Allegiant Travel Company

Good day, and thank you for standing by. Welcome to the Q3 2022 Allegiant Travel Company earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today. Sherry Wilson, please go ahead.

Thank you, Chris. Welcome to the Allegiant Travel Company's third quarter 2022 earnings call. On the call with me today are John Redman, the company's chief executive officer, Greg Anderson, president and chief financial officer, Scott Sheldon, president and chief operating officer, Scott D'Angelo, our EBP and chief marketing officer, Drew Wells, our SVP of Revenue and Planning, 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. 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. 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.alegionair.com. With that, I'll turn it over to John.

Thank you very much, Sherry, and good afternoon, everyone. The quarter saw our airline operations getting back to more acceptable performance levels, more in line with where we were in 2019 before the pandemic. The respective teams have done a lot of hard work getting to these levels, and the effort and results have continued into Q4. The revenue picture was also solid with total average fair to shy of $126 and up 15.5% over Q3 of 19. Q4 should exceed Q4 of 19 by a similar percentage, assuming no severe weather issues in the balance of the quarter. In this rising fair environment, we are uniquely positioned to not only capture customers trading down, but to continue to grow total average fare given a significant domestic average base fare gap between us and other carriers. With the exception of the other ULCCs, all other carriers' average base fare is somewhere between two and almost four times higher than us. After adjusting for one-off items such as a Sunseeker Resort Special Charge of $35 million, the Employee Recognition Bonus of $9.3 million, and the $5 million loss on extinguishment of debt, the quarter was strong and encouraging going into Q4 and 23 as well. Turning to our balance sheet, one important point to make regarding our outstanding debt given the interest rate outlook is the fact that we are 83% fixed and only 17% floating. Our floating rate debt is all secured by aircraft in primarily shorter duration or less than five-year maturities. All this debt is very flexible, prepayable, and refinanceable. Equally important, our current maturities are only 8% of our outstanding debt. In regards to Hurricane Ian, which struck on 9-28, we are currently operational at all Florida airports. Punta Gorda was the only airport shut down post-Ian, but flying resumed October 6th. Our teams did a fantastic job relocating aircraft pre- and post-Ian allowing us to become operational faster than expected. Even better, our traffic volumes returned to normal within 14 days of reopening. Southwest Florida is incredible, and the resilience never ceases to amaze in its further validation of the Sunseeker story. Sunseeker Resort Charlotte Harbor survived Hurricane Ian, which some have referred to as the worst storm to hit the state, without any damage except from falling cranes, or unfinished parts of the building, which allowed water intrusion. We believe all storm damage to the resort is fully insured, including business interruption. The initial estimate of damage determined by the insurance carriers was 35 million, but this amount is subject to change after further assessment and understanding of impacted supply chains. We have estimated the opening of the resort to be delayed roughly 90 days. As a result, we've pushed the beginning reservation acceptance date or opening date from May 26th of 23 to September 1 of 23. Given all the IT system upgrades happening throughout the company and touching everything we do, we knew 2022 and 23 would be foundational years for our company and transformational at the same time. The effort put in by our team members has been nothing short of exceptional. This complete change out would take decades for some to achieve and never contemplated by others, but our team members will accomplish the impossible in two years. Certain upgrades will allow us to take full advantage of and more seamlessly integrate our Viva Airboost partnership. While not a certainty, we believe all necessary approvals will be in place including category one status in Mexico in the first half of 23. Our Viva partners recently reported an outstanding Q3, extending their compelling growth story. Because of the upgrades, we will be able to take full advantage of the partnership and the opportunities it offers in conjunction with the necessary approvals. In the Q2 earnings call, I made reference to ongoing negotiations with our pilots. Moria is personally involved in those negotiations, and progress is being made on a weekly basis. It's an arduous process that, frankly, takes longer than it should. We will get a deal done that works for both parties that recognizes the value and contributions of our pilots and the importance of maintaining our business model. We expect significant progress towards that end over the next couple of months. Thank you to our incredible team members for their passion and stamina you have shown not only in the quarter but throughout the year. And with that, I'll turn it over to Scott Sheldon. Thank you, John, and good afternoon, everyone.

Before I touch on third quarter results, I first want to say thank you from this management team and to all of our team members and partners throughout the network. Your efforts throughout the third quarter, and particularly through the devastating hurricane that impacted southwest Florida in late September, were tremendous. Our ground, maintenance, and flight crew volunteers enabled a movement of nearly 25% of our fleet, countless passengers, and well in excess of 100 team and family members out of our Florida bases. My hat's off to you for an outstanding effort. A few quick comments on the operational environment before I touch on labor. We continue to see improvements in our operational performance on all fronts during the third quarter. It was a relatively clean quarter in that it wasn't solely dominated by labor instability. As discussed on prior calls, our network is more complex and dispersed than it was in the third quarter of 19. Year over three years, scheduled departures were up 8.4%. and our crew base growth and aircraft growth of 21% and 31% respectively. This month, we plan on opening our 24th crew base in Provo, Utah, up from 19 bases in 2019. The breadth of our operational footprint requires individual bases to operate as standalone franchises. And to drive high completion factors and on-time performance, we need to see some significant improvements in dispatch reliability and unplanned absence trends. We remain cautiously optimistic, but we are seeing nice traction on both fronts. We ended the quarter with nearly 99.5% controllable completion and A14 production of just over 70% through the end of October. Uncontrollable factors such as air traffic control staffing and flow control programs in the Florida will continue to be on-time performance headwinds, but we hope to see substantial reductions in higher ops costs as we move into 2023. Moving on to pilots, we're happy to report we entered into our first exclusive pilot pathway program with Spartan College of Aeronautics in Denver, Colorado. This exclusive program, to be branded Altitude, will be a closed-loop partnership customized for prospective Allegiant pilots and is expected to produce upwards of 250 pilots annually as the program matures. Details and a formal join announcement are still to come, but we are excited to secure a direct pipeline for our future growth needs. And the last thing I'd like to touch on is our efforts to ratify a new contract with our pilots. A ratified agreement is and continues to be our number one focus and is critical to the long-term success of the airline. As JR mentioned, our team headed up by the old man himself, Maury Gallagher, continues to meet in person with the IBT and good progress has been made over the last three months. The rate environment continues to be incredibly volatile. And since January, we've passed seven comprehensive proposals for IBT consideration. Our proposals touch on everything from rates, rate guarantees, retirement, scheduling, work rules, and quality of life enhancements, all of which directionally reflect other domestic air carrier CBAs that have been ratified since the beginning of the year. A newly ratified contract coupled with the rollout of our altitude pilot pathway program sets us up nicely. for the introduction of our new Boeing fleet in the back half of the year and into 2024. Hope to have something to report in the not too distant future. And with that, I'll turn it over to Scott D'Angelo.

Thanks, Scott. Q3 saw sustained strong leisure travel demand for Allegiant across both web traffic to Allegiant.com and passenger segments both. Just as we saw during the pandemic, and as we're seeing again in the face of negative economic factors threatening to impact consumer discretionary spending, Our direct-to-consumer distribution approach gives us an advantage by enabling us to stay close to our customers and engage with them in ongoing two-way communication to ensure that the Allegiant brand is top of mind at addressing the two most important buying factors for leisure travelers, low fares and nonstop flights. During the current economic climate, we're seeing our brand proposition, what we positioned as living the nonstop life through affordable, accessible leisure travel, resonate more than ever to attract new customers and retain existing ones. Year-to-date, total visitation to our website remains up by nearly 30% versus 2019, and new first-time visitors are up by nearly 50% versus 2019. In addition, the number of new customers booking their first Allegiant flight is up by nearly 25% versus 2019 levels. We also continue to see the strong positive impact of leisure travel from the unprecedented number of baby boomers who retired the past two years and now have the discretionary time to travel more. Year to date, the number of new Allegiant customers ages 60 or older is up by more than 60% versus 2019 levels. As I referenced last quarter, our addressable customer audience continues to grow as more new customers consider Allegiant for their leisure travel needs. They're seeking relief from sky-high fares, as well as avoiding the risk, inconvenience, and time associated with connecting flights through crowded airport hubs. This past week, in a survey of customers who flew with Allegiant this year, we asked them whether economic considerations, such as inflation, gas prices, and recession fears, would make them more or less likely to consider flying with Allegiant again in the next 12 months. Among those customers who have traditionally flown most often with Southwest, Delta, American, or United, more than 40% said they are more likely to consider flying with Allegiant in light of these economic concerns. In particular, for those customers who said they have traditionally flown most often with American or United, nearly 50% said they were more likely to consider flying with Allegiant this upcoming year. Also noteworthy coming out of this survey was getting a deeper understanding into the reasons for travel among Allegiant customers in 2022 to date. About 15% are flying for combined work and leisure, representing the first time we've seen a material segment of our customer base in this growing leisure category. Also, nearly 60% of leisure-only Allegiant customers are flying to visit family and friends. And as we've noted in the past, 15 to 20%, depending on the season, are flying to a second or vacation home. Each of these customer travel occasion types represent what we believe to be the most resilient forms of leisure travel during economic downturns. And to that point, looking forward, web searches for flights during virtually all upcoming weeks of travel through March of next year remain between 10 to 40% above last year's flight search levels at the same time. Beyond the growth of new customers to Allegiant, we're also retaining customers and growing customer value at our greatest levels ever, thanks to our award-winning loyalty programs. USA Today Reader's Choice awarded Best Airline Credit Card to the Always Allegiant World MasterCard for the fourth consecutive year, and in its inaugural year, Always Rewards also claimed the top spot as Best Frequent Flyer Program in the nation. The Always Allegiant World MasterCard continues to post record-setting months in terms of new card sign-ups, average spend on card, and total compensation to Allegiant. Most notably, however, may be that above and beyond the program's third-party revenue and profit stream, our cardholder base of nearly $400,000 currently drives about 15% of our total air and air ancillary revenue, and the level of spend by this group on air and air ancillary has grown by more than 350% since 2019. Similarly, our Always Rewards program has about 3 million active members who account for about two-thirds of our total air and air ancillary revenue. And one year into its existence, we're already seeing these members spending 34% more on average per itinerary booked and booking 28% more frequently on average compared to non-members. Having the vast majority of our revenue linked to customers in our loyalty program is not only positive in terms of retaining these customers and this revenue, but also helps motivate these customers to attach Air Ancillary and third-party products, such as hotel and rental car, at a greater rate. In closing, we believe Allegiant's unique brand of low fares and nonstop flights remains a compelling, distinctive value proposition, especially in these uncertain economic times that is attracting new and returning customers alike in record numbers who are engaging with our popular loyalty programs and making Allegiant their airline of choice. And with that, I'll turn it over to Drew.

Thank you, Scott, and thanks to everyone for joining us this afternoon. Third quarter revenue was tracking nicely to come in a bit above the original guidance of plus 29% versus the third quarter of 2019. However, Due to Hurricane Ian, we lost approximately $3.5 million in revenue to finish with total revenue up plus 28.4%. Similarly, we lost one point of scheduled service capacity to finish at plus 17%. The resulting 12.60 TRASM in the quarter is the best third quarter since 2008. Perhaps most importantly, through an immense amount of communication and collaboration, the planning and operational groups have done an incredible job balancing the needs across the enterprise to set the operation up for success. and we're excited about the improvements we've seen on that front. There are generally three distinct pre-hurricane periods to the third quarter. The peak summer weeks were marked with lower growth and strong demand met with strong unitized metrics. The ensuing four weeks saw roughly 45% ASM growth and high rates of cash-positive flying, and while unit revenues were relatively challenged due to the growth, they were still positive. The rest of the quarter until the hurricane was likely the start of the quarter based on relative outperformance. While ASM growth was elevated between 25% and 30%, travel growth still performed in the double digits, and September load factors were the highest since 2011. We'd long theorized the changing dynamics of leisure and hybrid travel should lift the floor on September and other off-peak periods, and we're pleased with how that has manifested through the first trial. Scott touched on the emerging significance of hybrid travel to our business, and everyone around this table believes in the structural shift of both how travel is valued as a life experience but also how our business model meshes so well with that shift. Despite the relative September strength, the growth cadence in the quarter was still a unit revenue headwind. If weekly ASM growth through the quarter was the same as the average peak summer growth rate, we'd have expected to perform about five and a half points better on a year over three year basis. With the unbundled approach to itineraries that we employ, we tried to balance the approach to maximizing total revenue per flight generally ensuring that we are capturing the ancillary piece where inventory allows and pushing yields where demand is the greatest. As a part of this balance, we accomplished monthly record total revenue per passenger in both September and October, on top of load factors we hadn't seen since the early part of last decade. The step-up in ancillary per passenger during the third quarter was essentially in line with the second quarter at plus 17.9%, again, driven by success with our bundled ancillary product and the always-allegiant World MasterCard program, and the fourth quarter should end at approximately $70 per passenger. While we won't see much incremental upside in this quarter, we will begin to induct new-to-us Airbus aircraft in the 180-seat Allegiant Extra layout this month, gaining three tails by quarter's end and two more shortly after the new year. Throughout 2022, Allegiant Extra returns on the four initial aircraft currently in service continue to widen the gap on both the required hurdle rate for positive contribution and the performance versus previous years. We are ecstatic to make this available to more customers in the coming quarters. Zooming out a little bit, we expect total revenue for the fourth quarter to be up between 26.5% and 28.5% year over three year, with scheduled service capacity of 15%, implying mild sequential trials and acceleration at the midpoint. And while ASM growth is a bit flatter throughout the fourth quarter versus the third, two primary headwinds remain, 3% due to Hurricane Ian and roughly one point due to incremental off-peak days and holiday timing. However, despite these headwinds, the fourth quarter will vie for the highest TRASM of any quarter in Allegiant history. And with that, I'd like to turn it over to Greg.

Drew, thank you, and we appreciate everyone joining us today. And of course, a special thanks to Team Allegiant. We are extremely proud of the amazing work you continue to accomplish. So operational stability has been one of our top priorities, and third quarter results did not disappoint. Controllable completion for the quarter of 99.4% was 2.1% higher than the first half of 2022 and very much trending in the right direction. However, as we were closing out the quarter, we experienced an uncontrollable disruption as Hurricane Ian ripped through Florida. First and foremost, our heartfelt thoughts are with those impacted by the storm. As announced earlier this week, we deepened our partnership with the Red Cross to support the recovery and rebuilding of this area. When Ian made landfall in Southwest Florida, it devastated the surrounding areas, including the Port Charlotte and Punta Gorda area. This hit home for us in many ways as Punta Gorda is one of our largest aircraft bases and Port Charlotte is home to our Sunseeker Resort. Over 550 Allegiant and Sunseeker team members live in and around these surrounding areas. We are grateful to report that all of our team members were safe and accounted for, although the recovery for many of them continues. We estimate the hurricane headwind to our operating margin to be one point and three points in the third and fourth quarters respectively. And regarding the damage to the resort, we still have limited information, but preliminary estimates suggest approximately 35 million of physical damage primarily caused by subcontractor cranes hitting the buildings. We believe we have ample insurance to cover these estimated damages. And from an accounting perspective, GAAP required us to record a preliminary loss estimate of the 35 million which will be offset in subsequent quarters as insurance proceeds are collected. So if we exclude this $35 million, our adjusted operating income for the third quarter was $13.5 million, a 2.4% op margin. And prior to the hurricane, and as Drew explained, revenue for the quarter was on pace to exceed our initial expectations. Absolute costs were down 8% from prior quarter, aided by a reduction in fuel costs, and our third quarter fuel costs per gallon of $3.85 was generally in line with our initial guide. Our unitized costs, excluding fuel recognition grant and that 35 million hurricane and special charge, it came in at 7.61 cents, 13.9% versus the same period in 2019 on 14.5% ASM growth. And this increase was largely driven by four points of labor productivity, three points of inflation, and four points of aircraft utilization. Aircraft utilization, as measured by block hours per day, was 6.4 hours per day during the third quarter. And you compare that to 7.4 hours during the same period in 2019. And so we estimate a one-hour increase in utilization per aircraft per day would have reduced our unit cost by half a cent. Turning towards the fourth quarter, our guidance issue today suggests an adjusted operating margin of 8%. And that's for the fourth quarter, a meaningful improvement sequentially. And this assumes an average of $3.75 per gallon of fuel. And based on system ASM growth of 13.5%, we expect CASMX for the quarter to be up 14% year over three. This increase is summarized as follows. One, inflationary pressures at our airports and with service providers is roughly four points. Two, lower aircraft utilization should drive roughly four points. And three, lower labor productivity should result in another two points of this increase. As we look towards 2023, uncertainty remains around fuel price levels, supply chain and OEM delays and pilot constraints. And as such, we are not prepared to share specifics on our 23 budget plans, but we'll provide some high level thoughts. Overall, our 2023 priority is to continue improving margins, which we have line of sight on. A couple important steps in helping us get there is first, operational stability, which is not only paramount for our team members and our guests, but will also improve financial results. This is underscored by our year-to-date spend in total IROPs, which is $60 million more than all of 2019. In addition, we are seeing improved reliability has naturally helped with crew stability by reducing the number of unplanned absences and sick calls. Second, securing labor contracts. We are in active contract negotiations with our pilot and flight attendant groups. We have terrific crew members, improving communication, upgrading systems, and getting a new contract they deserve is our top priority. While these new deals should have a headwind to absolute costs, we expect them to increase the momentum in achieving staffing levels and restoring our ability to optimize aircraft productivity. And speaking of aircraft, our internal teams continue to pace nicely with our plans of being ready to take delivery of our 737 MAX aircraft order. We are excited to bring on the MAX aircraft, particularly as we believe they will bring a 30% earnings advantage compared to our A320 COs. However, the delivery timing from Boeing is pushed to the right a few months. We actually only expect three of the aircraft next year with the first one now not expected until October of 2023. With that backdrop, we want to reaffirm our current plan of 2023 ASM growth to be around 10%. This in no way suggests demand is weak. In fact, we continue to see very strong demand. We will, however, continue to keep a close eye on the consumer as the Fed is still far off from achieving its target goal of 2% inflation and is raising interest rates at unprecedented speed. which leads into some recent debt transactions that have greatly de-risked our capital stack. During the third quarter, we carefully timed the markets by extending our $533 million term loan maturity from one year out to five years. This was with the $550 million secured bond offering. That offering was six times oversubscribed and priced at a fixed rate of 7.25%. An interest to be paid on the new bond is expected to be less than the pre-existing loan given the high rising rate environment. In addition, and as part of this transaction, we secured a $75 million revolving credit facility with Barclays. And as such, we expect to end the year with $1.2 billion in total liquidity, inclusive of cash on hand and undrawn revolvers. This is more than two times our liquidity on hand prior to the pandemic. Total debt, inclusive of finance leases, is expected to end 2022 at roughly $2 billion, which applies $1 billion of net debt. Last month, we drew our final tranche from our $350 million loan with Castle Lake to fund Sunseeker, and that's at a fixed interest rate of 5.75%. Also during the quarter, we secured $200 million in financing for our upcoming PDP commitments with Boeing. We were really pleased to find standalone PDP financing, which didn't require long-term financing commitments for any aircraft. This will provide us with tremendous flexibility in managing the balance sheet as we take delivery of those aircraft in 23 and 24, while also navigating the interest rate environment. We are fortunate to have a fleet plan with tremendous flexibility, and in the event of extended delays in delivery of our 737 MAX order book, we could adjust timing of our A320 retirements and or take additional aircraft from the used market to meet our network requirements. In addition, we have valuable options for up to 50 additional 737 MAX aircraft for delivery between 2025 and 2028. And as mentioned last quarter, We decided to hold three aircraft in storage this year and place them into service in the first half of 2023. This change means we will end 2022 with 123 aircraft in service. And with that, I'll take your questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. In addition, we ask that you limit your questions to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Savanti Sis at Raymond James. Your line is open.

Hey, thanks. Good afternoon, everyone. I'm just kind of curious if you could provide just a little color on, are you seeing your crew levels and attrition levels improving? And as you kind of think about 2023 is, you know, if you're expecting an improvement into 2023, how much of that will be kind of offset by having to kind of hire and train ahead of the MAX kind of coming into the fleet?

Hey, Salvi. This is Sheldon. Appreciate the question. Yeah, there's certain months, definitely throughout 22, where we saw first officer attrition specifically reached 30% on an annual basis. If you look at the complement of pilots throughout the system, it's running about 15%. We've put in more than 350 folks through the school, the schoolhouse this year. And if you look at the net seniority list increase, we're up about 135 folks. That's a lot of thrash in order to get ready for the introduction of the Boeing fleet. That being said, with the launch of a pilot program, and more importantly, we've got to get a deal done. At the end of the day, our rates are so far underwater. I think directionally, we know where the contract needs to be, and we're just plowing through it as quickly as we can. I think aspirationally, we want to have classes of 25 each month. which should more than offset any sort of attrition. But that's sort of how we're looking at modeling this into 2023.

Hey, it's Avi. It's Greg. On your question around the cost headwinds from incorporating the MAX aircraft, where we're looking at today, 2023, we'd expect that to be roughly 0.05 cents of CASMX headwind. 2024, I think where it would hit the top, there would be about 0.10 cents of CASMX.

That's super helpful. Thanks for all that color. If I might, on the fuel efficiency side, it seems like the fuel efficiency of the Airbus fleet hasn't really been showing up. I'm wondering if you could just provide a little bit more color and what the trend there might be.

Sure, Savi. It's Greg. Let me take that. You know, I think overall we target the fuel efficiency on the A320 fleet to be roughly like 86 ASMs per gallon. It also is impacted by season, so by quarter. The third quarter is generally the hottest, and so that'll be the lowest or least efficient quarter in terms of ASMs per gallon. So where I think we're going to end the year is probably 84 ASMs per gallon. I would expect a little bit of step up next year in 2023. And then once we take that to Boeing aircraft, I think those are roughly... mixed in the fleet, those are mixed between the two types, the 7 and the 8200s. I think you're about 110 ASMs per gallon, so I'd like to see in 2024 get closer to 90 ASMs per gallon, and then in 2025 when we have more on, you know, going above the 90 ASMs per gallon.

That's the bill. Thank you.

Thank you. Our next question comes from the line of Dwayne Fenigworth at Evercore ISI. Your line is open.

Hey, thank you for the time. So your guidance implies some sequential improvement in margins from 3Q to 4Q. And honestly, we haven't had a lot of time to dissect the special bonuses, the debt charge, the hurricane charge. But it looks like X all of that. You still a loss of money, which is historically unusual for Allegiant. What would you point to as the biggest drivers of your loss in 3Q? And what are the fundamental reasons you see margins getting better? Is this really about like, we're going to be chugging along here at similar levels until you guys have more confidence in your ability to flex up in the peaks? And I'd love your comments on if you think, you know, that confidence is increasing yet.

Hey, Dwayne. Thanks for the question. It's Greg. Why don't I kick it off here, and then others will, I'm sure, want to jump in. But, you know, I think in terms of the sequential improvement in margins, one, the fourth quarter is just stronger than the third quarter seasonally, so we should see strength, and that should help drive revenue. You know, some of the tailwinds that we should see as well as operational reliability, Third quarter, we did a nice job there, but it's even trending much better into the fourth quarter. You know, some of the headwinds, I think Drew pointed this out in the fourth quarter, will still be the lingering of Hurricane Ian. We have some of the Sunseeker operating costs that have been trending up over the quarters as we get closer to opening as well. You know, I think what I'd say, though, is we think about, like, optimizing aircraft utilization and how we get there. Scott mentioned focus on labor, but also with the operational reliability improvement, we've seen a reduction in unplanned crew absences and sick time, which if you think about that and you take that crew stability, that can give you more of an opportunity to increase utilization in those peak periods. Candidly, this year, we've capped our peak periods, and that's where, as you, I know, Duane, you've followed us for so many years, you know that's where we make most of our money. I think in March and the summer, we make 60% of all of our earnings in those peak periods. So having that cap has been more difficult for us to produce those type of results, but we see line of sight in getting back there. And as we mentioned with operational stability, that's the first step, and then we'll continue to layer on and kind of torque up the utilization where we can and where it makes sense at the right time, right and appropriate time. I'll pause there. Anything? Anybody else? Did that help, Duane? Did we miss anything?

Yeah, I appreciate those thoughts. And then just on CAPEX, I think we can back into the remaining spend on Sunseeker next year from the disclosure that you have. Can you just remind us total aircraft CAPEX and maintenance-related CAPEX you'd expect next year?

Hey, Dwayne, it's Greg. It's a great question. And what I'll caveat it with is it's just it's fluid at this point, given the uncertainty of timing around max deliveries, not only in 23, but as you know, a big part of our CapEx is going to be PDP payments and trying to understand all that between for the entire order. So what I'll say is where we sit today, I think CapEx next year as a floor should be at least $500 million. So I want to say we'll end this year at $350 million for the airline. So for next year, the airline will be at least $500 million. But what I'd want to say, maybe put BJ on the spot here, but ask BJ to add some color because of that CapEx, I think he's done a really nice job of making sure we have the appropriate financing to support it. But BJ, anything you want to add?

Maybe just, Duane, you know, the moving parts are, of course, the actual delivery of the Boeing airplanes. Like Greg mentioned, the 2024 schedule will impact PDT CapEx in 2023. And then there's a couple of other things in there, you know, whether or not those first deliveries or those early deliveries in 24 end up being max 7s or max 8s. And then finally, just movement in the used A320 acquisitions that we may need to bridge that gap.

Okay. Thank you very much.

Thanks, Dwayne.

Thank you. Our next question comes from the line of Michael Linenberg from Deutsche Bank. Your line is now open.

Oh, great. Hey, good afternoon, everyone. Hey, Greg, I want to go back to, you know, the 8% adjusted operating margin that you sort of threw out earlier on the call. Is that incorporating like the three points from Ian? So we should be thinking more like a five-point margin margin? 5% margin X and or are you rolling that through? And then also just the employee recognition piece. I know you call it out as a special for the last two quarters. Is that going to feature as a cost item in the fourth quarter? Because I know you don't include it in CASM. So we're just trying to get to that 8%. Any color thing? Sure.

yeah um so for the fourth quarter i said he adjusted off margin of eight percent we'll exclude that recognition or the bulk of that recognition bonus and i'll tell you here why in one second michael but it would include the impact from hurricane ian so you know save the hurricane and it would be 11 if that makes sense in the reason in the reason we excluded this year the recognition bonus is you know we've had a policy for many many years to you'd have to achieve a 5% operating margin before we started accruing a bonus profit sharing for our team members. Given this unique environment from labor across all of our team members and they're just going above and beyond, we wanted to make sure that we did the right thing and we accrued and had bonuses ready for them irrespective of where our profit came in or lack thereof. But what I would say is next year, we're going to pull that out. So next year when we expect to be back to earning, again, and providing profits, we're not going to peg it to a recognition grant. It's going to be based on profitability, and we would not exclude that in CASMAC.

Okay, that helps. And then just a quick one to Drew on capacity fourth quarter. You mentioned 15%. I think the schedules are still indicating a bit higher than that, so I guess we should be We should assume that we're going to see some additional cuts through additional filing schedules over the next month or so. Is that accurate?

I think essentially we just need to file the changes that have been made. Things that happened around Ian will never be reflected in DOR or the public sources because they were so close in. Okay. So we took an impact there. So I think we're scheduled. I thought we were going to do it this last weekend. I think a new filing is coming soon. But the deal will remain or public forums will remain slightly elevated just due to those closing cancels associated with EM.

Fair enough. Okay. Thanks, everyone, for answering my questions.

Thank you.

Our next question comes from the line of Scott Groop at Wolf Research. Your line is now open.

Hey, thanks. Good afternoon. I want to see if you have any thoughts on CASM next year. So if ASMs are up about 10%, sounds like maybe you'll be expensing the employee recognition. Maybe you get a new pilot deal. How are you thinking about CASM-X next year? Do you think it can be down on a year-over-year basis or any directional color?

Hey, Scott, it's Greg. Yeah, maybe just directionally. And we're still in the process of budgeting for 2023, so I want to be careful and not give get too specific here on where we expect CASMX to be. You mentioned that 10% ASM number that we've of course mentioned as well. I would say that growth is generally, you should expect that to be back half of 23 loaded. So the first half is gonna be limited ASM growth or generally flat. Yeah, what I'd say some of the tailwinds or at least a big tailwind in 2023 versus 2022 to the unit cost will be the IROPs being down, right? I think that should be super helpful. And then some of the headwinds are, as Savi asked early on, Boeing incorporating the Boeing aircraft. So that's about a 0.05% CASMX headwind. You have FTEs are up with the exception of pilots to kind of support this infrastructure to be larger. I mean, candidly, a year ago at this time, we thought in 2023, we'd be 20% larger than we're going to be. But we have that infrastructure in place. And as we kind of loosen up and get the pipeline, as Scott Sheldon mentioned, with the pilots coming in and the ability to kind of yank up utilization and growth, the good thing is we're spring-coiled and ready to go. And so we have that foundation in place. And then at some point, I think you could see nice growth, but I wouldn't expect that to even happen. again, happening until the back half of 2023. And again, that's going to be contingent on a labor deal being done or likely being done. And then, you know, and then just everything I talked about here directionally, that doesn't assume a pilot deal in the cost, but I would say for internal forecasts, that's what we're expecting. We're building that in for our forecast, but I don't want to give numbers and negotiate, you know, publicly, if you will.

Yeah.

And so, I mean, I know you're guiding to margin improvement next year and just planning out. It feels like double-digit margin is tough to get to, but let me know if you think differently. But I guess what is the path to getting back to double-digit operating margin, which you guys consistently used to have? How do we get there?

Yeah, it's a great question. Let me kick it off here again. And I say, and I keep saying it, ops stability, getting rid of IROPS, that's got to come out of the business. $60 million incremental in total IROPS costs this year versus 2019. So that's one. That's stable ops, as we mentioned, stabilizing ops, that gives us crew stability so we could peak up more or we could fly more in those peak periods, which is the most profitable time for us to fly. So that's two. Labor deals getting done, which helps with utilization, with growth. That's three. Aircraft, the aircraft we're bringing in. If you think about 2019, we talked EBITDA for aircraft was $6 million per shell. The 320-186 seat or even the 320 that's going to be Allegiant Extra, that has an earnings potential of $7 million of EBITDA per copy. So, you know, we think bringing those in along with the 30% economic advantage of the Boeing aircraft is going to be key there as well. Cost discipline, you know, like as I mentioned, we're going through the budget and austerity is a big theme here at Allegiant this year to make sure that we're cutting out any unnecessary costs, but that we can support the opportunities that we have ahead. And maybe I'll pause, and I don't know if Drew or Scott want to hit on some of the commercial initiatives, such as systems like Navitare or Viva. I mean, we think these can really drive earnings potential or drive margins higher, not to mention loyalty and everything that's happening on that side of the house as well. But anybody else want to add?

I think you covered quite a bit.

Great.

Go ahead. If you have more to add, go ahead, please.

No, I think that I probably just took too much time and answered for everybody, so I apologize. But, yeah, I think that covered kind of where we wanted to hit.

Thank you, guys. Appreciate the time.

Thank you. Our next question comes from the line of Andrew DeDora from Bank of America. Your line is now open.

Hey, good afternoon, everyone. John or Greg, I know in the release you highlighted the suspension, the removal of the suspension on the existing buyback. Obviously, all the government restrictions were lifted at the end of September. Just curious, how do you think about capital allocation today now that these restrictions have been lifted and Would you consider buying back stock before, say, getting a new pilot deal? Just curious your thoughts there.

We're not going to try to predict timing in that regard. I think our board wanted to make sure that the capital allocation strategies we had... in the past. We opened those back up as soon as we were able to do that, which is why they lifted the restriction that we put in place due to the CARES Act. So now we no longer