
We have.
I mainly ask because, once before, you guys went down this path of focusing on improved operations and then you kind of slipped back. So, just making sure you're not going down that path again.
No. Appreciate that, Helane. Okay. Bob wants to...
We'll go back to the beginning. We did have an issue last year, but that was almost all tied to labor. We have made since May of 2016, basically, every month has been better than the comparable month adjusted for that period of two months last year. And it's not just words. We actually had to reduce our utilization initially to begin to make the improvements we had and establish a baseline in the airline.
And again, when you're generally not running – when you're running in the 60s or low 70s, there's a lot of things that are not right ultimately and it creates a lot of adverse cost. And once you begin to create stability, quite frankly, then all of a sudden, you can start to fix and make fundamental improvements.
And we're only about halfway through the process. We just implemented the new agreement – new pilot agreement in the first quarter. We haven't implemented the pref bid system yet. That's still many months away. And quite frankly, what we're finding is, as we become better planned, we were using one less spare this summer than we thought we needed because we see more quality in the operation.
Certainly, not all months will be good depending on weather can drive big changes. But I think we've made fundamental shifts in what we have in terms of what we have for people. Our OCC environment is dramatically different in terms of how we operate, in terms of the tools, the standards that we have. It's – I think if you kind of go back, Helane, to some of the stuff in my past, it becomes a habit of running well.
And you can always have a bad month. But, ultimately, once you put the ingredients in place and once you have standards in place, I think this trajectory should continue. Very confident about that. Again, it's not accidental. We said we were going to do it and its happening. And like I said, the only surprise is it probably took us six months longer because we had to go through a few operational issues last summer tied to some labor issues. But the trend is well intact.
That's great. Thanks, Bob. Excuse me. Sorry. I don't know what's wrong with my voice. Thanks very much. I appreciate it the answer.
Thanks, Helane.
The next question is from Michael Linenberg.
Yes. Two ones here. Bob, on some prior calls, I know you had mentioned that part of the operational constraints that you saw in some of your big airports was the fact that you didn't have enough gates. And as I recall, you started to rattle off airports where you saw an opportunity to get additional gates, one to improve the ops.
And I'll point to Orlando. That was one that, for a very long time, you were targeting additional gate space. It sounds like you got it since you're going to do the build-out this fall to, I guess, 11 plus markets or so. So, where are you now? What airports do you feel like you're still constrained and can't get space? And as we look out over the next year, what airports do you actually see where you're going to probably get up some additional space?
So, generally speaking, let's just say in bigger airports, gate space is really tight. And if you look at places like O'Hare or Atlanta or even at Dallas, there's not a whole lot of gates available. And maybe there's one here or there before the next construction project.
I think the biggest constraint for us is New York. We have a gate in Newark. And so we can only get so big there. We have two in LaGuardia. We'd like to be bigger in New York, New York. It makes a lot of sense because if you have additional flights in New York, you can do a lot more things outside New York. So those become a key.
Fort Lauderdale is a growth opportunity, but it's also tight. I think if you listen to a lot of calls, there's a lot of carriers talk about growing Fort Lauderdale. There's not enough real estate there for everybody to do what they want to do. And it's part of the reason why our initiative in Orlando becomes even more important.
So, right now, what we do like the fact is we don't have all our eggs in one basket. It's kind of by design. We have – again, we have 20-some odd cities with more than 25 today, some much more than that. And we have a few others that's kind of knocking on the door. So we have an opportunity to pick and choose. And that's what we plan on doing.
So, again, and sometimes you have to wait to get the next gate at an airport in maybe three years. And what we do like is the fact that we find in a number of opportunities. An opportunity that we didn't use in the past was that we used to fly mostly single daily, but we have quite a few markets today where we go double daily because that may be the better opportunity than a new market. So we feel pretty comfortable about the diverse nature. And, like I said, we like the optionality because of the size of the network. Okay?
Okay. Great. Great. Just one quick follow-up just to Matt. You mentioned Cancun. Did you say that that was 100-basis-point headwind to RASM in the third quarter? And I was just curious like how much – what does Cancun represent of your system? Like percentage of ASMs or seats? It seemed like...
Yeah. Sure, Mike. So – yeah. You did hear that correctly.
Okay.
It's about 2% of our overall capacity. So, what we're seeing right now is a different booking curve. We are seeing a different passenger makeup there as well. And what's happening is demand, at least for us, demand is coming in but it's coming in late and it's basically not willing to pay the prices that it's paid in the past right now.
There's been a lot of travel advisories for Cancun and other Mexican destinations. But, for us, the most impactful is Cancun for sure. And those travel advisories have been out there all year. They've been updated up and down. But it continues to be an issue for us and it's something that we think will eventually resolve itself, but it is that much of a drag on our third quarter expectations.
Okay. Great. Thank you.
Certainly.
The next question is from Hunter Keay.
Hey, good morning.
Hey, Hunter.
Hey. So, are you seeing a relationship between an improved product or brand or general sort of likability of Spirit and how far out your customers book tickets? Maybe you're not being viewed as like an airline of like last resort, like a backup option for people. I'm kind of – I have a follow-up for that too. I'm kind of curious to know if there's a relationship between sort of like the duration or length of the booking curve and how you're perceived from a brand perspective.
Hunter, I'll make a comment. And we've said this before. We know there are instances and it's been more noticeable of late where our price point is no longer the lowest price point in the market. And we're selling at those fares. So that would indicate to me that our product and our timing of the flight and our reliability is lending itself to a certain consumer.
Remember that the drive all along was always to improve operational reliability to drive cost savings and deliver a quality good. The upside from a revenue perspective may be there. And there are at least indications that it's true. But, beyond that, it's tough to see direct effect on booking curve. It's just tough to measure.
Yeah. And I also know you made some strategic choices around driving loads last year at this point, so maybe that's making that noisy a little bit, but I guess, the nature of the question is, if you get more people that like your product and they're willing to book a reasonable fare that they think is a fair value early in the thought process of taking a trip and you fill up your plane a little bit earlier, does that give you more tactical ability to manage closing yields as...
Absolutely.
...you have an improvement in your brand? Okay.
Absolutely. Yeah. That's true regardless. And I think that is a lever point. I think Matt maybe wants to add a comment here.
Yeah, Hunter, one of the things that we – I know this going to sound a little bit from a marketing answer, but the reality is, we think our guests think about the value they receive as the experience the receive divided by the price. So, as the experience improves and the experience goes up, that would allow the price to float up over time because the value they're receiving will be improving along the way.
So I know that's a bit of a marketing answer to your question, but that's how we think about it and that does allow for different kinds of customers who wouldn't – we wouldn't have been in their – even in their consideration set in the past. We're now in their consideration set. So, it'll take time. Brand reputation repair takes time for that to flow through to everyone. But it's happening and we're seeing some early signs of that in the way that we see our customer satisfaction numbers.
Yeah. And you feel you have the RM tools set from an IT perspective to take advantage of that changing dynamic?
Yeah. So that's a great question. So, we are actively and have been for a couple of years and, really, in the last six to nine months, have really been able to hone in better on how we think about revenue management in this environment. And the environment, as Ted alluded to, is one in which, at times, we're now able to sell higher price tickets than our competitors. And that's got to be reputation and brand related.
And for us to be able to do that means we have to have different thoughts around revenue management, taking risk and making sure that we're confident in taking that risk. And we're building tools and putting the right people in place to be able to really leverage that. And that's the improvements that we've been talking about. We're now starting to see some of that come through.
Thanks, Matt.
Sure.
Our next question is from Jamie Baker.
Hey. Good morning. On the international push, are you prepared to say yet whether international is more profitable than domestic? The reason I ask is that I would imagine ex-Cancun that it very well could be. I'm just trying to think about how margins progress over time as the international component continues to grow.
Sure, Jamie. It's Ted. Yeah. The reason we've had a decided effort to find more international gateways and build out the international network is the international markets generally do better these days, and we've been pushing to find those opportunities in Lauderdale. But, obviously, Orlando is complementary to that, and Matt discussed earlier. And then we're finding one-off and two-off launching pads elsewhere in the network as well, be it Newark or Detroit or Chicago or those kind of things. So, yes, I think that has been a deserted effort to push the percentage of flying towards international because those markets do very well.
Okay. Helpful.
And Jamie, the only other piece is actually – I get it. They're going to – there's a limit to the size of it. But, structurally, we're actually better to compete because we actually – our network looks more traditional in a sense, and we can really, ultimately, carry a lot more connections of like, let's say, Fort Lauderdale. I mean the predominant number of our connections ultimately go through Fort Lauderdale. So we also – not only do we – are we able to do it with a low cost, we kind of get a structural benefit of flow, which creates a lot of optionality from a revenue perspective.
Yeah. That's right. And if I could just add to that, Jamie, at the end there, is it's also how we've established our international footprint over time. It's not something out of Fort Lauderdale that we just threw down. It's been developing over time. We're reaching communities and joining communities together with a lot of what we call VFR traffic, visiting friends and relatives traffic. That is also going to be a little less seasonal and a little less constrained by economic environment as well because that kind of traffic wants to go back and forth to see friends and relatives.
So it's something that we really positioned our self well here in Fort Lauderdale. We know there's a tie between Orlando and a lot of these communities as well in Latin America and the Caribbean. And we think we're positioned uniquely to be able to take advantage of a lot of those opportunities that perhaps others may not have the same kind of success rate on.
Excellent. And just a quick follow-up. Just over the last couple of months, has the competition you face in OA hubs changed at all? And I'm not asking you to name names. I'm just wondering if the competitive behavior is the same in each hub regardless of who dominates it or if there's been any divergence recently. One airline might compete with you in its hubs versus how another airline does it in their hubs. Or is it just all uniform?
Right. So, it's the summer and everything's relatively strong with summer demand right now. And we're most concerned about what are the selling fares that carriers are offering. Having said that, there's definitely some personalities within each hub and it can be across different carriers as well. So I do think that there is concerted efforts going on to think about peak demand. And as we get out of the peak and as we head into the shoulder, we anticipate there will be some changes.
And I know there's a lot of pricing activity that's been going on. I think a lot of it's been constructive from our perspective in what we're seeing. And then, as we get out of the peak into the shoulder and into the off-peak, we'll then see how the inventory trends may change by hub. So, it's sort of a – there's a lot of pricing activity going on, Jamie, but at the same time, there's a lot of inventory constrain that we're seeing in the peak right now.
Got it. Thanks very much for the answers. Appreciate it, guys.
The next question is from Kevin Crissey.
Good morning. Thank you very much for the time. I wanted to follow up on basically your answer there. It's more of a general question, but I guess, obviously, you'll answer it from Spirit's perspective. But do airlines staff and fleet to their peaks and then kind of use the assets and people to kind of look at off-peaks as cheap utilization?
Obviously, I'm hoping that you're not really doing that, but if you look at the way the capacity changes are made industry-wide in the face of higher fuel, the responses are all in the off-peak periods. Everyone protects their revenue in the peak periods. And I'm just wondering whether the cost structures and the businesses are built around peaks or are they built around the average for the year. Thank you.
Yeah, Kevin, it's a great question. We can speak specifically to ourselves because I think we're better suited to. I think the way – as a growth airline, it's not as black and white as it would be for a more stable operation, which is the idea that you're espousing, which is hiring to the peak or the shoulder. We're growing and so we're adding – we're having to add the necessary resources to fly that next possible 15% of opportunity at all times.
I think what we do is we flex efficiency more in the peak to – which would imply, by the way, that we're not hiring to the peak. We're pushing our assets harder in the peak and the resources around those assets such that we don't suffer as much from a cost perspective in the off-peak. And so the implication there is that we tend to target more of an average.
It's harder to draw the line because we are a growth airline, but remember, that our primary asset and our primary focus is our cost structure. And that's true in September, and it's true in July. And so that means we have to be a little bit more efficient with what we're flying in July such that we can make September work. And hopefully, that at least gives you some perspective as to how Spirit addresses the issue. I can't speak for slower growth airlines, however.
Yeah. Thanks. I can appreciate the difference. I guess then why don't airlines cut their capacity in the summer? I get that they're fill and worried about spilling traffic, but it seems like that is a protected sacred cow, you can't do it. Is it just that's so wildly profitable that you, the industry is willing to absorb lower margins in those periods?
The answer is yes. The summer is wildly profitable and does well, and so there would be no reason, at least from our perspective, to be trimming capacity in the summer. Remember that there's a lot of things that influence how we add our resources, the timing of those resources. Our delivery timings can have an impact on that. If they're all bunched together at one particular time, it forces us to do certain things. And so, the idea here is for us to drive earnings growth. And we do that definitely in the peak, and we manage through it in the shoulders and the off. And that's the way we think about our business.
Thank you so much for the time.
Yes.
The next question is from Joseph DeNardi.
Yeah, hey. Good morning. Ted, just want to talk about some of the capacity plans for next year. You just mentioned that, I guess, your cost structure is one of your most valuable assets. Is that influencing kind of your rate of growth and what gives you confidence that that level of growth isn't going to lead to kind of these very choppy, unpredictable revenue environments that we've seen over the past couple of years? Acknowledging that it's slower growth than what you've had recently.
Yeah. The answer is no. We grow into the opportunity and we think a lot, Joe, about the rate and pace at which we tackle that opportunity. And I think reflective of that is this look at 2019, which admittedly is less than we've been growing over the last six years. I think if you just took a straight average of the last six years of our growth rate, I think you'd come up with a number that's around 21%. And so, we take into account all factors when we think about our growth rate.
We're a bigger airline today than when we were six years ago. We have a good feel of our ability to deliver the growth, to train the people, to select the markets. And so, when we take that all into account, we arrive at a growth rate based on the opportunity. We manage our costs regardless. And I think that's indicative of our view on next year. We're going to grow considerably less next year than this year and we're still targeting around up 1% to flat CASM. And that's the way we manage our business. So it's opportunity and then management costs around it. And that's – I think that's the difference, by the way, between a low-cost carrier and not one.
Okay. Yeah. I'm tempted to ask Matt about the credit card opportunity, but I just want to follow up with you, Ted. Even with slower growth next year, your CASM advantage relative to the industry is probably going to grow again. Is there a point at which it gets wide enough so that you start to manage capacity for your CASM to grow more in line with your peers and that would allow you to get a little bit more control over the pricing environment?
Well, it's a great point, Joe, and one that I've talked a lot about as the airline matures. And I don't know exactly – you've heard me use that word before. I don't know exactly when we hit it. But, at some point, we will reach a point where our growth rate will – it will continue to taper as the airline gets bigger and our objective over that time was to manage to be a low-cost business. And once that's true, any growth, any marginal growth, that doesn't eat up all inflationary expense just moves you in line with the rest of the business. We're just going to be dramatically lower than everyone else.
And that's the starting point that we're setting up. So that's not next year, that's not the year after, that's not for a while because the opportunity's too big. But that's the objective is to be a long-term, low-cost business that can maintain a wide and widening advantage against its peers.
Okay. Thank you.
Yes.
The next question is from Dan McKenzie.
Hey. Good morning. Thanks, guys. 22 unencumbered aircraft. What is the right number to have as you think about your fleet?
Well, right now it's 22. So, we made tactical decisions here, Dan, to purchase aircraft off-lease for a variety of reasons. We thought it was a good capital deployment decision, we thought it was a good CASM decision, and also we thought it was a good flexibility decision. These were all aircraft that are reaching towards the end of their original lease term or extended lease term and it creates the flexibility we want.
And as we've alluded to earlier, we're in the midst of a fleet evaluation process right now that will outline what the fleet looks like beyond 2021 and I think these aircraft act as swing airplanes during that process, at least them alone and perhaps others, but these specifically because we now have direct flexibility. We can choose to keep them or not and we are not encumbered to anyone else. And so I think we feel good about that number, by the way. And we will evaluate other opportunities to change that, either to reduce the number or to increase it. But, right now, this is the right spot to be.
Okay. And then just going back to some of the earlier questions, the plans for 2019, increased utilization, how many percentage points of growth is it adding? And just separately, as we think about the CASM-RASM relationship, how do we size that margin contribution at the system level?
Well, I'll try to – from a utilization perspective, Dan, we really bottomed out from a utilization perspective towards the second half of last year, and we talked about improvement to that number, and we're seeing it right now. Fleet utilization now is, on a trailing six, I think we're above 12.3 or 12.4 hours per day. And I think there's further opportunity. You can just take percentage points off of that.
Our previous peak utilization was in the very high 12s. I don't know if we ever get back to that, by the way. But, at some point, it's a percent in utilization is a percent in capacity. And so, I wouldn't slice and dice the 14 hours per day that we're looking at next year in the utilization or deliveries yet because that's all still getting kind of sifted out. So that's the way it would work. That's the math.
And the CASM-RASM relationship, the margin contribution?
Can you clarify the question, Dan?
Yeah. As you flex utilization flying, obviously, it helps drive down lower non-fuel costs, also results in lower unit revenues, and as you just kind of think about that dynamic, the incremental profit that it generates, how do we think about the materiality of that at the system level?
Well, the premise is generally true, by the way. Higher utilization is going to come with CASM advantage and RASM dilution. The only caveat I would add to that is that when you can add peak utilization, it's theoretically not necessarily going to be as dilutive or dilutive at all to RASM because you're flying when your RASMs are above average. And that's where we're focused, is how can we get more and more utilization in the peak?
Admittedly, the goal overall of this business is to get the earnings to grow. And off-peak flying contributes to that, by the way. We do it today and we will continue to look at it. So, I think the trade-off that you just mentioned is a quick summary of how you evaluate peak and off-peak flying. And as long as it's contributing to EPS in the right way, we will do that. And we do it today and we adjust accordingly. So, the only caveat I'd say is that utilization flying doesn't necessarily have to be dilutive to RASM.
Just to beat this to death, we could run our utilization dramatically higher in a month like September, dramatically higher. In fact, the primary reason why our long-term utilization won't get back to where it was five years ago has nature of competitive dynamics. But September is a less-than-average revenue month and in those kind of months extra capacity can be very dilutive at the end of the day.
And I think, what we're trying to do, we're trying to do a better job and we thought we were doing a better job last year, but didn't do it as well as we thought. We think we'll make many more improvements in the off-peak this year that will have a – we'll be better close to the right mix this year. And if you watch what we did with our schedules, I think it was pretty comprehensive what we did. A lot of east-west flying that didn't work out all that well for us. And a lot of new capacity went into, let's say, the southeastern part of the U.S. and an international expansion, which is probably much greater both short and long term opportunity. Okay?
Thanks, guys.
The next question is from Brandon Oglenski.
Hey. Thanks for taking my question. I'll just keep it to one. But, Ted, given the fact that you've committed to, call it, growing in the low-teens next year, and I think you said at a conference recently that you target a mid-teens profit margin longer term, should we be thinking that you're managing towards that level of profitability in the 2019 plan? And if not, like, what are the headwinds that remain in the business?
Sure, Brandon. What we've said, and I believe I've probably reiterated at a conference, is that we target opportunities with mid-teens margin opportunity. The prevailing market, the competitive environment, fuel prices, always have a discrete effect on those. But we're building this business for the long term and we still target those opportunities with mid-teens and whether or not they materialize in the first month will depend on the competitive environment and a bunch of different inputs.
So, objectively, we're always looking to push the organization forward from a margin perspective. I think Bob alluded to the fact that we like the trend that we're seeing. It may come in nibbles and bites, but it's definitely headed in the right direction. We have understanding of and stability on the cost side now that I think we didn't fully have over the last couple years, couple three years. And so now we can say with confidence this is the business we're running, these are the opportunities we're looking to tackle, and how do we optimize at the margin? Which comes with some of what we were describing in the prior answer, which is network flexibility, seasonality adjustments, off-peak and peak flying changes. And so, we're pushing the organization for the margin and earnings growth. And I'll say that again because that's where this business has to be. We've got to be focused on delivering on that line.
Appreciate it.
Ellen, we have time for one more question.
Thank you. Question comes from Rajeev Lalwani.
Good morning, guys.
Good morning.
Hey, Rajeev.
Matt, I actually have a couple of questions for you. On the RASM side, I think you're something like 15%, 20% below your prior peak and correct me if I'm wrong there, but the question is, with fuel where it is now, with competition starting to maybe ease a bit, is there an opportunity for you to recapture that over the next year or two. It seems like the legacies are making some pretty good progress there. Just trying to figure out if it's a realistic goal or not.
Rajeev, so the way that we see the industry and some of what we're seeing from capacity moves and some of the things that we anticipate that we're going to see out there is that we'll continue to see some incremental improvements. I think we probably talked about it a little here on the call this morning, which is thing – we like the momentum, we like how things are moving.
I cannot predict exactly what the environment's going to look like in the future. I know what's in front of us now and I know what we anticipate to see. But to understand what things are going to look like two or three or four years from now is really difficult for me to understand. So, I don't know that I can really fully answer your question that way.
Okay. Maybe the other way to approach it. What sort of environment do you need to see to get back to where you were before? Do we domestic capacity growth of 2% a year, oil of $100 or so?
So I think, Rajeev let's just go back. We had an environment, I'm not sure you can pinpoint what created it, but basically, if you go back 2014, there was no price matching in the industry. None. And if you just kind of look at what was taking shape, United Continental was struggling through that combination. They're doing a much better job now. American had just got in the back – they're just kind of getting reorganized. Southwest was going through its digestion of AirTran. It was a completely different business.
And we're not planning on that business taking place. The fact is we don't need numbers like that. $2 in pricing is big. $3 or $4 is a couple of margin points to begin to see improvement. And that's the way we're kind of looking at it. When the costs are stable, we can always debate where oil will be. $2 will make a huge difference and anything beyond that is really just gravy at the end of the day.
I would make the point the route network is pretty well intact. We've got the key pieces in place. We're much improved. We had a lot of avoidance; the avoidance is disappearing. We've got positive flyers. So we have a lot of things moving for us and I think, at this point, the industry is going to start making its moves.
We've got through a two and a half year change in how we do business and I think you're going to see other airlines do the same thing. And at some point, I think you're going to see positive improvements. And at the pace, we'll decide that, but I think I said we're happy with this kind of two and a half year journey we've gone through and we think we're set up pretty good.
That's great. Thank you, Bob. Thank you, everyone, for joining us. That concludes our call for the day. Talk to you next quarter.