Allegiant Travel Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 14 speakers on the call.

Operator

Thank you for standing by. My name is Dee, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allegiance Travel Company First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the call over to Sherry Wilson, Managing Director of Investor Relations. Please go ahead. Thank you, Dee. Welcome to the

Speaker 1

Allegiant Travel Company's Q1 2024 earnings call. On the call with me today are Maury Gallagher, the company's Executive Chairman and CEO Greg Anderson, President Micah Richins, President of Sunseeker Resorts Scott DeAngelo, our EVP and Chief Marketing Officer Drew Wells, our SVP and Chief Revenue Officer Robert Neal, SVP and Chief Financial Officer and a handful of others to help answer questions. We will start the call with commentary and then open it up to questions. We ask that you please limit yourself to one question and one follow-up. The company's comments today will contain forward looking statements concerning our future performance and strategic plan.

Speaker 1

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. 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.

Speaker 1

To view this earnings release as well as the rebroadcast of the call, feel free to visit the company's Investor Relations site at ir.allegionair.com. With that, I'll turn it over to Maury.

Speaker 2

Thank you, Sherry, and good morning, everyone. Thank you for joining us today. As you can see from our release, our results are not where we want them to be. Historically, our Q1 is one of our strongest quarters. Last year's 15% operating income showed this strength.

Speaker 2

If you look at our operations, operationally, we ran the same airline this Q1 that we ran in 'twenty three. Departures, ASMs, passengers all were are within 2% of each other. In fact, we've had minimal growth since 2021, averaging approximately 3% per year during these past 3 years. Even with this minimal growth, however, we have been one of the most profitable airlines during these turbulent times. But in the last year, we and the industry have experienced major expense increases, particularly salaries and specifically with our pilots.

Speaker 2

Additionally, we had problems predicting how many pilots would be available for us last year. This time, last year, we were losing more than a pilot a day, annualizing out to a 40% annual attrition rate. To stop this hemorrhaging in June, we began to accrue future bonus payable to our crew members after we sign an agreement. Through this April, we have accrued and expensed $80,000,000 without any corresponding offset of a new pilot agreement. We hope to have this new agreement in the not too distant future.

Speaker 2

You'll hear today from Greg, Drew, Robert, Scott and Michael Richards about our current status, including comments on our revenue problems tied to our Navitaire upgrade, Boeing deliveries and the lack of productivity of our fleet and pilots, particularly due during our off peak periods. There are a number of reasons for this drop off in productivity. Clearly, the pandemic changed our rhythms, our routines, our annual cycle of hiring and training new pilots for the coming year in the fall, adding them in January, February for March, uptick and the late spring for the summer sprint. We've been out of this rhythm for the past 3 years. We are about to resume this proven approach in the back half of this year and into 2025.

Speaker 2

A critical component of this rhythm is obviously having airplanes. Our Boeing order of 50 MAX plus 80 options provides us with the necessary aircraft for the anticipated growth in the coming years. Let me emphasize that the model remains the same. Going forward, we need to reinstate the execution of the model that has worked so well. Additionally, we are optimizing our revenue software, finalizing MAX deliveries, as I mentioned, and working with our pilots to finish an agreement.

Speaker 2

Let me turn to Sunseeker at this point. We are excited to finally have this world class destination resort open and operating. Initial reviews are all exceptional on the quality of the personnel, the product and in particular to the quality of the cuisine. Like all new projects, however, there is a run-in time. Opening at the end of December was not ideal.

Speaker 2

The date was driven by the construction delays we experienced for most of last year. Given we made the decision to open in late October, we did not have as much time as we would have liked to market and sell this new destination resort. We're using many tools to drive traffic, not the least of which is our 18,000,000 person customer database. We've had success with this program sending out as many as 25,000,000 to 30,000,000 emails per week on Sunseeker and specifically. We are learning the booking patterns for Southwest Florida what the differences are.

Speaker 2

We saw some expected strength in Q1. Q2 and Q3, however, will be slower and we're trying to understand where they will settle. Given the patterns we are experiencing at this point, we are lowering our estimates to a negative $15,000,000 EBITDA for this year. Michael Richards, President of Sunseeker will have more comments in just a moment. While Sunseeker will be a project for 2024 and 2025, the airline problems we are currently experiencing can be addressed for the most part during the remainder of this year and into 2025.

Speaker 2

By then, we should be hitting our stride. A comment about the industry. For years, we have been grouped together with other low cost, low fare companies, particularly Spirit and Frontier. While all of us offer low fares and have focused on leisure customers, we would be remiss if we did not point out that our model has made money consistently during this pandemic time. In particular, I want to direct your attention to the revenue differences.

Speaker 2

In the just completed Q1, our unit revenue or TRASM was $0.132 compared to $0.092 average or 42% greater than the aforementioned operators. In today's inflationary world, the ability to generate sufficient revenues and increase revenues is the difference between success and failure. Cost management is also important, no doubt. Given our increased utilization later this year and into 2025, you'll see our unit cost decline accordingly. An important component of our revenues has been our 3rd party revenues.

Speaker 2

And while they are not that big on an absolute basis, they are very powerful for the bottom line. This quarter, our $8.21 per passenger was worth $33,000,000 of operating income. That's a 30% increase over last year's 6.32 dollars In spite of our problems with our revenue tools in Navitaire, we still had one of our best unit revenues in the company history. Many things go into this ability to generate stronger revenues, including brand and reputation, and we are pleased with how we have positioned ourselves. If you look at the success of the majors, one only has to point to their loyalty programs to see the power of third party revenues.

Speaker 2

We understand this benefit and are focused on this producing more of these very accretive dollars. Life is about rhythm. We all work better, have better results when what we do is known, is repeatable and predictable. Looking back on our successes over the past 20 years, while the model is a critical component, namely 77% of our routes do not have direct competition, the execution component, the rhythm each year is also critical. The past many years post COVID, the rhythm, the routine has not been present.

Speaker 2

To the contrary, there has been minimal predictability, uncertain rhythm, starts and stops. The fog is lifting in the traditional focus and we are in better control of our own actions going forward. The model is just fine as I mentioned, as strong as ever. The rhythm is coming back. Stay tuned for the good news.

Speaker 2

Greg?

Speaker 3

Maury, thank you. Team Allegiant delivered another strong operational performance this quarter with a 99.7% controllable completion rate. That puts us near the top of the industry and that's thanks to the tremendous efforts of our frontline team members. We have a long history of providing a great service at an attractive price for our customers. And our differentiated model is focused on being the only nonstop carrier on the vast majority of our 5 25 routes.

Speaker 3

That is a structural advantage that affords us great relationships within our origination and destination market, which in addition contribute to our strong ancillary and third party revenue. Our differentiation is why we have been able to generate industry leading margins and profitability for our investors over the long term. While I am pleased with our operational and customer service metrics this quarter, our Q1 adjusted operating margin of 6.2% is disappointing and is not reflective of Allegiant's earnings potential. These results were impacted by 3 distinct issues: lower aircraft utilization during peak periods, Navitaire implementation timing and Boeing's delivery delays. Starting with lower utilization, March 2024 flying was about 20% less than where we would have liked it to be.

Speaker 3

The primary constraint of our peak utilization has been the uncertainty of our pilot staffing levels. We were impacted by the same industry wide shortage faced by our peers and our attrition levels were meaningfully elevated coming out of COVID, but beginning to normalize around the middle of 2023. It was because at this time, we implemented a retention bonus for our pilots that materially helped stem attrition. It is important to us that our pilots receive fair competitive compensation. In advance of an agreed upon pilot contract, we are accruing upwards of $6,000,000 per month for this bonus.

Speaker 3

Given our pilot staffing levels have turned to being stable, we are just starting to realize some of these benefits through our scheduling as we work towards restoring our peak utilization. On a related note, achieving a pilot labor contract continues to be a priority of ours, and I am optimistic that we can come to an agreement in the not too distant future. We value our relationships with our pilots and are encouraged by the forward movement made since the recent changes in union leadership. Since cutting over to Navitaire in the second half of twenty twenty three, we have made a lot of progress in the system that runs all of our reservations and revenue management. It offers critical new features over our legacy homegrown system.

Speaker 3

This includes the ability for international expansion and further efficiencies that are expected to improve our dynamic pricing and increase ancillary revenues. That migration last year went well for the most critical aspects as customers had a seamless ability to book and to fly. However, migrating our ancillary data has taken longer than we expected, which caused a reduction of about $2 per passenger in ancillary fees in the quarter. As you all know, that is high margin revenue for us. Turning to Boeing.

Speaker 3

Due to their well publicized issues, we are experiencing even further delivery delays since our last earnings call. As a reminder, we had originally anticipated and planned for 6 MAX deliveries in the first half of this year. Prior to this brand new type of aircraft entering the Allegiant fleet, we hire and train pilots, we plan our network and we take on other preparation and infrastructure costs. These material headwinds are at a current run rate of roughly $30,000,000 annually to operating income. At this time, we do not anticipate any MAX aircraft to be placed in service during the first half of twenty twenty four, yet we continue to incur these significant expenses.

Speaker 3

Excluding these 3 distinct items I just outlined, our adjusted airline operating margin for the quarter would have been approximately 13%. This does not, however, change the fact that our current financial performance is not acceptable to us. The good thing is we have solutions. So I'd like to talk about the key drivers of how we will return to our normal industry leading margins. The first driver is increasing peak flying.

Speaker 3

While the airline has recovered well from COVID, our peak flying is still 20% below 2019 levels. Fortunately, our pilot hiring and attrition issues have improved considerably and we are seeing normalized staffing levels. Given these improvements, we are pushing up peak utilization and look to fully restore it by 2025 in 2025, which we expect to add roughly 4 points of incremental margin. The second driver is harnessing the full power of our Navitaire's preservation system. While the implementation of the system was more complex and took longer than we expected, we are now at the right point with Drew Wells, our Chief Revenue Officer, spearheading this initiative at this pivotal time.

Speaker 3

We see a big opportunity using Navitaire's tools to drive greater ancillary revenue. Drew will talk in more detail about this platform, but we estimate enhancements to Navitaire will drive as much as 3 points of incremental margin at a mature state in 2025. We are also growing and improving our product offerings through other commercial opportunities in areas such as loyalty, co brand, Allegiant Extra and our planned international expansion with Vivo. Finally, the 3rd driver is ramping up our Boeing MAX fleet. Once in service and operating at scale, we expect the MAX aircraft will provide a meaningful tailwind to our earnings.

Speaker 3

Annual operating income carrying cost of $30,000,000 we are currently incurring will naturally subside. Furthermore, there is a 20% fuel burn savings and other advantages of this new fleet per Allegiant. We are working with Boeing to ensure an orderly delivery schedule and given their extended delivery delays, our 2024 CapEx is expected to be significantly below our initial forecast. Last but certainly not least, we are very happy to report we have reached a deal with the TWU and our flight attendants on a new contract, a deal our in flight team members were proud to support. And in closing, our airline is one of the best proven models in the business.

Speaker 3

This management team is laser focused on restoring our industry leading margins. We are executing on a clear path just as outlined and further building on our strength. I'm excited about the opportunities ahead for us. And with that, I'll turn it to Micah.

Speaker 4

Thanks, Greg, and good morning, everyone. As Maury mentioned in his opening remarks, we're extremely pleased with the progress that's been made Sunseeker this past quarter. When we last updated you, we were in the early days of transition from a construction site to an operating resort. We still had thousands of punch list items to complete and several venues to bring online. Today, all of our outlets are online and all but a handful of the punch list items have been completed.

Speaker 4

Feedback from guests has been overwhelmingly positive with consistent month over month improvements in our Medallia NPS scores. Of note, our customers are not only impressed by the resort, but have been delighted by our wonderful team members. In terms of quality of experience drivers, the leading category is helpfulness of staff. We couldn't be more proud of them. Guests and locals alike have been highly complementary of our food and beverage offerings.

Speaker 4

Opening this many restaurants concurrently is no easy task. Despite that, all 6 of our specialty restaurants have satisfaction ratings over 4 on a scale of 5, with the average being 4.5. These venues, in addition to our spectacular pool experiences, allow us the ability to activate the property in meaningful ways, including sporting events like Super Bowl and the Kentucky Derby we had just this past weekend. In terms of group business, year to date, we've successfully hosted more than 50 groups. Our operating and services team have worked tirelessly to ensure the satisfaction of meeting planners and the attendees alike, building reputational credibility that will pay dividends throughout the remainder of the year and certainly into 2025 beyond.

Speaker 4

In the hospitality business, the convention segment is the most effective leading indicator of future financial performance. While our sales teams are still fielding leads for short term in the year for the year bookings, much of their activity is now focused on planners booking 2025 beyond. Our 2025 goal for convention room nights is 60,000. We expect to open the year with 43,000 room nights on the books and 17,000 to be booked in the year. We already have 20,000 on the books with 62,000 room nights in the funnel.

Speaker 4

In future calls, I'll provide updates on our progress. Clearly, our occupancy and our resulting financial performance is not yet where we expect it to be. The repeated shifting of our opening date made it extremely challenging for sales teams to book convention business into Q1 and Q2 of this year. Understandably, group planners are historically risk averse when it comes to new hotel products. That's why the reputational credibility I mentioned earlier is so critical.

Speaker 4

Right now at 785 Keys, we have a short term excess room capacity challenge with the associated cost structures. As with any new venture, particularly one of this scale, it will take time and significant effort to rectify. We've assembled an executive committee of highly skilled experienced leaders, some from Vegas, some from Florida and others from around the country. Most have been through the rigors of opening multiple properties. They know what to expect, they know what to do and how to accomplish the results we anticipate going forward.

Speaker 4

With that, I'll turn it over to Scott DeAngelo.

Speaker 5

Thanks, Micah. Our Allegiant brand and product continue to improve and are increasingly highly regarded among our customer base. Our net promoter score rose to 55 in the Q1, that's 4 points higher than we reported last quarter and our customers rated us materially higher than all other airlines in the nation. Our high margin third party product revenue increased nearly 30% during the Q1 compared to Q1 2023 with our Always Rewards Visa card leading the way as the program surpassed 500,000 cardholders in the quarter and earned nearly $35,000,000 in total co brand credit card compensation, up 24% versus Q1 2023. It's also noteworthy that this program was included among Newsweek's 2024 listing of America's Best Loyalty Programs for the value it delivers to consumers as voted on by consumers.

Speaker 5

We also continue to see progress during the Q1 from our marketing support for Sunseeker Resort, primarily email marketing to our 18,000,000 customer database, but also including prominent merchandising on our website and mobile app and onboard through our in flight magazine Nonstop Live dedicated seat back inserts. We also enabled functionality at lesion.com for customers to be able to book their stay without requiring a deposit. Bookings improved sequentially each month from an average of 140 room nights booked per day in December when the resort opened to an average of 2 65 room nights booked per day in March. While we're heading into a typical off peak season for Southwest Florida, we expect to continue making progress on the sales and distribution front in order to be at full strength when customers begin booking in earnest for fall and winter. Lastly, our transition from legacy homegrown booking and operating systems to modern open integration technology platforms will enable us greater speed and flexibility as we enhance our customer facing website and mobile app to improve the booking experience and maximize customer driven revenue.

Speaker 5

Specifically, as our Navitaire implementation unlocks its full set of features and functionalities, as both Maury and Greg referenced and Drew will elaborate on, we will in parallel be enhancing our web and app booking experience and merchandising capabilities to drive increased take rate for high margin air ancillary products and bundles along with continued increased attachment for high margin third party hotel, rental car and credit card. Also the expansion of newer air ancillary products such as Allegion Extra, Lightroom Plus and Trip Insurance along with future new product conditions such as gift card, play subscriptions and more should collectively play key roles in driving profitable revenue growth on a per passenger basis. And with that, I'll turn it over to our Chief Revenue Officer, Drew Wells.

Speaker 6

Thank you, Scott, and thanks to everyone for joining us today. I'm pleased to report a 1st quarter airline revenue of $632,500,000 and TRASM of $0.1323 both the 2nd highest first quarter figures in Allegiant history. System ASM also increased 2% versus 1Q 2023. I believe this continues to represent one of the best performances versus pre pandemic at roughly 15% TRASM gains on over 20% ASM gains versus the Q1 of 2019, along with a record Q1 fixed speed performance. Leading the way once more was a total ancillary per passenger increase of roughly $0.50 Our core products were strong and the addition of Allianz travel insurance drove new opportunities in the booking path.

Speaker 6

Further, as Scott described, the Always Rewards Visa card continued to drive excellent value. The air ancillary portion was down slightly and we know that we're leaving value on the table here as Greg mentioned, but more on that later. The 1Q TRASM represents a 0.54% sequential increase versus 4Q 2023 and in line with our revised guidance. While on a year over year basis, TRASM was down 4.8%, as communicated in the last quarter's call, our peak spring break flying at the end of March was unit revenue positive versus the same weeks in 2023. Obviously, 2024 gets the benefit of Easter in that comparison.

Speaker 6

However, it is still a great signal that the best leisure travel periods remain resilient. Of course, there's the other side to Easter shifting. The 1st 2 weeks of March were weaker than anticipated and early April felt the pain of the spring travel season ending earlier. While Easter shifts every year, it landed in March just twice between 2,009 2019. Both of those times saw 1Q to 2Q sequential trazm decline at least 5%.

Speaker 6

The expectations for 2Q 2024 exceed those comparisons and we expect sequential TRASM to decline just 2.5% versus 1Q 2024. This represents a year over year decline of roughly 5.5%. While I still expect the total ancillary per passenger to slightly year over year in the Q2, we're accomplishing this with reduced functionality versus the same time last year. Our Navitaire cutover in late August 2023 was implemented with some known gaps and a path to not just bridging, but improving our position. Included in those gaps were $2 per passenger and booking path ancillary functionality, impacts to our ability to collect all revenues at the airport and a handful of factors driving additional call volume to our customer care team for issues previously self servable.

Speaker 6

And the bridges have proven significantly more challenging than initially thought. The additional upside of at least another $2 per passenger we had communicated from the increased dynamic abilities had to take a back seat. I'd like to commend the entire organization for their efforts in developing, testing, finding ways to go above and beyond and continuing to make this company great through their growing pains. As we become more familiar with the platform and its capabilities, we feel it is time to take a step back and acknowledge there may be a better way to move forward. We have incredibly high conviction in the Navitaire platform when done right, and done right is what we need to do.

Speaker 6

It won't be an overnight fix, but we believe it's the right long term decision. We'll have more details around timing and value beyond what I've described here in the coming quarters. One of the ways we continue to offset the current integration headwind is with our extra product. As the fleet grows and we gather more data, we continue to work to align our product mix and experience with what customers value most. The Q1 ended with 15 tails and the 180 seat extra layout.

Speaker 6

And thanks to our maintenance strategy team and our Mesa hangar, we expect as many as 11 additional aircraft to be modified by the end of May. As we shift to the capacity front, our summer capacity did increase as indicated on the last call. The month of June is expected to grow approximately 7%. And while it offsets the 11% April decline primarily associated with the Easter shift, we expect the quarter to have ASMs approximately 1% below 2Q2023. Despite the delays in Boeing aircraft, our planning and ops teams have found a way to preserve the selling schedule through July August, allowing us to maintain a mid single digit percent ASM growth in each month and about a half hour utilization per day per aircraft increase over last summer.

Speaker 6

This is generally in line with 2018 summer utilization and a solid first step toward restoring our peak period utilization. It has taken about a year from the announcement of the pilot retention bonus to have comfort levels at the appropriate lead time to push on flying a bit harder. Candidly, we ended with enough pilots to fly a little more in March. Unfortunately, that certainty occurred too close to March to react accordingly, but it does provide support for our summer plan. However, our reduced Boeing delivery expectations will impact our anticipated Q4 capacity and in turn our full year guidance, and we now expect 2% to 4% year over year ASM growth.

Speaker 6

The demand environment continues to be elevated well above pre pandemic levels. Peaks have shown resiliency and the gaps between peak and off peak leisure demand appear normal. We see a path forward with our system implementation and other plans laid out today and are confident that we are building out the tools and processes to optimize flying, revenue and most importantly, profitability. And with that, I'd like to turn it over to Robert. Good afternoon.

Speaker 6

As you've heard from others today, our Q1 results are below our expectations. As Greg outlined, there are several contributing factors for this underperformance. We are encouraged, however, that for each of the factors Greg identified, we have a clear and actionable plan to restore our earnings potential in the coming quarters. I'll speak today to our financial results and guidance on an adjusted basis. Looking at the Q1, we delivered a consolidated net income of $10,400,000 yielding an earnings per share of $0.57 Consolidated EBITDA came in at $92,300,000 generating an EBITDA margin of just over 14%.

Speaker 6

The airline business recorded a net income of $19,800,000 yielding an airline only EPS of $1.08 The airline produced $97,000,000 in EBITDA during the quarter for an EBITDA margin of 15.3%. Fuel continued to pressure results coming in at $3.03 per gallon for the quarter, which was $0.18 above our initial expectations. We have seen some slight relief as of late, and we're estimating 2nd quarter fuel costs to be approximately $2.90 per gallon. Non dual unit costs were up 14% year over year. Six points of this increase was related to the accrual for our pilot retention bonus as we were not accruing during the Q1 of 2023.

Speaker 6

Three points were driven by pilot training and loss of pilot productivity awaiting delivery of the 7 37 MAX aircraft. Roughly 1.5 was attributable to the maintenance CBA that was passed last May. One point came from the timing of light engine maintenance and the remainder was from a handful of various other items. Turning to the balance sheet. Our total liquidity at the end of the quarter was $1,100,000,000 comprised of $854,000,000 in cash and investments and $275,000,000 in undrawn revolvers.

Speaker 6

We made principal payments of $31,500,000 during the Q1 and expect about the same during the Q2. Net leverage was higher at the end of the quarter with net debt to trailing 12 month EBITDA at 3.4 times, which included $75,000,000 in pilot retention bonus costs. At the end of the quarter, we had prearranged financing commitments for $435,000,000 to cover our first 9 737 MAX deliveries, which in aggregate provide the business with approximately $100,000,000 in liquidity from efficient financing vehicles that those aircraft deliver. This will give us valuable flexibility with respect to aircraft financing heading into 2025, while retaining ownership of those assets. Want to thank our committed financing partners and our PDP lenders who have been particularly supportive and flexible for us in the face of the aircraft delivery delays.

Speaker 6

We retired 2 A320 aircraft during the quarter and placed 1 A320 into service. We took delivery of 1 A320 aircraft during the quarter. This delivery represents our last A320 under contract, we expect the airplane to enter revenue service for our summer peak. As Greg mentioned, we're working with Boeing to devise an orderly delivery schedule, which may moderate our capacity growth in the short to mid term, but should mitigate risks to the operation, risks to our selling schedule and cost drag resulting from the disconnected timing of crew and aircraft availability. At the time of our last earnings call, we anticipated our first 737 aircraft delivery to be in March.

Speaker 6

That aircraft, the first in Allegiant spec is awaiting FAA inspection, which will need to be completed before deliveries to Allegiant can begin. We now expect this aircraft to enter revenue service during the Q3. We are updating our delivery expectations and planning the business for delivery of 6 aircraft this year rather than 12 previously communicated. This estimate is not based on guidance from Boeing, but rather represents our best estimate based on information available to us today. While we remain excited about and committed to the MAX entering our fleet this year, we're very happy to own 86% of our operating fleet, providing meaningful flexibility to help manage these delays.

Speaker 6

Given the reduction in expected deliveries, we have updated our full year airline CapEx to $475,000,000 down roughly $315,000,000 from the prior guide. As indicated last quarter, these expectations differ from our contractual obligations. Updated CapEx guidance consists of $240,000,000 in aircraft and engine related payments, dollars 85,000,000 related to heavy maintenance and $165,000,000 related to other airline CapEx. Because we're planning for 6 fewer aircraft to deliver in 2024, we've trimmed our full year capacity guide by 1 point and now expect capacity to be up 3% over the prior year. On a quarterly cadence, we are estimating 2nd quarter capacity to remain unchanged at down 1% year over year, 3rd quarter capacity to be up about 4% year over year and 4th quarter capacity to be up about 7% over the Q4 of 2023.

Speaker 6

Due to further reductions in capacity this year and uncertainty around our 2025 aircraft delivery schedule, we are now reviewing our airline infrastructure and expect to make adjustments over the coming months to align with a more moderate growth trajectory. Turning to Q2 guidance. We expect the airlines to produce an adjusted earnings per share of $1.50 at the midpoint of our guide, yielding an airline operating margin of around 8%. We expect Q2 CASM ex to increase by approximately 7% over the Q2 of 2023. While this assumes a slight year over year reduction in capacity in the quarter, the increase is due primarily to increases in the salary and benefits line, including one additional month of the pilot retention bonus accrual as well as incorporating increased wage rates for our flight attendants, technicians and dispatchers as a result of new agreements or amendments.

Speaker 6

It's worth noting that these labor agreements are part of our path back to incremental utilization and better productivity in the business. I want to congratulate our flight attendants on their recently ratified agreement. As we progress throughout the back half of the year, we Based on Maury's commentary regarding Sunseeker and much of the 2nd quarter being off peak for the property, we are guiding consolidated earnings per share of $0.75 for the Q2. Before I close, I want to thank our team members for all their efforts this quarter. Despite this financial outcome, the operation again ran safely and smoothly, thanks to your hard work.

Speaker 6

And that's foundational for us as we now focus on increasing utilization in peak leisure demand periods. As we head into our peak summer schedule, thank you for all you do. And with that said, Dee, we can now turn it back to you for analyst questions.

Operator

Thank you. We will now begin the question and answer session. And our first question comes from the line of Helane Becker from TD Cowen. Please go ahead.

Speaker 7

Thanks very much, operator. Hi, everybody. Thanks for the time here. Just a couple of questions on guidance. As we're looking forward to maintenance costs, is that just a 1 quarter item or is that a full year item that we should expect at that level?

Speaker 6

Hey, Helane, it's BJ. Thanks. Yes, it's a little bit of both. There's some noise in the comp in the Q1 of 2023. So we are running some light check and repair levels, maintenance visits on our engines.

Speaker 6

That will persist throughout the year, but it's offset by a nice reduction in contract labor expense. So on an ASM basis, we expect maintenance costs to be down unitized throughout the year.

Speaker 7

Okay. That's very helpful. And then actually follow-up question for you. Is there a level of cash or I don't know if you want to measure it in liquidity that you are not willing to go below as you think about it?

Speaker 6

Sure. We normally talk on these calls about liquidity levels being maintained at 2x ATL. Now for our purposes, we would credit that with some of the available balance under our undrawn revolver facilities. So all in, we're a little bit above that today. I still like to maintain cash balances around 2x ATL until we have some clarity on the Boeing delivery schedules.

Speaker 6

But as we have financing lined up further and further out, we'd be comfortable at 2x ATL including

Operator

Our next question comes from the line of Ravi Shanker from Morgan Stanley. Please go ahead.

Speaker 8

Great. Thanks. Good afternoon, everyone. Thanks for all the detail on the call. Maybe the first question is, you said that you are taking steps to kind of improve the financials and the first step was to improve your peak flying.

Speaker 8

1 of your peers also kind of increased their flying once they resolved their staffing issues, but they ended up with too much capacity and they're now pulling back. Do you have the visibility that kind of your increasing peak flying is kind of not going to end up that outcome and will actually kind of be accretive to earnings?

Speaker 6

This is Drew. If I'm reading between the lines properly and thinking of the right other airline, I believe they commented that there was outsized growth in April May that they wish they had pulled back a little bit given current fare levels. What we're talking about is summer flying, it's March, it's the holidays, where I still believe that there is immense incremental value for us to drive by flying more there, and not quite as much in the April, May timeframe. So forgive me if I'm thinking of the wrong quote, but that's my position.

Speaker 3

And Ravi, this is Craig. I just want to add a comment to that. And 80% of our earnings come in those peak periods, the March, the summers and the holidays. And Drew is still and his team are still seeing terrific demand, leisure demand in those periods as well. I don't know if you caught in his comments, but we're already taking a nice step up this summer with a half hour more of utilization per aircraft.

Speaker 6

And we're going to continue

Speaker 3

to take those steps up until we get into 20 25 where we want to restore that 20% delta that we're under today in terms of aircraft utilization in the peak periods.

Speaker 8

Got it. That's really helpful. And maybe as a follow-up, I know that a lot of the industry is kind of pushing towards premiumizing their product and some of your ULCC peers are also introducing new front of cabin product and kind of pushing the potential kind of premium offering. What are your thoughts on that? Kind of obviously, you have a good bundled product now with Sunseeker.

Speaker 8

And if anything you can do kind of on the aircraft itself to kind of push towards a premium flyer that you're thinking of?

Speaker 6

Yes. So we're not that far removed from talking about bringing the extra products across all of our fleet. We still haven't received our 1st MAX aircraft, which would have materially increased the number of either extra or leg room plus seats on an aircraft. We're constantly looking and evaluating other options. I don't think we're at a position today, again, think we haven't received a MAX aircraft to say we need to be pushing harder.

Speaker 6

But it's a lot of, I think, confirmation bias and what we've seen, right, and putting aircraft on the most valuable routes. So give it time, we'll continue to review everything and maybe it makes sense, maybe it doesn't, but that's probably a little bit further down the road for us.

Speaker 2

I think this is Maury, one other thing. When you have 77% of your routes are without competition, a lot of what you're seeing is the one upsmanship and competitiveness and ability to price with some majors that really rolled in. So they can roll people up in their purchasing, having that ability to fly. Our customer, while we've got a great brand and we do a good job, I don't know that they're that price sensitive. And on a 2 hour flight, it's hard to see that you're really adding a lot of value 1st class, but that's very much being driven by the majors and the others are following to try and keep up.

Speaker 8

Very helpful. Thanks everyone.

Operator

Our next question comes from the line of Andrew DeJour from Bank of America. Please go ahead.

Speaker 9

Hey, thanks for the questions everyone. Maybe first question for Greg or P. J. Just given the CapEx changes in 2024, I think down about $315,000,000 what would be kind of your first look in terms of how 2025 and maybe 2026 look like? I would assume that $300,000,000 just moves into those years.

Speaker 9

Any initial thoughts?

Speaker 6

Hey, Andrew, it's BJ. I apologize, I'm just trying to get back to that page. But what I will say is there's just still a lot of uncertainty around 2025. And I mentioned at the moment, we're taking a close look at different areas of the business and where we need to adjust to be prepared for a little bit slower growth profile. So I think we'll have a lot more for you next quarter that maybe we

Speaker 10

could share on

Speaker 6

2025. We were originally contracted to take 24 airplanes next year. Just given what we've learned from the risk of relying on 2 aircraft a month, I would expect we adjust that down somewhat. So as that does shift into 2025, some of the 2025 CapEx, I would expect to shift to 2026.

Speaker 9

Got it. Okay. Thank you. And then second question just for maybe for Maury. I mean, I guess just in terms of Sunseeker, what changed so rapidly on the years that brought kind of RevPAR assumptions down about 30%?

Speaker 9

And does the year 1 EBITDA losses make you think any differently about owning or running the asset and potentially thinking about a potential divestiture here? Thank

Speaker 2

you. Unfortunately, we didn't have a lot of front end time to market and sell. And I think we're also a bit of victims of the curve that's coming down and normalizing that you we've been started in 2021, 2022. We were looking I know I personally looked at rates of $2,000 a night for a lot of equivalent properties down there. But it's just an effort that we've got to go after.

Speaker 2

I think Micah can probably add more color than I can at this point. As far as looking at other alternatives, yes, we're going to look at those types of alternatives. I think that this year I look at this as I call it a project. We're going to learn a lot this year and we'll be able to react and do things accordingly for filling it in next year. It's definitely going to improve as we go forward.

Speaker 2

But bottom line, as I said, we have a really quality product. So we'll fill it up. It's just a question of how fast. Micah, any thoughts?

Speaker 4

Yes. In terms of why the adjustment, I think there's a couple of things. One, we now have 4 months of data, and that helps us at least think better about what's going to happen in the next coming months. When we were talking about this in Q1, we had 0. So that helps us a little bit.

Speaker 4

Scott talked about the booking trends and the way they were ramping up like we wanted them to into March and they slowed down a little bit. So part of the booking trend analysis that we were watching and its decline has led to us thinking about Q2 and Q3 a little differently than we were thinking about it in February March. There is anecdotal softness in Florida. Some of you are starting to see people talking about that. So that's a part of it.

Speaker 4

We're still learning every day about how the locals behave and how they'll handle food and beverage demand in between seasons, in and out of season. And I think the last thing that I would tell you is that we didn't really know for sure when we first talked about what of our group prospects would materialize and which ones wouldn't. We kind of hoped we'd play a little bit more lucky than we have. And I think those are probably some of the things that led to the changes in the short term.

Speaker 6

Great. Thank you.

Operator

Our next question comes from the line of Duane Pfennigwerth from Evercore ISI. Please go ahead.

Speaker 11

Hey, thank you guys. Good morning. I wanted to maybe ask the CapEx question a different way. Obviously, you're disappointed in the delays. The delays drive your hiring plan and your ops plan or at least the fleet plan does.

Speaker 11

But from the outside looking in, the hiring feels like it's actually a good thing for 2024. And so the question is, do you see an opportunity to smooth out the capital commitments beyond just this year? And how do you think about the guardrails from a balance sheet perspective that shape your longer term capital plans?

Speaker 6

Sure, Duane. Yes, I mean, I guess there is an ability to smooth it out. I think we'll have to wait to see just how many airplanes Boeing is going to produce in a month and how many of those are delivered to Allegiant. We do need to be careful of what I think is an outside risk for Allegiant compared to some of the other carriers with respect to these deliveries. And that what Greg mentioned is we're getting ready for these airplanes and taking pilots off of the A320 and having them standing by ready for 737.

Speaker 6

And so sitting here relying on 2 aircraft a month just doesn't feel like a good recipe at the moment. And then that said, that's also creating some pressure on earnings as we talked about today, which would limit what we can do from a leverage perspective. So all things that we're mindful of, but I don't know that I have a clean answer for you as we think about '25, 'twenty 6 yet.

Speaker 3

Duane, it's Greg. I might just add and BJ mentioned this in his opening comments that he and the team, they're actively working with Boeing on setting up an orderly delivery schedule that we can all execute to. And so that flexibility is important and that plan is going to be important. And together, we believe we'll get to the right outcome.

Speaker 2

Yes. One other final comment, Duane. If we slow down a little bit, it won't be the end of the world too. Certainly part of that process, we're going to retire some airplanes as we took those new equipment. But just given the way the world's developing, just taking our time a little bit longer is not a bad thing for where we see ourselves.

Speaker 2

And I think you also get some benefits maybe in interest rates that you take them all very quickly, we won't have the interest rate benefits that might come a year or 2 later. But Boeing and we have to come to an agreement and they're certainly continuing. I can't believe how they can't get off the front page. It's just astonishing. So, yes.

Speaker 11

Okay. Appreciate those thoughts. And then maybe you gave part of the answer with the Navitaire commentary, but can you speak to the level of integration of air and hotel packages within your booking engine? When do you think you'll have the ability to fully market Sunseeker to your airline customers?

Speaker 5

Hi, Duane. This is Scott. Thanks for the question. The answer is we've gotten there technically now. As of a couple of weeks ago, we removed one of the biggest barriers, which you may recall was requiring customers to pay for the entire AirPlus hotel purchase at once.

Speaker 5

Now when you book Sunseeker, you actually are required to leave no deposit as you book your air and hotel together. We will begin to market that now that we've got a couple of weeks knowing that everything works from a customer experience standpoint and customer servicing standpoint, market that in earnest very soon. I will tell you just one other tidbit of the different channels, the allegiant.com, if you will, customer who books Air and Hotel is by far the highest value. Their length of stay is longer and they're paying more in average daily rate. So continuing to fuel that fire of Aeron Plus Hotel for Sunseeker is going to be critical and we're already at now the technical ability to do that in earnest.

Speaker 11

Thanks. And if I could sneak one last one in. Just on the Sunseeker OpEx run rate, is this Q1 level a good level? Do we go up from there sequentially? Or is there a way to kind of flex it down in these off peak periods?

Speaker 11

Thanks for taking the questions.

Speaker 2

Micah?

Speaker 4

Say that again, Duane.

Speaker 2

I had

Speaker 4

a hard time hearing you.

Speaker 11

Yes. Just we now have a quarter, a full quarter of Sunseeker OpEx. And so is this the right level to model off of going forward? Or can you flex that up or down depending upon seasonality?

Speaker 4

No, absolutely, you can flex it up and down based on seasonality. So you should see us become more efficient in Q2 and Q3 and then flex back up a little bit in Q4 as demand returns.

Speaker 11

Okay. Thank you.

Operator

Our next question comes from the line of Scott Group from Wolfe Research. Please go ahead.

Speaker 12

Hey, thanks. Good afternoon. So I think you talked about 7% increase in airline CASM ex in Q2. Is that I just want to make sure, is that apples to apples with the up 14.5% in Q1? And then any thoughts on back half of the year CASM?

Speaker 6

Sure. Hey, Scott. Yes, it dappled to apples with the Q1, I will mention in the Q2, you have still 1 month of the pilot payroll accrual, I think I mentioned in the script and then incorporating some of the new labor agreements, but yes, otherwise apples to apples.

Speaker 3

Scott, it's Greg. Just as you think about maybe even longer term and the power of increasing utilization, think something like an hour increase of aircraft utilization per year results in a reduction of CASM ex about 0.5 percent. So that could be a nice tailwind. And then as we work through some of the kind of inefficiencies with the overhead getting ready to take on the new MAX aircraft, I believe as that starts to work itself through, it's another like 0.8 percent of CASM ex that we could see there too.

Speaker 6

And then just Scott, as I mentioned in the prepared remarks, we expect CASM ex on a year over year comp basis to moderate into the Q3 and end up slightly below the 4th quarter comp.

Speaker 12

You're saying 4th quarter CASM ex should be down something year over year?

Speaker 6

Right, slightly. Okay.

Speaker 12

Any I know you said RASM down about 2.5% sequentially Q1 to Q2, just absolute terms. I know it's early, but any early thoughts about how you're thinking about back half of your RASM?

Speaker 6

Not particularly. There's still obviously a long ways to go. Again for July has at least 75% left to book. So everything is still early. And I think the general theme still hold that we believe there's resiliency in the peak period.

Speaker 6

I'd expect continued normalization between the peak and the off peak. But other than that, I don't have a lot more to add to the back half of the year.

Speaker 12

Okay. And then just last one. I know you got asked a question already about sort of liquidity targets and all that sort of stuff. To the extent that you wanted, how do you balance liquidity needs versus where you're willing to take the leverage is give or take 4 times? Is that as high as you're willing to take the balance sheet leverage?

Speaker 12

Would you take it higher? Or if any incremental capital raise, is that more likely to be with equity than debt?

Speaker 6

Sure. Yes. No plans for any equity related capital raise at this time. I realize what that could mean for leverage if we're trying to maintain liquidity at 2x ATL. But as we've locked in financing for some of this future CapEx, we're okay with liquidity coming down a little bit, as I mentioned in response to Helane's question.

Speaker 6

Or the other part of your question,

Speaker 8

did I miss something?

Speaker 12

No, I mean, I guess you're saying you're okay either with the liquidity coming down a little bit or the leverage metrics going up a little bit?

Speaker 6

Yes. And we had expected leverage to be elevated throughout this year. I think we may have mentioned that on the last call, but certainly in 1 on ones and whatnot throughout the year, this is an investment period with a lot of CapEx airplanes, so we would have expected leverage to be pressured a little bit as we move through 2024.

Speaker 12

Okay. Thank you guys for the time. Appreciate it.

Speaker 4

Thank you.

Operator

Our next question comes from the line of Mike Linenberg from Deutsche Bank. Please go ahead.

Speaker 10

Yes. Hey, good morning, everyone. With respect to the distribution of Sunseeker, I know that you are going through 3rd party channels, which I know historically was not the model for Allegiant. Can you tell us as of now maybe what you're booking through allegiant.com versus 3rd party channels. And I'm just curious out of the 18,000,000 people in your customer database, what's the uptake of them?

Speaker 10

Would you say that the majority of people at Sunseeker today are out of that 18,000,000 database? Or are these just entirely new clients, new customers?

Speaker 5

Hi, Mike, it's Scott. I'll start and let Mike chime in. So right now the majority I put it at like 80% to 85% and Mike you correct me are coming directly either to sunseekerresorts.com or via allegiant.com. So that's great news that we're seeing the majority of bookings without requiring both the added cost and the disintermediation that comes via OTA. In terms of the majority of folks that are staying back in January, call it, you've seen it go from about like 3 quarters to 1 quarter in favor of Allegiant customers to now close to fifty-fifty, while the overall pie grows.

Speaker 5

So it's a good story that, yes, we're driving a lot directly and through the email, but that proportion as the pie has grown has become smaller meaning that more other people are coming into the Allegiant Travel Company family if you will, many from places that Allegiant doesn't currently serve or serve in earnest like Atlanta or New York City, etcetera. Mike, I'd invite you for any additional commentary.

Speaker 4

The only thing that I'd add to that, Scott, is that as you mentioned in Q1, we were just in the very early stages of ramping up OPA productivity. So for example, when you looked at January, I mean, we booked less than 15 rooms. By February, we're booking 300 to 350 and by March upwards of 1800 to 2000. And we think that will continue to grow. One of the things that we think, I think Scott mentioned it, it's obviously best for us to produce as much as we can through G4 Direct as part of packages.

Speaker 4

They have long lengths of stay. They have really good rates. And then obviously anything that we can book directly to our own website and or through group business is our priority. But 3rd party will always be a good partner for us and it's important for us to continue to grow that. And so you'll see our sales and marketing teams, particularly over the next several months, working to not only establish, but then make them make our partnerships that we have already established now more effective, working marketing programs with them and see better production out of the OTA partners.

Speaker 4

But I think Scott nailed it the right way. We have a priority of how we'd like that to happen, but they are a key component for us.

Speaker 10

Mike, is that $1800 to $2000 in March, that is that's a monthly booking rate, is that?

Speaker 4

No, that's an actualized in the month. So on a go forward basis, yes, in a go forward basis, you'd expect that to be somewhere in the 2000 to 3000 a month or so.

Speaker 10

Okay, great. And then just my second question, with respect to this call it this DOT, I guess, consumer protection plan or benefits as they characterize. From what we hear, you have this refund element that kicks in, I think, in the next month or so, maybe it's like at the end of June and the transparency piece. And carriers have come back and some have said that it disproportionately impacts low fare carriers. It's ultimately going to raise the cost to the consumer, which is actually I do think that it is going to add cost.

Speaker 10

So it's going to make it harder to offer lower fares. What are the gating issues? It seems like some of the refund elements are already being done today, but it does seem like we've gotten feedback on the technology piece that the industry may not be ready in 6 weeks to meet the various elements of what the DOT is requiring. Your thoughts on that? Thanks for taking my question.

Speaker 6

Sure. Drew, I'll start and we'll probably keep it pretty high level. This is all pretty fresh, right, and we're trying to work through it. Yes, I think we do comply, particularly to the refund language. I think we comply with quite a bit of it already.

Speaker 6

I'm proud of we've addressed a lot of that around cancels in particular. I think there's a little work we need to do around the delay side. But in terms of gating or how ready we'll be in 6 weeks, I think we still need to kind of do some work on that. But I don't think it's quite as big of a lift given what we've already done to date. And not a lot of commentary on the transparency part of ancillary phasing.

Speaker 6

We still need to do a lot of work to understand what that's going to look like in the booking funnel. So sorry to keep it maybe a bit vague for today, but we're still working through it just like everyone else.

Speaker 3

Can I just add one thing, Drew? Mike, this is Greg. Just on the refund point, Allegion, we've talked about this over the years, but when we have cancellations with our customers, we issue them actual what's called a pay maneuver up to $300 And so we compensate our customers when we have cancellations. We've been doing that. I think we're one of the unique carriers in the U.

Speaker 3

S. To do that. And so when we talk about IROPS, that's a big chunk of the IROPS. So just wanted to point that out that we've already for years have tried to take care of our customers in those typical type of situations when there's a cancellation.

Speaker 10

Very good. Thanks, everyone.

Speaker 6

Thanks, Michael.

Operator

Our next question comes from the line of Dan McKenzie from Seaport Global. Please go ahead.

Speaker 13

Hey, thanks. I know you're not guiding to the full year obviously, but the Street's pretty divided. You could drive a Mack truck through estimates. I think you got a low of $2.55 to over $7 And I guess just based on what you're seeing for the summer, can we start to eliminate either the high end or the low end here? And I guess as part of that, does the current plan contemplate profitability in each of the quarters?

Speaker 6

Hey, Dan, it's BJ. I'm going to shy away from giving guidance in the 3rd Q4. There's a lot of moving parts as we've talked about today, one of which is execution of a CBA with our pilots, which will have an impact on full year results as well the timing of Boeing deliveries and when those airplanes can be placed into service. And one that would be more immediate is just around some of the improvements in Navitaire that Drew has been speaking to. So as you can see, just a lot moving and so apologies for dodging the question.

Speaker 13

Yes, understood. Okay. I guess second question here, leg room plus seems it's now part of

Speaker 3

the booking process. I can see

Speaker 13

it there. But it doesn't look like you're really monetizing it yet.

Speaker 10

I'm just wondering if you

Speaker 13

can remind us, when did that start exactly and where are you at with this program? And then I guess what is the kind of target benefit that this could potentially provide?

Speaker 6

Yes. So we started testing the Allegiant Extra layout 2019, I believe. And then of course ran right into the pandemic and kind of got derailed a little bit through there. We announced probably what 18, 24 months ago we were going to bring this to the full fleet, in addition to putting it on all MAX aircraft with about double the number of seats, a little bit less than double the amount of premium seats. So there's a little distinction between Allegion Extra, which is kind of an all inclusive by Allegion standards product that has the extra leg room comes with the priority boarding, the dedicated overhead bin space and now a free snack on board, which complements very well for our cardholders who will get a free drink and really maybe not to the full extent, but rival kind of a Delta Comfort Plus type of experience, which I think is a remarkable perk there.

Speaker 6

So in terms of monetizing, right, it's not only a few a portion of our fleet, 15 aircraft, but 11 more primed for this summer. So I think there's a lot left to go here in terms of experimentation with pricing and product mix. But so far, we've been responding to what our customers say is valuable to them and led us to where we are today. So still in the infancy, I think of where this will go, but absolutely thrilled with what we've been able to do with the product and monetization thus far.

Speaker 13

I see. Okay. Well, thanks for the time you guys.

Speaker 3

Thanks, Dan.

Operator

This concludes our Q and A session. I will now turn conference back over to Maury Gallagher for closing remarks.

Speaker 2

Thank you all very much. Appreciate your input, and we'll talk to you in 90 days. Have a good day.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Allegiant Travel Q1 2024
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