Allegiant Travel Company

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter Allegiant Travel Company earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then 1 on your telephone. We ask that you limit yourself to one question and a follow-up. Please be advised that today's call is being recorded. If you require additional assistance, press star, then 0 to reach an operator. I'm now going to hand the call over to Sherry Wilson. Please go ahead.

Thank you, Michelle. Welcome to the Allegiant Travel Company's third quarter 2020 earnings call. On the call with me today are Maury Gallagher, the company's chairman and chief executive officer, John Redmond, the company's president, Greg Anderson, our EVP and chief financial officer, Scott Sheldon, our EVP and chief operating officer, Scott D'Angelo, our EVP and chief marketing officer, Drew Wells, our VP of revenue and planning, and a handful of others to help answer questions. We will start with some commentary and then open it up to questions. 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. 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, 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, visit the company's investor relations site at ir.allegiantair.com. With that, I'll turn it over to Maury.

Thank you, Sherry, and good afternoon, everyone, and welcome to our October 2020 conference call. First, let me thank all of our team members, their spouses and families, as we continue to fly in these perilous times. Our passengers are They're very important to us, and team members are doing a yeoman's job, as always. Again, thank you. I'm happy to say we can report some optimism, some, mind you, but with the understanding there are still a ways to go. The only way back will be one step at a time, as it appears. In the early days, we had little to no view on how we were going to get back to the top after we had fallen into this abyss. Today, however, we have a good sense of where we are and are beginning to believe we can return to our former state. In February, we were looking at a record year. After March 1st, it turned to record losses, pre-COVID and post-COVID, respectively. This generational event has changed how we think. In the early 1980s after, 1990s rather, after the Soviet Union fell, there was a proclamation by a certain historian that it was the end of history as we knew it at that time. So it was after March 1st of this year. It's the end of our history as we know it. Year-over-year comparisons are meaningless. Month over month is what is important. And the further we get away from March, the better our results will be. But for June, each of our subsequent months has improved consecutively since that time. And we expect this trend to continue through the end of this year and into 2021. And given this new measurement approach, we had a very good quarter. In fact, September wasn't a cash burn month, but rather it was a cash flow breakeven month. Breakeven, by the way, includes debt service and other payables. Also, this is without any CARES payments. On the P&L front, excluding special items, Q3 had a break-even operating profit. If you take September out of that mix by itself, we had a 17% operating margin, our best month in the past two quarters, with actually better margins than we had in June. This operating profit, however, was aided by our CARES payments. This climb out of this abyss has been a slow one and will continue to be slower than we would like. Small percentages each week with possible setbacks in the not too distant future. But we are seeing a better October than September, and we believe the same can be said as we look into November and December. You will hear from Greg about how strong we are positioned with cash going forward. I want to highlight that we might be the only carrier who has not had a dilutive equity offering nor taken the expensive government loan package. Our total debt levels have only increased $130 million from year-end 2019 levels at the end of Q3. We did, however, add $150 million additional debt in early October. Furthermore, our aircraft debt amortizes within five years very quickly. And on an annual basis, we are paying approximately $200 million in principal plus our interest costs. Our Q3 debt payments were $50 million. with just over half of that total paid in September. Yet we had sufficient cash flow from operations to cover these debt payments and other special items during the final month of Q3. But perhaps the best position we find ourselves in is our future CapEx requirements. Many others have large order books in front of them priced at pre-COVID numbers. Most everyone will want to do sale leasebacks to finance those purchases. Terms will certainly be more difficult, I would think, than pre-COVID numbers. We, however, have minimal obligations going forward. In our delayed May report for the first quarter, I touched on the overnight change in our industry between the suppliers and operators. Historically, there's been a natural tension between our two groups, a zero-sum game of sorts, if you will. For the past 15 years, aircraft demand has been incredibly strong, particularly with the economic emergence of China, India, and others. As a result, suppliers have held the upper hand. Witness the recent seven- to eight-year order backlogs between Boeing and Airbus. Fast forward to November 2020, and the advantage has changed, namely it's moved to our side of the ledger. This is particularly true for carriers such as us that trade in used aircraft. The airline industry took it on the chin this year. The leasing industry has not seen the immediate problems faced by the airlines. Early on, no one understood the depth of this malady, and we were hopeful we would be in full rebound by now. And while we are seeing a slow, steady rebound in the leisure segment here in the U.S., many places in the rest of the world still haven't found bottom. As a result, it appears 2021 will be a tough year for many aircraft owners. The Far East is upside down, as we understand it, particularly carriers such as AirAsia, and many aircraft have been parked in the U.S. and Europe. The hope that a significant rebound will be happening in the next year, I believe, is fading. It doesn't appear our COVID problems will leave anytime soon. International governments are making up travel rules with each passing day. We are fortunate here in the U.S. we have a large, robust country with a well-heeled leisure travel segment. It appears the U.S. domestic leisure space will pull itself up and out of the pandemic in the coming months, hopefully in 2021. But as the pandemic fatigue is setting in, people want this exercise to be over. Additionally, they are knowledgeable about what the risks are and are judging their actions accordingly. We will be the beneficiary, I believe, of this rebound in domestic travel. An added bonus will be the availability of inexpensive aircraft and associated parts, motors, et cetera, in the coming 12 to 24 months, perhaps longer. If so, we'll be able to substantially lower our ownership costs and add capital assets with minimal cash outlays. I'll repeat my comment from our last call, namely we continue to be the best of the worst. The U.S. airline industry will struggle for a number of years to come, I believe, particularly with respect to business and international traffic. Allegiant, with our focus exclusively on domestic leisure traffic, our flexible model, plus our excellent cost structure, you'll hear some of that from Greg in a bit, should emerge from this fray better than most in the coming 12 to 24 months. Our shareholders are fortunate to have such a capable management group, which has shown its depth and understanding of how to maneuver in this extreme environment. Speaking as a shareholder, I know I'm grateful we have this talented team. Lastly, our team members have been the true heroes in our world. I want to again personally thank each one for all they have done during this trying seven to eight months. You are the backbone of this company. In the meantime, in the airline space, we will take care of our business, and we are survivors with a great company and an excellent business model. Thank you very much, and with that, I'll turn it over to John.