Allegiant Travel Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 13 speakers on the call.

Operator

Welcome to the Second Quarter 2023 Ulegent Travel Company Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sherry Wilson, Managing Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Michelle. Welcome to the Allegiant Travel Company's Q2 2023 earnings call. On the call with me today are John Redmond, the company's Chief Executive Officer Greg Anderson, President Scott DeAngelo, our EVP and Chief Marketing Officer Drew Wells, our SVP and Chief Revenue Officer Robert Neal, SVP and Chief Financial Officer The company's comments today will contain forward looking statements concerning our future performance and strategic plan. Various risk factors could cause the underlying assumptions of these statements and our actual results to differ materially from those expressed or implied by our forward looking statements. These risk factors and others are more fully disclosed in our filings with the SEC.

Speaker 1

Any forward looking statements are based on information available to us today. We undertake no obligation to update publicly any forward looking statements, whether as a result of future events, new information or otherwise. The company cautions investors not to place undue reliance on forward looking statements, which may be based on assumptions and events that do not materialize. To view this earnings release as well as the rebroadcast of the call, please feel free to visit the company's Investor Relations site at ir.allegiantair.com. And with that, I'll turn it over to John.

Speaker 2

Thank you very much, Harry, and good morning, everyone. I'm thrilled to report an 18% operating margin 99.7% controllable completion for the 2nd quarter among the highest in the industry during the quarter both operationally and financially. In the face of high demand and operational complexity, the team continues to deliver. It is their exceptional efforts that have allowed us to meet and exceed our customers' expectations. Over the last year, we have increased our NPS scores by an average of 10 points and are now at the highest scores since the pandemic.

Speaker 2

I could not be prouder of the work our team members do each and every day. Thank you very much for your continued passion and dedication. Our commitment to enhancing the travel experience remains a key driver of our success. Over the years, we have invested in our services and our brand ensuring we not only meet the evolving needs of our customers, But also create new opportunities for growth and expansion. One area that continues to pay dividends is our co branded credit card.

Speaker 2

With over 600,000 credit cards issued, the program continues to surpass expectations. Cardholder has increased by 2 20 percent since 2019 and shows no signs of slowing. We believe the opening of Sunseeker Resort later this year will provide further value propositions for our cardholders and guests and help drive cardholder sign ups well into the future. Last quarter, I spoke about the key strategic initiatives of this management team. I'd like to provide a quick update on our progress.

Speaker 2

1st and foremost, finalizing our outstanding labor contracts remains our top priority. Greg will provide additional detail around our status, but it is of the utmost importance that we continue making progress and deliver contracts that our teams are proud to support. Secondly, we are committed to continuing to deliver high operational performance. It is our obligation to our guests to strive for industry leading performance as shown in our Q2 results. It is a necessary pillar in ensuring we protect the investments we've made over the years in our brand.

Speaker 2

Finally, I'm happy to report We remain on track to open Sunseeker Resort in Port Charlotte, Florida in mid October. This has been a long time coming. The project is full of challenges and delays outside of our control, so to see the end in sight is remarkable. Bookings for Sunseeker continue coming in from all corners of the country. 42 states all told, which speaks volumes of the breadth of the database.

Speaker 2

To date excluding group bookings we have sold approximately 3,300 transient room nights And an average roommate of $4.10 per night. This transient room night book to date are impressive in that most people book hotel rooms inside 50 days of arrival. Regarding group bookings, Over 50 groups have contracted or in the process of contracting nearly 40,000 room nights. The team continues to bring in high quality groups And I fully expect this group room nights booked number to grow to roughly 75,000 by year end covering all years booked. These are incredible group numbers for our property and brand that has never existed in the market.

Speaker 2

The team in Florida is in full hiring mode Looking to onboard a targeted headcount of around 1200 personnel. We received over 5,700 applications with over 70 of those applicants residing within a 50 mile radius of the resort demonstrating our commitment to supporting the local economy. Underpinning this influx in applications is unique retention bonus we announced in early July for our inaugural non management Sunseeker Resort team members. It provides an annual retention bonus of $10,000 for 10 years after completing 10 years of continuous full time employment. Interestingly, We have received applications from people residing in 49 states.

Speaker 2

Given the early response, we would expect the application pool to exceed 7,000 people. With an application pool that continues to grow, this innovative program should help us attract and retain the very best Hospitality Professionals and we already see evidence of this within the pool. From a financial The Sunseeker Resort budget remains at $695,000,000 As indicated in prior calls, costs will ramp in the Q3 due to preopening expenses. We estimate the total cost impact will be roughly $15,000,000 this quarter. Consistent with Last quarter, the full year impact to consolidated EPS remains at $1.25 loss.

Speaker 2

I continue to be encouraged by the long term value creation of Sunseeker Resorts. Upon completion of the project, the team will shift focus to begin laying the groundwork for our asset light growth trajectory. With the opening around the corner, some of you will continue to speculate about our future intentions regarding expansion plans or future projects requiring material capital outlays. We will not pursue any such projects without an equity partner. In closing, I could not be happier where we sit today.

Speaker 2

Our upward guidance revisions reflect our conviction about the balance of the year and to continue to deliver strong performance in the coming years. As such, I am pleased to announce that the Allegiant Travel Board of Directors has authorized an annual dividend of $2.40 Payable in equal amounts quarterly beginning September 1, Q2 2023. We remain committed to growing profitably while enhancing our offerings, driving customer satisfaction and delivering increased value to our shareholders. With that, I'll turn it over

Speaker 3

to Greg Anderson. John, thank you. Over the past year, the industry has faced a uniquely challenging operating environment. Despite these many team Allegiant is delivering exceptional results. In our business, everything begins and ends with operations.

Speaker 3

And here at Allegiant, we are only days away from having the heaviest flying periods of the year behind us, March summer. Through July, we are running an impressive 99.8% controllable completion factor that's here to date. In addition, during the month of June, we are amongst the industry leaders in on time performance. The results we are seeing today represent a significant improvement over where we were a year ago. This improvement has driven our year to date irregular operation cost Down by $80,000,000 compared to the same period in 2022.

Speaker 3

Obviously, an unreliable operation is much more expensive to run. It also leads to unnecessary disruption and frustration for our guests and our frontline team members. Overly ambitious Scheduling may lead to higher revenues, but when it's results in excessive delays and cancellations, the juice isn't worth the squeeze. We are committed to maintaining a balanced scheduling approach. This approach is executed jointly by our planning and operational teams as together They expertly manage a schedule to meet the leisure demand environment while maintaining operational integrity.

Speaker 3

Our unique ability in adjusting capacity is differentiated by our low fixed cost structure. One of the interesting themes you are hearing from other carriers has been around leisure traffic. Moreover, Some carriers are reshaping their network and adjusting their schedules accordingly by lowering off peak capacity. This leisure focus And focus flying on peak days has been our approach for over 20 years. We are ideally suited for this leisure peak flying approach And you can see this in our results.

Speaker 3

And going forward, we believe this approach will continue to pay dividends. In addition to our operational and financial performances, There is also an incredible amount of work being accomplished behind the scenes to strengthen our foundation and to be able to support 200 plus aircraft airline in roughly 5 years. Our major system implementations are a key step in getting there and I am happy to report SAP went live on July 1, a major milestone along this journey. This once in a generation system changeover will help drive internal efficiencies across our back office team. Additionally, we plan to cut over to Navitaire in late August.

Speaker 3

We delayed its go live date to move any potential operational disruption to outside of our peak summer travel Navitaire is expected to drive incremental ancillary revenue due to its dynamic pricing capabilities. In addition, this system will support our expansion into Mexico with our joint venture partner Veeva Aerobus. However, due to recent actions undertaken by Mexico affecting U. S. Our ATI application with the DOT has been temporarily put on hold.

Speaker 3

We want to be clear though that this does not affect the merits of our application. It's also worth noting that we have readied the areas within our control to be able to launch once ATI is approved. The execution of the incredible team members at Allegiant truly amazes me. Not only do they continue to strengthen our foundation, but their efforts delivered industry leading controllable completion and operating margins during the first half of twenty twenty three. This triggered the maximum profit share amount paying out over $12,000,000 to our airline team members.

Speaker 3

We could not be prouder of the work team Allegiant does and thank you. We believe we are incredibly well positioned for the future and are uniquely set up destination airline for all of our team members. A key element of this is to ensure we maintain competitive labor contracts. Last quarter, our dispatchers, whom are represented by the IVT, ratified a 2 year contract extension more than a year before the amendable date of their CBA, which included pay rate increases at the higher end of the industry. Similarly, we are happy to have reached a formal tentative agreement with our mechanics, also represented by the IVT more than 3 years prior to their amendable date.

Speaker 3

This TA provides for significant increases in rates And as a 2 year extension to the current contract, the TA is subject to approval by the mechanics in the coming weeks. In June, We announced a tentative agreement with the TWU, which represent our flight attendants. While this initial TA was unfortunately voted down, We remain focused and committed to reaching a deal with our flight attendants and reengaging at the table with the TWU in short order. Regarding our pilot group, who are represented by the IVT, we remain in mediation and working towards pathways to a deal. Given the uncertainty around the timing of a deal, we felt it necessary to address pilot compensation outside of bargaining and recognize the importance our pilots Our ongoing success.

Speaker 3

As such, in early June, we were pleased to announce a retention bonus for all pilots that remain with the company through ratification of a deal. We began banking a 35% increase to their current rates except for 1st year first officers, which accrue at an even higher rate of 82%. These retention bonuses are intended to bring our pilot pay more in line with the industry with the understanding final pay rates will continue to be negotiated through the mediation process. We are pleased the IVT supported this retention bonus as we continue to work with them towards a contract that our pilots deserve. In closing, I want to thank all of Team Allegiant.

Speaker 3

You are the best in the business. We appreciate everything you do. With that, I'll turn it over to Scott.

Speaker 4

Thanks, Greg. Our 2nd quarter saw continued strong domestic leisure travel demand and capture that remain near our historic highs in 2022. Thanks to improved operations, a testament to the strong leadership of our Chief Operating Officer, Kenny Wilbur, along with his expert leadership team and the great work by all in the Allegiant Emily, this year's controllable completion rate being far above last year's level means we're keeping and recognizing a much greater portion of book revenue year to date. Looking forward, while there's no shortage of opinions with regards to macroeconomic conditions and their impact on consumer domestic leisure travel behavior, We spend less time trying to predict the future and more time ensuring we're prepared to succeed in it. It all starts with keeping our fingers on the pulse of customer sentiment and their leisure travel intention.

Speaker 4

Just as we did following the past two quarters, we surveyed a representative sample from both our most frequent flying repeat customers as well as those who flew us for the first time this past quarter. The results remain strong and unchanged from the past 2 quarters. Among both groups, about 50% said that economic conditions will have no impact on their flying behavior with Allegion in the next 12 months And more than 30% said that economic considerations will actually make them more likely to fly with Allegiant in the next 12 months. The market is moving toward us. For our most frequent flying repeat customers, the rationale for their unchanged sentiment and intention stems from the fact that the vast majority of them are either flying to visit family or relatives, more than 40% of the group, or are flying between their primary residence and their vacation home, just under 40% of the group.

Speaker 4

These remain the most resilient forms of leisure travel during any macroeconomic environment. Quarter rewarding our most frequent flying repeat customers along with engaging And turning them into repeat customers is our Always Rewards loyalty program. Year to date, nearly 90% Our customer bookings have come from Always Rewards members. The number of members with activity year to date is up nearly 30% versus last year And the number of new members with their first activity is up nearly 15% versus last year. Ultimately, having such broad coverage with Always Rewards enables us to reward the vast majority of our customers with points that can be easily used as currency in any amount at any time for anything sold at allegiant.com.

Speaker 4

Year to date, on average, Always Rewards members are 1.5 times more valuable than non members. Most notably, this value is largely driven by them spending 60% more on air ancillary products than non members do. Their take rates of core air ancillary products, seats and bags, are 10 to 20 percentage points higher than that of non members. Our most loyal and engaged segment within the Always Rewards program is of course our co brand credit cardholders, who are 3 times more valuable than non members. Currently, about 2.5% of our total active customer database of 17,000,000 has the card.

Speaker 4

As such, We believe there is significant growth potential. In 7 years, we have grown the program into a $100,000,000 business unit, and we expect to double that in the next 3 years. To that end, I'm excited to announce an upcoming change to our program. Later this month, we will be transitioning our co brand credit card network partner from Mastercard to Visa. Our Allegiant World Mastercard will be renamed and rebranded as the Allegiant Always Rewards Visa Card.

Speaker 4

While Bank of America remains our issuing partner And no existing cardholder benefits will change, we made the decision to move to Visa, the nation's leading brand in credit card issuance and acceptance, because we believe it will enable us to drive higher levels of both new cardholders and cardholder spend, the 2 largest ways that we derive revenue from the program. We asked Allegiant customers who do not currently have our co brand credit card which card they would be most likely to apply for. 60% said Visa, while only 25% said Mastercard. In addition, one of the nation's largest retailers, Costco, Only accepts Visa and more than 40% of our customers say they regularly shop there. What's more, Visa will provide stronger financial, Technical and analytics support for growing the Allegiant Always Rewards Visa Card Program and in providing additional benefits through their exclusive partnerships and proprietary capabilities.

Speaker 4

Wrapping up, year to date, in as much as demand is slightly below last year's historic high levels, We believe this simply represents a continued return to normalized pre pandemic peak and non peak seasonal travel patterns. We continue to view domestic leisure travel in the cities and among the customers we serve as strong. But we remain close to our customers and As it's been the hallmark of our company throughout its history, we stand ready to adapt to any changes in the demand environment. And with that, I'll turn it over to our Chief Revenue Officer, Drew Wells.

Speaker 5

Thank you, Scott, and thanks everyone for joining us this morning. I'm extremely pleased with the record 2nd quarter performance of $684,000,000 in total revenue, growth of nearly 9% on system ASM growth of 1.3%. This combination produced a TRASM of $13.64 which vested any previous second quarter by $0.05 and grew year over year by 7.5%. As Greg mentioned, we achieved remarkable operational results in the Q2 on top of financial results among the best in the industry. The current operating environment has proven challenging and we are not immune to this.

Speaker 5

3 months ago, we talked about trimming about 2.5 points of capacity from the summer schedule We believe it was absolutely worth it. I want to reiterate how impressed I am with the planning and operations teams coming together to do an incredible job aligning our schedule with available resources and anticipating risk areas to help mitigate potential issues both controllable and uncontrollable alike. The buffers added into our schedule enabled better recovery options when faced Regular operations, including ATC related concerns, especially out of Florida. We've done the commercial piece as well or better than anyone else in the world as measured by margins and returns, but candidly often at the expense of operational excellence. In the first half of twenty twenty three, We showed that we could do the operational piece while maintaining that industry leading financial position.

Speaker 5

Those 2 in Harmony is an elite combination. We still have more work to do to continually improve, but this summer will serve as a great foundation going forward to ensure operational reliability in conjunction with the appropriate deployment of capacity. Diving into revenue a bit, the strength in the quarter was well balanced As yields and ancillary products each contributed roughly $5 incremental per passenger versus the Q2 in 2022. We exceeded $70 per passenger and ancillary revenue once again, in large part thanks to Allegiant Extra and continued success with our funneled ancillary product as well as the Allegiant co brand program, which continues to thrive. Allegiant Extra is now featured on 14 aircraft and continues to exceed expectations.

Speaker 5

While we don't expect any incremental aircraft with this layout in 2023, all Boeing's coming in 2024 will have the Allegiant Extra option. Additionally, the strength of our operations and diligence from the Charter's team allowed us to capitalize on additional fixed fee business from both new and current clients to grow fixed fee revenue over 30%. As previously mentioned, we are still maintaining the expectation of TRASM over the last 9 months to be up mid single digits, though now expected to narrow to the lower side of the mid single digit range. In addition to the continued story of incredible demand, the upside factors for Allegiant remain the same: Continued operational stability and an expanded Allegion Extra product we've talked about. Another upside factor is an historically mature network.

Speaker 5

But that doesn't mean 0 routes in development. 5 new routes and 3 reintroduced routes started service this summer, including growth in Portland, Oregon Provo, Utah and Denver among other cities. I'm extremely happy that all 8 held their own with some even exceeding system average profitability from the start. Additionally, Last month, we announced 6 new routes for the winter season, mainly focused on Florida with one add into our Mesa base. These announcements are booking above average compared to Lastly, Navitaire should provide lift to our ancillary program.

Speaker 5

However, given the integration delay, we will not see the previously anticipated upside in the Q3, but we are still baking that lift into the 4th. Furthermore, we did see some yield compression through the heart of the summer booking curve, somewhat offset by atypical close in demand. As you well know, Allegiant prides itself on matching capacity with demand. For more than 20 years, our daily and monthly levels of flying have fluctuated meaningfully. We have a great understanding of the leisure customer and when they most want to fly.

Speaker 5

The 3rd quarter will be no different as roughly 80% of our ASMs will fall on our peak leisure days And September ASMs look to be roughly 55% of July's flying, both generally in line with the Q3 of 2022. Scheduled service ASMs are expected to be very slightly negative in the quarter, while a full year guide remains intact at flat to up 3%. With that, I'd like to turn it over to Robert.

Speaker 2

Thanks, Drew, and thank

Speaker 6

you to everyone for joining us on

Speaker 2

the call

Speaker 6

today. We're pleased to report another quarter of strong financial results. Allegiant produced $76,900,000 of consolidated adjusted net income for the 2nd quarter, resulting in adjusted EPS of $4.35 in line with 2019 earnings. We recognized record total operating revenue in the quarter of Our non fuel unit cost increased 12.9 percent year over year with 4 points of that increase attributable to pilot payroll accruals and other frontline labor cost increases, which As Greg noted, we announced in June, but were effective beginning May 1. Similar to our last call, unit costs were pressured in comparison to the same period last by lower productivity, which accounts for about 3 points of the increase.

Speaker 6

Improved operational performance drove a nice tailwind by reducing irregular operations expense in the quarter that was largely offset by inflationary costs, pressure in stations. Variable team member compensation related to improved financial performance drove roughly 2.5 points of the increase over the Q2 last year And two points of CASM increase in the quarter came from some one time non recurring costs, which included the cancellation fee related to the transition of our co brand credit card from Mastercard to And the remainder of our ex fuel unit cost increase was related to various other items. Fuel cost came in below our expectations at 2 point $0.69 per gallon, helping to drive an airline operating margin of 18.6%. Shifting to full year guidance, we are increasing our Estimated airline earnings per share by $0.75 at the midpoint to $11.75 The increase in expected full year EPS is fully attributable to a $0.10 decrease in our full year estimated fuel cost per gallon from $3 to $2.90 As John noted, we continue to expect a full year loss related to Sunseeker Resort of $1.25 per share. We expect pre opening costs to ramp during the Q3 at approximately $15,000,000 ahead of opening the property early in Q4.

Speaker 6

When taken in conjunction and using the midpoint of our guide, we expect a consolidated full year adjusted earnings per share of roughly $10.50 Turning to the balance sheet, we ended the June quarter with $1,400,000,000 in available liquidity. That's just over $1,000,000,000 In cash and investments and $356,000,000 in capacity and undrawn revolvers and PDP financing facilities after a prepayment of $61,000,000 in aircraft Net debt remained consistent with last quarter at $1,100,000,000 Our net debt was down to 2.2 turns, a reduction from 3.7 at year end, driven by strong EBITDA production during the 1st 6 months of the year. We do expect to add some incremental debt leading up to delivery of our first 737 MAX Aircraft late in the 4th quarter and would expect net leverage to be up just slightly above the current level at the end of

Speaker 2

the year.

Speaker 6

2nd quarter capital expenditures included $147,000,000 related to aircraft purchases, inductions, pre delivery deposits and other fleet related costs. We spent an additional $29,000,000 in other airline capital expenditures and deferred heavy maintenance CapEx came in at 21,700,000 CapEx for our Sunseeker Resort property was $92,000,000 during the quarter. Moving to fleet. We inducted 2 Airbus A320 aircraft into operation and ended the quarter with 91 A320 and 35 A319 aircraft in service. We had one additional A320 aircraft owned and undergoing induction work as of the quarter end and expect to purchase 2 additional A320 aircraft during And on the 7 37 fleet, updates from Boeing indicate that our first two MAX aircraft, which were scheduled for delivery at the end of this year will each be delayed by approximately 4 weeks, leaving one aircraft for delivery to us in 2023 and moving the second into 2024.

Speaker 6

While the follow on effect on the remainder of our 2024 delivery schedule is still under discussion, Our 2023 capacity plans are not impacted by this delay. As we've shared previously, we expect to begin operating our first 737 aircraft in the first quarter of next year and expect to take delivery of approximately 2 aircraft per month throughout 2024. Our updated full year CapEx guide today implies just under $500,000,000 in aircraft engine and induction related spend this year, with the reduction from prior guidance related to timing of pre delivery deposits and timing of aircraft deliveries. All in, we expect full year airline CapEx to be roughly $640,000,000 I'm very pleased with the financial trajectory we've seen in the past few quarters and excited for the earnings potential in our business As we can start to unlock the benefits of the infrastructure investments we've been making. EBITDA in the trailing 12 months is approximately $4,500,000 per aircraft on a trailing 12 month fuel cost of $3.38 per gallon.

Speaker 6

Adjusting for fuel, we would be back to our 2019 level of $6,000,000 in EBITDA per aircraft notwithstanding some of the added cost pressures I mentioned earlier. While I recognize there are certainly Many moving parts here, we expect continued improvement on this metric as our numerous initiatives come online. Running a reliable operation has been paramount to achieving the results that we're sharing today. We're extremely proud of our team members and the way that they have worked together to schedule and operate the airline during a time that remains challenging. I want to just end by thanking our 5,400 team members

Speaker 7

Michelle, we're

Speaker 6

ready to begin taking analyst questions.

Operator

The first question comes from Duane Pfennigwerth with Evercore. Your line is open.

Speaker 8

Hey, thanks. Good morning. John, what would you envision the segmentation mix For Sunseeker to be, I mean, if you had to guess, how much would be group versus transient? And for the groups that you have contracted with, What do those rates look like relative to the transient rate that you cited?

Speaker 2

Hi, Duane. Good questions. I think when you look at that, you have to kind of look at it by year. So in 20 4, we'll start with the full year of 2024. You're probably looking at something in the range of, I'd say maybe 12% to it's going to be a wide range just because we'll be booking into the year, but probably in the range of like 12% to 18%.

Speaker 2

Could get as high as 20%, but probably in that range of 12% to 18%. When you're looking at the out years starting with 25%, you're probably looking at 20% to 25% would be more normal as we move forward. Just to give Some color on that. When you look at the roughly 40,000 group room nights that have already been booked, About 26,300 of those fall into 24. So that's roughly More than 10% slightly over 10% of the total room nights that we would have in a given year.

Speaker 2

So That kind of gives you a good barometer. That's why I think that's where it's going to fall. But again, we're dealing with a brand and a property hasn't existed to run these percentages As we are, it's incredibly impressive. But I think that's kind of like the 25% range would be where it starts to peak in 25.

Speaker 3

And John on the group rates, they're $250,000,000 to $300,000,000 or thereabouts?

Speaker 2

Yes. They've been averaging around 2.90 ish, when you look at all 40,000 room nights. And I would expect those to ramp up too as there's a greater awareness of the property and we're not selling into an unknown. So the rates we're selling into, I mean the rates we're getting are more than we expected again selling into an unknown property, But those will continue to ramp up in the out years as we get into 2025, 2026. This is another data point.

Speaker 2

So we have group room nights that have already been booked into 27.

Speaker 8

Got it. I appreciate the thoughts. I know it's somewhat hypothetical at this point. And then just on the OpEx run rate, can you give us a little help in the quarter? I know you got Some insurance reimbursement.

Speaker 8

So what was kind of the OpEx run rate for Sunseeker in 2Q? And how do you see that kind of Ramping into 3Q and 4Q. Thanks for taking the questions.

Speaker 2

I think the 2Q number I think 3Q we're talking about the $15,000,000 which was of course is all preopening as you're talking about. The 2Q number I don't have off the top of my head what that was, But obviously it would be probably for sure less than half that number. Yes. I think we had go ahead.

Speaker 3

Like $5,000,000 to $7,000,000 I want to say between the 1st and second quarter per quarter.

Speaker 9

Yes.

Speaker 8

And sorry, that $15,000,000 when you're sort of up and running with a full 4th What does that look like?

Speaker 2

Well, once we're up and operating, we haven't put out Any financial data from an operating standpoint, we intend to do that probably At the same time, we provide guidance for the airline, which would be historically we do after Q4. So we would provide operating guidance for the resort at that same time. So right now we are only providing The OpEx piece before opening, so I'll just have pre opening numbers. There is public numbers that we put out there a few years ago. Obviously, They're dated and I would expect results to be significantly better because I think the ADR in those projections was something Around the $2.50 range, dollars 2.50 a night.

Speaker 2

And as you can see, we're running much better even when you blend group and transient.

Speaker 8

Okay. Thank you.

Speaker 2

Thanks, Glenn.

Operator

Please standby for the next question. The next question comes from Savi Syth with Raymond James. Your line is open.

Speaker 10

Hey, good morning. Just if I could talk a little bit about the pilot bonus that you're Has that improved kind of the attrition rates that you're seeing there? And if you could talk a little bit about the retention and hiring Capabilities today?

Speaker 3

Hey, Savi. Sure, it's Greg. Thanks for the question. And Yes. The bonus in general as we came up and moving forward with it is just to hit on it was the right thing to do.

Speaker 3

We have so many of our pilots that want to be at Allegiant that we were talking to and providing us feedback to say, how is it Difficult to want to stay here when the rates are so low. I mean, we want to be here, but the rates are low compared to the industry. So We felt overall this was the right thing to do for our pilots, because they do want to be here and they understand the unique setup that Allegiant has in terms of that out and back quality of life. Don't get me wrong, that's just one step. The contracts ultimately where we need to get and we need to make a lot of improvements in certain areas, including quality of life, pay rates, Retirement and so forth.

Speaker 3

In terms of staffing though, maybe let's just I'll break it down into 2 pieces. Let's the SchoolHouse being 1, Savi, And then I'll talk about kind of the net pilots and the attrition that we've been seeing. But SchoolHouse, as we've seen over the past couple of months, a terrific Increase in the number of pilots coming through the schoolhouse. I mean classes are full. I think beginning the last 3 or 4 classes So about 20 to 25 per class.

Speaker 3

Before that perspective in the 1st part of the year, we were seeing roughly 12 to 14 per class. So Really encouraged by what we're seeing there. Our team led by Tyler Hollingsworth has really kind of turned that around and focused on a lot of several different pathway programs And recruiting the right type of pilots that want to be at Allegiant that sees this unique quality of life setup. So and as we look forward to the rest of the year, we still remain really encouraged about Classes, those that have signed up and continue to maintain kind of that full class status, if you will. But in terms of staffing, just to maybe put some Guardrails around that and around the attrition or the notices that we were receiving.

Speaker 3

So I'd say like in April, May, it was roughly we were receiving notice about Nearly a pilot a day, I mean, just to put it into simple terms. And since June, since early June, that number has been cut down to a quarter of that number. So we've certainly seen some encouraging trends along those lines. Some of that's probably seasonal. Some of it Hopefully, it's due not just to the retention bonus, but us going out there and trying to make the improvements we can outside of collective bargaining.

Speaker 3

And also but again, I want to reiterate the most important thing we could do in a big step is getting that deal done and then go from there to continue to make this a destination airline, Not just for all of our pilots, but all of our team members.

Speaker 10

That's super helpful color. And if I might, on the Of MAX deliveries and just early thoughts on 2024. Is 2024 going to be another year where Half these somewhat constrained as you kind of make these investments to operate well and kind of the max uncertainty or how are you thinking about like What type of kind of capacity growth you could target in 2024 recognizing it's still very early?

Speaker 5

Hey Savi, Drew here. 1st and foremost, one of the biggest components will be timing of getting a CBA done with our flight crews Above and beyond the MAX deliveries. As you focus on the MAXs though and the constraints we have today, we'll still have training requirements that We'll drive through all of 2024. So I would expect there to be a little bit of a ceiling relative to the fleet we're bringing on in terms of what we're able to produce ASM wise Until maybe the end of the year, I think we can start to get a lot closer to our run rate, but I might pull that back a little bit.

Speaker 6

Yes, Savi, it's P. J. The only other thing I would mention there is that we haven't yet confirmed our retirement schedule on some of the A320s we expect to And so that just gives us a little bit of flexibility. And so we haven't come out with a 2024 fleet plan specifically as we want to wait to gain some certainty

Speaker 3

And Savi, I'm just going to this is Greg. I'm going to add one more quick comment. I mentioned in my remarks Over the next 5 years, we're planning to be 200 plus aircraft. So I just want to reorient around that and that's what we're doing. We're building a strong foundation to support an airline That side, we're strengthening that foundation.

Speaker 3

We're looking at long term growth. We're investing in all the right things and most important in our people. And we believe we're going to we have a path to get there. It may not be at this we don't know the exact cadence, but that's what we're planning on. And so a lot of the moves we're seeing is Getting prepared for that and we believe that we're able to continue to grow and grow profitably as we hit that 200 plus aircraft number in the next 5 years.

Speaker 10

Very helpful. Thank you.

Operator

Please stand by for the next question. Please standby for the next question. The next question comes from Andrew Didora with Bank of America. Your line is open.

Speaker 9

Hey, good morning, everyone. Just a couple of questions on CASM. I think you had been targeting kind of low double digit growth This year, were the new were the pilot retention bonuses paid out in June part of that number? And then I think you were including maybe about a third of a cent From the pilots in that outlook, any change to that number given the tentative agreements out there with others in the industry?

Speaker 6

Hey, Andrew, it's Vijay. I'll start and Greg if you want to jump in on the second part of that. But yes, no, we continue to think about it Like around a $0.03 I will mention in the Q2, we only included 2 months of those accruals. And so Moving throughout the rest of the year, you'll get the burden through each of the 3 months in the quarter. But yes, you're Right, kind of low double digit growth year over year on unit costs for the back half of the year.

Speaker 3

And Andrew, just Just a couple of maybe clarifying points. It's not paid out in June. It is actually a retention bonus and it's paid out upon ratification of an agreement For those pilots that are still actively employed at that time, we've locked in the rates at that 35% for All pilots with the exceptions of the 1st year first officers at 82% has locked in over that period. But we'll continue to negotiate final rates Through the mediation process, but this is a retention bonus.

Speaker 9

Right, understood. And look, I know there are a lot of moving parts Between timing of pilot deal training requirements for the MAXs, but You mentioned in response to Savi's question about maybe suboptimal lower than historical growth in 2024. In that type of scenario, how should we think about kind of CASM growth next year? Any puts and takes you can provide around that would be helpful.

Speaker 6

Yes. Andrew, I'm sorry, I don't have a lot in front of me, but I'll just say it's real early to give kind of Calvin guidance on 2024. There's a lot of moving parts like you mentioned around the actual delivery schedule of the MAX, which will determine how many pilots are useful in producing ASNs at each different period throughout the year and then what are we doing on retirements of the 320. I hope by the time of the next call, we've got a little bit more color to share with you. So apologies, it's a little early to give that kind of guidance.

Speaker 9

Got it. And maybe if I could sneak one more housekeeping one in. Hassan, your guidance interest expense came down a little bit. I think in your prepared remarks, you said that you're going to take on a bit more debt Through year end as the MAXs were delivered, just curious what was the driver of the lowest lower interest expense there?

Speaker 6

The driver of the lower interest expense this year, yes, so

Speaker 2

a little bit of it is we prepaid

Speaker 6

$61,000,000 in some aircraft secured debt at the end of the second quarter, which gives us a bit of relief in the final two quarters of this year. And then my comment on opening remarks that just like year end leverage was I just wanted to Set expectations, we still will add a little bit of debt as we continue making PDP payments in the final two quarters of the year. And then there's still one MAX delivery at the end of the year.

Speaker 3

And Andrew, I'm just going to add, just piggyback on that. The equity value in those 737 aircraft day 1, it's meaningful and it gives BJ and the team The opportunity to put effective and efficient financing, we're very comfortable being able to go out and finance those aircraft. But something else that I just want to remind our investors in Our Street is the opportunistic nature of the 7 37 deal and the timing and particularly around the Tax law and bonus appreciation, excuse me, that we received. I mean, in essence, we're going to receive, we estimate roughly 250 $1,000,000 in interest free rate loan from the government by moving forward with this deal. So that will offset cash taxes in the future.

Speaker 9

Thank you.

Operator

Please standby for the next question. The next question comes from Ravi Shanker with Morgan Stanley. Your line is open.

Speaker 11

Good afternoon, everyone. This is Catherine Klardis on for Ravi. So thank you for taking my question. I wanted to follow-up on a previous Comment in which you said airlines have started to favor peak periods and that Allegiant has done this for some time. But I was curious if you could provide some color around the competitive dynamics during these periods and if what you consider peak might be different than industry peers.

Speaker 11

Also just curious if these dynamics might be different in Florida market specifically.

Speaker 5

Yes. I mean when it's true here. When we refer to peak, we're exclusively talking about domestic leisure peak, which is Traditionally around school holidays, right? So your spring break, summer, and holiday timeframes, I think most would describe leisure peak as the same. And I think it's and I'm speculating a bit here, carriers are having a bit more leisure exposure.

Speaker 5

They're kind of coming around to how those dynamics are working. One of the great things about peaks though is there is an excess of demand generally. And even in periods, I think pre pandemic when capacity was quite elevated, Particularly the off peak capacity could sorry, peak capacity could soak up that demand pretty well. I don't anticipate competitive dynamics to change Meaningfully, the peaks are peak for a reason. And so in general, I believe it's a good thing, but The demand patterns fit the Allegiant model just exceedingly well and something like we mentioned that we've catered to for 20 plus years.

Speaker 5

So we're built for exactly this kind of dynamic.

Speaker 11

And just as a quick follow-up, your stat about how 50% of those surveyed Economic conditions will have no impact on flying was interesting. Just curious how inelastic you think demand really is? And Maybe how you've seen the ULCs perform in past recessionary environments? Thank you.

Speaker 4

Thanks for that question. For our most frequent flyers, the answer is it is pretty inelastic because they're traveling to and from family where they're staying and or To and from their 2nd and vacation homes. So in many of those instances, right, high interest rates, inflation, It's not as meaningful as, say, a family vacation to an Orlando theme park or a Las Vegas casino. So amongst our core customers, It's fairly inelastic because they're flying to and from family and or a second home.

Speaker 5

Yes, but more broadly, the customer That we serve is generally still a very price sensitive customer, less so in summer peaks or peaks in general when you have a thicker demand pool to Certainly in the off peaks, you still see that just by way of example, while we're already pricing higher Closer in, taking advantage of relative inelasticity, if you will, the ability to pass through more was a bit muted, right, especially in the face of $70 Plus ancillary per passenger that we're trying to balance as we build loads. So there's a pretty heavy mix on our aircraft that can be Tricky to revenue manage and I think it's a place where a product like Allegiant Extra can really help differentiate between the customer segments that we have And find that right balance of a a legentized premium experience versus the main cabin that's right for all of our customers.

Operator

Please standby for the next question. The next question comes from Helane Becker with TD Cowen. Your line is open.

Speaker 5

Hi. This is Tom Fitzgerald on for Helane. Thanks so much for the time and the question. Would you mind providing any color on what you're seeing in Las Vegas, Just given some of the runway challenges that have been happening there, and then just any of the drivers of the operational performance just beyond having more of a buffer, Some of the learnings that you're taking with you for next year, that would be great. Thank you.

Speaker 5

Yes, great questions. And we called out 3 months ago that Vegas had kind of an outsized portion of that 2.5%. April May still had pockets of struggles as there were some concentrated days and periods of Impact, but that materially turned around in June July and I think Vegas went exceedingly well or performed exceedingly well through the summer. So outside of some heat related concerns that there's not a lot anybody can do there, I'm extremely happy with how Vegas panned out. Thinking more broadly as we think about the schedule moving forward, reviewing things from firebreaks and adding some slack into the schedule that provides that recoverability, Especially as you think about Florida and pretty routine thunderstorms coming through at 3:30 every afternoon.

Speaker 5

We were better balanced about Viewing that in its entirety, thinking about how a firebreak relates to extended turn times and where those minutes actually matter. But perhaps at least to me one of the most impactful things I was thinking about the overnight touch time for our mechanics and crews And getting that plane to the gate on time every morning, so we could start the airline correctly and give ourselves a chance to succeed. Both starting on time and thinking about how we could recover through the day when things start to go awry. I think we got close to the right answer this year, but there's a lot more work for To continue to refine and maintain our place towards the top of the industry.

Speaker 3

Yes. And Drew, I just want to add just a quick comment here too. And that's Where we sit today, we feel really confident about the second half of the year and moving on from the commentary that we talked about, the coordination between planning and ops and that Drew and Kenny Wilbur Heading up. The staffing levels are very solid. In fact, with the exception of pilot, that's the best we've seen since 2019.

Speaker 3

So we're encouraged by that. As we get out of the as we exit the gauntlet of the summer peak flying, the teams all come together and do a postmortem around a summer debrief And they look for process efficiencies and ways to get better and that will be coming that will be just around the corner and we'll continue to step up our payment anyway we can.

Speaker 5

Thanks very much. If I could just squeeze one more in. Just, you mentioned a little bit of the outlook for revenue the rest

Speaker 3

of the year. I was

Speaker 5

just wondering if you could unpack that and any color on the cadence point you a little bit as we get into kind of cadence related, the 2 things I'll point out. I would look toward last year's comp set and kind of ASM cadence to help guide how you think about the 3rd Q4. And the second I'll point out and maybe not one that I communicated well or maybe even appreciated enough as we talked about The last 9 months previously was the Q2 of 2020 2 cadence. And I think there was still a fair amount of recovery from the variance that we In the first half of that quarter, not to disparage the 2Q results at all, but probably helped bolster the relative TRASM year over year there a little bit. So I think kind of think about those two pieces in concurrence as you think about the last 9 months in totality.

Operator

Please standby for the next question. The next question comes from Michael Linenberg with Deutsche Bank. Your line is open.

Speaker 7

Hey, good morning, everyone. Just a few quick ones here. John, just in response to Duane's question on you talking about Sunseeker where the numbers were better and You were referring to the rates. How should we think about it just from with all the cost inflation there, if we kind of go back to the original plan, I think the guide was EBITDA margins sort of in that 30% range, is that still a reasonable sort of ballpark profit margin?

Speaker 2

Michael, I do. I think those EBITDA margins are still doable. It's kind of like when you see even happen on the air side, right, with the CapEx or CASMex increasing, while revenue is outpacing the CASMex growth. So you're seeing the same thing happen on the in the resort world where the cost increases are Way more than offset by the room rate increases in that market. So very encouraging and Florida in particular, It's just been extremely strong.

Speaker 2

Obviously, the hotel industry throughout the U. S. Has been, Florida, it's a shining star when it comes to what's going on. So I think the EBITDA Margins that we were looking at early on and were out there in our projections, I think there's a potential for those to be even much stronger.

Speaker 7

Very good. And then just a second one for you, John, and probably Greg as well and maybe the team. We've seen an announcement by Frontier To take up some of the assets of the JetBlue Spirit proposed merger, assets that they would potentially divest at this point. It looks like Just a lot. Obviously, there's a lot more that they've already indicated that they would be willing to divest.

Speaker 7

Maybe it's runway timings at Newark, Gates and Fort Lauderdale Space in Boston. Is any of that of interest to Allegiant?

Speaker 3

Hey, Michael, it's Greg. Hey, Greg. Good to chat with you. The team continued Drew and his team continue to look at all opportunities in Certainly aware of the situation, but I think where we sit today, there's nothing really to report on that front.

Speaker 7

Very good. And then just if I could squeeze in one quick last one For Scott, we have heard other carriers talk about this traffic patterns where People are spending a lot more time this summer going to Europe rather than flying domestically. And Scott, you do a lot of different surveys and Other carriers have said that they've surveyed their own customer base and some percentage are electing to go to Europe. What are you seeing amongst your customer base, which I know you're very close to? Are you seeing something similar where you're just losing a lot of flow because they're going maybe outside of the United States?

Speaker 7

Any color on that would be great. Thanks for taking my question.

Speaker 4

Absolutely. And thank you, Michael, because the last several weeks we have asked exactly that. So I'm prepared to tell you, first, we asked our customer base to make sure they had the ability to travel internationally. It turns out That about 80% of Allegiant customers have a passport, but we're seeing something very different than what Frontier and others have reported. When asked, do you plan to travel internationally in the next 6 months or have you traveled internationally in the last 6 months, The answer is the same between like 16% 19% say yes.

Speaker 4

That means the vast majority of our customers, 80% have no plans And have not traveled internationally in 2023.

Speaker 2

But I think maybe, Scott, it's worth elaborating on too that the 16% to 19% you're talking about Hasn't changed year over year.

Speaker 4

That's right. It hasn't been a zero sum as much as now it's open and it's taken an additional trip. Great point.

Speaker 2

For us, it's not a displacement argument at all. The percentages are consistent year in and year out.

Speaker 7

Great. Very helpful. Thanks, everyone.

Operator

Please standby for the next question. The next question comes from Connor Cunningham with Melius Research. Your line is open.

Speaker 12

Hi, everyone. Thank you. On the doubling of the Always credit card contribution, just trying to understand the cadence there. I assume that's both Card growth and spend, but in your prepared remarks, you mentioned the potential of SunCedar contributing. Just curious about the ramp there going forward?

Speaker 12

Thanks.

Speaker 4

Absolutely. So the comment that the next 3 years will in effect double from roughly where we ended last year at 97,000,000 Can I post over $100,000,000 It's largely based without Sunseeker assumed in it? So it is from the key things you mentioned, Increased cardholder growth compounded cardholder spend, right, as that portfolio grows and we achieve atorabove The same spin per cardholder. So I think John's comments in the beginning represent upside that Could even make it faster. My comments were not based on any additional goodness which we'll absolutely get from Sunseeker opening.

Speaker 2

Yes. I think this is John. I think when you look at the I think a huge data point that Scott pointed out is The channels that were in the past with a Mastercard program not available to a cardholder that are now or will be available to a cardholder Most notably Costco is significant. So that type of increase then doesn't require necessarily an increase in the number of Although we are planning on that, but just the channels of use are going to expand significantly with moving to Visa.

Speaker 12

Okay. That's helpful. And then on Sunseeker, great commentary on ADRs and bookings. But the question that I get and Maybe this is kind of to Mike's point as well. Just around the inflection point on profitability, like I realized that you're working towards opening.

Speaker 12

I'm just trying to get Just some color on your path to profitability there, when we could expect a potential contribution overall. Again, realize that it's still early days, but Just any thoughts there would be helpful. Thank you.

Speaker 2

When you talk about a cash contribution or contribution, you said term, No, you're talking about EBITDA. We don't intend to ever be negative on a quarterly basis means there's no time we forecast Any period that we would have a negative EBITDA. So I think from a cash standpoint, they're going to be positive throughout the year. With the added upside in the out years, so we purposely priced the product That you see out there for 2023 and 2024 below market. So even when you see these rates, believe it or not, we're below market because We're putting a new brand and a new property into that market.

Speaker 2

So when you look at after we've been open for a period of time and I'm not talking years, I'm talking months, You're going to start to see that rate those rates accelerate up. So we purposely have underpriced And even with that purposeful underpricing those ADRs are impressive, but you will see those ramp up significantly For sure, the 25.5.

Speaker 12

Appreciate it. Thank you.

Operator

I would like to turn the call back to John Redmond for closing remarks.

Speaker 2

Well, I appreciate everyone's time. We're very proud of our team and the management here and what we've been able to accomplish year to date. And we're very excited about the balance of this year. An incredible amount of time and resources have gone into Systems over the last couple of years, you're starting to see the rollout of all that time and effort start to happen this year, Which really sets the backbone for this company going forward. So we will have no restrictions, limitations, what have you from a system standpoint as we move into the 20 aircraft or 200 aircraft environment, I should say that Greg Prefer to everything is allowing us to do everything we need to and want to do going forward.

Speaker 2

So we've absolutely no restrictions And our focus now is just finishing up the last labor agreements. We're very encouraged by where we are today And where we're going to end up tomorrow with those agreements. So again, very bullish about the out years for this company. It's very exciting times ahead. Stay tuned.

Speaker 2

Thank you very much.

Operator

This concludes today's conference call. Thank you for participating. You may now

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Earnings Conference Call
Allegiant Travel Q2 2023
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