Q2 2019 Earnings Call
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Thank you for calling the Conferencing Center conference operator will be with you momentarily.
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Yes.
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Athree one nine.
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Jimmy I think where how about the spelling of your first and last name.
Your first name is Michael Am I see a real.
Last name is.
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Thank you how about the spelling of your company name. Please.
Hey, I.E.R. J.
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I E.R.E. here.
Yes.
Thank you lastly, your email address sir.
Yes, it's Kenneth.
Yes.
Michael.
At G. mail Dot com.
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Gene meal dotcom. Thank you so much the conference is now in progress I'll join you.
Thank you.
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I knew we would appreciate the return to a single more modern fleet.
We're only the only carrier in the United States in the past many years that are so radically changed their company.
And even while we were in transition we were able to generate industry, leading operating margins with our previous mix of Airbus and Mds.
Our projections over the past couple of years have suggested we would be able to improve these margins when we completed the changeover.
But now that we are here, it's nice to actually see the.
Experience the upside.
Productivity. This newer generation aircraft is proving to be all we had hoped for with respect to both reliability and profitability.
While the capital outlay for Airbus is certainly greater than we pay for our Mds. The increased cost is more than offset in the fuel burn savings and the additional 20 seats in the Athree 20.
Our model of the past 20 years of low utilization and low cost focused on leisure customers is alive and well only now we are stronger and more resilient.
Past two quarters increase in margins has been driven by our changeover.
In practically we are still in our transition.
Our fleet at the end of the year was reduced to 76 from 96 aircraft at this time last year.
And while we will add 17 aircraft during the year, we needed to ask more of our limited number of planes in the first half of the year, we wanted to grow.
Last year during the first two quarters, we averaged just over seven hours per day, while this year. The average has been closer to 8.6 hours, that's an 18% increase in our daily utilization.
Year over year for the first six months.
But in March and June this year, we flew 9.7 hours per day in both months.
Last year was Athree and 70 per day, respectively.
We grew capacity, 13.4% in Q2 was substantially fewer aircraft than we had last year during the same period.
Reason I've dealt with so much into those details to raise relate to the impact of this change.
We are learning to quote manage our fleet.
Learning how much upside, we can extract them and still be additive to our bottom line, particularly during our peak months, which are so important to us.
This almost 20% increase in utilization this year during Q1, and Q2 and 25% in March and June .
Was extremely accretive.
We have more flexibility economically to operate this aircraft at the edges. We can do more on a Wednesday or Saturday earlier in the morning later in the evening. This is how we are able to operate close to 10 hours a day in March and June .
But we are still learning how far we can push the schedule in hindsight, we over played our hand a bit in early April .
With too much capacity in the extended Easter break period, the extra three weeks this year to not have the demand, particularly in the first 10 days of the month, but even with this capacity Miss overall the outcome was accretive.
Frankly comparisons to 2018 metrics are not as meaningful given the structural changes we have undergone this year.
As an example, if you review the fuel gallons consumed our six month financial Statistical summary in the release, you'll notice we concern virtu consume virtually the same amount of gallons year over year.
Yes, we produced an additional 600000 passengers on 4400 flights.
With nine fewer aircraft and generated over $81 million of incremental revenue.
Our total fuel expense actually declined almost $9 million year over year because of the 10 cents decline in our cost per gallon.
On the ownership front, we spent an additional $16 million in DNA to generate this incremental $81 million of revenue.
Other expenses, such as labor stations marketing and marketing increased at their corresponding rates, but while maintenance was flat year over year. Another benefit of this aircraft.
Bottom line, we traded increased ownership for an ability to generate substantially more revenue in our first two quarters.
Critical reasons for these improvements in our ability to execute include one the aircraft just more reliable.
We were able to reliably increase utilization of this aircraft as weve demonstrated in the past six months to we're better at what we are doing.
Just because the aircraft is better one still has operated in our internal improvements over the past 24 months have been impressive Scott will touch more on that today. We are one of the best in the industry, providing reliable operations, particularly now during our peak periods.
My hat is off to our team for their great efforts in this area.
The third area is the fuel burn the increased productivity. This aircraft is self evident.
As I said earlier, we burned virtually the same amount of fuel for 4400 additional departures and over 600000 additional passengers during the past six months.
Lastly, we become just more efficient in our cost structure, particularly with our pilot productivity.
The transition pains our past.
The one off expenses associated with the move to our Airbus fleet are behind Us I'm happy to say this transition has enhanced our model as I said earlier, we have an up better ability to pick up for our critical peak months, while still maintaining our historic low utilization in our shoulder months.
Mr Coming September where our plan is to average four hours a day our traditional schedule in this off period going forward. The combination of our improved operations, particularly in peak months and the enhanced flexibility. This fleet provides are going to be fun to watch.
Our goal is to hold the high ground when it comes to financial performance in the coming years.
And now that we're through the rough patches of the past two to three years this looks very doable.
Lastly, I want to thank our 4000 plus team members for all their efforts during this difficult transition.
I know I speak for all in the management team when I say. Thank you you are the difference maker, so lets keep it up.
Scott.
Thank you Lori and good afternoon, everyone.
As morry alluded to in his opening comments.
We continue to be incredibly pleased with our performance, particularly in the second quarter.
And the progress we're making within every operating group will make these results, particularly unique is how we flex the model during the quarter.
Namely, how we scheduled airline how we deployed our fleet, how we stared the airline and increased overall customer service levels. During what is traditionally been the most challenging period throughout the year.
Before I jump into the Twoq you up results I want to take a quick second and just highlight what this organization and in particular this operations team has accomplished since they were put in place 24 months ago.
As many of you may recall, the second quarter of 2017 was our operation operational performance locally.
We just completed the quarter with over 800, excuse me 480 cancellations.
425 of which being maintenance related our completion factor was 98%, which was nearly last in the industry are irregular our ops cost for the quarter were over $20 million and accelerating with nave negatively impacted over 4% of our customer base.
And our on time performance.
Was was 69%.
On a trailing 12 month basis, our regular ops costs were in excess of $55 million and trending in the wrong direction.
Results that are not only putting tremendous cost pressure.
Our excuse me tremendous pressure on our cost structure and our team members ability to execute but we are inflicting long term damage to the Legion brand.
Fast forward to the second quarter of 19 results in what a difference 24 months mix.
From our second quarter 17, low point, we ended second COVID-19 was just 18 controllable cancellations as compared to 449 and 156 cancellations in 2017 and 18, respectively.
A dramatic improvement over a two year period, considering we grew departures cyber 24%.
Our completion factor improved.
Has improved 0.4 points to 99.6% year over year and over 1.6 points since Two Q1 7, and as Lori indicated in his opening comments, we have led the industry and completion factor for all of 2019 and 16 of the past 18 months.
A direct byproduct of being able to complete our daily flying schedule is our ability to drive on time performance improve customer satisfaction, our net promoter score and most importantly drive unnecessary costs out of the organization.
Our second quarter, a 14 performance has increased 2.8 points year over year to 77.7%.
And over eight points from two years prior which has resulted in substantial improvements to our net promoter score which is over a which is up over eight points year over year.
The number of customers impacted by four ops improved 0.6 points to just over 1% of our find capacity and a lot and has allowed us to pull over $7 million and irregular ops cost out of the business.
On a trailing 12 month basis, our regular ops costs are down over $27 million.
And we still have a number of areas, where we can improve.
Looking into the back half of the year and I know I speak for more and John and the rest of the management team. We are excited with the strength of the business and the trajectory of our operations, particularly in the improvements and predictive maintenance.
Our month to date July results.
Have seen dramatic improvement year over year and our momentum from June has continued into what should be a record record setting third quarter.
And lastly, I want to thank all our team members service providers and partners throughout the network for the tremendous job. They do everyday the results have been nothing less than impressive and with that I'll turn it over to John .
Thank you Scott and thanks to everyone for joining us this afternoon.
While second quarter TRASM was down 1.6% on a 13.6% increase in Asms, primarily driven by over 22% growth in the week, leading up to Easter The may performance with TRASM, plus 2.4% on 11% Asms in the June performance of plus 1.2% on 13.5% ASM, which is different from the earnings release due to removing a onetime $750000 contra revenue.
With solid considering the utilization and general growth.
The momentum continues into July and the month is on track to finish higher than the adjusted 1.2% leased on June .
That said, we don't manage the business to maximize unit revenue, but to drive higher earnings, which we were successful in doing.
And what are the total company effort, we were successful in creating more profitability through increased utilization of the aircraft in three ways.
First.
While off peak days of week grew nearly 22% in the quarter. After normalizing for fuel price differences that growth contributed an incremental $15 million of earnings versus last year more than half of which came in June when we had 9.7 hours of utilization like Morry mentioned.
Second we were able to increase utilization on peak days, a week by over 20% in June and still drive a unit revenue increase on those days of two and a quarter.
Finally, the combination of the Airbus aircraft and the incredible operational performance. We've exhibited opened up significant opportunities on the fixed fee side that enable us to grow that line by 63% versus last year.
Our planning methodology has remained consistent as we continue to learn how powerful how powerful a highly reliable all Airbus fleet can be for us.
In order to achieve margins in the Twentys.
Each hour of clean space is extremely valuable and to that end, we continue to scheduled to profitability thresholds.
Our success in deploying continually profitable flying even with elevated utilization rates gives us confidence to continue to push where appropriate.
It also means remaining flexible to pull down capacity in the weaker demand periods.
This is exemplified in the third quarter as we will grow July asms by 13% to 14% while September will actually be negative.
This combined for a total quarter asset growth rate between five and 7%.
In terms of the full year, we have narrowed our azim guide toward the midpoint to 8% to 9% year over year.
With July likely to be our seventh consecutive month with air ancillary a greater than $50 per passenger the downward trend in load factors with obviously sub optimal and while our expectation for the second year of the revenue management system was driving incremental yields our revenue dynamic has shifted.
As the split has converge on 50 50 air versus ancillary DRM system is re optimizing or at a higher ancillary base and prioritizing load factor in order to achieve the benefits of that.
I expect our load factor to flip positive in July and throughout the third quarter, which coupled with the SM cadence set us up extremely well to continue expanding upon our industry leading margins.
And with that I'd like to turn it over to Greg.
Thank you drew and good afternoon, everyone.
As Morry noted in his remarks, the airline has gone through a radical change over the past years with the outcome being a brand new airline equipped to better optimize both operational and financial performance.
We are proud to report the airline expanded to year over year to Q operating margin by more than six percentage points from 17.5% to just under 24%.
And posted earnings per share of $4.81, an increase of 50% year over year in the second highest quarterly EPS in our company's history.
Our second quarter costs were significantly better than expected unit cost excluding fuel decreased by over 6% year over year, which was largely driven by our outstanding operation.
Namely combined cost improvements from within our maintenance and supply chain areas improved pilot productivity and lower irregular operational costs.
In fact with the exception of depreciation each one of the cost line items for the airline decreased on a unitized basis year over year.
This result gives us increased confidence in our full year airline CASM outlook.
And we are both improving our guidance and tightening the range. Our previous range was down 3.5 to down 1.5%. We're currently guiding down four to down 3%.
We believe the operational efficiencies, we experienced during the second quarter, our here to see.
By way of example, our pilot productivity as measured pace to block hours continues to trend nicely and near 65% productivity.
Compared to the 51% productivity at the peak of our inefficiency.
Maintaining cost discipline is a key focus and we expect continued improvements on this front.
Moving on fuel prices and decrease since around this last around this time last quarter with the reduction with the reduction in Brent crude oil of 13.5% with this significant move in oil we are reducing our full year assumption for fuel cost per gallon from $2.26 to $2.15. Our fuel efficiency improvements continued to outperform as we saw year over year increase of 8% during the second quarter to 82.3 asms per gallon.
As such we increased our full year fuel efficiency guidance by half point to 82.5% Asms per gallon, an increase of nearly 6% for the full year.
Turning now to the balance sheet. We ended the June quarter, with total cash and investments of 695 million and $1.5 billion in total debt.
Earlier this month, we paid off the stuff on a high yield bond of just over $100 million, reducing both our cash and debt balances by the same amount.
During the second quarter, we refinanced 23 of our older Athree hundred 19 aircraft with the net proceeds of over $100 million and a reduction in margin by 40 basis points.
This was a refinancing of aircraft that currently had debt balances on them and did not include any of our existing unencumbered aircraft.
While we don't expect to raise any incremental debt in the near term we continue to maintain sufficient dry powder through our 26 unencumbered aircraft and $81 million available in our Undrawn revolver.
Currently our leverage is 3.2 turns debt to EBITDA and a comfortable 1.8 turns of net debt to EBITDA. We believe the high point of our leverage is behind US as we expect to continue to de lever through quickly amortizing aircraft debt and expecting to increase EBITDA.
Our increasing EBITDA supported by our aircraft growth as we generated approximately $3.5 million of EBITDA per aircraft. During the first six months of 2019.
During the second quarter, we placed two Athree hundred 20 series aircraft into service, bringing our total in service aircraft 86. We also purchased three Athree hundred Twentys, which are scheduled for revenue service during the third quarter and we expect to end the year with 93 and service aircraft. In addition to the three aircraft purchase during the second quarter. We also acquired three spirits three spare CFM engines. These combined purchases constituted the majority of our $100 million in airline capex during the quarter.
We are adjusting our full year airline capex guidance down by around $17 million to reflect lower than expected actual purchase price of used aircraft based on their maintenance status at delivery.
We are also reducing the midpoint of our full year sunseeker capex by approximate approximately $110 million. This reduction simply represents a timing shift by a quarter from the fourth quarter of 2019 ended the first quarter of 2020 total project Capex is unchanged.
In regards to other non airline initiatives you may have noticed in our release, we are evaluating strategic alternatives for T. snap.
Tea snacks, all encompassing golf course software solution is cutting edge and has been a disruptor in the golf industry from its beginnings nearly five years ago.
Since that time key snap has signed up 600 golf courses in 49 States and it's nearly 70 team members continue to capture market share in a competitive landscape.
We are very proud of the tremendous growth in the efforts of the team snap and team.
Fueling the continued growth of this compelling fee to be software as a service offering requires a salesforce in resources that an organization focused in this space can best provide.
As such in order to take key snap to the next level. We have it we believe it is best to acquire or to be acquired Moreover, giving that our lead in 2.0 strategy is focused on fee to see not be to be as his teeth announced model. We feel the right course of action for both Allegion and for T. snap is a sale.
Ideally, we partner with a potential acquirer via marketing services and or the opportunity to continuingly onramp their customer data into our lead in 2.0 platforms.
Recently, we had a strategic conversation with a party interested in acquiring key staff and we intend to open up similar discussions with additional Counterparties as a result of these discussions our attention to sale and with all requisite criteria being met an asset held for sale classification for accounting purposes has been triggered and will be reflected in our Q3 financials and onward.
Under this classification, we are required to stop depreciating T. snaps assets. Additionally, we have reviewed these assets and have determined at this time no impairment is necessary as the sales price is expected to be greater than the carrying cost of t. snaps assets.
Additional criteria to meet this classification include the intent and ability to close the deal within a year.
We meet this criteria and we expect to close the deal within the 12 month requirement.
Finally, all of T. snaps future revenue costs and potential gain on sale. We will continue to be recorded under income from operations and disclosed within our non airline segment reporting.
T. snap makes up a significant portion of our non airline reporting and in order to best maximize the value of this transaction, we have decided to suspend our non airline EBIT guidance under sale and tell the sale is complete.
Given the sensitivity and relative minor impact on consolidated earnings are non airline commentary will largely be limited to our earnings release and future prepared remarks.
With that said, we are seeing solid trends with our FCC and expect same store results to be EBITDA positive for full year 2020.
I also want to mention our full year 2019, EPS guidance incorporates both airline and non airline expected results.
And in closing I'd like to add my thanks to all of our hard working team members. As these outstanding results are attributed to their terrific efforts day in and day out and with that I'll turn it back over to the operator for today.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key we also ask that you. Please limit yourself to one question and one follow up our first question comes in line of Andrew Didora from Bank of America. Your question. Please.
Hi, good Nick Good afternoon, everyone. I guess my first question is for drew I guess based on Mike kind of back of the envelope Calcs here it looks like April .
T. RASM was down about.
And kind of down mid single digits I think.
Correct me if I'm wrong.
Call in April you said that Youre expecting having sequential improvement one Q2, Q and T. RASM. So I ask you kind of know the Easter issues at that at the time I guess, what kind of changed from an error what youre looking out two in May in June from a revenue perspective.
Yes, candidly at that time.
You have to kind of remember back to the comps of last year end and frankly I was a bit aggressive in terms of what I thought we could recapture from those comps and thats, where a lot of the bullshit came from.
No that failed to materialize and we end up closer to kind of a non recapture state.
So I mean, Canada, Thats exactly where it came from.
Okay and then.
Look I know in your prepared remarks, you spent a lot of time talking about the fleet transition.
Back at the end of 2017 at your Investor Day, you outlined hopefully profitability by 2020 could be about $5 million and EBIT per Airbus aircraft, however, about roughly around $500 million.
As you're going through and as you've been through the transition kind of learning about than the new fleet type how much confidence do you have in this figure in these early days and what do you think the street is missing as seems like consensus is nowhere nowhere near that right now.
Hey, Andrew Thanks, This is Greg.
We're pretty confident if you take a look at our forward guidance for 2019, you can back into EBITDA per aircraft of about $6 million.
We roughly have about $1 million in depreciation per aircraft. So that gets you to your EBIT per aircraft of 5 million.
And we're growing that we think theres some upside to that in 2020, I would just caveat that with debt the existing fuel prices I think senator about to the.
Dollars 12 cents per gallon.
Okay. Thank you.
Thank you. Our next question comes from the line of Duane Pfennigwerth from Evercore. Your question. Please.
Hey, thanks.
On Sunseeker I wondered if you could comment on what spending is.
Year to date.
And what's driving your lower view on the year. If there if there were some delays if it was permitting or stuff like that.
This is the quarter shift Wayne this is John I mean anything when you try to predict.
Cash flows when it comes resorts like that.
There is some.
Uncertainties between quarters, but.
All in all as Greg said, the Capex doesn't change at all just the quarter shift.
I forgot the first part of that question well cost what Youre, just what you're spending to date. This year has been on it.
Well, it's in the earnings release I don't have the exact dollar amount per quarter, but we have we don't have any.
We're not providing any information as it comes to.
Quarter by quarter, but B, we don't expect to 470 to change at all.
Everything we've been saying about it is factual that do have the numbers by quarter, Andy Greg Yeah. If you if you kind of back into it Duane I think all in the first half of the year Capex for Sunseeker was roughly I want to say about $20 million.
Yes, and Thats largely piling and.
Demo ride on the property one thing I'll mention Dwayne why Rad.
I know you'd put out some progress photos of the resort one of the things I should update.
Everyone with as we are.
Adding a a tab to the sunseeker resorts dotcom website.
That's called a project update tab that have will be added in the first week of August and everyone can click on that tab at any point in time and get up to the minute of progress photos, including a drone video footage.
So that will save you and everyone else some time looking at that and.
I think that should help you out.
To the extent you wanted to keep looking at those.
That's great John I appreciate it.
When would you expect like what would you expect those photos to look like.
Kind of exiting this year, so going from the.
20 million to this 161 75 by year end, what do you think we'll be able to sort of point to exiting 2019.
You have.
On a site like that not to get into too much detail, but there is something like 23, 2400 piles that are deaf to be put into the ground.
Before you can come out of the ground. So we would expect the resort to be coming out of the ground towards the middle to the back end of Q4, so you're going to see structure.
Coming out of the ground up by that timeframe. So.
One other data point I'll share with you is.
We're going to be we're probably 30 to 45 days away from having been able to provide you certainty around.
Timing.
And construction budget right. So call. It by the October conference call on Q3, and most assuredly of course by the Investor day, albeit we'll give you with relative certainty what the construction costs, then we'll be in relation to budget as well as the timing of opening and the reason for that is we're out to bid right now with significantly more aspects of the project, we expect those bids to be coming back over the next.
15 to 30 days and in conjunction with those bids were able to formulate a much tighter schedule. So thats, it's biased at getting more data, which we're right on the cusp of that I'll be able to give you with a pretty high degree of certainty, where we stand on that budget and where we stand on a timing around opening.
Thank you. Our next question comes from the line of Catherine O'brien from Goldman Sachs. Your question. Please.
Hey, good afternoon, everyone. Thanks for the time.
I guess, maybe first just on that airline.
Only CASM ex the 6% really impressive congrats.
I guess just.
What what do we what should we be looking at two here and there I think on the last quarterly earnings call you guys mentioned you're expecting.
Deeper decline.
And and CASM ex each quarter as we go through this year.
Even though you've updated presently here would imply maybe something a little a little less negative net impact of minus six and that in the coming quarters. So I guess like.
Is there something special about the June quarter that really drove the outsized performance or or could we potentially see.
You know similar or better than expected performance in the back half Thats you got there. Thanks.
Hey, Katy.
Yes, our expectation is that the June quarter as far as decrease will be the most outperforming quarter of the year you can back into the second half CASM ex for the airline only just by taking our guidance and what I would do is I just kind of average those two the third and fourth quarter based on that and kind of backing into it.
You know in the June quarter, we had a couple of so it was a terrific quarter as we mentioned.
Recapturing a lot of the efficiencies primarily due to operational.
Performance, but there are a couple of kind of one onetime items that did happen in the quarter I'd say, one we had.
Some inventory part sales for our non Airbus part.
Our supply chain team did a very good job in negotiating and getting some really good rates on those parts. So that was a onetime good guide during the second quarter and Additionally, we had some slight shift of engine maintenance cost from the second quarter into the third quarter.
But other than that a lot of goodness that we've seen is going to be intact for here to come.
Great. Thanks, then.
Maybe one for true true as you're seeing this improvement operational performance and then the corresponding.
Improvement and net promoter score.
Are you starting to see any uplift sale your pricing structure because of that or would you anticipate seeing any going forward. Thanks.
Yes, thanks, Katy so one of the bigger factors, we'll see.
Enter the pricing structure is as we drive up utilization and capacity that obviously take puts pressure on our pricing structure should go.
In terms of I guess, Directionally, where you will see that impact our returning customer base is stronger than it has been perhaps ever web visitation looks great.
So I do think we are seeing an impact to our passenger in our customer base from the operations from the net promoter score as you'd expect.
And so I think you'll see us perhaps have an easier time, raising that utilization and capacity as kind of an effect.
All the improvements.
Thank you. Our next question comes from the line of Michael Linenberg from Deutsche Bank. Your question. Please.
Hey, two quick ones here, Hey, just to Greg you spent some time talking about deleveraging the balance sheet after that.
Replacing aircraft debt.
From your perspective is an important correlation to have an investment grade credit rating.
That's something that makes sense.
Over the next couple of years or so.
Hey, Michael Good question, it's something we're not focused on and when you. When you go through some of the criteria from the rating agencies given the size of a Legion kind of our focus in the in the us and not as diversified throughout the world as just a high hurdle for us to ever get there. So we don't really focus on it and over focused on strengthening our balance sheet and and that's where our attention will be.
Focused on okay great.
Okay great.
Our next question just them Maury.
Look I know you spent several years getting to single fleet type and it's clearly paying dividends, but along the way. It seems like you have a much stronger.
Operational Foundation, so that single fleet has help you get there that said is.
With that base have you thought about maybe adding a second aircraft site soon move into maybe some of the smaller markets and I'm just I'm highlighting that because one of your competitors is looking very closely well I should say one of your competitor you Ltcs is looking very closely at.
In a smaller aircraft site with that would that make sense in the.
With model.
Michael We just got the held for this first the 100.
Thanks, Rick and me all with your before my time.
No in a word we're not looking at it we've got just a lot of work we can do with the one airplane type.
Drew and team are.
I think we've said we have how many one hundreds of markets routes. We have 459 routes that yes, we can still look out we've got international and another 600 to more incremental yes.
So.
Keep it simple stupid.
I think I really want to take a moment and and.
Put out of boys out to Scott Sheldon and the whole ops team and what they've done and this has just been a lot of elbow grease.
Following up your sleeves and as I said my own comments fixing airplanes is is is a job that in of itself. The best airplanes in the world. We are going to the work and if you're not well organized and taking care of business. It's.
It's going to show up even with the best of airplanes. So.
It's.
Pretty pretty impressive what we've done in two years and it really was a will to give us make a good and make it right. In this current management team I know we've got some.
Good past times for people, leaving us but.
I think we've demonstrated over and over again, the deep and wide bench, we have here and the quality of the product, we're putting out and again with the Allegion Twod auto and the customer focus reputational importance is the second to none and I think you're seeing that in the industry as well to the speed of the social media post is as a new toys or new weapon. If you will in the in our customers' hands that focuses.
Operational and marketing aspects of the company to a much greater degree than they might have in the past.
Great answer Mark to tell you that wasn't that wasn't Ted's question and you answered it correctly so.
I'm going to ask we've known each other through law Michael to be doing that.
I'm sorry.
No I don't think you are on that.
Uh huh.
Thank you. Our next question comes from the line of Hunter Keay from Wolfe Research. Your question. Please.
Thanks, Hi, everybody.
Hey, John can you. Please do me a favor and elaborate a little bit on the sunseeker I know I know, it's the slip I should say in the schedule I know, it's hard to nail that these things down quarter to quarter, but.
The next question is does this relate to anything like around like permitting issues was it something tied to engineering or design was it like a labor shortage issue just just trying to understand a little more what what did push that to the right a little bit. Thank you.
It's hard to point to any one thing hundred so it's always a good question, but the one thing I can.
I should mention is once you get started the difficulty is predicting a start date, because there's so many things that to happen.
In order for us to start a project well, but what I can say is once you do start the project. The end date as much more predictable because these sequential nature of construction is much easier to predict so the start date is always a moving target. So this is nothing abnormal when you look at development projects. They are always difficult to predict the start.
But thats why I was mentioning by the October conference call all be able to give you a relative certainty what the opening date will be or at least the opening month.
And.
In some real.
Affirmations regarding the ability to hit budget.
So it's just the normal storage will project, especially one of this size. This is a very large project as I'm sure you all know probably the largest.
Non gaming.
Our resort the under construction in U.S so.
Nothing unusual, but but I can I can understand some of the sensitivity around.
Alright, Thanks, and then hey, Maury, how did that extra leg room product Tesco that you mentioned I think you said it was in la kind of curious if thats done.
And what the results were in with his plans to maybe roll it out further thanks.
Hi, Andrew Yes ill take that 100, so it's still under way and ill be there through the entire summer.
I think I think we've had lets call mixed results. So far nothing definitive in terms of overwhelming success and certainly nothing thats an absolute train wreck.
We are going to continue to test it will it will likely to up to our Grand Rapids based.
Coming this fall through that through the winter so.
We know Weve had more success on longer haul flights and have shorter haul.
We have some other projects.
That will help the merchandising and sales of the of the product.
So it's on forecasting nothing, but but better result on that moving forward.
That said, if we come out of this winter and still can camp piece. It altogether, then that will have no problem pulling the plug on it but I do think this is going to be successful.
Thank you. Our next question comes from the line of 70 sites from Raymond James Your question. Please.
Two follow ups actually.
The first one on the cost side.
I'm just trying to understand.
Hoping to kind of get a little help in how we modeled the kind of the consolidated cost line and.
This this quarter I think the airline CASM ex is down two point.
And then they kind of the consolidated is that some of that start up costs that you have to kind of get on long Island.
Next year or is that just a function of.
You have now is kind of a growing non airline segment that.
Not producing so you don't get to divide the you know the Coffeyville ran more than just just wondering how we should think about that the difference there.
Yes, Savi, it's probably more the latter I mean, there is some startup costs that are in there that would put pressure on it but if you think as these non airline components.
Excluding t. snap if they were to continue to grow those costs would grow but you'd probably you would likely see a corresponding growth in revenue and as those cost grow youre not producing asms to offset it.
That makes sense.
And then just on the AD.
Revenue side question couple of questions already on that but it tied to the EPS.
And the Vps is brought down as well is that kind of a function of maybe not recapturing of much of that Q revenue from last year as you thought or is there something else that drove kind of the top end of the PS slower as well.
Yes from from the revenues I think there is a lot of truth to that obviously coming in lower than what we communicated in twoq is going to put some pressure on the top of the range that I think you're I think you're spot on.
All right.
Thank you.
Thank you. Our next question comes from the line of Joseph Denardi from Stifel. Your question. Please.
Yes, good evening.
Drew I just want to kind of clarify the EPS guidance seems to have that kind of benefited from lower fuel and but our CASM ex as the the PRASM outlook changed at all kind of for the rest of the year.
No I mean, so so as we were looking at Fourq here, there's obviously a lot of variability in that from from the time of budget Asms that kind of come up and come back down a little bit since January .
I am more confident now in third quarter than I probably was.
About three months ago. So I think we've got a little bit of of lift there.
But I don't think materially it's changed a ton for the backup here okay.
Can you just talk about how much you think your PRASM is benefiting from the reduction in industry capacity from from the X. grounding as a marginal benefit or is it something that's more material that we should kind of consider.
You know from a year over year standpoint next year, assuming it comes back yet charity I think for US. It's negligible I mean, we have a sub at lease up 2% exposure to routes, where the Max had been scheduled.
It's not a meaningful impact to us so I wouldn't I would attribute anything to our result, this year, nor would I expect any sort of.
Change in results next year from that comparison base.
Thank you. Our next question comes from the line of Helane Becker from Cowen Your question. Please.
Okay. Thanks, very much operator, hi, everybody on thank you.
I'm very much for the time.
You know I noticed in the comments in the press release, you talked about going from 12.
Spares last year to for this year.
And my question is really.
Obviously, that's included in I think the numbers you cited Mario in terms of additional flying and incremental revenue, but Ken Lewis for spares is that like done that.
Number you need or cannot go even lower.
I wouldn't put a lot of we're still figuring out the airplane quite a bit Helane anda.
So.
Depending on the time of the year frankly, when September we'll have a lot more spares just because of reduced line.
In our peak months oil kind of mid peak months four was probably a good number we might even kick in up to six or seven in the June period, just because of the we're flying.
For 130 flights a day now which is a substantial increase for us during this peak period, but it's substantially better than what we have with the Mds, there's no doubt about that.
And.
The other piece of this is hopefully we'll be able to get two or three year.
But an old C check growth cadence here in the not too distant future next 12 to 18 months, which matches. The 737 and then one obviously hopes bearing as well so you're not having to do those but theres a lot of work, we can do to enhance the sparing stuff going forward, but.
It's substantially improved from where we were.
Thank you and then I just have one follow up question on Ancillaries I think someone said you are at.
50, 50 for Amflora and.
Fair is that where you want to stay or can that change tab I know now 55 45 or something.
Yes, something not where we're we're a bigger percentage is coming from ancillaries.
Yes, I think I think 50 50 is probably the right shorter term target obviously in the medium term I would love to be able to drive ancillary higher.
But there is a lot that goes into that based on the economics of the time, how much were flying et cetera.
Where oil is.
I would be 50 50 is the right kind of short term target and we'll just see what happens when the industry has moved forward beyond that.
Thank you.
Thanks, all of you.
Our next question comes from the line of this isn't that obvious from Macquarie. Your question. Please.
Yes, hi, everyone.
So just two questions one is on your non airline side.
Should we assume that you are actively looking at other businesses are do you think it's more.
More passive an opportunistic and just trying to.
Gauge, whether we can expect further growth in this area.
We're not looking at any new businesses other than whats identified to date.
Okay, Great and then on the guide.
Okay Thats it.
Okay.
And then on the airline side.
Just wondering with respect to kind of overall fare levels was there and even now throughout your system, especially.
You bet.
I'm added.
Our utilization et cetera, I'm just trying to.
Get a gauge of health throughout the system.
Yes, there is obviously pockets within the network that are always ebbing and flowing we continue to see pressure on studies across the Canadian border due to foreign exchange.
No wonder that that holds a little better with oil price.
But weve been sticking around 130 to 132 I think in Canadian dollar there so continue to see pressure there.
Otherwise I think I think the networks very healthy there is areas that we certainly layered on more capacity than others that will that will put pressure on any unit revenue metric.
But there is no there is no pockets I would cause or I would call out beyond just some of that border stuff related to foreign exchange.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Dan Mckenzie from Buckingham Research. Your question. Please.
Yes, hi, everybody. Thanks, I had somewhat of a similar question just as you exited the second quarter I'm just curious.
Drew how same store sales were trending versus new stores sales.
Just given some of the volatility in the second quarter and Im just wondering can you just elaborate just a little bit more around them around the core network versus the growth part of the network.
Sure so.
New new markets actually performed quite well for us through the second quarter.
Exceptionally pleased especially with some of the growth that we've seen in Nashville is kind of a new direction for our network with that being a new new destination and being able to sustain some service that was otherwise unserved.
For the for the core it was it was fine there's really nothing to call out to the really good or the really bad it kind of was.
Flatter.
In terms of results there so nothing nothing exotic to talk about on that front.
Understood. Okay. Thank question.
Just getting to utilization back to utilization here as we look at 2020, just given the operational reliability of the fleet today and how well you guys are performing as maybe Scott this might be for you.
Where can you how far can you push utilization next year could you could you increase block hours over and above sort of beyond what your planned growth is.
Ill take a stab at it and I'll, probably kicking back to Jerry but.
If you look at the improvement in the operation.
Typically just making sure the tails are ready to start the operation in the morning.
We've seen over a point to probably 1.2% increase year over year.
Some of the things we're really excited about is more on the predictive maintenance side.
There's a lot more data that you can harvest. These planes. They start talking to you earlier you can build in.
What would be kind of grounding or irregular route type events and scheduled maintenance events.
So in theory, we should be able to to support kind of whatever drew we'd like to go to whether it be how much she wants to start early in flight.
It's more of kind of on the demand side I think in general the more we expand the day. It definitely takes away from the time that mechanics can touch the planes at night.
So you'd probably look at maybe some staffing constraints, we might acting increase some headcount just given that the duration at which we can actually work on planes overnight.
Yeah. This is this is drew I would expect kind of your biggest period March in the summer to be relatively close to where we're at today.
As as we gain more aircraft and get back to kind of finally getting the same number of shells. We had in 2018, you will see a little bit of easing on that front. So I think we're pretty close to the peak of where we're at.
But you will see especially in the first week of April a reduction in utilization.
And you're still going to see that four to five hours in September . So I expect more of the same this year with potentially a little bit of easing at the very top end.
Understood. Okay. Thanks for the time you guys.
Thank you Jim.
Thank you. Our next question is a follow up from the line of Duane Pfennigwerth from Evercore. Your question. Please.
Hey, Thanks for taking the follow up.
So just just a little bit of an accounting follow up your pre tax income through the first half is up about 25%.
Yet your operating cash flow is down modestly.
Can you just explain why that would be and when we should expect cash flow to grow more in line with earnings.
I think probably the bigger they doing its Greg probably the biggest driver in that operating cash flow would be our heavy maintenance, so you're seeing some pressure on that side.
For accounting purposes.
Although we capitalize that maintenance and the cash flow statement you have to throw it in the cash flow from operations. So without diving into details top my head I think that might be one of the big.
The driver of that.
So would we round trip that at some point you'd expect cash to grow with earnings growth.
Yes, so what we do is we try and pull that no thats right and then what we do internally, though I mean, you have to for GAAP purposes reported as such with heavy maintenance in there, but when we think about it we kind of pull that out and then we classify our heavy maintenance capex. So you could think about it from that perspective, if you don't because when we report.
We report cap heavy maintenance capex might be double dipping.
Okay. Thank you.
Thank you. Our next question is a follow up from the line of Joseph Denardi from Stifel. Your question. Please.
Yes. Thanks.
Good morning, when you guys reported 24% op margin on the airline does that influence at all how you think about the need for drews team to push price does it create.
Any less urgency to push yields I mean is that a consideration for for for you or the team at all.
Well on a theoretical basis I'm interested in bottom line, which is soft demise pricing load factor.
And at certain points.
Fuel may push on one and not the other the beauty of this airplane, though with more utilization as you can.
Take down some of your yield numbers up and still give an accretive benefit to it so.
Drew and team are working on that were figuring it out as I said in my notes in my comments I'm not sure how we're really comparative year over year. This year, maybe more next year back to this year, but it's a learning curve and.
They are pretty good at what they do so I wouldnt expect or given up too much of anything.
Yes, I guess I'm trying to get at is if you're on track for a 20% plus margin for the year is that too high where it attracts competition in some form and you actually want to grow into that youre growing into the demand and would you consider kind of more new airplanes, given that that seems to have been successful for you.
More new airplanes, meaning brand, new airplanes or growing the fleet.
Yes, either.
Yes, we're not really looking to new airplanes and that was a onetime transaction that serve to facilities force. One gave was airplanes when we needed them and second there were end of line types of offerings that go.
We've struck a reasonable deal with Airbus on.
We've got BJ here on he's he's our hound dog outlook for airplanes and used.
He is out there and dig in and we've got a lot of opportunities in spite of the Max and things like that on Maxi somewhat surprised that there's good aircraft and available prices aren't optimal but they're not that bad.
So we'll just continue to grow the way we are based on a high level through may come to us and said can do more or less but.
That's going to be his his comments becca.
Senior management.
Thank you.
Well, one other comment to the 20%.
Im not sure how we kind of dial that down I am not looking to dial it down for fear of people coming in I think we have unique factors that allow us to be profitable and others cant do not the least which is we're really generating some great revenue we haven't heard from Scott. The Angelo today, we're really starting to ramp up on the marketing side.
Some of the things that we know frankly, we were order takers and heretofore. We've polishing allowed people came to US now, we're really pushing the edge and doing things and Reputationally, where we're moving up the ladder and.
So we're starting to see people come to us and think about us and not just an after a moderate Alaska shutterfly, perhaps some of the UL ccs might be but more that this my reliable airline so all in all the whole the tone around here is terrific and.
We're really bring a lot of toolsets to bear.
And 24%.
Hopefully, we're going to stay at around 20%, we've said that for a long time is an ideal place for us to be if we're above it and maybe some of that fuel and fuel comes and goes but.
Comparatively we face competition, all the time, but were still 75% noncompetitive.
It all comes back to as you note to the model right. I mean, the model is unique no. One else has as we've always had higher margins than anyone else. So this is nothing new you just seen them.
Much higher because of aircraft and because of improved performance of the aircraft.
So between that and this amazing model, we have that we're starting to optimize even more.
That's why there isn't a fear about people trying to match you can't.
Well the other thing too we are we've had our head down so much in the last 24 to 36 months as we transitioned it's kind of like people look around for things to do.
Okay. So the drilldown is getting more and more tight and.
Granular as to what we can do to improve cost, obviously optimizing revenues and profitability.
It's a nice place for us to be and we're excited about.
Go forward, obviously with.
With the airline in particular.
Thank you.
Thank you.
Our next question comes in line of Catherine O'brien from Goldman Sachs. They follow up question.
Thank you very much follow up.
So maybe just one on the non airline really modeling clarification question I want to make sure. The key snap non airline impact is but still baked into that player as Steve just pulled.
You just pulled that particular guidance item is that right.
Yes, that's right Okay, great and then I guess, just one quick follow up to that and I think last quarter you that on an said.
You expected to see a narrowing of your non airline loss as we got through the year and I think the result was pretty similar.
Pretty similar to last quarter I guess, just any thoughts on what drove that are you just expecting marvin improve in the back half. Okay helpful. Thank you.
Well again.
Great.
Pretty much laid it out, but we're not going to break out all the various components I think we we do we've done a good job of transparency throughout the year on all these various airline and not airline issues, but that's why we're not revising the range is because of the uncertainty of.
Any kind of value realizes this in conjunction with the sale.
But it's something we've been looking at.
But we're very comfortable we've given you some really good information about where we think the fccs will be next year.
So that answers a lot of that question and we gave you.
We haven't revised anything as it relates to sunseeker sunseeker is going to be similar of course next year is still a preopening expenses without any revenue obviously no change to that until we open.
And when we get into the Investor day.
On November this year that.
That Chris alluded to we're going to give you a lot of detail around all the business lines that will have operating.
For 2020.
Thanks.
Thank you.
This does conclude the question and answer session of today's program I'd like to hand, the program over to Maury Gallagher, Chairman and Chief Executive Officer for any further remarks.
Thank you all very much appreciate your comments and we'll see you in October .
Have a good day.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.