Allegiant Travel Company - Q2 2023

Transcript

Operator (participant)

Good afternoon, thank you for standing by. Welcome to the Second Quarter 2023 Allegiant Travel Company Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one 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.

Sherry Wilson (Managing Director of Investor Relations)

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, Gregory Anderson, President, Scott DeAngelo, our EVP and Chief Marketing Officer, Drew Wells, our SVP and Chief Revenue Officer, Robert Neal, SVP and Chief Financial Officer, and a handful of others to help answer questions. We will start the call with commentary and then open it up to questions. We ask that you please limit yourself to one question and one follow-up. The company's comments today will contain forward-looking statements concerning our future performance and strategic 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. With that, I'll turn it over to John.

John Redmond (CEO)

Thank you very much, Sherry, and 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 remains a key driver of our success.

Over the years, 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 sign-ups 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, 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 Sunseeker 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, 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. This 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 nights 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 Sunseeker 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 Sunseeker 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 Sunseeker 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 a $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 to begin laying the groundwork for our asset-light 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 1, for the Second Quarter of 2023. We remain committed to growing profitably while enhancing our offerings, driving customer satisfaction, and delivering increased value to our shareholders. With that, I'll turn it over to Greg Anderson.

Gregory Anderson (President)

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. 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's result 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 themes you are hearing from other carriers has been around leisure traffic. 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. 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 5 years. Our major system implementations are a key step in getting there, and I am happy to report SAP went live on July first, 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 Navitaire in late August. We delayed its go-live date to move any potential operational disruption to outside of our peak summer travel period.

Navitaire 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 Aerobus. 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 2-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. We are happy to have reached a formal tentative agreement with our mechanics, also represented by the IBT, more than 3 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 reengaging 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.

Scott DeAngelo (EVP and CMO)

Thanks, Greg. Our Second Quarter saw continued strong domestic leisure travel demand and capture that remained near our historic highs in 2022. Thanks to improved operations, a testament to the strong leadership of our Chief Operating Officer, Ken Wilpert, 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 booked 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 Allegiant in the next 12 months, and more than 30% said that economic considerations will actually make them more likely to fly with Allegiant 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 Allways Rewards loyalty program. Year to date, nearly 90% of our customer bookings have come from Allways 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 Allways 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, Allways Rewards members are 1.5 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 core air ancillary products, seats and bags, are 10-20 percentage points higher than that of non-members. Our most loyal and engaged segment within the Allways Rewards program is, of course, our co-brand credit card holders, who are 3 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 7 years, we have grown the program into a $100 million business unit, and we expect to double that in the next 3 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 Allways 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 2 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, 1 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 Allways Rewards Visa Card program, and in providing additional benefits through their exclusive partnerships and proprietary capabilities. Wrapping up, year-to-date, inasmuch 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. 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. With that, I'll turn it over to our Chief Revenue Officer, Drew Wells.

Drew Wells (SVP and CRO)

Thank you, Scott. 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 $0.005 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, we are not immune to this. Three months ago, we talked about trimming about 2.5 points of capacity from the summer schedule, 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 of capacity. Diving into revenue a bit, the strength in the quarter was well-balanced, as yields 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 the 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 9 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. 5 new routes and 3 reintroduced routes started service this summer, including growth in Portland, Oregon, Provo, Utah, and Denver, among other cities.

I'm extremely happy that all 8 held their own, with some even exceeding system average profitability from the start. Additionally, last month, we announced 6 new routes for the winter season, mainly focused on Florida, with 1 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, Navitaire 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 and flat to up 3%. With that, I'd like to turn it over to Robert.

Robert Neal (EVP and CFO)

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, up 8.6 over the prior year on 1.3% higher capacity. Our non-fuel 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 first.

Similar to our last call, unit costs were pressured in comparison to the same period last year by lower productivity, which accounts for about 3 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 2.5 points of the increase over the Second Quarter last year, and 2 points of CASM 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. 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 are increasing our estimated airline earnings per share by $0.75 at the midpoint to $11.75. The increase in expected full-year EPS is fully attributable to a $0.10 decrease in our full-year estimated fuel cost per gallon from $3.00 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 and 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. 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. 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 2 Airbus A320 aircraft into operation. Ended the quarter with 91 A320 and 35 A319 aircraft in service.

We had 1 additional A320 aircraft owned and undergoing induction work as of the quarter end. Expect to purchase 2 additional A320 aircraft during the remainder of 2023. On the 737 fleet, updates from Boeing indicate that our first 2 MAX aircraft, which were scheduled for delivery at the end of this year, will each be delayed by approximately 4 weeks, leaving 1 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 2 aircraft per month throughout 2024.

Our updated full-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.

Operator (participant)

Okay. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one 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 Duane Pfennigwerth with Evercore. Your line is open.

Duane Pfennigwerth (Managing Director, Airline Analyst)

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?

John Redmond (CEO)

Hi, Duane. Good questions. I think when you look at that, you have to kind of look at it by year. In 2024, we'll start with a full year of 2024, you're probably looking at something in, in the range of, I'd say maybe 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%-18%. Could get as high as 20, but probably in that range of 12%-18%. When you're looking at the out years starting with 2025, you're probably looking at 20%-25% would be, you know, more, more normal as we move forward.

You know, just to give you, you know, some color on that, when you look at the roughly 40,000 group room nights, room nights that have already been booked, about 26,300 of those fall into 2024. That's roughly, you know, more than 10%, slightly over 10% of the total room nights that we would have in a given year. That kind of gives you a good barometer, and that's why I think that's where it's going to fall. Again, we're dealing with a brand and a property that hasn't existed to run these percentages as we are, is, is incredibly impressive. I think that's kind of like the 25% range would be where it starts to peak in 2025.

Gregory Anderson (President)

John, on the, on the group rates, they're $250-$300 or thereabouts?

John Redmond (CEO)

Yeah, they've been averaging around 290-ish when you look at all 40,000 room nights. 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. The rates we're, 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 2025, 2026. Just as another data point, we have group room nights that have already been booked into 2027.

Duane Pfennigwerth (Managing Director, Airline Analyst)

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

John Redmond (CEO)

I think three Q, we're talking about the $15 million, which was, 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.

Gregory Anderson (President)

Yeah. I, I think we had... Oh, go ahead.

John Redmond (CEO)

Sure.

Gregory Anderson (President)

Like $5 million-$7 million, I want to say, between the first and Second Quarter, per quarter.

John Redmond (CEO)

Yeah.

Duane Pfennigwerth (Managing Director, Airline Analyst)

Sorry, that $15 million, when you're sort of up and running with a full Fourth Quarter, what does that, what does that look like?

John Redmond (CEO)

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. We would provide operating guidance for the resort at that same time. Right now, we are only providing the OpEx piece before opening. 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. As you can see, we're running much better even when you blend group and transient.

Duane Pfennigwerth (Managing Director, Airline Analyst)

Okay, thank you.

John Redmond (CEO)

Thanks, Duane.

Operator (participant)

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

Savi Syth (Managing Director, Senior Airline and Transportation Equity Research Analyst)

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

Gregory Anderson (President)

Hey, Savi. Sure, it's Greg. thanks for the question. You know, the, the bonus in general, as we, 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, how is it difficult to, 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." 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, that 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 2 pieces. Let's the Schoolhouse being one, Savi, and then I'll talk about kind of the net pilots and the attrition that we've been seeing. Schoolhouse, as we've seen over the past couple of months, a terrific increase in the number of pilots coming through the schoolhouse. I mean, classes are full. I think beginning the last 3 or 4 classes have been full, so about 20-25 per class.

Before that, just for perspective, in the first, first part of the year, we were seeing roughly 12 to 14 per class. Really encouraged by what we're seeing there. Our team, led by Ty- Tyler Hollingsworth, has really kind of turned that around and focused on a lot of, on several different pathway programs and recruiting the right type of pilots that wanna be at Allegiant, that, that sees this, you know, this unique quality of life setup. As we look forward to the rest of the year, we're-- 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. In terms of staffing, just to maybe put some guardrails around that and around the attrition or the, the notices that we were receiving.

I'd say, like, in April, May, it was roughly, we were receiving notice about, you know, nearly a pilot a day, I mean, just to put it into simple terms. Since June, since early June, that number has been cut down to a quarter of that number. We, 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, you know, us going out there and trying to make the improvements we can outside of collective bargaining.

But again, I wanna 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.

Savi Syth (Managing Director, Senior Airline and Transportation Equity Research Analyst)

That's, that's super helpful color. If I might, on the MAX deliveries and, and just early thoughts on, on 2024. Is 2024 gonna be another year where, you know, capacity is somewhat constrained as, as you kind of make these investments to operate well and kind of the MAX uncertainty? How are you thinking about, like, what, what type of kind of capacity growth you could target in, in 2024, recognizing it's still very early?

Drew Wells (SVP and CRO)

Hey, Savi, Drew here. You know, 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 MAXs, though, and, you know, the constraints we have today, we'll still have training requirements that will drive through all of 2024. 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 historical run rate, but I might pull that back a little bit.

Robert Neal (EVP and CFO)

Yeah, Savi, it's 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. So we haven't come out with a 2024 fleet plan specifically, as we wanna wait to gain some certainty around the MAX delivery schedule.

Gregory Anderson (President)

Hey, Savi, I'm just gonna, this is Greg, I'm gonna add one more quick comment. The, I, I mentioned in my remarks, over the next 5 years, we're planning to be 200-plus aircraft. I just wanna re- 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, and, and most important, in our people. We believe we're gonna we have a path to get there. We, we don't know the exact cadence, but that's what we're planning on. So a lot of the moves we're seeing is, is us getting prepared for that, and we believe that we're able to continue to, to grow and grow profitably as we hit that 200-plus aircraft number in the next five years.

Savi Syth (Managing Director, Senior Airline and Transportation Equity Research Analyst)

All very helpful. Thank you.

Operator (participant)

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

Andrew Didora (Managing Director, Senior Airline and Transportation Equity Research Analyst)

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 new, were the pilot retention bonuses paid out in June part of that number? Then I think you were including maybe about $0.0033 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?

Robert Neal (EVP and CFO)

Hey, Andrew, it's, it's BJ. I'll start, and Greg, if you wanna jump in on the second part of that. 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 2 months of those accruals, and so moving throughout the rest of the year, you'll get the burden through, you know, each of the 3 months in the quarter. Yeah, you're, you're right, kind of low, low double-digit growth year-over-year on unit costs for the back half of the year.

Gregory Anderson (President)

Hey, 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, we've locked in the rates at that 35% for all 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.

Andrew Didora (Managing Director, Senior Airline and Transportation Equity Research Analyst)

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

Drew Wells (SVP and CRO)

Yeah, Andrew, I'm sorry, I don't have a lot in front of me, I'll just say, you know, it's real early to give kind of CASM guidance on 2024. 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 A320. You know, I hope by the time of the next call, we've got a little bit more color to share with you. Apologies, it's just a little early to give that kind of guidance.

Andrew Didora (Managing Director, Senior Airline and Transportation Equity Research Analyst)

Got it. Maybe if I could sneak one more housekeeping 1 in. I saw on your, your guidance, interest expense came down a little bit. I think in your pre-prepared remarks, you said that you were going to take on a bit more debt through, through year-end as the MAXs were delivered. Just, just curious, what was the, the driver of the lowest- lower interest expense there?

Drew Wells (SVP and CRO)

The driver of the lower interest expense this year? Yeah, so a little bit of it is we, we prepaid $61 million in, 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. 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, in the final two quarters of the year. There's still 1 MAX delivery at the end of the year.

Gregory Anderson (President)

Andrew, I'm just going to add, just to 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. Something else that I just want to remind our investors and our street is the opportunistic nature of the 737 deal and the timing, and particularly around, you know, the tax law and bonus appreciation, depreciation, excuse me, 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, you know, moving forward with this deal. That'll offset cash taxes in the future.

Andrew Didora (Managing Director, Senior Airline and Transportation Equity Research Analyst)

Thank you.

Operator (participant)

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

Catherine Kleros (Executive Director & Senior Airline Equity Research Analyst)

Good afternoon, everyone. This is Catherine Kleros on for Robbie. 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.

Drew Wells (SVP and CRO)

Yeah, I mean, when, when, when we refer to peak, we're, we're exclusively talking about, you know, domestic leisure peak, which is, is traditionally around school holidays, right? So your spring break, summer, and holiday timeframe. I think most would describe leisure peak as, as the same, and, and I think as, and I'm speculating a bit here, other carriers are having a bit more leisure exposure, they're, they're kind of coming around to, to how those dynamics are working. One of the great things about peaks, though, is there is an excess of, of demand generally, and, and even in periods, thinking pre-pandemic, when, when capacity was quite elevated, particularly in the off-peak, capacity could... sorry, peak capacity could soak up that demand pretty well. I don't anticipate com- competitive dynamics to change meaningfully.

The peaks are, are peak for a reason. In general, I, you know, I believe it's, it's a good thing, but, you know, the, the demand patterns fit the Allegiant model just exceedingly well, and something like, like we mentioned, that we've catered to for, you know, 20-plus years. You know, we're, we're built for, for exactly this kind of dynamic.

Catherine Kleros (Executive Director & Senior Airline Equity Research Analyst)

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 do you think demand really is? You know, maybe how you've seen the ULCs perform in past recessionary environments. Thank you.

Gregory Anderson (President)

Thanks for that question. For our 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. 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. Amongst our core customers, it's fairly inelastic because they're flying to and from family and/or a second home.

Drew Wells (SVP and CRO)

Yeah, but, but, you know, more broadly, you know, the, the customer that, that we serve is generally still a very price-sensitive customer. You know, less so in, in summer peaks or, or peaks in general, when you, you have a thicker demand pool to, to choose from. Certainly in the off-peaks, you, you still see that. You know, just by, by way of example, while we're already pricing higher, closer in, taking, 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.

There, there is a pretty heavy mix on our aircraft that, that can be tricky to revenue manage, and I, 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, that's right for all of our customers.

Operator (participant)

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

Tom Fitzgerald (Senior Analyst, U.S. Airlines and Transportation Equity Research)

Hi, this is Tom Fitzgerald on for Helaine. 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? Then just any, 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.

Drew Wells (SVP and CRO)

Yeah, yeah, great question. We called out three months ago that Vegas had kind of an outsized portion of that, that 2.5%. You know, April and May still had pockets of struggles, as there were some concentrated days and periods of impact. That materially turned around in June and July, and I think Vegas went exceedingly well, performed exceedingly well through the summer. Outside of some heat-related concerns that there's not a lot anybody can do there, I'm extremely happy with how Vegas panned out.

I think more broadly, as we, as we think about the schedule moving forward, you know, reviewing things from, from fire breaks and, and adding some slack into the schedule that provides that recoverability, especially as you think about Florida and pretty routine thunderstorms coming through at, you know, 3:30 every afternoon. We were better balanced about, you know, viewing that in its entirety, thinking about how, how a fire break relates to extended turn times and, and where those minutes actually matter. You know, perhaps, at least to me, one of the most impactful things, was thinking about the, the overnight touch time for our, our mechanics and, 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.

You know, both starting on time and, and thinking about how we could recover through the day when, when things start to go awry. I think we got close to the right answer this year, there's a lot more work for us to do to, to continue to refine and, and maintain, our, our place towards the top of the industry.

Gregory Anderson (President)

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 Ken Wilper are heading up. 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 exit the gauntlet of the summer peak flying, you know, the teams all come together and do a post, postmortem around, around a summer debrief. They look for process efficiencies and ways to get better. That'll be just around the corner. We'll continue to, you know, step up our game in any way we can.

Tom Fitzgerald (Senior Analyst, U.S. Airlines and Transportation Equity Research)

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

Drew Wells (SVP and CRO)

Yeah, I'll probably disappoint you a little bit as we get into kind of cadence related. You know, the two things I'll, I'll point out, one, you know, I, I would look toward last year's comp set, and, and kind of ASM cadence to, to help guide how you think about the, the third and, and Fourth Quarter. The second I'll point out, and maybe not one that, that I communicated well or, or maybe even appreciated enough as we talked about, the last 9 months previously, was the, the Second Quarter of 2022 cadence. I think there was still a fair amount of recovery from the variant that, that we experienced in the first half of that quarter.

That, you know, not to disparage the 2 key results at all, but probably helped bolster the, the relative traffic year-over-year there a little bit. I, I, I would, you know, kind of think about those two pieces in, in concurrence as, as you think about the last 9 months in, in totality.

Operator (participant)

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

Michael Linenberg (Senior Equity Research Analyst, Airlines and Transportation)

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 I-- 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, a reasonable sort of ballpark profit margin?

John Redmond (CEO)

Michael, I do. I, I think those, those EBITDA, EBITDA margins are still doable. It's kind of like when you see even happen on the air side, right? With the CapEx or, or, or CASMex increasing, well, revenue is outpacing the, the CASMex growth. You're seeing the same thing happen on the, in the resort world, where the cost increases are way more than offset by the room rate increases, increases in that market. It, very encouraging and, and Florida in particular, you know, it, it's just been extremely strong. Obviously, the, the hotel industry throughout the US has been, but Florida, it, it's a shining star when it comes to what's going on.

You know, I, I, I think the EBITDA margins that we were looking at early on and were out there on the projections, I think there's a potential for those to be even much stronger.

Michael Linenberg (Senior Equity Research Analyst, Airlines and Transportation)

Very good. And then just a 2nd one for you, John, and probably Greg as well, and maybe the team. You know, we've seen, you know, an announcement by Frontier to, you know, take up some of the assets of the JetBlue Spirit proposed merger, you know, assets that they would potentially divest. At this point, it looks like it's just LaGuardia slots. Obviously, there's, 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, of interest to Allegiant?

Gregory Anderson (President)

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

Michael Linenberg (Senior Equity Research Analyst, Airlines and Transportation)

Very good. 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. 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, what are you seeing amongst your, 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 color on that would be great. Thanks for taking my question.

Scott DeAngelo (EVP and CMO)

Absolutely, thank you, Michael, because the last several weeks we have asked exactly that. 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 6 months, or have you traveled internationally in the last 6 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.

John Redmond (CEO)

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

Scott DeAngelo (EVP and CMO)

That's right. It hasn't been a zero sum as much as-

John Redmond (CEO)

Exactly.

Scott DeAngelo (EVP and CMO)

Now it's open, and they've taken an additional trip.

John Redmond (CEO)

Yes.

Scott DeAngelo (EVP and CMO)

Great point.

John Redmond (CEO)

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

Michael Linenberg (Senior Equity Research Analyst, Airlines and Transportation)

Great. Very helpful. Thanks, everyone.

Operator (participant)

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

Conor Cunningham (Director and Senior Equity Research Analyst, Travel and Transportation)

Hi, everyone. Thank you. On the doubling of the Allways 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, you know, the potential of Sunseeker...

Scott DeAngelo (EVP and CMO)

Yeah

Catherine Kleros (Executive Director & Senior Airline Equity Research Analyst)

... contributing. Just curious, the, the, the ramp there, going forward. Thanks.

Scott DeAngelo (EVP and CMO)

Absolutely. The, the, the comment that in the next 3 years will in effect double from, you know, roughly where we ended last year at $97 million, gonna post over $100 million, is largely based without Sunseeker assumed in it. It is from the, 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. I think John's comments in the beginning represent upside that could even, you know, make it faster. My, my comments were not based on any additional goodness, which we'll absolutely get from Sunseeker opening.

John Redmond (CEO)

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

Conor Cunningham (Director and Senior Equity Research Analyst, Travel and Transportation)

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

John Redmond (CEO)

You know, we could talk about a cash contribution or contribution. You, you used that term. You know, you're talking about EBITDA. We don't intend to ever be negative on a quarterly basis. I mean, there's no time we, we, we forecast any period that we would have a negative EBITDA. I think from a cash standpoint, you're going to be positive throughout the year with the, the, the added upside in the out years. We purposely priced the product that you see out there for 2023 and 2024 below market. Even when you see these rates, believe it or not, we're, we're below market because we're, we're putting a new brand and a new property into that market.

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 that rate, that those rates accelerate up. We purposely have underpriced, and even with that purposeful underpricing, those ADRs are impressive, but you will see those, you know, ramp up significantly for sure in the 25 and out.

Conor Cunningham (Director and Senior Equity Research Analyst, Travel and Transportation)

Appreciate it. Thank you.

John Redmond (CEO)

Yes.

Operator (participant)

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

John Redmond (CEO)

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. 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 of 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. We will have no restrictions, limitations, what have you, from a system standpoint, 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.

We've 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 gonna end up, you know, tomorrow with those agreements. Again, very bullish about the out years for this company. Very exciting times ahead, and stay tuned. Thank you very much.

Operator (participant)

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