Allegiant Travel Company - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 twenty twenty Allegiant Travel Company Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to introduce your host for today's conference call Ms. Sherry Wilson. You may begin ma'am.

Speaker 1

Thank you, Kevin. Welcome to the Allegiant Travel Company's second quarter twenty twenty earnings call. On the call with me today are Maury Gallagher, the company's Chairman and Chief Executive Officer John Redman, the company's President Scott Sheldon, our EVP and Chief Operating Officer Greg Anderson, our EVP and Chief Financial Officer Scott DeAngelo, our EVP and Chief Marketing Officer Drew Wells, our VP of Revenue and Planning and a handful of others to help answer questions. We will start with some commentary and then open it up to questions. The company's comments today will contain forward looking statements concerning our future performance and strategic 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, feel free to visit the company's Investor Relations site at ir.allegiantair.com. With that, I'll turn it over to Maury.

Speaker 2

Thank you, Sherry, and thank you all for joining us today. First, let me thank all of our team members, their spouses and families as we continue to fly our passengers during these difficult times. They've done yeoman's work. I'm sure you've all heard of the movie Groundhog Day with Bill Murray and his adventures of repeating the same day over and over. That's where we find ourselves today.

Each day seems to be repeating itself as we wind our way through this slow motion video called COVID. Each of us is managing through these repetitive awkward days in our own way. Bottom line, I believe things will get better, but most likely not as fast as we all would have liked. Today, we and the airline industry are printing our economic hopes on the upcoming holidays at the end of the year in 2021. Many of my colleagues have been providing you the best guesses on what will happen in the future.

So let me throw a few ideas out there. First and foremost, I don't believe we'll go back to a full shutdown. People just won't put up with it. And while we are made an operating profit in June, very proud of that, and thought we might have be back to some form of normalcy, I don't believe we will get back to those numbers anytime soon. At a minimum, the near term calendar will not allow it.

At present, we believe we have a plan we have to plan on this current state as being the norm. Near term problem is how do we work towards breakeven cash flow. From the August until November 15 is traditionally one of our slowest periods, particularly September. Given the problems we are seeing, it will be even more difficult than in past years. Assuming no CARES extension, adjusting labor costs is our number one cash flow lever available as we work towards our breakeven cash flow goal.

We will eliminate two twenty jobs, including 87 personnel associated with those jobs on October 1, a difficult task, but a necessary one. We're in the late stages of discussions with our other contract personnel that will allow us to generate the needed savings in the coming months. We want to keep as many team members on board as possible to take advantage of our operating peaks. To do this in between these peaks, we need financial relief on our labor payrolls. We need to spread the pain, as we've said in the past, to save labor expense accordingly.

Unfortunately, our pilots leadership is unwilling to work with us on this approach. And as a result, we have notified the IBT management that we intend to furlough up to as many as two seventy five of our crew members, pilots that is. While we regret having to do this, these numbers will allow us to optimize both the peaks and valleys that we just discussed in the coming months and into 2021. You'll hear more about this from Scott Sheldon in just a moment. With respect to liquidity, we're in good shape given what we know today.

Our cash balance was $663,000,000 at the end of the quarter, up almost 50% from our Q1 balance. We also have other capital avenues open to us if we feel we have a need to go to market, including near term prospects of an extension of the CARES Act. And Greg will fill you in with more of those specifics. I'm very happy how we have managed through our worst situations in the past five months. We've led the industry in most almost all of the new now what we call the now important operating areas, including we had the largest percentage of our schedule flown compared to other carriers.

We had the largest percentage of passengers carried compared to our historic market share, and we had the best negative cash burn percentage. I've joked around the office that we are the best of the worst, given the state of the airline industry and the tourism industry overall. Once again, our model with its flexibility is allowing us to react as demand dictates. It will continue to be our strategic asset in the coming months as we quickly adjust to the vagaries that the market allows us to experience. It has provided us with terrific financial results over the years and continues to allow us to lead the industry in near term results.

Our financial strength has also allowed us to minimize the dilution to our shareholders during this period. As I said in our last call, we have not had to go to the equity or convert markets and have no plans to. Our $200,000,000 plus of tax refunds from NOLs has and will provide us with the equivalent of a good sized equity raise. Those NOL dollars are a return of our tax dollars paid on our profits from our 68 quarters of profitability in past months and years. These are difficult times, hard to believe times, frankly.

Hopefully, there'll be some relief in the near term via slowdown in the virus cases. Perhaps the only better near term news given the increase in cases we've been experiencing is that the rate of death has dropped substantially. Many people are working tirelessly to find ways to both control and end this terrible play. News of vaccines are reassuring, a decline in reported cases would also be beneficial. But at the end of the day, to return to any semblance of normalcy, to begin to interact with others as we used to do, people have to believe they won't become infected.

This is particularly important for our industry since leisure activities involve people congregating in close quarters. You're hearing good news about increased testing. Good, we need more of this. And while more testing is better, I'm concerned about its ability to scale to the levels we need, about the time it takes to receive results and about what one does with the information on their status. Namely, it's easy to know what to do if you have it, you quarantine yourself.

If your test is negative, you're happy about the results, but what do you do with this information? How does it help the instant problem you're getting together with others and feeling good about it? If you look at our medical establishment, it was not designed nor does it have the capacity to provide us the one thing we all want and need most in today's COVID environment, information. When I get my negative test results, good information, like I said, but then what? As an important or perhaps more important, I want information that tells me the person next to me is not infected.

Not a big ask until it becomes everyone, three thirty million people. Then it becomes an almost impossible ask. Only the federal government can manage this national task. I would hope there are plans in the offering to develop a national approach to managing this pandemic and the next one that is sure to follow. We cannot allow this type of event to cause this level of destruction anytime in the future.

In the meantime, as I said on the last call, I believe we will continue to be one of the top performers. In my opinion, we have the ability to flex ourselves to meet the conditions better than any other carrier. Our model will continue to serve us well. Lastly, I want to again personally thank each one of our team members for all they have done for us during these trying past five months. You are the backbone of this company.

In the meantime, in the airline space, we will take care of business. We are survivors with a great company and an excellent business model. John?

Speaker 3

Thank you very much, Mori. Good afternoon, everyone. Of course, I echo Mori's comments regarding our incredible team members here and the sacrifices they and their families have made through this craziest of times. I thought I'd spend a quick couple of minutes talking about leisure travel space since those are the only people flying now and deep into 2021, if not all of 2021. On most other airlines, the lucrative business traveler accumulates frequent flyer miles using a company credit card for business related travel and then uses their accumulated miles from business travel as currency to pay for their leisure travel.

The databases of these other airlines are populated with people whose leisure travel is free or substantially offset through the use of accumulated business travel miles. I am sure a lot of you are walking examples of this. As a result, there was little to no reason for these individuals to comparison shop when traveling for leisure. As these other carriers pivot to a leisure travel only environment, they are marketing to people who historically have not used their own wallet for leisure travel. Will some of these people fair shop going forward when using their own money?

I would imagine some percentage will after burning off their accumulated points. The Allegiant database on the other hand is populated solely with people who have used their own money since the inception of the airline. We have been accumulating emails and data on these cash paying leisure customers for over twenty years. We have been marketing to these individuals pushing leisure only travel options for longer than any other domestic carrier. It is not an accident that we are performing better than all the other airlines in the leisure only environment.

Speaking of leisure, I want to further expand on the $20,000,000 settlement with Sixth Street Partners. As long as the agreement was in place, we were required to invest another $150,000,000 in equity with a completion guarantee end date of December of twenty twenty one. The settlement agreement gives us much more flexibility in dealing with the project from an outright sale, finding an additional equity partner or further borrowings. Greg will expand further in his comments. In the COVID-nineteen related special charges section of the release, there was an additional salary and benefit expense relating to position eliminations that Greg will expand on in his comments.

As difficult as the decision was, it demonstrates how quickly we will move to reduce cash burn and right size the business model. Going forward, we will pull additional costs out if necessary to adjust to the revenue environment we find ourselves in. On that note, I'll turn

Speaker 4

it over to Scott. Thank you, John, and good afternoon, everyone. First, I'd like to thank our 4,500 plus team members and partners across the network for their outstanding service. Your efforts since the start of this pandemic has been amazing and the sensitivity and care you've shown our guests and each other are the reason we have and will continue to be successful. COVID has resulted in challenging all aspects of our operation in ways we couldn't have contemplated six months ago, from shutting down operations, restarting operations, canceling and revising schedules, cutting costs, educating consumers, creating new safety strategies and health policies have all introduced a great deal of complexity to the operation, and the team's execution has been something we should all be proud of.

From the onset of the pandemic, we had three immediate focus areas. The first was ensuring the safety of our passengers and Allegiant team members. This continues to be our top priority. Our customer experience leadership team and members of our emergency command center have done an amazing job rolling out initiatives related to Allegiant's going the distance for health and safety program. Offering additional layers of safety throughout a guest's journey, along with an enhanced educational campaign to drive consumer confidence are critical to our long term success.

Second was rapidly adjusting our daily operations to reflect a near zero demand environment, while positioning our operational cost structure for the long term slow recovery. As you'll hear from Drew, our strategy of maintaining a wide selling footprint, managing cancellations close in on the seven to ten day cycle has resulted in our outsized 2Q performance relative to our industry peers. Unfortunately, we find ourselves at somewhat of a crossroads as we look for additional cost saving opportunities as we exit our summer peak into what is traditionally our weakest quarter. Much more on that to follow. And third was to develop an aircraft storage program for potential fleet management scenarios as we progress through the recovery.

As mentioned on our earlier call, our fleet induction, maintenance and engineering teams did a tremendous job standing up a flexible program that will allow us to execute any number of strategies in the back half of the year on short notice. Despite a successful June, we all recognize how deep this pandemic really is, and it's clearly going to last longer than we had hoped. COVID hotspot flare ups, quarantines, state pausing reopening plans, and in many cases, reimposing restrictions provide for a very choppy and uncontrollable demand outlook. As we move into the back half of the year, our focus now becomes how continued approach of casting a wide selling net, maintaining base and labor structure integrity while driving much needed cost relief, particularly in soft shoulder months. No doubt costs have to come out of the organization in this current revenue environment if we're going to approach our goal of being cash flow neutral by the end of the year.

Therefore, our focus has been and continues to be driving down labor costs and improving productivity, so differently doing more with less employees in all aspects of the organization. During the second quarter, we made strides in reducing labor costs in both unionized and non unionized work groups. On the non unionized labor front, we eliminated 121 positions within the ops organization. These reductions are expected to save the company approximately $9,000,000 in annual labor costs through voluntary or early retirement programs. Also with virtually all non line level support teams working from home, we continue to find ways to drive productivity and consolidate areas of responsibility, which we feel confident there are more savings to come.

In the event these savings are not attainable, we may look at a second round of headcount reductions in order to meet our goals. On the unionized labor front, we were very transparent from the start of the pandemic on challenges we faced as an organization. We worked closely with the union leadership through weekly meetings and educational town halls to specifically lay out our strategy knowing we would need their involvement and cooperation at some point. Well, that point is unfortunately now. Despite the fact we are able to drive approximately $10,000,000 in line level labor savings through the combination of emergency time off agreements and better scheduling practices, which essentially drove down flight crew guarantees to contractual minimums, we need additional cooperation as care support funds roll off October 1 if we want to eliminate network disruption.

As Maury mentioned in his opening remarks, we've been in discussions with all unionized work groups to drive creative solutions to reduce labor costs in much needed off peak periods. We've made substantial progress with most work groups and hope to have something to report shortly. That being said, we have noticed IBT leadership of our intention to furlough up to two seventy five pilots. Unfortunately, appears to be little appetite within the IBT leadership to engage in constructive talks. Therefore, we have taken the first necessary step and plan to execute accordingly.

In closing, we remain focused on structuring our organization for the current reality. COVID is here to stay. It's unpredictable and relying on a stable demand outlook isn't the best strategy. Reducing controllable costs, namely labor, while maintaining maximum flexibility is what we're focused on. We plan to push forward with labor discussions and remain optimistic we can come to some sort of creative solution, but are ready to modify our approach if need be.

All in all, this is a difficult balancing act, but I'm confident our team is up for the challenge. And with that, I'll turn it over to Scott D'Angelo.

Speaker 5

Thank you, Scott. Our commercial approach remains focused on going the distance for health and safety, while providing value and flexibility to customers during these uncertain times. And our unique business model of all nonstop routes, which enable our customers to avoid crowded hubs direct to consumer distribution, which enables us to sell at industry low sales and marketing costs and focus on selling beyond the aircraft to third party products all helped us punch above our weight, so to speak, in Q2 and continue to position us well as market demand returns. During the second quarter, despite the challenging demand environment, Allegion saw relative highs in web traffic and load factor versus the industry. And as Maury had mentioned, our share of total U.

S. Passengers was nearly three times higher than it was during the second quarter last year. In addition, our increasingly precise and predictive digital marketing approach, along with co op funding support from many of our great airports and destination partners, enabled us to reduce our sales and marketing costs on a per booking basis by more than 90%. There's no silver bullet to generating demand at a time like this, but there is a silver lining in getting more cost efficient and effective at capturing the demand that does exist across the markets we serve. We continue to stay close to our customers primarily through our weekly customer sentiment tracking survey, which we've been building weekly since March.

We're finding that the everyday mobility of our customers has become a leading indicator of sorts for their willingness to travel. About two thirds of our customers currently say they feel comfortable eating out at restaurants or going to shopping centers where they live. When it comes to travel, nearly one third tell us they plan to travel by air in the next three months and half plan to do so before the end of the year. Only one quarter of customers say that they're actually delaying travel plans altogether. Most are closely monitoring the situation before booking or simply traveling as planned.

It certainly helps that more than half of our customers continue to report that their personal finances have not been negatively impacted by the COVID-nineteen situation. And an additional one third say that their personal finances have only been somewhat negatively impacted. For those customers who flew with us during Q2, twenty percent were flying between their primary residence and a second vacation home, one third were visiting family or relatives and just under half were on vacation or even working remotely at a hotel or a vacation rental. To that end, we continue to be vigilant by engaging with our hotel partners across the nation to create more value for our customers and stronger economics for Allegion. We're also addressing trends we're beginning to see emerge as part of the next normal.

For example, we're working with a top Las Vegas casino resort operator to capture opportunities presented by the rise in remote working. As John referenced earlier, the business traveler paying on the corporate card is now giving way to the individual traveler paying their own way to work remote, but away from home. And last, but maybe most notable, has been Allegiant's unique ability to serve what has become a relatively strong reverse travel trend as people from larger cities like Los Angeles, Oakland and Phoenix in the West or like Tampa, Orlando and Fort Lauderdale in the East have increasingly planned their vacations to more natural, less crowded destinations like Yellowstone National Park, Mount Rushmore, the Smoky Mountains and Niagara Falls. And with that, I'll turn it over to Drew Wells, Head of Revenue and Planning.

Speaker 6

Great. Thank you, Scott, and thanks to everyone for joining us this afternoon. Our approach of maintaining a wide selling footprint enabled us to capitalize exceedingly well on the increasing demand cadence throughout the second quarter. We believe our ability to match demand with supply is unparalleled and virtually every week in the quarter saw both revenue per flight and the percentage of flying versus our pre COVID-nineteen expectation increased from the previous week. We recorded a 56.8 load factor, while operating roughly 70% of our expected June schedule.

We accomplished that through deep cuts on off peak Tuesdays and Wednesdays, while growing ASM year over year on many peak days. In turn, as has been mentioned, our 6% share of TSA throughput in the month was roughly four points higher than our prior year figure. As destinations reopened, demand improved not just for flying, but also for the third party products that helped further differentiate ourselves from the industry. Auto and hotel per passenger was higher in the month of June versus the prior year, led by Scott and team's work strengthening relationships with many great partners and creating new opportunities. Our strategy of reviewing flights in the seven to ten day window resulted in minimal close in cancellations through June and to date in July.

However, we continue to review and monitor to ensure the schedule is right sized for the demand we are seeing. Our normal seasonal variance will kick in mid August when the schedule drops precipitously as it does every year. Even prior to COVID-nineteen, September was scheduled to operate at less than 50% of July's departures. This will still be the case as departures will almost certainly be below 5,000 for the month and over 90% of routes are currently scheduled to operate only two times per week. Bookings have trended slightly better over the last few weeks after a rough start to July.

The slope is definitely shallower than the initial recovery period we experienced, but any positive slope is certainly welcome. This fall and winter have a wide range of potential results and we look to continue to be flexible in our approach. It is too early to make any call on where the schedule will shake out or where we think daily revenues will be. We are comfortable reacting to and operating a near full schedule as we have done throughout summer, a skeleton schedule as we did in April and anything in between. This would not be possible without all of our incredible team members and a business model structure around Extreme flexibility.

Thank you to all of the team members that have continued to relentlessly push forward through the stops and the starts. And with that, I'd to turn it over to Greg.

Speaker 7

Thank you, Drew, and thank you everyone for joining us today. For the second quarter of twenty twenty, revenues declined by 73%, and we recorded an adjusted net loss of $95,000,000 or $5.96 per share. This excludes items pertaining to the impact of COVID-nineteen, particularly the benefit of $75,000,000 of CARES Act payroll support, offset by roughly $100,000,000 of special charges. Simply put, our focus remains on liquidity and reducing cash burn. Thanks to our quick response to increased liquidity and reduced cash burn, we improved our total cash balance by nearly $200,000,000 and ended the quarter with $663,000,000 of cash.

Regarding cash burn, our second quarter average daily cash burn was $900,000 down from our original estimate of $2,100,000 per day. And in fact, for the month of June, we produced a slightly positive daily cash inflow. As a reminder, our daily cash burn is defined as cash from operations, less debt and rent payments and CapEx. It excludes aircraft acquisitions, new financings and cash benefits from the CARES Act. Also during the second quarter, we received $200,000,000 between payroll support funds in our first installment of our twenty eighteen-twenty nineteen NOL carryback tax refund.

In addition, we raised nearly $80,000,000 in aircraft financings, 48,000,000 of which pertains to a sale leaseback of four aircraft and the remaining $31,000,000 is a loan secured by two aircraft at a very low interest rate. During July, we will receive our remaining 10% of the payroll support funds or $17,000,000 and we've already received a second installment of our NOL carryback refund of nearly $50,000,000 Beyond the liquidity sources we have tapped thus far, we expect to receive an additional $125,000,000 by mid-twenty twenty one in a cash refund through our twenty twenty NOL carryback. Furthermore, we have an option to access a loan of up to $270,000,000 available through the CARES Act, along with unencumbered assets with a market value of just under $400,000,000 However, managing cash burn still remains our most effective liquidity strategy. As we look ahead, our average cash burn for the third quarter would be just over $1,000,000 per day, assuming gross bookings per day of $2,000,000 for the quarter. This is based on booking trends thus far in July and represents a reduction of approximately 60% from 2019 booking levels.

If current booking trends do not improve and remain flat through the duration of the year, we expect our third quarter's cash burn to be the highest of any quarter moving forward as we have the ability on October 1 to further right size our cost structure. Managing our cash burn effectively helps us highlight the flexibility of the model we have refined over many years. In fact, back in February annual letter to Allegiant team members, Mr. Gallagher here said, and I quote, It is easy to be low fare, and that can be done almost instantaneously by lowering one's prices. The hard part is being low cost.

That is an everyday commitment from each and every one of us. That's what makes the low fare bit work and an efficient cost structure is the best insurance for our success. More than sixteen years later, Mori's words and this core principle of our model couldn't be more true. We continue to believe we have the most variable cost structure in the airline industry. Allegiant remains the low cost carrier built around low utilization, which allows us to nimbly adjust capacity to match the demand environment.

As a recent example, during the second quarter, we reacted quickly to adjust capacity due to shifting demand. During April and May, we pulled back capacity by as much as 8750%, respectively. However, June, we only pulled back capacity by 30% due to the relative demand strength. This flexibility not only allowed Allegiant to take full advantage of the stronger demand in June, but also reduced direct operating expenses in April and May. To further illustrate, on roughly 50% fewer ASMs during the second quarter, our adjusted operating expense was down 38% versus the same period a year ago.

This was largely driven by a 77% decrease in fuel expense and reductions in other flight volume related expenses. Additionally, total labor costs were down 17.5% year over year despite an increase in total airline FTEs of nearly 10% with an even larger increase in crew members of roughly 17%. These labor cost reductions were helped in large part by our many team members who volunteered to contribute by reducing their pay and or taking voluntary leave. Our sincerest thanks goes out to each and every one of them. Turning to debt real quick.

We ended the quarter with $1,500,000,000 in total debt, nearly flat compared to the same period in 2019. Since that time, our average cost of debt has reduced by more than 150 basis points, and this reduction is evidenced by more than 30 reduction in second quarter interest expense versus same period a year ago. Additionally, more than 60% of our outstanding debt relates to secured aircraft and amortizes quickly over an average of just five years. This rapid paydown in debt results in annual principal payments of roughly $150,000,000 And as a reminder, these payments are included within our cash burn definition. Defending our balance sheet has been another top financial priority for us as we navigate this very fluid environment.

Where we stand today, we believe we are well positioned to emerge on the other side of this crisis with one of the stronger balance sheets in the sector. Looking to CapEx. For the remaining six months of 2020, we expect total CapEx to be roughly $165,000,000 of which $135,000,000 relates to the acquisition of five A320 aircraft and four spare CFM engines. We expect all of these acquisitions to be financed. We expect full year CapEx to be approximately $375,000,000 compared to our initial plan of approximately $750,000,000 We have reduced our total full year airline CapEx by $100,000,000 from planned levels and total CapEx by over $375,000,000 for the year.

And looking to 2021, we only have two committed aircraft. Currently, we anticipate total 2021 CapEx to be around 125,000,000 Looking over to fleet. Our flexibility here has always been critical to Allegion's business model, and that continues today. You may recall that there were up to 22 aircraft identified for either early retirement or storage in order to defer maintenance related costs and to right size the fleet. Fortunately, our flexible business model gives us the ability to make fleet decisions in a nimble manner, adjusting as we go based on a variety of factors, but not limited to, our current and projected year end cash position, demand trends, status of the used aircraft market and opportunities for growth when demand returns.

For now, the decision has been made to retire seven of the 22 identified aircraft, five will retire by year end and the other two in 2021 and 2023 respectively. Retirement dates for each aircraft are scheduled around their respective upcoming heavy maintenance events. This allows us to utilize remaining green time on these assets. We maintain further flexibility with our fleet through six aircraft currently in storage status, and that will take place to be at least early twenty twenty one. And in the event we need to reduce our fleet counts due to continued weak demand, we would maintain flexibility through these aircraft.

Conversely, though, should we see improvements in passenger demand, our fleet team plan our fleet planning team has identified several aircraft in the used market that would be a good fit for our fleet moving forward. And with that said, we entered 2020 with 91 total Airbus aircraft. During the year, aircraft inductions are largely offset by the aircraft retirements in storage, bringing our expected in service fleet count to 93 at the year end. In regards to special charges, booked during the quarter, dollars 59,000,000 of non cash expense related to book loss on the sale leaseback of four aircraft, coupled this with accelerated depreciation related to the retirement of the seven aircraft and write offs on other aircraft related assets. And just to note, $16,000,000 of additional non cash expense associated with the retirement of the seven aircraft that will be recognized in subsequent quarters with roughly 12,000,000 of the remaining $16,000,000 being recognized in the third quarter of this year.

Also during the quarter, and as John mentioned, we accrued $20,000,000 minimum yield fee on the expectation to terminate our Sunseeker loan commitment with Sixth Street Partners. The fee is expected to be paid throughout the remainder of the year. The team at Sixth Street, they have been good partners, we appreciate their continued support of the project as evidenced by their willingness to work with us on an extension of their commitment. However, without clear line of sight of when we can resume constructions, both parties agreed the best path forward at this time would be to terminate their loan commitment. We continue to explore various strategic options for Sunseeker.

As John mentioned, all options are on the table as we look for best ways to optimize our investment there. We believe there's significant value in the land, value in the possible NOL and or value if we resume construction much later on down the road. And finally, during the second quarter and consistent with the CARES Act, we reduced two twenty positions from our corporate management and support teams, many of which were voluntary and or early retirements. These reductions are expected to save the company approximately $15,000,000 annually in labor costs. It's very difficult for us to see so many talented, hardworking team members moving on from Allegiant.

Our sincerest thanks for their tireless efforts over the years, they will be greatly missed. And with that, we will turn it over to our operator for questions.

Speaker 0

Our first question comes from Helane Becker with Cowen.

Speaker 8

Hi everybody. Thank you very much operator. I appreciate the time. Thank you for all of that information. So I'm just thinking about the network and the way it looks right now and I'm wondering if you could just talk about Las Vegas versus Orlando and other focus cities because it looked like based on the Las Vegas data there were about 120,000 ish passengers that went through Las Vegas in the quarter versus the 1,300,000 almost 1,270,000 that you carried, know, that you reported carrying.

So I'm just kind of wondering what the network looks like, you know, or will look like in September maybe? Thanks.

Speaker 6

Sure, Helane. This is Drew. I'll kick this one off.

Speaker 7

So we anticipate the network is

Speaker 6

going to look very similar to how it always has. We'll pull back in September much like we have every year really since the inception of the company. Obviously, Florida is a bit more impacted by the seasonal swings in Vegas', which stays a bit more flat. And I think that will be exacerbated this year with kind of more pent up demand for Vegas given the shutdowns earlier this year. I think it's also fair to say that Orlando never really got the large step change we expected with the reopening of theme parks down there.

My impression of that is given the limited capacity theme parks were allowing, if you didn't already have a reservation, it was very hard to create a new one and therefore generate new travel down to the area. Vegas obviously being different having the room capacity and having that elevating has created more opportunity. So I think Vegas has certainly held up better and will continue to hold up better through September than Orlando for a few reasons.

Speaker 8

Okay. And then for my follow-up question on the headcount, I just wanted to be clear on that. You announced two twenty I think and not including the pilots. Should we think about more I guess I'm a little confused. You talked about eliminating two twenty jobs but 87 people on October 1.

Does that mean there are open jobs that you're just not filling? Or are there other people later on that get terminated? Sorry, I didn't I guess I got a little confused there.

Speaker 7

It's a good question and one we should clarify. So thanks for asking that, Helane. Yes, I would say there's two twenty total positions. Of those, some of those positions were individuals that left, let's say, from April through June. So we weren't counting those as part of the 87.

The 87 are what we are the individuals we notified on a particular day. And then some were some remaining open positions that we were just not going to backfill. And those are all corporate and admin function roles. So no, that wasn't a lever on the labor side at all. But so that thanks for the question.

But hopefully, helps with a little more color there.

Speaker 8

Yes. That is very helpful. Thank you very much for your answers. I appreciate it.

Speaker 2

Thanks Helene.

Speaker 8

Thanks.

Speaker 0

Our next question comes from Mike Leidenberg with Deutsche Bank.

Speaker 9

Yes. Hey, good afternoon everybody. I guess two quick ones here. Greg, the $1,000,000 just over $1,000,000 burn per day in the subQ, you indicated that, that does include a portion of the $20,000,000 accrual. What how much of that accrual actually runs through the September?

Speaker 7

We haven't finalized that yet with the Sixth Street folks, Michael. But I think what for modeling purposes, perhaps a way to do it is just take that and amortize it straight over the rest of the year.

Speaker 9

Okay. Okay. That's helpful. And then on your air traffic liability at June 30, you were $355,000,000 Now is that a short term number there? Or are your refunds, the vouchers that you have, are they only good for twelve months?

Or have you actually extended that beyond twelve months?

Speaker 7

Yes. No, you're right. We did. We extended it to two years. And so of the I think there was a $350,000,000 ATL, kind of what we're seeing today is roughly 60% are credit vouchers.

That's down a little bit from when we reported in April. And so yes, and then the remainder would be advanced bookings as part of that. But some of those, to your point, have been extended for on the credit vouchers for two years.

Speaker 9

Okay. Very good. That's all I have. Thank you.

Speaker 7

Thanks, Michael.

Speaker 0

Our next question comes from Duane Pfennigwerth with Evercore ISI.

Speaker 10

Hey, thank you. So I don't know if you're able to speak to it, but I think about Allegiant as a carrier which will fly as much as it possibly can when the demand is there and not fly as much when the demand is not there. Can you talk about the flexibility or the incremental flexibility that you're seeking? And is this something that you gave up at some point in the past when margins were super high and clearly the demand was there to support it?

Speaker 2

Well, I'll just chime in. I don't know that we've ever given that up. You can go back year after year with our famous graph, which shows January low, going up, peaking in March, falling off in April, peaking again June, July, falling very noticeably almost half or more in September and then starting to work its way back to a peak at the end of the year. That graph has repeated kind of decade or more. As far as this one, certainly, Drew's the peaks have been what they have been historically, although who knows how much higher or lower we'll be in September than we otherwise would.

But Drew, what's the plan?

Speaker 6

Sure. One of the things that we've talked about in the past is coming out of MD-eighty and into Airbus actually exacerbated the peaks and valleys. Right? So we were able to fly significantly more in March and July while maintaining the same roughly the same level of utilization in September. So

Speaker 11

we kind

Speaker 6

of stretched that out. So to echo Maurice, I don't believe we've given anything up and we maintain the ability to fly as much as we can when the demand exists. We're trying to do right now, I think all we're trying to communicate is that we're trying to right size the entirety of the organization to match where demand is as we see it and still provide optionality for what may come.

Speaker 2

I think the other component that Scott can touch on this a little bit is we've really dug into a lot of things that we otherwise weren't looking carefully at to save cash like scheduling, how do we optimize scheduling with crews and flight attendants. And particularly in the early days when we were canceling so much, we had a lot of ups and downs. But we're much more efficient, think, Scott, than we were a couple even coming into this thing with how we are able to deal with crews.

Speaker 4

Yes. If you kind of look at the buildup of base sizes, so if you kind of look at medium to small bases, which are anywhere from six aircraft down to one, they're inherently less cost effective and efficient, but they contain about half of our labor, our flight crews. And so all that is built into the economics during good times. But when you're built for, call it, 30,000 plus block hours and you're flying maybe 40%, you take a hard look at still giving Drew the footprint that he needs, but how do you reduce costs in a reasonable manner. But there's a point in which to get substantial savings, you really got to start pulling base structures down.

And that's something that we really would not like to do, which is why we're in active negotiations trying to get specific relief for off peak periods. So

Speaker 10

Yes, that's super helpful. That's super helpful.

Speaker 5

Just

Speaker 10

on the cost reductions that you're outlining, I don't know if you can say, but what level of revenue decline sort of post these cost saves, what level of revenue decline you think you would achieve cash flow breakeven? And thanks for taking the questions.

Speaker 7

Sure, Duane. This is Greg. I don't know if you bake into some of these levers, excuse me, that we're anticipating to pull, particularly in the fourth quarter, I think we could get to cash flow breakeven if year over year bookings are down roughly 40% to 45%. If they're elevated above that, I think the way I mean, you'd have to get there, and this just kind of expanding on Scott's point, as you probably you'd have to take further reductions such as like consolidating bases and things like that to get the cost down on a breakeven point. I'm not suggesting we do that.

I think regardless in the fourth quarter, we're going to be rather low on the cash burn front, but I believe we'll be significantly lower than we are in the third quarter. And we're just going to manage the business for flexibility and the best we can. We have an owner here next to us, Maury Gallagher. He's looking at this every day, and he's asking questions and making sure we're making the right decisions. So we'll continue to look and try and react as nimbly and flexibly as we can.

But I think just long story short that, yes, in the fourth quarter, we'd be able to pull down quite a bit on the

Speaker 2

labor front to get near breakeven. Duane, another comment. It's an interesting question I was asking the group. We really never looked at breakeven load factor. When you're looking at 21% operating margins that we averaged in 2019, Candidly, we didn't know the 65%.

Of course, you've got the vagaries in revenue because unit revenue, I think Michael and I looked at it has a schedule. Somebody was selling an Atlanta trip out of New York for $9 So you're going to see a lot of the unit revenue pieces are going to be problematic. But our third party revenue is coming on strong. We're making money in June. I don't think anybody can say that, take away the exceptional stuff.

The model still is responsive to us all hell. And I think we're going to have to fight some unit revenue as everybody just piles back in and no one quite knows how to price things because it's all new. But I'm pretty bullish that it's getting to a cash flow breakeven. We can do it as best as anybody can going forward.

Speaker 10

Appreciate the thoughts. Thank you.

Speaker 0

Our next question comes from Sally Siff with Raymond James.

Speaker 12

Hey, good afternoon. Just if on the loan program, the CARES Act loan program, just wondering is this kind of stance that you still might not need to tap into that? Or are you has that changed? And what have you had a discussion on kind of what kind of collateral might be used for that?

Speaker 7

Savi. Thanks for the question. It's Greg. Yes. So as far as whether or not we're going to take it, that's still undecided.

I wouldn't read into though that we haven't signed an LOI that we're not still eligible for it. We certainly are. PJ and I, we're having great discussions with the treasury team and the PJT team, their advisers about the loan. Just an interesting kind of tidbit on it. We at Allegiant, we also qualify for the Main Street Lending Program, say if we could find a bank to support that.

So we've been talking with treasury and some banks about potentially that program. And we're not saying we're going tap that either, just looking at options, if you will. And the benefit to that program as compared to just the CARES Act loan is that it doesn't require warrants and then everything else is pretty similar. But in terms of collateral, to answer that question, I think that they've been pretty responsive on kind of what we can do and what the art of the possible is with collateral. We have the unencumbered aircraft and engines.

Those would be kind of the prime collateral, if you will. But however, we also qualify for unsecured, if you look at the requirements on the CARES Act loan for unsecured. And so my point with that saying is if we decide to pull that lever, I think we can we should have the ability to raise up to the liquidity available to us under that program. But again, we're not ready to make that call at this point in time.

Speaker 12

Thank you. And if I might just follow-up on some of the Sunseeker comments. I'm just wondering, so what's your time line for making a decision there? I know you have a team in place. Just how should we think about kind of when certain decisions have to be made about that?

Or have the the steps you've taken just kind of brought you twelve to twenty four months?

Speaker 3

Again, last call, Savi, we said we weren't going to touch anything or do anything for eighteen months. And that thinking hasn't changed at all. We don't have any staff to speak of other than three individuals, and they're operating on significant reductions in pay. And we have a couple of people working through the construction closedown, if you will. So you need to have these people it's not like parking an airplane.

When you stop the construction process, when it's in process, you have to wind down payables and everything else. So there's just a handful of people that are still remaining, all working on significant pay cuts. So our burn associated with that project is at very minimum levels.

Speaker 12

And is there so from a no movement on eighteen months, but is there a timeline if you're kind of taking a strategic alternative to spin it off versus if you want to it's going to continue with the start of the construction again, when do those decisions need to be made? Is there no such kind of time line?

Speaker 3

We don't have any committed time line beyond what we've already stated. Having said that, I probably get a call a week regarding what the art of the possible is. So we are entertaining and exploring the options that I made in my comments, whether there's an opportunity for an outright sale, whether there's an opportunity to JV it or bring in another equity partner or to look at borrowing the entire amount that's left to be built, I mean, all of these are options that are on the table beyond sitting and waiting and doing nothing for eighteen months. So we are exploring those. We haven't ruled anything out.

I think that's the takeaway should come out of here is we are open to everything. So it's not like we're sitting here saying we're not going to do this, we're not going to do that. We had to say that arguably before this call or before this last couple of weeks when we've had the conversations with TSSP. But now that we have reached a settlement with them, the options are wide open. We have no limitation.

Speaker 12

That's helpful. Thank you.

Speaker 2

You're welcome.

Speaker 0

Our next question comes from Joseph DeNardi with Stifel.

Speaker 13

Hey, good evening, guys. Maybe, Drew, the commentary in the release about June bookings being up for a period year over year. Can you just talk about why that isn't a pretty bullish data point, maybe the quality of that demand in terms of price point? What exactly does that mean or revenues up for a period or just kind of absolute bookings? Thanks.

Speaker 6

Sure, Joe. Yes. So it was certainly a bullish time for those few days before things changed again. It was just looking at a segment count, so the number of people buying tickets and traveling, not the revenue. So I wouldn't read that far into it.

But yes, that was kind of when we were at our high point and really looking forward to what the rest of the year could be before about the June when it turned back down that you've heard from everyone else. That was a distant memory at this point.

Speaker 5

Would simply add that the key thing there was there were some key catalysts, right? There was Las Vegas coming online June 3, Universal Studios, Walt Disney World shortly after that. So there was that kind of grand reopening, if you will. And since then, just as Drew had mentioned, we lack kind of at least an obvious catalyst for what can bust through the ceiling that currently exists since we've already kind of reopened and now pulled back and or quasi opened. There's nothing obvious staring us in the face like a flip, a switch like we had in early June.

Speaker 13

Okay. That's helpful. And then maybe Greg or Scott Sheldon, I think the plan was last quarter that you would maybe have to shrink the fleet by 25 aircraft. Like how did the recovery in June inform that decision? And how are you all thinking about that now?

Speaker 7

Sure. I'll kick it off and of course to Scott or anybody who wants to add to it, Joe. I think what I'd say is in June, we remain cautiously optimistic. But we shortly in July, saw bookings coming down again. And it just goes back to flexibility and fleet flexibility.

And fortunately, we're in a position at Allegion here because of a lot of hard work in the past that we can be nimble with our fleet. And so as we think about the number of aircraft to retire in the future, we're kind of taking it day by day, so to speak, in a wait and see approach. We decided on up to seven aircraft today or recently. And that's because those aircraft made a lot of sense for us to retire as we compared their reliability, their age, their ability to generate additional cash as we compared their investments and things of that nature, we determined that these were good aircraft to put down at this point in time. And that's going to save on cost down the road, particularly on the heavy maintenance side.

And then the one last thing I may add just before perhaps turning it over to somebody else is that we still have flexibility with that 22 number hasn't changed. We still have that flexibility. Six are in storage and we'll continue to evaluate six more of those, excuse me, are in storage and then we'll continue to evaluate the rest the remaining 10 on a go forward basis and just try and be flexible and react accordingly.

Speaker 13

Thanks. I'll get back in the queue.

Speaker 2

Thanks, Joe.

Speaker 0

Our next question comes from Matthew Wisniewski with Barclays.

Speaker 4

Hi, thanks for taking my question. So I just wanted to come back to how you or the management is thinking about adding incremental capacity back. Are you managing the load factors? Or is the idea to managing and covering variable costs or some type of profitability level as you're adding incremental flights or taking them out? Any thoughts there would be appreciated.

Speaker 6

Sure. Yes, this is Drew here. And your latter point is exactly right. We're still thinking about cash basis, cash profitability as we're thinking about capacity. Kind of as Maury stated, there's not necessarily one load factor that drives or necessitates whether or not that flight will make money.

But that's very much where we're focused is variable cost. And as we start to gain margin on that, it becomes a lot easier to sprinkle in more peak day flying in more markets where required.

Speaker 2

Okay.

Speaker 4

And I guess kind of as a side of that, as ancillaries per passenger stayed relatively intact year over year, can you keep that rate going forward? Or is there something skewing that in the near term? Because if I'm wrong, that can set you up pretty well if ticket pricing does face some competitive pressures.

Speaker 6

Yes. Well, this has certainly been the largest test for our ancillary. Our thesis has always been that ancillary is much more sticky than the air component. And I think we've shown that over the last few months. We're still over 50 per passenger in air ancillary.

The third party such that things are open and available to sell for resorts and for auto will be there. And the co brand credit card has been phenomenal bolstering the third party as well. So I have confidence that the ancillary can continue to remain sticky and at levels we're seeing today.

Speaker 4

Okay. Thank you.

Speaker 2

Thank you.

Speaker 0

Our next question comes from Hunter Keay with Wolfe Research.

Speaker 11

Hi, how are you guys?

Speaker 2

Good, no, Hunter.

Speaker 4

I'm sorry.

Speaker 11

Hey, good to talk to you. I'm sorry, the call dropped for like five minutes in earlier scripted remarks. I'm sorry if you touched on this, I doubt it. But John and Maury, other than price, what are some of the conditions on a sale of Sunseeker or a scenario where you relinquish some portion of control of the project?

Speaker 2

Gosh, Hunter, I it's there's so zero opportunities now other than an occasional call that gets logged in. Again, the focus is on the airline. Today, probably wouldn't take much to do to get if it's got cash associated with it or I'd like to see us stay involved in the management because John and his are just so good at that stuff. But we really have just don't talk about it that much. And John's got this or that offer coming across the transom.

But in today's world, it's pretty hard to get even muster a reasonable offer.

Speaker 3

I think, Hunter, you can appreciate we kind of lose some negotiating leverage if we talked about what price we'd accept over the earnings call. So we won't go that far. But I guess the takeaways I mentioned earlier is that there is a willingness to have those kind of conversations and have any kind of conversation regarding any opportunity. So I think that had made some allusion to that, but we don't have any restrictions on anything. We're open to having any and all dialogue.

I have a phone call tomorrow that's an interesting one. And I have, as I say, I get at least one phone call a week. So it's one of those stories, stay tuned. That story is yet to be written. We just don't how it's going to play out.

And but we are open to any numerous options that are out there.

Speaker 2

Hunter, just a big picture statement. The strategy is solid and sound that we embark on here. We've sold third party revenues for twenty years. We've proven year in and year out that we can make money on that. You look at the strength in the West Coast Of Florida, of all the areas in this country, it probably is among the strongest Because the people going there are older and they have money and they're less affected by this and that's going to continue.

It's got a tremendous history. So the combination of that, the breadbasket, the feed we can bring to it from where we fly, all the markers are incredibly strong. While we're not going to put any capital into it at this point in time, longer term as a strategy, I think that what we're embarked on is a diversification that's second to none in the industry. And we've got a great head start with that asset. So we certainly want to stay involved in some fashion to feed ourselves and continue to enhance third party revenues.

So that's a good strategic That's

Speaker 5

great.

Speaker 11

Thank you. I appreciate that, Maury. And then, Bill, let want to talk to you a second about the IVT disagreement that you talked you mentioned. I assume that was them just not really cooperating with your vision of facilitating voluntary early outs. But more importantly, how does that impact your support or lack thereof on potential PSP extension?

How does that factor in? Thank you.

Speaker 4

Yes. I think, Ken, if you look at the strategy, right, so we had a really wide schedule out there. May, we canceled the ton off. We flew a lot more in the May. June was down, but it was relatively intact.

July year over year was down 10% maybe departures. You have a workforce that on the surface, it looks like everything is good. We're flying full schedules. But then you start to see spikes, flare ups. And just as Scott D.

Mentioned, what's the vision, what's the expectation for the back half of the year? And you just got to assume it's going to be bumpy. So that's kind of how we position this. Early on, I mean, were educating folks on what was our option, option A, which is let's go wide and so otherwise or B, which is consolidate. And so I think there's a middle ground there.

What the issue we had in July is we couldn't really grant a lot of short term leads because we needed the bodies and we were flying such a relatively healthy schedule. And so this is just to protect the off peaks. As far as round two, if that does come through, obviously, that's we're going to have to pivot and change the discussions. But if that doesn't hit, like I said, we still want to have these discussions. There is a solution here.

We proposed a number of different kind of creative ways in order to flex down and flex up to give these guys clarity on what snapback provisions would look like. And so it's just tough, like I said, on the surface, they just assume everything is great, we're just preparing for a very soft off peak period.

Speaker 2

Hunter, we've managed peaks and valleys consistently for years. So the idea that we can peak up is important to us because that's I've discovered a long time ago, you make more money on Sunday and you do the other seven days or the six days of the week and you want to carry those seats around for your profit potential. Same analogy applies to those peak periods where you our March is like 20%, 25% of our operating income in historic terms. So you need the bodies to do that type of flying. But now in this period, what we're our ask is, is that we spread that cost during the bottom end and we get less expense going forward.

That's cash management 101. So that's the ask. And most of our people are getting it. Some people, they just want to leave status quo and that's their call, that's their group to manage. And what you're basically saying is that the top guys are going to get taken care of and the bottom guys, we don't care furloughs or what happens in the industry.

So anyway, different philosophies for different people.

Speaker 4

Yes. And kind of the number around the $275,000,000 I mean, that really maintains the footprint. If you go above that, then there's going to be a consolidation of bases, which is painful. That's a longer term different strategy. But at the end of the day, it might warrant going there.

So this is kind of our first pass at it. I think until you start pushing notices and rosters of impacted folks, technically it's not real. And so we'll see how these folks respond. But at the end of the day, the two seventy five folks that's worth about 25,000,000 to $30,000,000 in payroll, but you give up upside from a network configuration standpoint.

Speaker 0

Thank you. Ladies and gentlemen, this concludes the Q and A portion of the conference. I'd like to turn the call back over to Maury Gallagher for closing remarks.

Speaker 2

Thank you all for your time. Appreciate it. Stay safe in the next ninety days. We'll talk to you in October. Thank you.

Speaker 0

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.