Welcome to Allegiant Travel Company's Allegiant First Quarter 2012 Financial Results Conference Call. We have on the call today Maury Gallagher, the company's Chief Executive Officer and Chairman; Andrew Levy, the company's President; and Scott Sheldon, the company's Chief Financial Officer. Today's comments will begin with Maury Gallagher, followed by Andrew Levy, then Scott Sheldon. After their prepared remarks, we'll hold a short question-and-answer session. We wish to remind listeners at 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 and Exchange Commission. Any forward-looking statements are based on information available to us today, and 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 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, ir.allegiant.com. At this time, I would like to turn the conference over to Maury Gallagher for opening remarks.

Thank you, operator. Good afternoon, everyone. It's a pleasure to talk with you again this afternoon. Joining me today, as usual, are Andrew Levy and Scott Sheldon. We had another very good profitable quarter, our 37th consecutive profitable quarter. We had net income of $21.7 million or $1.12 per share. That compares to last year's $17.2 million or $0.89 per share. Revenues during the quarter increased 23% to $238 million, while year-over-year operating profits increased 30% to $36.3 million. This represents a 15.3% operating margin and our first year-over-year margin increase since the last quarter of 2009. Lastly, even with this growth, we were able to move our PRASM up during the quarter and TRASM, up 2.4%. On the expense front, fuel has continued to dominate the news. Year-over-year, our cost per gallon increased $0.40 during the quarter or 14%. In the past 18 months, our fuel cost has increased over $1 per gallon. And as a result, our fuel cost per passenger has jumped 48% from $40 to almost $59. But having said this, recent activities in the marketplace suggest upcoming year-over-year fuel comps should be more favorable. I'm pleased we have increased our operating margin this quarter from 14.4% last year to the 15.3% I mentioned just a moment ago and perhaps more importantly, accomplished this increase while growing 22% during the quarter. As I mentioned, since the fourth quarter of '09, year-over-year operating margin comparisons have been trending the wrong way. Clearly, fuel expenses have been the biggest weight on the margins during this time. Our fuel cost per ASM shot up 72% during 2010 and '11. But nonfuel costs have also been a bit of a drag as our cost per ASM increased 15% during these 2 years. While we can't control unit fuel cost, we…

Thanks, Maury. We had another successful quarter raising fares to offset the increase in fuel. In Q1, our fuel cost per passenger increased $5.53, but our average airfare increased $5.95, and total fare, including ancillaries, increased by $7.48. This is particularly noteworthy in light of the 22% increase in scheduled service ASMs. This is also the fourth consecutive quarter where we have been able to fully offset the growth in fuel cost per passenger with increases in revenue. We continue to see strength in our third-party products business. Third-party products increased 31% or $2.1 million to $5.36 per passenger. Our fixed fee revenue declined 20% due to fewer ad hoc charters flown. This was a result of our decision to dedicate more of our fleet than crew resources to scheduled service activity. Other revenue primarily consists of lease revenue from 3 757 aircraft leased to European carriers. We expect this contribution to be lower in the coming quarters since we now have only 2 aircraft on lease. These 2 aircraft returned to us in the first few days of October, so they will contribute to other revenue in 2Q and 3Q. On June 25, we became compliant with DOT Consumer Rule II. As Maury indicated, compliance with this unnecessary rule cost us a lot of time and money, and we still believe it has no appreciable benefit for our customers. Before Consumer Rule II and now after its implementation, our customers have always known what the cost of their air travel is before they agree to pay. We believe compliance with this new rule has resulted in a bunch of busywork for no customer benefit. That being said, through many changes to the booking presentation, we have been able to minimize, if not totally eliminate, revenue degradation we had been…

Thanks, Andrew. Our cash flow production during the quarter was strong. We generated $83 million in cash flows from operations that resulted in nearly $50 million in free cash flow, net of our capital spending during the quarter of $32 million. Unrestricted cash, which includes investments and marketable securities, at the end of the quarter were $369 million, up 16% from the end of the fourth quarter and represented nearly 45% of our trailing 12-month operating revenues. Our CapEx spend of $32 million during the quarter primarily consisted of the purchase of our fifth Boeing 757 aircraft, the purchase of 2 aircraft on operating lease and the continuation of our 166-seat modification program. Subsequent to the quarter end, we closed on our sixth and final 757 aircraft and look forward to placing it in revenue service in the third quarter. At the end of the quarter, we had modified 17 MD-80 aircraft from 150 to 166 seats, for a total capital spend of $16.8 million. The number of reconfigured aircraft now stands at 19, and the overall program is coming in on budget. On a full year basis, we still anticipate capital expenditures of $105 million to $115 million. Although we had a very successful quarter and drove the highest operating margin since 2Q 2010, fuel costs continue to have a significant impact on our financial performance. During the quarter, our fuel cost per gallon was $3.28, up $0.41 or 14% year-over-year and up nearly $0.20 per gallon since the end of the fourth quarter. This increase, in combination with a 13.4% increase in gallons, drove the system fuel expense of $102 million or nearly $57 per passenger. On the nonfuel cost run, we were pleased with our first quarter performance and are expecting to see a significant decrease in…

[Operator Instructions] Our first question comes the line of Bill Greene from Morgan Stanley.

It's actually John Godyn filling in for Bill. I wanted to -- Andrew, I wanted to follow-up on the PRASM guidance a little bit. Tough comps aren't going away in sort of the months to come after the second quarter, and when we think about some of these changes and impacts on PRASM from up-gauging with the 757s and the length of haul changes, it seems like those forces are going to be kind of difficult to forecast through the end of the year. I mean, just thinking about these things, it seems like PRASM could be negative for quite some time. If you could just sort of help us think about where core demand is trending. And just any thoughts on maybe how some of these factors evolved throughout the year? I mean, maybe we should just have a negative PRASM number for the full year. I'm not sure, but I was hoping that you could just offer some thoughts.

Sure, John. I don't have a forecast handy through the end of the year for PRASM. But there are certainly some factors that you've indicated that will put pressure on PRASM. I mean, the additional seats on the MD-80s is certainly not going to be accretive. It's going to be profitable. So I should say, it is going to be accretive in terms of earnings. It's not necessarily going to result in higher PRASM, but we're not really all that concerned about PRASM as much as we are about earnings. So I think that you're right, there's going to be some pressure from that. Certainly, the flying on 757s to Hawaii is not going to result in higher RASM relative to the rest of the system. Longer haul flights, of course, are going to be lower. So there is pressure. As I indicated, we're more interested in focusing on profits, and we're happy that we're able to increase earnings, increase margins, and we hope to be able to do so in the next several quarters. And I do think that you're right, the comps are tough because of the improvements we saw last year. However, I think, May is just worth noting because it's particularly outsized and made it that much more of a difficult comp for this year. And I think, lastly, we did mention that there's some capacity that we wish we didn't have in Las Vegas. That's been eliminated. It will be out of the system in the next several weeks, and we think that, that will be helpful as we go forward.

Okay. That's helpful. And I know it's early, but can you just talk about any kind of customer reaction you've seen from the carry-on bag fees? I mean, could that be weighing on fares a little bit as well? And I know that you don't have a lot of competitors on many of your routes, but is there anything to note from the customer reaction on routes where you do have competition versus routes where you don't that, that is sort of evidence of any kind of customer response?

Sure, John. I think that we have not really seen any negative customer reaction at all. We have seen -- well, when we implemented the carry-on charge, we also, at the same time, had a fare sale. And over time, we hope to be able to march up our fares back to what they would have otherwise been. It's possible we may not completely be able to just take the carry-on charges as pure incremental additional revenue. But we do think that whatever decline we might experience in fare will be more than offset by the carry-on charges. So we do think it's going to be accretive, certainly. It's a bit hard to forecast there, you're right. And so our forecast on passenger RASM are perhaps even maybe a little more cautious than normal because of us not understanding what the effect is going to be of this new charge. As far as competitor routes, we haven't seen anything at all that's notable. We make money in all the routes we compete with others, and that has hasn't changed. Customers care about the total price before they agree to pay. And the value that we offer, even in the routes where we compete with others, is extremely material and relevant. And customers root with their wallets, and they keep going back. And we see no change in demand on the demand on a go-forward basis from any of these new fees that we've imposed or the new fee that we've imposed.

John, this is Maury. For those anecdote, the day we put out our notice and then the next day, the 2 of our cities put out press releases, and it was -- one on the East Coast suggested that they shop fares, and we were half the price of the usual suspects, even with our increased baggage fees. Another one put out the same thing, and we were not quite half but substantially less than the competition. So to Andrew's point, people are going to shop fares at the end of the day. That's just been our experience all the years we've been doing this.

Okay, that's super helpful. And Maury, just last question. You mentioned that there was, I think, one more check, sort of final approval check ahead of the Hawaii flying. If you could just kind of elaborate on that and just kind of give us a sense of the difficulty of that check or what that entails just so that we can have some comfort that there isn't much that could get derail the first flight.

Yes. It's not done until it's done, I'll say that. But this is a nonevent in our mind. We've completed all the flying. All those things are done, signed off. We had an inspection required on our parts facility in Honolulu that we have to turn into a "permanent facility" instead of the temporary one we had. So this is a couple of minutes looking inside and seeing we have the proper net or environment to store our parts and the like, and it's a very regular for what we do.

And our next question comes from the line of Hunter Keay from Wolfe Trahan.

Maury, can you give us an update on where you stand with that suit with, I guess, the Rule II? Do you have any color on the judges that were appointed to the panel in terms of maybe party makeup and maybe an updated expectation on are you skeptical of the outcome? Or do you maybe have a little bit of incremental optimism from last time?

Well, I think it's just not appropriate given what our lawyers have told us to think we're going to win. It's always less than 50-50 chance. The experts in the room are usually the wrong experts, but nevertheless, they are given the deference as being experts, but the party makeup, as I understand it, is 2 Republican appointees and 1 Democratic appointee. And the only other kind of glimmer of -- I wouldn't actually say it that way, another positive is that one of the -- I think the head judge of the 3 wrote the opinion in favor of Republic in their win here, 6 months ago or so, when they sued the DOT over some slot rights a couple of years ago. So those are positives. We think we have a good case. We think that DOT is just exceeding their authority and the standards that are being put forth by them are not within the defined standards of what congress had in mind back when they wrote this rule 25 years ago, 30 years ago.

Sure. And to be clear, if you prevail in the suit, you would be able to experiment with post purchase price increases, right?

Not -- well, yes.

Theoretically? I'm not saying you would, but you could?

Yes, the main thrust in this is the display, the 24-hour cancellation and then, post purchases, some of it. But we'll have to see where it comes out. They could find in one and not on the other, so we'll just have to wait and see. By the way, the oral argument is scheduled for a week from Monday.

Okay that's good to know. It's probably going to take, I would think maybe what, a couple of months after that?

That's typical. If you want some entertainment value, those of you in Washington, D.C. can view the 9:30 circuit court and listen in to our government officials as they argue their case.

That actually sounds great. And in terms of the incremental margins, the 166-seat reconfigured aircraft. I think, last quarter you told us they were contributing about 60%. Now that you've got some more on the system, is that number still holding up?

We didn't to try to replicate the analysis that we did last time. So I guess I'd honestly tell you I don't know. But we -- it's continued to do really well. I think that we expect that it'll continue to drive substantial amounts of profits. And as I mentioned, even more so in the future as we have the ability to sell into those additional seats on a more normalized booking window, as opposed to the kind of accelerated one that we have as we introduce each aircraft, and we then start selling into it. So we're really excited about that project. It continues to be, I think, probably the -- maybe the most material project that we've got going on this year in terms of adding to earnings.

And our next question comes the line of Jim Parker from Raymond James.

Just, Andrew, the fare sale that you've mentioned might be muddying the picture a little bit in terms of the impact of the carry-on bag charge. So I'm curious. Did you initiate the fare sale to perhaps counter the impact of the carry-on bag fee? Or was that some separate activity? And did you do the same fare sale on a year-to-year basis? Or why did you do the fare sale?

Jim, I think it's really what you just described. We wanted to mitigate the impact initially and be able to monitor the fares overtime. And it's also -- look, it's a seasonally weak period. It's a shorter period, so it's not unusual to offer some fare initiatives at this time of the year to fill in the post-Easter to summer period. Look, there's a lot of moving parts. There's no question about it, and that's why we're not prepared in any way to provide a forecast as to what the effect overall will be on overall passenger revenue from the implementation of this new charge. We are very confident that it will drive higher revenue. But we're not willing at this point to make a prediction as to what the value of that is.

Okay. And Andrew, how much of your revenue comes out of Las Vegas currently?

I don't have a revenue number, Jim. But Las Vegas represents about 1/3 of the business, and that number has held pretty firm for a while. And as we continue forward, it will decline with the initiation of Hawaii and Oakland and Punta Gorda, Vegas will become slightly less than 1/3 as time goes on.

I'm curious because it looks like capacity total airline seats in Las Vegas in the first quarter looked essentially flat year-to-year. What's going on in Las Vegas that's causing you all to say that may be a difficult revenue environment currently?

I don't want you to think it's a difficult revenue environment because that's certainly -- I'm glad you asked the question. We're not seeing any softness in demand in Las Vegas. What we are -- what we do have is we have a number of routes that have underperformed, and so we are eliminating service to those routes. And additionally, we put in additional seats in the market -- in many of the markets this past first quarter that, quite honestly, we look back on and regret. And it's just simply marginal additional seats on marginal flying days. And as we look forward, we realized that we're better off to cut back some of those additional flights, and that's what we've done beginning in the May time frame. So I mean there's nothing wrong with Vegas demand. Las Vegas demand is very strong. Hotel statistics are very good, both ours, as well as the city's, hotels statistics. Visitors are up. So the Vegas market continues to be very good, I think quite honestly in Vegas, we hurt ourselves a little bit by being a little over aggressive on additions in capacity, and we've reversed that. And we should expect to see a material improvement.

Okay. Just a quick question for Scott. You may have given this number, the engine maintenance expense in the first quarter of this year versus a year ago.

I didn't give that, I just gave the spillage from 2011 into '12, so $3.5 million was related to the 2011 program.

Okay, now are we at the end of that program?

Right.

So we won't see that in the second quarter, any unusual engine maintenance expense?

That's correct.

Jim, it's Maury. One other thing. Just a note, our average fare since January of '05 through March of this year, how much it's up? 6%. We were charging $89 back in January '05. So experience also brought this point forward that our goal is to keep our selling fares as low as possible. So some of the things that we did here with the introduction of the bags and things like that, we certainly want to let the world know that's we're still the lowest fare out there. And while you may have some ancillary charges, it's still substantially below what you can get elsewhere. But we're very pleased -- well, the ancillary products during that time were up 339%. So we find it very essential to keep that average fare as low as possible.

And our next question comes on the line of Duane Pfennigwerth of Evercore Partners.

Just on the fuel efficiency, it looks like that bumped up quite a bit. And just wanted to ask you was there anything one-time in nature in the first quarter? I assume it's due to the changing fleet mix, more seats in your 80s and adding the 75s. Where can that go relative to what we saw in the first quarter?

You're correct about that, Duane. That's exactly what it is, and it will continue to improve as we have more of the, larger gauge MD-80s mix of the fleet, as well as more flying by 757s. I think that we have not tried to even forecast what that looks like in subsequent quarters from now. But certainly, that helps, there's no question about it.

I guess the biggest bump sequentially from 4Q to 1Q was what? Is it 166? Or is it 75s?

166.

Okay. Sorry, and I'm sure you mentioned it, but where are you in that process? How many do you have done?

We have 19 today, and we have 4 lines -- in other words, 4 aircraft being modified simultaneously, and we expect that pace to continue through the balance of the program with exceptions during particular strong demand periods where we will have fewer than 4 out of service. At this point, the airplanes that are in modification are airplanes that were previously in service that we're pulling out of service in order to add the seats. So we will continue to chug along get them out as fast as we can. It's -- I wish we could be faster. It's a little delayed from what we initially thought it would be, but we're making progress.

And then, just a general question on the seasonality of your earnings. We've been increasing fuel a fair amount over the last couple of years, and that's probably kind of continue to vary here. But if there is such a thing as steady state, is the March quarter still your big quarter? Or is Hawaii and 166 likely to change that?

I don't think 166 will have any bearing at all on it. But I think Hawaii certainly has historically been stronger in the third quarter. I think Oakland is the same thing. So as the network competition shifts, I think, there is a possibility to see some changes there. Although, I think March is still March, and March everywhere is pretty much as good as it gets. So -- but I think that we've had some pretty good performance, really, first, second and fourth quarter. Third, historically, has been the weakest, in part because we pull a lot of capacity out, put some pressure on cost. And we take advantage of that time to do a lot of maintenance work, which puts additional pressure on the cost side. But we'll see. We aim to obviously generate really high returns every quarter. And with a few exceptions, I think we've been able to do that.

And our next question comes from the line of Michael Linenberg from Deutsche Bank.

Just a couple of questions here. With the new service to Hawaii, the flights out of Vegas, are you attempting -- is there going to be connections into your network? Or is that really being sold as a local market?

Mike, they are being sold as a local. At this point, no plans to offer through connections, anything like that. I guess, you never say never, but we just think the complexity that comes with changing so fundamentally the system that the revenue benefits are outweighed by the cost of complexity and the actual hard cost associated with that kind of a service. I think what you'll see us do is we have a new website roll out and certainly offer customers and some of the locals, including maybe hotel stays in Vegas and in Hawaii, if they wish to self connect. But that's, at this point, that's the extent of any thoughts we have about what you just mentioned.

Okay. And then when you mentioned that the Fresno piece, you had some positive commentary. I think you specifically said that you were pleased with the air piece. What -- I guess at start out, what's the hotel penetration like? I mean, what you're offering relative to maybe some of the other markets? Is it a dozen properties in Hawaii? I mean, what are -- at this point, how much are you selling? And I'm talking about the third-party type stuff out of Hawaii. And I realize it's very early on. Where do you -- sort of what are the plans as we roll out over the next year? I mean, will you be -- will you have a much broader offering? Can you just give us some color that?

Yes, Mike. We have contracts with 50 properties in Oahu, so we have a very broad product offering. And the early returns are pretty good, with a lot of room for improvement, but I'll tell you that the take rate today is materially higher than any of our destination markets, with the exception of Las Vegas. And we expect that will continue to drive higher. We do not expect significant -- we do not expect the Vegas market, which is 3/4 of the capacity this summer, to show the same characteristics as the other markets that we target, and that's because Vegas and Oahu have a lot of VFR traffic. So we don't expect that presents the same opportunity. If we peel back and just look solely at Fresno, it's more representative, and we're really pleased with what we're selling. It's just too early to really tell where that trend is going go. But we feel really good about it. We feel we have the right inventory at the right price, and that goes for not only hotel but car. We are selling a few attractions. I think that the breadth of that offering will increase over time. We went in there this summer, even though it's a short booking window because we really want to get into the market and get some experience and hit the peak summer period. But clearly, the performance this summer will not be as strong as it will be next summer when we have a more normalized selling opportunity, and we will learn a lot from our experience this summer that we'll use to optimize the network and the offerings as we go forward. But as indicated, we're really pleased with the early returns, especially Fresno, which has one flight a week. And so any concerns about limited frequency at this point in time seem to be misplaced, so we're happy with the first couple weeks of bookings.

That's good. And just if I could just add one last in on Hawaii. As we think about it and I realize people look at the unit revenue impact. Obviously, there's a unit cost impact. If we sort of take it from a different perspective and think about impact to your margin to sort of the historical legacy Allegiant system and you bring in Hawaii. Given that there's always startup costs, and there's always teething pains early on. In the market, it takes sometime maybe for the market to get to know you. I know you've been pretty good at ramping up pretty quickly in other markets. This is a bigger deal. When we think about early returns and out over the next 6 to 12 months, is it your view at this point that it looks like that the overall profitability of Hawaii is as profitable as the Allegiant system? Or are you getting the sense that you could actually be -- very quickly you could get to a point where it's running margins that are higher than the Allegiant system? I mean, how should we think about it? I mean, any color on that would be great.

Well, Mike, I can tell you that the early returns would be of no use at this point in terms of forecasting, in my opinion, because we just don't have enough data. Before we made the decision to invest in the 757 aircraft, which was done in order to serve Hawaii, the forecasting we did at that time indicated that the returns, in terms of margin, would actually be higher than the network that we currently operate on the mainland. And that's why we felt comfortable making the investment and the complexity of having a second type and the more capital-intensive aircraft that we brought on. So there's no reason at this point to think that our forecast, going forward, would be different from that, but time will tell, as we gain experience in the market. It's off to a good start, but it's certainly way too early, I think, to be able to predict what margins are going to look like in Hawaii.

Our next question comes from the line of Jeff Kauffman from Sterne Agee.

Sal Vitale on for Jeff Kauffman. Just a quick question on the cost side, specifically looking at the labor cost per available seat mile. That declined nicely year-over-year about 9%. How should we look at that going forward into the out quarters?

This is Scott. I think when you look starting Q2 going forward, that's when you have the lapping effect of when we outsourced the Las Vegas station. Hopefully, we can continue the trend of really good crew efficiency. So I would be hesitant to say you'd see that sort of decrease year-over-year subsequent to the first quarter.

In fact -- this is Andrew. Let me jump in. I think that the other that's going to be potentially a headwind is just simply as we roll out more of the 166-seat airplanes, while we get the benefit on the ASM side of the house in terms of costs, they do require 4 flight attendants. So I think that there's a few moving parts right now. But the trend is -- we feel like we're on top of that expense line.

Let me ask it a different way. How should we think about headcount? And I'm not sure if you commented on this earlier in the call, but how should we think about headcount for the rest of the year?

I would say it's relatively flat. We've been real consistent, 30 to, say, 34 FTEs per aircraft. Even with the addition of the 4 flight attendants, we continue to outsource more of the station operations. They're somewhat offsetting. We're just not providing a forecast on that right now. But again, as Scott indicated, we just don't see the reason to think that it's -- that the trend is going to be any different on a go -- provided that you could look at the last several quarters of last year, you can get on handle on that number that you just asked about. And I think that's really all we have to say about that right now.

And our next question comes from the line of David Fintzen from Barclays.

Just following up on the Vegas, Honolulu market. It just -- it feels a little out of character in terms of how you started a lot of other basis, I mean, obviously connecting two destinations. You mentioned the VFR traffic. Is that just something unique to Vegas that you saw? Or is there maybe an operational reason or some other reason that you would do Vegas, Honolulu in the start?

David, it's Maury. The operations certainly had a play in it. It's a big undertaking, and we want to make sure we can support the system. And we have our main resources here in Las Vegas to do those types of things. So I'm not going to say we didn't think the market would be a bad market by any means. Honolulu, Hawaii and Las Vegas are somewhat like sister cities, so we felt that there was certainly room for demand and again, with pricing that we felt would be underneath Hawaiians, so we would be able to stimulate our traffic share per se as well. So it's a little bit of everything. But it's, long term, we think, a good market for us.

Okay. As we start to see these announcements for the fourth quarter, we shouldn't be thinking a different strategy in terms of market selection better than your historical?

I think the initial point here is Fresno and how well that's done. And that's a good, if you will, endorsement of our thought process.

Okay. Then just on third-party ancillary. Obviously, you mentioned that flights to Vegas are maybe a little bit different than the norm. Just to help us, how should we think of spool sort of outside of those 2 bases? I mean, is this something that takes sort of 2, 3 years to mature? I mean, I'm just thinking as you're adding Punta Gorda and Oakland and Myrtle, some of these other destinations. What's the timeframe on sort of getting that business to maturity?

David, I think -- this is Andrew. I think that we continue to see outsized growth in Orlando where we've been serving since 2005. And so I don't know if we know the answer to that. We obviously made a big investment in this area with management. We have a big investment on the automation side with some tools that we don't have quite have ready, but we think will help us. And then, of course, in due time, with these new tools, we expect to be able to offer a land-only product, whereas today everything has to be sold on an air seat. We do think that we have opportunity to grow the business on the hotel side. I think what's interesting in the first quarter is you saw that the growth in cars was -- exceeded that of hotel in terms of units. Hotel is the still more valuable because it's a higher purchase transaction. But we think that there's just a lot of upside in this area, and we're working hard to be able to slowly capture it, and we'll see. Maybe in a few years, we'll be able to better answer to that question.

Right. And then one little one, when you roll out the new website, will you be able to sell international?

Sure. We just have to set it up and put your taxes and fees, and it will take some work, but the structures will be all there to put it together. It's just another market.

And our next question comes of the line of Helane Becker from Dahlman Rose.

Most of my questions have been cleverly asked already, so I just have one little one. And I think it's related -- somebody, I think, said that you had bought 2 aircraft off lease during the quarter? So is that it for aircraft lease rentals than going forward, everything shows up in depreciation?

That's correct.

And our next question comes from the line of Dan McKenzie from Rodman & Renshaw.

Scott, just a couple of balance sheet questions. I got pulled away from the call here, so I'm not sure if you might have mentioned this, but I was wondering Allegiant's cash flow from operations in the first quarter. And then related to that, as you generate cash, would you be inclined to essentially accelerate the paydown of debts throughout the year? Or is it just -- given the CapEx obligations, is the plan really just to hoard cash as we look ahead?

Hoard's a vile word, Dan. It implies bad market juju. A few airlines have cash.

Yes, I mean we still have north of $70 million in CapEx. Fuel, on a skid basis, is still right around $3.50 a gallon. So I think having a little extra cash isn't going to hurt.

Got it. And then can you share what the cash flow from operations were?

Yes, I think I mentioned that in my script. It was roughly $85 million.

Got it, okay. I appreciate that. And then, as you transition to longer haul flying to Hawaii, I think, one of the, I think, product attributes is a little bit different from Allegiant as the seats don't recline. Did you do market research on that before implementing that? Or is that essentially sort of the key to extracting kind of a seat assignment premium?

We did market research, Maury and I talked about it a few years ago. We decided that made a lot of sense, so we did it. I mean, we don't really believe in that kind of stuff, Dan. I mean, we roll out things and let the customers decide. And if for some reason, if we get a huge amount of feedback that says, "Oh my gosh, I can't fly on this Hawaii trip because the seat doesn't recline, despite the fact that I'm saving hundreds of dollars," then I guess we will consider reclining the seats. But we don't expect that's going to happen.

Dan, we made a conscious decision, 5 years ago, to -- seats are an ultimate pain in the butt for management to remain -- to stay on top of -- put those recliners in there. Big guys like you get in there, and you kind of thrash your way back and the next thing you know, the seat is broken. It won't come off, and now we got to take it out of service until we can make sure it stays up, I mean. So what we did is we took in the middle road. We ordered our own seats, and we reclined them halfway. We actually get a lot of positives about them. They're comfortable and they feel good. So all in all, it's been a pretty good program for us, and seat maintenance is way down.

Yes, I appreciate that. I guess, what I was really getting at with respect to the market research was potentially the premium that you may be able to get from selling the seats. So if the market research was very positive, it suggests perhaps that you wouldn't have to discount fares as much to fill the seats. So I guess, that's what I was really trying to get at.

Dan, we -- yes, I mean, I think that our market research is experienced. And right now, we're -- seat assignment on Hawaii has been exceptional, which as I mentioned in my comments, it's perhaps not surprising.

It attracts our long haul flyer.

People are more interested knowing where they want to sit and assuring themselves of a particular seat on that kind of omission. But we try to just look at data after the fact and what our customers actually do and behave, as opposed to try to ask questions ahead of time. So we prefer to just experiment and learn from there.

And our next question comes from the line of Glenn Engel from Bank of America Merrill Lynch.

Two quick questions. One is you mentioned the 24-hour refund rule, Maury. I was curious whether many people took that up. Or is that not been as bad as feared?

There was a slight increase. I wouldn't say we would expect it to go down, but we just haven't seen anything that's kind of we have to get after and meaningful. We believe strongly that, that really, of all the issues with the DOT, that one's clearly outside their purview. But it wasn't a material item, and we just didn't see it jump through the roof.

Then why really fight it if it doesn't seem to be that big of a deal?

It's personal. You got a NatGeo [ph] guy that thinks he's been around too long to have these guys tell us how to run an airline.

Last question is on CapEx. Can I assume that it drops considerably next year. Can you give us a general range for 2013?

That's a fair assumption. Yes, we don't have anything in the pipeline at this point to -- all the stuff is there, Glenn.

So the only thing would be engines and stuff, I guess?

Glenn, I think we're not prepared to really give a range for 2013. Certainly, the seat program will be done this year, the 757s will have been purchased this year, and those are some -- the 2 prior largest contributors to CapEx during 2012.

And our next question comes from the line of Steve O'Hara from Sidoti & Company.

In terms of the revenue growth going forward, with the new IP system and carry-on bags and so forth, I mean, do you see more revenue growth coming from the ancillary side of the house or from just PRASM?

That's a tough question to answer, Steve. We're definitely trying to roll out some new ancillary products like the carry-on bag, and there's a few others that are -- that we hope to roll out in the next few quarters. So I think perhaps if I had to guess, I'd say maybe that would be where we'd more of the growth. As Maury indicated, we think it's really important to keep the passenger -- the airfare as low as we can and instead drive revenue by offering other services and other options that customers can choose from. And that's proved to be a much more effective way to maximize revenue, in our experience.

And then, just kind of as a follow-up, I mean, in terms of the -- there's a decent gap, I think, in terms of ancillary between you and Spirit. I mean, do you think the IP system you had in place was something that kind of tied your hands in terms of being able to grow that piece of the business? And do you think this new IP system will help you kind of get those handcuffs off a little bit?

That's, in part, a fair description. I'm not sure I'd say that the old system has handcuffed us. We had limited resources to develop, and when we chose to dive into the bowels of the system with the resources we have rather than every time you fix the old system, that's more work you've got to do on the new system as well. So we fought that battle, Steve, for the last 1.5 years, and we're at the point now where we've essentially frozen all work on the old system so we can get the new one launched. And once there, then we can make those improvements. And yes, they will be enhanced offerings as a result.

Okay. And then finally, did you -- did I hear you correctly in terms of the take rate for carry-on? Did you say 1/3 of the passengers are buying that product?

Yes. I said it's approximately 1/3, yes.

And our final question is a follow-up from the line of Hunter Keay from Wolfe Trahan.

Two more quick ones. Maury, another policy regulatory question for you. I'm sure you probably saw Senator Schumer send a letter to the DOT asking them to require airlines now to disclose the price of carry-ons in the total price. So in your experience, with these letters that we've all seen before, did you guys think this one has any potential traction given what just happened with Rule II?

We answered the senator's letter, and we suggested that -- I think he quoted a stat in there that United Continental had 87% of their customers with carry-ons, and we respectfully suggested that our customers are a bit different and that we didn't see that kind of statistic. And one of the beauties of the marketplace is it lets customers decide for themselves. And again, the issue for us isn't that we're not letting you bring a carry-on, it's we just like to ration the space. As I mentioned earlier in my comments, with 166 seats, with 90% load factors, one thing we can make on more of is overhead space. So we -- to my mind, it's not fair that the first person who gets on gets baggage space because of their luck of the draw. We want to manage it according to value and what people place on it and that comes back to dollars and cents. So good traction with DOT. Perhaps there's new rules being written, I understand, as we sit here today. So we'll see.

But Hunter, this is Andrew. I think that what's really important is that, again, before anybody agrees to buy travel, they know what the total cost is. And so there's this notion that somehow customers should be able to get the total price that much earlier in the transaction, as opposed to waiting another minute or 2 later. And we just think that's kind of silly and makes no sense, and we just don't understand it at all, quite honestly. So...

Updated rules and approaches that go back to a system that's the same for many, many years. And they want it to be the same, but it's not going to be.

No. And the other quick one I have is your expectation is going to -- I have a follow-up on the Hawaii dynamic. You said before you're going to come in at a lower price point to stimulate traffic against Hawaii. But you have different point-of-sale expectations because I'm thinking that maybe you guys take a share of Vegas to Hawaii. They take a share from Hawaii to Vegas given the sort of local recognition and whatnot, the mileage plans over there. Are you targeting more Vegas-based to Hawaii? Or are you targeting more Hawaii-based to Vegas? What is your point-of-sale expectations for both you and Hawaiian market?

I think you summarized it very well. They certainly have the presence over -- in their part of the world, and we're known here. Not to say Hawaiian isn't known here, but typically our destinations, we book the traffic away from the destination to the destination. So given Honolulu is our destination, that's not an unreasonable place we'll start in and go at it.

Yes, Hunter. That being said -- it's Andrew. We have seen -- the market as a whole, I believe, it's about 70% point-of-sale or origination in Hawaii. And we're seeing numbers that are not -- we're not at 70%, but we're pretty substantial, so I mean, it's the same thing that happens at all the other destination markets. We haven't put a lot of effort into marketing in Honolulu. We've put our effort in the market in Vegas. And friends and family and acquaintances let people know on the other side that we are offering this service, and we've seen that time and again in Phoenix and L.A. and Florida markets where we end up with a very large percentage of traffic originating in those cities despite minimal to no marketing efforts. So I think we'll see that in this route as well.

And this concludes our question-and-answer session. I would like to turn the conference back to Maury Gallagher for any final comments.

Thank you, all, very much. Appreciate the inputs, and we'll see you in 90 days. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.