Good day, ladies and gentlemen, and welcome to the Allegiant Travel Company's Second 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. We ask that you begin to queue up for question now as we will have a very brief commentary and we'll shortly begin our question-and-answer session. [Operator Instructions] First, we wish to remind listeners that the company's comments today will contain forward-looking statements and they are only predictions and involve risks and uncertainties. Forward-looking statements made today may include, among others, references to future performance and any other comments about our strategic plans. There are many risk factors that could prevent us from achieving our goals and causing the underlining 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 may be 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'd like to turn the call over to Maury Gallagher. Please proceed.

Thank you, operator. Good afternoon everyone. Operator, let's go right to questions. [Operator Instructions]

And our first question comes from the line of Joseph DeNardi of Stifel. Your line is open. Please go ahead.

Hey. Thanks, good afternoon, everybody. Maury, thanks for the time for - thanks for all the time for the Q&A. Could you guys just comment maybe on the demand environment that you're seeing in general right now? Are you seeing any spillover effect in terms of what's happening in some of these markets where there is extra capacity, just at a high level kind of what you're seeing in terms of demand?

Hey, Joe, it's Jude. I mean keep in mind that we operate mainly in environments where we don't have any direct competition. So, for the most part, no, and that's reflective of our 7% decline in TRASM for the second quarter and our guide for the third as well. Keep in mind that if it's same-store sales without any growth we'd be down about 4% just based on what we've done with the credit card surcharge shift from [ph] D, the debit card discount and baking in the taxes that have increased in the third quarter last year. So, 4 percentage points of the 7% decline is just associated with other things. And then we're growing pretty rapidly right now. So a 3% decline in TRASM is a pretty good demand environment considering 20% growth.

Okay. And then in terms of kind of the growth trajectory over the next few years, I think kind of the 15% type growth is what we're kind of expecting. How much flexibility do you guys have? And is the bias to grow more or less given the environment you're seeing right now?

This is Jude again. So, we're catching up from growth that we wanted to do, but weren't able to do with the pilot shortage that ended in April of this year. And also we're adding a lot of off peak flying opportunities that now work in the environment with more A320s in our fleet and low fuel prices. So that - those two events - the opportunity to change the network in response to those two things is going to slow down our growth as we kind of bake that in on a comp basis. So, we will not be growing over 20% for very long. I think a more stable growth would be, as we've always said, seven, eight airplanes a year, mid-teen ASM growth annually.

Okay. Thanks. I'll get back in the queue.

Thank you. Our next question comes from the line of Andrew Didora of Bank of America Merrill Lynch. Your line is open. Please go ahead.

Hi, good afternoon everyone. Maury, are you in a position to give us the latest update in relation to the pilot negotiations?

Those obviously, we like to keep close to the vest, but we're working very hard both sides to move forward, see if we can get something done here, in fact we're meeting today, as we speak here, talking about the number of areas. First contracts, as we've said before, always take longer because you have to touch every area. And so that's just a laborious process to get through all that. But, I think, both sides are looking for movement and getting something done. So, we're pleased with the progress, and I think, that there is more work to do certainly, but it's moving along nicely.

Any sort of timeline you could [ph] put out on it at this point?

I don't want to go there.

Okay.

That's this one forecast that I wouldn't want to hazard a guess at this point.

Understood. And then just on the cost side, can you let us know what you are paying for fuel today?

Yeah. Gulf Coast all-in we're paying about $1.80.

Got it. Great. That's it from me, right now. Thanks.

Sure.

Thank you. Our next question comes from the line of Duane Pfennigwerth of Evercore Partners. Your line is open, please go ahead.

Hey. Thanks for taking the questions. Just with respect to the mix of the Airbus in your fleet. Is there any way to segment sort of what margins were on the Airbus line versus the MD-80s, higher or...?

Yeah. Hey, Duane. It's higher on the A320s, we can say that definitely. But keep in mind that as we introduced the A320 into the fleet, we tried to deploy it on routes that use it the most. So we're cherry-picking still, so it's not really accurate to compare margin differential between the two types. I would say that where fuel prices are today, it still makes sense for us to substitute the MD-80 with used A320 equipment at the prices that we're transacting on today. So fuel prices relative to where they were last year haven't changed our fleet outlook.

Okay. And then I can appreciate that in some respects you're kind of an asset manager first and if you get the asset at the right price, then you look to add them. So this might be a little bit dependent upon the environment going forward. But as we think about that 30% fleet mix or 30% of your ASMs on Airbus, when does that get to a 100% if ever?

After a long time, Duane. I think the way to think about it is we can't really take more than one plane a month on a sustained basis because of the challenges of originating and inducting used equipment, and we intend to grow the airline in this environment obviously. So half of those are for growth and half of those are for replacement, we got 53 MD-80s and some 75s, we're still in this plane seven years from now.

Okay. And just lastly, as we think about the CapEx which I think moved up a little bit and I think you highlighted it in the press release that you were able to find a couple more A320s, which probably drove that differential. As we think about 2016, 2017, is it kind of this $300 million per year level or will it just depend upon the availability of aircraft?

Well, it will depend upon the availability of aircraft, but the CapEx of this year and last year should be higher than what we see going forward, primarily because we did a big deal on the leased airplanes that are on lease to easyJet. We did that deal last year, so we bought forward a lot of the CapEx that would otherwise have happened in 2018 and 2019. So we're investing in the future, we're bringing forward a lot of the CapEx. So I think we're going to see CapEx go down and then there's the big question of how many and what price, I think it'll be lower than the $300 million on a steady state than we've experienced this year and last year.

Thanks for the questions. Very strong results.

Thanks, Duane.

Thanks, Duane.

Thank you. Our next question comes from the line of Helane Becker of Cowen Securities. Your line is open. Please go ahead.

Thanks very much, operator. Hi, guys. Thank you very much for the time. I just have two questions actually. One is on off-peak flying where you talk about the seats now being 22% of the total, up from 16%. So how is the pricing on that versus the rest of the system and is that - or maybe how much of the 7% decline is related to that?

Well, I don't have the - can't give you a real definitive answer on that. But I mean I think a good number is 20% to 30% less unit revenue on a flight that is on a Tuesday, Wednesday or Saturday relative to the same week on a Thursday, Friday, Sunday, or Monday. So, as we grow off the flying which would be those three days that I mentioned, we're going to continue to put pressure on our unit revenues and you will see that in our utilization. So one of the real great things about our business model is that as fuel price comes down, we can fly more with the same assets, because we have underutilized assets during those off-peak periods. And to give you an idea going forward, so off-peak day flying, day week flying in the second quarter was about 36% growth. In other words, 2014 over 2015, we grew off-peak flying by 36% in the second quarter. In the third quarter, that number is 66%. So it's a big catalyst for our growth to be able to take advantage of these off-peak opportunities, and it does put pressure on our unit revenues.

Right. But it increases asset utilization?

It increases earnings.

Right. Yeah, and earnings. Right. And then does that also drive third-party product sales?

No, it makes third party product sales harder in general. Generally speaking, third-party conversion is correlated to fare.

Okay. Because you had a really...

For the same market [indiscernible].

You had a really substantial increase in rental car days and car rentals, right?

Yeah. I wouldn't correlate that to utilization increase. What's happening there is that, we introduced some new technology for pricing at the end of last year, and that's been really accretive, and then you're seeing network shift towards the East Coast. And so, the unit revenue production of our car rental business has greatly increased from those two factors. It doesn't have much to do with off-peak flying.

Okay. And then, what's the outlook for acquiring more A320s? Can you give us an update on the market [ph] for some more?

Yeah, sure. I think as demonstrated by our recent opportunities in the spot market that we've taken advantage of, we continue to find Airbuses in sufficient quantities and prices to meet our growth. And I don't see that changing. I think the market is moving towards us. We've had more and more interest from sellers than we've had at the same time last year. I think the market is coming our way.

Awesome. Thank you.

Thanks.

Thanks very much, Helane.

Thank you. Our next question comes from the line of Hunter Keay of Wolfe Trahan. Your line is open. Please go ahead.

Wolfe Trahan. Old school. On the growth, a couple of questions on the growth. Jude, how come - this is in follow-up to Joe's question earlier? Why don't you keep the pedal to the metal a little bit here and why are you talking about mid-teens? Is it a function of just sort of being prudent and just making sure you get the execution right? Is it a function of aircraft availability? Is it a function of pilot availability? Is it a function of maybe just the growth opportunity isn't as extremely good as I think it is? So why the deceleration?

It's an operational limit. Yeah, so the debate we're having now is, there is no economic constraint to grow in the company. We have plenty of opportunity. We have availability of airplanes. We have markets we want to serve and passengers that we want to serve. It's really about us balancing how quickly we can grow the airline with how much strain we can put on the operation.

Okay.

Hunter, it's Maury. Just to follow-up to that. One of the things I admired about Southwest over the 40 some years they have been doing this is, while they were in growth phase, they were doing 10% to 15% a year, and the organization can stress - it's a stress to jump it up to 20%, 25%, and then to come back to 5% to 10%. You'd much rather kind of standardize around a pace that the organization can gear up to and deliver consistently. Certainly, you can push things like we're doing this year, but operations, every time we go to a new level, we have more requirements for just the volumes and things like that and we want to be mindful of that.

Good. Okay. Thank you, guys. And as you think about that growth, how should we think about it? Is it more about sort of A320 enabled routes that maybe connecting dots within your regional network that are out of range with the MD-80s? Is it adding frequencies? Is it may be adding even more gauge or is it maybe something even more exotic that we haven't seen before from you guys? I think maybe a few years ago at an Analyst Day you talked about flying transatlantic. I'm sure you're not thinking about that now, but you get the nature of the question.

Predominantly, it will come from the same kind of growth that we've had over the last 12 months, which is underserved markets on less than daily service. And the A320's performance capabilities won't really impact our network planning, so we're not adding airports that are in challenging places, hot or high, nor are we flying longer. It's really about with the A320 it's really about utilization, so we're flying more often on the margin. But if you look at the recent announcements, it's all been relatively larger cities. I would expect that trend in those cities to continue. One of the big catalysts for our growth over the last 12 months has been Cincinnati and markets like it, in Indianapolis and Memphis more recently and Austin is growing. So we're really looking hard at with those kind of markets and I think that's going to be the story for the next 24 months or so.

Okay, great. And just last follow up speaking of hot and high, can you give us a metrical update? Thank you.

So like we said the last four years, it's next year.

Got it. Thank you.

Mañana.

Mañana. Adios.

Our next question comes from the line of Mike Linenberg of Deutsche Bank. Your line is open, please go ahead.

Yes, hey. Good afternoon. Hey, Jude, the markets that you just talked about Austin, Memphis, Cincinnati, et cetera. Can you talk about just the recent addition to do a market like Austin, Memphis, I realize that was a market vacated by Delta, but when I think about historically the type of markets that Allegiant focused on, it was always from a smaller city to a leisure destination and now we're looking at connecting two medium-size cities and I know there's leisure travel between Austin and Memphis, but it doesn't totally strike me as a going to a leisure type destination. Is this the beginning? Maybe its experimental or maybe this is the beginning of another phase and just you really being opportunistic. Can you talk about that on that market and...

Sure, yes. So it has many of the same characteristics of all our markets, which is that there is no low-cost daily alternative, and so if you want to travel on that city pair, you need to have traffic over a hub and it's not priced appropriately for non-stop customer that pays with their own wallet. So we view that as a great opportunity for us and if you look at across the mid-size market space, there's not a lot of connectivity between those markets. And if there is, then the incumbents won't really be hurt by us because we'll travel on days of week where there's still traffic already existing. So yes we think it's a great opportunity and it doesn't hurt anybody or compete with anybody else. It's a service no one's providing.

Perfect. Thank you for that and just a second question and this is to Maury. Maury, I'm just watching your credit profile improving. You're now a DD. You're two notches away from investment grade, and when you look around the industry some airlines aspire to be investment grade. They talk about it and there are others who to them it doesn't really matter. It's not all that relevant because they can borrow at fairly low rates anyway since they're typically borrowing on a secured basis. Where does Allegiant sort of fallout? Do you aspire to an investment grade credit rating? And if you do, does that have any sort of influence on how you think about redeploying capital back to shareholders, whether it's like what you did today reupping the divi and reupping the share repurchase? Thoughts on that?

Yes, Mike, it's always kind of a nice badge of honor to be investment grade, particularly in this industry. Has Alaska made investment grade now? Are they up there do you think?

They are.

Yes.

Ryanair.

Yes, but frankly you need that under traditional metrics because the industry didn't produce any cash and you're always borrowing, and so it was a self-fulfilling problem that without making any money, you weren't ever going to be investment grade to begin with. But the interesting place we find ourselves, we don't need a lot of capital. We are producing our own capital, buying used airplanes, able to borrow at 'Oh! My God' rates with today's environment. We just borrowed under net of 1.7% over LIBOR for used airplanes. So in many ways, I'm telling our board that what we have today is the same model we started with the MD-80. The only difference is we're putting $5 million or $6 million of capital into an Airbus airplane and borrowing $10 million, $12 million whatever the number is. But that package is the same package in many ways that we had with the MD-80. You just look at the debt as part of the asset and the economics. So the model, while we need some capital from a debt side and should use it, I'm not sure investment grade gets us much better rates, unless maybe we wanted to go to the unsecured market and what was Ryanair's like a 1.78% or something for $500 million, $800 million. That'd be nice to have, but we're fine at where we're at right now from a capital deployment perspective. I think candidly the other side we're too small to be investment grade. We've been told that numerous times. They're just looking for size and scope more so than perhaps we have at this point, too.

Okay. Fair enough. Thanks. Thank you very much.

Yes.

Thank you. Our next question comes from the line of Dan McKenzie of Buckingham Research. Your line is open. Please go ahead.

Hey, good afternoon, guys. Just a couple of quick house-cleaning questions here. The 17% growth whether looking at ASMs or the number of new routes seems a little bit of a disconnect from full-time equivalents, which grew 25%, and I'm wondering what's driving that is. Is it that the full-time equivalents could fall in the back half of the year to normalize more with growth?

Hey, Dan, it's Scott. No, it's primarily driven by flight crews and you're going to see the number of FTEs related to those outpace growth, whether its aircraft or ASMs or however you want to measure it and that's been a consistent trend.

And so we should expect that going forward I guess is I'm understanding you're saying.

Correct.

And then just another house cleaning item here, just given the pilot noise in the media, I just want to verify. We are back to normal surveillance from the FAA if I'm not mistaken. Is that correct?

Yes.

Okay, good. And then second question here, it looks like you were able to get rid of a 757 next year, and I'm just wondering if you could remind us what the cost of complexity is either on a block hour basis or margin basis if easier, and I guess in other words, to what extent are they a drag on margins? And where I'm going with this is if you're getting rid of a 757, is there the opportunity to get rid of more and would that be a source of potential earnings upside as we look ahead next year?

Jude can give you some more color, but it's hard to beat 29%, Dan. That's something that's [ph] verified atmosphere for us here and I certainly - while I'd like to maintain it, I'm not going to sit here and tell anybody we can, but there's complexity when you have multiple airplane types. There's no doubt about it. I'm not sure we can increase the margin much beyond where we're at, but Jude.

Yes, the thing to consider on those airplanes is that there's one-time maintenance events coming up on those dates that would otherwise need to be run through the P&L. So by retiring them, we won't necessarily get a benefit. It will be basically neutral to where it is now because we're not doing that maintenance today. The Hawaii network is performing really well. It's the biggest beneficiary of the decline in fuel prices in our network because of the length of haul. But we continue to look at the 75 and as those events come up, our best guess is reflected in that fleet plant, which shows them retiring.

Very good. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Steve O'Hara of Sidoti. Your line open. Please go ahead. Steve O’Hara: Hi. Good afternoon.

Hi, Steve. Steve O’Hara: Hi. I was just curious and kind of following up on Hunter's question but on the Fare Club or something similar to that and I think the other thing was credit card, maybe if you could just talk about if that's next year as well? And then also in terms of if you're growing at mid-teens, kind of what's the potential for either unit cost growth or unit cost improvement longer term obviously excluding any pilot contract? Thank you.

Maybe I'll take the loyalty question and turn over to Scott for costs. This is Jude. Today, just to be clear, we don't have a loyalty program nor a Fare Club. We've talked about it for several years to our investors. And as we sit today, we would plan on launching the loyalty program which is based on a cobranded credit card in about the middle of next year. So we're working towards that goal today. The growth that you've seen in our ancillary production has come from Air ancillary products primarily and I think that's going to slow over time as far as the year-over-year increase, but we continue to focus on it and we want to take down the airfare to make travel more available to our passengers and we do that by raising ancillary in some ways. So that's loyalty. And we really aren't in a position to give you any guidance on how effective or how productive our loyalty program would be. Steve O’Hara: Okay, thank you.

Yeah, Steven, on the cost side, if you take the midpoints of where we just guided down [ph] 13 down to 11 that puts you roughly at $0.058. Without getting into too much detail, the expectation was you'd see a nice size reduction into 2016 as well. Couple of the areas, D&A, I think we have the most aggressive policy out there. So, our book value on our MD-80 fleet will be substantially reduced. Maintenance, it appears it'll be a fairly light year, although we haven't got into any of the CFM motors yet, so we'll see those in the next couple of years. But in general, it should be a really nice cost story as we go forward. Steve O’Hara: Okay, great. And then just on the - I want to say it was - sales and marketing was down significantly; it was down big. Is that the credit card versus debit card piece?

That's correct. Steve O’Hara: Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Bob McAdoo of Imperial Capital. Your line is open. Please go ahead.

Yeah, hi guys. Just to try to get a sense of how the world has changed as you've gotten more complex and the route structure seems to be going different ways. We talked about Austin/Memphis, for example. It used to be pretty easy that you could kind of figure out where the crew base was, and you said you never had crews away from base at night and it was kind of easy. Okay, Vegas is a base and Bismarck isn't. In a place like Austin/Memphis, how do you crew that one? And kind of along that same line, over time there used to be a kind of a sense that you rarely had your own station people; anybody in a lot of these stations at all. It was all contract people out there. Is that still kind of the rule, or is that starting to change given the nature of these mid-sized cities?

Hey, Bob, it's Jude.

Hi.

I'll talk about the scheduling side of it. I think you're right. I mean it does cause a challenge to route - schedule a flight between two cities that we don't have a base in, but we are very capable of doing that on an inside turn or a triangular pattern. So, I don't think we are constrained in growing those markets as we sit today significantly, but I think that you're right, it's going to force us to make some adjustments. And I think that's going to come in the form of more Mid-Continental based airplanes. And so we have...

Which aren't necessarily in a really big city a la Florida or something like that you're saying?

They're not necessarily in a destination market, but they will be in a city that we have significant presence in. So we've recently announced basing airplanes in Cincinnati and that's an indication. Now we have 10 markets from Cincinnati and it starts to get difficult to route all those markets without putting a base there in Cincinnati to better serve that community. But I think that trend....

But from an overnight point of view, it's the same as it used to be, though? There's still nobody - nobody stays out in a hotel at night?

Yeah. We don't have any significant scheduled overnights anywhere in the network. Today it's still an out-and-back pattern, absolutely.

Bob, it's Maury. It's important for us to maintain that as best as we can. Just keeps it simple and allows our people to understand what the basics are. So that's critical in what we do going forward.

What about station staffing? How is that? Has it changed at all or?

Hey, Bob. This is Scott. No, it hasn't changed. If anything, we continue to move towards a fully outsourced model, the only two bases that have any sizeable Allegiant presence would be St. Pete and Bellingham. We partner with four or five major ground service providers across the nation. Just to give you an order of magnitude, we have maybe 140 direct station personnel. Those are folks above and below wing that would actually touch the plane. So 95% of what we do is outsourced.

Great. Thanks.

Thank you.

Thank you. And our next question is a follow-up from the line of Joe DeNardi of Stifel. Your line is open. Please go ahead.

Hey, thanks. Jude, I imagine you guys have a board there somewhere with new routes that kind of meet your threshold for growth. So just given the changes we've seen domestically from a capacity and pricing standpoint over the past, call it, 12 months, have the number of markets you guys have identified as meeting that threshold, are there more markets that you guys feel comfortable growing into or fewer? Are you guys kind of working through them at this point?

Yeah. Lukas Johnson and his team spend a lot of time thinking about that. And from my perspective, we're just about willing to try anything. And we just really need to be honest with ourselves about the potential of any given market, and be willing to cut anything, and then have the flexibility in all of our contracts to do so. So, as we sit here today relative to where we were say last year, I think our growth potential is much increased based on the success we've had in some of our midsized markets, which wasn't really part of our strategy as recent as two years ago. And so, going into midsized markets provides the ability to fly a fuller calendar on more days of week and to more destinations. And now as Michael brought about and mentioned earlier, now we're experimenting connecting those midsized community. So, we've had great success doing all of that. And if that continues on, then yes, there is four years to five years of growth just exploring that strategy. And that won't change the proportion of our routes that have direct competition because we continue to look at connecting markets that don't have any non-stop service today.

Okay. And then on the hotel side, where are we from a - or where are you guys from a technology standpoint in terms of maybe creating some more opportunities there?

Scott, you want to touch that?

We're midway right now through about a four months project to rewrite our hotel backend that will open up some automated pricing technology that'll give Jude the ability to add breadth of hotel inventory underneath, which I think is important as the network shifts out of Vegas.

Again Joe, it's a Vegas-centric market with hotel. It just stands out to a much greater degree than any other city. And as we add more capacity, most of which has gone to the East, you're just going to have pressure on those per passenger numbers. We're real pleased, the cars has stepped up, and we're holding our own on a per passenger revenue basis now which is good.

The network is going to continue to challenge unit revenue for hotel. And that's going to be because more of our passengers are coming from bigger communities that have in general lower take rates and also less often will those passengers be destined for Vegas as a proportion of the network. And so we're going to continue to see in revenue declines - but I'll bring out our third-party production in the second quarter on a dollar basis is the best it's ever been. [indiscernible]

[Indiscernible]

So it continues to be a very important part of our business. And Maury just nudged me to remind you that Canadians and Mexicans tend to have the highest take rate as a demographic, and we're carrying less of those folks proportionally and that continues to be the case. And our Canadian markets are particularly challenged because of the exchange rate.

Okay, great. Thanks guys.

Thanks, Joe.

Sure.

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

Thank you all very much. I appreciate the questions and the interest. If you have any follow-up, obviously go through Chris and the IR team, and we'll be glad to try and answer them as best we can. We'll talk to you at the end of next quarter. Thanks, again. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.