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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 Fourth Quarter, 2018 Earnings Conference Call. My name is Silvia 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, DeAnne you may begin.
Thank you Silvia and welcome everyone to Spirit Airlines, Fourth Quarter Earnings Call. 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 based on management's current expectations and 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 fourth quarter 2018 earnings release which is available on our website for the reconciliation of our non-GAAP measures.
Presenting on today’s call are Ted Christie, our 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 in the room today are Thomas Canfield, our General Counsel; John Bendoraitis, our Chief Operating Officer and other members of our senior leadership team.
With that I will turn the call over to Ted.
Thanks DeAnne, and thanks to everyone for joining us today. 2018 was a year of many accomplishments. We achieved a completion factor of better than 99%, ranked among the best for fewest bags lost, improved our customer service metrics and delivered a record on-time performance of 81.1% testing [ph] most of the other U.S. Carriers for the full year.
We ranked number one in on-time performance in October and based on preliminary results, it looks like we ranked among the top three carriers for November and December. We leveraged self-help initiatives to increase our average fare and average non-ticket revenue per segment and improved our CASM ex-fuel to nearly 4% year-over-year. My thanks and congratulations go out to the entire Spirit team. It is very fulfilling to begin to realize the benefit of our hard work over the past couple years.
Before we begin with an overview of our fourth quarter results, I want to take the opportunity to acknowledge Bob Fornaro for his many contributions to Spirit. In early 2016, following a shift in the competitive landscape, Bob joined the Spirit Management Team knowing that we needed to make some changes to succeed. Bob is a proven leader and was instrumental in helping us improve our operational reliability and our customer service metrics, all while strengthening Spirits position as the airline providing the best value in the sky. Bob retired at the end of 2018 and will remain on our Board. The entire Spirit team thanks Bob for helping us become an even stronger competitor.
Turning now to our fourth quarter 2018 results, yesterday we reported fourth quarter net income of $94.7 million or earnings per diluted share of $1.38. We were exceptionally pleased with the success of our initiatives during the quarter to drive higher passenger and non-ticket revenues. We also had a very strong fourth quarter operationally. Our on-time performance was 85.1% and our completion factor was 99.6%, an excellent quarter all around.
With that, here’s Matt and Scott to discuss our results for the fourth quarter 2018 and our outlook for 2019 in more detail.
Thanks Ted. For the fourth quarter 2018 total revenue increased 29.5% year-over-year to $863 million. Total revenue for available seat mile increased 11.4% year-over-year on 16.2% capacity growth.
Our network reorientation, off-peak schedule changes, and ticket and non-ticket yield initiatives, all contributed to our strong fourth quarter revenue performance, additionally throughout the quarter we saw strength in industry pricing which was assisted by tighter inventory controls.
Turning to non-ticket, on a per passenger segment basis non-ticket revenue for the fourth quarter was $56.70, up 5.2% year-over-year, primarily due to our dynamic pricing initiatives and the continued improvement of our bundled services offering.
In addition to our initiatives that are still maturing, we have several new revenue enhancements that we plan to deploy this year. Our new website with improved merchandising capabilities is currently in the final testing stages and we are excited about its potential to drive additional ancillary revenue and increase conversions. We are working on a revamp vacation package program and expect to see the benefits of this new program begin to take hold later this spring.
As you may recall, last October we made some changes to our co-branded credit card offer on board the aircraft. We have seen a nice uptick in the number of applications since the changes were implemented.
Lastly, we are also working on overhauling our loyalty program to be more reflective of the value of our ULCC product provides to leisure customers. We are encouraged with our continued growth in non-ticket revenue per segment and believe that in 2019 we will again see year-over-year improvement. For the full year 2019 we estimate or non-ticket revenue per passenger segment will be between $56 and $57.
Turning to our network, we’ve been very busy with new market launches and new market announcements. During the fourth quarter 2018 we began service to Callie, Columbia and Jacksonville, Florida and we announced we will start service to Austin, Texas on February 14.
Next up after Austin will be Indianapolis service that starts next month, followed by Raleigh/Durham where service is slated to commence this May. We are excited to add these new cities to our network, bringing our low fares with customizable travel options to more people in more places.
As for 2019 capacity, our outstanding operational performance in 2018 has given us the confidence that without sacrificing any operational integrity, we can increase our aircraft utilization in the peak periods, which is when we typically capture higher than average unit revenue.
This change, together with some other minor adjustments to our WiFi installation schedule and a more refined view on timing of aircraft deliveries, rose up to a full year 2019 capacity growth of approximately 15% year-over-year. First quarter capacity will be up approximately 16.5% and we estimate capacity in the second, third and fourth quarters will each be up 14% to 16% year-over-year.
Now turning to our revenue outlook: Based on our current booking trends and customer buying behavior for ancillary items, for the first quarter 2019 we estimate TRASM will increase approximately 5% year-over-year. This includes an estimated 250 basis points drag on first quarter 2019, due to the shift of Easter to late April this year.
The demand in volume for both domestic and international remains strong. As you know, during the fourth quarter we launched the largest international expansion in our company's history. While we are pleased with the overall development of our portfolio of new international routes, they are still in their initial [inaudible] period which is a slight drag to our first quarter TRASM, but by the peak summer travel period they should be approaching steady state.
Overall we are very pleased with how well our ticket and non-ticket initiatives are performing along with the overall benefits from our network and schedule changes.
And with that, I'll turn it over to Scott.
Thanks Matt and thanks to all of you for joining us today and thanks to our entire team for their contributions to our strong results. Our core cost structure continues to improve and I'm exceptionally pleased that for the full year 2018 our team once again delivered an industry leading cost performance with adjusted CASM ex-fuel decreasing 3.8% year-over-year, despite absorbing material increases related to higher pilot rates in connection with the revised contract ratified in the first quarter of 2018.
Turning to our fourth quarter 2018 results, CASM ex-fuel for the fourth quarter was $5.49, an increase of 5.6% year-over-year. This increase was primarily due to higher salaries, wages and benefits per ASM, largely driven by higher pilot rates. This increase was partially offset by lower aircraft rent per ASM. We also realized benefits throughout the business from increased productivity and efficiencies driven by better operational performance.
Regarding fleet, in the fourth quarter we took delivery of seven new aircraft, ending the year with 128 aircrafts in our fleet. Thus far in 2019 we have taken delivery of two aircraft and have 14 additional deliveries scheduled for the remainder of the year. We plan to finance nine deliveries using sale leaseback transaction, five will be under direct operating leases and the remaining two deliveries will be debt financed.
Looking ahead to our 2019 cost guidance, our core cost outlook for 2019 has not changed. However rather than debt financing the majority of deliveries, we now plan to use sale lease back transactions to finance the majority of which of course means higher aircraft rent. The higher aircraft rent will largely be offset by lower depreciation and lower interest expense such that our pretax income is minimally affected by our financing decisions.
Our 2019 network plan has stage length decreasing 1% to 2% year-over-year. Together these changes add about a point of pressure to CASM ex-fuel. Incorporating these changes, we estimate our CASM ex-fuel for the full year of 2019 will be up 1% to 2% year-over-year. When you adjust for the shorter stage and the sale leaseback financing, this is in-line with our previous guide of flat to up 1%.
For the first quarter 2019 CASM ex-fuel is estimated to be up 2% to 3% year-over-year. On a per ASM basis in the first quarter, we will have pressure from higher pilot rates and higher depreciation and amortization. In addition, quarter-to-date we have seen a significant year-over-year increase in deicing expense driven by both rate and volume of deicing event due to the level and intensity of winter storms this year. These increases will partially be offset by lower aircraft rent per ASM.
For the second and third quarters of 2019 we expect CASM ex to be up 1% to 2% year-over-year and the fourth quarter up about 1%.
I'm very comfortable with our set-up for 2019 and how well our team is managing the various cost pressures in the business. Our goal is to get better every day, and while the comps are tough give our exceptional performance in 2018 the team remains focused on holding the line on costs and committed to finding ways to increase efficiency and drive productivity.
With that, it’s back to Ted.
Thanks Scott. We are very excited about our momentum as we head into 2019. We continue to grow our network and are pleased to be adding Austin, Indianapolis and Raleigh/Durham to our list of destinations. Throughout 2019 we will continue to see growth opportunities in large domestic leisure destinations and near field international destinations.
In addition, as the opportunities present themselves to grow in large gate constrain metros, we will do so, as this is where many customers who have otherwise been priced out of the market with high fares live, and where many leisure customers want to go.
We are broadening and diversifying our network, but large cities attract many leisure customers. With our low fares, reliable operations and friendly service, we are the best airline to stimulate and grow the leisure traffic based in these markets.
Even though 2018 was a stellar year on many fronts, record on-time performance, improved operational reliability, record non-ticket revenue per segment, excellent cost performance and improved customer metrics and brand image, we are raising the bar for 2019.
Our top priorities for 2019 are to consistently deliver operational reliability, while increasing fleet utilization, continue to innovate and grow non-ticket revenue per passenger segment, further refine our network to support diversification, maintain our industry leading cost position and grow our relative cost advantage and deliver earnings growth for our shareholders.
These things together with an improving brand image and our low fares solidifies our position as the best value in the sky and provides us the leverage to deliver margin expansion and strong earnings growth in 2019.
With that, back to DeAnne.
Thanks Matt, Ted and Scott. We are now ready to take questions from the analyst. We ask that you limit yourself to one question with one related follow-up.
Silvia, we are ready to begin.
Thank you. [Operator Instructions]. And our first question comes from Andrew Didora.
Hi, good morning everyone and thank you for the question here. My question is for Ted or Matt. There seems to be a lot of moving parts in 1Q versus 4Q RASM just given the stage length change of Easter shift, peak versus off peak dynamics. Can you maybe give us a sense of where you see the core underlying growth rate today and what types of tailwinds could you see as you move into more peak travel periods in 2Q?
Yes, sure Andrew. This is Matt. Good morning and thanks for the question. So one thing that we want to talk about is how we think about off-peak and peak periods and as we move from sort of the peaks that we saw over the holidays in Q4 into Q1 and then back into Q2, what we are finding generally and this has been something that we’ve been talking about now for probably six months or more, is that the off-peaks continue to be what they are. They are off-peak periods; we continue to change our network to address that. A little more seasonality put into the network and as we’ve talked about before, trimming some of the off-peak flying in some of the more weaker periods of the year.
And in the fourth quarter there was certainly a lot more of what we would call off-peak periods than we are seeing in the first quarter and in the second quarter we move out of that off-peak period into Easter and then a little bit of shoulder in May and then the summer peak really kicks in, Memorial Day weekend and then into June.
So generally speaking, what we're seeing is a pretty good inventory control out there that allows us to also have pretty good inventory control around the peak periods and one other nuance that we want to talk about a little bit is that when you get into the peak periods, and every peak period is still a little bit different, they are not all the same. But peak periods also allow us to do a little bit more with our non-ticket yields, especially when it comes to our bundled services offering.
So the bundle services offering definitely kicks in a lot more when families are traveling together and they want to sit together on the aircraft, they are checking bags and the bundle offering that we put together for them also gives them then a couple of additional items that really seem to be have a pretty good up-tick around peak periods. So that’s something that I think is important for us to understand.
And then additionally as we move from Q1 specifically into Q2, year-over-year our stage comes in from Q1 to Q2. So in Q1 we actually have a little bit of a stage expansion, but in Q2 the stage really starts to come in a little bit. That will help unit revenue in Q2 as well. Of course overall revenue performance is what really drives the unit revenue production, but stage definitely will have a positive benefit to TRASM in the second quarter.
Great. Thank you and just quickly as a follow-up Matt, did I hear you correctly in your prepared remarks that you think non-ticket could be up about 3% in this year to about – I think you said $56, $57 per trip, is that right?
Yes, so we expect to land – by the end of the year for the full year we expect to land between $56 and $57 for non-ticket.
Okay, thank you.
You're welcome.
Our following question comes from Jack Atkins.
Good morning. Thank you for the time.
Good morning Jack.
Matt, just going back to that last question there on non-ticket, you know the fall of 2%, 3% in non-ticket, you know given the multiple initiatives that you guys are targeting for this year, plus the maturation of your rent reactions in 2018, you know I guess why wouldn’t that number be a little bit higher on a full year basis as you think about 2019, you know not-ticket per flight segment?
Yeah, thanks Jack. So a lot of the things that we started to put in place really a year ago and a lot of the initiatives that we are talking about require testing and learning and then the experience around revenue management. And we really, we've been talking about this for a while now, but a lot of the initiatives take time and it just takes time. You can't just implement new revenue management strategy and expect it to work overnight, especially for something for us that's new which is revenue managing ancillary products and services.
So we really saw – we thought the ramp up would take longer and it's a testament to our team, it’s a testament to our IT group working with our revenue management group, putting new reports in place, putting new systems in place and we've really been able to ramp that faster and we saw a lot of that hit third quarter into fourth quarter.
So a lot of that we think we captured in third quarter and fourth quarter. And now yes, we are going to continue to improve, continue to make that better, but a lot of the big punch we think we captured late last year, so we'll just continue to improve on it. But now it's just the big step-up we think we may have taken on a couple of the products.
Okay got you, that makes sense. And then just following-up Matt for you on the international side, you talked about sort of the spool up of the international routes that you had in, you know in the fourth quarter. Could you just talk about you know what you're seeing in terms of uptake for those routes and how do you expect the revenue performance there to trend as we sort of get out of the first quarter into more of the peak travel periods later on this year.
Yes, sure. So our – the makeup of our network is changed quite a bit. So we were – I think on a year-over-year basis we are going from around 10% of our system capacity being in what we call international, which is really Caribbean, Latin America and from 10% to around 15%, 16% as we go through Q1 and Q2. So it’s a much larger part of our network.
And a big benefit to these routes, once we get to steady state for them, it’s not only again – we talked about our abilities to sell to what we call VFR traffic, visiting friends and relatives traffic and a lot of the routes that we've added are unique routes like that, that we service very well. Our model works very, very well for travelers of that segment.
And as we get through Q1 into Q2, normally we like to think about routes taking maybe up to a year to really hit full maturation. However we started these routs on purpose in the fourth quarter so that by the time we got to the Easter period and then into late spring early summer, they'd have a lot of time under their belt.
Really a lot of these routes will have about six months of service before we hit peak Easter period, and we really think that that's going to help allow us to step up the results on those, maybe sooner than that full year would otherwise be the norm. And it’s mostly about timing of when the routes came into the market.
So we are very excited about what we are seeing now and a lot of these routes because they have a heavy, again what we call VFR traffic, means a lot of the guests are carrying bags and in some cases multiple bags. And again, this adds to our profile of our success in our international routes and something that we can take advantage of quite well.
Okay, great. Thank you again.
Absolutely.
Our following question comes from Duane Pfennigwerth.
Hey thanks, good morning. I wonder if you could just replay the fourth quarter a bit and the significant upward revision in your guidance. What was the biggest driver of that? Was it the behavior in the peaks and just that you know pricing was really, really firm?
Yeah, so what we saw happen throughout fourth quarter is a lot of our network changes really, really works incredibly well, especially the calling of the Tuesday and Wednesday flying and what that allowed us to do was really take a different look as to the overall pricing that we needed to put in the market place in order to stimulate traffic.
So by pulling a lot of those Tuesdays – and I believe we had maybe nine or so weeks of the fourth quarter where we were able to pull out a lot of that Tuesday and Wednesday flying that in the past hasn't been real accretive to earnings or to TRASM.
So in addition to that, a lot of the things that we did pull were some of the long haul flying and I guess it’s a bit of a testament to some of the issues we were having on some of that flying that we were able to pull some of that out and really look at the Tuesday, Wednesday flying and really be able to see a better uptick from a pricing strength perspective. We didn’t need to go out there with fares as low in order to help fill Tuesdays and Wednesdays, therefore our shelf strategy, as we like to call it, for the whole week improved.
And so that really gave us a nice upper left. More than we expected obviously from our results based on our original guide. And we have some of that going on in the first quarter as well. We have that from about mid-January through mid-February. We did some of that pull down as well but it's just not as aggressive as we saw out there for the fourth quarter. So that’s really kind of what helped push up fourth quarter.
In addition to that, we did have a strong industry environment for sure and that can't be left out of the conversation. Things were pretty healthy out there and they are good now too. It’s not that they are not good now, they are. Just what we were seeing in the fourth quarter was an abundance of inventory control and as we move through February now and we have a line of sight into March, we are pretty happy with what we are seeing out there today.
Duane the only thing I’d added to that is and Matt talked about it in one of his other questions was you know the success we are having with non-ticket initiatives really kind of you know accelerated through the end of the year and I think that was also a positive surprises as we headed into the fourth quarter, which again contributed to TRASM very productively. So that sets you up nicely as we head into the first and second quarters of this year to really capture a lot of that momentum going into that period too.
Thanks for those comments and a follow-up maybe for Scott or Ted. Can you just expand a little bit on what you are seeing in the leasing market, lease rates, etcetera. You know why would the decision to tilt back to leasing, what is it that's really driving that, what has changed in that market? Thank you.
Hey Duane, this is Scott. Hey, we entered 2018 with 64% of our fleet owned, which a quarter of that was owned out right. So we feel like now we can look at financing from a balanced approach and really be opportunistic. I mean the leasing market has closed the gap to the debt side, WTC and bank side, so we feel like we can take advantage of that today. I like the idea of being able to look at the different funding sources and just sort of move where the economics are most favorable and that's sort of what we are doing here.
Okay, thank you.
The following question comes from Joe Caiado.
Hey, good morning, thanks very much. Matt, first question for you on RASM and on some of these new revenue enhancements that you mentioned, you know have the new website, the new app and all kind of the related functionality that comes with that. How should we think about the ramp-up to a run rate revenue contribution from those things? Just trying to calibrate how much of that is driving the $56 to $57 non-ticket target for this year, or if it's because of the learning that's involved if this is a little bit more of longer term contributor?
That's right. Actually, that is correct. So just like all of our other initiatives, as we get new functionality, we have to learn the best way to use it and we have really great people here with experience that know how to use these kinds of technologies and merchandising capabilities in general. But once we get the new functionality in place, then we’ll learn how best to apply those thoughts and processes to our product and to what we are seeing from our customer base.
So it is something that we expect to have a benefit this year for sure, but it's going to be more of a longer term benefit, which actually works out pretty well from my perspective, because as we continue to get better at revenue management of our existing services, that will help us as we then will be able to test and learn on some of the new functionality coming in, that will then be able to monetize as this year progresses, but really by the end of this year and into early and into early next year is when we should start to see a real benefit from that, not unlike a lot of our other initiatives that took about a year to kick in and then when they kicked in, they kicked in really well. So we are expecting to follow a similar trend.
And that's helpful thanks. And then just a bigger picture fleet and cabin question for Ted and Scott. So operating a single fleet type has been an important driver of your low cost structure. You’ve got an RFP out there and you are evaluating a new aircraft order to kind of support your growth plans beyond kind of 2021. I think you said you expect to make a decision this year.
Without asking you to get into specifics on that, I just love to get your bigger picture thoughts on the importance of that strategy and kind of the core LCC tentative of operating a single fleet type to keep costs low, as you think about Spirit’s future and kind of retaining your cost advantage into the future? Thanks.
Hey Joe, it's Ted. I’ll make few comments and let Scott add in too. You know I think you hit all the points. What’s core to us is low cost structure, efficiency utilization, all of those things. Clearly in historical perspective, while it would be natural to assume that a single fleet type is the most efficient use of aircraft, there are examples in our history where that’s not true.
We are very, very low cost carriers like AirTrend for example operated multiple fleet types and did sell at the lowest cost in the business and what you really have to solve for is the mix between operating costs and upfront expense on the airplane. And so it’s in our best interest to drive the best deal and we want to make sure we are ticking all the boxes. So we are happy with our customer today, but we got to evaluate all the options available to us. Scott, I don’t know if you want to add anything more.
No, that’s exactly right, and even just from a status update for you Joe, I mean we are in the early stages of the RFP today. We have gotten the first responses back. We are evaluating those as we speak, but we are on path for the timeline that we set out to sort of mid-2019 you know end result.
I appreciate that. Thanks very much.
Our following question comes from Hunter Keay.
Hi, good morning.
Good morning.
Ted you mentioned, you know you’ll be looking at adding services on the large metros, gate constrain specifically that you mentioned. How do you do that, how do you get into some of these gate constrained airports and when you do, how has your thinking maybe evolved over the last few years about how you market service, both to and from those major metros?
Sure, you know it's a game of patience to be honest Hunter. We have for the better part of a decade been you know evolving the network and I think it's kind of the hidden story around Spirit, is the network development over the better part of a decade showing where we deployed the choices we've made and in doing so we've been extremely vocal about and patient with our decisions around where it is we've grown.
In fact over the last two years, the vast majority of our growth has been in Orlando and Vegas, because they are very, very good leisure destinations. They've been extremely accretive to us, but at the same time when available we've been able to grow in Los Angeles and in Chicago and in Houston and Dallas and New York and a lot of large metropolitan areas to, because that's where people live and it is also where people want to go?
So I think it’s a balanced approach always and remember that we’re – when we go into a market from a marketing perspective, the primary marketing value is our low fares and we stimulate additional traffic to the market, and that's a proven data supported claim that the market gets bigger when we go into the market.
So we are clearly interested in bringing back customers who have been priced out with low fares. From a targeted marketing perspective we use very efficient low cost type methods to attract our new customers and turn them into guests, and that doesn't really vary that much to be honest depending on the size of the metropolitan area. But I guess that that's the key theme, is we put our name out there and we got to be patient and we grow. We think there is tremendous opportunity in all three pillars of our network, which is you know big origin cities, large leisure destinations in the international. I think we are picking those off in the order we like.
Got it, thanks. And then as you think about adding some utilization carefully as you mentioned and adding back some peak capacity, are these flights that you are kind of adding back in, in airports that you cut back because they were operationally challenged because of you know just air space or congestion or was it more scaling back some of that peak stuff because of competitive factors or inability to price. I'm trying to think about that in the context of what you are going to be adding back going forward? You got the question.
Yeah I mean, I'll give you my thoughts. Matt you can obviously add as well. You know when we are looking at where we think we can and to your point, carefully add additional utilization to the peak and we've been talking about that for the better part of the year, we think it's one of the opportunities we have as the operation has improved and we've gotten our legs underneath us, which clearly we have at this point.
We think we can exploit more RASM accretive flying in to peak periods, and I think it's going to very. I think you are going to see it in – clearly in some times of year in the peak it will be in Florida, because Florida is the peak and that's happening right about now as we head into spring break in into the Easter holiday, and then as the network kind of moves to more East West into the summer, there's more opportunities in certain other metropolitan areas.
So I don't know that it’s specifically to answer your questions tied to whether or not we are trying to trim for operational integrity or competitive action. I think we are just now looking at opportunities as they sit and picking off the ones that probably meet the best you know, the best thresholds depending on the season. So Matt, you want to…
Yeah, that’s right. And one note Hunter about that is with our change in our WiFi insulation schedule, we had a bit of a delay due to the government shut down. So with a couple of certifications we had to get put in place.
So we definitely also had a couple of late ads that normally you wouldn't see something like that from us, as late as they were loaded. But that’s a bit of why some of those ads came in later. And in that case as Ted mentioned, we are looking for the routes that we believe we can drive a lot of demand late and get it in an extremely unit revenue and P&L positive way.
So a lot of it has been really maybe adding a second trip on top of the really good market. It’s not necessarily putting anything back in where we thought there is issues in the past. We are looking for where we see strength or take some chances on the thought that some demand will come in pretty late at yields that we think are earnings accretive.
Okay, thank.
Absolutely.
Our next question comes from Helane Becker.
Thanks operator. Hi team, thanks for the time. I'm still not sure who wants to answer this, maybe Matt. Have you noticed a change in international bookings and demand from international passengers or is your focus more U.S. origination?
So our focus was – so Helane, great question, because it's going to depend on the route. There are certainly going to be routes that we add that we believe are going to be heavily leisure based when you think about when we fly to Cancun and most of that traffic originates in the U.S. and the way that we promote and market that service is going to be different than perhaps someone you know in Fort Lauderdale who's going to Honduras or vice versa and we've set up a pretty, I would say unique distribution network in a few key Latin American countries for us where we can do business there and it supports our model and it supports the way that we distribute there as well. So we have some pretty tight relationships in place.
That really helped customers on both sides of the journey. So I don’t know if that answers your question perfectly, but that's the way that we think about distribution and how we go after that kind of traffic, which we believe again is a little bit unique for us in the way that we think about how we carry guests, especially in this VFR kind of market.
Okay, no that's actually very helpful. And the other question I had is sort of unrelated Scott and maybe you’ll answer this. As we think about the go forward for financing aircraft, should we just think like 50-50 you know forever or 50-50 for four years, you know that kind of thing, or will it just be more dependent on existing market conditions.
Yeah, hey Helane. I think the latter is probably right. Look, I mean I think we feel good about our capital structure today and we think we can be opportunistic, so we can play on either side and it will sort of be where the economics blow.
Great, thank you. Alright, thanks. Well, thanks for your help.
Our following question comes from Savi Syth
Hey, good morning.
Good morning Savi.
Just wondering if you could talk a little bit more about you know the 1Q and the 2Q dynamic here from a unit revenue standpoint. Just kind of curious, on 1Q you know just if you can kind of talk about some of the drivers that are you know causing it to be up at 5% year-over-year and your confidence given that you know it's much more heavily weighted to March and kind of your confidence level around that.
And then also, just a little digging, a little bit more into your 2Q comment rate, is that – I mean is it fair to assume that we should see an acceleration from 1Q to 2Q and what can that magnitude be?
Yes Savi, so I think in terms of what we are seeing for first quarter in general, we're still definitely lapping in industry environment. That was a tougher environment in 2018, so in 2019 this quarter we’re lapping some of that tough environment last year. It’s a little bit better environment this year, so that's a piece of why we have confidence in the number.
We also in January specifically just to give you some color about January, is the New Year's holiday and the return from New Year's was very strong, not unlike what we saw for Thanksgiving and Christmas, which we've already talked about in the past.
But what we saw in New Year's also carried through and in addition to that, this is going to be very nuance, but the placement of Martin Luther King Junior holiday this year was actually on the calendar. It's always the third Monday in January, but it was pushed to the latest they could possibly be this year and that gave some nice separation between the New Year's return and that holiday weekend.
Now granted we had some weather and some other things going on that weekend, but it created a nice separation and it allowed some people, at least from our results anyway, some people to be able to take multiple trips.
And then heading into President’s weekend which is coming up soon, we're really pleased with how we set up our inventory control for that weekend and it looks like it's going to be paying off much like it did in the peak holiday periods in the fourth quarter.
So we're just trying to take a really pragmatic approach to how we think about yield management in general, that the off peak periods are still off peak and they will likely always be off peak. And the peak periods, I think we're just getting better and smarter as time goes by and the process and the people that we put in place are just getting better and that just happens with time and experience.
Revenue management in general is not something that just flips on and off. It takes time to learn and for us we came from a position a few years ago where we always just wanted to have the lowest fare in the market all the time, period. Now we can be a lot smarter and recognize that things like time of day matter and things like outbound and return matter and how we think about different periods.
Not all Florida is created the same, even though it's all in Florida, different cities in Florida act different ways and as Florida becomes a bigger piece of our network, we are able to harness that and think about yield management better. So that's how we think about Q1.
In terms of Q2, I don't think we're ready to talk about Q2, specifically other than the Easter shift. What we have mentioned already right is the Easter shift is definitely going to push revenue into April and international, especially a lot of our international expansion being a larger part of our network should also peak up Easter for us more, meaning that there's even – there should be an even bigger push around Easter for us, just because the network is a little different this year than last year.
That’s helpful and if I might just on the fuel efficiency side, you do see kind of that your guiding to a decline in fuel efficiency. Is that completely the results of the kind of decline in face length or how should we think about it?
Yeah, hey Savi, this is Scott, hey. Yeah, we do expect the ASMS per gallon number to come in a bit, obviously due to stage, but also due to the price of fuel. So the way our routing optimizer works is it takes a number of inputs, including fuel price. So over time we would tend to fly a little faster and it might have a slight drag to the ASMS per gallon number, but it's fairly small.
Thank you.
Our following question comes from Dan McKenzie.
Oh hey, good morning. Thanks guys. Just a house cleaning question here on the growth for the first quarter; the growth is up 16.5%. What's the growth rate in off peak versus peak capacity, you know since you've talked about that. So if we could just break those two types of flying out, is that you know a 25% growth in peak flying versus you know a 10% in off peak to get to that 60.5. I'm just working if you can provide a little bit more perspective on how you are handling those two aspects of the schedule in the first quarter.
Hey Dan, its Ted. Yeah, I don't think we would have broken it out exactly that way in advance. I think directionally the way you're thinking about it is correct, that obviously we've crammed Tuesdays and Wednesdays in a lot of the periods post New Year’s, all the way up through quite frankly the President's Day holiday and so that's going to bring down your year-over-year comp in those areas and then it's going to you know raise the percentage artificially in the spring break and the holiday weekends that sit in the quarter. So I don't know what the exact numbers is, but I think directionally the way you are thinking about it is a blend.
Understood, okay. And then you know I had a follow up question on the non-ticket initiatives as well. So man, if we look back say two to three years, you know what has changed the most? What hasn't? And you know maybe if we could take hotels or car rentals for example, are these being dynamic offered you know today versus you know two to three years ago? Is there upside potential in this revenue vertical and I guess I’m just wondering if you can provide you know some more transparency about you know how you are thinking about the opportunity in the non-ticket part of the revenue structure.
Yeah Dan, so our – what we call vacation packaging, which is really the adding of hotels and/or cars to the itinerary has definitely been performing below what we would want to see. We are making some changes there from a technology perspective, as well as from a content provider perspective and we expect to see some benefit from there, but it's going to come in stages.
First piece is getting new technology and new content in place and then the second stage is starting to then be able to merchandise better and starting to get more thoughts and this is something that will take time as well, to get more thoughts around when different customers are shopping for different kinds of destinations, how do we offer up the proper offer at the right time to the right customer. So that's a piece on the vacation packaging.
We've also talked in the past. I can just add in now also about our loyalty program and about our co-branded credit card program, where we’re also under performing on a rate basis where we were in the past. And what I mean by rate basis, it's not necessarily from an economics perspective that we have with our partner Bank of America. It's more about our program quite frankly has become a little bit dated and it's not reflective of the ULCC model and the value that we provide and how we provide it.
So later this year we're going to be putting changes in place for our loyalty program and that's something that we believe will have a positive benefit. We do know that we have leisure customers who want a better loyalty program from us and it'll take into account more things that are part of who we are, part of our ancillary model and part of our low fare model.
So those are pieces that have opportunity for us in the future. I'm not sure if I totally covered what you are looking for in that question, but I think that’s some color there.
Yeah, well that's helpful. So you know the timing for the new technology on the vacation side and then I guess I'm just you know assuming that the $56, $57 non-fair you know sort of guide that you've laid out there for the full year probably doesn't factor in the upside from some of these developments, if you know maybe we could add some additional perspective there.
Well, if we have upside on that, it's going to come from delivery happening sooner than we expect and based on the prioritization of how we’re putting things together, I'm pretty comfortable with when we think the programs are going to launch and then taking into account some of the learning that has to happen and take place. So like I said earlier in one of your other questions, I believe we are going to see results from it this year, but it's going to be just like other non-take initiatives. They take 12, 15, 18 months to really hit steady state, because it just takes time to learn how to use the new technology.
Understood. Thanks for the time.
Absolutely.
Our following question comes from Michael Linenberg.
Yeah hey, good morning, everyone. Hey Matt, a question to you as it relates to route selection since it's been you know real integral to I think you’re out performance over the last year. If I take a market like Raleigh to New Orleans, which I know you are going to start in May, you know it looks like Allegiant’s going to be on that market, Frontier is going to be in that market and that’s a southwest market. I think Delta’s going to add service and when I think about you know how Spirit differentiate yourself, it does look like you are going to start with a superior schedule you'll be daily. You clearly have improved your ops.
Is that – you know as we think about you know a number of players moving into a particular city pair is – you know is that how we think about you know sort of longer term you’re staying power, you know because of the superior schedule, the ops, maybe a better product you know as you talked about improve loyalty and even improvement on the credit card, etcetera.
Yes. So Mike, yes that’s correct. We definitely come in the markets and when we do route selection, we are looking for places that we think are overpriced and underserved and sometimes that includes markets that have a lot of players in them already and we believe that the items you mentioned is what we bring.
We are amongst the best in on time performance, that matters to the customers and in addition to that, one thing that Ted talked about in his remarks and one thing that I can add on to a little bit, is that in some cases there's also going to be real estate or gate situations in certain airports that basically say to us, ‘Make a decision Spirit. What are you going to do? How are you thinking about your network opportunities? And when are you going to go grab them?’
So in some cases we will advance ads if we think that's the right thing for us to do, because of the city that we want to be in and it's a place that if we don't move soon, then we might not be able to go back in there for a couple years. So in some cases you are going to also see that from some of our route selection, but by and large we are not going to do that if we don't think it's a good opportunity at the right time for us anyway, so that's kind of how we think about route selection.
And then just going back to what we do with our international expansion out of Orlando, there's a number of routes in there that no one else serves. So it’s not that we are looking to go into routs where others already exists or a market is there. We will definitely look for places that we think is best for us to bring our low fares and our high quality service to that market.
Okay great, and then just as a related follow-up, how do you think about you know maybe your penetration into you know going after price sensitive business passengers? Is that something that you track and the reason I also throw this out there is, when I look at like Raleigh and some of the other markets that you've been adding service recently.
You know Raleigh, Baltimore for example, you're going in initially with double daily service and what looks like a very competitive pattern on both ends that would be attractive to at least a price sensitive business passenger. And again, I know you've stayed away from that segment for some time. So one – are you looking at that, and two, can you maybe even give us a rough feel for what percent of your passengers today that you at least believe may be traveling on some sort of business, maybe mixing business and pleasure, thoughts on that? Thank you.
Hey Mike, its Ted. You know as you know we are a leisure airline, we focus on that and so there is no really concrete way for us to measure the question that you are asking. We do expect that there are people who are traveling on us for business. Usually they are people who are paying for their own ticket. So it’s going to be small business, it’s going to be sole proprietorships, that sort of thing, and then maybe mixing that trip with a leisure weekend or something to that effect.
But the vast majority of the traffic we carry is going to be stimulated, and that's true across the board, so however you want to label it. We're trying to build a network and I think it's been and again I said in a previous answer, you can now look at the where the company flies and see an actual network. And I think the idea there is we are targeting those types of customers that have been priced out in a variety of different origin and destinations. So your example is one, where we think that there's just under service there at our price point and we are going to go in and be able to carry that traffic.
Great, thanks Ted, thanks Matt.
Our following question comes from Brandon Oglenski.
Hi, this is actually Matt Wisniewski for Brandon, thanks for taking my question. You know I was hoping we come back to the network improvements and kind of expand on that a little bit more. You know first should we be thinking about this as an structural improvement, kind of would this be to assume that you’re holding all of this constant, but this should be realized going forward next year. And then second, is there opportunity for material improvements going forward, kind of what you saw towards the end of last year.
Yeah, this is Ted. So I think some of the network improvement you are alluding to is that we made a couple of adjustments. We looked at some longer haul flying and decided to redeploy towards the latter half of last year into slightly shorter stage, more core Florida for example and then we also made some network moves around peak and off-peak flying that reallocated aircraft into better places to be honest with you. So they moved better gauge into different places, but also trim capacity in the off-peak which moves demand into the peak periods. And as Matt alluded to and talked about in his comments, that continues as we head into the first quarter.
Now our objective and the network team’s objective is to continue to optimize within that band. So you will see us continue to do things like that, depending on the season, depending on the competitive behavior, depending on a variety of different things. And so I think that that we're just sharper about that today, plus we have a much broader reach than we ever did and I think that gives us a tremendous amount of flexibility with regard to what we do depending on the season.
Okay great, that's all for me. Thank you.
Our following question comes from Joseph DeNardi.
Yeah, good morning. Ted in your slide deck, you refer to your cost advantage as Spirit’s most valuable asset. I’m wondering if you’ve ever given any thought to quantifying what the asset is worth. I mean the cost advantage as grown pretty substantially over the past few years, but stock price and your multiple obviously not moved to tandem. So the market is not really seeing it as an asset. Maybe it would help if you could quantify it a little bit. Have you ever given it any thought?
That’s an interesting question and a very obscure -- you know what I mean, like a concept to be honest. I don't know how it would explore and Scott can think about it too or jump in here buddy. But you are right, Joe. I mean we are extremely protective about that cost structure because it is an important part of who we are and going forward one thing will always remain true, is that's going to be core to whose Spirit is, is maintaining and widening that advantage.
Because it is core to the fair strategy, its core to the non-ticket strategy, its core to the network strategy and so how we quantify that, not sure, other than you can look at two different cost structure and try to figure out what that means to us from a dollars perspective. But it is definitely the one thing that we are extremely productive about, and I think you know Scott make his comments in his prepared remarks that we are extremely pleased with the performance the company had last year.
We are very, very excited about what we have going forward. Timing over a calendar period you know is to us interesting, but it's not what's most important. As we look at the trends of the cost structure, we look at the advantage that we have and watch it widen, that's what's most important.
Yeah, we agree with that. Hey Joe, this is Scott. So just one further comment is obviously we are very protective of the unit cost advantage we have and I think it's a little bit unfair to say that the valuation has moved, which means they don't think the unit cost of the value. I think there's a lot of other variables that have come into play there. I think the unit cost is an extremely valuable component to our, not only our company, but our investment thesis. So I think that maybe a little unfair to say that.
Yeah, no I think I agree with you. But just on the loyalty program Ted and Matt, it feels like you are kind of indicating that maybe it’s gotten overlooked a little bit, given some higher priorities elsewhere. How many people currently work on the program? Like what’s the size of that staff?
So Joe, we -- I don't think I’m going to actually answer that question directly. I would just tell you that it's something that a number of us, including myself pay attention to, and we talk about frequently and we are in the midst of finalizing what our new program is going to look like. And we’ve done a lot of work on understanding lifetime value of leisure customers and we've done a lot of work behind it and we've been talking about it for a while and the only reason why we haven't rolled something out yet, is because want to make sure that we get it right.
You don’t get many chances to change your loyalty program and we want to make sure that we roll it out correctly, that we are putting the right program together and I'm really excited about the opportunity that we have there to make it more reflective of a program that our leisure customers are looking for?
Yeah, I would add that you know the precursor to all of this, to guest improvement, to customer service metrics, this all started with us running about a better airline and we needed to know that we were going to do that consistently and regularly. And to Matt’s point, we want to make sure that we – when we talk to our guests about how they're getting value from us, we can back it up and I think that was the first step and something that now we've proven. And so now we've we can really let the guest focus people really, you know turn loose to focus on what is going to be best for a Spirit customer.
Thank you.
Are there any more questions in the queue?
Our next question comes from Rajeev Lalwani.
Hi, good morning.
Hi Rajeev.
Actually I wanted to come back to the CASM discussion. I'm not sure this is for Ted or Scott, but can you just talk about general trends that you are seeing on unit cots. I think the foresee numbers maybe came in a bit live. I guess the geography moves around 2019. But there's just been a lot of data points out there about just lots of pressure is on cost and maybe relating to that anything that think about as far as labors concern, now that pilots are behind us as far as other groups or types of employees that may need step-ups.
Hey Rajeev, this is Scott. Hey as we mentioned in the update in the prepared remarks, we’ve adjusted financing mix for ’19, we’ve lowered stage. So look in reality, looking at the calendar view year-over-year does create some awkwardness.
We have some timing of the pilot contract, timing of the A319 purchase in 2018 and even maintenance of its timing. In fact if you had signed the pilot contract in 2018, January 1, we would be down unit cost in Q1 and it would have a material impact to the full year and probably wouldn't even be talking about unit cost at this. So the timing does make it a bit awkward.
So we feel good about where we sit today, we feel good about our growing CASM advantage, and we said earlier we are very protective of the unit cost advantage and always looking for ways to widen that gap versus the industry.
Matt, a quick one for you. Are you seeing any signs of lower fuel making its way to the revenue environment, whether its pricing behavior or capacity. Any data points and that’s a couple of years ago is one of the first to see some of the pressures that we’ve noted back in ’15, ’16 or so.
Rajeev, no, we are not really seeing evidence of that. The only thing that I would mention is that off-peak periods are still off peak and that really hasn't changed much and that's when fuel was elevated last year and that's when fuel came down in the fourth quarter and where we are now. It’s sort of where the off-peaks are the off-peaks and we are feeling pretty good about the peak. So I think the answer to your question directly is, no.
I’ll leave it there. Thank you.
You’re welcome.
Our following question comes from Catherine O’Brien.
Good morning everyone. Thanks for the time. So maybe first as a quick follow up to the question Savi had earlier, it sounds like with the ramp up of your new international service, you are expecting maybe a larger tailwind from Easter versus the 250 basis point headwind you mention for the March quarter. You know is some of that just the timing of the holiday, one of your peers mention they were expecting a larger June Q benefit or is it really just like this international boost that you didn’t have last year that that's driving maybe a larger Easter tailwind? Thanks.
Yeah, I think generally speaking the tailwind for Q2 when the Easter shifts is going to be about the same as if there's a headwind in Q1 or vice versa depending on how Easter moves around. So when we get into the Easter period, we are going to be able to obviously see a lot more on close and demand and how that's going to materialize.
Is it possible that the tailwind would be greater in Q2? Sure, it’s possible. I don't know that yet and we’ll know that as we get closer to the period itself. I would just tell you the overall we are feeling pretty good about the peaks and just to reiterate, we do believe the international routes are going to be really beneficial to Q2 as we move forward.
Okay, great, and then just another one. So Spirit used to talk about getting to 50/50 for the ticket revenue and non-ticket per passenger and in this quarter you are very close. So first, is that still a goal and then second do you think that gap continues to close or do you think at the current demand environment holds your fair revenue per passenger should continue to recover back towards you know close to 2014 levels. Thanks.
Yeah, sure. So as you mentioned there at the very end, we do know where the ticket fair resided in the past and there's a lot of upside and opportunity to keep pushing our ticket revenue up. We don’t set a goal to say that we should have 50/50 non-ticket and ticket. Sometimes it comes out that way, because of seasonality or what's happening in the industry, but really we are just – we are out there trying to maximize unit revenue, how we get it and when we get it, and that's what we are always going after.
Great, thanks for the time.
Silvia, this is DeAnne. I think we are out of time for questions today, but thank you all for joining us and we'll talk to you soon.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.