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Edited Transcript of SAVE earnings conference call or presentation 24-Oct-19 2:00pm GMT

Q3 2019 Spirit Airlines Inc Earnings Call

MIRAMAR Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Spirit Airlines Inc earnings conference call or presentation Thursday, October 24, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* DeAnne Gabel

Spirit Airlines, Inc. - Senior Director of IR

* Edward M. Christie

Spirit Airlines, Inc. - President, CEO & Director

* Matthew H. Klein

Spirit Airlines, Inc. - Senior VP & Chief Commercial Officer

* Scott M. Haralson

Spirit Airlines, Inc. - Senior VP & CFO

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Conference Call Participants

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* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity Analyst

* Catherine Maureen O'Brien

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Daniel J. McKenzie

The Buckingham Research Group Incorporated - Research Analyst

* Duane Thomas Pfennigwerth

Evercore ISI Institutional Equities, Research Division - Senior MD

* Helane R. Becker

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Hunter Kent Keay

Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace & Defense

* James Corridore

CFRA Equity Research - Director of Industrials Equity Research

* Jamie Nathaniel Baker

JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst

* Joseph William DeNardi

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst

* Michael John Linenberg

Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst

* Rajeev Lalwani

Morgan Stanley, Research Division - Executive Director

* Savanthi Nipunika Syth

Raymond James & Associates, Inc., Research Division - Airlines Analyst

* Susan Marie Donofrio

Macquarie Research - Senior Analyst

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Presentation

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Operator [1]

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Welcome to the Spirit Airlines' Third Quarter 2019 Earnings Conference Call. My name is Ellen, and I will be your operator for today's call. (Operator Instructions)

I would now like turn the call over to DeAnne Gabel, Senior Director, Investor Relations. You may begin.

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DeAnne Gabel, Spirit Airlines, Inc. - Senior Director of IR [2]

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Thank you, Ellen, and welcome everyone to Spirit Airlines' Third Quarter Earnings Call. This call is being recorded and is simultaneously webcast. A replay of this call will be archived on our website for 60 days. Presenting on today's call are Ted Christie, Spirit's Chief Executive Officer, Matt Klein, our Chief Commercial Officer; and Scott Haralson, our Chief Financial Officer.

We will have a Q&A session for sell-side analysts following our prepared remarks. Also joining us in the room today are Thomas Canfield, our General Counsel; John Bendoraitis, our Chief Operating Officer; and other members of our senior leadership team.

Today's discussion contains forward-looking statements that represent the company's current expectations or beliefs concerning future events and financial performance. Forward-looking statements are based on management's current expectations and are not a guarantee of future performance or results. There could be significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements, including the Risk Factors discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q. We undertake no duty to update any forward-looking statements.

In comparing results today, we will be adjusting all periods to exclude special items. Please refer to our third quarter 2019 earnings release, which is available on our website for the reconciliation of all our non-GAAP measures.

With that, here's Ted.

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [3]

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Thanks, DeAnne. Thanks to everyone for joining us today. For the third quarter 2019, we reported adjusted earnings per share of $1.32 and an operating margin of 13.5%. Numerous summer storms, including Hurricane Dorian, along with record passenger volumes and our own self-inflicted operational challenges made for a difficult operating environment.

I want to thank all our team members, especially those on the frontline for their commitment and dedication to provide a quality travel experience to our guests during what was a very busy summer travel season. I'm pleased to report that post-Labor Day, our operational performance has been very good, and we have consistently achieved completion factors at or above 99% and an on-time performance in the high 80s or better placing us once again in the mid-pack of our competitors for the year.

Over the last week, we've had a couple of big announcements. We announced that we're building a headquarters complex near Fort Lauderdale Airport. We've outgrown our current headquarters location and are currently spread amongst several buildings in various facilities. This new complex will allow us to consolidate various locations, including our training facilities, and drive efficiencies and cost savings to support our ever-growing network.

And speaking of growing our network, we also announced an MoU with Airbus for 100 A320neo family aircraft along with 50 purchase options. A lot of exciting things are happening for Spirit and for our guests. We'll give you more of those details shortly. But first, here's Matt and Scott to discuss our results for third quarter 2019 and our forward outlook in more detail.

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Matthew H. Klein, Spirit Airlines, Inc. - Senior VP & Chief Commercial Officer [4]

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Thanks, Ted. For the third quarter 2019, total revenue increased 9.7%, which includes an estimated $20 million impact from Hurricane Dorian. Total revenue per available seat mile decreased 1.7% year-over-year on 11.6% capacity growth. Excluding Hurricane Dorian, we estimate our TRASM would have been down about 1% year-over-year.

On a per-passenger segment basis, nonticket revenue for the third quarter was $55.37, up 1.7% year-over-year. We continue to see improvement in seat assignment revenue per-passenger segment and the take rate for our bundled services offering continues to grow. Additionally, it is important to note that both of these initiatives still have a lot of opportunity for optimization and conversion rate expansion. For the fourth quarter, we anticipate nonticket revenue per-passenger segment will increase between 1% to 2% year-over-year.

Despite a shorter average stage than we initially assumed for 2019, which is penalizing to nonticket per segment and the delayed implementation of a few of our ancillary initiatives, nonticket for the full year 2019 is still expected to be between $56 and $57, which bodes well for next year.

Shifting now to some overall comments about our e-commerce initiatives. The latest update to spirit.com has been fully implemented and has been converting at stronger levels versus the last version of our site. Our ticket and nonticket metrics have improved considerably on both the desktop and mobile web versions of the site.

Turning to the app. The current version of the app has been in production for the last 3 months, and we're starting to see the benefits from a booking volume perspective. Push notifications have gone live, and soon, we will be able to start driving take-rate improvements on products like the BIG FRONT SEAT, which will create more demand for that product and further help drive higher yields on this nonticket revenue stream as well. We are very pleased with the continued performance of our ancillary initiatives. And together with the initiatives to launch next year, we are confident we can grow nonticket revenue per-passenger segment by 3% in 2020.

Turning to network. Earlier this month, we added Nashville to the system. Not only is it a growing leisure vacation destination, Nashville is one of the fastest-growing cities in the U.S., and we're excited to add it to our portfolio. We've also been busy expanding our footprint of service to Cancún, Mexico. By March 2020, we will offer service to Cancún from 11 origination cities. Our unbundled product and focus on international leisure markets makes Cancún a perfect destination for us to grow.

We've also recently announced additional flights to Puerto Rico, leveraging our unique ability to profitably grow the size of this VFR market. By March 2020, we will be at 13 flights a day to Puerto Rico, up from less than 3 a day just a few years ago. These service additions will maintain our mid-teens Latin America and Caribbean mix of system capacity. Looking forward to the fourth quarter, we estimate our capacity growth will increase 16%.

Now turning to our revenue outlook. Domestic and international demand trends remain strong. Our retiming of flights in our Orlando to international markets have taken effect and built upon the maturing nature these routes have been experiencing since the summer season. For our domestic network, we are still seeing looser inventory controls for leisure fares than we saw last year at this time, but demand remains good and we are capturing more off-peak volume, which is translating into high-low factors.

Based on the trends we are currently seeing, for the fourth quarter 2019, we estimate TRASM will be down 4.5% to 6.5% year-over-year. For reference, this translates to a 5.5% increase on a 2-year stack versus Q4 2017. Looking ahead to 2020, we plan to grow capacity 17% to 19% year-over-year with about 100 basis points attributable to 2019 being a year with a depressed completion factor.

In closing, demand is good, which is supporting the revenue environment. From an inventory perspective, the backdrop is not as tight as it was last year, but we've been able to leverage our cost advantage, grow profitably into real-estate-constrained airports and set ourselves up for a strong set of holidays in Q4. A powerful part of the story is the continued strength in ancillary revenue per-passenger segment, which coupled with the maturing network in 2020, sets us up well to compete.

And with that, I'll turn it over to Scott.

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [5]

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Thanks, Matt. And thanks to everyone joining us today. Our third quarter 2019 CASM ex-fuel was $5.66, an increase of 8.4% year-over-year. In addition to the transitory pressures due to Hurricane Dorian and our other operational challenges, during the third quarter, we continued to face ongoing cost pressure from airport rents and landing fees, ground service rates and maintenance amortization.

As we look forward to the fourth quarter, we estimate our fourth quarter CASM ex-fuel will be up 3.5% to 4.5% year-over-year. Shorter average stays contributes about 100 basis points to that increase, with the remainder primarily related with the continued pressures from airport rents and landing fees, ground service rates and maintenance amortization. That will put our CASM ex-fuel at about $5.55 for the full year of 2019. And in our guide for the fourth quarter, we are assuming that the weather pattern will remain similar to what we have experienced over the last 6 months. While we are confident we have made the adjustments to better recover in the event of a weather disruption, we are assuming a higher number of weather-related disruptions year-over-year.

Turning to fleet. As Ted mentioned, we are happy to say that we have signed an MoU with Airbus for 100 firm A320neo family aircraft along with 50 purchase options delivering from 2022 through 2027. We will be supplementing these orders with additional leased aircraft to reach our mid-teens target growth rate over that period. This order allowed us to not only improve the economics of our current order book but also address the outdated terms and conditions. We gained further flexibility with this order that enhances our ability to flex our total fleet count, up or down, using options, fleet retirements or leasing more or less aircraft.

Regarding potential tariffs to be levied on Airbus aircraft, it is our understanding that deliveries assembled in Mobile, Alabama, will not be subject to a tariff. All of our remaining 2019 deliveries, as well as our first 9 firm orders delivered through mid-summer 2020, are slated to be Mobile deliveries. We do have 2 first half 2020 direct operating leases delivering from Hamburg. All other deliveries are still to be determined. In the near term, tariffs do not change our overall cost structure. We are working with Airbus to mitigate the impact, and we remain in regular communication with our trade representatives and believe that over time it will get resolved. However, until then, it does remain a concern.

Ted also mentioned our new headquarters development. This development will be ready in the middle of 2022, and we'll have approximately 200 aircraft in our fleet at that time. Part of this development will replace the various facilities we currently lease and eliminate the need to lease additional space around Fort Lauderdale. The administrative portion of the development will cost approximately $80 million. We will also consolidate the 4 current training facilities in Fort Lauderdale into an operations training facility for our pilots, flight attendants and airport personnel. This facility is estimated to cost about $100 million. In addition, we plan to spend another $70 million building a corporate residence large enough to cover about half of our overnight lodging needs in Fort Lauderdale. All in, the total cost is approximately $250 million and is NPV positive. We expect to realize operating cost savings in the neighborhood of $10 million in year 1, growing significantly over time, which will drive further improvement in our relative cost advantage.

We ended the quarter with $1 billion of unrestricted cash and short-term investments. And for the 12 months ending September 30th, our average adjusted net debt to EBITDAR was down year-over-year to 2.5, a level which we are very comfortable with.

Looking ahead to 2020, we're still working through the final budgeting process, but based on the current mix of airports in our network plan, we are anticipating even greater pressure on airport rents, landing fees and ground-handling rates than we had initially assumed.

Based on our current assumptions, we estimate CASM ex-fuel will be up 1% to 2% for 2020. From a profitability perspective, given the CASM ex-fuel pressure in 2020, we believe our expected increases in ancillary revenue per passenger segment and relative network maturity can produce TRASM to drive earnings growth at or in excess of our capacity growth rate. This would also drive an increase in ROIC year-over-year.

And with that, it's back to Ted.

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [6]

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Thanks, Scott. A few years ago, we set ourselves on a course to improve our brand, our operation and our guest experience, all while profitably growing our network, maintaining the lowest cost structure in the industry and growing our relative cost advantage. We've done a good job delivering on those initiatives and are excited about our future plans.

Over the last 3 years, we have made great strides in improving our operational reliability. And despite a few hiccups this summer, we consistently deliver high completion factors and good on-time performance, and our guests are noticing. This summer, our guest satisfaction numbers reached record highs, proving that our investments in the brand are paying dividends. Our total addressable market remains very large, and we plan to capture those opportunities by growing capacity in the mid-teens range over the next several years. We've secured new aircraft orders to help us achieve that growth. And our new headquarters complex will position us to support our growth over the foreseeable future.

In August, we announced that we will be installing new, more comfortable seats that will provide additional usable legroom. The seats will add comfort for our guests and will reduce weight on the aircraft, acting as an additional cost benefit. The new seat installations will begin in December. And more improvements for our guests such as Wi-Fi and a revamped loyalty program are planned to come online before the end of next year.

In addition to improving our product, we are committed to investing in our team members by giving them improved tools and productive training for them to drive further efficiencies and higher service levels. Investing in our people and product while delivering consistently reliable operations are all part of our mission to deliver the best value in the sky while providing exceptional guest experience. Together with our low fares and our leading cost structure, this sets us up well to continue to drive earnings growth. With that, back to DeAnne.

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DeAnne Gabel, Spirit Airlines, Inc. - Senior Director of IR [7]

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Thank you, gentlemen. We are now ready to take questions from the analysts. (Operator Instructions)

Ellen, we are ready to begin.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Michael Linenberg.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [2]

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Two questions here, maybe tied to growth. With respect to the 100-aircraft Airbus order, does that include any sort of conversion rates into the smaller A220? And if it doesn't, does it mean that -- I know that at one point you were considering a second aircraft type. Is that topic now kind of behind you and you're just going to focus on Airbus narrowbodies? Or is that topic still alive?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [3]

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Mike, this is Scott Haralson. Yes, quick comment on the conversion component. We did in this order, order 319s, 320s and 321s, so the 320 family. However, we do have conversion rates up and down the spectrum of what Airbus offers through the 19, 20, and 21 as well into the 220 if we would like to do that. That's just a mechanism in the contract, not a hint to our desire to do that at all. Our plan is to operate the 320 family of aircraft.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [4]

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Is there any sort of going down that line and looking at an A220, a smaller airplane? Or it sounds like that, that is not going to be a focus over the next couple of years? Because that was -- at least the company was contemplating that a few years back.

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [5]

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Yes, the way we are viewing the small gauge is that the A319 would be that aircraft for us, that's the way we've placed this MoU as we sit today, but we do have the option, if things were to change, to down-convert to a 220 if we wanted to, but that is, like I said, not the plan as we sit today.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [6]

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Okay. And then just second, it's sort of tied to growth. Ted, you talked about the comment you made, the addressable markets for you are still quite large and maybe this is more of a philosophical question. Do you feel like that the number of markets available to you today is similarly large of a few years ago prior to the rollout of basic economy by the larger -- or I should say, basically by everybody else? Has that at all changed the calculus there? Your thoughts on that.

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [7]

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Sure. No, it hasn't. In fact, what's been interesting to watch even in my 7 or 8 years here, has been the expansion in that opportunity over that time despite our growth into the opportunities. So the relative cost advantage and fair positioning in the markets where we see that opportunity has actually grown the total addressable market rather than us consuming it at any realistic rate. That's why we feel so bullish about the ability to grow into it. What Scott mentioned is, we pursued a fleet answer that we think addresses that broadly. And we think the 320 family can do that for us, and we reserve the right to be flexible within that gauge. So we're actually pretty excited about it over the next several years.

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Operator [8]

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The next question is from Savi Syth.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [9]

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Just another question on the growth here. I wondered -- I'm a little bit surprised by the level and just kind of wondering if you could give a little bit more color on where that will -- generally, how -- what the growth will be made up of and kind of your confidence on driving the revenue line? It seems like it's coming from ancillary, but if there anything else -- and most of also on the operational front, given -- is it going to be with fewer departures so that you don't have the operational issues that you had this year, just a little bit more color on the growth?

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [10]

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Sure, Savi. It's Ted. I assume you're talking about the 2020 forecast for growth. So what we're assuming in there is a few things: one is the stays will probably stretch back out again. So that's going to give you a little bit of mathematical growth by a couple of points. In addition to that, as Matt mentioned, 2019 was an artificially depressed year due to some of the operational challenges beginning in Easter through the summer and into the hurricane season, so that actually adds another point. When you start kind of normalizing for that, you're really landing mid-teens on a stage-neutral basis, which is about where we would plan to be.

Now I'd tell you that one of the exciting things for us from a fleet deployment perspective is our ability to optimize the gauge within the network. And one of the things we've alluded to since we started taking the A320neo aircraft is once we got scale in that fleet type, it was going to become the long-range airplane in the fleet, which is clearly accretive to margin, it's accretive to earnings and it's dilutive to CASM ex and produces capacity.

So we're finally at a position today -- in fact today, we have 31 319s in the fleet, and those are our long-haul airplanes. As of today, we have about 14 320neos, and by the end of the year, it'll be almost 20. So we're finally getting to the point where we can actually subfleet that airplane and have it run the way it was built to run, and we think that's going to be beneficial to gauge, which is another net benefit, I guess, to growth.

So net-net, we feel -- look, we feel like we are consuming the right opportunities next year. I think if you normalize for the couple of things, I'd say, we are very much in line with the company's growth rate over the last few years. And what I would also add is that because I think you alluded to it is, how do we feel about unit revenue production going into next year. Clearly, as we mentioned, we've got a little bit of cost pressure heading into next year, if you figure that that's 100 to 150 basis points of cost pressure, that's going to pressure the margin probably by about a point. But as we talked about, ancillary performance, we expect to be up almost 3%, which is really almost 150 basis points on the margin right there. And as we've talked about this year, we've had network maturity drag throughout the course of the year, both in the amount of new flying relative to the market and international exposure out of Orlando.

Both of those things, we figured was around 100 basis points each throughout the course of the year. So when you start to add this stuff up, you set yourself in a position where we're actually got margin tailwind kind of coming out of the box, and then it's just a question of how the industry capacity stacks up and how the environment looks from a competitive standpoint. But I think we're set up pretty well to deliver good earnings growth next year.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [11]

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And just a clarifying question on that, is there -- it should be assumed -- it seems to be what you're alluding to, but kind of similar domestic versus international growth. Is that fair, so you kind of keep that mid-teens fixed?

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [12]

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Exactly, that's what Matt mentioned in his comments, it's what we're going to do -- and what we call international, we're really saying Latin American, Caribbean because Puerto Rico is not technically international. But when you add all that up, it's going to sit around 15% of the network, but the issue or the drag that we had throughout the course of this year was a lot of the international out of Orlando, which a good chunk of that, by the way, was greenfield flying. So it's maturing right now, like we're lapping that beginning this quarter, and we feel very good about the setup, especially with the retiming we did this quarter.

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Operator [13]

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The next question is from Jamie Baker.

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Jamie Nathaniel Baker, JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst [14]

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We're not asking about consolidation directly, that's not really the issue. But with the new aircraft contract, did you build any, I don't know, deliberate contract flexibility into that as part of the order? Should you end up participating in M&A at any point during the delivery stream?

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [15]

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Jamie, it's Ed. So we were pretty thoughtful throughout the course of this order for a variety of things. And as Scott mentioned in his comments, flexibility was a component of our fleet desires going forward and that flexibility went up or down within gauge, and we've built a balance sheet to enhance that by the way. So we're very excited about the growth prospects. We feel good about the setup. We have the desired fleet flexibility to move within gauge to get more airplanes if we want, to retire aircraft, to sell aircraft. We have flexibility within the contract as well. So I would say, broadly speaking, I think, we're in a good spot.

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Jamie Nathaniel Baker, JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst [16]

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Okay. That helps. And second, Scott talked about earnings growth next year despite the disappointing cost guide or what the market has interpreted as a disappointing cost guide. The color and response to Savi's question was helpful. But just to point out the obvious, The Street assumes that the best you can do next year is essentially flat earnings. So my question really is whether you would settle for that? Or put differently, if you get a few months into 2020, because clearly your internal forecast is better than what The Street is modeling, but if you get a few months into next year and it looks like it's going to be another year in the, call it, mid-to-high $4 range, do you make changes to the plan? Or at that point do you just say, "Well, maybe 2021?"

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [17]

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So you're right. I mean I think as we set up, both in the commentary Scott provided as well as what I was mentioning on the prior question, we do feel good about our ability to drive earnings growth headed into next year. We think we have the tools and the relative comparison that sets us up well. Look, we're active managers, and we're always looking to make adjustments. We're not going to undo the long-term strategy of the business if there is a close-in macro shift. But if we don't feel like -- and this would be true in any given year. If we don't feel like the things we're doing are working, we look to change that; in fact, we did some of that this year. There were a number of markets and opportunities that we launched this year, that we canceled.

And I think some of the reflection of driving network performance from an operating perspective, too, is going into next year, stretching out the stage, looking at the way we're routing the aircraft and frequency in markets. I think those things are going to be helpful for us heading into the next year. So I would tell you that we're not going to knee jerk based on, like, a small short-in -- short-term kind of micro thing, but yes, we're active managers, we're always looking to push the earnings.

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Operator [18]

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Our next question is from Hunter Keay.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace & Defense [19]

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Scott, given some of the moving parts -- actually, you know what, let me change the question I'm asking here for one. On CASM ex, which P&L items do you see the best opportunity to drive costs up less than capacity, like, for example, I can see distribution and maintenance in 3Q came in pretty well. So if I think about where you might be able to beat sort of P&L buckets or the CASM ex number? If you're going to be there, where am I most likely to see that?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [20]

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Yes. I think most of the benefit we'll see in 2020 will come from running a good airline, especially year-over-year. A lot of the challenges we have this year, as we mentioned before, won't replicate itself into 2020. So we'll get benefits, hopefully, from our ability to utilize crew better, both pilots and flight attendants as well as from an operating expense perspective. So we get that in a number of areas, obviously, from interrupted trip expense, but it does have littering benefits throughout the P&L, including ground handling, over time, all those sorts of things that we do benefit indirectly from running a good airline.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace & Defense [21]

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That's like an other OpEx. A lot of that sounds like it might be other OpEx if anything, right?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [22]

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It's -- most of that is other OpEx, including ITE and some of the airport ground handling components.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace & Defense [23]

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All right. And then deferred heavy maintenance on the balance sheet is now up to $330 million, it's a long-term asset. Can you help us understand how growth in this line item impacts the P&L, and ultimately, CASM ex, whether it's a 2-year lag, 1-year lag, look -- a backwards look, forwards look? Just help us understand how that is a leading or lagging indicator for anything that you might see on the P&L?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [24]

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Yes. I mean, well, that obviously flows through heavy maintenance amortization. So in years like this year and 2018, we've had heavy capital maintenance spend years, outsized years, actually. So as we look into sort of '21 and '22, those numbers come down dramatically. So the amortization line where that flows through will come down as well. So the headwinds we faced in '18 and '19 have been pretty outsized from an amortization perspective, and those will mitigate a bit as we head into '21 and '22. But that's where that will flow through from a balance sheet perspective. So that's where the benefit will show up.

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Operator [25]

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The next question is from Duane Pfennigwerth.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [26]

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Just looking back and reflecting on your top line execution this year, what do you plan to do differently from a new markets perspective in 2020 on your network plan?

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Matthew H. Klein, Spirit Airlines, Inc. - Senior VP & Chief Commercial Officer [27]

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Sure. Duane, this is Matt. Well, I think to start off with, I think it's important to look back at the history, which I think you're alluding to. In 2018, we entered 9 new cities; in 2019, this year, we entered 7 new cities. We will be adding a few new cities to the network next year, but it will be considerably less than we've seen in the last couple of years. And when you add those new cities, the spool increased and that spool percentage of our overall network does matter. It matters in the short run. In the long run, the opportunities are great, and we're very pleased with where we've been growing and the results we've seen. But overall, having those less cities will definitely help that overall mix of new city ASM mix, and that should overall be a tailwind to unit revenue year-over-year.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [28]

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Okay. And then I don't if there is a way to do this, but we see your new fleet plans, but can you talk about kind of annual retirements in the plan? And how much flexibility you have 2020, 2021, 2022?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [29]

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Duane, this is Scott. We do have -- like Ted mentioned earlier, we have set up the balance sheet through the years to own more of the assets unencumbered, which gives us flexibility to retire. We do have an estimated retirement plan for an aging fleet, but our ability to flex that or do them a little sooner provides us flexibility to mitigate some of the sort of macroeconomic shock issues we may face. So we do have that flexibility. And also too, as we think about this fleet or one of the concepts that we've built into this is we're taking less firm aircraft in the early part of the delivery period, which means we'll be leasing a few more aircraft in the '22 to '24 time frame and then that really acts as sort of an optionality component for us where we can take more or less aircraft in that period. So as we think about flexibility, it comes in the form of leased aircraft and also in the form of what you mentioned, retirement of the aircraft on a schedule that we sort of have planned already today.

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Duane Thomas Pfennigwerth, Evercore ISI Institutional Equities, Research Division - Senior MD [30]

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Okay. And if I could sneak one more in. Just the cadence of your nonfuel unit cost growth next year, specifically into the March quarter, does it continue to look up, call it, mid-single digits like we're seeing here in 4Q?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [31]

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Duane, this is Scott, again. So thinking about the cadence, we're in the sort of mid-innings of our budgeting process, so we don't have a good view into -- for the unit cost cadence for the year at this point. So there's not much I can tell you there. I think we'll be able to update you here in the coming months. But from a history perspective, you can sort of look at how CASM flows through the year, in any given year, maybe estimate it that way. I don't have any guidance to give you today on cadence.

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Operator [32]

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The next question is from Catherine O'Brien.

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Catherine Maureen O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [33]

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So just taking a look at your newly introduced nonticket per flight segment guidance here in the fourth quarter, I realize there could be some wiggle room here on passenger flight segment growth. But given that 1% to 2% growth guidance, that would imply a fair flight segment down in the high-teens or maybe even 20%, which is a deceleration on 2 or 3 years back when we look at it. Can you just talk about what's going on there, I mean, I know last year you had good growth there, just what's driving that? Is some of that just a refocusing on driving higher nonticket, any color there would be great?

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Matthew H. Klein, Spirit Airlines, Inc. - Senior VP & Chief Commercial Officer [34]

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Sure. This is Matt. I'll take that question. So when you look at the mix there and how the TRASM is comprised between nonticket and passenger, you did hit on a key component there, which is the passenger flight segment number. We've been able to shift our strategy as necessary based on the competitive environment. There is a lot more volume pushing through off-peak periods and we are also participating in that volume in off-peak periods. That volume in off-peak periods, generally, is going to be driving a lower average fare on the ticket side, the nonticket number, which is very impressive from our perspective is that we've been able to hold and even improve that nonticket number while the ticket yield has seen some degradation. And the passenger flight segment number is what makes up that component to continue to help maintain the production. So a long way to say, you're correct, the passenger flight segment number matters a lot, and that's part of driving more volume in the off-peak times of the week, times of the month.

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Catherine Maureen O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [35]

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Okay, great. And then maybe just one on the cost side of the house. You've noted that you've taken some more measures to make sure that you can recover the operation more quickly going forward in the case of an IROP situation. Can you flesh that out a little bit, details on what you're doing to help the operation? And I guess, should we think about those being a net tailwind to CASM with maybe a little bit more cost on some of these recovery measures offset by lower passenger reaccoms, stuff like that?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [36]

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Catherine, this is Scott. I'll start and then Ted can fill in as well. But from an operational and cost perspective, as we think about 2020, we've done a few things. Even really starting in 2019 as we've headed through the summer, planning the airline with a few more reserves from a crew perspective, thinking about how we run block and how we run the network. Those things were a part of some of the issues that we had in 2019 that we don't think will replicate into 2020 and it's primarily centered around the crew. So what we've done as we think about the 2020 plan is be thoughtful around reserves and how we utilize the pilots really specifically.

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [37]

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Yes. I mean you asked whether or not it was this decision or this investment is CASM accretive, we believe the answer to that is a resounding yes. This has been what we've been testing over the last 3 years is that our view is that better operational performance, while it does require a certain "investments" either in the amount of block you deploy, the amount of reserves you have, the scheduling of the different airplanes may reduce utilization at the margin. But we believe that the savings associated with less disruption-related expenses over time interrupt the trip expense, crew lodging, moving parts throughout the system, all those things coming out is a net benefit to CASM. We saw the bad side of that this summer, and we expect to see the good side of it going forward. So I think that the answer to your question is, absolutely yes, a benefit to CASM.

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Operator [38]

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Our next question is from Helane Becker.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [39]

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Two questions. One on -- as you think about the growth in the fleet, so if you -- I guess I think 10 crews per -- 5 crews per aircraft, 10 pilots per plane. And I'm wondering if you're thinking about, as you hire these 1,000 more pilots plus whatever you need to hire for reserves, how do you compete with the other airlines that are in the process of replacing retired pilots who have a higher starting pay. I mean -- are you -- and your contract doesn't come up until 2023. So how are you contemplating attracting people to your brand?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [40]

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Yes, it's a really good news story, Helane. The reason that Spirit is one of the most attractive places to work is that because of our growth, our pilots achieve seniority and therefore move themselves up into the captain seat faster than any other airline. And they do it by a factor of 2x or 3x faster than they will anywhere else, even when taking into account the retirement schedules.

So what we love to see when we -- and you mentioned some numbers there that we're hiring a good deal of pilots, and we see them every time they come into the office. We bring them in here, and we get to meet with them, and they are thrilled to hear about the company's growth opportunities because they want to be here and be part of it, and they want to further their career. So that's our single-best asset when we're attracting pilot talent.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [41]

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Okay. That's great. And then my other unrelated question for you Scott, I guess is on your -- and I know this is not a big number, right, 7% or 8% of expenses is your airport costs, but you do complain about them and you are not alone, by the way. But as you grow, do you have more, I don't think power is the right word, but more ability to -- a greater ability to push back to the airports to get better, I don't know, get lower costs or better agreements? Or how do I think about that?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [42]

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Helane, from an airport cost perspective, we don't get to negotiate too much with the airports on this. We're pretty much a taker in most of the expenses, but we do have some things in our own tool belt that we can do. Obviously, we are a high-utilization carrier. So the assets that we use at the airport are pretty efficient relative to the industry. Plus this drives our desire to use automation effectively at the airport, as we think about the go-forward plan, the front end of the process. But airports is a considerable expense for us, and we think about our ability to utilize assets and the resources that we have there and even thinking about the number for 2020, the number is pretty substantial as we think about the increase. It's a 100 basis points headwind as we think about inflation at the airport and resources there.

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [43]

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Helane, the answer to that is our selection of where we fly is our active decision. We pick where we go. And when we choose to go into an airport, even if the costs are higher than what we experience on our average, we're doing that intentionally because we view the profit opportunity is there. In some ways, you should almost view cost structures as airport pass-through because you're driving revenue based on the opportunity that exist in that geography. While it pressures our unit costs because of some of these decisions we're making, we should expect to see benefit on that. And I was asked earlier, to the extent that that's not working, we obviously pivot. But while it is definitely a mathematical pressure to CASM, it's less concerning to us because we've picked intentionally to go there.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [44]

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Right. So I guess, what I'm hearing you say is, is you go into a specific market, regardless of the cost, knowing you can pass the cost on to your customer in the form of a higher ticket price?

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [45]

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I wouldn't say regardless of the cost, I say that where we pick we do so mindfully, and we do so intentionally. And to the extent that those things don't work, we change our mind.

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Operator [46]

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Our next question is from Joe Corridore (sic) [James Corridore].

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James Corridore, CFRA Equity Research - Director of Industrials Equity Research [47]

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Matt, quick one for you. Can you just give some more detail on the specific ancillary initiatives that are going to drive that 3% growth in nonticket next year and sort of the ramp-up or the cadence of those initiatives in 2020?

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Matthew H. Klein, Spirit Airlines, Inc. - Senior VP & Chief Commercial Officer [48]

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Yes, sure, Joe (sic) [James]. I can certainly talk to the initiatives. The cadence I may hold off on, but the initiatives I can go through some of that. The biggest thing that we have moving forward for us is our new website is now in live and it's been live for a little while now as well as our app, and those things are continuous development platforms for us. But we finally got to a place where we feel like we've modernized a lot of where we are, and that gives us the ability to really start getting into the merchandising and the ability to understand better from an analytics perspective what's going on, on the site.

Our goal is to drive as high of a conversion rate as we can off of the website, but we definitely mix in with that, how we sell our products and what the take rates are for those products on the site as well. There is a lot of opportunity that we've been waiting to really unlock. And as we move through this quarter and into next year, we're going to be able to start to really leverage what we know to be an opportunity there. So that's one piece that's giving us confidence on the number. And I would say the other piece is, we're basically in the final stages now of getting our new hotel and car content putting onto the website. That will be a little bit of a benefit later this year. It will really start to pick up into next year; and then by the middle of the year, we will have an even more improved merchandising opportunity there as well.

So some of these products that we, at one point in time, were really the leaders in the industry on, and we took a little bit of a step back. We're now about to take advantage of a lot of those opportunities. So -- and let me just add to that, 2020 we feel really good about, 2021 has opportunities as well. We don't just look at the next 6 to 12 months. We're looking down line and we know what's coming, we know what we're going to build. And we sit around and think about what are the ways that we could optimize further today. Those opportunities just take time to absorb. We want to make sure that we're not moving too many pieces all at the same time. It's harder to learn that way. So we're trying to be very methodical and pragmatic as to what we launch and when we do it.

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James Corridore, CFRA Equity Research - Director of Industrials Equity Research [49]

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Okay. And then a question on the new aircraft order. Are these -- the 319 and 321neos that you're going to get next decade, are they going to have the same seat density as your current 319 and 321ceos? Or is this also an opportunity for some densifying and upgauging?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [50]

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Joe (sic) [James], this is Scott. So the plan right now is to keep the same LOPA configuration that we have today on all 3. But we will think about those changes depending on what the 319 fleet does over that period of time. We can be flexible on how we think about LOPA, most really on the 319 fleet. The 320 and 321 really depending on where we sit with the number of aircraft we may make some decisions around LOPA. But as it sits today, they'd be about the same.

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Operator [51]

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Our next question is from Joseph DeNardi.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [52]

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Scott, just on the, maybe the CapEx profile for the business over the next few years. Can you speak to that? It looks like the next couple of years you'll probably start with $1 billion? And then just kind of your perspective on leverage through a cycle, what you'd be comfortable with kind of on the high end?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [53]

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Sure. I think from a CapEx perspective like you said, I think just giving the fleet count that we have over the next few years, you're going to see it up around $1 billion from a CapEx perspective. And really that is pretty typical on a size of the airline we will be over the next few years relative to what we've been since 2013, 2014 from a CapEx perspective. So it isn't the material increase from a percentage basis, it's actually probably smaller. And from a leverage basis, we think we're going to continue to drive leverage down even with those CapEx numbers because we knew that we would peak from a lever perspective around the 2018, maybe 2019, time frame. As the new debt that we had in 2014/'15 amortizes and we continue to sort of grow the airline, that levered number will come down. So we feel comfortable where we are. We feel comfortable with the trend of where it's going. And so I think we're not concerned at all about the CapEx.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [54]

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Okay. And then, Matt, just on maybe the kind of the RASM environment or assumptions for next year, is it -- kind of given the exit rate particularly and the base fair, is it safe to assume that kind of your expectation would be that RASM would continue to be pressured in the first half of the year and then you'd expect kind of an inflection in the back half, like very high level? Is that your expectation?

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [55]

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The short answer, Joe, is yes. That's how we're thinking about it. And there were a couple of things that happened last year as well. Ted went into some of that. And things like having a pretty bad storm over Easter weekend, those are impactful for us. And you can't plan on that, and we don't anticipate things like that to happen again. So there are some other kinds of pieces that are mixed in to the overall answer, but that's how we think about things, generally: first half, a little bit pressured; back half, we'll start to be able to take advantage of the year-over-year comp.

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Operator [56]

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The next question is from Rajeev Lalwani.

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Rajeev Lalwani, Morgan Stanley, Research Division - Executive Director [57]

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Actually, 2 questions for Matt. First, Matt, just starting with the near term. Can you talk just generally about the yield environment progression between 3Q and 4Q, i.e., are things getting better or worse? And then where does SAVE come into all of this, i.e., do you think some of the yield weakness is more strategic with folks targeting you guys?

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Matthew H. Klein, Spirit Airlines, Inc. - Senior VP & Chief Commercial Officer [58]

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Sure. So from an industry perspective, we did see coming out of July 4th through the summer, passenger yields were not as strong as we were anticipating and what we would have liked to have seen. I think we've talked about that probably a great deal. And then we got hit with Hurricane Dorian pretty hard over Labor Day weekend, which was the last great weekend of the quarter. So in terms of that being behind us, the off-peak periods have more capacity for the industry, capacity drives pricing, and we have to basically adjust to make sure that we're capturing what we need to capture to drive our unit revenue performance. So off-peaks have been pretty stable, but stable at a level that are low fares. We have a great cost structure. Historically, last few years, we've been trying to make sure that fares can push up. When we think -- if we think that's the best way to drive unit revenue, we'll do that. And generally speaking, we've been players in trying to do that. As the environment shifts or as capacity comes into other times of the week, other times of the month, other times of the year, we're going to adjust to that as well.

We are about low fares. And if we have to drive our unit revenue through low-fare volume, then we'll do that, and we're probably in the best position in the industry to do that. But having said all that, the peaks continue to be strong. There's plenty of demand out there. We're utilizing our processes that we've been putting in place the last few years to really understand competitive dynamics. There are definitely times when we know that we have the ability to sit out on the booking curve, and we don't need to take the cheapest fare 3 months out from departure. We have the ability to forecast demand, just like everybody else, and we know where we're strong. And when we can leverage those yields higher, we will, especially in the holiday and peak periods. As how we participate in all of that, I think I just mentioned it, we're out there thinking about the network as well and thinking about how we deploy our assets, thinking about where we are strong. Over 80% of our seat growth in the last couple of years has been to places like Orlando, Las Vegas, Fort Lauderdale, Tampa, New Orleans. And you have a city like Austin, which has great incoming demand and great outgoing demand, outbound demand. So all of those things play into unit revenue. And having less mix of new cities certainly will help. By the first quarter of 2020, our new mix capacity goes from 8% in 2019 to 4% in 2020, that's meaningful for how we think about unit revenue production.

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Rajeev Lalwani, Morgan Stanley, Research Division - Executive Director [59]

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That's helpful. And then as a brief follow-up on the idea of high capacity leads to lower yield, how are you thinking about next year from an industry standpoint, just given your guide of being upper or whatever it is? Obviously, it's going to matter greatly given the size of Spirit versus others.

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [60]

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Rajeev, it's Ted. I don't know what you were talking about guide up. We did talk about ancillary being up 3%, so maybe that's what you're referring to. But as I walked through earlier, if we start out with just the basic math, which is we face a little bit of a headwind from a CASM ex perspective, if you assume all this fuel-neutral for the purposes of this discussion and then we get a tailwind on the ancillary and we get a tailwind on the relative network maturity because of these things we've discussed before, that actually sets us up to be at an advantage from a margin perspective versus we believe the rest of the industry because those things are very unique and specific to Spirit. Then you do have to think about what's happening from an industry growth perspective and overlap and competitive issues and that sort of thing. But as we said earlier, we feel like the relative positioning that we have puts us in a good spot to grow earnings, at least at our rate of growth. And that would imply that we're going to be able to digest the marketplace changes and whatever happens. And a few moves down, sometimes revenue -- RASM moves down; and a few moves up, revenue moves up. But neutral of that, we think we're set up in the right space versus our competitors to drive that earnings growth.

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Operator [61]

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The next question is from Susan Donofrio

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Susan Marie Donofrio, Macquarie Research - Senior Analyst [62]

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Just wanted to ask on international. Can you talk a little bit about your performance and just your thoughts on plans for growth going forward?

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Matthew H. Klein, Spirit Airlines, Inc. - Senior VP & Chief Commercial Officer [63]

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Sure, Susan, it's Matt. So we are not dislocated from other airlines as it comes -- as we talk about international. For example, Dominican Republic does continue to be pressured, Haiti continues to have some pressure as well. But on the other end of that, we've seen really good strength and volume out of both other kinds of just tourist destinations. Our growth in Cancún should tell you how we think about leisure markets like Cancún. Our growth in Puerto Rico should tell you how we think about Puerto Rico in general and how we've been able to grow there. But there's also lots of good news throughout the rest of the region. We set out last year to change the mix of our system capacity to be around 15%, mid-teens, for the mix of our capacity. This year, that's continued to be our plan and our schedule. That's out at the first quarter and it shows around the same percentage. In any given quarter, you may see that move up or down, which is going to be mostly based on seasonality, not about intent to serve the region. So -- and the good news with that as well is, we continue to see really good nonticket performance there, and depending on the time of year, especially around peak periods, it gives us the ability to flex our nonticket profile even stronger for a lot of the international markets.

And by the way, when we say international, we're talking about Latin America and Caribbean, as Ted mentioned. Because places like Puerto Rico, U.S. Virgin Islands are not really international, but they're in the same region there.

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Susan Marie Donofrio, Macquarie Research - Senior Analyst [64]

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Right. And then just an unrelated question on dynamic pricing of bags and how should we think about that in terms of just kind of your thoughts on that?

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Matthew H. Klein, Spirit Airlines, Inc. - Senior VP & Chief Commercial Officer [65]

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Sure. So I want to make it definitely clear that when we talk about bags, we're not talking about individualizing different price points for individual people. We're talking about different kinds of price points based on the profile of the search request. So am I going to leisure -- a tourist destination for 7 days, and I'm buying my tickets 3 months out, might have a different kind of price point for bags; than am I flying this weekend on a quick trip to Vegas. So we may have different kinds of price points and how we think about take rates on that. We do a lot of work. We've been able to really leverage a lot of data. And as lot of e-commerce companies do, we're really getting into the weeds of being able to think about how we refine our analytics. And I don't want to talk too nuanced here, but there's a lot of new technologies and new ways to analyze our data and bring in new thoughts around machine learning that can really help how we move forward.

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Operator [66]

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The next question is from Brandon Oglenski.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [67]

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I'll just keep it to one here on the 2020 outlook, but I mean maybe to be more explicit, when the max comes back at some of your competitors, we most likely will see capacity go up, I guess. What can you give investors confidence that we can resolve some of these off-peak issues that have been a drag this year? Or Ted, is your point that the maturity in the network could offset some of those headwinds and that's why you have confidence in growing earnings equal to capacity growth?

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [68]

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Yes. I think that's the point, Brandon, is that we had some unique -- I described a few of them, which was throughout the course of the year, we called out Orlando International has a 100 basis point drag on unit revenue and our relative maturity has anywhere from 100 to 200 basis point drag on unit revenue throughout the course of this year. Those were specific Spirit things that actually flip around next year. And so we do believe that while there will be pressures or benefits heading into next year depending on when, for example, capacity comes online with the max or who is growing where or whatever, unique to Spirit, we have tailwinds. And so we are set up, we believe, in the right position. I would also add, and Matt referenced this in one of his comments, that over the last 3 years, our load factor is down around 3 points from where it used to be. Now part of that has been in our intentional effort to drive yield. And to the extent that we're in an environment where yield is less of the focus and load becomes more of the focus, our cost advantage becomes more and more important. And I think it's underappreciated at that point because good ancillary performance and driving a point of yield every year is the same as getting a point or 2 of -- driving a point of load factor is the same as getting a point or 2 of yield. And so I think that, that's part of the reason that we feel good about going into what could be a higher growth year for the industry depending on how things come.

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Operator [69]

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Our next question is from Dan McKenzie.

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Daniel J. McKenzie, The Buckingham Research Group Incorporated - Research Analyst [70]

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I think you referenced the book away in the prepared remarks less of it today. I'm wondering if you can talk about what it's cost you so far this year? Has it been 100 bps of margin pressure, 200 bps? And I guess just as background, I think about the people flying Spirit is maybe people that typically fly once a year. But maybe you could touch on the percent of repeat flyers and loyalty?

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [71]

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Sure, Dan. There's a lot in there. So let me try to take a little bit of that. In terms of book away, we didn't really mention anything specific about that, but one thing that I can talk to is our Hurricane Dorian impact, is we had previously estimated it to be a little bit higher than it ended up being because part of that is normally after a hurricane, you will see some avoidance to book, and it's not specific to any given airline, it's just that maybe a little bit of an avoidance to book that region of travel. We didn't really see that as much after the hurricane this year as we've seen in the years past. Maybe it was the timing of when it happened. We're not certainly sure what happened, but that is one of the reasons why we came in a little bit better on the third quarter is that impact wasn't as strong, which I think speaks to the overall demand environment in general and why low fares can drive volume, and we did that. And we're pretty pleased with how that worked out.

In terms of repeat travelers, we don't really -- we haven't disclosed exactly what those percentages are. Can definitely tell you that the brand evolution and the continued great operation, the great job we've done on guest services training, both at the airports and with our flight attendants, has been very, very well received, not just internally by our own team members but externally as well. We're seeing it in our guest satisfaction metrics. And while we didn't have the greatest operation this summer, in terms of our own expectations, we still hit record guest satisfaction numbers this summer, which speaks to the overall brand, our overall ability to get our message out into the marketplace to the general media, and it's paying off. And we believe it's the way that we can help leverage our growth into the future. We know that's not the most important thing that's out there in terms of how we run the business, but it certainly is an important ingredient as to how we think about ourselves, how we are investing in the guests' products and how that can help take us through any kind of operating period.

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Daniel J. McKenzie, The Buckingham Research Group Incorporated - Research Analyst [72]

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Yes, good clarification. And then a second question here just on fleet optimization. I'm wondering if you can talk about the percent of the network that's tied to the A319s today that are in the wrong market that could shift to neos. So I think you shared it's 1 point of margin pressure this year that goes away next year? So I'm just trying to bucket here ex percent of the revenue this year that was -- pardon me, that was suboptimized and gets fixed as we look ahead? How much of a margin good guide could that be?

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Edward M. Christie, Spirit Airlines, Inc. - President, CEO & Director [73]

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Well, I don't think I'll talk, Dan, to specifically the margin improvement on that. It's not something we would really want to share. But we've been waiting for us to be able to have a significant number, a material number of the neo aircraft. So we can call, what we're just calling, a subfleet here. And that allows us to fly the aircraft reliably from an operations perspective in many places that today we're using a A319. I think you understand that point, but just to give you an example, today we've been flying a 319 to Lima from Fort Lauderdale, on a A319, with some seat block restrictions on it, just from a performance perspective. The neo eliminates that issue. So we now have the ability to fly the right aircraft during the right mission, generate very efficient ASMs and drive the right kind of unit revenue and nonticket performance because we're not going to have to take any kind of bag restrictions either on that flight anymore as well. Those are the kinds of ways that we can use the neo subfleet to drive very efficient growth.

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Scott M. Haralson, Spirit Airlines, Inc. - Senior VP & CFO [74]

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And it helps from a cost perspective as well, as Matt mentioned, from the revenue side. Using the right aircraft on the right route is an extremely CASM-dilutive play.

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DeAnne Gabel, Spirit Airlines, Inc. - Senior Director of IR [75]

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Great. Thank you all for joining us today. That concludes our third quarter earnings conference call.

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Operator [76]

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