Allegiant Travel Company (ALGT)

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Allegiant Travel Company (ALGT)

Q4 2008 Earnings Call

January 27, 2009 1:00 pm ET


Maurice Gallagher, Jr. – President & CEO

Andrew Levy – CFO

Ponder Harrison – Managing Director Marketing & Sales


Michael Linenberg – Merrill Lynch

Helane Becker – Jessup & Lamont

Kevin Crissy – UBS

William Greene – Morgan Stanley

Duane Pfennigwerth - Raymond James

Jim Parker – Raymond James

Steve O’Hara – Sidoti & Company

Adam Hoff – Holden Asset Management

Brian Delaney – [Inrust] Capital



Good day everyone and welcome to the Allegiant Travel Company’s fourth quarter and full year 2008 financial results conference call.

We have on the call today Maurice Gallagher, the company’s President, CEO and Chairman, Andrew Levy, CFO and Managing Director of Planning for the company and Ponder Harrison, the company’s Managing Director of Marketing and Sales. Today’s comments will begin with Maurice Gallagher followed by Ponder Harrison and then Andrew Levy.

After the presentation we will hold a short question and answer session. We wish to remind listeners to this webcast that the company’s comments today will contain forward-looking statements that are only predictions and involve risks and uncertainties. Forward-looking statements made today may include, among others references to future performance and any comments about our strategic plans.

There are many risk factors that could prevent us from achieving our goals and cause the underlying assumptions of these forward-looking statements and our actual results to differ materially from those expressed in or implied by our forward-looking statements. These risk factors and others are more fully discussed in our filings with the Securities & Exchange Commission.

Any forward-looking statements are based on information available to us today and we undertake no obligation to update publically any forward-looking statements whether as a result of future events, new information or otherwise. The company cautions users of this presentation not to place undue reliance on forward-looking statements which may be based on assumptions and anticipated events that do not materialize.

The earnings release as well as a rebroadcast of this call are available at the company’s Investor Relations site At this time I would like to turn the call over to Maurice Gallagher; please go ahead sir.

Maurice Gallagher

Good morning everyone. It’s a pleasure to be with you again. As indicated joining me today are Andrew Levy and Ponder Harrison. I’m going to give a brief overview, Ponder will comment on our revenue results and Andrew will wrap up with comments on our network activity, expenses, and balance sheet, after which we will take your questions.

We are very pleased with our outcome this quarter. It appears we will once again produce industry-leading results with an operating margin of 23.4%. Net income increased over 280% compared to the fourth quarter of 2007 and 272% sequentially compared to our third quarter in 2008.

If you remember back to our IPO Road Show in late 2006, we indicated our corporate goal was to achieve and sustain a mid-teens operating profit. First three quarters of 2007 had operating profits of 14%. However beginning in the fourth quarter of that year we had to take the next four quarters off because of the spike in fuel prices.

As margins began deteriorating due to fuel increases, we adjusted the business accordingly, namely trimming capacity and reducing growth; both necessary to increase unit revenues. This allowed us to maintain profitability through these difficult months, though at a margin substantially below our corporate goal.

Our 23% operating margin this quarter however puts us back on track towards our commitment of late 2006. How were we able to generate such a large increase in margin from 7% in the third quarter to this 23% level?

Our focus on increasing revenues was evident in these results. In spite of a difficult economy we were able to not only hold overall revenue per passenger compared to the third quarter but increase it from just under $120 to $120.50.

Over the past year Ponder and his team have focused increasingly on our ancillary revenues and we have seen a 50% increase during this timeframe from a low $20 range to our current $32 plus. These ancillary revenues were a critical part of our December results. As I said overall we had $120 in revenue per passenger and $92 in cost for $28 per passenger in operating margin.

In the September comparatively we had $8 per passenger in operating margin on the same revenue per passenger, $120 but the costs were $112. This $20 increase in profit per passenger was attributable to our reduction in fuel cost. In the third quarter it cost us up $58 per passenger for fuel while the fourth quarter cost was $37 per passenger.

And by the way, December fuel cost per passenger was $29.50 and most recently it is approaching the mid-$20’s per passenger.

Oil prices again appear to be connected to supply and demand metrics. The speculative bubble that peaked at $147 per barrel this past summer was part and parcel of the economic turbulence we have been experiencing in the past 18 months.

We made a decision some 18 months ago as well to manage our fuel issues by a capacity adjustments. We ceased entering into traditional financial derivative contracts. Although some questioned our strategy of not hedging as prices rose, in hindsight this has proved to be a wise decision.

Today we are benefiting completely from the rapid reduction in oil prices of the past few months. I must say the reaction of the market this morning is quite surprising. Clearly the economic malaise we are enduring has caused our booking curve to compress in the past 60 days and the selling [fare] to commence somewhat.

As we indicated in our release in the first quarter we expect ancillary fare to at least maintain its current levels but we expect the combined scheduled service selling fare to be down 4% to 6% compared to our Q1 2008 results. There are offsets to this. Offsetting this decline are two important factors, namely, one our year-over-year stage length and scheduled service will decline more then 3% and two, we expect our load factor to increase from 87% last year to north of 90% in this coming quarter.

Results of these combinations will be an increase in total scheduled RASM, not a decline.

Based on what I have heard from analysts and others we will be one of the only players with a positive year-over-year RASM increase in the upcoming quarter. Those who focus just on our selling fare missed a critical part of the equation; our leisure customers will and still respond to pricing initiatives.

Our scheduled reductions we initiated in 2008 as we chased spiraling fuel costs, caused some of our unit costs to increase in this fourth quarter. Small increases in unit costs are the issue when compared to substantial increases in unit revenue, such as the 24% increase in TRASM we had in the most recent quarter.

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