Allegiant Travel Company

Good afternoon and thank you for standing by. Welcome to the second quarter 2023 Eulogent 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 question 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. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sherry Wilson, Managing Director of Investor Relations. Please go ahead.

Thank you, Michelle. Welcome to the Allegiant Travel Company's second quarter 2023 earnings call. On the call with me today are John Redmond, the company's Chief Executive Officer, Greg Anderson, President, Scott D'Angelo, 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 plans. 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, please feel free to visit the company's investor relations site at ir.allegiantair.com. And with that, I'll turn it over to John.

Thank you very much, Erin. Good morning, everyone. I'm thrilled to report an 18% operating margin and 99.7% controllable completion for the second quarter, among the highest in the industry during the quarter, both operationally and financially. In the face of high demand and operational complexity, the team continues to deliver. It is their exceptional efforts that have allowed us to meet and exceed our customers' expectations. Over the last year, we have increased our NPS scores by an average of 10 points and are now at the highest scores since the pandemic. I could not be prouder of the work our team members do each and every day. Thank you very much for your continued passion and dedication. Our commitment to enhancing the travel experience remained the key driver of our success. Over the years, we have invested in our services and our brand, ensuring we not only meet the evolving needs of our customers, but also create new opportunities for growth and expansion. One area that continues to pay dividends is our co-branded credit card. With over 600,000 credit cards issued, the program continues to surpass expectations. Cardholder spend has increased by 220% since 2019 and shows no signs of slowing. We believe the opening of Sunseeker Resort later this year will provide further value propositions for our cardholders and guests and help drive cardholder signups well into the future. Last quarter, I spoke about the key strategic initiatives of this management team. I'd like to provide a quick update on our progress. First and foremost, finalizing our outstanding labor contracts remains our top priority. Greg will provide additional detail around our status, but it is of the utmost importance that we continue making progress and deliver contracts that our teams are proud to support. Secondly, we are committed to continuing to deliver high operational performance. It is our obligation to our guests to strive for industry-leading performance as shown in our Q2 results. It is a necessary pillar in ensuring we protect the investments we've made over the years in our brand. Finally, I'm happy to report we remain on track to open Sun Seeker Resort in Port Charlotte, Florida in mid-October. This has been a long time coming. a project full of challenges and delays outside of our control, so to see the end in sight is remarkable. Bookings for Sunseeker continue coming in from all corners of the country, 42 states all told, which speaks volumes of the breadth of the database. To date, excluding group bookings, we have sold approximately 3,300 transient room nights and an average room rate of $410 per night. Transient room nights booked to date are impressive in that most people book hotel rooms inside 50 days of arrival. Regarding group bookings, over 50 groups have contracted or are in the process of contracting nearly 40,000 room nights. The team continues to bring in high-quality groups, and I fully expect this group room night's booked number to grow to roughly 75,000 by year end, covering all years booked. These are incredible group numbers for a property and brand that has never existed in the market. The team in Florida is in full hiring mode, looking to onboard a targeted headcount of around 1,200 personnel. We received over 5,700 applications, with over 70% of those applicants residing within a 50-mile radius of the resort, demonstrating our commitment to supporting the local economy. Underpinning this influx in applications is the unique retention bonus we announced in early July for our inaugural non-management Sun Seeker Resort team members. It provides an annual retention bonus of $10,000 for 10 years after completing 10 years of continuous full-time employment. Interestingly, we have received applications from people residing in 49 states. Given the early response, we would expect the application pool to exceed 7,000 people. With an application pool that continues to grow, this innovative program should help us attract and retain the very best hospitality professionals, and we already see evidence of this within the pool. From a financial perspective, the Sun Secret Resort budget remains at $695 million. As indicated in prior calls, costs will ramp in the third quarter due to pre-opening expenses. We estimate the total cost impact will be roughly $15 million this quarter. Consistent with last quarter, the full-year impact to consolidated EPS remains at $1.25 loss. I continue to be encouraged by the long-term value creation of Sunseeker Resorts. Upon completion of the project, the team will shift focus begin laying the groundwork for our asset-like growth trajectory. With the opening around the corner, some of you will continue to speculate about our future intentions regarding expansion plans or future projects requiring material capital outlays. We will not pursue any such projects without an equity partner. In closing, I could not be happier where we sit today. Our upward guidance revisions reflect our conviction about the balance of the year and to continue to deliver strong performance in the coming years. As such, I am pleased to announce that the Allegiant Travel Board of Directors has authorized an annual dividend of $2.40, payable in equal amounts quarterly beginning September 1st for the second quarter of 2023. We remain committed to growing profitably by enhancing our offerings, driving customer satisfaction, and delivering increased value to our shareholders. With that, I'll turn it over to Greg Anderson.

John, thank you. Over the past year, the industry has faced a uniquely challenging operating environment. Despite these many obstacles, Team Allegiant is delivering exceptional results. In our business, everything begins and ends with operations. And here at Allegiant, we are only days away from having the heaviest flying periods of the year behind us, March and summer. Through July, we are running an impressive 99.8% controllable completion factor, and that's year-to-date. In addition, during the month of June, we are amongst the industry leaders in on-time performance. The results we are seeing today represent a significant improvement over where we were a year ago. This improvement has driven our year-to-date irregular operation costs down by $80 million compared to the same period in 2022. Obviously, an unreliable operation is much more expensive to run. It also leads to unnecessary disruption and frustration for our guests and our frontline team members. Overly ambitious scheduling may lead to higher revenues, but when it results in excessive delays and cancellations, the juice isn't worth the squeeze. We are committed to maintaining a balanced scheduling approach. This approach is executed jointly by our planning and operational teams as together, They expertly manage a schedule to meet the leisure demand environment while maintaining operational integrity. Our unique ability in adjusting capacity is differentiated by our low fixed cost structure. One of the interesting things you are hearing from other carriers has been around leisure traffic. Moreover, some carriers are reshaping their network and adjusting their schedules accordingly by lowering off-peak capacity. This leisure focus and focus flying on peak days has been our approach for over 20 years. We are ideally suited for this leisure peak flying approach, and you can see this in our results. And going forward, we believe this approach will continue to pay dividends. In addition to our operational and financial performances, there is also an incredible amount of work being accomplished behind the scenes to strengthen our foundation and to be able to support a 200-plus aircraft airline in roughly five years. Our major system implementations are a key step in getting there, and I am happy to report SAP went live on July 1st. a major milestone along this journey. This once-in-a-generation system changeover will help drive internal efficiencies across our back office teams. Additionally, we plan to cut over to Navitare in late August. We delayed its go-live date to move any potential operational disruption to outside of our peak summer travel period. Navitare is expected to drive incremental ancillary revenue due to its dynamic pricing capabilities. In addition, this system will support our expansion into Mexico with our joint venture partner, Viva Airboost. However, due to recent actions undertaken by Mexico affecting U.S. carrier operations at Mexico City Airport, our ATI application with the DOT has been temporarily put on hold. We want to be clear, though, that this does not affect the merits of our application. It's also worth noting that we have readied the areas within our control to be able to launch once ATI is approved. The execution of the incredible team members at Allegiant truly amazes me. Not only do they continue to strengthen our foundation, but their efforts delivered industry-leading controllable completion and operating margins during the first half of 2023. This triggered the maximum profit share amount, paying out over $12 million to our airline team members. We could not be prouder of the work Team Allegiant does, and thank you. We believe we are incredibly well positioned for the future and are uniquely set up to be a destination airline for all of our team members. A key element of this is to ensure we maintain competitive labor contracts. Last quarter, our dispatchers, whom are represented by the IBT, ratified a two-year contract extension more than a year before the amendable date of their CBA, which included pay rate increases at the higher end of the industry. Similarly, We are happy to have reached a formal tentative agreement with our mechanics, also represented by the IBT, more than three years prior to their amendable date. This TA provides for significant increases in rates and adds a two-year extension to the current contract. The TA is subject to approval by the mechanics in the coming weeks. In June, we announced a tentative agreement with the TWU, which represent our flight attendants. While this initial TA was unfortunately voted down, we remain focused and committed to reaching a deal with our flight attendants and re-engaging at the table with the TWU in short order. Regarding our pilot group, who are represented by the IBT, we remain in mediation and working towards pathways to a deal. Given the uncertainty around the timing of a deal, we felt it necessary to address pilot compensation outside of bargaining and recognize the importance our pilots play in our ongoing success. As such, in early June, we were pleased to announce a retention bonus for all pilots that remain with the company through ratification of a deal. We began banking a 35% increase to their current rates, except for first-year first officers, which accrue at an even higher rate of 82%. These retention bonuses are intended to bring our pilot pay more in line with the industry, with the understanding final pay rates will continue to be negotiated through the mediation process. We are pleased the IBT supported this retention bonus as we continue to work with them towards a contract that our pilots deserve. In closing, I want to thank all of Team Allegiant. You are the best in the business. We appreciate everything you do. With that, I'll turn it over to Scott.

Thanks, Greg. Our second quarter saw continued strong domestic leisure travel demand and capture that remain near our historic highs in 2022. Thanks to improved operations, a testament to the strong leadership of our Chief Operating Officer, Kenny Wilper, along with his expert leadership team and the great work by all in the Allegiant family, this year's controllable completion rate being far above last year's level means we're keeping and recognizing a much greater portion of book revenue year to date. Looking forward, while there's no shortage of opinions with regards to macroeconomic conditions and their impact on consumer domestic leisure travel behavior, We spend less time trying to predict the future and more time ensuring we're prepared to succeed in it. It all starts with keeping our fingers on the pulse of customer sentiment and their leisure travel intention. Just as we did following the past two quarters, we surveyed a representative sample from both our most frequent flying repeat customers as well as those who flew us for the first time this past quarter. The results remain strong and unchanged from the past two quarters. Among both groups, about 50% said that economic conditions will have no impact on their flying behavior with the Legion in the next 12 months, and more than 30% said that economic considerations will actually make them more likely to fly with the Legion in the next 12 months. The market is moving toward us. For our most frequent flying repeat customers, the rationale for their unchanged sentiment and intention stems from the fact that the vast majority of them are either flying to visit family or relatives, more than 40% of the group, or are flying between their primary residence and their vacation home, just under 40% of the group. These remain the most resilient forms of leisure travel during any macroeconomic environment. Quarter rewarding our most frequent flying repeat customers, along with engaging new customers and turning them into repeat customers, is our Always Rewards loyalty program. Year to date, nearly 90% of our customer bookings have come from Always Rewards members. The number of members with activity year to date is up nearly 30% versus last year, and the number of new members with their first activity is up nearly 15% versus last year. Ultimately, having such broad coverage with Always Rewards enables us to reward the vast majority of our customers with points that can be easily used as currency in any amount at any time for anything sold at Allegiant.com. Year-to-date, on average, Always Rewards members are one and a half times more valuable than non-members. Most notably, this value is largely driven by them spending 60% more on air ancillary products than non-members do. Their take rates of Corair ancillary products, seats and bags, are 10 to 20 percentage points higher than that of non-members. Our most loyal and engaged segment within the Always Rewards program is, of course, our co-brand credit card holders, who are three times more valuable than non-members. Currently, about 2.5% of our total active customer database of 17 million has the card. As such, we believe there is significant growth potential. In seven years, we have grown the program into a $100 million business unit, and we expect to double that in the next three years. To that end, I'm excited to announce an upcoming change to our program. Later this month, we will be transitioning our co-brand credit card network partner from MasterCard to Visa. Our Allegiant World MasterCard will be renamed and rebranded as the Allegiant Always Rewards Visa Card. While Bank of America remains our issuing partner, and no existing cardholder benefits will change, we made the decision to move to Visa, the nation's leading brand in credit card issuance and acceptance, because we believe it will enable us to drive higher levels of both new cardholders and cardholder spend, the two largest ways that we derive revenue from the program. We asked Allegiant customers who do not currently have our co-brand credit card which card they would be most likely to apply for. 60% said Visa, while only 25% said MasterCard. In addition, one of the nation's largest retailers, Costco, only accepts Visa, and more than 40% of our customers say they regularly shop there. What's more, Visa will provide stronger financial, technical, and analytic support for growing the Allegiant Always Rewards Visa card program and in providing additional benefits through their exclusive partnerships and proprietary capabilities. Wrapping up, year-to-date, in as much as demand is slightly below last year's historic high levels, we believe this simply represents a continued return to normalized pre-pandemic peak and non-peak seasonal travel patterns, We continue to view domestic leisure travel in the cities and among the customers we serve as strong. But we remain close to our customers, and as has been the hallmark of our company throughout its history, we stand ready to adapt to any changes in the demand environment. And with that, I'll turn it over to our Chief Revenue Officer, Drew Wells.

Thank you, Scott, and thanks, everyone, for joining us this morning. I'm extremely pleased with the record second quarter performance of $684 million in total revenue, growth of nearly 9% on system ASM growth of 1.3%. This combination produced a TRASM of 13.64, which bested any previous second quarter by 0.5%, and grew year-over-year by 7.5%. As Greg mentioned, we achieved remarkable operational results in the second quarter on top of financial results among the best in the industry. The current operating environment has proven challenging, and we are not immune to this. Three months ago, we talked about trimming about two and a half points of capacity from the summer schedule, and we believe it was absolutely worth it. I want to reiterate how impressed I am with the planning and operations teams coming together to do an incredible job aligning our schedule with available resources and anticipating risk areas to help mitigate potential issues, both controllable and uncontrollable alike. The buffers added into our schedule enabled better recovery options when faced with irregular operations, including ATC-related concerns, especially out of Florida. We've done the commercial piece as well or better than anyone else in the world, as measured by margins and returns, but candidly, often at the expense of operational excellence. In the first half of 2023, we showed that we could do the operational piece while maintaining that industry-leading financial position. Those two in harmony is an elite combination. We still have more work to do to continually improve, but this summer will serve as a great foundation going forward to ensure operational reliability in conjunction with the appropriate deployment capacity. Diving into revenue a bit, the strength in the quarter was well-balanced, as yield and ancillary products each contributed roughly $5 incremental per passenger versus the second quarter in 2022. We exceeded $70 per passenger in ancillary revenue once again, in large part thanks to Allegiant Extra and continued success with our bundled ancillary product, as well as the Allegiant co-brand program, which continues to thrive. Allegiant Extra is now featured on 14 aircraft and continues to exceed expectations. While we don't expect any incremental aircraft with this layout in 2023, all Boeings coming in 2024 will have the Allegiant Extra option. Additionally, the strength of our operations and diligence from the Charters team allowed us to capitalize on additional fixed-fee business from both new and current clients to grow fixed-fee revenue over 30%. As previously mentioned, we are still maintaining the expectation of TRASM over the last nine months to be up mid-single digits. though now expected to narrow to the lower side of the mid-single-digit range. In addition to the continued story of incredible demand, the upside factors for Allegiant remain the same. Continued operational stability and an expanded Allegiant Extra product we've talked about. Another upside factor is an historically mature network. But that doesn't mean zero routes in development. Five new routes and three reintroduced routes started service this summer, including growth in Portland, Oregon, Provo, Utah, and Denver, among other cities. I'm extremely happy that all eight held their own with some even exceeding system average profitability from the start. Additionally, last month we announced six new routes for the winter season, mainly focused on Florida, with one add into our Mesa base. These announcements are booking above average compared to prior announcements, which is continued evidence of a strong leisure demand presence. Lastly, Navitare should provide lift to our ancillary program. However, given the integration delay, we will not see the previously anticipated upside in the third quarter, though we are still baking that lift into the fourth. Furthermore, we did see some yield compression through the heart of the summer booking curve, somewhat offset by atypical close-in demand. As you well know, Allegiant prides itself on matching capacity with demand. For more than 20 years, our daily and monthly levels of flying have fluctuated meaningfully. We have a great understanding of the leisure customer and when they most want to fly. The third quarter will be no different, as roughly 80% of our ASMs will fall on our peak leisure days, And September ASMs look to be roughly 55% of July's flying, both generally in line with the third quarter of 2022. Scheduled service ASMs are expected to be very slightly negative in the quarter, while a full-year guide remains intact at flat to up 3%. With that, I'd like to turn it over to Robert.

Thanks, Drew, and thank you to everyone for joining us on the call today. We're pleased to report another quarter of strong financial results. Allegiant produced $76.9 million of consolidated adjusted net income for the second quarter, resulting in adjusted EPS of $4.35 in line with 2019 earnings. We recognized record total operating revenue in the quarter of $684 million of 8.6 over the prior year on 1.3% higher capacity. Our non-field unit cost increased 12.9% year over year, with four points of that increase attributable to pilot payroll accruals and other frontline labor cost increases, which, as Greg noted, we announced in June but were effective beginning May 1st. Similar to our last call, unit costs were pressured in comparison to the same period last year by lower productivity, which accounts for about three points of the increase. Improved operational performance drove a nice tailwind by reducing irregular operations expense in the quarter. That was largely offset by inflationary costs pressure in stations. Variable team member compensation related to improved financial performance drove roughly two and a half points of the increase over the second quarter last year, and two points of chasm increase in the quarter came from some one-time non-recurring costs, which included a cancellation fee related to the transition of our co-brand credit card from MasterCard to Visa, and the remainder of our ex-fuel unit cost increase was related to various other items. Fuel costs came in below our expectations at $2.69 per gallon, helping to drive an airline operating margin of 18.6%. Shifting to full-year guidance, we're increasing our estimated airline earnings per share by 75 cents at the midpoint to $11.75. The increase in expected full-year EPS is fully attributable to a 10-cent decrease in our full-year estimated fuel costs per gallon from $3 to $2.90. As John noted, we continue to expect a full year loss related to Sunseeker Resort of $1.25 per share. We expect pre-opening costs to ramp during the third quarter at approximately $15 million ahead of opening the property early in the fourth quarter. When taken in conjunction and using the midpoint of our guide, we expect a consolidated full year adjusted earnings per share of roughly $10.50. Turning to the balance sheet, We ended the June quarter with $1.4 billion in available liquidity. That's just over $1 billion in cash and investments and $356 million in capacity in undrawn revolvers and PDP financing facilities after a prepayment of $61 million in aircraft secured debt in late June. Net debt remained consistent with last quarter at $1.1 billion. Our net debt was down to 2.2 turns, a reduction from 3.7 at year end. driven by strong EBITDA production during the first six months of the year. We do expect to add some incremental debt leading up to delivery of our first 737 MAX aircraft late in the fourth quarter, and would expect net leverage to be up just slightly above the current level at the end of the year. Second quarter capital expenditures included $147 million related to aircraft purchases, inductions, pre-delivery deposits, and other fleet-related costs. We spent an additional $29 million in other airline capital expenditures and deferred heavy maintenance CapEx came in at $21.7 million. CapEx for our Sunseeker Resort property was $92 million during the quarter. Moving to fleet, we inducted two Airbus A320 aircraft into operation and ended the quarter with 91 A320 and 35 A319 aircraft in service. We had one additional A320 aircraft owned and undergoing induction work as of the quarter end, and expect to purchase two additional A320 aircraft during the remainder of 2023. And on the 737 fleet, updates from Boeing indicate that our first two MAX aircraft, which were scheduled for delivery at the end of this year, will each be delayed by approximately four weeks, leaving one aircraft for delivery to us in 2023 and moving the second into 2024. While the follow-on effect on the remainder of our 2024 delivery schedule is still under discussion, Our 2023 capacity plans are not impacted by this delay. As we've shared previously, we expect to begin operating our first 737 aircraft in the first quarter of next year and expect to take delivery of approximately two aircraft per month throughout 2024. Our updated four-year CapEx guide today implies just under $500 million in aircraft, engine, and induction-related spend this year, with the reduction from prior guidance related to timing of pre-delivery deposits and timing of aircraft deliveries. All in, we expect full-year airline CapEx to be roughly $640 million. I'm very pleased with the financial trajectory we've seen the past few quarters and excited for the earnings potential in our business as we can start to unlock the benefits of the infrastructure investments we've been making. EBITDA in the trailing 12 months is approximately $4.5 million per aircraft on a trailing 12-month fuel cost of $3.38 per gallon. Adjusting for fuel, we would be back to our 2019 level of $6 million in EBITDA per aircraft, notwithstanding some of the added cost pressures I mentioned earlier. While I recognize there are certainly many moving parts here, we expect continued improvement on this metric as our numerous initiatives come online. Running a reliable operation has been paramount to achieving the results that we're sharing today. We're extremely proud of our team members and the way that they have worked together to schedule and operate the airline during a time that remains challenging. I want to just end by thanking our 5,400 team members for all of their contributions during this busy peak summer travel season. Michelle, we're ready to begin taking analyst questions. Okay.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask you to please limit to one question and one follow-up. Please stand by while we compile the Q&A roster. The first question comes from Dwayne Finnigworth with Evercore. Your line is open.

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

Hi, Dwayne. Good questions. I think when you look at that, you have to kind of look at it by year. So in 24, we'll start with a full year of 24, you're probably looking at something in the range of, I'd say maybe 12 to, it's going to be a wide range just because we'll be booking into the year, but probably in the range of like 12 to 18%. Could get as high as 20, but probably in that range of 12 to 18%. When you're looking at the out years starting with 25, you're probably looking at 20% to 25% would be more normal as we move forward. Just to give you some color on that, when you look at the roughly 40,000 group room nights that have already been booked, about 26,300 of those fall into 24. So that's roughly... you know, more than 10%, slightly over 10% of the total room nights that we would have in a given year. So that kind of gives you a good barometer, and that's why I think that's where it's going to fall. But again, we're dealing with a brand and a property that hasn't existed to run these percentages as we are is incredibly impressive, but I think that's kind of like the 25% range would be where it starts to peak in 2025.

And John, on the group rates, they're 250 to 300 or thereabouts? Yeah, they've been averaging around 290-ish when you look at all 40,000 ruminides.

And I would expect those to ramp up, too, as there's a greater awareness of the property and we're not selling into an unknown. So the rates we're selling into, I mean, the rates we're getting are more than we expected, again, selling into an unknown property. But those will continue to ramp up in the out years. as we get into 25, 26. This is another data point. We have room nights that have already been booked into 27. Got it.

Appreciate the thoughts. I know it's somewhat hypothetical at this point. And then just on the OPEX run rate, can you give us a little help in the quarter? I know you got some insurance reimbursement. So what was kind of the OPEX run rate for Sunseeker in 2Q and And how do you see that kind of ramping into 3Q and 4Q? Thanks for taking the questions.

I think the 2Q number, I think 3Q, we're talking about the 15 million, which of course is all pre-opening as you're talking about. The 2Q number, I don't have off the top of my head what that was, but obviously would be probably for sure less than half that number.

Yeah, I think we had, oh, go ahead. Like five to seven million, I want to say, between the first and second quarter per quarter.

And sorry, that 15 million, when you're sort of up and running with a full fourth quarter, what does that look like?

Well, once we're up and operating, we haven't put out any financial data from an operating standpoint. We intend to do that Probably at the same time, we provide guidance for the airline, which would be historically we do after Q4. So we would provide operating guidance for the resort at that same time. So right now, we are only providing the op-ex of keys before opening, so all just the pre-opening numbers. There is public numbers that we put out there a few years ago. Obviously, they're dated, and I would expect results to be significantly better because I think the ADR in those projections was something around the 250 range, $250 a night. And as you can see, we're running much better even when you blend group and transient. Okay. Thank you. Thanks, Glenn. Thanks, Glenn.

Please stand by for the next question. The next question comes from Savi Scythe with Raymond James. Your line is open.

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

Hey, Savi. Sure. It's Greg. Thanks for the question. And, you know, the bonus in general as we came up and moving forward with it is just to hit on it was the right thing to do. You know, we have so many of our pilots that want to be at Allegiant that we were talking to and providing us feedback to say, You know, how is it difficult to want to stay here when the rates are so low? I mean, we want to be here, but the rates are low compared to the industry. So we felt overall this was the right thing to do for our pilots because they do want to be here and they understand the unique setup that Allegiant has in terms of that out-and-back quality of life. Don't get me wrong, this is one step. The contract's ultimately, you know, where we need to get, and we need to make a lot of improvements in certain areas, including quality of life, pay rates, retirement, and so forth. In terms of staffing, though, maybe let's just – I'll break it down into two pieces. The schoolhouse being one, Savi, and then I'll talk about kind of the net pilots and the attrition that we've been seeing. But schoolhouse, as we've seen over the past couple months, a terrific increase in the number of pilots coming through the schoolhouse. I mean, classes are full. I think beginning – the last three or four classes have been full, so about 20 to 25 per class. Before that perspective in the first part of the year, we were seeing roughly 12 to 14 per class. So really encouraged by what we're seeing there. Our team led by Tyler Hollingsworth has really kind of turned that around and focused on a lot of several different pathway programs and recruiting the right type of pilots that want to be at Allegiant that sees this, you know, this unique quality of life set up. So, and as we look forward to the rest of the year, we still remain really encouraged about the classes, those that have signed up and continuing to maintain. Kind of that full class status, if you will. But in terms of staffing, just to maybe put some guardrails around that and around the attrition or the notices that we were receiving. So I'd say like in April, May, it was roughly we were receiving notice about nearly a pilot a day. I mean, just to put it into simple terms. And since June, since early June, that number has been cut down to a quarter of that number. So we've certainly seen some encouraging trends along those lines. Some of that's probably seasonal. Some of it hopefully is due not just to the retention bonus, but us going out there and trying to make the improvements we can outside of collective bargaining. But again, I want to reiterate the most important thing we could do in a big step is getting that deal done and then go from there to continue to make this a destination airline, not just for all of our pilots, but all of our team members.

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

Hey, Savi, Drew here. First and foremost, one of the biggest components will be timing of getting a CBA done with our flight crews above and beyond the max delivery. As we focus on the maxes, though, and the constraints we have today, we'll still have training requirements that will drive through all of 24. So I would expect there to be a little bit of a ceiling relative to the fleet we're bringing on in terms of what we're able to produce ASM-wise. until maybe the end of the year. I think we can start to get a lot closer to our historic run rate, but I might pull that back a little bit.

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

And Savi, I'm just going to, this is Greg, I'm going to add one more quick comment. I mentioned in my remarks that over the next five years, we're planning to be 200 plus aircraft. So I just want to reorient around that. And that's what we're doing. We're building a strong foundation to support an airline, you know, of that size. We're strengthening that foundation. We're looking at long-term growth. We're investing in all the right things and most important in our people. And we believe we have a path to get there. It may not be at this – we don't know the exact cadence, but that's what we're planning on. And so a lot of the moves we're seeing is us getting prepared for that. And we believe we're able to continue to grow and grow profitably as we hit that 200-plus aircraft number in the next five years.

Oh, very helpful. Thank you.

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

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

Hey, Andrew, it's Vijay Allstart. And Greg, if you want to jump in on the second part of that. But yeah, no, we continue to think about it like around a third of a cent. You know, I will mention in the second quarter, we only included two months of those accruals. And so, Moving throughout the rest of the year, you'll get the burden through each of the three months in the quarter. But, yeah, you're right, kind of low double-digit growth year over year on unit costs for the back half of the year.

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

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

Yeah, Andrew, I'm sorry. I don't have a lot in front of me, but I'll just say it's real early to give chasm guidance on 24. There's a lot of moving parts, like you mentioned, around the actual delivery schedule of the MAX, which will determine How many pilots are useful in producing ASMs at each different period throughout the year? And then what are we doing on retirements of the 320s? You know, I hope by the time of the next call, we've got a little bit more color to share with you. So apologies. It's a little early to give that kind of guidance.

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

The driver of the lower interest expense this year, yeah, so a little bit of it is we prepaid $61 million in some aircraft secured debt at the end of the second quarter, which gives us a bit of relief in the final two quarters of this year. And then my comment on opening remarks that just like year-end leverage was, you know, I just wanted to set expectations. We still will add a little bit of debt as we continue making PDP payments in the final two quarters of the year. And then there's still one max delivery at the end of the year.

And Andrew, I'm just going to add, just piggyback on that, you know, the equity value in those 737 aircraft day one, you know, it's meaningful and it gives BJ and the team the opportunity to put effective and efficient financing. We're very comfortable being able to go out and finance those aircraft. But something else that I just want to remind our investors in our street is the opportunistic nature of the 737 deal and the timing, and particularly around the tax law and bonus depreciation that we receive. I mean, in essence, we're going to receive, we estimate roughly $250 million in an interest-free rate loan from the government by moving forward with this deal. So that will offset cash taxes in the future. Thank you.

Please stand by for the next question. The next question comes from Robbie Shanker with Morgan Stanley. Your line is open.

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

Yeah, I mean, when we refer to peak, we're exclusively talking about domestic leisure peak, which is traditionally around school holidays, right? So your spring break, summer, and holiday timeframes. I think most would describe leisure peak as the same, and I think, and I'm speculating a bit here, carriers are having a bit more leisure exposure. They're kind of coming around to how those dynamics are working. One of the great things about peaks, though, is there is an excess of demand generally, and even in periods, I think pre-pandemic when capacity was quite elevated, particularly in the off-peaks, peak capacity could soak up that demand pretty well. I don't anticipate competitive dynamics to change meaningfully. The peaks are a peak for a reason. And so in general, I believe it's a good thing, but the demand patterns fit the Allegiant model just exceedingly well and something like we mentioned that we've catered to for 20 plus years. So we're built for exactly this kind of dynamic.

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

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

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

Please stand by for the next question. The next question comes from Helene Becker with TD Cowan. Your line is open.

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

Yeah, yeah, great question. And we called out three months ago that Vegas had kind of an outsized portion of that 2.5%. You know, April and May still had pockets of struggles as there were some concentrated days and periods of impact. But that materially turned around in June and July, and I think Vegas went exceedingly well, performed exceedingly well through the summer. So outside of some heat-related concerns, there's not a lot anybody can do there I'm extremely happy with how Vegas panned out. Thinking more broadly as we think about the schedule moving forward, reviewing things from fire breaks and adding some slack into the schedule that provides that recoverability, especially if you think about Florida and pretty routine thunderstorms coming through at 3.30 every afternoon. We were better balanced about viewing that in its entirety, thinking about how a fire break relates to extended turn times and where those minutes actually matter. But perhaps, at least to me, one of the most impactful things was thinking about the overnight touch time for our mechanics and crews and getting that plane to the gate on time every morning so we could start the airline correctly and give ourselves a chance to succeed. So both starting on time and thinking about how we could recover through the day when things start to go awry. I think we got close to the right answer this year, but there's a lot more work for us to do to continue to refine and maintain our place towards the top of the industry.

Yeah, and Drew, I just want to add just a quick comment here too, and that's, you know, where we sit today, we feel really confident about, you know, the second half of the year and moving on from the commentary that we talked about, the coordination between planning and ops, and that Drew and Kenny Wilk are heading up. But staffing levels are very solid. In fact, with the exception of pilots, it's the best we've seen since 2019, so we're encouraged by that. As we get out of the, as we exit the gauntlet of the summer peak flying, Now that the teams all come together and do a post-mortem around a summer debrief, and they look for process efficiencies and ways to get better, and that'll be around the corner, and we'll continue to step up our game in any way we can.

Thanks very much. If I could just squeeze one more in. You mentioned a little bit on the outlook for revenue the rest of the year. I just wonder if you could unpack that in any color on the cadence for base fairs and ancillaries from what you can see from right now. Thanks very much.

Yeah, I'll probably disappoint you a little bit as we get into kind of cadence related. Two things I'll point out. One, I would look toward last year's comp set and kind of ASM cadence to help guide how you think about the third and fourth quarter. And the second I'll point out, and maybe not one that I communicated well or maybe even appreciated enough as we talked about the last nine months previously, was the second quarter of 22 cadence And I think there was still a fair amount of recovery from the variant that we experienced in the first half of that quarter. You know, not to disparage the two key results at all, but probably helped bolster the relative trasm year over year there a little bit. So I would, you know, kind of think about those two pieces in concurrence as you think about the last nine months in totality.

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

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

Michael, I do. I think those EBITDA margins are still doable. It's kind of like when you see even happen on the air side, right, with the CAF or CASMX increasing, well, revenue is outpacing the CASMX growth. So you're seeing the same thing happen in the resort world where the cost increases are way more than offset by the room rate increases in that market. So very encouraging, and Florida in particular, you know, it's just been extremely strong. Obviously, the hotel industry throughout the U.S. has been, but Florida, it's a shining star when it comes to what's going on. So, you know, I think the EBITDA margins that we were looking at early on and were out there under projections, I think there's a potential for those to be even much stronger.

Very good. And then just a second one for you, John, and probably Greg as well, and maybe the team. We've seen an announcement by Frontier to take up some of the assets of the JetBlue Spirit proposed merger, assets that they would potentially divest. At this point, it looks like it's just LaGuardia slots. Obviously, there's a lot more that they've already indicated that they would be willing to divest. Maybe it's runway timings at Newark, gates in Fort Lauderdale, space in Boston. Is any of that of interest to Allegiant?

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

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

Absolutely. And thank you, Michael, because the last several weeks we have asked exactly that. So I'm prepared to tell you. First, we asked our customer base to make sure they had the ability to travel internationally. It turns out that about 80% of Allegiant customers have a passport. But... We're seeing something very different than what Frontier and others have reported. When asked, do you plan to travel internationally in the next six months or have you traveled internationally in the last six months? The answer is the same between like 16 and 19% say yes. That means the vast majority of our customers, 80% have no plans and have not traveled internationally in 2023.

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

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

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

Great. Very helpful. Thanks, everyone.

Please stand by for the next question. The next question comes from Connor Cunningham with Milius Research. Your line is open.

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

Absolutely. So the comment that in the next three years will, in effect, double from roughly where we ended last year at $97 million, going to post over $100 million, is largely based without Sunseeker assumed in it. So it is from the key things you mentioned, increased cardholder growth, compounded cardholder spend, right, as that portfolio grows and we achieve at or above the same spend per cardholder. So I think John's comments in the beginning represent upside that could even, you know, make it faster. My comments were not based on any additional goodness, which we'll absolutely get from Sunseeker opening.

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

Okay. That's helpful. And then on Sunseeker, you know, great commentary on ADRs and bookings. But the question that I get, and maybe this is kind of Mike's point as well, is just around the inflection point on profitability. Like, I realize that, you know, you're working towards opening. I'm just trying to get some color on your path to profitability there, one that we could expect a potential contribution overall. Again, realize that it's still early days, but just any thoughts that would be helpful. Thank you.

You know, when you talk about a cash contribution or contribution, you use that term. You know, when you're talking about EBITDA, we don't intend to ever be negative on a quarterly basis. I mean, there's no time we forecast any period that we would have a negative EBITDA. So I think from a cash standpoint, you're going to be positive throughout the year. With the added upside in the out years, so we purposely priced the product that you see out there for 23 and 24 below market. So even when you see these rates, believe it or not, we're below market because we're putting a new brand and a new property into that market. So when you look at after we've been open for a period of time, and I'm not talking years, I'm talking months, you're going to start to see those rates accelerate up. So we purposely have underpriced, and even with that purposeful underpricing, those ADRs are impressive, but you will see those ramp up significantly for sure in the 25 and out. Appreciate it. Thank you.

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

Well, I appreciate everyone's time. We're very proud of our team and the management here and what we've been able to accomplish year to date. And we're very excited about the balance of this year. You know, an incredible amount of time and resources have gone into systems over the last couple years you're starting to see the rollout of all that time and effort start to happen this year which really sets the backbone for this company going forward so we will have no restrictions limitations what have you from a system standpoint as as we move into you know the 20 aircraft or 200 aircraft environment i should say that greg referred to you know everything is allowing us to do everything we need to and want to do going forward So we have absolutely no restrictions, and our focus now is just finishing up the last labor agreements. We're very encouraged by where we are today and where we're going to end up tomorrow with those agreements. So, again, very bullish about the out years for this company. Very exciting times ahead, and stay tuned. Thank you very much.

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