ALGT - NASDAQ

Good morning, and thank you for standing by. Welcome to the Q3 2023 Allegiant Travel Company Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] 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. Please go ahead.

Thank you, Lisa. Welcome to the Allegiant Travel Company's Third Quarter 2023 Earnings Call. On the call with me today are Maurice Gallagher, the company’s Executive Chairman and CEO, Greg 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. And with that, I'll turn it over to Maurice.

Thank you, Sherry, and well, hello again. Some of you may recognize my voice. I hope you've all been well the past 1.5 years. It's good to be back. As you saw in our release, Allegiant Airlines generated an operating profit in Q3 after adjustments of our 11th quarter in a row of airline operating profits beginning in Q1 of '21. Our year-to-date 2023, 13% airline operating margin leads the industry for those that have reported. And we have achieved these results while continuing to invest for the future. During the past quarter, we've installed two substantial management systems, SAP and Navitaire, both are operating as I write this. As you saw at the top of our release Sunseeker will open December 15. It's been a five-year effort, almost three years longer than planned, but the wait will be worth it. Micah Richins, our Sunseeker President and his cohorts, Jason Shkorupa and Paul Berry, all MGM Las Vegas veterans are putting the final touches on this magnificent project. The critical reason I endorsed Sunseeker was the quality of this management group. Our ability to attract these gentlemen to convince them to work for a startup, move their families to Florida, speaks volumes of their belief in this project. And Micah is here with us today, I'm happy to announce to answer any questions. Our first MAX 8200 is scheduled for delivery in early 2024. Our MAX fleet will have a premium seating of just over 50 of our 190 seats. And we'll improve our economics in the coming years, besides the benefits from the quality and number of seats that will have a substantially improved fuel burn compared to the Airbus, improved reliability, maintenance time, while maintaining a comparable Airbus ownership expense. We're excited about onboarding the MAX in coming years and beyond. During the past few months, there have been discussions concerning the structural shift in our industry, particularly as it pertains to the ULCCs. We stirred in Frontier invented this industry segment during the past 20 years, focusing on low cost and high growth for our leisure customers. There's been and still are differences between our business model and the Frankie-centric model. At the end of the day, you judge us on our profitability. Costs are a part of the equation, but having the lowest cost does not guarantee success. We at Allegiant have a flexible model focused on flying when the customers want to fly. Or said differently, we minimize our flying in off-peak periods and peak up for the peak periods. That has been our model for over 20 years. In addition, our direct-to-customer sales approach is less expensive and allows us to capture important customer information. I might add we have over 18 million names in our customer database at this point. It also allows us to capture more of a leisure customers wallet with our third-party revenue program. During the past five years, we have prioritized enhancing our brand as well. These efforts include adding Allegiant Stadium, our soon to be open Sunseeker Resort, our best in show completion percentage, and our number one ranked credit card program. All are difference makers. These investments have allowed us to maintain unit revenues that have been consistently higher than the high utilization ULCCs. Today, as much as 40% higher. As we all know, revenue production is the issue of the day. Our revenue production is one of the critical differences that separates us from the ULCC crowd. Our network structure is also different. We have operated in an out and back schedule since our earliest days. It's much simpler to manage than the traditional hub and spoke. Each route stands alone. We monitor what we believe its capacity should be and hence its profitability. We are diligent in managing individual route earnings. We have had a 22-year history of consistent profits and growth with this scheduling approach, industry-leading profits, I might add. Additionally, with our focus on smaller cities to sun and find destinations, we've been able to own the majority of our markets. 75% of our routes have no direct competition. As I said, we own these markets. This contrasts with the 90% overlap the high utilization ULCC is having in our networks. Lastly, we have identified as many as 1,400 new domestic routes that we could add in the coming years, plus the addition of our international partnership with Viva. More subtle difference has been the pace of growth. During our 22 years, we've grown to 127 aircraft or an average of 5.7 per year. Others in this space have grown at a much faster pace. To date, adding aircraft almost 3x faster per year than we have. Still others have planned deliveries in the coming years that have double digit yearly ads with a three handle if you do the math. Fast growth while attractive to the audience on the phone here creates potential operational problems including a concentrated fleet of the same aircraft type which has historically been desired but today has become a burden with the Pratt Motor problem. Operational size and complexity that most likely outpaces management experience, and lastly a pronounced competitive response given the network overlap with the larger incumbent carriers. We are built for the long haul for consistency. We have a bright future. I understand there's a new label as well for ULCC circulating LMAs or low margin airlines. That description does not define nor fit our model. At this time, given the names seem to be involved, given new names, I'm proposing a new label for us. No more ULCC and certainly no LMA. Our new label is PLFC, Profitable Leisure Focus Carrier. That's what we're going to be called from now on. We are in a class of our own. Lastly, let me thank our team members. There's been a difficult 3 to 4 years. They have been supporting our passengers with safe, reliable, and friendly service during this time. They have run the best airline this year, an industry leading 99.8% completion factor. In today's era of poor service and canceled flights, they have put us back where we belong, at the top of the pack. Thank you very much. Greg?

Maury, thank you. Great to have you back. As we experience broader macro uncertainty around geopolitical risk inflation and high interest rates there also appear to be signs of structural changes happening in our industry. In the face of these uncertainties, Allegiant is uniquely set up to continue to reshape the leisure travel sector. We have been strengthening our foundation to do just that. Operational excellence underpins everything we do and our year-to-date controllable completion of 99.8% demonstrates that also resulting in a staggering reduction of nearly $100 million or 75% in total IROP costs year-over-year. Our disciplined approach to costs and particularly our variable cost model gives us a competitive advantage as we adjust capacity to the environment. Whether day of week month of year or route by route, our planning teams are expertly matching capacity with leisure demand. As leisure demand seasonality has more normalized we are working towards a measured approach to take utilization higher during the peak demand periods or in other words peak the peaks. For instance, average aircraft utilization was seven hours during this past summer increasing that by one hour would drive roughly $50 million more in earnings. The composition of our mix fleet balanced with both low per seat and low per trip costs will further benefit us by deploying the right gauge aircraft in the right markets at the right time. Our 737 MAX aircraft will strengthen our fleet flexibility. It's nearly 20% fuel burn advantage yet similar ownership cost profile translates into incremental earnings power of more than two million more per Max aircraft when compared to our existing fleet. Furthermore, we are excited to expand premium sittings for our customers. Every MAX aircraft delivered will enter into service in the Allegiant extra configuration while the retrofit of the in-service A320 has already begun and will complete over time. Our Allegiant Extra product continues to deliver as it is in high demand with our customers and driving meaningful value. During 2023, we expect to fly nearly 18 million customers. Notably, we were the most convenient and only nonstop option available on approximately 75% of the routes from the communities we serve. Our direct distribution strategy coupled with our continued ascension of our brand is unlocking deep and long-standing relationships with our customers. On an annual basis nearly two-thirds of our customers are repeating their experience with us 12 million of whom are members of our award-winning Allways rewards fueling the amazing growth of our aspirational loyalty program that Scott will discuss momentarily. Our continued investments in technological upgrades to our foundational systems such as SAP Navitaire, Trax and NAVBLUE not only optimize scale and provide new capabilities they also free up development resources for strategic differentiated products to drive more revenue or reduce costs. Furthermore Navitaire will unlock international expansion for us into coveted beach destinations in Mexico alongside our joint venture partner Viva Aerobus once we can secure the necessary government approvals. Each of these initiatives mentioned have or should provide significant long-term benefits for the company. However, none have near as creative impact as Team Allegiant. As we listen and learn from our team members across the system, I am constantly energized by their commitment and their passion. They are dedicated to taking care of our customers and each other. And while earlier this year we ratified and extended two of our four labor agreements we still have two to go one with flight attendants and one with pilots. I want to reiterate management's commitment to getting agreements in place that our flight crews will be proud to support. What Team Allegiant has accomplished this year is truly remarkable. While today our broad footprint serves 125 cities with over 550 routes throughout the United States we are positioning to grow our airline profitably as the environment allows. Allegiant's business model and the role we play in the communities we serve has netted us into the fabric of the nation's leisure travel industry. We have identified 1400 plus incremental routes that fit beautifully into the Allegiant network. As we expand in those markets we further solidify the important and necessary part we play in the travel industry throughout the US. And in closing I want to extend my sincere thanks to all of our team members. Together we are running a great airline. Together we have meaningfully strengthened our foundation and together Team Allegiant has proven to be unstoppable. Thank you. Scott?

Thanks, Greg. Third quarter saw a continued post-pandemic normalization of domestic leisure travel demand. We saw peak demand levels during July when we top bookings and load factor versus last year's historic highs we saw slight demand decline during August versus prior year as back to school came mid-month for many of the cities we serve and summer vacation season came to an end. And we saw further modest demand decline in September versus prior year as we officially entered the off-peak leisure travel season. As you all know our business model has always focused on the domestic leisure traveler and these peak versus off-peak ebbs and flows in domestic leisure travel demand regularly existed before the pandemic and a year removed from unprecedented levels of pent-up revenge travel demand in 2022 the same familiar ebbs and flows have returned this year. That said, there are two areas of potential domestic leisure travel demand headwinds that are being talked about a lot in the industry and that I'd like to address based on what we're seeing and hearing from our customers at Allegiant. The first is the economy. We conduct a weekly customer sentiment tracking survey where we ask our customers how they feel about the state of the economy. At the beginning of the third quarter about 50% said they felt the economy was getting somewhat or much worse. In the past several weeks, that number has grown to nearly 70%. However, during that same time span as captured within the same survey the portion of customers saying they intend to book air travel in the next 90 days has remained virtually unchanged. We believe this seeming contradiction can be easily explained by the majority of our customers who say they are traveling to visit friends or family as well as by the material portion of our customers who say they are traveling between a primary residence and a second vacation home. As we've stated in the past, it's been our experience that these remain the most reliable and resilient forms of leisure travel during economic downturns. The second area is international travel. For the past quarter, we've also surveyed our customers weekly on this topic. Consistently, up to 20% of our customers do say that they either had traveled or planning to travel abroad this year. However, the vast majority of those nearly 90% said that their international travel is in addition to not in substitution of their domestic leisure travel plans. While these observations may be different than what other airlines are seeing or saying it likely speaks to Allegiant's differentiated low-utilization business model with a focus on selling our all-nonstop route network direct to consumers under a surging brand and winning loyalty programs that are unique and their ability to engage and reward the domestic leisure traveler. Speaking of our loyalty programs, our most lot and engage segment within the Allways Rewards program is of course our co-brand credit card holders. Third quarter year-to-date these cardholders have exhibited 11% greater spend on the card on a per cardholder basis versus last year. In addition, our co-brand cardholders continue to exhibit strong travel frequency and spend with net revenue burped up 10% versus prior year. Through third quarter total co-brand credit card program compensation has been $88 million which is 14% higher than last year and puts us well on our way to surpassing $100 million in total program compensation for the full year. Our Allways Rewards noncredit card program also continues to show strong positive impact on customer behavior. Third quarter year-to-date nearly 13 million Allways Rewards member passenger segments have been booked that' 17% more than last year and for the same time period spend per member is about 5% greater than last year. Finally as Maurice mentioned completion of enterprise-wide systems implementations that provide a modern technology foundation for all areas of our business will free up technology development capacity for smaller but nonetheless critical strategic enhancements to our website mobile app and loyalty programs helping us supercharge our ability to drive greater revenue outside the aircraft and high-margin third-party products and loyalty program partnerships. We believe that these enhancements enable us to further differentiate Allegiant and further diversify the ways we drive revenue. And with that, I'll turn it over to our Chief Revenue Officer, Drew Wells.

Thank you, Scott, and thanks, everyone, for joining us this morning. I'm extremely pleased with the record third quarter performance of $565 million in total revenue, growth of nearly 1% on system ASM reduction of 0.4%. This combination produced a TRASM of $12.78, which vested any previous third quarter and grew year-over-year by 1.4%. Our commitment to matching capacity and demand set us up for success in the third quarter with nearly 45% of our scheduled ASMs coming in July and in September having just more than half of July flying. However, we are still meaningfully constrained in the best demand period, limiting our ability to truly match with appropriate capacity. Despite the relatively outweighted July level of flying, our utilization is almost 2.5 hours per aircraft per day lower than 2019, lower than any years since 2015 when MD-80s grew over 60% of our ASMs. We have proven the ability to achieve peak line and as we will always schedule peak periods to the first operational constraint, either aircraft or crew, expect to restore utilization alongside the release of those constraints. As we continue to learn what the new normal means for the travel industry, one component of pre-pandemic travel has firmly returned, the gap between peak and off-peak performance. By way of example, Saturdays and post Labor Day, September 2023 were approximately 30% worse than July Saturdays in terms of unit revenue and in line with 2019's peak trough variance. Last year, that figure was just 15% worse. And as one would expect, the combination of outperforming off-peak periods in late 2022 and current year demand normalizing creates a tough environment for year-over-year figures. This makes me even prouder of the results we generated. A significant part of this was continued success of our air ancillary products, which grew approximately 10% on a per passenger basis year-over-year. First and foremost, our learning and experimenting with bundled ancillaries continue to show incredible strides. Additionally, Allegiant extra contribution on a per flight basis has improved year-over-year in every quarter despite increasing the number of configured aircraft. We will end the year with roughly 11% of the fleet configured for Allegiant Extra and expect that to grow to nearly 30%, of the year-end 2024 fleet. Underscoring both in air ancillary at large are the expected improvements of Navitaire, one of the ramifications of specific use case internal development is some mismatch of existing capabilities versus the off-the-shelf products. I truly believe this is a significant signal of strength for our internal capabilities that will become supercharged in the future state. So while we still have immense confidence in the upside to come with Navitaire, we actually expect to see some slight headwinds into the fourth quarter due to a short-term small loss of functionality. I believe it's worth reminding that the entire leisure demand ecosystem remains well above pre-pandemic levels with July roughly flat with 2022 and high teen percent above 2019. In fact among carriers reporting thus far Allegiant is the only carrier of double digits in both capacity and unit revenue year-over-year both in the third quarter and year-to-date through the third quarter. We are also seeing some normalcy as we shift into 4Q and expect a TRASM reasonably in line with pre-pandemic historic median sequential change while certainly off from the extraordinary 4Q 2022 comp it should still produce a better 4Q TRASM than any pre-pandemic fourth quarter and the last nine months 2023 TRASM higher than the last nine months 2022. Additionally, there is some growth through the fourth quarter around 5%. This should put full year scheduled service capacity up approximately 1.5% versus full year 2022 while system capacity should be approximately plus 1.8%. The growth in the quarter is focused in two areas: weeks with large forecasted cost per gallon decline like in October and holiday weeks which will extend into early January 2024 as well. As I mentioned even with the growth holiday flying will still be lower than we can ultimately desire. However, we believe we struck the right balance of profitability potential and operations within the limitations present particularly after 2022's weather impacted holiday operations across the industry. Further we are treading carefully with capacity in early 2024 with so many moving parts Boeing deliveries crew polls for transition training and persistent elevated fuel among others. I expect the first half of the year to be fairly flat with a full year target of up mid-single digits. The holiday weeks as with all peaks have shown incredible resilience. Even Labor Day in September was a record. I maintain high expectations for holiday performance while expecting normal leisure softness around them. And with that, I'd lie to turn it over to Robert.

Thanks, Drew, and good morning, everyone. This morning we reported our third quarter 2023 financial results which included an adjusted consolidated net income of $2.7 million and an adjusted earnings per share of $0.09. Included in that number is approximately $6 million in costs related to, resort operations ahead of opening our Sunseeker property later this year. Adjusted net income for the airline was $7.9 million yielding an adjusted airline earnings per share of $0.31. Total operating revenue during the quarter was $565 million up approximately 1% over the same quarter last year and the highest of any third quarter in our history. This was on a slight capacity reduction of 0.8% resulting in TRASM of $0.1278 which was 1.4% higher as compared to the same quarter last year. Fuel costs increased sharply beginning mid-August driving a September cost per gallon 27.5% above July. This brought our third quarter cost per gallon to $3.09 15% above the prior quarter and brings our estimated full year cost per gallon to $3.12 an increase of $0.22 from the prior guide of $2.90. Adjusted non-fuel unit costs were just under $0.085 which was an increase of 9.5% over the third quarter of 2022. Our non-fuel unit cost increase was driven by approximately seven points in wage increases for frontline employees inclusive of our pilot payroll accrual which was in place for all three months during the quarter. Other drivers of the unit cost increase were 1.7 points from lower asset utilization and approximately 0.5 point related to inflationary cost in aircraft maintenance and stations and the rest from a handful of other items. Assuming an estimated fuel cost of $3.12 per gallon for the full year we are expecting an adjusted airline earnings per share of approximately $8.15 at the midpoint down from $11.75 at the midpoint of prior guidance. Fuel costs drive a reduction of $2.40 per share and the reduced off-peak revenue makes up most of the remaining $1.20. As Maury noted, opening of Sunseeker has shifted by about two months. And as a result, we are now expecting only about two weeks of revenue production during the year, which would take our full year Sunseeker guidance to the loss per share of $1.75 as compared to our prior estimate of $1.20. Although I'm pleased to see significant improvement in 2023 over the prior year with respect to financial performance, we still have work to do to return to sustained industry-leading margins. With the introduction of a new fleet type alongside a volatile fuel environment and the normalization of leisure demand patterns, we expect to take a conservative and measured approach to growth during next year. We've made significant investments in the business this year, and we remain confident these investments will deliver expanding margins in the coming years. On the balance sheet, we ended the quarter with net debt of $1.3 billion and just under $1.3 billion in available liquidity, which included $1 billion in cash and investments and $280 million in undrawn revolvers. In addition, we are pleased to have more than $400 million in committed financing for upcoming aircraft deliveries and pre-delivery deposits. We refinanced seven A320 aircraft during the quarter and used proceeds towards this morning's prepayment of a $150 million bond, which was scheduled to mature in 2024. With committed financing covering the vast majority of our CapEx obligations up to the second quarter of next year and our largest 2024 maturity now repaid, we expect to maintain liquidity at the greater of two times our air traffic liability or $850 million at year-end. Third quarter airline capital expenditures were $157.6 million, which included $112 million in aircraft inductions and pre-delivery deposits, $45.5 million in other airline CapEx and deferred heavy maintenance spend of $14 million. Capital expenditures related to Sunseeker were $71.6 million. Our guidance today reduces our full year 2023 estimated airline CapEx, excluding heavy maintenance to approximately $590 million largely due to the timing of aircraft deliveries shifting some of this spend into 2024 and 2025. Turning to fleet. We inducted one A320 aircraft during the quarter, which was owned on property at the end of the second quarter. We expect two additional A320 purchases during the fourth quarter before we begin taking deliveries of our 737 MAX order book in early 2024. During the quarter, we reached agreement with Boeing on an amendment to our order for 50 737 MAX aircraft, whereby, the firm aircraft are now scheduled to deliver through the fourth quarter of 2025. We've converted six of our MAX seven positions to the MAX A200 variant, and we're pleased to now have 80 options in our MAX order book, securing opportunities for fleet growth through 2029 and providing tremendous flexibility, allowing us to evaluate the results of a new fleet type in our business prior to making further commitments. I'm pleased with our year-to-date financial performance, yielding an adjusted airline operating margin of roughly 13%, notwithstanding, the continued heightened fuel. Our loan utilization model sets us up nicely to expertly deploy capacity to meet seasonal demand trends, and we will enhance this with the introduction of more efficient aircraft next year. By the time of our next earnings call, we expect to have opened Sunseeker, taking delivery of our first MAX aircraft and starting to see the benefits of Navitaire and the systems investments we've made in 2023. Certainly, we're not out of the woods on execution risk yet, but we are excited about the positive momentum we have on these initiatives heading into 2024. Thank you, Lisa, and we can now begin taking analyst questions.

Hi, Shannon this is Greg. Why don't I kick it off. There are some components in the first half of the year. Obviously, demand strength in the off-peak fuel that helped fuel that the higher profitability versus the second half of the year. But as we think about 2024, we're not coming out and to give a guide this year, but I think BJ hit on it really nicely in his remarks where we should think about 2024 of unlocking a lot of the benefits and the investments that we've made. First and foremost from my perspective, we want to continue to work hard and get labor deals complete for our flight crews. That's a key component systems. Both Maury and I alluded to this, as it's Scott DeAngelo, in our opening remarks that we've made massive investments in new kind of next generational type systems. And when I say investments I mean these are hundreds of thousands of man hours that we've been putting in on each one of these systems SAP Trax. We've cut those two over. We have two more to go. And what we're going to do with those systems, now is we're going to get better. We're going to learn how to use them properly. We're going to become more efficient; we can scale better. So that's an important element as well. Obviously, Sunseeker opening bringing on the Boeing aircraft. So there's just been a lot of investments in the business, that I think truly believe will strengthen us. The one thing I want to say is you think about capacity next year and balancing that with the environment and the normalization that we've seen it's how do we get back to peak in those peaks. And we've been constrained for various reasons, whether that be the broader ecosystem ATC whether that be labor. But really, if you think about 2023 and if you remember a year ago when we talked about entering 2023 we said, we needed to level set operations. We need to make sure we ran an integrity -- operational excellence and integrity and we've done that. And now it's how do we balance and build that back. And as we think about peaking the peaks I'm not sure if Drew or anyone wants to add any commentary there for next year or anything else on 2024 .

Yes. I hit on this a little bit in my remarks, but the peaks are subject to any operational constraint all of the time, right? And right now it's a bit more constraining than typical. We earn a significant amount of our annual earnings through those periods. There will come a time that we get some relief on those constraints and then we will be able to peak. We've been kept relatively similar in terms of departures per peak day in the summer for the last several years, which is not something we've experienced in the past. Beyond that, we've taken a lot of strides to maintain operational integrity and we kind of throw a lot of things at that. And now we can start to claw those back in a meaningful way we start to understand how each of those components build up to the whole. So I think what you're seeing is something that's on the more conservative side relative to what we've thrown out before. We've proven that we can do peak close to 10 hours a day and then I have every bit of confidence we'll get back there.

No, thanks for the question, Shannon. And that would be just in the summer period. So if you think about it on a full year the summers are -- so longest peak period. But if you add March and you end the winter of the holidays, it's probably more like $100 million in total if you're able to take an hour up to utilization. I'd say, it just depends on the stuff on the as we were more aircraft constrained. In the summer it's been more labor constraints, but also trying to balance what we're seeing with some of the disruptions around airports or ATC. But kind of underpinning all of this Shannon though is operational integrity and we capped our peak period flying this year before we even enter it. We just said we won't do any more than this roughly seven hours per day until we build it back.

Thank you. While we prepare the next question. Our next question will be coming from Savi Syth of Raymond James. Your line is open.

Hey, good morning. Could I ask you about your 2024 fleet plan, Boeing you said two more Airbus and then kind of is it the rest of Boeing then and hopefully, you'll get to a month?

Yes. So Savi, it's BJ. For 2024, we are currently -- we are contracted to take delivery of two airplanes per month throughout 2024. As you know, and I think you're alluding to, there's a lot of moving parts there. So we're staying close to Boeing on that. And it's for that reason that we kept a good amount of flexibility in the used fleet that we'll keep in service for next year. Candidly, there's a few other candidates out there that we would like to retire a little bit more quickly, but we're going to keep those in through next year as a bit of an insurance policy. The two A320s that you're talking about are purchased this year and inducted in, I think, January, February or sometime during the first quarter of next year. And then we have the MAX aircraft entering service late first quarter and building on that throughout the year. On the high end, I would expect the total fleet count around 141, 41, but that's not guidance. That's about as high as we go.

That's helpful. And then if I might, you've heard some of your competitors talking about where a lot of the extra capacity is in some of the kind of bigger markets, crowded markets, and wanting to redeploy the capacity. I'm wondering and on the other hand too you have regional airlines that I think trends are bottoming and maybe starting to as you get into 2024, possibly being able to pick up their utilization as well. Just curious kind of based on the visibility you have what you're seeing from a competitive standpoint in your markets?

Yes. Drew here. The relative level of competition has been quite flat for the better part of two years and is relatively in line with what we saw in 2019. Obviously the dynamics change a little bit who it is and where it is, but the overall level has been remarkably consistent.

And that's what you're seeing in the forward schedules, Drew here?

Correct.

So you're just going to -- you can't see capacity grow with the way fuel stays at this level and there's a good argument to suggest, it's been permanently changed given the environmental issues and what's going on in the world. Capacity can't grow that much if people are going to make money. It just doesn't work. Capacity has got to come out to raise pairs to offset the fuel increases. So that's a macro statement.

Is that negative for your model too Maurice, isn't it? Because you talk about leisure, travel?

I'm not going to sit here and say we're going to grow like a weed but we have better opportunities to grow because we have less competition. I think we're not facing a lot of headwinds that everybody else is with our 75% noncompetitive. And that profile will continue we believe going forward. So it's not a rosy picture for the industry. I'm not going to sit here and say it is but oil has to come down somewhat. It's the big variable we can all face.

And further -- so remember, we can pull our September capacity down to half of what we do in July as a reflection of the broader fuel environment recognizing that demand is thick enough in the peaks to withstand the capacity and we're going to withdraw it where it doesn't make sense for all factors including fuel. So I feel really good about how we think about capacity deployment in the face of persistent high fuel.

That makes sense. Thank you.

Thank you. Our next question will be coming from Duane Pfennigwerth of Evercore. Your line is open.

Hey, thanks. Good morning. Welcome back. Drew, maybe you could just expand on your RASM commentary. I think you made some statement like normal sequential change or normal seasonal change in RASM. Could you just expand on that?

Yes. I mean just look back I think I was leaving even like 2005 to 2019 sequential change in absolute TRASM from 3Q to 4Q seems to be the right barometer as we're looking at 2023. So hopefully that gets to what you're driving at.

Yes. It just looks like it's up in -- or sorry in 2018 and 2019, it looks like it's up sequentially. So I just want to make sure that's not what you're suggesting there.

2018 and 2019 were definitely on the high end of -- if you look at all, however, many in 14, 15 years there. So I would expect something sequentially less than that, but in line if you take a much bigger sample.

Okay. And then just taking a step back, I know you've got some of the team on the phone here, but early thoughts on Sunseeker ramp in 2024? What kind of top line and EBITDA margins we should be thinking about? I understand this could be a two to three year ramp, but maybe in year one, how you're thinking about it.

Micah, can you comment

Yes, I think right now, it's really too early for us to guide. We're happy now to just be announcing the date being able to kick off our bookings and get going on the marketing. The real indicator -- the only real indicator that we have right now is group bookings that are on the books and we've got about 30,000 on the books and another 32,000 that are--

35,000 room nights.

Yes. So, that's probably the best leading indicator right now. We're still outside the booking window and we'll know a lot more in about 90 days.

Okay. Well, good luck with the launch. Thank you.

Thank you, Duane.

Thank you Our next question will be coming from Scott Group of Wolfe. Your line is open.

Yes. Hi. It's -- I think this is me. It's Scott. I think you called me. The -- I just want to -- Maury, you made a comment about -- I get the seasonality in Q3 we see that. You made a comment about like Q4 is a lower margin this year. I wasn't sure I was following your point. Can you just maybe go back to that?

Well, it just goes to the theme that we've got more in the way of off-peak flying that we can't peak-up as much as we have historically because of just utilization crews, all the things we've talked about. We're somewhat relearning how to do all this stuff too, I might add. But our first priority this year was to make sure we ran a good operation. So, we didn't -- we got conservative and pulled back being pushy and edgy that we might have been in the past times. If you go back to 2019 versus 2018, we flew eight hours a day, and we came out of -- we only had, I think, like 775 airplanes down from 90 airplanes in 2018 when we moved out of the MDs. And we pushed the edge and that saw dramatic benefits of being able to push the utilization up. So, those are the things we have to relearn and we'll do that. That's one of our top priorities going into 2024 and beyond.

Okay. And then just following up on that last question, can you just maybe be a little bit more explicit with what you're assuming for RASM or at least what that historical 3Q to 4Q, absolute RASM trend should be? I just want to make sure we're all on the same page. And then in an environment where capacity is up mid-single-digits next year, any early thoughts how you're thinking about CASM for next year? thank you.

Yes, I'll take the first part and maybe I missed something is the look around the table. Just taking the absolute RASM from third quarter, the absolute RASM from fourth quarter historically, we've tended to step up a little bit, not by a huge amount, low singles. That's generally what I'm expecting. So, not a year-over-year commentary, but simply an metered sequential.

Hey Scott. This is Greg real quick. I know we haven't put out quarterly guide. So, we're getting there, you can kind of back into it with the fourth quarter, but I think it might just be helpful to Maury's comment about the third quarter being the weakest seasonally for us and what you saw in the third quarter airline EPS. I just want to say that fourth quarter airline EPS, the midpoint of our guide, we expect it to be stronger than the third quarter. Sometimes with the weighted average share counts and what's happening on that side of the house and the lower overall share count that we have, kind of, highlights or pronounces the swings, but I just wanted to make sure that, that came across that we expect the fourth quarter airline EPS to be higher than the third quarter. And then sorry, BJ, I didn't mean to jump in there on your 2024 costs.

No, no that's great. I mean we're in the middle, Scott, of our budget process for 2024. So not ready to give a guide on CASMx for next year. And I'll just say there are a lot of moving parts around delivery of the Boeing aircraft induction of those airplanes having crew members ready et cetera. But on kind of the capacity guidance that Drew put out there we would expect CASMx to be up a little bit next year. I don't want to give a number yet.

Okay. Thank you, guys, appreciate the time.

Thank you. Our next question will be coming from Daniel McKenzie of [Technical difficulty] Global. Your line is open.

Oh, hey, thanks. Maury, welcome back here. A couple of questions. I guess the first is really a house cleaning question on Sunseeker. I know you don't want to elaborate on 2024, but at least for the fourth quarter here, Does the full year EPS outlook include or exclude Sunseeker revenue? And then once it opens, can you share at least what you're seeing today in terms of occupancy and booked room rates?

Hey, Dan. I'll start with the first question. The outlook on Sunseeker for full year 2023 does include some revenue, but it's very, very minimal, assuming that you're only open for two weeks out of the year and you're just kind of barely opening. You're not expected to be at any kind of full run rate. So there's some in there, but I wouldn't run away with that for 2024, or 2023, I'm sorry.

Okay. All right. And then I guess in terms of the occupancy room rates I understand it's in there. And Drew going back to your commentary of peak periods being scheduled to aircraft and crew constraints. I am looking at the back half of December and it looks like Allegiant flying is down 14% year-over-year. And so I guess a couple of questions tied to that. One is that accurate? And then secondly, is that tied to constraints? And I'm just wondering if we should model these constraints extending into peak March 2024 flying as well potentially.

I think what you're capturing there is some of the shift in the holiday timing as well. So the, let's call it the third week of December with a pretty meaningful capacity in December of 22 as the travel started a bit sooner. That week comes down, I believe it's about 22%, and then you get a little bit of growth into the more peak, call it last, I don't know, 10 days or so of the month. So I think a competitor called this out as well. But there will be a downshift in the mid-part of December that's kind of captured on the upside at the beginning of January. That I think explains most of what you're seeing. I see.

Okay. Very good. Thanks for the time, you guys.

Thanks, Dan.

Thank you. Our next question for today will be coming from Conor Cunningham of Melius Research. Your line is open.

Hi, everyone. I thank you called me. As you think about load factor versus yields, you're not trying to talk about pricing. Just like from a high level, as you think in the 2024, there seems to be a lot of discounting to fill seats. I'm just curious on what you're viewing as the key priority in building revenue next year? Thank you.

Yeah. I mean, at the end of the day, total revenue is the end game. I think you'll see yields be more resilient in the peaks. And then us making sure that we're capitalizing on $70 of total ancillary per passenger through the rest of the year, which is generally driven by load factor build as a general rule of thumb. So, I would kind of separate those two elements like that. But at the end of the day we need to make sure that we're maximizing that ancillary component.

Okay. And then on the 1,400 route comment that you had all the opportunities going forward I'm just -- you've always had a lot of ad opportunities. So I'm just -- your cost structure is obviously a lot higher. So I'm just trying to understand how that changes with a higher cost base. And then if you could just touch on where you sit with the pilots today and what's going on there that would be helpful. That's world help. Thank you very much.

Sure. On 1,400 route I mean we're still extremely confident in that. I think you have to strip it back a little bit into a fixed versus variable type of thought on that cost structure right in fuel we'll see. I mean, that's as variable as it gets. But for the rest of the cost structure it still supports all of these 1,400 routes as the fixed cost portion will kind of take care of itself as we get back to utilization we get back to growing again, but again that's not how we think about new network deployment. It's all on a variable basis.

Hey, Conor it's Greg. I might try to hit on a couple of other parts there. On the cost to Drew's point keep in mind, we're accruing this year at least beginning in May accruing for increased labor agreement with our pilots. But increase in productivity of just a half hour in utilization per aircraft per day is worth like 0.5% of CASMx. So you have that that, I think over time I mentioned that we've invested in this infrastructure where the infrastructure has outpaced ASMs, but we're going to get back there. And when we did the system cutovers everyone has their day job and these are massive system cutovers. And so the philosophy was measure twice cut once get it, done but it's going to allow us to scale and grow more efficiently. And then on the pilot side of the house just the trends are meaningfully improving. Just to put that into perspective in the first half of '23 if you think about net new pilots we were flat whereas in the back half of 2023 we'll have over 100 or we expect over 100 net new pilots. And that's twofold. One attrition is meaningfully down. But two the classes are full and they remain full. And in fact applications over the past couple of months have more than doubled. And I think our the shout out to our Fios team and the focus that they have in their pathway programs and making sure that we're identifying the pilots that want to be here at Allegiant. We have a unique quality of life offering overall which is that out-and-back model, but the most important thing that we need to do and I keep saying this is we're working hard and we're committed to getting a deal done for our pilots for our flight attendants and that's a key focus for us and we'll carry that in and trying to get that done as soon as possible.

Conor, let me editorial on top of that. You can't understand the mindset inside of an airline in March February with the pilot issues going on. You just didn't know what was going to happen particularly ,if you're in the middle of the sandwich like we are where a lot of our guys are going up the hill to American Delta and United. And can you -- we literally train 200 pilots in 2022 and kept 10. So a lot of expenses going in just to training these guys but now that you're seeing the world I mean Spirit announced they're not hiring any pilots for 2024. I mean, there's a radical shift in mindset of how you can think about having access to crews. And for us we need to make sure we get -- we need some extra crews certainly for the Boeing as we transition. So we needed to have that type of mindset and it's there. To Greg's point get a contract done. Our pilots are very much on board with growing this business and we're also being much more selective in who we bring into the business. We need to know that they want to be in our model and want to be here long term not to say we weren't selective before but it was much more could you fly an airplane than what are your personal needs. So, those are the kinds of things we've learned from this effort. And not only us, but everybody in this industry is going to be much more comfortable that they can make a forecast on pilots and availability. So you can put a schedule out nine months from now and still operate it.

Appreciate the thoughts. Thank you.

Our next question will be coming from Andrew Didora of Bank of America. Your line is open.

Hey everyone. Thanks for taking the questions. Maury, welcome back. Maury or maybe Greg, just on the pilots here. Where are you, kind of where do those negotiations stand right now? And if you can, just what are the sort of the key holdups at this point?

Hey Andrew, it's Greg. So earlier this year, we combined with the union, started remediation process. And while we're progressing, candidly, it's not at the rate I'd like to see. So -- but we're still working through it. And there's a variety of items we're working through, but we understand the important items that we need to get done to get a competitive contract is fair in our view. And I have all the confidence that we'll continue to make progress, and then we'll get a deal done.

Yes, Andrew, there is some practical applications. We're both at the table young in our maturity in many ways in doing a contract. This group of pilots has never been involved in negotiating a contract before and so they're, I think, kind of feeling their way forward as to what that they want to see in a contract and you have proper people at the table that know how to do this. So United American and Delta have been 70 years. They have 500 page contracts that they don't have a lot to talk about. We've got a lot of items that are still young and tender and both sides need to feel their way through it. So to Greg's point, it's been slower than we would have liked, but we get the materiality of what we want to do. But I think both sides are getting a better deal candidly, if I had to say, so just to get something done. As we all know, this is not -- these contracts never end. They're just extensions until we sit down and do it again three or four or five years from now.

Got it. And then as a follow-up, I know you spoke a little bit about kind of the contracted deliveries for 2024 in that context, how should we be thinking about CapEx for next year?

Hey Andrew, it's BJ. We're live in discussing some of this with Boeing. What I'll tell you is in 2023, we were paying large amounts of predelivery deposits substantially focused on aircraft delivering in '24. And so you would see the same thing in '24 for aircraft delivering in '25, given the new schedule. I would expect CapEx to be elevated next year versus 2023, but don't have a guide for you yet.

Okay. Thank you

Thank you. Our next question will be coming from Christopher Stathoulopoulos of Susquehanna Financial Group. Your line is open.

Thank you, operator. Good afternoon, everyone. I’ll keep this to one. Maurice, so I want to understand if you could a little bit more on the composition of your 2024 capacity with the idea here that not all capacity is created equal it comes with different margin profiles et cetera. So I think you said 70% 75% of routes non-competitive 1,400 new domestic routes identified and that you have a line of sight or looking to get back to 2019 utilization levels. On the other side of the ledger mid-single digit ASM growth is below what you've typically done. So as we think about the moving pieces, and if you want to frame it departure stage engage or however else is this about frequencies within existing dots, adding dots, a little bit of both? Just want to understand here the moving pieces that makes up and build into that mid-single-digit capacity guide in that soft CASM-X guide that you gave for next year? Thank you.

Hey, Christopher Drew here. Probably a little early to get into all of those dynamics today. I think maybe speaking fairly generally, I wouldn't anticipate seeing that utilization rebuild in the first half of the year with the flat ASM that probably goes without saying. As we bring on the Boeing, we will get a little bit of gauge benefit as the 8,200s will come in at 190 seats, which is larger than what we have today by a little bit. I don't foresee massive stage differences through the year although we'll get back to you maybe on that in 90 days. But I think as we think about the overall network, I would foresee a bit more frequency restoration coming earlier than new route announcements than kind of relative to our typical split before probably more on the late 2024 but really more of a 2025 and 2026 story on network expansion would be my guess at this point..

Hey, Chris this is BJ. The main thing to think about for CASM-X next year is really just the full year of the pilot payroll cost and the full year of labor agreements that were implemented this year. Other than that, we don't have most of the other buckets moving so much on the capacity that we just outlined.

Okay. Thank you.

Thank you. Our next question will be coming from Helane Becker of TD Cowen. Your line is open.

Thanks very much, operator. Hi, everybody. Welcome back, Maury. Just two maybe clarification questions. All your peers are calling out maintenance and you didn't really mention that. Is there something I mean what's different between you and them, anything?

Helane, it's BJ here. I think one of the things is potentially that our heavy maintenance is capitalized or we use a deferred method. And so you don't see the immediate impact of it in the period that the cash goes out. So there has been some pressure in heavy maintenance expense, not to the degree that, like we've been hearing from some of the other carriers' calls, but also expecting some pretty nice relief on that as we move through 2024 and 2025 and those aircraft with the most expensive heavy checks would be retired prior to undergoing maintenance.

Right. Got it. That's really helpful. And then for my follow-up question, the other thing that some of your competitors, I don't know if they're really competitors, but some of the other airlines have been calling out has spent too much capacity in Las Vegas. And you didn't mention that either. And yet, Las Vegas tends to be one of your larger locations, I don't think it's the largest anymore. I think that's shifted around the network. But maybe can you talk a little bit about what you're seeing in Las Vegas? And I guess the Grand Prix is coming pretty soon. So I'm imagining or near to see if the step-up in traffic there in addition to the holidays?

Yes. Thanks Helane. Just because Vegas has seen incremental seats, does not necessarily mean that Allegiant has seen incremental seats on top of ourselves into Vegas our route and where we originate customers tend to be pretty differentiated. And the price points haven't leaked into connecting traffic in a way that we saw in like 2015 when you could get to Vegas one stop for $100. So that has not manifested yet. So we still maintain a really solid network differentiation here that I think kind of puts us on an island if you will there. In terms of First quarter, Canada has been a little wrong on this. I went into it saying that it would probably be the worst suite that Allegiant has ever had coming into Vegas. And luckily that has not manifested, you've seen hotel pricing come down here looking at Scott DeAngelo but 50%, 60% in places that I think is catering back towards -- away from the core F1 customer and more towards say Vegas experience and have some fast cars going on around the bend. So it will be fine, but I wouldn't call it out of anything that I believe will be super special for us.

Yeah. F1 is -- Vegas is a mid-priced town. It's not a high-end town like Monaco or something like that. And the hotel prices were starting off the stratosphere and you can't blame them they'd start there and then come down. But it's going to be a zoo here that weekend but it's $20,000, $15,000 to get into pad [ph] as they call it. Those are not the usual Vegas prices.

Got it. Maury, I'm really disappointed that you haven't done an Investor Day at Allegiant Stadium in conjunction with one of the football teams there.

We'll put it on the list. Helane that's a good idea. We can do that.

All right. Thanks very much you guys.

Thank you.

Thank you. One on for our next question. Our next question will be coming from Catherine O'Brien of Goldman Sachs. Your line is open.

Hey, good morning, everyone, and welcome back, Maury. Maybe just two quick ones on some of the ancillary revenue buckets, I thought it was great you shared that remuneration year-to-date on the credit card. I guess, is that similar to the revenue impact? I understand there is a bit of a timing difference there. And I guess any thoughts on what the tailwinds are they're going forward? Like how should we think about -- if we're talking mid-single-digit capacity growth are we thinking about credit card remuneration above and beyond that? And I've got one more. Thanks.

Thanks, Catty. This is Scott DeAngelo. I'll take the first couple of parts there. So the way to think about it is a rule of thumb about 75% to 80% of total compensation is recognized in any given year. A portion of what we get paid gets immediately recognized and the other portion is deferred and it's in effect subsidizing a cardholder when they use points to buy air travel and it gets recognized as revenue once those points are redeemed. In terms of tailwinds, there's a couple of things that I'll speak to a high level at. We are aggressively pursuing what's referred to as a second look program. So an augmentation of our credit card program that to the customer looks no different, but it's other issuers who are willing to issue in the subprime and the near prime spaces, which currently are largely unserved by our product and that enabled us to open the aperture if you will on approval rate. And then finally, the other thing we're doing is marketing more aggressively not just in the plane, but through digital and even in some cases traditional advertising to build preference for and drive applications for the card in a way that we've never done before. So all of those things combined we expect to continue to plan tailwinds. Last point, we currently sit at about three percentage of our loyalty program has the card. Mature airlines, Delta and American, I believe bold made this public were more in the 13% to 14% of their loyalty program. So that gives you kind of an idea of what upside is there if these tailwinds above and beyond the traditional ASM growth can drive us down.

And Katie, it's Greg. I just want to add one quick point to what Scott mentioned there. And that's the network that we serve and the communities that we're in so many of them were a really big deal. And our card is aspirational. They want that card. And it's a great I think kind of program that we continue to build on that's unique to Allegiant because again in those markets we are the game in town.

That's great. And then maybe just one -- sorry.

Go ahead, Katie. No, go ahead.

Just on Allegiant Extra, I know you talked about a positive contribution, but could you just put a finer point on that? Like what's the average buy-up on an extra seat or can you talk about how revenue growth is trending on a maybe versus Allegiant extra fee growth? Any help there would be great. Thanks so much.

Yes, Kate. I think this is something we continually say, hey we'll dive into more detail at an Investor Day and really provide some good stuff there and we even keep pushing the Investor Day. So I promise we'll get there at a future Investor Day. In terms of occupancy, we tend to get by right around the 50% mark give or take at a pretty meaningful unitized rev over any other seat. So we're -- I think we've stated about $1 per passenger in the past but I think that might be a little bit conservative as we've seen continued growth.

Right. Maybe I'll just throw another location into the ring with Helane. I'd love to go see Sunseeker so keep us close on that Investor Day. Thanks, guys.

All right. Thanks Katie.

Thank you. And our last question for today is coming from Ravi Shanker of Morgan Stanley. Your line is open.

Hi. Good afternoon, everyone. So a, Maury, welcome back and b, I just wanted to follow up on something you said earlier about how high jet fuel prices kind of almost forces capacity -- across the industry. We have seen some indications of that on the 3Q conference calls with some of the low-cost carriers talking about muting their growth plans for next year. Do you think the industry finally gets it on capacity discipline for next year? Or do you think there's kind of still a little bit of proof needed on kind of walking the talk there?

We've got what 30 40 years of deregulation history bucking a new 10 trend. If you want to take a comparable one price of oil has gone up dramatically since February '22 but you haven't seen the fracking industry run out and put a lot of new wells in. They've caught a lot of grief from your compatriots about saving investment and make some money. So you're seeing behavioural changes there which have I think affected supply and the U.S. has always been the counterbalance for oil and knocking the price down when it gets to rich from the Middle East and Russia and those guys. So maybe you have new trends there. I think the industry is very focused on making money. The big guys are definitely showing that they like having those numbers. They've got a very well-rounded product they've got a lot of debt on the balance sheet they want to pay down. So making good money the way they have is maybe becomes infectious. But long-term making money is the name of the game. And what you've seen over the last three years four years is we've all been thrown out of our habits and what we've done historically I think American Delta and United have benefited by the kind of the stuff they did pre-pandemic and brought it to home here in the last few months and last year with both international being so rich and with the ability to offer competitive products. When you look at the ULCC market as I said they've got over a 90% overlap in their marketplaces. That's tough competition to go up against if you've got a comparable product that's sitting there with a well-known brand that has a credit card has all the attributes. So we like staying out of people's way in doing those things but as far as capacity growth I think it's you're certainly not going to see kind of a wide-open funnel like we saw in the mid-teens and the like in my mind. Could it get there a couple of years from now? Sure. But right now I think everybody is a bit cautious and wants to bring it back slowly. And sitting on top of all this is ATC. When you're being asked to cut your summer travel into New York City because ATC can't keep up that's a big whack to your operation and your bottom-line.

Always appreciate your thoughts. Thanks, Maury.

Thank you.

Thank you. There are no more questions in the queue. And I will now turn the call back over to Maury, for closing remarks. Please go ahead.

Thank you all very much for your time. I appreciate your interest. And we'll see you in 90 days. Thank you.