Allegiant Travel Company (ALGT) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the First Quarter 2020 Allegiant Travel Company Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. I would now like to hand the conference over to your speaker today, Sherry Wilson, Director of Investor Relations. Please go ahead.

Thank you, Sarah. Welcome to Allegiant Travel Company's first quarter and 2020 earnings call. On the call with me today are Maury Gallagher, the company's Chairman and Chief Executive Officer; John Redmond, the company's President; Greg Anderson, our Chief Financial Officer; Scott Sheldon, our EVP and Chief Operating Officer; Scott DeAngelo, our EVP and Chief Marketing Officer; Drew Wells, our VP of Revenue and Planning, and a handful of others to help answer questions. We will start with some commentary and then open it up to questions. The company's comments today will contain forward-looking statements concerning our future performance and strategic plans. Various risk factors could cause the underlying assumptions of these statements and our actual results to differ materially from those expressed or implied by our forward-looking statements. These risk factors and others are more fully disclosed in our filings with the SEC. Any forward-looking statements are based on information available to us today. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. The company cautions investors not to place undue reliance on forward-looking statements, which may be based on assumptions and events that do not materialize. To view this earnings release as well as the rebroadcast of the call, feel free to visit the company's Investor Relations site at ir.allegiantair.com. With that, I’ll turn it over to Maury.

Thank you, Sherry and thank you everyone for joining us today, it's been a while. First, let me thank all of our team members, their spouses and families as we continue to fly our passengers during these difficult and disturbing times. Thank you all very much. As I said in our press release, these are unprecedented times we are living through. Most of you will be listening to calls from the different carriers the past few weeks, and the story from each of them is more from TRASM, CASM, CapEx and capacity changes to liquidity, liquidity and more liquidity. To that end, we’ll provide you with some thoughts on where we are today and going forward. And you will hear from our management team on the specifics regarding liquidity, as well as how we are managing our schedule and how we’re responding to our customers. Over the years we prided ourselves on being different. You will hear today how we continue to differentiate ourselves from our industry. A critical component for us has been our model, it’s always been a core strength. Based on our model, our management team and our terrific team member we believe we will emerge stronger from this life changing experience in the coming months and years. Clearly, none of us has ever seen an environment where book revenues as well as booked future revenues disappeared in less than a month. During the last three weeks of March, each week's fall was so much worse than what we thought it might be. I tell my team members that fear is the lack of knowledge. And the lack of knowledge was definitely the case from the middle of March through April. We’re starting to have some clarity from knowledge we’re getting to understand the path out of this calamity that we find ourselves in. There’s three main types of traffic in my opinion in this industry, international, business and leisure. I believe the first two will be slow to return. In our case, the case more business you're seeing another important evolution. The world is learning to do things online, to work from home. In our specific case, we have multiple board meetings by video conferencing and plan to do it for the foreseeable future. This would not have happened but for COVID. Will it change our habits? Some think it will. Historically, coming out of downturns, leisure customers have been the first to return. From January '09 with the onset of the GFC, we found leisure traffic responded very quite well in that first quarter. We believe that will be the case with respect to this downturn that leisure traffic will respond faster than business in international. And while we do not have any specific forecast to make, we are seeing some increases the past few weeks. I want to stress to our audience that how fortunate I feel to be involved with such a quality management team. This group has done extraordinary work capacity, not only are they talented but just as important they are working very well together. I'm comfortable stating this group will continue to shine for us in the coming months and you'll hear from most of them today, so judge for yourself. We believe we are among the first to react to the COVID situation recognizing quickly this was not a passing phenomenon. We immediately began shrinking our schedule, cutting expenses and capital investments, working with vendors on delaying payables and renegotiating our relationships with them as well. We have approximately 25% of our team members participating in some form of pay reduction program to-date, and I want to thank them for that effort. We quickly ceased all construction expenditures on Sunseeker. Scott DeAngelo, our CMO since late March, has been focused on how we are going to recover. He's been surveying our customers weekly for the past eight weeks about their opinion on the pandemic, how they feel about it, when they plan to travel next and other key questions. He'll provide you with some further detail in a few minutes. I’d never wish for an event such as this pandemic, but these added to May of this year, it has dramatically altered the economic landscape. Bankruptcies have begun, as I'm sure you're aware. Avianca past weekend will operate approximately 45 A320s with CFM motors or type recently filed Chapter 11. Others will follow. U.S. carriers, as you know, that have -- will park over 2,500 aircraft in the next few weeks. In the space of 30 to 60 days what was once a robust seller's market for airplanes and equipment of the sort has been turned on in past. Most proper liquidity tool we have today is to stop cash from leaving the building, both operating expenses and capital expenditures. But for some aircraft, we've made the purchase for delivery in the back half of this year and a few in the first quarter of '21. We have dramatically reduced our CapEx. Beyond nearly 2021 deliveries, we do not have any further aircraft commitment. As a result, we will be able to exploit one of our core competences our ability to trade in the aircraft marketplace, we have a long history in trading used aircraft. Regarding our fleet near-term we are looking at what is the right size. As the cash saving move, we want to retire a number of aircraft perhaps as many as 10 to 15, because of upcoming expense and maintenance work. We will put these retired aircraft to good use in addition to saving capital for repairs, we will benefit from putting out the aircraft, particularly the motors. We're facing a great deal of expense in the coming years, particularly in motor overhauls. Now, however, between our motors from retirement and inevitable availability of tear down aircraft, we will substantially reduce cash outlays in my opinion for planned motor work and other parts cost in the coming years. My belief we will begin to see numbers of older 320s and 319s and their motors available as part of our opportunities in the not too distant future and prices will begin to react accordingly. Furthermore, we will be one of the few players I believe in the market with the wherewithal to purchase these assets. As you've heard repeatedly in the recent calls, companies are planning for the worst and hoping for the best. You will hear today our version of this truth. We are definitely planning for the worst. To that end near term we are reviewing parking as many as 10 aircraft because of demand softness. However, I believe you can [Technical Difficulty] our release and our comments today that our financial strength is among the best. The strength gives us the flexibility to respond if the market snaps back. The combination of the purchased aircraft I mentioned earlier for the rest of this year and into early 2021 and the return of our parked aircraft that we'll put down here shortly to service will give us a fleet for 2021 roughly the size it is today. So we want to go or take advantage of opportunities we believe there will be a wide variety of reasonably priced aircraft that we can pursue and purchase. As I mentioned a moment ago, our model has always been one of our core strengths. First and foremost, we maintain optionality with our parked aircraft. Annually, we expand and contract our network based on seasonal demand. We also have a simple network out and back. It is the ideal approach where one has to cancel so many of their operations given the dramatic reduction in demand that we've been seeing. By trading in used aircraft, we also have an expensive model. Over the years, no one has been able to match our combination of a low cost structure and low utilization. In the coming months, you will see our costs come in noticeably as we refocus on operational efficiencies. As I said previously, reducing costs and capital expenditures is the best way for a carrier to their liquidity. One of my favorite sayings when we operated MD80s was we were a noncapital intensive business competing in a capital intensive industry. I believe we'll be able to use this description in the not too distant future. I'm the largest shareholder in this company with almost 20% position. I want to assure you all that we are doing the necessary things to guarantee our future. We are still the same hard nosed disciplined company and industry leader you're used to seeing. We're rightsizing the company. We are managing expenses and capital outlays. We have sufficient liquidity. Our flexibility and managing capacity continues to pay dividend. 80% of our markets do not have any competition. We will continue these traditions. In closing, I have been amazed at the very options one sees and how to act during this pandemic. And my own family -- those who don't want to come out they want to stay locked down. They believe there's a virus in every hard surface and floating everywhere in the air. Others are ready to rumble, looking to get back out and resume their lives. One way to choose 100% sample perhaps 40 to 50 was one return to normal times while the balance do not. We as airline have to be able to cope with this level of uncertainty, be able to rightsize ourselves to service those 40 or 50 looking to rumble in the coming months and hopefully see remaining 50 return later this year and in 2021. In my opinion, we have the ability to size ourselves better than any other carrier. This flexibility will serve us well in the coming months and years as it has the past 19 years. Lastly, I want to personally thank each one of our team members for all they have done during this trying past six to eight weeks. You are the backbone of the company. And while we were still in the woods, the sunrise is shining through a bit more each day. Thank you. John?

Thank you, Maury and good afternoon, everyone. Over these unprecedented times, there have been comments made by most if not all companies across industries how they will come out at the end of this a different but better company. You have to ask yourself what exactly does that mean. Our answer ensures much different than most and probably the least expected given the earnings season commentary, it's a better balance sheet. That's right. A better stronger balance sheet. The steps to get through are difficult, painful and not without emotion but required in order to come out the other side, better position, greater financial flexibility and more options. One of these difficult but required decisions was to shutdown the Sunseeker resort development. We have said from the outset the most important component of our model is the airline. We have to do everything we can to preserve the cash register, and the earnings release outlines numerous additional steps that have been taken to date. We will not put any more capital into the project for at least the next 18 months as we deliver on our expectation to have the strongest balance sheet when we come out of this. The Allegiant model has been well tested over its history, and there's no doubt COVID-19 is the ultimate hurdle. Having said that, the financial discipline, the willingness and creativity to adapt and change and our dedicated passionate Allegiant team will create opportunities this model never dreamed of. Furthermore, the power of the model and the speed at which the team has reacted to date have put us in a position to not pursue equity dilutive transactions at this time given what we are seeing to-date. And with that, I'll turn it over to Scott Sheldon.

Thank you, John and good afternoon, everyone. First, I'd like to thank our 4,500 plus team members across the network for their outstanding service and professionalism in the face of this global COVID-19 pandemic. Your efforts have been tremendous. I realized this call is mostly entirely about liquidity and capital raising efforts and cash preservation but our team members and partners across the U.S. are the backbone and the face of organization. And their unwavering commitment and loyalty to our customers is why our organization has and will continue to be successful in the future. You’ve embraced the uncertainty, you’ve remained flexible in the incredibly challenging times and for that all of your senior leadership thanks to you. From the onset of pandemic, we have three immediate focus areas. First was to ensure the safety of our passengers and Allegiant team members. Second is rapidly adjusting of our daily operations to reflect a near zero demand environment, while also positioning our operational cost structure for long-term slow recovery. And third was to develop an aircraft storage program for potential fleet management scenarios as the recovery curve progresses. As indicated in our release, we began to experience some booking softness in late February. And although, we hadn't experienced the COVID-19 related flight cancellation, we activated our ECC, which is our emergency command center on March 6th to coordinate all aspects of our emergency response program, an anticipatory step that proved to be invaluable from an execution standpoint over the next 60 days. Without going into too much detail, this group was responsible for developing many of the COVID related safety and health strategies, policy and procedure enhancements and overall operational execution in their first hours days of the pandemic. Some of the key highlights champion along with the marketing team, Allegiant is going the distance for health and safety, revamps our cleaning program for our aircraft to include scheduled and deep cleaning procedures, implemented the hospital grade standards across the system, established routine treatment schedule for our aircraft with advanced antimicrobial protectant that kills viruses, germs and bacteria on contact. We were the first to provide customers with the complementary health and safety kit upon boarding, which included a single use face mask, disposable non-latex gloves and sanitizing wipes. We deployed VOC filters on our aircraft, which exceed air quality standards. Social distance practices have been put in place wherever possible during check-in and at our gates and on-board aircraft. Helped acknowledgement certification during online mobile check in. Also, we extended our voucher redemption policy from one year to two years from initial booking, and that's important because for basically the 60-day period beginning 1st of March, we have returned 235 million in vouchers to consumers. So that allows them to extend for an additional year. Moving onto our near-term scheduling philosophy. We wanted to create as much selling opportunities as possible coming out of the negative to net zero demand environment. This meant keeping as wide of a selling footprint as possible. In this case, this means maintaining 18 operational basis, fully staffed for a baseline of activity that we can reasonably decline. Basically initial schedule reflecting a relatively full pre-COVID selling profile with few exceptions to take advantage of potential opportunities as states and communities come online, travel restrictions are eased and non-essential businesses and entertainment experiences present themselves. This is no way the most cost effective approach. There are lots of obstacles and challenges in executing to a public schedule that will largely go on phone and it creates significant cost that could otherwise be mitigated, but we feel the trade off is worth it in the near-term. A byproduct of this is the micromanaging of our flight schedules by our network team on a weekly if not daily basis. Looking at individual dispatch decisions based on cash profitability. At the end of the day, we ultimately have to get back to flying schedule we published. There has to be scheduled integrity given the traditional frequency profile we fly, but as low as in demands where we build, we can continue to execute on this strategy, basically low load, cancellations, equals minimal, passenger disruptions. Overall, it's proven to be successful, relatively speaking. And as we -- and we are capturing more flying than we would have otherwise captured. Drew and Scott will speak more on that in a second. And lastly, our fleet aircraft induction and maintenance and engineering teams have done a tremendous job launching an Airbus aircraft storage program on the fly to accommodate any number of fleet scenarios as we progress through the back half the year. Our teams have done a great job of positioning the majority of our fleet to be ready on short notice. This is particularly important given how we are over scheduling the airline in the near-term. Long-term as indicated in the release, we expect to retire and/or store as many as 25 aircraft, which can be action based on any number of different scenarios. Once again, thanks to all involved. You give the network and planning team the tools that they need to navigate very troubling environment. And with that, I'll turn it over to Scott DeAngelo.

Thanks Scott. As Marty alluded to since late March, our commercial approach has been focused tightly on executing a recovery roadmap that leverages our robust monitoring of the COVID-19 situation in order to lay the foundation for recovery and the next generation of air travel post COVID-19, and ultimately to driver recovery that capitalizes on new opportunities that may arise. Our direct to customer distribution model and moreover the direct customer relationship enables us to maintain has been invaluable during this period, both in terms of gauging customer sentiment in these uncertain times and in terms of capturing customer demand as it returns to the market. We stay close to our customers and we've been continuously gauging their sentiment through proprietary tracking surveys that we filled at each of the past eight weeks. As a Sunday, our customers are telling us they overwhelmingly believe things are getting better, and they're most expected we’ll take more than six months for life to return to, “normal”, nearly two-thirds planned to travel by air before the end of the year. Also promising news for the leisure travel sector overall is that about half so they plan to stay in a hotel or vacation rental property, while nearly one-third plan to visit friends or relative and the remaining 20% plan to travel between their primary resident and a second vacation home. Also, when close partnership with our corporate intelligence and data science teams, we've been able to monitor health, economic and other factors impacting the cities we serve. To-date both the personal health and the economic health, as well as the overall sentiment for most of our key origin cities in the Midwest and Mid Atlantic have been consistent with a near-term recovery scenario for much of our network. The foundation for our recovery, as Scott mentioned, has been going to distance for health and safety, an integrated holistic approach to fundamentally enhancing our cleaning house and social distancing practices, complete details of which can be found at allegiant.com, and has been shared far and wide across national media. Thanks to industry leading measures, such as providing each and every passenger who boards with a free health and safety tip. Building off this strong foundation, our data driven direct-to-consumer marketing approach has enabled us to surgically identify and capture demand on a route-by-route basis, which began to lift off the bottom in mid-April. Since then, we've seen steady growth in the number of qualified flight searches being conducted by web users at allegiant.com, with some time periods in market at levels even higher than last year. More importantly, we've seen an elevated web traffic begin to translate into an uptick in bookings for select markets over the past few weeks correlated with beaches opening on Florida's West Coast and Panhandle. That being said, our two largest summer travel destinations, Orlando and Las Vegas, will need to reopen their flagship theme parks and casino resorts and for that matter, NFL stadiums for us to see the next step change in demand recovery. Finally, as we continue up the recovery curve, we're also benefiting from other aspects of our unique business model, namely the proprietary booking platform, which is enabling us to fast track development of contact lists or touch free elements of the customer travel journey, as well as offer hotel and only booking capabilities for those looking to drive to Las Vegas or Florida resorts. Right market travel is expected to recover faster than air to these destinations, and we've been working closely with the leading agencies and bureaus in both regions to play a role in their combat. Remaining true to our purpose even while flexing during these challenging time we’re supporting all natural options to capture greater share of leisure travel spend as they return to the market. And with that, I'll turn it over to Drew Wells.

Thank you, Scott. And thanks everyone for joining us this afternoon. I want to build a bit on what you've heard so far and expand briefly on our approach and our differences from the industry at large. We have taken to this environment with largerly the same detailed processes that we use to assess capacity in a normal state, just at a significantly more frequent rate. We've maintained a very broad network and selling presence, and all future round trips are assessed for cash profitability. While most carriers offer less than 30% of their scheduled for May, we held about 75% of flights available. We made some hard decisions on entire routes and got in front of some low hanging fruit such lower demand Tuesday flying or consolidating flying in the event we have multiple daily flights on the same route. For the remaining 75%, we are monitoring net bookings and making decisions on a round trip basis as we have clarity to the final strength of flight a week or more in advance. As Maury mentioned, our business model is set up to quickly and appropriately respond to any level of demand. Like all others, our capacity was significantly reduced in April. As we operated just 12.6% of the expected departures. However, we completed weeks flying as low as 9.6% of the original expectations and as high as 24.6%. Our out and background in structure and relative simplicity of scheduling provided tremendous benefit when making very granular decisions. While this certainly drives a lot of work in the short term reviewing and forecasting flying that is likely to be canceled, I believe strongly that it puts us in an advantageous position to have both visibility and more importantly, the ability to react immediately whenever and wherever demand begins to return, whether in a one off or sustained form. Bookings are not there yet. However, as you’ve heard today, we are seeing mild sequential improvement. There's a long way to go still but leveraging the flexibility of this business model will put us in a remarkable position when system wide demand does return. And with that, I’d like to turn it over to Greg.

Thanks Drew and thanks, everyone for joining us today. For the first quarter of 2020, we reported a consolidated GAAP net loss of $2.08 per share, and this was due to an impairment charge of over $160 million related to our non-airline subsidiaries. On an airline only basis, we recorded over $50 million in op income or 12.6% in op margin. This is despite seeing a precipitous drop in revenue during March, our busiest month of the year and is a testament of the earnings power and flexibility of our unique model. Rather than discuss the puts and takes of these results, we felt it was appropriate to focus on the metrics that matter most in the current environment, maintaining sufficient liquidity and minimizing cash burn. Due to the impact from COVID-19, we took quick and aggressive action to cut costs and preserve liquidity. This is outlined in our earnings release. So far, we estimate these actions will result in nearly $375 million of total cash outflow reductions to our initial full year 2020 plan with approximately 80% of the reductions in the form of CapEx and the suspension of our quarterly dividend. The remaining balance is attributed to the removal of non-flight relating operating costs, including but not limited to, marketing, contractors, travel, subscriptions, non airline labor and renegotiating contracts with vendors. Perhaps worth noting the $375 million reduction in cash outflows does not take into account further cost reductions we achieved by flowing back capacity, such as variable costs associated with airline labor, fuel stations and maintenance. Regarding liquidity, in February, we went to the market to reprice our Term Loan B facility and achieved 150 basis point reduction to our rate. Due to strong demand, we also upsized the facility by $100 million. At the time it was unclear the importance of this move as a short couple of weeks later, the impact from COVID-19 began to put pressure on the capital markets. Including this upsize, we ended the March quarter with $464 million in total cash. In April, we obtained financing of $31 million secured by two A320 aircraft at a very low interest rates. Also in April, we received our first installment of the CARES Act Payroll Support for $86 million, and our monthly cash burn was reduced to $65 million or $2.1 million per day. The cash burn partially offsets these two liquidity inflows to bring our ending April total cash blaance to $515 million. In addition, Allegiant’s portion of the Payroll Support under the CARES Act is $172 million capital, half of which we received in April and we will receive the bulk of the remaining amount in the second quarter. As we look ahead, we expect the cadence of average cash burn for the second and third quarters to be approximately $2.1 million and $1.5 million per day respectively. These average burn rates assume gross bookings per day of 750,000 for both quarters, which is based on booking trends we saw mid-April. We've continued to see modest improvements in booking since that time as Drew mentioned. This is down more than 85% from 2019 levels. In comparison, a year ago this amount would have been approximately $5.5 million per day in gross bookings. For reference, our low point in gross bookings during the last few months was about $250,000 per day. So to be clear, the 750,000 average bookings per day is not our forecast, it is just simply held constant to highlight the area we can control, our costs. However, should demand stay at these low levels in the fourth quarter, we estimate an average cash burn of well under $1 million per day. Reducing our cash burn is the most efficient liquidity strategy we can affect. Another efficient mode of increasing liquidity comes through our federal tax refunds as afforded to us by the CARES Act. This legislation allows for a five year carry back on tax net operating losses. So for Allegiant, this means a $94 million cash refund on our 2018, '19 NOLs. In early April, we submitted these NOL carry back claims with the IRS and expect to receive this cash refund in the coming weeks. We expect an even larger cash refund, more than $100 million to come in for estimated 2020 NOL early next year. We also apply for our portion of the CARES Act loan about to $276 million. We're currently evaluating our need to tap this program for liquidity. A terrific benefit of the loan program is the optionality it provides, not only because it serve as a backstop in September, it has the added benefit of being the benchmark that is for proving helpful for us in discussions with other lenders for additional financing. I would like to add my most sincere thanks to the treasury department and their advisors at PJT and they've been working tirelessly around the clock to ensure quick access to as much needed liquidity. The CARES Act alone has provided us nearly $650 million in available liquidity to Allegiant, the NOLs, PSPs and loans. Of this amount, $350 million pertaining to the NOLs and PSP does not have to be paid back. This $350 million of non-GAAP liquidity would cover more than 85% of our total cash burn from April through December. This assumes that down case scenario previously mentioned of daily bookings down 85% with an average of 1.5 million of daily cash burn throughout the period. This example helps illustrate why our number one priority in terms of liquidity is further reducing our costs. While there have been many tough decision today and likely more many to come, doing so is the best defense of our balance sheet and proves vital and coming out as healthy as possible on the other side. As it relates to the additional alternative sources of liquidity, we have several levers available and we are keeping all options on the table. However, based on our current numerous scenario planning at this time, we think it is unlikely we will need to pull any of these levers. As noted earlier, the optionality of the treasury loan provided us additional time to continue monitoring this environment. The available amount of upto $276 million through September provides this confidence we have the access to ample liquidity to make it to the other side. Turning to CapEx. For the remaining nine months of 2020, gross CapEx is now under $200 million. This amount include the potential acquisition of up to seven 320 aircraft and four CFM engines. We are in ongoing discussions with the respective counterparties of these assets by any we may take will be financed. Regarding fleet, no one knows when demand will return. Therefore, fleet flexibility is critical. Accordingly, we are working on plan to strategically part up to 25 of our existing aircraft, depending on the demand environment. Our current expectation is up to half of these aircraft may be permanently retired. We intend to maintain flexibility with the other half by either retiring or reinstating based on the recovery timing of travel demand. Retiring in or parking these aircraft allows us to meaningfully optimize spend on engine maintenance down the road. By way of example, we now expect our 2020 and '21 heavy maintenance CapEx to be reduced by $60 million to $75 million respectively. Additionally, strategically parking aircraft now will provide optionality for us to bring some of them back beginning in '21 should travel demand warranted. We have commitments for only two future aircraft next year and if we purchase we expect to finance them. Including these two aircraft, we would expect total gross CapEx for ‘21 to be less than $150 million. Core to Allegiant Travel is our are airline. Our number one priority is to ensure survival and long-term success. In order to make this happen, we have suspended construction indefinitely on Sunseeker and restructured Teesnap and Nonstop to be self sufficient in terms of cash flow. As a result of suspending construction on Sunseeker coupled with no current plans to complete, we have recognized $137 million impairment over its related assets, writing them down to a fair market value of roughly $35 million. A focus of ours coming out of this environment will be to quickly restore our balance sheet. We are planning to maintain our regular debt servicing schedule during the crisis and make nearly $300 million of principal payments from now until the end of '21. These principal payments should help to offset the incremental debt added as a result of COVID-19. In closing, we are nimble airline uniquely built on a flexible capacity strategy. We believe this will help us during this crisis. However, we will continue to maintain discipline and further rightsizing our cost structure to support any demand environment to help restore our earnings power as timely as possible. And with that, I'll turn it over for Q&A.

[Operator Instructions] Our first question comes from the line of Mike Linenberg with Deutsche Bank.

Actually two questions here for Greg, so Sunseeker no CapEx tied to it and basically nothing for the next 18 months. And yet, there is -- isn't there some debt or is there any sort of liability, is there any sort of costs associated with it over the next 18 months keeping it in sort of this more in state? Is there going to be cash out the door any sort of charges? It's not completely zero or is it?

As far as debt -- there's no debt that we've drawn on that so there's no debt obligations at this point. In terms of additional costs, now there is some outstanding payables that we've committed to for stopping down that we're bleeding out over the next few months. So we intend to make those payments. And that's built into our cash flow number that we provided. And then there's some minor investments or there's some minor costs I’d say nominal to just secure our investment in that property but nothing to write down about.

And on tax payments to write you have to pay, or maybe there's not. There's nothing there. I'm just thinking of property tax. Or maybe there's actually none in the State of Florida now that I think about it. So…

And everything is pretty minor. It's not a meaningful investment, or not a meaning amount of investment…

And just my second question, when you think of unencumbered assets and anything that you could potentially sort of pledge to secure additional financings, whether it's the loan program into the CARES Act. What do you currently have and can you give us just a rough estimate of what available unencumbered collateral would be?

So all of our non-aircraft and engine collateral debt was to the term loan. So really the dry powder we have for the most part is our unencumbered aircraft and engines. And then I'd also add have we have a lot of equity in our aircraft, because it is currently under secured financing because we're paying it off so quickly. But in total our unencumbered assets, aircraft and engines, I think we have about 28 aircraft, eight spare CFM engines that are unencumbered. So that gives us $36 million. I think the fair market value currently is about $430 million to $450 million on these assets. And so depending on the LTVs between 50% to 75%, you could probably raise $250 million or so.

Thank you. Our next question comes from the line of Catherine O'Brien with Goldman Sachs. Your line is now open.

So maybe just a couple on the cash burns. So I guess first, are you including the impact of the CARES grants in that cash burn? I just wasn't entirely clear and then I have a follow up on the cash burn as well.

No, we're not. Those are -- the impact of the TSP grants are excluded from our cash burn number.

And then just on the 750,000 daily gross bookings, is that offset at all by refunds? And so maybe the net revenue assumption is lower. And then how does that net assumption compare to what you're seeing right now? And then lastly on the cash burn. What's driving improvement on the cost side from 2Q to 3Q since you're assuming revenue assumptions are static? Thanks.

The 750,000 gross, that's a gross number. So there was -- refunds would net that down. We've seen I think relative to others, I don't want to get into the exact amounts relative to other carriers, I think we have modest cash refunds out the door. And then as far as the cost reductions that you're seeing in the cadence, I would say a lot of the efforts that we outlined in the release that have taken place that's kind of the driver from where we've seen the second quarter average to go down to the third quarter average. But what really is driving that down are just we have outstanding payables. Maury mentioned this in his opening remarks. Once it started in early March, we reached out to all of our vendors, started working on deferred payment plans and it was a it was a monumental effort across the board. We appreciate our vendor partners and everyone. But we're committed to paying all our vendors. And so you're seeing a fleet that that outstanding payables out over the next few months, and then we'll get back to a normal rate. So that's worth about I guess 500,000 per day, if you do the quick math. And then I think the fourth quarter drop that we’re alluding to is that would be just the rightsizing of our cost structure just based on where demand is at. So that 750,000 gross bookings number, we're just trying to keep that constant to show you a down case scenario, and just to really highlight where the cost puts and takes to be.

And then maybe if I can just sneak hopefully on Sunseeker. So just to be clear, all these impairments were non-cash. And then on the future of Sunseeker, you’re saying you're not going to receive any funds from Allegiant for at least 18 months. Two on that, if you can't find the partnership, would you be able to just pause construction for that entire period? Are there any cost of locking down the site, I think you kind of already answered that on that to Mike. And then second, if you do find a strategic partner to continue construction and start up costs. Would you move forward with that? And I guess, if you do move forward with that, would you only consider a partner that would allow you the same flexibility and bundling packages, et cetera, that you would have had without a partner? Thanks so much.

Katie, you're like 17 months ahead of us right now. We just had [Multiple speakers]. So it's shut down and it's not what we're doing. We had to pick a number. It's an asset, we got to do something eventually. But like I said, that moves ahead of us.

And the impairment is non-cash, Katie, just to answer that your first part impairment, yes, that’s a non-cash impairment.

Our next question comes from the line of Duane Pfennigwerth with Evercore ISI.

So one I just want to say that the commentary on declining cash burn with no improvement in underlying demand is perfectly clear, and I think that's a really interesting perspective. Regarding demand, you said it got as low as I think 250,000 a day and you're seeing 750,000 per day at some point or recover to that. Where is that now? Is it is it better than the 750,000?

No, I think that's a pretty good look at where we're at today.

And then big picture 2021. Obviously, you guys can flex up, flex down, depending upon how you think this is going to play out. And my guess is July is sort of a pivot month into the rest of the year. But can you just give us a range of outcomes into 2021? And then just as a follow up, how confident are you in your ability to sort of resize the cost structure to those various scenarios?

I'll kind of kick it off with I guess scenarios and it will be kind of a non answer to that, anything is pretty much still on the table. You're right, the July is a pivot month. But to be able to give a lot of insight into what's going to happen in 3Q and 4Q depends on I guess what you think about second wave, what you think may happen with Orlando and Vegas. And I think there's so many moving parts that the spectrum of possible scenarios is gigantic, at least from my vantage point, almost others around the table have different things.

Well, let me just make a macro comment, Duane. This is all about cash management. And what drew is doing right now is we're cash forecasting each flight literally and it makes sense for running it certainly at a point once you get to big enough, you have to be more discerning in canceling flights with impacting customers and things like that but we're certainly in the transition. So for the foreseeable future, it's going to be a cash call on just what we're going to do going forward and that's the whole liquidity burn. The things we can control the CapEx, all those investment types of things. I think Greg put in the numbers 375 million we've taken out so far of this one time and ability to do that. We're going to continue to focus on that and we’ll slowly but surely react to the marketplaces as presents itself. I'm personally optimistic, like I said in my comments, I know a lot of people that just want to get out and use the tongue in cheek rumble. People are tired of sitting at home and we just -- we travel amongst ourselves on the weekends and John can speak for it coming out of Southern California, there’s just people on the beaches. Somebody told me they were down and lawful in this weekend as the river runs through that place was packed with people, as well to all people. Social distancing was not in the lexicon according to him. So you're getting all kinds of signals. And the thing that I see personally is there's really no hard data you can point out, in many ways its opinions. And some people have an opinion that they're going to go out and other people they wouldn't be caught outdoors if God came down and said it was all clear. So, it's just going to be a wait and see as we kind of feel our way through this.

I think the only other thing worth commenting on in your question was had to do with the confidence around rightsizing our cost structure, whether or not we're confident about doing that and the emphatic answer is yes. We've demonstrated that in the past and we'll demonstrate that going forward. So you've heard it in our commentary and you can see the language in the release but we're very confident about being able to do that.

And if I could sneak one more in not that you’re a Vegas story but you are there. And I think in many respects, the airlines are somewhat ahead of the resorts and the hotels. What are you hearing from Vegas? What is your view of the reopening plan? And how far before customers can sort of constantly book vacation packages in Vegas? And thanks for taking the questions.

I mean, I don't know that there's any visibility in that regard. I mean, the thing and you look at lot of the Vegas hotels, they were hoping to open early as you can see just by their booking windows, lot of them are allowing people to book into Memorial weekend that didn't happen. Having said that, the governor made pretty quick announcements when it came to opening up some of the local elements that we have here, didn't give a lot of advance notice in that regard. But I'd imagine listening our hope would be that when it comes to the strip and the resort corridor, that there would be a lot of advance notice on that realizing that people need this advance notice to be able to book and react to it properly, especially the operators. So my guess would be that that would happen but trying to predict anything could be very difficult in this environment as to when that would happen.

We’ve had some operators, Duane. I think Wynn gentleman Matt Maddox. He suggested he wanted to open on Memorial Day weekend, I talked to him personally but you had not had the powers to be throw the switch so they could do things. Other people suggest they want to open May 15th. So they’re I think chopping out a bit and we talked to one hotel said it was fully booked for June.

But when you look at it too in a lot of jurisdiction, hotels are open -- the wrinkle here in Nevada is you have gaming, which is a privilege license right. So it requires not only the governor but we try the gaming control board to approve that. So that’s added wrinkles that you have here in Nevada. I would imagine both bodies will act in concert nearby that decision. And I would hope that happens sooner rather than later but predicting a date would be impossible.

For our two weakest, if you want to pick our big five or four markets, the two tougher ones right now are Orlando and Las Vegas. And they're trailing the others that we're seeing pretty good activity on. So we’ve got upside and we’re looking forward to that. And I would think Disney World and Orlando is going to be -- they opened Shanghai. So they’ve got to be in the power or moving towards that date it’s coming. I think we all understand that, you just can't pick date certain as the one that's coming. But I would be absolutely astonished that if these hotels here in Vegas are open within the next 30 to 45 days.

I would too. And I think when you look at the Florida, they’ve been out in front of this opening the state so to speak and Disney, I know has -- they're taking bookings on the Disney World Resorts beginning July 1. So that's somewhat of a statement that they're kind of making that they consider probably open up around that timeframe. They have started opening up their retail locations already. So I'm sure Disney's in conversations as operators are here. So I would agree with Maury that this is probably in that 30 to 45 day timeframe.

Thank you. Our next question comes from the line of Joseph DeNardi with Stifel. Your line is now open.

Maury, could you just opine on what you think this means for air travel demand longer term? I guess just kind of lead to any structural changes in your business. I mean, obviously you played some pretty big bets on kind of the resiliency of travel and the secular drivers of growth behind that. Does this change how you view any of that longer term?

Well, you right that you’ve got two fundamental issues. It's how long do people's memories last and how fast does this disappear. We are a very predictable species. I think in many cases of wanting to do things and the like. I think the main structural change in many ways is going to be in the business world where you've proven that you can do a lot of work with the Zooms of the world. Having said that when times get good, people they forget these things. And you look back at the mentality going into March 1st in this country and mentality on April 1st, it was a sea change. Can you get back there? Well, it was 12 years getting to March 1. Does it happen in this week or next? Obviously, no. And I think you just go back and study your history, it's going to be structural I think around those types of things. As far as sizing and the like, who knows. I like our prospects, because we're niche and we can play in places that other people can't or aren't comfortable. I’d remind of our folks in 2005 Northwest came after us and put airplanes on top of us from Fargo and Des Moines and the like into Vegas and they stayed around for a year, but they just didn't work for them, because they're not built to work like we are. So that's a plus. Is there short term problems with people coming downhill? Maybe. But long term I don't think it works that way for us. But the industry, it's got to shrink, obviously. But I'm reasonably bullish that, as a population, we're going to grow. We're going to be, I think, right now I don't see any material weakness in the economy that other than, we're spending like Drunken Sailors and whether or not that will have any problem, but they'll be short-term problems with unemployment certainly. But we're not -- Scott DeAngelo probably better in this, it doesn't seem from our surveys that it's like, Oh My God, people are doing nothing.

That's right. In fact, the majority of people in our surveys report their personal financial situation has largely stayed the same and/or gotten better. Obviously, most of those didn’t stayed the same. Getting better are the ones that might have, that's a bigger jack. But the fact is in the Midwest and Mid Atlantic, the Upper West, I got to tell you they don't share the opinion that the evening news is putting out there. And we’ve seen here that one more step or you’ll follow most tracking surveys out there have asked the question about you go all in for public health, or do you balance public health with the needs of the economy. The nation as a whole has been 50-50. The Allegiant customer base has been 75/25, every time we've asked that question in favor of you balance public health with the needs of the economy and you get out there. So our footprint just don't happen to mirror one where the sentiment is very different than a general cost survey that captures New York, Dallas, Atlanta, and Los Angeles.

And then maybe one for Greg or Scott. One of the key differences you guys have is the ability to flex up and down. And so can you just maybe quantify a little bit more like if you shrink the fleet by 25 aircraft. What is your OpEx do in that environment? If you shrink it by 35, like what does it do? Are there certain pain points along the way where it gets harder to scale up and down? Can you just maybe quantify that a little bit? Thank you.

Joe, it's Greg. I'll kick it off and Scott will jump in. And just wanted to say real quick, we enjoyed your spirited debate with Hunter the other day, moderated by our good friend Mr. David. So that was interesting information on the loyalty program. But just given our cost structure, Joe and I think maybe just a tag line or punch line as a good example is like September, we just -- we don't fly in September. So we built a cost structure around fleet find usefully in low ownership costs. And if we think about the current environment we're in, say ownership costs were pretty much variable and we'll kind of rightsize that as we come out. So by that I mean the fuel, obviously, variable we're seeing low fuel costs. We're seeing on the labor for the next couple of quarters that's the pass through, if you kind of want to think about it that way. Our stations, our airports, we don't have evergreen or long-term contracts with our airports very small cost I think relative and again variable. On the maintenance side, same thing. The vast majority of that's variable. Advertising sales if you think about that pretty much we pulled all our marketing spend, and so the cost going through that will be our interchange, which is variable. And then other I think, there's some of that is fixed and variable, but we've done a good job of pulling a lot of that back. As we've alluded to about $375 million number. And then I think perhaps worth mentioning too is just our compensation strategy. Maury and team has set this up in the beginning is for a lot of our particular corporate overhead folks, we keep low base salaries and pay high variable on the upside with bonuses. And to put that into perspective, I think last year, Joe, we paid roughly 10% of our total labor costs for profit sharing and bonuses. So that obviously in this type of situation will uniquely move down. And Scott, I didn't know if you wanted to add anything else on that.

Yes, I think the only thing I’d add there's been a conscious effort to grow kind of small and midsize cities. To Greg's point, we don't have much of a long-term expense or facility footprint, it’s just largely variable. But these commitments to grow in small cities is relatively expensive. Obviously, you don't get much or very good productivity flight crews, so those come on as those cities grow. So assuming demand does not snap back in a meaningful way, if you're going to get efficient on the cost structure, you'd likely reduce some of the really small cities that you have and consolidate those into larger basis where you can drive productivity. But labor is a big piece of this and we're going to see this through in the near-term to see where demand shakes out but that's definitely a lever that we're going to have to look at longer term.

Our next question for the line of Savvy Syth with Raymond James.

I know you're being very tactical with the planning currently, but I was wondering if you can give some high level thoughts on how you're thinking about 2Q in terms of capacity? And then also just clarification on 2020 CapEx with the reduction that you're expecting the business to spend around $380 million this year?

I’ll kick it off with kind of capacity and then turn over to Greg. Like I mentioned, we're trying to keep as broad of a selling footprint as possible. We still have about 75, 70% of June available for sale and we'll monitor those as we get closer in. May has obviously come in and roughly half of month is passed and we've actioned some of those cancels. But for Memorial Day week and beyond, I think we saw over 50% on sale. But we're watching these closely that will come down, but it's hard to give a lot of guidance as we're going to be following the seven, 14 days out before making final calls on anything.

And Savvy on the CapEx question, yes, it's about just over 300 for the full year. The kind of what's remaining left is about $200 million. The vast majority of that is through aircraft and engines, which we expect to finance. And then there's some minor amounts on the other kind of what we call other CapEx with IT and things like that, and then there's just let some minor trail off on the heavy maintenance spend.

And then if I might follow-up on a question as we think about costs going forward. Is there kind of the changes that you're making related to COVID, the stuff that might have kind of linger on, such as cleaning procedures and things like that. Is that a significant cost burden, or is that pretty minor when you kind of think about the grand scheme of things?

I'll kick it off and each other might want to jump in too. But I think what we've done particularly with the kind of personal safety and the maths and the kids and everything we've done, that was a good investment by our company. While I wouldn't say it's not minor, minor, I mean there's a decent amount of it, it's not going to meaningfully impact our numbers moving forward and that is built into the cash burn that we've provided.

Yes, I think the only thing I'd also add is maybe not in these times, but because the actual cost of product isn’t substantial. But if you're building extra time, if you're doing kind of mid term cleaning and so if you're going to increase the duty day, it's really going to change your profile and your staffing models. So, the art of possible is how you do this while still maintaining kind of a crew productivity metric in mind. And so we're not going to set yet but you know that's something that we're mindful of as we move forward.

Thank you. Our next question comes from the line of Hunter Keay with Wolfe Research. Your line is now open.

Actually Greg, what triggered the $137 million write down? Was there some sort of accounting test that that, it was just a subjective call? Just from a pure accounting perspective, what triggered that?

So the triggering event was the suspension of construction. And I guess kind of the way to think about it is, because we have no clear line of sight of when that resumes. When you go through impairment analysis, you'll see like a cash flow recoverability test. But without the clear line of sight, we're unable to kind of come up with I think appropriate number, if you will, just because there's so much uncertainty right now. And so, what you do is then you write that down to the current fair market value.

And then Maury, I'd ask you to dream a little bit on this with me here. Is there a way to totally rethink how you pay your frontline people? Maybe you give them like higher pay on an hourly basis, but you take away minimum guarantees, or maybe you even put some of these frontline folks on annual salaries and you give them an annual bonus based on company performance. Is there anything like that that you can affect pay wise, that could give you even more variability that works out, both for you and for the company? Obviously, I realize it's all to be done in collective bargaining, of course. But is there anything that you can think about long term, about affecting long term change as it relates to compensating people out of this thing, particularly the front line?

Well, you hit the nail on the head. It's all tied to contracts and the way that people are paid and we're creatures of habit. And we're used to thinking the way we think and there's these contracts get build up some of them are 50-60 years old that they’re built up of all the overarching little things that the average person would look to. I’d like to think that the nice thing about our model is we don't interchange a lot of people. So in Orlando is a contained base, it goes out and back and the like. One of the constructive things I'd like to see us do is work with the pilots, flight attendants, in particular to see about what's a better way to compensate you in a base and test it. So you got to go back, you got to go out and test it. You got to schedule and pay or the two fundamentals for these folks appropriately solve. So if you want to do some things that enhance for both sides, you got to just -- it's hard to sit across the table and just say, let's try this, because it's easy for the whole group and that's a hard sell. But I would recommend to our folks that let’s pick a base, let's try some ideas and we should be testing something all the time. It's just a good way for businesses and organizations to be continually checking what they're doing and could we do it better. But there won't be anything short term, I don't think at this point, Hunter, with people looking to change - candidly to their defense, they're scared to death too. I mean you, on February 1st, how your choice of jobs if you were a pilot, and I think we did an internal calculation that showed there'd be as many as 25,000 pilots, [how][ph] to work here in the not too distant future. That's a life changing for a lot of these folks that have never seen anything like this, that's pretty tough pill to swallow.

This concludes today's question-and-answer session. I would now like to turn the call back to Maury Gallagher for closing remarks.

Thank you all very much. Appreciate your time. And we'll see you in July, I would guess at this point. Thanks again. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.