Management's Discussion of Results of
Operations (Excerpts) |
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Second Quarter 2019 Review Highlights: – Achieved 23.7 percent airline operating margin, which represents a 6.2 percentage point increase year over year; – produced a 6.1 percent decrease in airline operating CASM excluding fuel; – recognized our second consecutive quarter of ancillary air-related revenue per passenger exceeding $50, with a total of $51.68 this quarter; – achieved industry leading controllable completion of more than 99.9% during the quarter; – improved A14 performance (flight arrival within 14 minutes of scheduled arrival) by 2.8 percentage points compared to 2018; – added two aircraft into service and expect an additional six to be added in the back half of 2019; and – announced 10 new routes, and began service on 35 routes previously announced. NETWORK As of June 30, 2019, we were selling 459 routes versus 414 as of the same date last year, which represents a 10.9 percent increase. Our total number of origination cities and leisure destinations (for operating routes) were 95 and 26, respectively, as of June 30, 2019. Based on our currently published schedule through May 2020, and service announcements and cancellations by other airlines as of June 30, 2019, we will have direct competition (which we consider to be similar non-stop service between markets) on approximately 100 routes as of that date. During the second quarter of 2019, we announced 10 new routes including service into three new cities - Redmond, OR; State College, PA; and Traverse City, MI. These new routes are planned to begin service in October 2019. During the second quarter 2019, we also began service on 35 routes announced previously, including our inaugural scheduled flights to Anchorage, AK. In April 2019, we filed an application with the U.S. Department of Transportation to offer scheduled service to Mexico. This is the first step in beginning to offer international service to our leisure travelers, with non-stop flights between the United States and Mexico. TRENDS The transition to an all-Airbus fleet continues to produce positive operating results. Despite having an average of seven fewer aircraft in service during the second quarter 2019 compared to 2018, scheduled service ASMs increased 13.6 percent on a 13.8 percent increase in departures, and scheduled service passengers increased 12.2 percent. We accomplished the increased capacity by increasing aircraft utilization (block hours per aircraft) by 20.5 percent compared to the second quarter 2018. We were able to grow airline operating margin by 6.2 percentage points due, in large part, to reduced costs per ASM which were impacted significantly by an 8.1 percent increase in fuel efficiency. During the second quarter, we flew more on off-peak days (32.8 percent of our scheduled ASMs for the quarter were on Tuesdays, Wednesdays or Saturdays compared to 30.6 percent in the same quarter last year). This contributed to our profitability, but led to a small decline in unit revenue. Additionally, we have led or tied for the industry lead in controllable completion factor for 16 of the past 18 months, including every month in the first half of 2019, during which time we had only ten days that were affected by maintenance cancellations. In July 2019, we announced the evaluation of strategic alternatives for our Teesnap golf course management solution entity, which will trigger held-for-sale classification in the third quarter 2019. The construction of Sunseeker Resort continues to progress. RESULTS OF OPERATIONS Comparison of three months ended June 30, 2019 to three months ended June 30, 2018 Operating Revenue Passenger revenue. For the second quarter 2019, passenger revenue increased 12.1 percent compared to second quarter 2018. The increase was driven primarily by a 13.8 percent increase in scheduled service departures, which resulted in a 12.2 percent increase in scheduled service passengers. The 13.5 percent increase in air-related ancillary average fare offset the decrease in scheduled service average fare. Increases in the customer convenience fee and baggage fees contributed to the increase in air-related ancillary unit revenue to $51.68 per passenger. Third party products revenue. Third party products revenue for the second quarter 2019 increased 2.3 percent, compared to the same period in 2018. This is primarily the result of increased revenue from our co-branded credit card program, as well as an increase in net revenue from rental cars. Fixed fee contract revenue. Fixed fee contract revenue for the second quarter 2019 increased 63.2 percent when compared to 2018. This is primarily the result of a 61.0 percent increase in related departures, which is largely attributable to greater availability of spare aircraft due to improved operations and an all-Airbus fleet. Other revenue. Other revenue increased by $0.5 million for the second quarter 2019 from 2018, due to increased revenue from our non-airline activities. This increase was partially offset by a decrease in aircraft lease revenue, as we had six aircraft on lease to a European carrier during the second quarter of 2018 and none during 2019. Operating Expenses We primarily evaluate our expense management by comparing our costs per ASM across different periods, which enables us to assess trends in each expense category. The following table presents unit costs on a per ASM basis, or CASM, for the indicated periods. Excluding fuel on a per ASM basis provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility. Both the cost and availability of fuel are subject to many economic and political factors beyond our control. Three Months Ended June 30, Salary and benefits expense. Salary and benefits expense increased $11.9 million, or 11.8 percent, for the second quarter 2019 when compared to the same period in 2018. The increase is largely due to an 8.8 percent increase in full-time equivalent employees supporting a 12.6 percent increase in system block hours, and increased activity in our non-airline subsidiaries. Pilot salaries and wages per ASM decreased 6.9 percent for the quarter, due to improved pilot productivity efficiencies as we have transitioned to an all-Airbus fleet. Aircraft fuel expense. Aircraft fuel expense decreased $2.5 million, or 2.0 percent, for the second quarter 2019 compared to second quarter 2018, despite a 4.9 percent increase in system fuel gallons consumed on a 13.4 percent increase in system ASMs. ASM growth outpaced fuel consumption as fuel efficiency (measured as ASMs per gallon) increased 8.1 percent year over year, due to our transition to an all-Airbus fleet which are significantly more fuel efficient than the MD-80 aircraft we operated before their retirement which concluded in November 2018. Also, system average fuel cost per gallon decreased 6.7 percent year over year, further contributing to the overall decrease in aircraft fuel expense. Station operations expense. Station operations expense for the second quarter 2019 increased $4.3 million, or 10.4 percent, on a 13.8 percent increase in scheduled service departures. The increase in departures outpaced the increase in expense due to additional station incentives realized compared to the same period in 2018. Maintenance and repairs expense. Maintenance and repairs expense for the second quarter 2019 decreased $3.7 million, or 15.2 percent, compared to the same period in 2018 mostly due to a decrease in non-major maintenance events. The cost of major maintenance events for our Airbus aircraft is deferred in accordance with the deferral method of accounting and the amortization of these expenses is included in depreciation and amortization expense. Depreciation and amortization expense. Depreciation and amortization expense for the second quarter 2019 increased 29.0 percent year over year. The average number of Airbus aircraft in service increased 38.7 percent year over year. Further, the MD-80 fleet operating in 2018 was fully depreciated prior to 2018. Amortization of major maintenance costs was $6.1 million for the second quarter 2019 compared to $2.6 million for the second quarter 2018, with increases expected to continue as our Airbus aircraft count and related deferred maintenance costs grow. Sales and marketing expense. Sales and marketing expense for the second quarter 2019 increased $2.2 million compared to the same period in 2018, partly due to an increase in net credit card fees paid as a result of the 12.1 percent increase in passenger revenue year over year. There were also increased expenses related to various marketing initiatives, including our multi-year partnerships with the Vegas Golden Knights and Minor League Baseball. Non-airline expenses Non-airline expenses are included in the various line items discussed above, as appropriate. The non-airline expenses include those from our Teesnap golf management business, Kingsway golf course, Allegiant Nonstop family entertainment centers, and operating expenses attributable to Sunseeker Resort (most of the Sunseeker Resort expenses are being capitalized at this time). We expect these expenses to increase with the growth in the number of family entertainment centers and the continued operation of Teesnap pending a possible sale. Income Tax Expense Our effective tax rate was 23.1 percent for the three months ended June 30, 2019, compared to 20.7 percent for the three months ended June 30, 2018. The effective tax rate for the three months ended June 30, 2019 differed from the statutory federal income tax rate of 21.0 percent primarily due to state taxes. While we expect our tax rate to be fairly consistent in the near term, it will vary depending on recurring items such as the amount of income we earn in each state and the state tax rate applicable to such income. Discrete items during interim periods may also affect our tax rates. We expect to be a non-cash taxpayer for federal income tax purposes for 2019. Comparison of six months ended June 30, 2019 to six months ended June 30, 2018 Operating Revenue Passenger revenue. For the six months ended June 30, 2019, passenger revenue increased 9.0 percent compared with 2018. The increase was mostly attributable to a 9.5 percent increase in scheduled service departures, which resulted in an 8.5 percent increase in scheduled service passengers. Average total fare per passenger increased slightly during the six month period as the increase in air-related ancillary revenue per passenger more than offset the decrease in scheduled service average fare. Increases in the customer convenience fee and baggage fees contributed to a 13.0 percent increase in air-related ancillary unit revenue to $52.32 per passenger. Third party products revenue. Third party products revenue for the six months ended June 30, 2019 increased 25.7 percent over the same period in 2018. This is primarily the result of increased revenue from our co-branded credit card program, as well as an increase in net revenue from rental cars. Fixed fee contract revenue. Fixed fee contract revenue for the six months ended June 30, 2019 increased 26.6 percent compared with 2018, primarily due to a 20.3 percent increase in related departures. This was made possible by greater availability of spare aircraft due to improved operations and an all-Airbus fleet. Other revenue. Other revenue decreased $3.3 million for the six months ended June 30, 2019 compared to 2018 primarily due to a decrease in aircraft lease revenue. We had six aircraft on lease to a European carrier during the first half of 2018 and none during 2019. The effects of this decrease were slightly offset by increases in revenue from our non-airline activities. Operating Expenses Salary and benefits expense. Salary and benefits expense increased $18.4 million, or 8.6 percent, for the six months ended June 30, 2019 compared to the same period in 2018. The increase is largely attributable to an 8.8 percent increase in the number of full-time equivalent employees supporting an 8.1 percent increase in system block hours, as well as increased activity in our non-airline subsidiaries. Pilot salaries and wages per ASM decreased 2.9 percent for the six months ended June 30, 2019, due to improved pilot productivity efficiencies as we have transitioned to an all-Airbus fleet. Aircraft fuel expense. Aircraft fuel expense decreased $8.8 million, or 3.9 percent, for the six months ended June 30, 2019 compared to the same period in 2018, despite a 0.4 percent increase in system fuel gallons consumed on a 9.2 percent increase in system ASMs. ASM growth outpaced fuel consumption as fuel efficiency (measured as ASMs per gallon) increased 8.8 percent year over year, due to our transition to an all-Airbus fleet. Also, system average fuel cost per gallon decreased 4.4 percent year over year, further contributing to the overall decrease in aircraft fuel expense. Station operations expense. Station operations expense for the six months ended June 30, 2019 increased 7.2 percent on a 9.5 percent increase in scheduled service departures compared to the same period in 2018. The increase in departures outpaced the increase in expense due to additional station incentives realized compared to the same period in 2018. Maintenance and repairs expense. Maintenance and repairs expense for the six months ended June 30, 2019 remained flat year over year. We had fewer non-major maintenance events in 2019, a reduction which was offset by higher overall repair costs for our Airbus fleet than our MD-80 fleet (though less frequent). Additionally, the cost of major maintenance events for our Airbus aircraft is being deferred in accordance with the deferral method of accounting and the amortization of these expenses is included under depreciation and amortization expense. Depreciation and amortization expense. Depreciation and amortization expense for the six months ended June 30, 2019 increased $16.7 million, or 28.8 percent, compared to the same period in 2018. The average number of Airbus aircraft in service increased 43.6 percent year over year. Amortization of major maintenance costs was $10.9 million for the six months ended June 30, 2019 compared to $5.1 million for 2018, with increases expected to continue as our Airbus aircraft count and related deferred maintenance costs grow. Sales and marketing expense. Sales and marketing expense for the six months ended June 30, 2019 increased $4.0 million compared to the same period in 2018, partly due to an increase in net credit card fees paid as a result of a 9.0 percent increase in passenger revenue year over year. There were also increased expenses related to various marketing initiatives, including our multi-year partnerships with the Vegas Golden Knights and Minor League Baseball. Other expense. Other expense remained flat year over year, as there were increases in general administrative expenses which were offset by over $12.0 million in gains from MD-80 and other aircraft part sales. Non-airline expenses Non-airline expenses are included in the various line items discussed above, as appropriate. The non-airline expenses include those from our Teesnap golf management business, Kingsway golf course, Allegiant Nonstop family entertainment centers, and operating expenses attributable to Sunseeker Resort (most of the Sunseeker Resort expenses are being capitalized at this time). Income Tax Expense Our effective tax rate was 23.0 percent for the six months ended June 30, 2019, compared to 20.6 percent for the six months ended June 30, 2018. The effective tax rate for the six months ended June 30, 2019 differed from the statutory federal income tax rate of 21.0 percent primarily due to state taxes. While we expect our tax rate to be fairly consistent in the near term, it will vary depending on recurring items such as the amount of income we earn in each state and the state tax rate applicable to such income. Discrete items during interim periods may also affect our tax rates. We expect to be a non-cash taxpayer for federal income tax purposes for 2019. LIQUIDITY AND CAPITAL RESOURCES Current liquidity Cash, cash equivalents and investment securities (short-term and long-term) increased at June 30, 2019 to $695.3 million, from $447.5 million at December 31, 2018. Investment securities represent highly liquid marketable securities which are available-for-sale. The increase in cash at June 30, 2019 is due primarily to cash generated from operations as well as debt proceeds in the second quarter. We received $213.0 million of debt proceeds from a financing secured by 23 aircraft, and generated $100.8 million in net proceeds after the early payoff of six loans and our revolving debt secured by aircraft. In the second quarter, we also borrowed $63.4 million secured by spare engines. We had 26 unencumbered aircraft at June 30, 2019. In July 2019, we repaid the remaining $102.1 million principal balance of our high yield debt at maturity. Restricted cash represents escrowed funds under fixed fee contracts and cash collateral against letters of credit required by hotel properties for guaranteed room availability, airports and certain other parties. Under our fixed fee flying contracts, we require our customers to prepay for flights to be provided by us. The prepayments are escrowed until the flight is completed and are recorded as restricted cash with a corresponding amount reflected as air traffic liability. Our operating cash flows and long-term debt borrowings have allowed us to invest in our fleet transition, return capital to shareholders in the form of recurring regular quarterly dividends, and invest in Sunseeker Resort and our Allegiant Nonstop family entertainment centers. Our future capital needs are primarily for the acquisition of additional aircraft, including our existing aircraft commitments, as well as planned capital outlay related to Sunseeker Resort and other travel and leisure initiatives. We believe we have more than adequate liquidity resources through our operating cash flows, borrowings, debt commitments, and cash balances, to meet our future contractual obligations. In addition, we continue to consider raising funds through debt financing on an opportunistic basis. In addition to our recurring quarterly cash dividend, our current share repurchase authority is $100 million. There is no expiration to this program. Debt Our long-term debt and finance lease obligations balance, without reduction for related issuance costs, increased from $1.3 billion as of December 31, 2018 to $1.5 billion as of June 30, 2019. During the first half of 2019, we borrowed $450.0 million under the Term Loan plus an additional $320.4 million secured by aircraft and engines, while repurchasing $347.9 million of our unsecured notes (the remaining balance of which was paid at maturity in July 2019). Additionally, we paid off six loans and the outstanding balance on our revolving credit facility for a combined $112.2 million in payoffs, and also made scheduled principal payments on our other existing debt. In March 2019, we entered into a Construction Loan Agreement with certain lenders affiliated with TPG Sixth Street Partners, LLC under which we may borrow up to $175.0 million to fund the construction of Phase 1 of Sunseeker Resort - Charlotte Harbor. No amounts under this loan agreement have been drawn to date. Sources and Uses of Cash Operating Activities. During the six months ended June 30, 2019, our operating activities provided $277.5 million of cash compared to $283.2 million during the same period of 2018. The decrease is due to a one-time tax benefit of $41.3 million in 2018 that was not applicable in the current year, as well as the net effect of changes in certain asset and liability accounts. These were partially offset by a $22.5 million increase in net income in 2019. Operating cash inflows are primarily derived from providing air transportation and related ancillary products and services to customers, and we expect to use that cash flow to purchase aircraft and equipment, make scheduled debt payments, invest in Sunseeker Resort - Charlotte Harbor and other travel and leisure initiatives, and return capital to shareholders through share repurchases and dividends. Investing Activities. Cash used in investing activities was $96.8 million during the six months ended June 30, 2019 compared to $158.6 million for the same period in 2018. A $47.0 million year-over-year increase in cash outlays for the purchase of property and equipment was offset as cash proceeds from maturities of investment securities (net of purchases) were $127.4 million during the six months ended June 30, 2019, compared to $30.4 million for the same period in 2018. Additionally, in the first six months of 2019 we had an $11.7 million increase in cash from other investing activities compared to the same period last year, mostly related to proceeds received from the sales of MD-80 parts. Financing Activities. Cash provided by financing activities for the six months ended June 30, 2019 was $191.6 million, compared to $153.1 million cash used in financing activities during the same period in 2018. This year-over-year fluctuation is primarily due to debt proceeds, as we entered into debt agreements totaling $770.4 million during the six months ended June 30, 2019, compared to $10.8 million in the first half of 2018. The increase in debt proceeds was partially offset by an increase in principal payments on, and early payoffs of, long-term debt and finance lease obligations in the current year compared to 2018. Quantitative and Qualitative Disclosures About Market Risk We are subject to certain market risks, including commodity prices (specifically aircraft fuel). The adverse effects of changes in these markets could pose potential losses as discussed below. The sensitivity analysis provided does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ. Aircraft Fuel Our results of operations can be significantly impacted by changes in the price and availability of aircraft fuel, as aircraft fuel expense represented 29.5 percent of our operating expenses for the six months ended June 30, 2019. Increases in fuel prices, or a shortage of supply, could have a material impact on our operations and operating results. Based on our fuel consumption for the three and six months ended June 30, 2019, a hypothetical ten percent increase in the average price per gallon of fuel would have increased fuel expense by approximately $11.9 million and $21.6 million, respectively. We have not hedged fuel price risk for many years. Interest Rates As of June 30, 2019, we had $1.2 billion in variable-rate debt, including current maturities and without reduction for related costs. A hypothetical 100 basis point increase in market interest rates for the three and six months ended June 30, 2019, would have affected interest expense by approximately $2.2 million and $4.6 million, respectively. As of June 30, 2019, we had $202.9 million of fixed-rate debt, including current maturities and without reduction for related costs. Of this amount, $102.1 million was repaid in July 2019. A hypothetical 100 basis point change in market interest rates would not impact interest expense on our fixed rate debt as of such date.