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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 Third Quarter, 2018 Earnings Conference Call. My name is Paulette 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. [Operator Instructions]
I will now turn the call over to DeAnne Gabel, Senior Director of Investor Relations. You may begin.
Thank you, Paulette, and welcome everyone to Spirit Airlines, Third 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, who will discuss our cost performance. We will have a Q&A session for sell-side analysts following our prepared remarks.
Also joining us in the room today are Scott Haralson our Chief Financial Officer, 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/or management's belief as of today, October 25, 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 third quarter 2018 earnings release which is available on our website for the reconciliation of our non-GAAP measures.
With that, I’ll turn the call over to Bob.
Thanks DeAnne and thanks to everyone for joining us today. Before we begin with comments, I want to take a moment to congratulate Scott Haralson. We announced last week that Scott had been promoted to Chief Financial Officer. Scott has over 18 years of industry experience. This experience, together with the knowledge gained from serving as our Vice President of Financial Planning and Analysis for the past six years made him an ideal choice to succeed Ted Christie as Chief Financial Officer.
Thanks Bob. This is Scott by the way. I'm excited about the new role. We have a great management team and I'm glad to be a part of it. For all of the analysts and shareholders on the call, I look forward to meeting you in the coming months. Thanks again Bob.
So turning to our results, yesterday we reported third quarter 2018 net income of $100.5 million or $1.47 per diluted share. We are very pleased with our third quarter TRASM result of up 5.5% year-over-year, which significantly exceeded our expectations.
We are also pleased with our continued strong financial performance. For the third quarter we achieved a completion factor of 99% and a DOT on-time performance of 76.6%. Year-to-date through last Sunday we have a completion factor of 99% and a DOT on-time performance of over 80%, which ranks us number four of 17 reporting carriers for on-time performance. Excellent teamwork all around.
Our revenue trajectory is improving and so is our operational reliability. Together with our continued focus on delivering excellent cost performance, we have a solid platform that positions us to deliver earnings growth in 2019.
With that, I'll turn it over to Matt and Ted to discuss our third quarter in more detail.
Thanks Bob. For the third quarter 2018 we reported total revenue of $904 million. Total revenue per available seat mile increased 5.5% year-over-year, materially better than our initial expectation of up 2% to 3%.
We are seeing measurable benefit from the enhancements we've been making to drive passenger yield. On the passenger revenue side we have restructured our pricing and revenue management teams, added resources and have been developing processes and using enhanced data analytics to better optimize passenger yield.
We believe these internal improvements have sustainable future benefit and especially so in strong demand environments when they give us increased leverage to manage yields up as they did in the third quarter 2018. In addition, post Labor Day we cut many underperforming long haul routes.
Over the last two years we have made a lot of network changes and now have 10 key cities with 20 or more daily departures. This, together with improved capabilities of our reservation system has helped to drive more connect itinerary opportunities resulting in higher load factors. These actions, as well as a strong demand environment contributed to our third quarter revenue result.
Turning to non-ticket, on a per passenger segment basis, non-ticket revenue for the third quarter was up $1.86 year-over-year to $54.44, in part due to our dynamic pricing initiatives and our ancillary bundle offering. We remain on track to achieve our goal of $55 in non-ticket revenue per segment by year end.
In the coming months, in addition to continued momentum from our current offerings, we expect we will begin to see additional benefit from enhanced merchandising opportunities and recently we and our partner Bank of America made some changes or our co-branded credit card offer onboard the aircraft.
These changes are designed to drive more applications, have higher attachment rates and promote additional use of the card itself. These initiatives, along with others that we plan to implement over the next two to three quarters give us confidence we can continue to drive increases in ancillary revenue per segment.
Turning to our network, since our last earnings call we began service to both Greensboro and Asheville, North Carolina and we've also recently announced Callie, Columbia and Jacksonville, Florida as our newest destinations, which begins service later this quarter.
Also in early October we launched service from Orlando to seven destinations in Latin America and the Caribbean with four more to start in early November. We are very excited to have the opportunity to expand our international footprint.
In addition to being a city with high demographic affinity to Latin America and the Caribbean, our Orlando service is a perfect complement to our existing Fort Lauderdale service as it provides greater schedule utility for our connecting passengers. By year-end our international capacity will account for nearly 15% of our total capacity.
Now, turning to our outlook for the fourth quarter 2018, as we announced last night we expect [indiscernible] capacity to increase about 15% year-over-year. Additionally in terms of our revenue guide, based on our current booking trends and considering how well our internal initiatives benefited us in the third quarter, we estimate TRASM will increase approximately 6% year-over-year.
Before I hand it over to Ted to discuss our cost performance, I want to add that the improvements we’re seeing on both ticket and non-ticket metrics are a direct result of a company-wide effort to improve our revenue performance. We have a lot more work to do, but the results thus far are clearly encouraging.
And with that, I'll turn it over Ted.
Thanks Matt. Thanks to all of you for joining us today. Now turning to our third quarter 2018 performance, network optimization and improve yield management, combined with our teams continued focus to drive ex-fuel costs down produced an operating margin of 16.1% for the third quarter 2018, nearly flat year-over-year despite a significant increase in the cost of fuel and higher pilot rates in connection with our new pilot agreement approved in the first quarter of 2018. I thank all our team members for contributing to the strong performance.
CASM ex-fuel for the third quarter was $0.0522, a decrease of 3.7% year-over-year. Better operational performance was a large driver of this improvement, 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.
Regarding fleet, in the third quarter we took delivery of two new A320ceo aircrafts and ended the quarter with 121 aircrafts in the fleet. In the fourth quarter we are scheduled to take delivery of five new A320ceo aircrafts and three A320neo aircrafts. In 2019 we have 15 aircrafts scheduled for delivery and estimate our capacity growth for 2019 will be about 14%. We are evaluating debt financing, as well as sale leaseback options to finance these aircraft; however, for cost guidance purposes, we are assuming we will debt finance them.
On a full year basis we are solidly on track to achieve 2018 CASM ex-fuel of down 3.5% to 4% year-over-year. Our fourth quarter 2018 CASM ex-fuel was estimated to be up 5% to 6% year-over-year. As you may recall, our 4Q CASM ex-fuel last year was down 4.4%, which was partially due to favorable group health expense and timing of supplemental rent. It creates a challenging comparison for this year.
In addition, we have yet to lap the pressure from higher pilot rates in connection with our new pilot deal ratified on March 1 of this year and we have some headwinds related to the timing of heavy maintenance events.
Regarding fuel, based on the trends quarter-to-date and the forward curve, we estimate our average fuel price per gallon in the fourth quarter will be $2.46. At these elevated fuel prices, it is more important than ever to drive continued fuel efficiency. We already have one of the youngest most fuel efficient fleets in the industry and over the next year our fuel efficiency should get even better as we add more new aircraft, most of which are neos that consume between 15% to 20% less fuel.
We are also leveraging technology to help us drive more fuel efficient routings and to optimize cost indexing and aircraft speed. In fact, on a per seat mile basis, we have a 30% advantage against the industry average in fuel burn, which actually helps expand our absolute cost advantage in times of rising oil prices.
Looking forward to 2019 non-fuel costs, we are still in the early stages of our 2019 budget planning process. We were comfortable reiterating our 2019 CASM ex-guide of flat to up 1%.
In closing, we are enthusiastic about both our revenue and cost trajectory as we look ahead to 2019. We are addressing higher fuel prices by adjusting our network and pushing pricing where we can. Our yield management initiatives are just beginning to bear fruit and should drive additional benefits as we further refine processes.
Our non-ticket initiatives remain robust and on target to produce higher non-ticket revenue. Together with our continued cost discipline and improved operational performance, we are optimistic about the potential outcome for earnings growth in 2019.
With that, I'll turn it back to Bob.
Thanks Ted. We made a lot of improvement at Spirit over the past few years, and all our hard work is starting to pay off. We've improved our operational reliability and made great strides in improving our service metrics. We have an industry leading cost structure and a cost gap to our competitors that we believe will continue to widen.
Our key labor agreements are in place for the next several years. We have refined and improved our revenue management processes. We have made measurable improvement in non-ticket revenues and see further upside and we have broadened and diversified our network. And in the future we see plenty of new route opportunities.
And of course, none of this would have been possible without our talented and dedicated team members. For all these reasons and more, we are confident about our future success.
With that, back to DeAnne.
Thank you, gentlemen. We are now ready to take questions from the analysts. To allow everyone the opportunity to participate, we ask that you limit yourself to one question with one related follow up. Paulette, we are ready to begin.
Thank you. [Operator Instructions]. And our first question comes from Kevin Crissey. Please go ahead.
Hi, thanks for the time this morning. Can you talk about what it is about the international market that is attractive from Orlando and how the cost structure advantage plays out in those international markets as compared to domestic markets?
Yes, sure Kevin. Good morning, this is Matt. In terms of Orlando, a lot of things that we’ve learned in Fort Lauderdale and how we serve the market tends to be unique. We have a great ability to carry customers that wouldn't otherwise be able to go, and that's what our cost structure allows us to do.
What we’ve learnt in Fort Lauderdale is that there's a lot of traffic back and forth that is visiting friends and relatives and that kind of traffic or that kind of customer base are people that we serve very well and Orlando has similar affinity to Latin America and the Caribbean. Not exactly the same as South Florida, but it has a lot of the same characteristics and as we continue to build out our network in Orlando, we're creating connect opportunities that allows us to flow traffic over Orlando as well.
So it actually creates really good opportunities for our guests out of the Northeast, specially or rather any city really that can connect through either Fort Lauderdale or Orlando gives them better ability to create an itinerary that meets their needs.
So what level of connectivity are we talking about? Are we above 10% connectivity from either of those cities at this point?
Yes sure. So yes, to answer the question. And in Fort Lauderdale we've done some things from a scheduling perspective that promotes the flow of connect traffic and it’s one of the few places in our network where we do have some banking that takes place there as well. And we don't have the same exact structure getting set up in Orlando right now just because the size is smaller, but over time we expect that we’ll continue to build out Orlando to act similarly to Fort Lauderdale, not exactly the same, but similarly.
And I guess why – I understand why that – how should we think about that for a low cost carrier? To what extent is that a traditional practice? I know that Southwest connects more than people think. How does that differ from the historical practices of an ultralow cost carrier or maybe it doesn't?
Hi Kevin, this is Bob. I don't think it does. Again, we have to look at the nature of the operation; it's got a lot more - we are not flying out of Transatlantic with twin aisle airplane. This is the narrow body operation and we're generally talking two or three hour flight. There is – for the most part the costs are not dissimilar. There’s some customs and things like that, but generally you get compensated for it. You are able to run relatively high utilization because many of these markets you can serve with red eyes and evening flights. So it’s actually in many ways it’s highly complementary to domestic operation, because we're actually using airplanes at night that quite frankly, but no other place to go, so it really extends the network.
It’s just a matter of how you want to view the globe, but the reality is that you know if there were more cities south of Fort Lauderdale we would be flying there. They just happen to be international. But it's – I think conceptually it's the same and quite frankly it helps us. Because of our geography and a large – we have almost 57%, 58% of our operation touches Florida, the Caribbean, Latin America, it allows us to increase our utilization actually quite a bit. So I think it's kind of a natural for us.
Okay, thank you very much.
Our next question comes from Duane Pfennigwerth. Please go ahead.
Hey, thanks. In terms of revenue management improvements you have made and pricing clean up, can you expand on what new tools you have deployed? You know what exactly it is you're doing and how would you characterize what inning are we in, in terms of the recovery of those base fares?
Hey Duane, this is Matt. So we’ve – I don’t think I’m going into too many details of exactly tools that we’re using. We’ve done some things internally and we are building out some new processes.
I think you've heard me say before how we have a tremendous amount of data just like every airline generates and one of the keys is not just the collection of the data, but thinking about the right way to use that data and that's exactly what we're doing now.
And in terms fares and what inning we are in, you know I just like to think of it as every flight every season, off peak, peak, they're all going to act a little bit differently and they have a lot of reliance on just what's going on in terms of the economy and the industry in general.
So sort of a continuation of what we saw throughout the summer and into the fall is not that different. We are seeing pretty good strength around the holidays and the peak period, and the off peak periods have recovered pretty well. We’ve done some things from a network perspective that have created more sort of peaking even within a week. So we've eliminated bad flying on Tuesdays and Wednesdays that we don't think is accretive to what we're trying to accomplish and that in general helps overall pricing trends for us. If we are not having to do a lot of extra discounting on Tuesdays and Wednesdays, then it just helps the overall week in general. So I’ll kind of leave with that.
Just to go a little further, I think we are in the early innings and I think – and the revenue improvements will come. Some will come from the industry environment, you can't escape that and someone will come from our own initiatives and you know fortunately we're getting a lot more from our initiatives. You know it takes a while to get this stuff going and finally like I said, it always takes a little more to get these systems up and running, but we are finally seeing the benefits. Again, we got a whole new team in that area.
So like I said, I think generally in the early innings we are way down from the real peaks of 2014 and 2015, that's kind of obvious and some will be tied to industry [evolution] [ph], but we feel good. A lot of things now are more in our control than perhaps a year or two ago.
That's great and then maybe you know an industry question. As you think about your fourth quarter outlook and seasonally stronger periods late in the quarter. Could you contrast your visibility into 4Q revenue versus the visibility that you had into 3Q revenue?
Sure. So at this point of the booking curve we're pretty good with what's going on in October obviously. And then as we look forward, the holidays, we have pretty good visibility as to what's going on. I think we're set up really well. I think we've done a really good job in understanding demand patterns and what we're seeing out there from a pricing environment perspective and it's really no different that we talked about on the last call, which is we're continuing to drive loads as much as possible in the off-peak periods.
We've eliminated some bad routes and we’ve eliminated off-peak flying on Tuesdays and Wednesdays, which is helping in general, and the trends are moving in a relatively stable way, which is what we like to see. So it’s a little easier to predict what's going on right now, but you never know what will happen as we move through the quarter. But as of right now we think we are pretty good on what we are looking at.
Thanks, I would have guessed that you would say we are ending on a high note as opposed to September, but thanks for taking the questions.
Alright.
Our next question comes from Dan McKenzie. Please go ahead.
Yeah, hey thanks. Good morning guys; a couple of questions here. I'm going to try a first on third quarter revenue/pricing. I'm just wondering if guys later followed any of the industry actions in the third quarter?
So this is Matt again. In terms of actions overall, we are making pricing changes and yield management changes on a daily basis. We tend to not take really big broad actions all the time, because that doesn't necessarily benefit us. We are much more surgical in how we look at our data and understand where do we see opportunity to increase fares we will, and where we see the need to reduce fares will be a little more sale promotional, we’ll do that. And in fact the same market may exhibit those two characteristics at the same time depending on travel, season or any unique events that are occurring in certain cities.
Very good, and then now I guess while I have you here, the $55 target for non-ticket revenue per passenger. First, you know what is the next target, how are you thinking about that? Is $60 reasonable next year and what is the pathway there? I believe there's a product refresh that's going on. I’m just wondering if that's enough in and of itself to get you in the next round or you know what are the big drivers as we look ahead?
Yeah, so Dan we haven't put a stake in the ground for sort of a next publicly stated goal that we want to get to. We are looking at that now; we are assessing all of the different opportunities that we have. I think we have mentioned before, and I have no problem mentioning it again, that we know that we have opportunity to improve our co-branded credit card program, which we are working on with Bank of America now.
We know we have opportunity to improve our packaging business, which we think of as selling hotels and cars in addition to air and we have some new technology coming in place later this quarter and into next year. That should help us with better merchandising and continuing to sell what we're selling today, but in better ways. So we have not stated exactly a target beyond the $55 at the end of this year, but it is something that we are looking at as we think about 2019 and beyond.
Okay, thanks for the timing guys.
Our next question comes from Jamie Baker. Please go ahead.
Hey, good morning everybody. You’ve had several months now to live with the new pilot contract and at the same time you know the growth rate based on ASM’s is decelerating pretty meaningfully. If I were hired as a first officer today, which would be a bad idea obviously, but what would your best estimate be in terms of how long it would take me to move to the left seat. In two years ago at this time what would your answer have been roughly speaking?
Hey Jamie, this is John Bendoraitis. So right now we're running about – it ranges from two years and eight months to about three years depending on you know when you want to make the move, so we just kind of round it to three years and it's been pretty consistent in my time here. So it's been hovering right around that three year mark, so give or take a few months on either side.
And going forward, that's true even with the slower growth rate?
But the block hours are, you know you got to look at we're getting bigger. So even though the rate is going down we’re in it.
And I would say the move Jamie; it’s Ted. The move off of this, there may be you know rounding a little bit, but it's not going to be material shifts. We’re still going to be an extremely attractive place to work for pilots while we continue to grow even at mid-teens rather than ‘21, in ’21. It's still going to be one of the best in the industry.
Okay, got it, that was the point of the question. And second, have you on any of your own simulations – would you be willing to run any of your own simulations you know at the currency pitch, just to be absolutely sure that you still hit the 90 second evac rule?
Yeah, I mean look, all of the airplanes that fly today have already been certified safe for exit, you know be it because of the original certification or many evac as it relates to whatever the configuration is. So we're comfortable that our airplanes meet those requirements and I think the FAA is already publicly opined on it to be honest. So I don't think there's an issue there and I think we are comfortable to say that our planes meet those mandatory requirements.
Excellent! Thank you very much everybody.
Our next question comes from Hunter Keay. Please go ahead.
Hi team, good morning.
Hey.
Hi.
Hey Ted, when you gave 2018 CASM ex last time you said zero to one, but you hoped to do better. This time you just said zero to one. Kind of curious to know why you chose to drop those words and do you still hope to do better and if you do, what's going to make that happen?
No, I always hope to do better, which is why we hired Scott. No, that's not an oversight. Look we go into the planning process always aggressively. I don't think you should read anything into that. Our objective is always to do better. We're still in the midst of it, so I'm not prepared to update beyond where we've always been, which is flat to up one with the intent to always do better.
Right, and the second part of that question was what's going to make that happen? Well, what is the – what's the – is it the budget, is it the utilization, I mean…
Yeah, I mean look you know, as we’ve said the leverage we pull around here are going to be you know – how do we best optimize assets, that's always the case. So peak utilization is a primary objective and you and I've talked about that as we have publicly that you know over the last few years our utilization has come off a little bit and we see that as an opportunity to improve asset utilization.
We don't – you know we don't have to pilot a deal until the first quarter, but obviously you know so there's a little bit of pressure there, but we still have the aircraft purchases that we did in the middle of this year. We don't lap till midway through the year, so that helps us too and so you know there's always maintenance timing, there's always a bunch of other things that we work our way through.
But this company's got you know a pretty unified objective to maintain our cost structure and expand the cost gap and we've done that for the last seven years and it will continue and you know I think if anyone were to ask us at the beginning of this year as to whether or not we are going to deliver flat to down CASM in a pilot year we would have been called liars and we did it, and so you know that's kind of the way we're approaching next year too.
Liar is a bit harsh, but – So this is a question for Matt. So as you build the schedule debt, you know you mentioned obviously the benefit of more connecting itineraries and you even talked about banking Orlando a little bit, but are you finding it a little bit harder to raise local fares in those markets because of the additional frequencies that effectively mean you're competing against yourself, you know because you also compete against ULCCs when you do that you know. How are you finding that dynamic of pricing improvements locally where you’re adding depts.?
Yeah Hunter, that's a good question. We're actually finding the reverse to be true, that as we add more optionality to our customers, we actually have the ability to carry them in both directions on a much better schedule, which in fact helps us on yield and helps us on pricing power in the market place.
So I know, I understand your question, but in fact what happens is that the benefit to pushing up yields, largely because we don't have to necessarily do some things to help drive added traffic. The traffic will just naturally flow over.
And then in terms of the local markets themselves, right now we believe the environment is strong. We know what happened last year. Pricing is still out in the marketplace, but inventory control are things that we’re practicing more and more of and I think it's showing up and I think that the ability to drive traffic has never been an issue for us. It's been more about can we get that at the right yield and right now we're not having any issues with it.
Let me just go a little further Hunter. If you just look at our route network, we got about a quarter of our routes where we have more than one flight a day. But yeah, you've got a look at networks completely differently and you can look at a legacy carrier network, so we're relatively small, but we've got a series of cities where we got 20, 30, 40 flights. Again, we’ve got you know 20 flights in about 10 cities and some substantially bigger and quite frankly we can add more servers because we're kind of gaining scale in key places and as Matt said, when we got better time of day coverage, we got a great cost structure, the product is better.
The differences in coach compared to carriers is tiny and we wanted to dramatically better airline before. So we do pretty well on those routes and then we operate against the larger carries and we can have a 50%, 60%, 70% cost advantage. So I think it's kind of hard to really what we do. About I think 50%, 60% of our routes we have once a day and we have 15% where they are less than daily. So we vary our strategy by the route and by how we perceive our own you know strength of the city and I think right now I think we're in a pretty good spot.
Okay, thank you.
Our next question comes from Savi Syth. Please go ahead. Savi, your line is now open.
Hey, good morning. Sorry about that.
Good morning.
Americans going to change their basic economy product offering a bit recently and I was wondering if you’ve noticed any difference, just when kind of you’re a legacy competitor now and you know in the future you will have some of the competitors with this basic offering. Is it different in kind of the product where they include the carry on or not and if you’re seeing anything different with this change?
I’ll start off and Matt can finish. Everybody now has basic economy. So they say, this is all tied to have people want to manage their revenues. We really don't care what they're doing. You know the industry competes in a lot of different formats and I’m guessing that maybe we’ll get four or five carriers doing it.
This is just a market place adjusting and adapting and the key thing is ultimately is how many seats do you sell at a certain price. That is by far the biggest driver and like I said, we're very comfortable with the direction of our earnings. Some of it's tied to what the industry does, but well more than half is tied to things that we're doing and obviously as you know we're pretty comfortable with our ancillary structure which doesn't fluctuate with industry activities. Matt?
Yeah sure, that's right Bob and I would just add Savi that the idea of customer segmentation by using base economy is one that makes sense. I think anyone, the core principles of revenue management suggests that customer segmentation helps you price more effectively to the customer segments that you are putting together.
So I guess from my perspective allowing like American exchange that you had mentioned, they are going to change their product to see how – to what they think is best, to the extent that it blurs the line on segmentation. To me it would mean like they have to sell less seats because they are blurring the segmentation. So in fact in that case our overall statement in the past still holds, that we expect all these products to be neutral to slightly beneficial to us, because anything that helps the segment is beneficial and then at the end of the day if there is a line that’s getting blurred on that, then our competitors may have to sell even less of those price points in order to maintain what they see as important segmentation.
Very helpful answer, thank you. And if I just might make a quick follow-up to Ted, you talked about fuel efficiency improvement. This year it kind of looks like it had improved about 3%. Does that moderate as we go into the following year? How should we think about that level of improvement?
Yeah, it’s a good question Savi. I don’t know if I can say for sure exactly what's going to be the impact going forward. I mean neos will have a notable improvement. They will drive considerable improvement going forward in just that fuel burn line. So I don't think we're done improving on. I assume that percentage was on an ASM basis and I don't think that improvements necessarily done. You know as the fleet gets bigger it will round over time, there’s no doubt about it, but we’re just not quite sure yet how much neos will offset any other aging pressures that we have.
Alright, thanks for the figures.
Our next question comes from Andrew Didora. Please go ahead.
Hi, good morning everyone. Ted, maybe a little bit of a follow up to the Savi’s first question, but look, as you enter your new role when you look forward for Spirit, how do you view the phased competitive position in the market as the Legacy Airlines continue to strengthen their cabin segmentation initiatives and I guess what do you think are the biggest network opportunities for Spirit over the say next three to five years, Thanks?
Sure. So I think Matt addressed our collective views very well on how we view the strength of our product. It’s tied to our cost advantage; it's tied to the design of the model and the attractiveness of a-la-carte pricing for our customer base. We know that's what they want. We survey them and that's what they get. So we feel very good about the way the product is designed.
I think what you hit upon is where my focus is for the next three to five years is on network and design of that network and the value as we build out the opportunities that we see and we put them in to bucket right. We talked about big city opportunities, we talk about large leisure destinations and we talked about international and in fact, if you look at the past year and you just look at the routes that we added over the past year, in rough numbers depending on categorization it's about a third, a third, a third is what we added last year. About you know some big city stuff some large leisure destinations and plenty of international.
And as the network matures and evolves, those opportunities become clearer to us rather than foggier. And so what we are excited about over the next three to five years is how are we going to optimize those opportunities and it ties into some of the commentary Matt made earlier about what we do with kind of intentional connect opportunities and how we time our aircraft in various markets, will have an impact on our ability continue to drive yield improvement.
And with a quality product, a clearly improving product and a very high quality product for us, we think we have a tremendous amount of advantage. Good costs, high quality product and an evolving network, that's where my head’s at and the management team for the next three years.
Thank you for that Ted. And then just a follow-up there, are there other markets outside of non-South Florida that could be another source for connecting traffic?
So we do connect some in non-South Florida markets today, it's not big and so there are a handful of opportunities for us to continue to optimize that and we do see markets that will flush out over time where that – again, I don't want to over emphasize the concept of connect. We’re never going to be a true banking airline in large kind of metropolitan areas. What we are going to do is optimize our fleet and the network opportunities, so that we drive appropriate amount of yield opportunity and that's going to come some from connect and largely from local and so we do see opportunities beyond just South Florida, but that’s going to have to flush out over time.
Thank you.
Our next question comes from Helane Becker. Please go ahead.
Thanks operator. Hi everybody. Thank you for the time. So Bob, I don’t know if Bob or Ted want to answer this or Matt even. But as you think about all these improvements that you have made and you have seen really great improvement on the operations, two questions; one, what’s the cost association with getting to 99% completion factor or should we be thinking of it more as a cost savings rather than a cost spent? And two, how has that translated into your net promoter score if that’s a number you look at?
So we’ll break it into two and I’ll let Matt talk about the net premotor or at lease comment on it. But we want to start with the operation, so philosophically if you try to fix an operation in six months or six weeks, you could also get cost structure very quickly? So we basically, we said we got a couple years and we're going to be very diligent, because the goal was to make sure the cost gap for the industry was lower. So we started with a little bit of luck, we made some adjustments on our routings, got through all our turns, we went into excruciating detail and we took some utilization down.
Really what we found was, we really wanted to get out the completion and the cost of disruption because that number – for us the cost of disruption is higher than other carriers who have a lot of frequencies. And so we've actually saved a substantial amount of money, and we're now at a point where we think we can begin to flex up the utilization again, so now we have control.
Again, so if you have an operation where we are, you don’t fix eight things at a time, you create the stability. You create a stable platform and we think now we can start improving our utilization again.
Again at the same time, I think our labor agreements are substantially better. I think our pilot deal is a win-win for the pilots and for our customers, because we have a lot more flexibility to you know manage our airline and the bulk of our operation is from the Midwest to the East Coast, so we have a lot of ATC issues. We manage these things dramatically better today than we did a couple of years ago.
So we're at a pretty good spot. I think we already are around 80%. I think we are running a good airline and I think we can now actually begin to squeeze some additional cost improvements out of it without really having a negative impact on our operation.
Yeah sure, and in terms of net promoter score, we don't publicly comment about what the actual numbers are. I can tell you that directionally we are very pleased with the trajectory. As you could imagine, running a much better operation in terms of on time performance, in terms of completion factor, just to get the plug in for operations group, we have the best bag handling rates in the industry and we're also seeing in a reduction in our DOT complaint level as well. They are at all-time lows for us as well and trending in the right direction.
And when we talk about the operation, it's not just about the aircraft taking off and landing. It’s also about what happens at the airport from an experience perspective. So we spent a great deal of time looking at our data, which you‘ll hear me say a lot, and analyzing where the pain points are and working very closely with our operations group to understand how to make the guest experience better at the airport.
I think it's playing through in a very smart way. Instead of having to swing really crude weapons around, we can go in very surgically and attack pain points that we see our guests experiencing and can alleviate them. And all that shows up on our NPS at the end of the day and we also know that the better we get scored on an NPS basis, the better we see repeat our purchase rates from our guests as well. So it all plays in together.
Matt, can you say what that repeat rate is and what it is compared to?
No, again Helane, we haven’t really talked about that one publicly. I don't think we are prepared to do that right now. But I can tell you that it's moved up nicely and it's not just moving up in terms of repeat rate, what we're also seeing is that the better the NPS score is then we also know that our guests spend a little bit more on ancillary purchases as well. So again it's on purpose. We view this as an investment into how we view the future revenue streams of the company.
That's great. Okay, thanks for your help. I appreciate your answer.
Our next question comes from Michael Linenberg. Please go ahead.
Yeah hey, I just – not to beat a dead horse here on the connections. But I know a lot of the conversation around connectivity has talked about improving yield and I'm just curious to structurally, do you by taking a connecting passenger, do you preclude capturing as much ancillary as you would like – as you would typically receive if you had two local passengers and look I've flown Spirit before, but I've never flown on a connecting base.
I mean can you charge the same passenger twice for a carryon bag for example? Or are the yields in the connecting itineraries sufficiently high that they more than compensate for whatever ancillary that you would forego, if you were taking two local passengers as opposed to one connecting?
Hey Mike, it’s Ted. Yeah, so look we're still a local airline, okay, so the primary focus on us is pushing local traffic. The design of the ancillary model favors that, but we will price connecting opportunities to optimize all in yield and by that I mean TRASM, okay.
So we're always looking for opportunities to drive TRASM. We measure ourselves based on T, not on the separate distinct items and so it's just one component. It’s one weapon or tool in the tool kit that we think we have more opportunity to use today than we did three or five years ago, that's all. It’s just because we are 121 airplanes rather than 21 airplanes and that will just continue to refine over time.
Okay, and just a follow up on you know about percentages of connecting passengers. I'm not sure if Matt actually said the number, but if I approached it differently and said what percent of your Latin itineraries involve a connection. Would you have that number even a rough approximation?
Yeah Mike, we do. So in terms of running through Fort Lauderdale, it’s about half of our international traffic connection at Fort Lauderdale and the other half is local, out of Fort Lauderdale. Most of our other international flying right now is going to be more of the local point-to-point nature and I don't want – I want to make sure that we don't over rotate on this idea of connective.
Like Ted mentioned, it's important and it helps add to the network, but it's really augmenting what we already do. We are very careful about utilization and we're not going to do things that’s going to hurt utilization in order to try to carry one or two more connect passengers. So I just want to make sure we are clear on that.
It’s really nothing new. We’ve been doing it, the company’s been doing it for years. We are just bigger and Fort Lauderdale serving 50 flights where we were two or three years ago, whereas that was in the 70s. But you know it's one of our key airports with the places like Orlando and Las Vegas or you know close second and third.
Yeah, but Bob you said though, you're now in 10 cities, you're over 20 departures a day. So it will become a byproduct and it sounds like it's going to be an accretive byproduct from a profitability standpoint.
It would be and it’s just the matter of size and there is generally more competition in local markets today. In actually connecting markets the fares are actually relatively higher. That's different than where we were eight to 10 years ago. So again there is opportunities that actually come with size. We've done things with automation and it will also vary by season, because we have bigger opportunities in September and October than perhaps to carry connections versus the summer where you can try to maximize local?
So again, as we get size and as the network evolves, it’s just all networks are different and ours evolves in a differ way and I think quite frankly you know we can – you know a lot of experience carrying connections and we can run an exceptionally low cost airline. Especially when you're dealing with narrow bodies the way we are other than customs, the operation is remarkably similar. So we don’t over complicate it.
Great! Thanks everyone.
Our next question comes from Joseph DeNardi. Please go ahead.
Yeah hi, good morning. Matt I think in the past you kind of characterized the ancillary opportunity as maybe $1, $2 you know per passenger. I’m wondering now that the credit card as an opportunity if that's changed. Are we still looking at dollar increases or is the opportunity more significant over the next say 12 to 24 months?
Yes. So Joe, thanks for the question. We have and we’ve report some of this publicly. And so we know what the opportunity is on credit card. I'm going to probably give you a little bit of a non-answer here, Joe so I'll just tell you in advance, but we know what the opportunity is.
Just on the credit card question.
Yeah, so specific to the credit card, we know where we've been. In fact our credit card program is under performing right now compared to where we were a year ago and we're bigger. So right there shows you some opportunity. I think we filed some numbers in the Q and you can see the opportunities there, and not only do we know that the opportunity is there, but it's also in conjunction with how we think about the loyalty program, which as you know those are clearly tied together.
So together we believe there's really good opportunity there and we also have one thing that we don't talk about a lot, but we talk about from time-to-time is that just as we evolve and as our customer base evolves and flies with Spirit more often, there are some challenges that we have with that that or not heavy challenges, but there is things that we have to understand which is when our customers start to fly us with a higher repeat rate, then they start to learn the model a little bit and then they'll join our $9 Fare Club, right.
So when they join the $9 Fare Club we get added revenue from that, they get some discounts on their bag charges. So we’ve created programs that help to take advantage of a repeat rate. I want to encourage repeat rate and what you'll see next year as we come out with our new loyalty program, it's going to be an extension of our overall product.
Right now our loyalty program and the credit card for Bank of America associated with it was developed years ago when our model was a certain way and where we are today, it doesn't fit. It doesn't our customer base and we see it and they are telling us with their behaviors that it doesn't fit for them anymore, and that's one of the major reasons why we are looking to change it and the opportunity I think is definitely there for us.
Okay, that's interesting Matt. And then Ted, a question for you. If you had formulated the capacity plans for 2019 without Bob sitting next to you, would Spirit be growing at a faster rate? Just trying to understand if you think the right rate of growth for Spirit is higher than Bob does?
I want to hear this.
No, we're pretty unified on how we view the business. You know we've always known and in fact we talked about this even before Bob took over as CEO, that as the airline got larger the percentage growth was going to round. It looks weird admittedly this year that we go from 23 to you know 14 or whatever, but remembering the 23 really should be around 18 or 17 or 18 when you figure out the problems that existed in 2017.
So I think we are on the right path. I think we feel really good about that growth rate. We are always going to look for opportunities within each individual year to optimize utilization of the fleet, to take advantage of opportunities principally in the peak, but around and quite frankly in times where it's not as good, you look to kind of draw down a little bit of your off peak flying to compensate. But nonetheless I think we're very comfortable, and have established a delivery profile that matches that, that's not a coincidence.
Thanks Ted.
Sure.
Our next question comes from Brandon Oglenski. Please go ahead.
Hi, this is actually Matt Wisniewski on for Brandon. Thanks for talking my question. Quick one for you. You talked about the operational improvements due to the new pilot contract. So I was hoping you kind of expand a little bit on that. You know obviously it seems to be working so far. Should we expect continued improvements? Is there something that could spool up over time?
Yeah, I think we're still collectively learning our agreement and you know as I mentioned – as we mentioned before, the principal benefits come in our ability to recover in times of disruption and I think that's where you see some of that benefit today.
As we've also mention next year, we anticipate we will be deploying a preferential bidding system that we think should have some we hope benefit as well. We haven't quantified, but we are looking at that happening in the late first quarter, early second quarter we hope.
So while we've shown operational benefit today and we're running a much better airline, we're still you know making sure that we’re optimized and I think that his gives us an opportunity to continue to kind of tweak the knobs going forward from here.
Okay great, thank you.
Paulette, we have time for one more question.
Thank you. And our last question comes from Jack Atkins. Please go ahead.
Thanks for squeezing me in here guys. I appreciate it.
No problem.
Good morning Jack.
Good morning. Just a couple of follow-up questions here. You know Matt going back to what you're saying on the credit card underperformance a moment ago, I mean is that something that gets resolved in the next you know couple quarters or is that something that's really more of you know a couple years out in terms of getting that fixed. What’s the timeline there, if you can sort of help us think through that?
Sure. So we will see improvement on this starting in next year, but overall it will probably take around 18 months where it’s all kind of flowing through and become annualized. So as we – right now we’ve done some things to help. We’ve increased the sign-up offer onboard the aircraft, so we've improved the offer.
We are working very closely with our flight attending group on creating better strategies to drive more flight attended engagement on the program in general. And then as we mentioned, next year as we look at our loyalty program revamp, that will have an additive effect as well and side note which I mention just recently, previously as well, is we expect our $9 Fare Club program to benefit from all these changes as well.
Okay, that's good to hear. And then just as a follow up to sort of the broader conversation around you know the optimism for the earnings growth in 2019. I mean Ted I would just be curious to get a sense for your level of confidence around you know pre-tax margin expansion next year.
Because I guess as we sort of think about the significant revenue momentum in the business as we are exiting the year, you know fairly the comps in the first half of the year and then you know pretty modest unit cost growth in terms of the outlook. I mean it seems like you guys are really well positioned to expand margins but you know I was just curious if there were any puts and takes around it. Thinking about it just to know what you’re level of confidence is?
No, it’s a great point Jack. Look, if we take a step back, we talked about this as we look at the broader opportunity set for this business and the markets that we look to tackle. We’ve always used the mid-teens target and today – and that's on the op line by the way, and today obviously that’s – we’re a little below that on average.
Obviously this quarter was good, but on average and so we believe that over time that we revert to a mean, we may have in certain years over performed that target and underperformed in others, but over time it kind of focuses around a meaning on purpose and that's the targeted number.
So our objective always is to drive further margin expansion and earnings and we feel very good about the set up for next year because of all the work that's been done over the last few years, all the things that Matt talked about in the revenue line and our continued discipline on cost. We just feel like the setup has inflected in the right direction.
Okay great. Thank you again for the time.
Thank you everyone for joining us today. That’s a wrap.
Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.