Allegiant Travel Company (ALGT) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Allegiant Travel Company’s First Quarter 2015 Financial Results Conference Call. We have on the call today Maury Gallagher, the company’s Chairman and Chief Executive Officer; Scott Sheldon, the company’s Chief Financial Officer; and Jude Bricker, the company’s Senior Vice President of Planning. Maury Gallagher will provide us with some brief comments and then we will begin our question-and-answer session. First, we wish to remind listeners that the company’s comments today will contain forward-looking statements and there 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 causing the underlying assumptions of these forward-looking 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 Securities and Exchange Commission. Any forward-looking statements are based on information available to us today and we are undertaking 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 maybe based on assumptions and events that do not materialize. This earnings release as well as the rebroadcast of the call are available on the company’s Investor Relations site at ir.allegiantair.com. At this time, I would like to turn the call over to Maury Gallagher. Please proceed.

Thank you, operator and welcome everyone to our Q1 call. Operator, let’s go right to questions.

Thank you. Our first question comes from the line of Hunter Keay from Wolf Research. Your question please.

Hi, everybody. Thanks very much. So I guess, unfortunately we have to spend some time talking about this pilot situation, Maury, a little bit here. Can you tell us how this gets resolved in the near-term? What gives you the confidence that the ruling is going to go in your favor in the next couple of weeks? And more importantly, maybe how this gets resolved over the long-term, because this is sort of a series of Band-Aid solutions, I sort of worry how this doesn’t become just this sort of ongoing distraction, what’s the long-term solution here and what happens in the interim basis?

Well, Hunter, it’s the perhaps elephant in the room given the last month. Fair question. We are in a process with our pilot group, the IBT in particular. Given the ruling last summer that the judge found we had status quo and if we want to expand on legal and technical terms and the like we can do it subsequent calls, but the – based on that finding, there is a technical right to seek self help if one of the groups in the contract, that’s ongoing, pilot group or a management group, their ability to seek self help if they believe the other group is not adhering to status quo. That’s what the pilots were doing. IBT was doing in the last couple of three weeks. In particular, they were pushing that we were not following status quo as it regards to bidding process. Two technical ways to bid: one, the line bidding, which we had been doing; and then with the switch over in January of ‘14, we went to a PBS system or as known in the industry preferential bidding system. That system was what the pilots subjected to last summer. Court found that there was status quo and that while we were not going to go back to the line bidding system, we did have to advance our efforts with regard to the PBS system. And in particular, the standard that the judge put out at that time was expanded seniority better, had transparency and predictability. And fast forward to the hearing here of the past week to two weeks, we went out as a company as the pilots and the IBT threatened to seek self help through a strike and filed our own action in the court and that’s how the initial TRR was granted a couple of weeks ago. And most recently, we had hearings on the applicability of that ruling by the judge and whether or not we were following what he had laid out on those three good points. And we feel very strongly that we demonstrated that we had followed those points and have enhanced this system. There is a number of other areas we can talk about, but bottom line understand, we want our pilots to be happy. There is no reason we want to have an upset pilot group. There is bigger issues I think that are being negotiated here, if you will, through this approach. But longer term, we think we will be successful with our preliminary injunction to stop this particular action strike-wise in the next couple of weeks. That’s our opinion. I am not saying the judge will agree with it, but we think he will. When that – if that injunctions and added to that ends the issues with regards to that particular one. In addition, the NMB has ordered us both back to bargaining table starting at the end of the month, which is fine with us. We haven’t had a bargaining session in 6 months since October, November of last year. And we obviously can’t get a deal done if you are not talking. And we have been spending our time in the courts and reacting to a lot of these accusations from the IBT. We think that most of this is over. We will wait and see. We can’t predict – we don’t know all the facts or what might be coming from the other side. But at this point in time, we want to get back to the table. We want our pilots to feel good about this situation. We also put in the release today that given the performance of the company, put our current work rules. The pilots will be getting a raise, give or take, 5% to 7% based on our performance. It was our band approach. And we have had a great 12 months. We are over 20% operating margin and that kicks them up into what we call band 4, so all those are positives. It won’t be over till October, but we don’t expect any of the activities that we see in the last month to continue at this pace or not to say we won’t have other small outbreaks and the like. But it’s we want to get to a solution with our crew members, we have said that to them. We are fighting a lot of technical issues, but we think there will be in our rearview mirror pretty quick.

Okay. So then to that end, if your successful in the preliminary injunction, is there going to be a maybe timeline on that, that will say last 6 months or will that be sort of an open-ended thing that bridges you to a collective bargaining agreement. And as a follow-up to that question is how does that impact this FAA indicating that you are not – it’s not going to process any current or additional work request that may relate to the growth, so do you need a CBA in place for the FAA to start giving the green light on growth or will the FAA start to process the requests if there is a preliminary injunction in place?

The answer we believe is the latter. We have a position in that when the preliminary injunction is in place, that’s sufficient for them, at least that’s verbally with us. We disagree with that, I might add. And we are – had issue with the FAA over what they are doing here and that’s a separate discussion we are having with them as we speak here. But going back to the first question, once that preliminary injunction is in place, it’s possible the pilots could suggest that we weren’t following the judge’s orders sometime down the road and reopen it, but we don’t expect that that’s going to happen. Of course, we can’t control what they do. But bottom line, Hunter the ability for them to strike over that issue once this preliminary injunction is in place is not – I mean they have got to go against the court order and face the sanctions of the court at that point. We don’t expect they will do that. Of course, we can’t obviously control that. But that puts that issue to bed and we are back at the table as well with the NMB and where we want to be.

Thanks a lot, Maury.

Sure.

Thank you. Our next question comes from the line of Duane Pfennigwerth from Evercore, your question please.

Thank you. Hi Maury, just want to follow-up on the revenue guidance that you have offered, can you talk about the seasonality of the ancillary line in particular, do you expect it to remain at that $52 level. And then all of that sort of TRASM compression would be coming from I guess lower yields. And then secondly, is there anything seasonal in nature, is there anything one-time in nature that you would highlight with respect to the 2Q revenue guidance?

Hi Duane, it’s Jude. The gains in the first quarter that we experienced on our ancillary product production are sustainable going forward. Our revenue guys just did a great job and we are continuing to add new capabilities with respect to pricing in particular on how we price and market those products. So, I think that, that revenue line is going to continue to grow and the growth that we have seen there is sustainable. Now as far as the guide on 2Q revenue, TRASM, as we are giving guidance down 8 to 10, I just want to be a little more granular there in saying that, I understand that there is some year-over-year differences that don’t have anything to do with the demand environment, particularly we have – we are continuing to pass-through this increase in the 9/11 security fee. We also changed from a debit card discount, which was inclusive in our revenue to a credit card surcharge, which now affects costs. Although that’s operating margin neutral or even accretive, it takes down our TRASM. So, those two together reduced TRASM by about 4 percentage points. Additionally, because of the strike being in the press and some of the refund policies that we have maintained through the risk of the strike over the last couple of weeks, there is another 1% decline in 2Q TRASM. So, I think in the demand neutral environment, we would be down 5 percentage points in TRASM. The remainder of that is just rapid growth. We are guiding 16% to 20% growth in the second quarter. That growth is going to come in two forms. One is more planes in markets and secondarily, more utilization, and more utilization is particularly – has a particularly pronounced downward effect on TRASM. So, I think all things considered, demand environment for our price is really strong.

Alright, that’s good detail. Thank you. On the sort of demand impact from the negative publicity as you sort of watch your bookings recover, is it sort of fully back to the trend that you expected? How long did that take?

That’s still going on. We are still underway, we would expect it to have been, but it’s very different to measure, because there is a lot of nice in our revenue numbers with the growth that we are putting into the network.

Okay, that’s great. And then just lastly, could you summarize the fleet changes that you are announcing, it looked like a couple more A320s and how – maybe it’s just the nature of these deals, but historically, there has been a pretty big lead time between new deals to getting them in your fleet, how are you able to get these in so quickly? And is there any lease revenue, sub-lease revenue associated with this? Thanks for taking the questions.

Yes, sure. These three airplanes that we announced today were last operated by Homburg Airways, which liquidated. So, we are buying them on repossession. And the induction therefore span of these airplanes is very long. We won’t put them into service until the end of the third quarter. So, it’s an opportunistic deal. It’s the kind of deals we like to do. I would expect those to pop up periodically often to the future.

Okay, thank you.

Yes, thanks.

Thank you. Our next question comes from the line of Michael Linenberg from Deutsche Bank. Your question please.

Yes. Hey, Maury, I want to just go back to the heightened surveillance by the FAA and the fact that it looks like that they may – there maybe some impact on your growth until the outcome of the litigation is known? Is that the right way to interpret it that if for some reason this drags on for more than just a few months that, as a result, you will have to scale back growth in the next quarter or two? I mean I realized in the press release you say that there is no impact on ops, but I am just – I am trying to get some clarification around that?

Well, the main things that we ask the FAA or have to ask the FAA to do, Michael, are: one, put more airplanes on our certificate. That goes through their process where they check the boxes and buy into our expansion. And secondly, as we put new cities on, we have to expand our ops specs to put these cities in place. And over the next two quarters in particular, we have enough airplanes to do what we need to do that we wouldn’t have put these numbers out obviously with the kind of growth we have got if we didn’t think we could do it. The only potential risk we have and we think we will manage through this is a couple of cities will be problematic getting them on the ops specs and we have ways to manage around that. But we are in the very active discussion with the FAA over their findings. And mind you, to the FAA’s defense, anytime there is labor issues the FAA steps up surveillance. It’s part of their requirements and we get that. We are just in discussion with them about why – what the letter says and what they are doing and things like that. It’s fair to say we disagree with some of their conclusions. But regardless, we are going to be in good shape relative to growth and what we are doing and a lot of that is just locked in and ready to go, more flying with the existing airplanes and with the airplanes we have.

Okay, great. And then just I guess another one, is there any sort of risk, maybe risk it’s not the right characterization, but that the union comes back and says that this pay increase is some form of – they view it as some form of interference in the negotiation process and make some noise about you rescinding it? I mean, is that…

Well, it’s an interesting issue, Michael. We will give you little labor 101. Status quo, the judge says we have an agreement, we disagree with his conclusion. We have had an appeal in with the Ninth Circuit. And the status quo says that we can’t change anything without negotiating it. And so part of the reason we are able to push this raise through our crew members, which we have had a real windfall, we are trying to share it and that’s what this whole intent was when we put this together a number of years ago. But we have to eliminate that right down with the 757s last quarter. So, we look back 12 months. And so we told that, right, when we put the thing out, the adjustment out for the 75s that we would be doing this. Technically, that’s not what the agreement says. So, we are – you could argue we are violating status quo. We will be talking to the IBT and if they say that we can’t do it, well, we will deal with that at the time, but that’s what the agreement says, we can’t do given our interpretation.

Okay, great. And then just the last one and this is probably for Scott, when you look at your growth and your unit cost, unit costs ex-fuel up in the March quarter. And obviously, not a lot of capacity growth, but as we move to the year, the capacity growth really starts to pick up. It looks like that the unit cost ex-fuel is going to be down a lot in the second half. And I am just – I am curious about the ramp up. It looks like it’s a more shallower ramp up, like you are not seeing the lower unit cost until you get well into the third and fourth quarter. Is that timing? Is there year-over-year? Is there some maintenance that’s brought forward? What’s – why does it seem like it’s so back-end loaded?

Yes. So, as Jude mentioned, with the single-digit growth in the first quarter, ASM growth is definitely picking up in the back half. If you remember the front half of 2014 was loaded with a lot of operational issues, crew availability issues, we subleased or sub-serviced a lot of scheduled service lift. We have been continuing to add to the infrastructure and we should start to see some scale as we go into the back half of the year. So yes, to your point, on a percent basis, we should start to see a much larger decrease heading into the 3Q and 4Q.

Great. Thanks, Scott.

Thanks, Michael.

Thank you. Our next question comes from the line of Savi Syth from Raymond James. Your question please.

Hey, good afternoon. Just on the new routes that are being opened this year, could you talk about just how many you expect given the kind of return to this good growth here in 2015, just how many new routes you expect this year versus the past and what we should consider the potential impact from that to be?

The new market growth for the second quarter has already been announced, which is primarily happening in May for the summer period. And then Savi you are going to see another big large tranche of announcements in the fall as we like to do going into the Christmas period. Are you talking about scale of markets or percentage of new markets as the total capacity more specifically?

Yes, exactly. My guess is there is going to be a lot more new markets here in the second half versus maybe last year than what we have seen in the kind of the prior years and does that put more pressure on kind of unit revenue or it shouldn’t have much of the significant impact?

No, it will put pressure on unit revenue. I think the big thing to understand on new markets is that it takes some time to ramp. And so as we look at second quarter guidance, one of the things that’s negatively affecting that unit revenue performance is the newness of our markets. So for the second quarter of 2015 about 11% of our ASMs are produced by markets that have been operated for 6 months or less. And to go back a year in the second quarter of 2014, that number was about 2.5%. So yes, markets ramp slowly and we are not prepared to talk about new markets in the third and fourth quarters. But to sustain the utilization growth that we are experiencing, utilization is about 10% as a result of airbuses and fuel prices. That will maintain it self through the third and fourth quarters and continue to put downward pressure on unit revenue.

Okay. That was my next question. So I mean last – I think last September kind of the average block hour was 13 – sorry 2.8 and I am guessing it’s going to be much higher this September and therefore should help on the cost side as well, is that maybe what’s driving a lot of the second half cost goodness?

I didn’t follow the 13.8?

2.8 sorry, that block – average block hours?

Yes. So we would intend – we would expect to take that up significantly.

Okay, got it. And then one last question on the fleet plan, I am guessing because some of the MD retirements – MD-80 retirements planned in 2015 – end of 2015, 2016 are a result of the three A320s that ran down, but I did notice that in the 10-K there were supposed to be four 757s by the year end ‘16 and now it looks like it will be five, is that just a matter of timing or were there kind of change of thoughts around the 757 retirements?

You are talking about the year end ‘15 numbers?

Year end ‘16?

So year end ‘16 we are guiding to four, right.

Okay. Because I think in the press release, it says five to maybe…?

Yes. So, that’s just about an airplane that’s going to be right on the border.

Okay. So timing?

Like the 31 of December.

Got it, alright. It sounds good. Thanks guys.

Thank you. Our next question comes from the line of Andrew Didora from Bank of America Merrill Lynch.

Hey, good afternoon everyone. I guess my question on this new capacity is its obviously hurting, putting pressure on your unit revenues while benefiting your unit cost particularly in the back half of the year, can you kind of help us – help to give us a sense of how we should think about this incremental capacity on a margin basis, I guess particularly relative to your margin in the overall system right now?

We made 33% operating margin, so everything is really good and the new markets are accretive to earnings. And if they weren’t we would cut them and do something else. Now the other thing to realize is that we would produce much higher growth in the first quarter and take down our operating margin and our unit revenues if we could have. So based on the availability of pilots, we loaded a relatively conservative schedule and now that we are appropriately staffed we can grow at a much more rational rate based on our margin opportunity.

Understood that it’s earnings accretive, but are the new routes operating margin accretive?

No, they will be operating margin dilutive. New markets will have lower margin than the average system.

Got it. And then I guess kind of bigger picture question here, near-term FAA issues aside and I guess as you lapse some of these pilot availability issues you had last year, what do you view as a good longer term capacity growth number just given kind of your current fleet plans and utilization opportunities? Thanks.

Sure. Yes. I mean, I think it’s in the low-teens based on seven airplanes added every year. We had some pent-up growth that we are applying in the second, third and fourth quarters of this year. But with our used airplane strategy and pushing out some 757s and MD-80s, fleet growth is going to be around seven airplanes in the long-term annual average seven to eight something like that, mid-teens ASM growth.

Alright, thank you.

Thank you. Our next question comes from the line of Helane Becker from Cowen. Your question please.

Thanks very much operator. Hi guys. Thanks for the time. Just on Las Vegas specifically, I think the airport today said that the longest runway was reopening after some maintenance, so how will that improve the cost – your costs going forward, now with that runway opening – reopening?

From a cost perspective, it’s relatively neutral. Las Vegas costs given kind of a flat to even declining capacity profile, we are not seeing much in the way of any sort of cost decrease. I don’t know if you have anything else to add Jude.

Right. I would just point out that we are growing Vegas slower than the rest of our network. And so proportionately it’s shrinking and that's because we are right-sizing the base to balance opportunities that we have elsewhere, but also because of the cost increase due to terminal fee, which affected us several years ago. You will see new markets coming into Vegas like Tulsa and Cincinnati and Indianapolis. But overall, the growth is clearly focused on the East Coast right now.

Okay. So that 50%, 51% or 52-ish percent I think it was flying on the East Coast, where should we think about that going over the next year or so?

Very rough numbers, I would consider the East Coast to continue to grow close to 20%. And you will you see Mesa growing I don’t know 10% and Vegas flat. For a mid-teen growth performance, you will see almost all of it focused on East Coast.

Okay. And then I apologize, but I didn’t have a chance to read the entire press release, did you put in here the percent of your ASMs that’s produced by each of your three aircraft, and if not can you say?

Yes, I think the Airbuses flying was roughly 28%, 757s was maybe 8% and the remainder will be MD-80s.

Okay, great. I think those were all my questions. Thank you very much for the time.

Thanks, Helane.

Thank you. Our next question comes from the line of Joe DeNardi from Stifel. Your question please.

Hi. Thanks for taking my question. Scott, on the unit cost guidance for the year, the change there, is that primarily just the higher ASMs and with the pay increase that the pilots are going to see, is that reflected in the prior guidance or is that new?

It wasn’t reflected in the prior guidance. The full year changed the ex-fuel range, majority of that is related to the capacity increases that Jude alluded to. Also there is some – we are expecting to get some better productivity out of certain groups. There are some other smaller items that are affecting that, but the capacity increases are the majority of it.

Okay. And then Jude, could you talk a little bit about some of the revenue initiatives that your team is working on and maybe to what extent that the pilots scheduling system, the resources that you are putting into that are impacting the progress you are making on some of those. And maybe also touch on the effects you are seeing from the credit card surcharge in first few months?

So first, most of the stuff we have talked about at our Investor Day, this is about pricing and merchandising better website for our air ancillary products. The most pronounced increase in air ancillary is just an increase in the convenience fee of $3 per segment. But we are also continuing to see increases in other products like our priority boarding and Trip Flex products. We have a pay-for-check-in product, that’s a year-over-year improvement. And also, our seat assignment revenue is increasing. So across every category and this maybe the first quarter in a while, across every category including buy onboard sales, we have seen year-over-year improvement on unit revenue for air ancillary products. So these, I think are structural and will continue maybe at a less rapid pace but nonetheless we will continue to see good improvement.

Okay. And then the CapEx increase for the year does that – I assume that reflects the three new aircraft?

Yes, that’s airplane.

Okay, alright. Thank you.

Thanks Joe.

Thank you. [Operator Instructions] Our next question comes from the line of Dan McKenzie from Buckingham Research, your question please.

Hey, good afternoon guys. I guess just first off a housekeeping item here. It seems that you are factoring in some kind of revenue book away into your forecast. So first, is that correct? And secondly, if the labor case is resolved in your favor, is that a potential revenue good guide or relative to the guide that we are seeing today?

When you say book away, are you meaning the strike in the press?

Yes, that’s correct, just following up on an earlier question.

Well, my 1 percentage point change in unit revenue for the second quarter comment was very conservatively based on the refunds that we gave for passengers during the weekend period of Easter that we offered refunds if they didn’t want to travel. So, the book away aspect of advances, fares that we are selling now and any change to those fares is very difficult to measure. We are not giving any guidance with respect to that.

I see, okay. Okay, CapEx – when does – just kind of a CapEx-related question here, when does the FAA surveillance go away exactly? Does it end when the Court decision – when we get the Court decision or does it linger after that for some period? And then I guess just related to that when we get back to a normalized operation, how many additional aircraft are you dealing in the market for looking ahead say just this year and next and I am asking that just to try to get a sense of what CapEx could be relative to the outlook we have today?

Dan, let me have Steve Harfst, COO comment on your first part of your question.

Hi, Dan. Good afternoon.

Hi, thanks.

Yes. Related to the FAA’s position related to the heightened surveillance that they have put in place really nationwide related to the strike efforts of the pilots union, we think this is going to be a short-term issue for them. And we are going to be able to work through it, like Maury mentioned and Jude mentioned earlier in our release. We don’t see any long-term effects of that. I think the judge’s decision, which we expect out the next week will provide some certainty and some stability into the situation. We think this is going to be easily resolved here in the next week or two.

So, on aircraft, we don’t need anymore airplanes to the back of ‘17 other than those already committed to?

Back of ‘17.

Back of ‘17. That’s with no retirements. Now, we would like to retire a couple of MD-80s here and there. So, we would like to go out and get some more A320s. And if the price and availability supports a more rapid transition, we will do so.

Yes, thanks Jude. I guess that’s actually my question. Assuming you can continue to buy these things for $10 million apiece, would the appetite be for replacing 5 of those MD-80s or perhaps more or I mean is there some way that we could kind of think about that?

Yes, $10 million, the economics are very powerful to support a transition away from the MD-80 even at this field size. So, yes, we could find $10 million in scale, we would transition very rapidly. There are some logistical and operational considerations of that how quickly we can move, but there is no capital constraints on how quickly we can acquire airplanes. It’s really about price and availability.

Got it. Can you provide some perspective on those operational constraints that would limit perhaps how many you could deploy in a given year?

We are moving about as rapidly now as we can. And so we are – we committed to 15 airplanes since the beginning of the year. We would like to maintain about 7 airplanes of growth as I said. So any transition would go over and above that. I would certainly be comfortable with say 15 a year and we could maybe stretch that a little higher. And then there is the end of fleet consideration. If you get down to the very end of a dozen airplanes or so, it’s probably not worth keeping them in service. That’s a longwinded answer to basically say it’s about 15 airplanes a year, which 8 of them would be for replacement roughly.

Good. One final question if I could squeeze it in here. It looks like Allegiant raised $37.5 million debt in the quarter. Just given the free cash story here – free cash flow story, why the liquidity boost is? Is that tied to a scenario where things perhaps don’t go your way or you mean you clearly don’t need the cash or is it perhaps some additional aircraft that you are perhaps looking at currently?

Yes, don’t read too much into that, Dan. It’s just 2% money, that’s all.

Okay, fair enough. Thanks guys. I appreciate the time.

Thanks.

Thank you. Our next question comes from the line of David Fintzen from Barclays. Your question please.

Hey, good afternoon everyone. Just a follow-up on a question from earlier, Jude, just as you are moving into markets like the Indianapolis, Pittsburgh, some of the – I guess, you won’t call big cities, but bigger than you have done historically. Do those develop faster or slower than sort of that classic, very small Allegiant city?

Cincinnati has been our fastest growing city in the history of Allegiant.

Okay, so…

So, yes, our marketing team has done a great job. I was concerned about our ability to get word out into a bigger city like that and that’s hasn’t been a constraint. And a lot of these new markets or all of them are outperforming expectations and our network team just does a great job of continuing to find places to put these new airplanes. So, I don’t see any constraint with growth out there on the network opportunity side.

And are you seeing because they are – some of these would have more competitive dynamics than some of your other cities? Do you see – and I know that’s early so maybe you don’t have the basis of history to judges, do you see a difference on how people are pricing against you with low oil?

In general, we don’t see a response from our capacity. I understand that we are very focused on peak demand profiles whether day of week or seasonal. So, New Orleans is we are flying it on a seasonal pattern. And then lot of our big – all our big cities were less than weekly. And so we are flying a weekend leisure profile and if you are flying twice daily like Frontier, it’s very difficult to price against us, because we are only flying when there is spill capacity, spill demand.

Got it, got it, where people aren’t talking about pricing weakness anyway. In the Dakotas, I mean, if I just sort of broadly look at, is that a high single-digit ASM exposure? And are you – some of these North – kind of shale type markets, are you seeing any impact there?

There is generally some weakness associated with markets with a high proportion of border – cross-border traffic. I would more attribute that to the Canadian dollar weakness than weakness in shale production. And then also growth in hub markets like Salt Lake affecting Montana and the Dakotas. But yes, we are seeing – generally, we are seeing weakness in Montana, Dakota, Utah, on a relative basis to our other markets, but these markets just they are producing really good returns. I mean everything on a relative basis, when the margin production is what it is. Yes, assumptions 20% margin, we are talking about weakness, that doesn’t necessarily mean it’s bad.

Right, it’s not. That’s fair. And then maybe just sort of a bigger picture question on the pilots, when you kind of get back to sort of the main negotiation for the contract, Maury, who do you look at in the industry as sort of the benchmark or sort of the pattern? I mean, how much do sort of what’s going on, on some of the legacies planned in these negotiations or is it all about sort of Virgin, JetBlue, whatever it happens with Spirit and their next negotiation? How do we think about those sort of the comps out there?

Well, I think that you can’t ignore comps. We, having said that, have a very unique system that is unlike anybody in the world literally. And well, I think Ryanair might be close to us. Certainly in the U.S, where our guys are in their bed, flight attendants are in their bed every night, it’s halting back, it’s a very attractive schedule. Clearly though, we have to compensate people on a relative basis. So, we at the table, all those issues are brought to bear and you work through what the company can afford, what the company thinks is reasonable against what the demands are from the pilot group. Clearly, I think you segregate yourself, when you look at our unit revenue, we don’t have the revenue that Delta or American, United have on a unit basis and as a result our cost structure has to reflect that type of expense base per se. But we will – I think when we started out in the early 2000s, our guys were making $50 an hour. And I think with this new, latest change, we will be up to $160 an hour for our senior captain. So, we have certainly had a lot of increases over the many years and typically in this industry, the number always tend to go up anyway. So stay tuned.

Alright, I appreciate all that. That’s all very helpful.

Thank you. Our next question comes from the line of Steve O'Hara from Sidoti & Company.

Hi, good afternoon.

Hi, Steve.

Hi, Steve.

In terms of – if you just talk maybe quickly tell me what you are paying for fuel right now? And then kind of all in and then how much of that their current price factor did into your decision to grow or is it maybe based on your ability to source aircraft? Thank you.

We are currently paying around $198 a gallon on the East Coast, that’s all in.

Plenty of planes out there, Steve but we are not having any trouble particularly the A319 there is a lot of softness there. So I don’t think availability or price of aircraft will be a constraint for our growth.

We are paying $315 a year ago. It’s nice savings.

Okay. So I mean in terms of the ramp up and growth, it was more kind of hit the gas because the gas is lower now kind of thing and if you see any change in that maybe you just kind of adjust the accelerator at some point, if you need to?

Yes. Utilization is going up 10%, that’s 10 percentage points, that’s half our growth. Just to say our planes our flying more often than we already had.

Okay, alright. Thank you very much.

Thanks Steve.

Thank you. Our next question is a follow-up from the line of Hunter Keay from Wolf Research. Your question please.

Thank you very much. A couple of quick ones here, I think you said the preliminary injunction hearing was next week, when is that specifically?

I think you either misspoke or misheard Hunter, the preliminary injunction hearing is done. Those were finished last Thursday and the judge now needs time to write his ruling. He hasn’t stated what that will be. We expect he will publish a ruling next week as early as maybe the following week.

Okay, sorry about that. Thank you. That’s good. And then, Jude you talked about this – the seat masking concept at your Analyst Day, which is obviously driving some of the seat assignment revenue here. I think you said at that time you had about 65% take rate on seat assignments and you guys had just implemented the seat masking concept, so multi-part question on this, where did 65% go to, how high do you want to take it too and is this revenue that’s hitting ancillary or is it in passenger revenue?

Well, I will answer the last question first. So it’s all in ancillary. It’s in our ancillary reports. Now, I think we are the best at this in the world, seat assignment. So I am not going to get too open with you on that. But I would just – I guess my guidance would be that we are just starting to implement some of the – being able to use some of the capabilities that IT has produced for us. So our masking strategy and our pricing strategy are very, very early. And I think there is a lot of headroom there. So I think it’s going to – seat assignments are going to continue to drive ancillary – air ancillary revenue increases for the next several – sorry, for the next year. I couldn’t be more specific.

I hear you, when you are talking about this stuff being sustainable and you are being optimistic about it, that’s obviously part of it. I got you. And then on the buyback, presumably you guys were blacked out during the noise with this pilot strike situation, the blackout ends tomorrow, is that correct?

That’s correct.

Any reason to think that you guys would not perceive your stock to be very inexpensive right now, at this point in time?

You know a good analyst we can ask?

Let me see if I can – I don’t know Jamie Bickers, is on the line, I don’t know, but. I think yes I mean as talk about the buyback here in the context of what you guys did last year, let me phrase it more broadly I mean given the pull back we have seen here and what we are seeing in the cash flow, CapEx guidance, I should say any reason to think why the buy back this year shouldn’t probably exceed what you did last year?

I think there is definitely opportunity just from free cash flow. Jude has a lot of unencumbered assets that he can go borrow against at very attractive rates. Yes, we like where the stock price is at right now. I think it’s buying opportunity.

We are basically bullish on the company. I think Jude did some research and suggested this was operating margins, we hold the record now at least in the U.S.

Got it. Very loose research, maybe you guys can help me with that?

Yes. I mean I have never seen a 40% EBITDA margin before in my career.

Alright. Thanks a lot.

We don’t have any rents, mind you…

Alright, thanks a lot guys.

Thank you. Our next question is a follow-up from the line of Savi Syth from Raymond James.

Hi guys. Just a quick question on the leisure demand, is the leisure demand that you are seeing today, if you can parse this out, do you think it’s mostly a factor of the kind of fair stimulation you are doing or are you seeing strength in the consumer where they might be kind of using the lower fuel kind of benefit that they are seeing and that they are spending or maybe do you think that’s more of a second half story?

Yes. I would characterize the demand as stable. The markets where we have flight capacity that we have been in for a long time, generally speaking, are producing about the same revenue production as we would expect considering all the exogenous influences on fares.

Okay, that’s helpful. Thanks.

Thanks Savi.

Thank you. Our next question is a follow-up from the line of Dan McKenzie from Buckingham Research. Dan you might have your phone on mute.

Hi. Thanks for the additional time guys. And apologies for going back to yet another labor question here, but if the decision doesn’t go in management’s favor, what kind of cost implication are we really talking about and is that – what have you assumed in the cost guidance?

We have not assumed anything in that sense that the judge suggest that we have not sustained our obligations under his PI at this point Dan. We don’t think that’s very high probability if at all at this juncture.

Okay and I understand. Okay. So I guess, just in terms of kind of the cost stake, I mean I guess is there some kind of perspective you can share just sometimes judge’s decisions can be wild, wildcard decisions, I totally agree and get what you are saying, but I am just wondering if there is anyway you could help us provide some color around that?

Well, I am not sure I totally understand it. Unfortunately, this situation is a kind of a zero-sum game, it’s either with business as usual or the IBT would call for another work stoppage. So at that point, we are into back to court to get another TRO to try and stop this. Beyond that assuming there is – the company is unable to fly its routes and as many planes, certainly we will have a different cost structure. More importantly, we will have a different revenue structure. So we will have to cross that bridge when we get there, but there hasn’t been a labor stoppage in this country and since Spirit. And if you go back to 15 years, it’s almost becoming in the airline industry very nominal at all. So I don’t want to – we have already made our forecast, we think we will be in fine shape and certainly, we will be reacting if not.

Okay, thanks again for the time.

Sure.

Thank you. This does conclude the question-and-answer session of today’s program. I would like to turn the call back over to Mr. Gallagher for closing remarks.

Thank you, operator. Thank you, all very much. We will talk to you again in 90 days. Have a good day. And thank you again. Call us if you have any further questions.