Operator: Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Allegiant Travel Company Earnings Conference Call. [Operator Instructions]. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Chris Allen, Investor Relations. Please go ahead, sir.

Christopher Allen: Thank you. Welcome to Allegiant Travel Company's Second Quarter 2019 Earnings Call. On the call with me today are Maury Gallagher, the company's Chairman and Chief Executive Officer; John Redmond, the company's President; Greg Anderson, our Chief Financial Officer and Principal Accounting Officer; Scott Sheldon, our EVP and Chief Operating Officer; and Scott DeAngelo, our Chief Marketing Officer; and Drew Wells, our VP of Revenue and Planning; and a handful of others to help answer any questions. So, we'll start with some commentary then open up to questions. The company's comments today will contain forward-looking statements concerning our future performance and strategic plan.

Various risk factors could cause the underlying assumptions of these statements and our actual results to differ materially from those expressed or implied by our forward-looking statements. These risk factors and others are more fully disclosed in our filings with the SEC. Any forward-looking statements are based on information available to us today. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. The company cautions investors not to place undue reliance on forward-looking statements, which may be based on assumptions and events that do not materialize.

To view the earnings release as well as a rebroadcast of the call, feel free to visit the company's Investor Relations site at ir.allegiantair.com. Finally, we are planning on having our Investor Day in Las Vegas on Wednesday, November 13. I will send out more information regarding this as we get closer. With that, I'd like to turn it over to Maury.

Maurice Gallagher: Thank you, Chris, and good afternoon, everyone.

Thank you again for joining us again this quarter. We had another excellent quarter, our 66th consecutive profitable quarter. Our operational and financial performances continue to shine. We're seeing the benefit of our transition to an all-Airbus fleet. We have also upped the bottom end of our EPS guidance to $13.50 per share.

And this range represents at a minimum a 35% increase in our earnings this year compared to 2018. We led the industry in overall completion again in Q2 as we did in Q1. The last major component of our reliability push has been for our operational performance in our peak periods to match our off-peak performance, and I'm happy to say we have accomplished this goal. During Q2 this year, we had only 16 maintenance cancellations compared to 129 last year. This represents a 99.9% controllable completion factor and an 88% reduction year-over-year.

Moreover, so far in July, we have had only three mechanicals on almost 8,800 flights month-to-date versus the over 80 maintenance cancellations at this time -- the same time this last year. In our operational performance in the past 24 months, we've benefited not only from our reputation but also our financial results. And to that end, we estimated our improved operations in Q2 same just over $7 million in interrupted trip expense. I knew you -- we would appreciate the return to a single, more modern fleet. We're only -- the only carrier in the United States in the past many years that has so radically changed their company.

And even while we were in transition, we were able to generate industry-leading operating margins with our previous mix of Airbus and MDs. Our projections over the past couple of years has suggested we would be able to improve these margins when we completed the changeover. But now that we're here, it's nice to actually see the -- experience the upside. Productivity in this newer generation aircraft is proving to be all we had hoped for with respect to both reliability and profitability. While the capital outlay for an Airbus is certainly greater than we paid for our MDs, the increased cost has more than offset the fuel burn savings and the additional 20 seats in the A320.

Our model of the past 20 years of low utilization and low cost focused on leisure customers is alive and well, only now we are stronger and more resilient. The past 2 quarters increase in margins has been driven by our changeover. And practically, we are still in our transition. Our fleet at the end of the year was reduced to 76 from 96 aircraft at this time last year. And while we have -- we'll add 17 aircraft during the year, we needed to ask more of our limited number of planes in the first half of the year if we wanted to grow.

Last year, during the first 2 quarters, we averaged just over 7 hours per day. While this year, the average has been closer to 8.6 hours, that's an 18% increase in our daily utilization, our year-over-year for the first 6 months. But in March and June this year, we flew 9.7 hours per day in both months. While last year was 8.3 and 7.8 per day, respectively. We grew capacity 13.4% in Q2 with substantially fewer aircraft than we had last year during the same period.

Reason I've delved so much into this detail is to relate to you the impact of this change. We're learning to "manage our fleet," learning how much upside we can extract and still be additive to our bottom line, particularly during our peak months, which was so important to us. This almost 20% increase in utilization this year during Q1 and Q2 and 25% in March and June was extremely accretive. We have more flexibility economically to operate this aircraft at the edges. We can do more on a Wednesday or a Saturday, earlier in the morning, later in the evening.

This is how we're able to operate close to 10 hours a day in March and June. But we're still learning how far we can push the schedule. In hindsight, we overplayed our hand a bit in early April. With too much capacity in the extended Easter break period, the extra 3 weeks this year do not have the demand particularly in the first 10 days of the month. But even with this capacity missed, overall, the outcome was accretive.

Frankly, comparisons to 2018 metrics are not as meaningful given the structural changes we have undergone this year. As an example, if you review the fuel gallons consumed on our 6 months financial statistical summary in the release, you'll notice we consumed virtually the same amount of gallons year-over-year yet we produced an additional 600,000 passengers on 4,400 flights with 9 fewer aircraft and generated over $81 million of incremental revenue. Our total fuel expense actually declined almost $9 million year-over-year because of the $0.10 decline in our cost per gallon. On the ownership front, we spent an additional $16 million in D&A to generate this incremental $81 million of revenue. Other expenses such as labor stations, marketing -- and marketing increased to corresponding rates but while maintenance was flat year-over-year, another benefit of this aircraft.

Bottom line, we traded increased ownership for an ability to generate substantially more revenue in our first two quarters. Critical reasons for these improvements in our ability to execute include, one, the aircraft is just more reliable. We're able to reliably increase utilization of this aircraft as we've demonstrated in the past 6 months. Two, we're better at what we're doing. Just because the aircraft is better once -- still have us operate it and our internal improvements over the past 24 months have been impressive.

Scott will touch more on that. Today, we are one of the best in the industry in providing reliable operations, particularly now during our peak period. My head is off to our team for their great efforts in this area. The third area is the fuel burn. The increased productivity of this aircraft is self-evident.

As I said earlier, we burned virtually the same amount of fuel for 4,400 additional departures and over 600,000 additional passengers during the past 6 months. Lastly, we'd become just more efficient in our cost structure, particularly with our pilot productivity. The transition teams are past. The one-off expenses associated with the move to our Airbus fleet are behind us. I'm happy to say this transition has enhanced our model, as I said earlier.

We're having a better ability to peak up for our critical peak months while still maintaining our historic low utilization in our shoulder months. This coming September, where our plan is to average 4 hours a day, our traditional schedule in this off period. Going forward, the combination of our improved operations, particularly in peak months and the enhanced flexibility this fleet provides, are going to be fun to watch. Our goal is to hold the high ground when it comes to financial performance in the coming years. And now that we are through the rough patches of the past 2 to 3 years, this looks very doable.

Lastly, I want to thank our 4,000-plus team members for all their efforts during this difficult transition. I know I speak for all in the management team when I say thank you. You're a difference maker, so let's keep it up. Scott?

Scott Sheldon: Yes. Thank you, Maury, and good afternoon, everyone.

As Maury alluded to in his opening comments, we continue to be incredibly pleased with our performance, particularly in the second quarter and the progress we're making within every operating group. What make these results particularly unique is how we flex the model during the quarter, namely how we schedule the airline, how we deployed our fleet, how we spared the airline and increased overall customer service levels during what has traditionally been the most challenging period throughout the year. Before I jump into the 2Q op results, I want to take a quick second and just highlight what this organization and in particular, this operations team, has accomplished since they were put in place 24 months ago. As many of you may recall, our -- the second quarter of 2017 was our operational performance low point. We've just completed the quarter with over 800 -- 480 cancellations, 425 of which being maintenance related.

Our completion factor was 98%, which is nearly last in the industry. Our regular ops cost for the quarter were over $20 million and accelerating. We had negatively impacted over 4% of our customer base and our on-time performance was 69%. On a trailing 12-month basis, our regular ops cost were in excess of $55 million and churning in the wrong direction. Results that are not only putting tremendous cost pressure -- or excuse me, tremendous pressure on our cost structure and our team members' ability to execute, but we're inflicting long-term damage to the Allegiant brand.

Fast-forward to the second quarter of '19 results and what a difference 24 months makes. From our second quarter '17 low point, we ended second quarter '19 with just 18 controllable cancellations as compared to 449 and 156 cancellations in 2017 and '18, respectively. A dramatic improvement over a 2-year period considering we grew departures by over 24%. Our completion factor improved -- has improved 0.4 points to 99.6% year-over-year and over 1.6 points since 2Q of '17. And as Maury indicated in his opening comments, we have led the industry in completion factor for all of 2019 and 16 of the past 18 months.

A direct byproduct of being able to complete our daily flying schedule is our ability to drive on-time performance, improve customer satisfaction or our Net Promoter Score and most importantly, drive unnecessary costs out of the organization. Our second quarter A14 performance has increased 2.8 points year-over-year to 77.7% and over 8 points from two years prior, which has resulted in substantial improvements to our Net Promoter Score, which is over -- which is up over 8 points year-over-year. The number of customers impacted by core ops improved 0.6 points to just over 1% of our flying capacity and has allowed us to pull over $7 million in a regular ops cost out of the business. On a trailing 12-month basis, our regular ops cost were down over $27 million and we still have a number of areas where we can improve. Looking into the back half of the year, and I know I speak for Maury and John and the rest of the management team, we're excited with the strength of the business and the trajectory of our operations, particularly in improvements in predictive maintenance.

Our month-to-date July results have seen dramatic improvement year-over-year and our momentum from June has continued into what should be a record-setting third quarter. And lastly, I want to thank all of our team members, service providers and partners throughout the network for the tremendous job they do every day. The results have been nothing less than impressive. And with that, I'll turn it over to Drew.

Drew Wells: Thank you, Scott, and thanks, everyone, for joining us this afternoon.

While second quarter TRASM was down 1.6% on a 13.6% increase in ASM, primarily driven by over 22% growth in the weeks leading up to Easter, the May performance was traveling plus 2.4% on 11% ASM and the June performance of plus 1.2% on 13.5% ASM, which is different from the earnings release due to moving a one-time $750,000 contra revenue was solid considering the utilization and general growth. The momentum continues into July, and the month is on track to finish higher than the adjusted 1.2% we saw in June. That said, we don't manage the business to maximizing unit revenue, but to drive higher earnings, which we were successful in doing. In one of the total company efforts, we were successful in creating more profitability through increased utilization of the aircraft in 3 ways. First, while off-peak days a week grew nearly 22% in the quarter, after normalizing for fuel price differences, that growth contributed an incremental $15 million of earnings versus last year, more than half of which came in June when we had 9.7 hours of utilization like Maury mentioned.

Second, we were able to increase utilization on peak days a week by over 20% in June and still drive a unit revenue increase on those days of 2 1/4. Finally, the combination of the Airbus aircraft and the incredible operational performance we've exhibited opened up significant opportunities on the fixed fee side that enabled us to grow that line by 63% versus last year. Our planning methodology has remained consistent as we continue to learn how we powerful -- how powerful and highly reliable all Airbus fleet can be for us. In order to achieve margins in the 20s, each hour of planes base is extremely valuable. And to that end, we continue to schedule the profitability thresholds.

Our success in deploying continually profitable flying even with elevated utilization rates gives us confidence to continue to push where appropriate. It also means remaining flexible to pull down capacity in the weaker demand periods. This is exemplified in the third quarter as we will grow July ASMs by 13% to 14% while September will actually be negative. This combines for a total quarter ASM growth rate between 5% and 7%. In terms of the full year, we have narrowed our ASM guide toward the midpoint to 8% to 9% year-over-year.

With July likely to be our seventh consecutive month with air ancillary greater than $50 per passenger, the downward trend in load factors was obviously suboptimal. And while our expectation for the second year of the revenue management system was driving incremental yields, our revenue dynamic has shifted. As the split has converged on 50-50 air versus ancillary, the RM system is reoptimizing around a higher ancillary base and prioritizing load factor in order to achieve the benefits of that. I expect our load factor to flip put positive in July and throughout the third quarter, which coupled with the ASM cadence, sets us up extremely well to continue expanding upon our industry-leading margins. And with that, I'd like to turn it over to Greg.

Gregory Anderson: Thank you, Drew, and good afternoon to everyone. And as Maury noted in his remarks, the airline has gone through a radical change over the past years with the outcome being a brand-new airline equipped to better optimize both operational and financial performance. We are proud to report the airline expanded its year-over-year 2Q operating margin by more than 6 percentage points from 17.5% to just under 24% and posted earnings per share of $4.81, an increase of 50% year-over-year and the second highest quarterly EPS in our company's history. Our second quarter costs were significantly better than unexpected. Unit cost excluding fuel decreased by over 6% year-over-year, which was largely driven by our outstanding operations, namely combined cost improvements from within our maintenance and supply chain areas, improved pilot productivity and lower irregular operational costs.

In fact, with the exception of depreciation, each one of the cost line items for the airline decreased on a unitized basis year-over-year. This result gives us increased confidence in our full year airline CASM outlook, and we are both improving our guidance and tightening the range. Our previous range was down 3.5% to down 1.5%. We are currently guiding down 4% to down 3%. We believe the operational efficiencies we experienced during the second quarter are here to stay.

By way of example, our pilot productivity, as measured in 8 block hours, continues to trend nicely in their 65% productivity compared to the 51% productivity at the peak of our inefficiency. Maintaining cost discipline is a key focus, and we expect continued improvements on this front. Moving on to fuel. Prices have decreased since around this last -- around this time last quarter with the reduction in Brent Crude oil of 13.5%. With this significant move in oil, we are reducing our full year assumption for fuel cost per gallon from $2.26 to do $2.15.

Our fuel efficiency improvements continue to outperform as we saw year-over-year increase of 8% during the second quarter to 82.3 ASM per gallon. As such, we increased our full year fuel efficiency guidance by 0.5 point to 82.5% ASMs per gallon, an increase of nearly 6% for the full year. Turning now to the balance sheet. We ended the June quarter with total cash and investments of $695 million and $1.5 billion in total debt. Earlier this month, we paid off the stub on a high-yield bond of just over $100 million, reducing both our cash and debt balances by the same amount.

Turning to second quarter. We refinanced 23 of our older A319 aircraft with the net proceeds of over $100 million and a reduction in margin by 40 basis points. This was a refinancing on aircraft that currently had debt balances on them and did not include any of our existing unencumbered aircraft. While we don't expect to raise any incremental debt in the near term, we continue to maintain sufficient dry powder through our 26 unencumbered aircraft and $81 million available in our undrawn revolver. Currently, our leverage is 3.2 turns debt-to-EBITDA and a comfortable 1.8 turns of net debt-to-EBITDA.

We believe the high point of our leverage is behind us as we expect to continue to delever through quickly amortizing aircraft debt and expecting to increase EBITDA. Our increasing EBITDA supported by our aircraft growth as we generated approximately $3.5 million of EBITDA per aircraft during the first 6 months of 2019. During the second quarter, we placed 2 A320 series aircraft into service, bringing our total in-service aircraft to 86. We also purchased 3 A320s, which are scheduled for revenue service during the third quarter, and we expect to end the year with 93 in-service aircraft. In addition to the 3 aircraft purchased during the second quarter, we also acquired 3 spare CFM engines.

These combined purchases constituted the majority of our $100 million in airline CapEx during the quarter. We are adjusting our full year airline CapEx guidance down by around $17 million to reflect lower-than-expected actual purchase price of used aircraft based on their maintenance status of delivery. We are also reducing the midpoint of our full year Sunseeker CapEx by approximately $110 million. This reduction simply represents the timing shift via quarter from the fourth quarter of 2019 into the first quarter of 2020. The total project CapEx is unchanged.

In regards to other -- on the airline initiatives, you may have noticed in our release, we are evaluating strategic alternatives for Teesnap. Teesnap's all-encompassing golf course software solution is cutting-edge and has been a disruptor in the golf industry from its beginnings nearly 5 years ago. Since that time, Teesnap has signed up 600 golf courses in 49 states and has nearly 718 members continued to capture market share in a competitive landscape. We are very proud of the tremendous growth and the efforts of the Teesnap team. Fueling the continued growth of this compelling B2B software-as-a-service offering requires the sales force and resources that an organization focused in this space can best provide.

As such, in order to take Teesnap to the next level, we believe it is best to acquire or to be acquired. Moreover, getting that our Allegiant 2.0 strategy is focused on B2C, not B2B as is Teesnap's model, we feel the right course of action for both Allegiant and Teesnap is a sale. Ideally, we partner with a potential acquirer, via marketing services and/or the opportunity to continually on-ramp their customer data into our Allegiant 2.0 platforms. Recently, we had a strategic conversation with the party interested in acquiring Teesnap, and we intend to open up similar discussions with additional counterparties. As a result of these discussions, our intention to sell and with all requisite criteria being met and asset held-for-sale classification for accounting purposes has been triggered and will be reflected in our Q3 financials and onward.

Under this classification, we are required to stop depreciating Teesnap's assets. Additionally, we have reviewed these assets and have determined at this time no impairment is necessary as the sales price is expected to be greater than the carrying cost of Teesnap's assets. Additional criteria to meet this classification include the intent and ability to close the deal within a year. We need this criteria and we expect to close the deal within the 12-month requirement. Finally, all of Teesnap's future revenue, cost and potential gain on sale will continue to be recorded under income from operations and disclosed within our nonairline segment reporting.

Teesnap makes up a significant portion of our nonairline reporting. And in order to best maximize the value of this transaction, we have decided to suspend our nonairline EBIT guidance under sale -- until the sale is complete. Given the sensitivity and relative minor impact on consolidated earnings, our nonairline commentary will largely be limited to our earnings release and future prepared remarks. With that said, we are seeing solid trends with our FECs and expect same-store results to be EBITDA positive for full year 2020. I also want to mention our full year 2019 EPS guidance incorporates both airline and nonairline expected results.

And in closing, I'd like to add my thanks to all of our hard-working team members as these outstanding results are attributed to their terrific efforts day in and day out. And with that, I'll turn it back over to the operator for Q&A.

Operator: [Operator Instructions]. Our first question comes from the line of Andrew Didora from Bank of America.

Andrew Didora: I guess my first question is for Drew.

I guess based on my back of the envelope calcs here, it looks like April TRASM was down about -- kind of down mid-single digits. I think -- correct me if I'm wrong, I'm calling April, you said that you're expecting having sequential improvement 1Q to 2Q in TRASM. So, I guess you kind of knew of the Easter issues at that time. I guess what kind of changed from your -- what you were looking out to in May and June from a revenue perspective?

Drew Wells: Yes. Candidly, at that time, you have to kind of remember back to the comps of last year.

And frankly, I was a bit aggressive in terms of what I thought we could recapture found those comps, and that's where a lot of the portions came from. That failed to materialize, and we ended up closer to kind of a nonrecapture state. So -- I mean candidly, that's exactly where it came from.

Andrew Didora: Okay. And then, look, I know in your prepared remarks, you spent a lot of time talking about the fleet transition back at the end of 2017 at your Investor Day, you outlined fleet profitability by 2020 could be about $5 million in EBIT per Airbus aircraft.

We're about, I think, roughly around $500 million. Now as you're going -- as you've been through the transition, kind of learning about the new fleet type, how much confidence do you have in this figure in these early days? And what do you think the Street is missing as it seems like consensus is nowhere near that right now?

Gregory Anderson: Andrew, thanks. This is Greg. We're pretty confident. If you take a look at our forward guidance for 2019, you can back end to EBITDA per aircraft of about $6 million.

We roughly have about $1 million in depreciation for aircraft. So that can get you to your EBIT per aircraft of $5 million. And we're growing that. We think there's some upside to that in 2020. I would just caveat that with that's -- existing fuel prices, I think a set are about $2.12 per gallon.

Operator: Our next question comes from the line of Duane Pfennigwerth from Evercore.

Duane Pfennigwerth: On Sunseeker, I wondered if you'd comment on what spending is year-to-date and what's driving your lower view on the year, if there were some delays, if it was permitting or stuff like that.

John Redmond: This is a quarter shift, Duane. This is John. I mean anything, when you're trying to predict cash flows when it comes to resorts like that, there is some uncertainty when -- between quarters.

But all in all, as Greg said, the CapEx doesn't change at all. It's just a quarter shift. I forget the first part of that question.

Maurice Gallagher: Cost.

John Redmond: Oh, cost.

Duane Pfennigwerth: Just what you're spending to date this year has been on it.

John Redmond: Well, it's in the earnings release. I don't know the exact dollar amounts per quarter. But we have -- we don't have any -- we're not providing any information as it comes to quarter-by-quarter. But the -- we don't expect the $470 million to change at all.

Everything we've been saying about it is factual. But do you have the numbers by quarter handy, Greg?

Gregory Anderson: Yes. If you kind of back into it, Duane, I think all -- the first half of the year CapEx for Sunseeker was roughly, I want to say about $20 million. And that's largely piling in the demo right on the property.

John Redmond: One thing I'll mention, Duane, while we're at it, I know we did put out some progress photos of the resort.

One of the things I should update everyone with is we are adding a tab to the sunseekerresorts.com website. That's a Call a Day Project update tab. That tab will be added in the first week of August, and everyone can click on that tab at any point in time then get up to the minute progress photos, including a drone video footage. So, they'll save you and everyone else some time looking at that, and I think that should help you out to the extent you wanted to keep looking at those.

Duane Pfennigwerth: That's great, John.

I appreciate it. Where would you expect -- like what would you expect those photos to look like kind of exiting this year? So, going from the $20 million to this $160 million, $175 million by year-end. What do you think we'll be able to sort of point to exiting 2019?

John Redmond: You have on a site like that, not to get into too much detail, but there's something like 2,300, 2,400 piles that are -- that have to be put into the ground before it can come out of the ground. So, we would expect the resort to be coming out of the ground towards the middle to the back end of Q4. So, you're going to see structure coming out of the ground by that time frame.

So, one other data point I'll share with you is we're going to be -- we're probably 30 to 45 days away from having been able to provide you certainty around timing and construction budget, right? So, call it by the October conference call on Q3, and most assuredly, of course, by the Investor Day, I'll be able to give you with relative certainty what the construction cost spend will be in relation to budget as well as the timing of opening. And the reason for that is we're out to bid right now with significantly more aspects of the project. We expect those bids to be coming back over the next 15 to 30 days. And in conjunction with those bids, we're able to formulate a much tighter schedule. So that's despite getting more data, which we're right on the cusp of.

But I'll be able to give you with pretty high degree of certainty where we stand on that budget and where we stand on timing around opening.

Operator: Our next question comes from the line of Catherine O'Brien from Goldman Sachs. Catherine O'Brien: So, I guess maybe first just on that airline only CASM-X, the 6% really impressive. Congrats. I guess just what are we -- what should we be looking at through year-end there? I think on the last quarterly earnings call, you guys mentioned you're expecting deeper declines in CASM-X each quarter as you go through this year even though you've updated positively here, it would imply maybe something a little less negative than the impressive minus 6 in the coming quarters.

So, I guess like is there something special about the June quarter that really drove this outside performance? Or could we potentially see similar, better-than-expected performance in the back half as we go through?

Gregory Anderson: Hey, Catie. Yes, our expectation is that the June quarter as far as decrease will be the most outperforming quarter of the year. You can back into the second half CASM-X for the airline only just by taking our guidance. And what I would do is I'll just kind of average those two, the third and fourth quarter based on that, kind of backing into it. In the June quarter, we had a couple -- it was a terrific quarter.

As we mentioned, we're capturing a lot of the efficiencies primarily due to operational performance. But there are a couple kind of one-time items that did happen in the quarter. I'd say one, we had some inventory part sales for a non-Airbus part. Our supply chain team did a very good job in negotiating and getting some really good rates on those parts. So that was a one-time good guy during the second quarter.

And additionally, we have some slight shift of engine maintenance cost from the second quarter into the third quarter. But other than that, a lot of the goodness that we've seen is going to be intact for years to come. Catherine O'Brien: Great. Then maybe one for Drew. Drew, as you're seeing this improvement on operational performance and then the corresponding improvement in Net Promoter Score, are you starting to see any uplift to your pricing structure because of that? Or would you anticipate seeing any going forward?

Drew Wells: Yes.

Thanks, Catie. So yes, one of the bigger factors we'll see and in terms of pricing structure is as we drive up utilization and capacity, that obviously take -- puts pressure on where pricing structure should go. And in terms of, I guess, direction where you will see that impact, our returning customer base is stronger than it has been, perhaps ever. Web visitation looks great. But I do think we're seeing an impact to our passenger and our customer base from the operations, from the Net Promoter Score, as you'd expect.

And so, I think you'll see us perhaps have an easier time raising that utilization and capacity as kind of an effect of all the improvements.

Operator: Our next question comes from the line of Michael Linenberg from Deutsche Bank.

Michael Linenberg: Two quick ones here. Just to Greg, you spent some time talking about deleveraging the balance sheet. You talked about amortizing aircraft debt.

From your perspective, is it important for Allegiant to have an investment-grade credit rating? Is that something that makes sense over the next couple of years or so?

Gregory Anderson: Michael, good question. It's something we're not focused on. And when you go through some of the criteria from the rating agencies, given the size of Allegiant, kind of our focus in the U.S. and not as diversified throughout the world, it's just a high hurdle for us to ever get there. So, we don't really focus on it.

And what we're focused on, strengthening our balance sheet, and that's where our attention will be focused on.

Michael Linenberg: Okay. Great. Okay. Great.

And my next question, just -- Maury, look, I know you've spent several years getting to the single fleet type. And it's clearly paying dividends. But along the way, it seems like you have a much stronger operational foundation. So that single fleet has helped you get there. That said, is -- with that base, have you thought about maybe adding a second aircraft site to move in to maybe some of the smaller markets? And I'm just highlighting that because I know one of your competitors is looking very closely -- well, I should say, one of your competitor, ULCC, is looking very closely at a smaller aircraft site.

Would that make sense in the -- with the Allegiant model?

Maurice Gallagher: Michael, we just got the help to this first one-off period. You're making me old here before my time. In a word, we're not looking at it. We've got just a lot of work we can do with the one airplane type. Drew and team are -- I think we've said we have -- how many hundreds of markets, routes?

Drew Wells: We have 459 routes.

Maurice Gallagher: That, yes, we can still look out. We've gotten international, so...

Drew Wells: And another 600 or more incremental on top of it.

Maurice Gallagher: Yes. I mean so keep it simple, stupid.

I think I really want to take a moment and put out the boys out to Scott Sheldon and the whole ops team and what they've done, and this has just been a lot of elbow grease, pulling up your sleeves. And as I said in my own comments, fixing airplanes is a job in and of itself. The best airplanes in the world are going to need work. And if you're not well organized in taking care of business, it's going to show up even with the best of airplanes. So, it's pretty impressive what we've done in 2 years, and it really was a will to just make it good and make it right.

And this current management team, I know we've caught some flack in the past, management people leaving us. But I think we've demonstrated over and over again the deep and wide bench we have here and the quality of the product we're putting out. And again, with the Allegiant 2.0 and the customer focus, reputational importance is second to none. And I think you're seeing that in the industry as well. The speed of the social media post is a new today or a new world weapon, if you will, in our customers' hands that focuses some operational and marketing aspects of the company to a much greater degree than they might have been in the past.

Michael Linenberg: Great answer, Maury. Just so you know that was a test question and you answered it correctly. So good answer.

Maurice Gallagher: We've known each other too long, Michael, to be doing that to me.

Operator: Our next question comes from the line of Hunter Keay from Wolfe Research.

Hunter Keay: John, can you please do me a favor and elaborate a little bit on the Sunseeker? I know it's -- the slip. I should say in the schedule; I know it's hard to nail the -- these things down quarter-to-quarter. But the nature of the question is does this relate to anything like -- around like permitting issues? Was it something tied to engineering or design? Was it like a labor shortage issue? Just trying to understand a little more what did push that to the right a little bit.

John Redmond: It's hard to point to any one thing, Hunter. It's always a good question.

But the one thing I can -- I should mention is once you get started, the difficulty of predicting a start date because there's so many things that have to happen in order for us to start a project. But what I can say is once you do start the project, the end date is much more predictable because the sequential nature of construction is much easier to predict. So, the start date is always a moving target. So, this is nothing abnormal. When you look at development projects, they're always difficult to predict the start.

But that's why I was mentioning by the October conference call, I'll be able to give you a relative certainty what the opening date will be or at least the opening month and some real affirmations regarding the ability to hit budget. So, it's just a -- the normal start to a project especially one of this size. This is a very large project as I'm sure you all know. Probably the largest that's -- a nongaming resort that's under construction in the U.S. So, nothing unusual.

But I can understand some of the sensitivity around it.

Hunter Keay: All right. And then, Maury, how did that extra legroom product test go that you mentioned? I think you said it was in L.A. I'm kind of curious if that's done and what the results were and if there's plans to maybe roll it out further.

Maurice Gallagher: Drew?

Drew Wells: Yes.

I'll take that one, Hunter. So, it's still underway in L.A. It will be there through the entire summer. I think we've had, let's call it mixed results so far. Nothing definitive in terms of overwhelming success and certainly nothing that's an absolute train wreck.

We are going to continue to test. It will likely go up to our Grand Rapids base coming this fall through the winter. So, we know we've had more success on longer haul flights than we have shorter haul. We have some other projects that will help the merchandising and sales of the product. So, it's on forecasting nothing but better results on that moving forward.

That said, if we come out of this winter and still can't piece it all together, then we'll have no problems on the plug on it. But I do think this is going to be successful.

Operator: Our next question comes from the line of Savi Syth from Raymond James.

Savanthi Syth: Two follow-ups, actually. The first one on the cost side.

Just trying to understand, hoping to kind of get a little help in how we model the kind of the consolidated cost line. And this quarter, I think the airline CASM-X is down about 2 points more than they -- kind of the consolidated. Is that some of that start-up costs that go -- kind of get unwound next year? Or is that just a function of you do have now kind of a growing nonairline segment that's not producing ASMs, so you don't get to give either the cost over it to get more ASMs. I'm just wondering how we should think about the difference there.

Gregory Anderson: Yes, Savi.

It's probably more the latter. I mean there is some startup costs that are in there that would put pressure on it. But I mean, if you think that these nonairline components, excluding Teesnap, if they were to continue to grow, those costs would grow but you would likely see a corresponding growth in revenue. And as those costs grow, costs, you're not producing ASMs to offset it.

Savanthi Syth: That makes sense.

And then just on the revenue side questions. I know you've got a couple of questions already on that. But tied to the EPS, the top end of the EPS is brought down as well. Is that kind of a function of maybe not recapturing as much of that 2Q revenue from last year as you thought? Or is there something else that you're kind of the top end of the EPS, lower as well?

Drew Wells: Yes. From the revenue, I think there's a lot of truth to that.

Obviously, coming in lower than we communicated in 2Q is going to put some pressure on the top of the range. So, I think you're spot on it.

Operator: Our next question comes from the line of Joseph DeNardi from Stifel.

Joseph DeNardi: Drew, mate, I just want to kind of clarify -- the EPS guidance seems to have been kind of benefited from lower fuel and better CASM-X as the TRASM outlook change at all kind of for the rest of the year?

Drew Wells: No. I mean -- so as we were looking at 4Q, there's obviously a lot of variability in that from the time of budget.

The ASMs have kind of come up and come back down a little bit since January. I'm more confident now in third quarter than I probably was about 3 months ago. So, I think we got a little bit of lift there. But I don't think materially, it's changed a ton for the back half of the year.

Joseph DeNardi: Okay.

Can you just talk about how much you think your TRASM is benefiting from the reduction in industry capacity from the MAX grounding? Is it a marginal benefit? Or is it something that's more material that we should kind of consider from a year-over-year standpoint next year, assuming it comes back?

Drew Wells: Yes. I think for us it's negligible. I mean we have a -- at least sub-2% exposure to routes where the MAX had been scheduled. It's just not a meaningful impact to us. So, I wouldn't attribute anything to our results this year nor would I expect any sort of change in results next year from that comparison base.

Operator: Our next question comes from the line of Helane Becker from Cowen.

Helane Becker: You know I noticed in the comments in the press release, you talked about going from 12 spares last year to 4 this year. And my question is really -- obviously, that's included in, I think, the numbers you cited, Maury, on terms of additional flying and incremental revenue. But can those 4 spares -- is that like the number you need? Or can that go even lower?

Maurice Gallagher: I wouldn't put a lot of -- we're still figuring out the airplane quite a bit, Helane. And so, depending on the time of the year -- frankly, in September, we'll have a lot more spares just because of reduced line.

In our peak months, kind of mid-peak months, four is probably a good number. We might even kick it up to 6 or 7 in a June period just because of the -- we're flying 430 flights a day now, which has substantially increased for us during this peak period. But it's substantially better than what we have with the MDs, there's no doubt about that. And the other piece of this is hopefully, we'll be able to get to a 3-year, I don't know, C check cadence here in the not-too-distant future, next 12 to 18 months, which matches the 737. And that will obviously help sparing as well, so you're not having to do those.

But there's a lot of work we can do to enhance the sparing stuff going forward. But it's substantially improved from where we were.

Helane Becker: And then I just have one follow-up question on ancillaries. I think someone said you're at 50-50 for ancillary and fares. Is that where you want to stay? Or can that change to, I don't know, 55, 45 or something, something not -- where a bigger percentage is coming from ancillaries?

Drew Wells: Yes.

I think 50-50 is probably the right shorter-term target. Obviously, the medium term I would love to be able to drive ancillary higher. But there's a lot that goes into that based on the economics at the time, how much we're flying, et cetera, where oil is. So, I would use 50-50 as the right kind of short-term target, and we'll just see what happens when the -- in the industry as we move forward beyond that.

Operator: Our next question comes from the line of Susan Donofrio from Macquarie.

Susan Donofrio: So just two questions. One is on your nonairline side. Should we assume that you are actively looking at other businesses? Or do you think it's more passive and opportunistic? Just trying to gauge whether we can expect further growth in this area.

John Redmond: We're not looking at any new businesses other than what's identified to date.

Susan Donofrio: Okay.

Great.

John Redmond: Current.

Susan Donofrio: And then on the -- go ahead.

John Redmond: Oh, that's it.

Susan Donofrio: Okay.

And then on the airline side. Just wondering with respect to kind of overall spare level, was there an evenness throughout your system, especially as you've added more utilization, et cetera? I'm just trying to get a gauge of the health throughout the system.

Drew Wells: Yes. There's obviously pockets within the network that are always ebbing and flowing. We continue to see pressure on states across the Canadian border due to foreign exchange.

Normally, that holds a little better with oil price. But we've been sticking around CAD 130 to CAD 132, I think in Canadian dollar there. So, continue to see pressure there. Otherwise, I think the network's very healthy. There's areas that we certainly layered on more capacity than others that will put pressure on any unit revenue metric.

But there's no pockets I would cause -- or I would call out beyond just some of that border stuff related to foreign exchange.

Operator: Our next question comes from the line of Dan McKenzie from Buckingham Research.

Daniel Mckenzie: I had somewhat of a similar question. Just as you exited the second quarter. I'm just curious, Drew, how same-store sales were trending versus new store sales just given some of the volatility in the second quarter.

And I'm just wondering if you can just elaborate just a little bit more around the core network versus the growth part of the network.

Drew Wells: Sure. Yes. So new market has actually formed quite well for us through the second quarter. Exceptionally pleased, especially with some of the growth that we've seen in Nashville.

It's kind of a new direction for our network without being a new destination and being able to sustain some service that was otherwise unserved. For the quarter, it was fine. There's really nothing to call out. So, they're really good or they're really bad. It kind of was flatter in terms of results there.

So, nothing exotic to talk about on that front.

Daniel Mckenzie: Understood. Okay. Second question, just getting to utilization, back to utilization here. As we look at 2020, just given the operational reliability of the fleet today and how well you guys are performing, I guess maybe, Scott, this might be for you, where can you -- how far can you push utilization next year? Could you increase block hours over and above sort of beyond what your planned growth is?

Scott Sheldon: I'll take a stab at it and I'll probably take it back to Drew.

But if you look at the improvement in the operation, particularly just making sure the tails are ready, the start of the operation in the morning, we've seen over 1 point, probably 1.2% increase year-over-year. Some of the things we're really excited about is more on the predictive maintenance side. There's a lot more data than you can harvest off these planes. They start talking to you earlier. You can build in what would be kind of grounding or regular, all type events into scheduled maintenance events.

So, in theory, we should be able to support kind of whatever Drew would like to go do. Whether he -- how much he wants to start early and fly late is more kind of on the demand side. I think, in general, the more we expand the day, it definitely takes away from the time that mechanics can touch the planes at night. So, you probably looked at maybe some staffing constraints. We might have to increase some headcount just given the duration of which we can actually work on planes overnight.

Drew Wells: Yes. This is Drew. I would expect just kind of the -- your peakiest period, March and the summer, to be relatively close to where we're at today as we gain more aircraft and get back to kind of finally getting the same number of shelves, we had in 2018. You'll see a little bit of easing on that front. So, I think we're pretty close to peak of where we're at.

But you'll see, especially in the first week of April, a reduction in utilization. And you're still going to see that 4 to 5 hours in September. So, I expect more of the same this year with potentially a little bit of easing at the very top end.

Operator: Our next question is a follow-up from the line of Duane Pfennigwerth from Evercore.

Duane Pfennigwerth: So just a little bit of an accounting follow-up.

Your pretax income through the first half is up about 25%, yet your operating cash flow is down modestly. Can you just explain why that would be and when we should expect cash flow to grow more in line with earnings?

Gregory Anderson: I think probably the -- Duane, it's Greg. Probably the biggest driver in that operating cash flow would be our heavy maintenance. So, you're seeing some pressure on that side. For accounting purposes, although we capitalize that maintenance unit in the cash flow statement, you have to throw it in the cash flow from operations.

So, without diving into detail, at the top of my head, I think that might be one of the big driver of that.

Duane Pfennigwerth: So, would we round-trip that at some point? And you'd expect cash to grow with earnings growth?

Gregory Anderson: Yes. So, what we do is we try and pull that -- no, that's right. And what we do internally though -- I mean you have to, for GAAP purposes, report it as such with heavy maintenance in there. But when we think about it, we kind of pull that out and then we classify our heavy maintenance as CapEx so you could think about it from that perspective.

If you don't -- because when we report, we report heavy maintenance CapEx, you might be double-dipping.

Operator: Our next question is a follow-up from the line of Joseph DeNardi from Stifel.

Joseph DeNardi: Maury, when you guys report a 24% op margin on the airline, does that influence at all how you think about the need for Drew's team to push price? Does it create any less urgency to push yields? I mean is that a consideration for you or the team at all?

Maurice Gallagher: Well, on a theoretical basis, I'm interested in bottom line, which is to optimize price and load factor. And at certain points, you may push on one and not the other. The beauty of this airplane though, with more utilization, is you can take down some of your yield numbers and still get an accretive benefit to it.

So, Drew and team are working on that. We're figuring it out. As I said in my notes, in my comments, I'm not sure we're really comparative year-over-year this year, maybe more next year, back to this year. But it's a learning curve, and we feel pretty good on what they do. So, I wouldn't expect that we're giving up too much, if anything.

Joseph DeNardi: Yes. I guess what I'm trying to get at is if you're on track for a 20% plus margin for the year, is that too high where it attracts competition in some form and you actually want to grow into that? So, you're growing into the demand. And would you consider kind of more new airplanes given that, that seems to have been successful for you?

Maurice Gallagher: More new airplanes meaning brand new airplanes or just growing the fleet?

Joseph DeNardi: Yes.

Maurice Gallagher: Yes. We're not really looking at new airplanes, and that was a one-time transaction to serve two facilities for us.

One, it gave us airplanes when we needed them. And second, they were end-of-line types of offerings that we've struck a reasonable deal with Airbus on. But we've got B.J. here, and he's our hound dog, out looking for airplanes. And he's out there digging.

And we've got a lot of opportunities in spite of the MAX and things like that, I'm actually somewhat surprised that there is good aircraft available. Prices aren't optimal, but they're not that bad. So, we'll just continue to grow the way we are based on -- at a high level. Drew may come to us and say, "I can do more or less." But that's going to be on his comments back to the senior management. And well, one other comment to the 20%.

I'm not sure how we kind of dial that down. I'm not looking to dial it down for fear of people coming in. I think we have unique factors that allow us to be profitable that others can't do, not the least of which is we're really generating some great revenue. We haven't heard from Scott DeAngelo today. We're really starting to ramp up on the marketing side.

Some of the things that we -- frankly, we were order tickets in heretofore. We hung our shingle out and people came to us. Now we're really pushing the edge and doing things. And reputationally, we're moving up the ladder and we're starting to see people come to us and think about us and not just an afterthought or the last guy to fly. Perhaps, a -- some of the ULCCs might be.

But more -- that's my reliable airline. So, all in all, the whole -- the tone around here is just terrific. And we're really bringing a lot of tool sets to bear. And 24%, hopefully, we're going to stay at around 20%. We've said that for a long time, it's an ideal place for us to be.

If we're above it, and maybe some of that's fuel, and fuel comes and goes. But comparatively, we face competition all the time, but we're still 75% noncompetitive.

John Redmond: It all comes back to -- as you know, to the model, right? I mean the model is unique. No one else has it. We've always set higher margins than anyone else.

So, this is nothing new. You're just seeing a much higher because of aircraft and because of improved performance in the aircraft. So, between that and this amazing model we have, and we're starting to optimize even more, that's why there isn't a fear about people trying to match it, you can.

Maurice Gallagher: Well, the other thing, too, we're -- we've had our head down so much in the last 24 to 36 months as we transition. It's kind of like people are looking around for things to do.

So, the drill down is just getting more and more tight and granular as to what we can do to improve cost. Obviously, optimizing revenues and profitability. It's a nice place for us to be and we're excited about the -- go forward obviously with the airline in particular.

Operator: Our next question comes from the line of Catherine O'Brien from Goldman Sachs, a follow-up question. Catherine O'Brien: So maybe just one on the nonairline, really, a modeling clarification question.

I just want to make sure, the Teesnap nonairline impact is still baked into that player EPS. You've just pulled up a particular guidance item, is that right?

Drew Wells: Yes. That's right, Catie. Catherine O'Brien: Okay. Great.

And then I guess it's just one quick follow-up to that. I think last quarter you've got on and said you expected to see a narrowing of your nonairline losses as you got through the year. And I think the result was pretty similar to last quarter. I guess just any thoughts on what drove that? Or are you just expecting more of an improvement in the back half? That will be really helpful.

John Redmond: Well, again, Greg pretty much laid it out.

But we're not going to break out all the various components. I think we -- we've done a good job of transparency throughout the year on all these various airline and nonairline issues. But that's why we're not revising the range, it's because of the uncertainty of any kind of value realizes in conjunction with the sale. But it's something we've been looking at. But we're very comfortable.

We've given you some really good information about where we think the FECs will be next year. So that answers a lot of that question, and we gave you -- we haven't revised anything as it relates to Sunseeker. Sunseeker is going to be similar, of course, next year. Still preopening expenses without any revenue. And obviously, no change to that until we open.

And when we get into the Investor Day, November this year that Chris alluded to, we're going to give you a lot of detail around all the business lines that we'll have operating for 2020.

Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program over to Maurice Gallagher, Chairman and Chief Executive Officer, for any further remarks.

Maurice Gallagher: Thank you all very much. Appreciate your comments, and we'll see you in October.

Have a good day.

Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.