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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 Second Quarter 2019 Earnings Conference Call. My name is John, and I will be your operator for today's call. [Operator Instructions]
And I will now turn the call over to DeAnne Gabel.
Thank you, John, and welcome everyone to Spirit Airlines second quarter earnings conference. This call is being recorded, and simultaneously webcast. A replay of this call will be archived on our website for 60 days.
Presenting on today's call are Ted Christie, Spirit's Chief Executive Officer; Matt Klein, our Chief Commercial Officer; and Scott Haralson, our Chief Financial Officer. We will have a Q&A session for sell-side analysts following our prepared remarks.
Also joining us today are Thomas Canfield, our General Counsel; John Bendoraitis, our Chief Operating Officer; and other members of our senior leadership team.
Today's discussion contains forward-looking statements that represent the Company's current expectations or beliefs concerning future events and financial performance. Forward-looking statements are based on management's current expectations are not a guarantee of future performance or results.
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 2019 earnings release, which is available on our website, for the reconciliation of our non-GAAP measures.
And with that, here's Ted.
Thanks DeAnne, and thanks to everyone for joining us today.
Our team delivered strong quarterly profits for the second quarter of 2019. Adjusted earnings per share increased 52.3%, and our operating margin increased 300 basis points to 16.3%. The strong demand environment and continued execution of our strategic initiatives drove a top line improvement of 18.9%.
A very busy travel season coupled with numerous storm systems has made for a challenging operating environment, and I want to thank the entire Spirit team for all that they do every day to care for our guests.
For the second quarter 2019, our on-time performance was 75.8% placing us in the middle of the pack relative to other U.S. airlines. Our completion factor was 98.2%, down about a point year-over-year.
Over the last three years, we made numerous adjustments to our business and have materially improved our operational reliability. In addition, we are doing a much better job of ensuring a quality guest experience regardless of the operating environment.
Coming off a record operating year in 2018, we elected to make some additional tweaks to how we run the business in an effort to drive further efficiencies. It has always been in our DNA to push ourselves toward further improvement. Given our operational performance this summer, it is evident that some of these changes were not effective. We are already making adjustments to our winter schedule and are thinking differently about how to approach the peak period next year to improve our ability to recover after weather disruptions.
With that here's Matt and Scott to discuss our results for the second quarter 2019 and our outlook for the third quarter and full-year 2019 in more detail.
Thanks Ted.
We are pleased to report that for the second quarter 2019 total revenue increased 18.9% to just over $1 billion. Total revenue per available seat mile increased 5% year-over-year on 13.2% capacity growth with gains in both load factor and yields.
On a per passenger segment basis, non-ticket revenue for the second quarter was $55.54, up 1.8% or $0.97 year-over-year, and we remain on track to produce non-ticket revenue per passenger segment between $56 and $57 for the full year 2019.
Our dynamic pricing initiatives around seats and market segmentation around bags continued to do well. Additionally, we are very pleased with the growing contribution from our bundled services offering which we believe still has a long runway for continued growth.
In the last six months, we've added six destinations to our growing network. Most of the new markets we've added in 2019 have been domestic routes and for the most part they are on pace with our expectations but they were a drag on second quarter TRASM.
In regards to our international network, overall I'd say we're pleased with the region’s performance. However, some of the routes we added late last year are taking longer to mature than we had anticipated, which negatively impacted second quarter TRASM by approximately 100 basis points. We are making a few adjustments in the post Labor Day schedule to these routes which should help improve the portfolio’s overall performance.
Looking forward to the third quarter, we estimate our capacity growth will increase approximately 13%. For the fourth quarter, we estimate capacity growth will increase between 14.5% and 15.5%.
Compared to our initial plan for 2019, our average stage for Q3 and Q4 will both be significantly lower. Third quarter stage will be down 4.2%, and based on the current plans fourth quarter stage will be down 2.5%. Shorter stage flights are generally beneficial to TRASM and that's true on our network too. However, even though most of the new routes we've launched in 2019 are shorter than average stage, they are still spooling up, so we are not yet seeing the full benefit to TRASM that a shorter stage generally provides.
Now turning to our revenue outlook, domestic and international demand trends remain strong. While inventory controls do not seem to be quite as locked down as they were last year at this time, I'd still describe the backdrop as stable.
Based on the trends we are currently seeing; for the third quarter 2019, we estimate TRASM will be somewhere between down 1% to up 1% year-over-year. Overall, we're pleased with the development of the network. We took the opportunity to enter new cities as real estate gate constrained airports became available. We are seeing some TRASM drag simply due to the mix of new flying in the network compared to recent years, but we expect that will be beneficial to unit revenue throughout 2020.
And with that, I'll turn it over to Scott.
Thanks Matt, and thanks to everyone joining us today.
Our second quarter 2019 CASM ex-fuel is $0.0541 an increase of 4.6% year-over-year in line with our previous guidance. During the quarter, we continued to face ongoing cost pressures from various airport rent escalations and ground service rates as well as higher than expected costs associated with a higher cancellation rate. These headwinds were partially offset by several favorable variances.
As Ted mentioned, in designing the summer schedule, we made a few strategic changes in an effort to increase our efficiency. In the end, these moves left us with less buffer in the system and impacted our ability to recover from adverse weather conditions, which in turn is driving higher costs.
We're already making adjustments to our plan for the peak period next year. In the meantime, for forecasting purposes, we think it is appropriate to assume we will continue to see a higher level of disruptions from weather for the remainder of the year. We estimate our third quarter CASM ex-fuel will be up 7% to 8% year-over-year. In February, we had anticipated CASM ex-fuel for the third quarter would be up 1% to 2% year-over-year.
Compared to that initial expectation, we had previously disclosed 150 basis points of pressure related to the additional costs in conjunction with the Fort Lauderdale runway construction. Another 250 basis points is due to reduced ASM production and shorter stage. The remaining 200 basis points is related to higher estimates for continued flight disruptions through the peak periods of Q3, which is clearly where we are focused.
For the fourth quarter, we estimate CASM-ex will be at 3.5% to 4.5%, a shorter stage, and anticipated lower ASM production than we had initially assumed contributes about 150 basis points to this increase versus our initial guide of up about 1%. The rest of the increase was primarily related to higher estimates for flight disruption costs.
We're always pushing levers in an effort to improve efficiency, increased productivity, and grow earnings, and when the net effect isn’t what we're expecting, we will pivot; and that's what we’re going to do here. We view this cost performance as an anomaly, and while it's too early to provide a 2020 guide, our view is that about 200 basis points of this pressure is transitory and will be tailwinds in 2020.
In other words it will not repeat in 2020. Not sure yet of the tailwinds will offset the 2020 headwinds but flat to maybe up gently feels about right. While we will make a few tweaks to help the stability of our network and operation, we're still producing top, growing earnings and producing solid mid-teens margins. These tweaks will complement our strong core business and set us up for a strong 2020.
Now from a fleet perspective, we took delivery of two aircraft in the second quarter one debt-financed and one leased ending the quarter at 135 aircraft. We expect to take delivery of 10 additional aircraft by the end of the year. We recently signed lease agreements for four additional aircraft to deliver in 2020 and nine additional aircraft to deliver in 2021 to help us meet our mid-teens capacity growth rate.
In regards to our fleet RFP, we continue to make progress on our discussion with the aircraft and engine manufacturers and are targeting a decision between late August and early September.
And with that, I will hand it back to Ted.
Thanks Scott.
The business is doing well and we're delivering strong earnings growth. Admittedly, we have a couple of bumps to overcome in the second half of the year and we've taken a dip and reliability this summer. Year-to-date, we are running nearly an 80% on-time airline which places us fourth in on-time performance among U.S. reportable carriers, but we can and will do better.
On the cost side much of our cabin hit is self-imposed. We pushed a few levers a bit too much that coupled with more weather related cancellations than last year had an adverse impact on the operation. And also was a notable change versus what we assumed in the base case in our original plan. We’re already changing the inputs to our network plan going forward to offset these unexpected impacts.
On the revenue front, we are pleased with our revenue management initiatives. Non-ticket continues to do well and we are on track to hit our target this year. And that’s even with a couple of our 2019 initiatives taking a bit longer than we originally expected. The timing then of most of their benefit may actually skew to 2020 setting us up well for next year. We continue to anticipate we will produce mid-teens margins in the back half of 2019 and we are on pace to deliver good earnings growth this year.
The foundation of our business are stronger than ever with an estimated CASM-ex of about Five and a half cents our cost gap to our competitors is larger than ever. Our non-ticket revenue production is the highest in the world and we have line of sight on initiatives to increase it even further and we are producing among the best margin in the business.
With that, back to DeAnne.
Thanks Ted, Matt and Scott. We are now ready to take questions from the analyst. We ask you to limit yourself to one question with one related follow-up.
[Operator Instructions] And our first question is from Brandon Oglenski. Please go ahead.
So Scott, I think you were talking about a 2020 cost outlook, if I am not mistaken, it’s very in there, and sorry I was distracted for one second. But you guys highlighted that you need to take your reserve crew ratios up a little bit looking at block time solutions to avoid these issues in the future. Can you just talk about how much structural cost that could add to the network as you look out getting beyond this quarter?
Sure Brandon, it's Ted. So, I think a key to this discussion is when we made changes, we looked at 2018 as an excellent operational year. And we said to ourselves, we think there is an opportunity to increase efficiency and drive a little bit more earnings potential in the peak by pushing utilization where we could, but also and that's in regard to crew as well. And I think what we’re finding is that that was actually destructive from a cost perspective.
So, as we look forward and as Scott mentioned we're going to pivot and make some changes to reserve staffing for one, schedule construction for another, and all of those things while they may on the surface appear to be cost additive. What we're really saying is net of all the impacts that we experienced this year, which is considerable additional disruption related expenses which we've already said is in the neighborhood of 200 basis points in the quarter.
In addition to that, we lost ASMs as a result of cancellations. And so, our view is that by making this change, we’re actually going to improve the cost structure. The net of all those things actually act as a tailwind. So, the benefit of less cancellations, less disruption related expenses, and less recovery related expenses like overtime far outweigh the additional expense of having more reserves.
And that’s the balance we've been looking to strike. Admittedly, the number is frustrating for us given where it landed, but we look to make these changes all the time. We’re always looking to optimize and execute to a better total output plan. And I think where we found ourselves was a little bit over our skis. And so, we’re going to make the necessary adjustments that we think will be beneficial to unit cost going forward.
Well Ted, I appreciate that response, but forgive me for being a bit critical. It seems like we had maybe for different reasons, but similar outcomes back in 2017 when we had disruptions with your pilots. Is this just a case that maybe Spirit has run into too much scale here where you need to rethink the operation of the company, because these - weather and contracts come up all the time right?
Yes right, no, the answer is no. We don't view this as anything structural to the business. Obviously, the circumstances in 2017 were completely different, but I would say that the level of tolerances luckily that we're dealing within here are much narrower than when we first launched this kind of operational improvement exercise really in early 2016. We knew we needed to make a trade for marginal utilization to improve the overall operational performance and improve the cost structure, and that experiment has worked generally very well for us.
So while admittedly, the combination of some of the tweaks we made here plus a much worse weather pattern year-over-year probably caught us a little bit like I said over our skis, we don't view that as long-term structural. In fact, most of these things naturally reverse and we know exactly what we did here.
So the good news is, we can fix that and we're already launching a lot of that change heading into the peak periods of - the remainder of the fourth quarter, but more importantly into the peaks of next year.
Our next question is from Joe Caiado. Please go ahead.
Ted, you spent a lot of time improving your operational reliability over the last few years as you pointed out that that’s improved your reputation with passengers. Just given the setback in your reliability this summer, are you feeling any reputational hit with passengers, and are you doing anything differently in terms of how you're compensating and taking care of affected customers?
So, thanks for the question. The short answer to the first part is no. The good news is, the work we’ve put in on improving this airlines' operational performance and therefore its brand reputation is actually reaping dividends when things don't always go our way. So, we are still much along the path in a brand improvement initiative, and we don't see there being an interruption as it relates to how we’re operating right now.
As I mentioned in my prepared comments, the on-time performance of the business is actually pretty good. What we are really talking about is the last few cancellations on any given day, and that's the part we look to improve upon. It may seem big and clearly in the peak, it drives more expense than we like, but it's really targeting those last few cancellations and that starts with network construction and schedule design, and then it ends with how we think about our reserve ratios for our crew, flight attendants, and pilots in an ability to better operate.
So, I don't see there to be any disruption from a brand perspective which is the good news. As it relates to how we take care of our guests, we’ve been on an improvement process as well over the course of the last three years; and in order to live up to that reputation, we at times will take care of our guests in ways that may have been different than the airline you experienced in 2013, but that's not a cliff effect.
I think it's more about how we view the nature of whatever the disruption is the cancellation and how - we think we can re-accommodate. The good news is as the network has gotten larger and the airline has gotten larger, the options for us re-accommodate our own will grow and that will help us over time. So again I think the focus here is on, we know exactly what we did and we’re looking to pivot back the other way and we think that acts as a tailwind going forward.
So we shouldn't think of that - last point maybe as a bit of structural cost creeps Spirit being a little bit nicer to passengers and the expense associated with that?
No, I wouldn't think of it that way at all. In fact we’re just more efficient generally and all in all as we move through over the next - really the next - this is a long-term story and a long-term view on things. So it’s going to be a tailwind over time quite frankly.
Okay, I appreciate that. Maybe just a very quick follow-up for Scott if I may. Would you characterize this updated full year cost guide as a kitchen sink. Just in terms of how conservative you were with the completion factor assumptions for the rest of the year does it also embed a bit of a cushion for other unknowns? Basically can investors get comfortable that we're extremely unlikely to see another bad cost surprise next quarter and that you really have your arms around this thing? Thanks everyone.
Yes, thanks Joe. Yes that’s right, I think look what we've done here as we said look we have some trends with the weather patterns. We've made that assumption going forward. Obviously, the end of Q3 and end of Q4 has a different seasonal weather pattern than does the summer times and even interruption gets a little bit cheaper. We’ve made those adjustments too.
So what we’re doing here is we feel like, we have arms around, what we need to do operationally. We’re going to make those changes to the network. What we can do in the short term, so we think that with the disruption that we expect to have and the structural changes that we have, we feel pretty good about where we are with the guidance so far.
I mean, look, we’re third of the way through the Q3 production already. So we have a pretty good idea where Q3 is going to fit. And we feel comfortable where Q4 peak will end up. So we feel good about where we are and given sort of what we've seen this is what we would expect to happen.
Our next question is from Savi Syth. Please go ahead.
I was just wondering if you can or maybe for Scott or Ed. Flat to maybe gently up look for next year on the cost line. Could you help me understand kind of the margin that you hear. I know there is some shifts from non-op to op as you start doing more operating leases versus debt but being a ULCC and growing mid-teens I mean, I always thought the kind of the view was maybe unit revenue was flat to down but unit cost flat to down as well and so just wondering how we should think about kind of the set up even and that fact up gently is even with the reversal of some of the kind of the miss out this year?
Savi, it's Ted. Let me make a few comments, and I am going to let Scott kind of someone around the edges as well. So you know, as a low cost operator clearly cost you have to focus. We know we are a cost business and that has to be where we’re focused going forward. But revenue is a component as well, and some of the changes we made this year to our network by bringing the stage in and launching a bunch of new cities that we found opportunities to get into haven’t help the unit revenue store close in but we think those are going to be beneficial to us going forward.
So stable cost next year, we think on an improving revenue comp is a really good market story actually and we faced headwinds every year that every airline faces from a cost perspective but we manage those using our growth and in this case using tailwinds from expenses we incurred this year.
So I do think that it sets us up well actually going into 2020 and with absolute cost very, very low here, maintaining that cost level is a widening advantage against everyone else and that's really got to be our focus as we move forward. So Scott, I don’t know if you’d had any more.
No, that right. Savi, I’ll give you a little bit of color on 2020.We’re not ready to give a firm guide. We haven't gone through the planning process but we know little bit about the puts and takes. We do know that the disruption costs interrupt the trip expense that happen this year won’t occur next year, definitely be a tailwind but we have industry is facing increasing labor costs and rent cost as we talked about before.
We’re going to have increasing amortization costs and depreciation costs, plus we’ve leased a number of aircraft this year that will have a full year effect. So we may not get the same rent, our ownership good guy that we’ve gotten in the past and in 2020. so these sort of puts and takes leave us in the early frames of 2019, thinking about where we are going to fit. We feel like we're in that sort of flat to maybe gently up. Like I said in the prepared remarks and will be able to give a more clear view into that as we head into the latter part of 2019.
And if I might follow up with Matt just talking about the stage length pressure might be a little bit less here in the fourth quarter. Could you help us maybe think about fourth quarter because I know a lot of us are struggling with some of the comps that we have from last year?
Yes, so - I am not going to give a guide or talk specifically to our fourth quarter revenue outlook but what I can tell you is sort of how we go about thinking about. How we're thinking about putting a guide together.
So we do look sequentially. We look at what's going on this year. We look at how we are performing right now. We look at all the different pieces that go into unit revenue number and then we look historically and understand how trends move us seasonally out of shoulder into peak, out of peak back in the shoulder and then into the peak again at the end of the year.
So we took all of these different variables into effect. We weighted heavily based on the current environment that we’re in and then we also look at things about how the network may have changed on a year-over-year basis.
So we take all those things together and that's how we think about our unit revenue guidance. I know that we always report and talk about them on a year-over-year basis but really what we're doing is looking at what's actually happening in real time and applying that -- applying that out to the future.
So one of the things that we mentioned is our network and more new markets than we've historically seen. So for example in the third quarter, last year 6% of our seats were in what we would call new routes pulling up. This year it’s 11%.
In the fourth quarter, it’s a little bit lower on an absolute basis but on a year-over-year basis it goes to 3% last year to 8% this year. So those are the kinds of variables that we think about when thinking about our unit revenue guide and then when we talk about how it becomes beneficial for 2020, we have the ability to think about that and this goes in cycles, this goes in waves.
Last year we entered nine new cities. This year we’re going to enter seven new cities and as we put our network construction together for next year we think about these things and I don’t know if that’s helps a little bit for you but that's how we think about putting our guides together.
Just a follow-up on that, Matt. So is the kind of the assumption that you continued doing some of the Tuesday cuts last year. I know late last year we’re thinking maybe you did too much and you might do less of it?
Yes. So on a mix basis as a percentage of the network, we have a little bit less this year than last year. It's still relatively healthy number of cuts on off-peak days a week, but it's not as large a percentage as it was last year, that's right.
Our next question is from Hunter Keay.
How does this recent experience with recoverability impact your thoughts on an aircraft order and the value of fleet commonality?
So as Scott mentioned in his remarks we’re really at the in the short strokes here on our fleet orders, so we don't want to comment specifically on how we think about things in that regard because we were running a competitive process. We want to make sure that we get the best absolute result for our shareholders.
Clearly inputs into that are there are benefits to having common fleet and we understand those and we spent a lot of time modeling them. And so, it's a consideration as we think about what's the right answer for us going forward. Much like there are other considerations that impact that as well like the price of the airplane and the maintenance cost of the airplane and the total cost of ownership, so I would say it's definitely an input and we know a lot about it being a single fleet operator today. So I think that at least can give you some color. Given where we are in the process I don’t think we would really comment much further than that.
And is one way to improve the cost structure may be to reduce -- and bear with me on this to reduce your presence in airports with really high or quickly rising CPEs and favoring ones with lower CPEs, because obviously the rhizome temptation and the demand is obviously strong in the high CPE airports but the costs and the operational challenges there are only certain to get worse. So as you think about balancing all this stuff together, how do you factor in these CPE trends with what you just out with in terms of the cost grade? Thanks.
Sure. I think you're right. You're seeing cost creep at all airports by the way even the low CPE airports are in improvement process today. So there's projects nationwide and we’re going to see pressure on a percent basis across the board, so I don't know the you could just isolate high cost airports versus low-cost airports.
Mathematically what you said is correct. If we abandon all high-cost airports and when the low-cost airports our CASM will go down. I don't know if that's the right earnings outcome for our shareholders.
And in fact over the last 10 years, we've been very careful about building a franchise that have balance to it, that includes larger leisure destinations, international and originations to lease and so there may be a mathematical answer in there, but I don't know that we think that's the right strategy going forward.
Our next question is from Michael Linenberg. Please go ahead.
This is kind of a follow-up on the guidance to Scott. You call out 200 basis points the costs that are primarily related to higher estimates for flight disruption costs. It looks like that's referencing just the 3Q CASM guide, but I know that you go on to say that for the rest of the year you're anticipating challenging weather conditions. So on a full-year basis when we think about the lower completion factor because of maybe more inclement weather than normal. What is that, is that 100 basis points hundred, 150 basis points?
Mike this is Scott, so the way we’re calculating or estimating the full year impact it's really about 100 basis points of ITE. There's about 50 basis points or so of ASM production will call it which is really sort of completion factor. And 50 basis points related to Fort Lauderdale construction and a little bit of Easter as well. So we’re really talking about 200 from a full-year perspective.
Then maybe just a follow-up to that issue and whether Scott or even Ted you can answer. As you think about your systems and the ability to recover and deal with our regular operations are you anticipating maybe an increase in CapEx. Are there new systems that you have to invest in given the size of the company today or do you feel like what you currently have your current toolbox is sufficient and you’ll get to the recovery and will be fine in 2020? Thank you.
Mike, it’s Ted. So I do believe that what we have available to us today is both the knowledge base and the toolkit to make these adjustments. This has nothing to do with CapEx, this has nothing to do with systems. These are strategic decisions that we made in an effort to improve efficiency. And in this case coupled with the bad weather it didn't work.
And what we’re saying is that gives us an opportunity to pivot in all of that stuff then acts as a tailwind going into next year. And that's the way we’re thinking about it, this is purely about execution around how we think about network and schedule construction. And how we think about allocation of crew resources.
Mike this is Scott, I would add to that, I don't want to oversimplify the operational component of this, but what we know the issue and have identified the changes we’re going to make. So a vast majority of the fixed is in the crew and we know we can make that change. It doesn't structurally change the cost structure, it doesn't change how we view systems or people or processes. So we've identified and we’ll be able to make that change in a fairly simple manner.
Our next question is from Rajeev Lalwani. Please go ahead.
Ted a question for you, over the last couple of years Spirit’s made a bunch of network adjustments to move away from some of these highly competitive markets. Is that part of what's creating some of these headwinds for you as this completely unrelated to some of those network shifts you made to again avoid some of those hypercompetitive markets?
Well again I don’t know that I would use the word avoid or whatever. We've had growth that comes in ebbs and flows. Rajeev so we've had years where we've grown considerably in Vegas and Orlando and Fort Lauderdale. We've had growth in bigger cities we had big international expansion those kind of things have happened at any given point. And this year we've added a lot of new midsized I would call them cities throughout the kind of – throughout the Eastern half of the United States.
But no the direct answer to your question as they are totally unrelated the way we deploy in the roots we choose is not affecting the company's operational performance. What is the inputs as to how we view the resources that we deploy. So again optimizing for that utilization of both crew and asset is really what we know and understand about what we've done thus far and what we know we can fix going forward.
Ted that’s helpful and then as a follow-up Ted you’ve touched the company as being sort of and correct if I'm wrong a flat to down year in, year out CASM story is that now off the table?
Yes, so I think we start with where we’ve been and where we are today. And Scott mentioned that the airline business generally faces inflationary pressures that we deal with from time to time but are generally worse I would say sequentially than they have been wage related and airport related inflationary pressures. Luckily, we do have growth that helps us offset some of that and we still gaining scale that does help us offset some of that. So I think what's core for us Rajeev is widening the advantage maintaining absolute very, very low cost.
That will come around the margin with any given year being maybe up a little or maybe down a little or maybe stable at any given year. But I think our view is that as we focus on operational efficiency good operational results and maintaining an absolute very low CASM our advantage widens over time and that sets us up well for our growth story.
Our next question is from Jamie Baker.
So one of the questions I have and feel free to tell me if you think this is misguided. But is it possible that you're trying to overfly your pilot contract. I mean when I think back to last year you know management was pretty bullish about moving to a PBS. There definitely seem to be some efficiencies at the new contract we’re going to unlock. I'm just wondering whether possible you’ve tried to squeeze too much from the contract or possibly you haven’t in which case there could be a contract related tailwind next year.
I guess I'm just wondering if there's a pilot contract angle to what's currently going wrong again don't hesitate to call me out if I'm barking up the wrong tree?
Jamie, it’s Ted. So first of all you know we've had the contract now for about a year and a half almost. We did get a bit implemented earlier this summer which was the last component really of that agreement. And we’re very pleased with the way that implementation has gone, by the way still early. So we’re still figuring things out as it relates to it, but we think that the teams did an excellent job of getting that implemented and going forward.
I think that the answer to your question is we pushed, we may have pushed a little bit too hard as it relates to the structure or the construct of the resource allocation for pilots or flight attendants perspective to be fair. But I don't think that had anything to do necessarily with the contract. I think that was more about us just saying hey, we ran a really good airline last year and we challenged ourselves and said we felt like there was a little bit of slack in the business.
And in doing so we said, we think we can probably – optimize a little more and that through those vehicles we just talk about. And I think if we were right about assuming that the weather pattern would be the same year-over-year we might be having a different discussion. So I think what we learned here is that in making those changes coupled with either this year being a more regular weather pattern and last year being artificially good don't know.
But it definitely tells us a lot about the sensitivities in there and I think that's our time to adjust. While I would never criticize you were saying you are barking up the wrong tree. The concept is correct we probably did push, but I think it has more to do with our strategic decisions than it does with contract itself.
I just so would like to give management the opportunity to say no you’re wrong. Can you say, a quick follow-up can you say how your RASM forecasts have evolved during the duration of the MAX groundings it doesn't look to me that there's been a profound impact given pretty limited overlap. I'm just curious as the delay wears on what has the sort of MAX related RASM experience been so far?
So Jamie this is Matt, and its widely reported about where the cancellations have occurred and who should be seeing benefit or not seeing benefit. Generally speaking with the way the cancellations have rolled has been pretty widespread across the country. There are few routes that we had a little bit outside benefit from perhaps and we’re taking advantage of that from a yield perspective.
But generally speaking we’re not necessarily seeing anything broadly helping us across the board. And one other thing to mention as it relates to what we've been seeing and we talk about network construction and a lot of the new things that we've added into the market this year is. It’s possible for sure that we are seeing a little bit more MAX benefits than what we've been able to specifically tease out of our numbers.
Simply because the mix or the flying we’re doing is skewed more towards new than we had in the past. So it is a little hard so that there are so many moving pieces with how revenue comes into the network. It's hard to be able to pinpoint specifically on anyone given point.
Our next question is from Helane Becker.
I just had two questions and they were mostly related to your loyalty program and the redesign of that. And I was kind of wondering if you could maybe update us on what you're thinking about there? And then the other question I had is on the big front seat and monetizing that and how you're thinking about your aircraft design going forward?
Helane, this is Matt. So from a loyalty program perspective, we are delayed on rolling that out. We talked about that I think a little bit earlier this year as well. You get one chance every show off to redesign your program and we’re making sure that we get all the inputs correct. We’re making sure that we have all the technology lined up so that when we go to launch everything works seamlessly and flawlessly and included in that would be a proper promotional push behind what we’re doing as well.
So all of those pieces together we’re making sure we take our time on that and get it right. It is delayed, it is something that we wish we already had in place later this year, so this will be something that's beneficial to us next year and moving forward we’re really pleased and proud of our non-ticket production that we've had this year with things like new programs like that not yet even contributing to the bottom line.
So when we talk about non-ticket in general and the opportunity and excitement that we have for moving forward that is a perfect example on that you bring up of opportunity moving forward. In terms of big front seat and I think your question with regards to how we think about cabin construction moving forward. For big front seat, I am going to let Scott or Ed chime in on the cabin construction but in terms of big front seat itself in terms of revenue production we’re happy with what we’re doing there. It’s continuing to improve at a very, very strong levels and we’re really probably only in the fourth or fifth inning at best of being able to truly optimize the revenue.
They are not just from a pricing and revenue management perspective but also from a merchandising perspective. So it's another one of those opportunities that are tailwinds for us as we continue to move through this year and into 2020 and reeling to 2021 big front seat still provides a lot of revenue opportunity for us.
Helane, this is Scott. To the cabin construction, we don’t have any thoughts around changing the number of BFST to have and applying I think what Matt talked about, the merchandising opponent is what we really focused on. As we think about the RFP, if that's what we're getting at. No, no intent to think about adding additional BFS at this point.
Our next question is from Duane Pfennigwerth. Please go ahead.
I think you had some leadership changes in network planning earlier in the year or late last year. Just staying on this new markets theme, can you quantify how much your new market push is holding back RASM either you know margin points or RASM points. What is the profile the new markets that are doing well versus the new markets that are holding you back and to what extent if any is the aggressive new market push versus dense buying in the markets that you're already serve contributing to the op strain?
Duane, it’s Matt. Great question. So we didn’t quantify that in the prepared remarks but I am prepared to tell you that in the second quarter the construction of the new cities, we think, we estimate it was between around 100 to 200 basis points of an impact to our second quarter TRASM and there's a lot of moving parts in there. I don’t want to get into all the details as to where that comes from but we estimate its around 100 to 200 basis points in the second quarter.
And we anticipate that’s having the same impact on third quarter as well. Again we will be able to give you a better number on that after the third quarter closes because there’s a lot of pieces still moving around in there but that’s what we’re anticipating the impact is.
We didn’t specifically call it out because a lot of this is just part of the normal course of business and you asked the question, so there’d be answer but for the most part we just believe that the network moves, we have lots of cycles. We had opportunity to be able to get into new cities for us that we were previously not able to get into and we took advantage of those opportunities.
When opportunities present themselves and we think they are good and they're already part of our five to seven year plan then if we have to advance some of those opportunities up, because they become available, we’re going to do that. And it means there’s a short-term impact and a long-term benefit to us. The last thing you want to do is be shut out of opportunities that we know are accretive to the network over time.
Yes. I certainly wasn’t asking it from a big market versus small market perspective I know that's a thesis from for someone to call but you know to what extent did your new markets push contribute to the ops strain and I guess the basic question is, is densifying existing markets, whether those are big cities or small cities more attractive than the spaghetti approach that you had here?
So to follow-up then, directly the answer to your question is no. Adding the new cities that we added of not really added to any of the issues we’re seeing from an operational perspective. One thing that we can say though, on to the second part of your question there is when we do densify in certain cities, it does give us the ability to think about how we schedule the airline and how we schedule the ability to have tail swaps or how we schedule the airline to help think about crew line construction.
So as we do densify in certain cities, we definitely have those opportunities. Orlando and Las Vegas are perfect examples of that as we continue to grow in those cities. It’s given us more ability to create a more flexible schedule and we’re taking advantage of that in fact, as we move -- as we move through the summer to Scott, to what Scott and Ted said earlier, about learning -- learning from how we schedule to making changes, we've done some things already in our August schedule that should be up slightly beneficial and more beneficial than as we move out of the summer into the fall and into next year.
We’re going to be learning from things that we’re doing and are taking advantage of that -- of that densification say in Las Vegas, it gives us way more opportunity to create swap opportunities for the operation to recover and run more in time.
Our next question is from Susan Donofrio. Please go ahead.
Question on forward planning. So just given some of the challenges you’ve had this quarter and certainly a number of the weather disruptions appear to be from Northeast of Florida. Are you thinking differently about new route and how you go forward with these? If you could address that, that will be appreciated.
Sure, Susan, it’s Ted. So I think that as I mentioned earlier, the forward planning is definitely going to have an impact. What we’re seeing today is going to have an impact on our forward plan. It has more to do with the inputs into that plan from a resource perspective than it has to do with route selection.
We are primarily a Florida airline and that will not change. We have almost 50% of our capacity there touching Florida and it is a big piece of who we are. We’re headquartered here. We’re the home state airline.
So while the weather has definitely shifted south this season and we've seen some data from the FA to confirm that it definitely has focused from the north, down into the south this year, that does not change our view of the overall opportunity. What it does do that was influenced the way we think about our recoverability and the slack we put in the system.
And I think this quarter, this third quarter is an example of we probably push the marginal utilization of crew a little bit harder than we needed to and that probably cost us money rather than saved, and I think reversing that is very much in the cards.
And then it appears there maybe some north case available, any comment and whether you guys would be interested?
That’s just obviously just came up this morning, so I think it's just too early to talk about that at all. We have a presence in New York, we’re happy with our performance there and we'll just have to see how things develop.
Our next question is form Kevin Crissey.
The sector wants to be investable or many investors and analysts want the sector to be investible but kind of like unforced errors make it tougher days where the stock down double-digits or make that more challenging, particularly when it comes on the cost side which we can take for granted in the way. Can you talk about whether in the schedule process its different to change the amount utilization and sector, but are you changing any of their processes that you used to create the schedule, are you incorporating more team members from other divisions or is it the same people just making a more conservative approach to the schedule? Thanks.
Kevin, it’s Ted. I’ll comment here, obviously Matt’s team is responsible for the scheduling, he can add in some color but we are an aggressive shop and since 2016 we have done a much better job of getting the teams together in a room talking about the impacts that we have.
I think from time to time we've had some very good successes that have come out of that exercise and quite frankly setting aside this summer, there have been some periods over the last three years where a few things did not work very well and we had tougher operational periods in early 2017 and the like that we learn from.
And so, there is already a lot of heads and a lot of brains involved with this, to make sure that we’re running the most efficient schedule we can. Clearly, as I’ve defined it, we've narrowed it down to a few discrete items that that we understand and that we intentionally moved, so as it relates specifically to right now, I think it is a little bit “easier for us to adjust” because we know exactly what we've done and exactly what we’re going to do to change it. So regardless of that there’s a lot of people talking about how do we make it better going forward?
Next question is from Catherine O'Brien.
So maybe first question, can you give us some color on the benefits if any you’re seeing from your revenue management improvements and adding more dynamic pricing ability to revenue stream, is there a boost that you saw in the second quarter, are you anticipating that to increase, doesn’t move towards the year any color there would be great.
Catherine, it’s Matt. Thanks for the questions. So we have seen a lot of benefit from what we’re doing from a revenue management perspective in terms of ancillaries, from the bags perspective, we are just beginning to a learning what we call clusters of customer segmentation. So we’re looking at specifically how groups or parties think about bags, where they’re flying to and then making sure that that pricing is very transparence everyone is extremely important.
I want to make sure that there's no surprises in and how that pricing works, so that's very -- it's very clear and evident on our website as to how that works, so we've taken a lot of time to do that and be thoughtful about that.
On a seats perspective, we talked a little earlier about big front seat and where we are there and all the opportunity we have going on there. And one thing that we talked about in the past a little bit but I think I can bring up right now as well is that stage does have some impact on our non-ticket production, so the fact that stage was down 4.5% in the second quarter but non-ticket per passenger segment was up 1.8% in the second quarter. I think probably speaks to the answer to your question about the success of our revenue management initiatives.
And then maybe just you know, reflecting on the fact that you are seeing a drag to RASM this year given some of the new markets you’ve added over the past 12 months and to ramp up on those markets is a little bit slower than you were initially expecting. Does that change how you think about maybe 2020 or even farther out capacity growth both in terms of how much in the complexion of that growth? Thanks.
Catherine, it’s Ted. So it's a great point and as Matt mentioned, we were opportunistic in finding markets that largely were gate constrained and an opportunity for us to get into them, they were part of our plan and we gave ourselves that that opportunity clearly increased the mix of new flying this year, but I can tell you that based on what we know today, it turns around again next year and such that that gap that Matt was describing in percentage terms probably goes back down to a more normal rate, and again, acts as a natural tailwind.
As the markets matures, so we think about what the company has done over the last year, we’ve got a big international presence that's growing and maturing in Orlando and then thus far this year we've added a bunch of new cities that are clearly a drag right now, but all of that stuff should help us going into 2020.
Maybe like one really quick follow-up to that. In terms of these new markets maybe in larger cities just ramping a little bit further than you thought. What's driving this slow ramp is that competitive response, is it just your forecast in terms of where the [indiscernible] those market any color will be helpful?
So this is Matt again. So just to be clear some of them are taking a little bit longer. And most of that is regarding our expansion out of Orlando from an international perspective. And that's really just because the expansion we did there was very large and very quick. And a lot of those routes don't have a whole lot of history behind them from a nonstop seats opportunity perspective.
So we’re building markets which is what we do in general and it was just the large number of them some of them are ramping a little slower. And we mentioned I think after Labor Day we’re starting to make adjustments to the schedule, optimize the schedule little bit better there in Orlando. So and just to be clear about other new routes, we are very happy with how they are moving, they are actually moving along the lines.
There is few exceptions as there - always are but generally they're moving along the lines we’d like to see. It's just the mix is double in percentage point terms than it was last year that is what’s having the drag on unit revenue. Specifically it’s not this city or that city in fact we’re happy with everything we’re doing there.
Some of the routes ramped even faster than we expected. So I don’t want you to take this away it’s something that we have an issue going on overall. It’s very normal kind of process and just a mix of new routes is really what’s causing the drag right now, right now.
Our next question is from Dan McKenzie.
Matt following up on that last question. If you would take a look in international versus domestic would you characterize 75% of the 200 bps RASM headwind in the third quarter or second quarter from international or 50% or all of it. I’m just wondering if you can just pull a little finer point on that response?
So thanks for the questions we can make this more clear. We had about 100 basis point drag from the international network itself and that’s just from the ramping like we just described. And then on top of that, the domestic is probably causing that’s the part that’s a little harder to pinpoint exactly when we’re estimating its between 100 to 200 basis points on the domestic new routes.
The new routes 100 bps, okay. The book away in the third quarter revenue outlook from the operational disruptions, is there any book away embedded I guess first off. And then secondly, what's the revenue opportunity from calling back some of this lost business. And I guess you know related to this, I’m wondering if you can just talk about the on-time in June versus what you're seeing months to date and where you expect to end the year exiting?
So the operation itself is not really causing a book away for us right now. One of the things that does occur when we cancel flights in the peak season which is we're in right now, we don't really have a revenue recoverability on that and a lot of that is just because we have very, very high load factors and the industry has high load factors.
So a lot of times, we can get people to where they want to go for a day or two and if they’re only taking a couple day trip, they may choose to cancel the trip out right which we don't like of course and we don’t want to provide that kind of experience to the guest but it just happens in the summer more than it happens other parts of the year.
So if they canceled their outbound that means they can’t come back, but if they are coming back only two or three days from now, our model and product is not set up to sell a lot of that demand super closed in. So a lot of times we get the outbound cancel, than the seat flies empty coming home.
So that's why when we have operational disruption in the summer and peak periods, it impacts us more than it may impact other airlines out there. And Ted you want to talk to the on-time performance.
Yes, so and just a clarification on that Dan, I mean we aren't seeing any evidence of book away. I mentioned earlier that the brand is strong, our metrics are still good. I think that the work we've done today's is doing exactly what we would have hoped. And quite frankly from an on-time perspective we’re still clicking along very much with what we hoped. Our on-time performance while lower in July then it was in June not surprisingly given the weather and the fact that we are intentionally pushing in the peak.
We're still in the 70s and so that feels like about what we would've scripted out. If you’d asked me at the beginning of the year how I felt about on-time, it's more about the completion factor and the last few flights of the day that's where we’re having the "disruption" and that's the part that can be fixed with a few changes to the schedule and a few changes to reserve optimization.
Can you just remind me when those change is going to effect, is it in September or is it more fourth quarter?
You know it's a bit - from a schedule perspective I think Matt mentioned earlier there's a few things that we can do close in that will assist a little bit heading into the fall and by the time we reach the peak of the fourth quarter there would be a few more things helping us from a schedule perspective but the really longer pooling attempt is making sure we have adequate crew resources to be - to make sure we have the mix on reserve correct, that just takes the engine a little bit longer to spool up.
So we're really thinking more about that being more of a Q1 and beyond kind of thing next year which is why our forecast today assumes there will be a little bit more disruption than we had originally planned and a little bit lower completion factor.
We have no further questions at this time.
Great. Thank you everyone for joining the call today and we will catch you next time.
Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating and you may now disconnect.