Good day, and thank you for standing by. Welcome to the Q3 2022 Allegiant Travel Company Earnings Conference Call. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Sherry Wilson. Please go ahead.

Thank you, Chris. Welcome to the Allegiant Travel Company's third quarter 2022 Earnings Call. On the call with me today are John Redmond, the company's Chief Executive Officer; Greg Anderson, President and Chief Financial Officer; Scott Sheldon, President and Chief Operating Officer; Scott DeAngelo, our EVP and Chief Marketing Officer; Drew Wells, our SVP of Revenue and Planning; and a handful of others to help answer questions. We will start the call with commentary and then open it up to questions. We ask that you please limit yourself to one question and one follow-up. 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 this earnings release as well as the rebroadcast of the call, feel free to visit the company's Investor Relations site at ir.allegiantair.com. With that, I'll turn it over to John.

Thank you very much, Sherry, and good afternoon, everyone. The quarter saw our airline operations getting back to more acceptable performance levels more in line with where we were in 2019 before the pandemic. The respective teams have done a lot of hard work getting to these levels, and the effort and results have continued into Q4. The revenue picture was also solid, with total average fare just shy of $126 and up 15.5% over Q3 of '19. Q4 should exceed Q4 '19 by a similar percentage, assuming no severe weather issues in the balance of the quarter. In this rising fare environment, we are uniquely positioned to not only capture customers trading down, but to continue to grow total average fare given the significant domestic average base fare gap between us and other carriers. With the exception of the other ULCCs, all other carriers' average base share is somewhere between 2 and almost four times higher than us. After adjusting for one-off items such as the Sunseeker Resorts special charge of $35 million, the employee recognition bonus of $9.3 million, and the $5 million loss on extinguishment of debt, the quarter was strong and encouraging going into Q4 and '23 as well. Turning to our balance sheet. One important point to make regarding our outstanding debt given the interest rate outlook is the fact that we are 83% fixed and only 17% floating. Our floating rate debt is all secured by aircraft and primarily shorter duration or less than 5-year maturities. All this debt is very flexible, prepayable, and refinanceable. Equally important, our current maturities are only 8% of our outstanding debt. In regards to Hurricane Ian, which struck on 928, we are currently operational at all Florida airports. Punta Gorda is the only airport shutdown post Ian, but flying resumed October 6. Our teams did a fantastic job relocating aircraft pre and post Ian, allowing us to become operational faster than expected. Even better, our traffic volumes returned to normal within 14 days of reopening. Southwest Florida is incredible, and the resilience never ceases to amaze and is further validation of the Sunseeker story. Sunseeker Resorts Charlotte Harbor survived Hurricane Ian, which some have referred to as the worst storm to hit the state, without any damage, except from falling cranes or unfinished parts of the building, which allowed water intrusion. We believe all storm damage to the resort is fully insured, including business interruption. The initial estimate of damage determined by the insurance carriers was $35 million, but this amount is subject to change after further assessment and understanding of impacted supply chains. We have estimated the opening of the resort to be delayed roughly 90 days. As a result, we've pushed the beginning reservation acceptance date or opening date from May 26 of '23 to September 1 of '23. Given all the IT system upgrades happening throughout the company and touching everything we do, we knew 2022 and '23 would be foundational years for our company and transformational at the same time. The effort put in by our team members has been nothing short of exceptional. This complete change out would take decades for some to achieve and never contemplated by others, but our team members will accomplish the impossible in 2 years. Certain upgrades will allow us to take full advantage of and more seamlessly integrate our Viva Aerobus partnership. While not a certainty, we believe all necessary approvals will be in place including Category 1 status in Mexico in the first half of '23. Our Viva Partners recently reported an outstanding Q3, extending their compelling growth story. Because of the upgrades, we will be able to take full advantage of the partnership and the opportunities it offers in conjunction with the necessary approvals. In the Q2 earnings call, I made reference to ongoing negotiations with our pilots. Maury is personally involved in those negotiations, and progress that is being made on a weekly basis. It's an arduous process that, frankly, takes longer than it should. We will get a deal done that works for both parties that recognizes the value and contributions of our pilots and the importance of maintaining our business model. We expect significant progress towards that end over the next couple of months. Thank you to our incredible team members for their passion and stamina you have shown not only in the quarter but throughout the year. And with that, I'll turn it over to Scott Sheldon.

Thank you, John, and good afternoon, everyone. Before I touch on third quarter results, I first want to say thank you from this management team and to all of our team members and partners throughout the network. Your efforts throughout the third quarter and particularly through the devastating hurricane that impacted Southwest Florida in late September were tremendous. Our ground maintenance and flight crew volunteers enabled a movement of nearly 25% of our fleet, countless passengers well in excess of 100 team and family members out of our Florida bases. My hat is off to you for an outstanding effort. A few quick comments on the operational environment before I touch on labor. We continue to see improvements in our operational performance on all fronts during the third quarter. It was a relatively clean quarter in that it wasn't solely dominated by labor and stability. As discussed on prior calls, our network is more complex and dispersed than it was in the third quarter of '19. Year over three year scheduled departures were up 8.4% and our crew base growth and aircraft growth of 21% and 31%, respectively. This month, we plan on opening our 24th crew base in Provo, Utah, up from 19 bases in 2019. The breadth of our operational footprint requires individual bases to operate as stand-alone franchises and to drive high completion factors and on-time performance; we needed to see some significant improvements in dispatch reliability and unplanned absentee trends. We remain cautiously optimistic, but we are seeing nice traction on both fronts. We ended the quarter with nearly 99.5% controllable completion and A14 production of just over 70% through the end of October. Uncontrollable factors, such as air traffic control staffing and flow control programs in Florida, will continue to be on-time performance headwinds, but we hope to see substantial reductions in our ops costs as we're moving into 2023. Moving on to pilots. We're happy to report we entered into our first exclusive pilot pathway program with Spartan College of Aeronautics in Denver, Colorado. This exclusive program to be branded Altitude will be a closed-loop partnership customized for prospective Allegiant pilots and is expected to produce upwards of 250 pilots annually as the program matures. Details in a formal joint announcement are still to come, but we are excited to secure a direct pipeline for our future growth needs. And the last thing I'd like to touch on is our efforts to ratify a new contract with our pilots. The ratified agreement is and continues to be our number one focus and is critical to the long-term success of the airline. As JR mentioned, our team, headed up by the old man himself, Maury Gallagher, continues to meet in person with the IBT and good progress has been made over the last three months. The rate environment continues to be incredibly volatile. And since January, we passed seven comprehensive proposals for IBT consideration. Our proposals touch on everything from rates, rate guarantees, retirement, scheduling, work rules, and quality of life enhancements, all of which directionally reflect other domestic air carrier CBAs that have been ratified since the beginning of the year. A newly ratified contract, coupled with the rollout of our altitude-pathway program, sets us up nicely for the introduction of our new Boeing fleet in the back half of the year and into 2024. Hope to have something to report in the not-too-distant future. And with that, I'll turn it over to Scott DeAngelo.

Thanks, Scott. Q3 saw sustained strong leisure travel demand for Allegiant across both web traffic to allegiant.com and passenger segments booked. Just as we saw during the pandemic and as we're seeing again in the face of negative economic factors threatening to impact consumer discretionary spending, our direct-to-consumer distribution approach gives us an advantage by enabling us to stay close to our customers and engage with them in ongoing two-way communication to ensure that the Allegiant brand is top of mind at addressing the two most important buying factors for leisure travelers, low fares and nonstop flights. During the current economic climate, we're seeing our brand proposition, which we positioned as living the nonstop life to affordable, accessible leisure travel, resonate more than ever to attract new customers and retain existing ones. Year-to-date, total visitation to our website remains up by nearly 30% versus 2019 and new first-time visitors are up by nearly 50% versus 2019. In addition, the number of new customers booking their first Allegiant flight is up by nearly 25% versus 2019 levels. We also continue to see the strong positive impact to leisure travel from the unprecedented number of baby boomers who retired the past two years and now have the discretionary time to travel more. Year-to-date, the number of new Allegiant customers age 60 or older is up by more than 60% versus 2019 levels. As I referenced last quarter, our addressable customer audience continues to grow as more new customers consider Allegiant for their leisure travel needs. They're seeking relief from sky-high fares, as well as avoiding the risk, inconvenience, and time associated with connecting flights through crowded airport hubs. This past week, in a survey of customers who flew with Allegiant this year, we asked them whether economic considerations, such as inflation, gas prices, and recession fears would make them more or less likely to consider flying with Allegiant again in the next 12 months. Among those customers who have traditionally flown most often with Southwest, Delta, American, or United, more than 40% said they are more likely to consider flying with Allegiant in light of these economic concerns. In particular, for those customers who said they have traditionally flown most often with American or United, nearly 50% said they were more likely to consider flying with Allegiant this upcoming year. Also noteworthy coming out of this survey was getting a deeper understanding into the reasons for travel among Allegiant customers in 2022 to date. About 15% are flying for combined work and leisure, representing the first time leasing and material segment of our customer base in this growing 'bleisure' category. Also, nearly 60% of leisure-only Allegiant customers are flying to visit family and friends. And as we've noted in the past, 15% to 20%, depending on the season, are flying to a second or vacation home. Each of these customer travel occasion types represent what we believe to be the most resilient forms of leisure travel during economic downturns. And to that point, looking forward, web searches for flights during virtually all upcoming weeks of travel through March of next year remain between 10% to 40% above last year's flight search levels at the same time. Beyond the growth of new customers to Allegiant, we're also retaining customers and growing customer value at our greatest levels ever, thanks to our award-winning loyalty program. USA TODAY Readers' Choice awarded Best Airline credit card to the Always Allegiant World MasterCard for the fourth consecutive year, and in its inaugural year, Always Rewards also claimed the top spot as best frequent flyer program in the nation. The Always Allegiant World MasterCard continues to post record-setting months in terms of new card sign-ups, average spend on card, and total compensation to Allegiant. Most notably, however, may be that above and beyond the program's third-party revenue and profit stream, our cardholder base of nearly 400,000 currently drives about 15% of our total air and air ancillary revenue, and the level of spend by this group on air and air ancillary has grown by more than 350% since 2019. Similarly, our Always Rewards program has about 3 million active members who account for about two-thirds of our total air and air ancillary revenue. And one year into its existence, we're already seeing these members spending 34% more on average per itinerary booked and booking 28% more frequently on average compared to non-members. Having the vast majority of our revenue linked to customers in our loyalty program is not only positive in terms of retaining these customers in this revenue, but also helps to motivate these customers to attach air ancillary and third-party products, such as hotel and rental card at a greater rate. In closing, we believe Allegiant's unique brand of low fares and nonstop flights remains a compelling distinctive value proposition, especially in these uncertain economic times that is attracting new and returning customers alike in record numbers who are engaging with our popular loyalty programs and making Allegiant their airline of choice. And with that, I'll turn it over to Drew.

Thank you, Scott, and thanks, everyone, for joining us this afternoon. Third quarter revenue was tracking nicely to come in a bit above the original guidance of plus 29% versus the third quarter of 2019. However, due to Hurricane Ian, we lost approximately $3.5 million in revenue to finish with total revenue up plus 28.4%. Similarly, we lost one point of scheduled service capacity to finish at plus 17%. The resulting 12.60 TRASM in the quarter is the best third quarter since 2008. Perhaps most importantly, through an immense amount of communication and collaboration, the planning and operational groups have done an incredible job balancing the needs across the enterprise to set the operation up for success, and we're excited about the improvements we've seen on that front. There are generally three distinct pre-hurricane periods to the third quarter. The peak summer weeks were marked with lower growth and strong demand that was strong unitized metrics. The ensuing four weeks saw roughly 45% ASM growth and high rates of cash positive line. And while unit revenues were relatively challenged due to the growth, they were still positive. The rest of the quarter until the hurricane was likely the start of the quarter based on relative outperformance. While ASM growth was elevated between 25% and 30%, TRASM growth still performed in the double digits, and September load factors were the highest since 2011. We long theorized the changing dynamics of leisure and hybrid travel should lift the floor on September and other off-peak periods, and we're pleased with how that has manifested through the first trial. Scott touched on the emerging significance of hybrid travel to our business, and everyone around this table believes in the structural shift of both how travel is valued as a life experience, but also how our business model measures so well with that shift. Despite the relative September strength, the growth cadence in the quarter was still a unit revenue headwind. If weekly ASM growth through the quarter was the same as the average peak summer growth rate, we'd have expected to perform about 5.5 points better on a year-over three-year basis. With the unbundled approach to itineraries that we employ, we tried to balance the approach to maximizing total revenue per flight, generally ensuring that we are capturing the ancillary piece where inventory allows and pushing yields where demand is the greatest. As a part of this balance, we accomplished monthly record total revenue per passenger in both September and October on top of load factors we hadn't seen since the early part of the last decade. The step-up in ancillary per passenger during the third quarter was essentially in line with the second quarter at plus 17.9%, again, driven by success with our bundled ancillary products and the Always Allegiant World MasterCard program. And the fourth quarter should end at approximately $70 per passenger. While we won't see much incremental upside in this quarter, we will begin to adopt new-to-us Airbus aircraft and the 180-seat Allegiant Extra layout this month, gaining three tails by quarter's end and two more shortly after the new year. Throughout 2022, Allegiant Extra returns on the four initial aircraft currently in service continued to widen the gap on both the required hurdle rate for positive contribution and the performance versus previous years. We are ecstatic to make this available to more customers in the coming quarters. Zooming out a little bit, we expect total revenue for the fourth quarter to be up between 26.5% and 28.5% year-over three-year with scheduled service capacity up 15%, implying mild sequential TRASM acceleration at the midpoint. And while ASM growth is a bit flatter throughout the fourth quarter versus the third, two primary headwinds remain, 3% due to Hurricane and roughly 1 point due to incremental off-peak days and holiday timing. However, despite these headwinds, the fourth quarter will vie for the highest TRASM of any quarter in Allegiant history. And with that, I'd like to turn it over to Greg.

Drew, thank you, and we appreciate everyone joining us today. And of course, a special thanks to Team Allegiant. We are extremely proud of the amazing work you continue to accomplish. So operational stability has been one of our top priorities and third quarter results did not disappoint. Controllable completion for the quarter of 99.4% was 2.1% higher than the first half of 2022 and very much trending in the right direction. However, as we were closing out the quarter, we experienced an uncontrollable disruption as Hurricane Ian ripped through Florida. First and foremost, our heartfelt thoughts are with those impacted by the storm. As announced earlier this week, we deepened our partnership with the Red Cross to support the recovery and rebuilding of this area. When Ian made landfall in Southwest Florida, it devastated the surrounding areas, including the Port Charlotte and Punta Gorda area. This hit home for us, in many ways, as Punta Gorda is one of our largest aircraft bases and Port Charlotte is home to our Sunseeker Resort. Over 550 Allegiant and Sunseeker team members live in and around the surrounding areas. We are grateful to report that all of our team members were safe and accounted for, although the recovery for many of them continues. We estimate the hurricane headwind to our operating margin to be 1 point and 3 points in the third and fourth quarters, respectively. And regarding the damage to the resort, we still have limited information, but preliminary estimates suggest approximately $35 million of physical damage primarily caused by subcontractor cranes hitting the building. We believe we have ample insurance to cover these estimated damages. And from an accounting perspective, GAAP required us to record a preliminary loss estimate of the $35 million, which will be offset in subsequent quarters as insurance proceeds are collected. So if we exclude this $35 million, our adjusted operating income for the third quarter was $13.5 million, a 2.4% margin. And prior to Hurricane Ian, and as Drew explained, revenue for the quarter was on pace to exceed our initial expectations. Absolute costs were down 8% from the prior quarter aided by a reduction in fuel costs, and our third quarter fuel cost per gallon of $3.85 was generally in line with our initial guide. Our unitized costs, excluding fuel recognition grant and that $35 million Hurricane Ian special charge, came in at $0.0761, up 13.9% versus the same period in 2019 on 14.5% ASM growth. And this increase was largely driven by 4 points of labor productivity, 3 points of inflation, and 4 points of aircraft utilization. Aircraft utilization as measured by block hours per day was 6.4 hours per day during the third quarter, in comparison to 7.4 hours during the same period in 2019. We estimate that a 1-hour increase in utilization per aircraft per day would have reduced our unit costs by $0.005. Turning to the fourth quarter. Our guidance issued today suggests an adjusted operating margin of 8% for the fourth quarter, representing a meaningful improvement sequentially, and this assumes an average of $3.75 per gallon of fuel. Based on system ASM growth of 13.5%, we expect CASM-X for the quarter to be up 14% year-over-three. This increase is summarized as follows: 1, inflationary pressures at our airports and service provider is roughly 4 points; 2, lower aircraft utilization should drive roughly 4 points; and 3, lower labor productivity should result in another 2 points of this increase. As we look towards 2023, uncertainty remains around fuel price levels, supply chain and OEM delays, and pilot constraints. As such, we are not prepared to share specifics on our '23 budget plans, but we'll provide some high-level thoughts. Overall, our 2023 priority is to continue improving margins, which we have line of sight on. A couple of important steps in helping us get there are, first, operational stability, which is not only paramount for our team members and our guests, but will also improve financial results. This is underscored by our year-to-date spend in total IROPs, which is $60 million more than all of 2019. In addition, we are seeing improved reliability that has naturally helped with crew stability by reducing the number of unplanned absences and sick calls. Second, securing labor contracts. We are in active contract negotiations with our pilot and flight attendant groups. We have terrific crew members, improving communication, upgrading systems, and getting a new contract they deserve as our top priority. While these new deals should have a headwind to absolute costs, we expect them to increase the momentum in achieving staffing levels and restoring our ability to optimize aircraft productivity. Speaking of aircraft, our internal teams continue to pace nicely with our plans for being ready to take delivery of our 737 MAX aircraft order. We are excited to bring on the MAX aircraft, particularly as we believe they will bring a 30% earnings advantage compared to our A320 COs. However, the delivery timing from Boeing is pushed to the right a few months. We actually only expect three of the aircraft next year, with the first one now not expected until October of 2023. With that backdrop, we want to reaffirm our current plan of 2023 ASM growth to be around 10%. This in no way suggests demand is weak. In fact, we continue to see very strong demand. However, we will continue to keep a close eye on the consumer as the Fed is still far off of achieving its target goal of 2% inflation and is raising interest rates at unprecedented speed, which leads into some recent debt transactions that have greatly derisked our capital stack. During the third quarter, we carefully timed the market by extending our $533 million term loan maturity from 1 year out to 5 years. This was with the $550 million secured bond offering. That offering was six times oversubscribed and priced at a fixed rate of 7.25%. Interest to be paid on the new bond is expected to be less than the pre-existing loan given the high rising rate environment. In addition, as part of this transaction, we secured a $75 million revolving credit facility with Barclays. As such, we expect to end the year with $1.2 billion in total liquidity, inclusive of cash on hand and undrawn revolvers. This is more than 2x our liquidity on hand prior to the pandemic. Total debt inclusive of finance leases is expected to end 2022 at roughly $2 billion, which implies $1 billion of net debt. Last month, we drew our final tranche from our $350 million loan with Castle Lake II Fund Sunseeker, and that's at a fixed interest rate of 5.75%. Also during the quarter, we secured $200 million in financing for our upcoming PDP commitments with Boeing. We were really pleased to find stand-alone PDP financing, which didn't require long-term financing commitments for any aircraft. This will provide us with tremendous flexibility in managing the balance sheet as we take delivery of those aircraft in '23 and '24, while also navigating the interest rate environment. We are fortunate to have a fleet plan with tremendous flexibility. In the event of extended delays in the delivery of our 737 MAX order book, we could adjust the timing of our A320 retirements and/or take additional aircraft in the used market to meet our network requirements. In addition, we have valuable options for up to 50 additional 737 MAX aircraft for delivery between 2025 and 2028. As mentioned last quarter, we decided to hold 3 aircraft in storage this year and place them into service in the first half of 2023. This change means we will end 2022 with 123 aircraft in service. And with that, we'll take your questions.

Thank you. Good afternoon, everyone. I'm curious if you could share any insights on whether your crew levels and attrition levels are improving. As you consider 2023, do you anticipate an improvement, and to what extent will that be impacted by the need to hire and train before the MAX aircraft joins the fleet?

Savi, this is Sheldon. I appreciate the question. Yes, there are certain months definitely throughout '22 where we saw first officer attrition specifically reached 30% on an annual basis. If you look at the complement of pilots throughout the system, it's running about 15%. We've put in more than 350 folks through the school, the schoolhouse this year. If you look at the net seniority list increase, we're up about 135 folks. So that's a lot of sort of thrash in order to sort of obviously get ready for the introduction of the Boeing fleet. That being said, with the launch of a pilot program, and more importantly, we got to get a deal done. At the end of the day, our rates are so far underwater. I think directionally, we know where the contract needs to be and we're just plowing through it as quickly as we can. So I think aspirationally, we want to have classes of 25 each month, which should more than offset any sort of attrition. But that's sort of how we're looking at modeling this into '23.

And Savi, it's Greg. On your question around the cost headwinds from incorporating the MAX aircraft, where we're looking at today, 2023, we'd expect that to be roughly $0.05 of CASM-X headwind. '24, I think where we hit the top there would be about $0.10 of CASM-X.

That's super helpful. Thanks for all that color. If I might, on the fuel efficiency side, it seems like the seal efficiency of the Airbus fleet hasn't really been showing up. Wondering if you could just provide a little bit more color and what the trend there might be.

Sure, Savi, it's Greg. Let me address that. Overall, we aim for the fuel efficiency of the A320 fleet to be about 86 ASMs per gallon. This varies seasonally, so by quarter. Typically, the third quarter is the hottest, making it the least efficient quarter in terms of ASMs per gallon. I expect we'll finish the year around 84 ASMs per gallon and anticipate a slight improvement next year in 2023. Regarding the Boeing aircraft, there’s a mix in the fleet between the 7 and the 8200s, averaging about 110 ASMs per gallon. I hope to see us get closer to 90 ASMs per gallon in 2024 and surpass 90 ASMs per gallon by 2025.

Got it. Thank you.

Thank you. Our next question comes from the line of Duane Pfennigwerth at Evercore ISI. Your line is open.

Hey, thank you for the time. So your guidance implies some sequential improvement in margins from 3Q to 4Q. Honestly, we haven't had a lot of time to dissect the special bonuses, the debt charge, the hurricane charge. But it looks like ex all of that, you still lost some money, which is historically unusual for Allegiant. What would you point to as the biggest drivers of your loss in 3Q? And what are the fundamental reasons you see margins getting better? Is this really about like we're going to be chugging along here at similar levels until you guys have more confidence in your ability to flex up in the peaks? And I'd love your comments on if you think that confidence is increasing yet.

Thank you for the question, Duane. It's Greg. I'll start here, and I'm sure others will want to add their thoughts. Regarding the improvement in margins, the fourth quarter tends to be stronger than the third quarter on a seasonal basis, which should positively impact revenue. We anticipate several supportive factors, including enhanced operational reliability; we performed well in the third quarter, and this trend is improving further into the fourth quarter. However, we do face some challenges, such as the lasting effects of Hurricane Ian and rising operating costs related to Sunseeker as we approach its opening. When we think about optimizing aircraft utilization, it's important to note that while Scott mentioned a focus on labor, the improvements in operational reliability have also led to fewer unexpected crew absences and sick days. This stability means we can better increase utilization during peak times. As you're aware, Duane, we've capped our peak periods this year, which has made it harder to achieve our usual results. In March and the summer months, we typically earn 60% of our revenue during these peak times. With the cap in place, it's been a challenge, but we believe we have a clear path to getting back on track. Operational stability is our first priority, and we will work to gradually enhance utilization at the right time. I'll stop here; did that clarify things for you, Duane? Did I miss anything?

I appreciate those thoughts. And then just on CapEx, I think we can back into the remaining spend on Sunseeker next year from the disclosure that you have. Can you just remind us, total aircraft CapEx and maintenance-related CapEx you'd expect next year?

Duane, it's Greg. That's a great question. I want to mention that the situation is fluid right now due to the uncertainty surrounding MAX deliveries, not just for 2023 but also for the overall order, particularly regarding PDP payments. As it stands, I believe our capital expenditures for next year should be at least $500 million. I anticipate that we'll finish this year with $350 million for the airline, so for next year, it will be at least $500 million. I’d like to invite BJ to provide more insights on this matter, as he has done an excellent job ensuring we have the right financing in place to support it. BJ, do you have anything to add?

Maybe just Duane, the moving parts are, of course, the actual deliveries of Boeing airplanes, like Greg mentioned, the 2024 schedule will impact PET CapEx in '23. There's a couple of other things in there, whether or not those first deliveries or those early deliveries in 24 end up being MAX 7s or MAX 8s. Finally, just movement in the used A320 acquisitions that we may need to bridge that gap.

Okay. Thank you very much.

Thanks, Duane.

Thank you. Our next question comes from the line of Michael Linenberg from Deutsche Bank. Your line is now open.

Good afternoon, everyone. Greg, I want to go back to the 8% adjusted operating margin that you sort of threw out earlier on the call. Is that incorporating like the 3 points from Ian? So we should be thinking more like a 5-point margin, 5% margin ex-Ian? Or are you rolling that through? And then also just the employee recognition piece, I know you called it out as a special for the last 2 quarters. Is that going to feature as a cost item in the fourth quarter because I know you don't include it in CASM? So we're just trying to get to that 8%. Any color?

For the fourth quarter, I'd say the adjusted op margin of 8% will exclude that recognition or the bulk of that recognition bonus. And I'll tell you here why in one second, Michael, but it would include the impact from Hurricane Ian. So save the Hurricane Ian, it would be 11%, if that makes sense. The reason we excluded this year the recognition bonus is we've had a policy for many, many years to - you'd have to achieve a 5% operating margin before we started accruing a bonus profit-sharing for our team members. Given this unique environment from labor across all of our team members, and they're just going above and beyond, we wanted to make sure that we did the right thing, and we approved and had bonuses ready for them irrespective of where our profit came in or lack thereof. What I would say is next year, we're going to pull that out. So next year when we expect to be back to earnings again and providing profits, we're not going to peg it to a recognition brand. It's going to be based on profitability, and we would not exclude that in CASM-X.

Okay, that helps. And then just a quick question for Drew about capacity in the fourth quarter. You mentioned 15%. I think the schedules are still indicating a bit higher than that. So I guess we should assume that we're going to see some additional cuts through more filing schedules over the next month or so. Is that accurate?

I think essentially we just need to file the changes that have been made. Things that happened around Ian will never be reflected in the public sources because they were so close in. So we took an impact there. I think we're scheduled - and I thought we were going to do this last weekend. I think a new filing is coming soon. The deal will remain or public forums will remain slightly elevated just due to those closing cancels associated with EM.

Fair enough. Okay, thanks. Thanks, everyone for answering my question.

Thank you. Our next question comes from the line of Scott Group at Wolfe Research. Your line is now open.

Hey, thanks. Good afternoon. So I want to see if you have any thoughts on CASM next year. So if ASMs are up about 10%, it sounds like maybe you'll be expensing the employee recognition, maybe you get a new pilot deal. How are you thinking about CASM-X next year? Do you think it can be down on a year-over-year basis? Any directional color?

Greg here. We are currently in the budgeting phase for 2023, so I want to be cautious about providing specifics on our expectations for CASM-X. You mentioned the 10% ASM growth, which we also anticipate will be stronger in the latter half of 2023, while the first half will likely see limited or flat ASM growth. One positive factor for 2023 compared to 2022 is the reduction in IROPs, which should help unit costs. However, there are some challenges, such as the impact of incorporating Boeing aircraft, which adds about a $0.05 CASM-X headwind. We're increasing FTEs, except for pilots, to support a larger infrastructure. A year ago, we projected that by 2023, we would be 20% larger than we are now, but we do have the infrastructure ready. As we start to ease operations and bring in pilots, we should be able to enhance utilization and growth. We're prepared for growth, but I wouldn't expect it to start until the latter part of 2023, which depends on finalizing a labor deal. The information I've shared here does not take a pilot deal into account. Internally, we are building these expectations into our forecasts, but I prefer not to release specific numbers publicly.

And so I know you're guiding to margin improvement next year, and just it feels like double-digit margin is tough to get to, but let me know if you think differently. What is the path to getting back to double-digit operating margin, which you guys consistently used to have? How do we get there?

Yes, that's a great question. Let me start by emphasizing operational stability and eliminating IROP, which has to be removed from the business. We expect an additional $60 million in IROP costs this year compared to 2019. Operational stability allows us to maintain crew stability, enabling us to increase flights during peak periods, which is the most profitable time for us. Additionally, finalizing labor agreements will aid in utilization and growth. Regarding aircraft, if we look at 2019, we talked about EBITDA per aircraft being $6 million per shell. The 320 with 186 seats or even the 320 set for Allegiant Extra has an earnings potential of $7 million of EBITDA each. We believe that adding these aircraft, along with the 30% economic advantage of the Boeing planes, will be crucial. We're also focused on cost discipline; austerity is a major theme for Allegiant this year as we work to eliminate unnecessary expenses while supporting future opportunities. I'll pause here and see if Drew or Scott would like to elaborate on some of the commercial initiatives, like systems such as Navitaire or Viva, that we believe can significantly enhance earnings potential, improve margins, and foster loyalty. Would anyone else like to contribute?

I think you covered quite a bit.

I think I probably took too much time and answered for everybody, so I apologize. But yes, I think that covered kind of where we wanted to hit.

Thank you. Our next question comes from the line of Andrew Didora from Bank of America. Your line is now open.

Good afternoon, everyone. John or Greg, I know in the release, you highlighted the removal of the suspension on the existing buyback. Obviously, all the government restrictions were lifted at the end of September. Just curious how do you think about capital allocation today, now that these restrictions have been lifted? Would you consider buying back stock before, say, getting a new pilot deal? Just curious of your thoughts there.

We're not going to try to predict timing in that regard. I think our Board wanted to make sure that the capital allocation strategies we had in the past, we opened those back up as soon as we are able to do that, which is why they lifted the restriction that we put in place due to the Cares Act. So now we no longer have that restriction, if you will. So we do have the flexibility to do what we historically have done in the past going forward, trying to predict timing. We're not going to try to do that here. But it is nice to have those restrictions gone.

Understood. And maybe for Scott DeAngelo or Drew. Look, I think a lot of your ULCC peers have some pretty aggressive goals for their non-ticket revenues over the next few years. Just curious what do you think your opportunity is for non-ticket? And how do you think about the trade-off between ticket and non-ticket? Thanks.

I'll start here, this is Drew. In our previous call, we mentioned that an additional $10 revenue over the next five years is very achievable. I still hold that view strongly. There are several initiatives, including the one Greg hinted at with Navitaire, that will enhance our ancillary capabilities, which we haven't had before in Allegiant's history. This will give us greater flexibility in managing our ancillary program. We've been making progress, particularly with seats, but we've faced limitations in areas like baggage due to our own constraints, and we see significant potential to improve there. I'm optimistic about this. Allegiant Extra was also talked about, which will contribute significantly to our seating revenue. Greg noted that we could potentially increase EBITDA for the A320s to $7 million each if we can achieve some of the operational levels we had in 2019. Beyond that, I'll pass it to Scott; he can share more about the co-branded opportunities and other third-party initiatives he's working on.

Yes, that's exactly what I would like to add, and thank you for the question. The next point, as Maury would say if he were here, is about selling beyond just the aircraft. Even with capacity challenges, part of the IT transformation that John mentioned involves expanding our hotel inventory beyond just Las Vegas, where we have traditionally performed well. It also aims to simplify the process of purchasing and adding hotels and rental cars to compete with leading online travel agencies, which we currently do not offer but will soon. I believe this additional sales capability for hotels and rental cars, along with what Drew mentioned, will help us achieve greater revenue growth.

I think maybe just in closing, the idea is not to just focus on ancillary as the opportunity but base fare as well. So everyone can deploy a different strategy, if you will, on getting to a larger total average fare. But as we get there, it's not strictly a focus on ancillary but a focus on base as well.

Thanks, everyone.

Thank you. Our next question comes from the line of Daniel McKenzie of Seaport Global. Your line is now open.

Hey. Thanks, guys. A couple of questions here. Just following up on an earlier question on CASM-X for next year, should we be including the upfront Sunseeker cost in that cost outlook? The reason I ask is just because there's no real offsetting revenue until that opens, I guess, now September 1. Or I guess maybe if you can provide some perspective on at least how you're initially thinking to report that. More broadly, just going on this point of expanding margins for next year, I'm just wondering if you can elaborate on that. What kind of economic scenario does that contemplate? I think Bloomberg has said there's 100% probably a recession. I think the market is assuming 60%. So if you can just elaborate a little bit more on those topics, that would be great.

It's Greg. I'll start by addressing both points. Regarding your comment about Sunseeker, we will be segmenting reports next year, breaking everything out so you can see it separately. We're planning to begin that in 2023. As we consider the upcoming year, particularly in light of a potential recession, our focus remains on leisure customers, who historically have proven to be a more loyal customer base. Scott DeAngelo mentioned in his opening remarks that 80% of our customer base is made up of visiting friends and relatives and second home owners, which we believe represents an even more committed segment of leisure customers. We're aiming for growth of up to 10% next year, with plans to achieve that in our existing markets, effectively minimizing the risks associated with that growth. Our flexible model, combined with our distribution network, positions us well. Overall, although capacity is somewhat constrained and GDP is growing faster than 2019—more so than the industry in general—we believe that even if a recession occurs and consumers face some challenges, we can continue to drive demand effectively. We feel that we are well positioned, if not better positioned than most other carriers, considering our unique advantages.

Dan, maybe just to elaborate a little bit on the Sunseeker piece you asked about. The expense you'll see we're incurring now, and you'll see next year is primarily all preopening, right? So next year, we'll blow out all the remaining part of that leading up to the opening of the resort. Most of that will skew in Q3 of '23. So we'll have it, of course, in the first two quarters, but most will skew into '23. We’ll share with you what that number is in Q4 when we finish the quarter. We'll break it out and let you know what that number is, and then give you some thoughts as to what the order of magnitude is for all of '23. The other thing, of course, that will impact that is just the delayed opening. Preopening is larger just due to the delay. But having said that, we would expect to recover some of that through insurance as well. So a lot more guidance you would, if you will, on that we'll share with you after Q4.

Second question here for, I guess, Scott DeAngelo. Total visitation to the website was up 30% versus '19. To what extent is this data feeding into your revenue management systems or at least informing how the revenue management system should work? Is the reference to the up 30% versus 2019 and kind of the second part of this question, is that our best indicator of pent-up demand as we think about the 2023 revenue picture? Or does it really more reflect the structural change in demand? So kind of a two-part question.

You bet. So we'll take the second part first, and it's the latter. We think it's structural demand. I commented versus 2019 just to keep it consistent, but I'm happy to share our total web users were up by 34% versus last year. So you actually see it gaining steam. So that suggests structural, as Drew had mentioned. On the first question, marketing and the revenue management and network planning teams do work extremely close, especially as you think about off-peak being able to grab some of what we might not be able to grab on peaking the peaks, as it were. When we drive those users and where we're driving them from market-wise, it's something we do in lockstep with network planning and revenue to make sure those users are coming at the right time and wanting to fly from and to the right places.

Maybe just - this is Drew here. just expand slightly on the actual RM model. It's probably more art than science. It's integrated into the model, but not in a way that's driving significant automated changes or recommendations at this point. It still falls on the analysts to interpret and react accordingly.

Yeah, understood. Okay. Thanks for the time, guys.

Thanks, Dan.

Thank you. Our next question comes from the line of Conor Cunningham from Melius Research. Your line is now open.

Hey, everyone. Thank you. Just on the 10% capacity growth, it seems like you're sizing that to your resources that you have right now, but there's still a lot of issues in terms of aviation infrastructure, ATC being a major problem. Just curious on how you plan on navigating a lot of those issues outside of your control next year.

Sure. As we look at next year and really using '22 as the baseline, ATC has certainly caused some A14 issues. I wouldn't call it anything major after probably the first quarter of the year; we struggled a little bit through March. It didn't really feel a material impact through the summer outside, as like I mentioned, some A14. Not a lot of cancels being driven by that. So at this point, we're not restructuring our network plans or our schedule around that. I think a similar story on TSA and other infrastructure issues. There's probably one-offs that get pointed to. But at this juncture, I would not plan on material changes to our plan in 2022 based on infrastructure that you're referring to.

Okay. And then just the changing dynamics from the flexibility. You talked about a little bit in the press release from a monthly standpoint. But some of the other airlines have talked about like day of weeks changing a fair bit. When I think about you guys, like you barely fly on Tuesdays and Saturdays. I'm just curious on how that trend may be changing or how you're looking at that trend now going forward and seeing if you're making any adjustments to your model as a result of it? Thank you.

No, I think you hit the nail on the head that we don't have a ton of exposure to markets that are beyond two and three times per week. Where we are running six or more times a week, we certainly have seen some of that same shift to where Wednesdays, primarily Wednesdays would come up a bit more toward the week average. Tuesday is still lagging a little bit behind that. I don't think it necessarily changes our philosophy at all. We've had the compressed schedules even on larger markets a little bit given the constraints we have in place. We'd love to be able to restore that and take better advantage. We would be doing that with or without the results that we've been seeing, I believe. So seeing what you're indicating, but it's not something that needs to change our approach in my opinion. I think the other part worth mentioning, and this came up just the other day. As you think about load factors exceeding our 90% booked, that kind of implies more than just your peak patterns that are booking, right? So instead of just a heavy Friday to Monday, or Thursday to Sunday weekend pattern coming into the destination, you're also experiencing those going out of the destination as well as covering kind of the midweek type of travel. So that's more of how we'll see the dynamic shift and how you need to adjust in order to facilitate booking load factors at those levels.

Okay. Thank you.

Thank you. Our next question comes from Christopher Stathoulopoulos from Susquehanna International Group.

Thank you. Good afternoon, everyone. So John, on the 10% ASM growth for next year, what is your risk-adjusted view on the order book? Meaning you're contracted to receive ex-aircraft, but you're expecting a minimum of, let's say, Y? And then on the 10%, could you give us some color on the moving pieces there, how much you're expecting to come from departures, gauge, and stage. Thank you.

Well, I'll let Greg or BJ talk about some of the more those details. But at the end of the day, we have an agreement in place with Boeing. We're not going to renegotiate, if you will, over the phone. As we come into more information through conversation with Boeing, we will react in a way that makes sense for Allegiant, but we're just going to stay tuned and see what happens. Right now, there's nothing really to add beyond what Greg and BJ mentioned about the 23 deliveries that we expect. But go into other detail that you're talking about?

Sure, Chris. Regarding the 10% growth, Drew can check this, but the departures are expected to lag behind the ASM growth by a point or two. We'll assess that as we move into next year. To John's point about Boeing deliveries, we anticipate they will primarily occur in the latter half of next year. We're eager to receive these aircraft; our team is fully dedicated to this effort. As I mentioned, these aircraft offer a 30% earnings advantage. In terms of bonus depreciation, we have 100% for 2023, which will decrease to 80% in 2024 and then to 60% in 2025. This is beneficial for us in offsetting cash taxes and influences our decision-making. We want to bring these aircraft in, as they are crucial, especially in a high fuel cost scenario for us. We're planning and preparing while remaining flexible for when that opportunity arises. BJ, please let me know if there's anything I missed or if you want to add something.

Yes, just to your question on contractual deliveries and expected deliveries. So we're contracted to take originally 10 aircraft during 2023. We had mutually agreed to reduce that to 8 aircraft shortly after signing the agreement. That was for some operational reasons to help us with onboarding the airplane type. Then we've now received notice from Boeing that it will only be 3 aircraft delivered in 2023, and we're still working with them to determine when the 5 airplanes that fell out of '23 will deliver. To Greg's point, we want to be made whole on that. There are a lot of things we were counting on with those, but we're not sure they're going to fit into 2024. So we'll have to update that maybe on the next call.

Okay. And Greg, on the CASM-X breakout for 4Q, how much of the 10 points that you outlined do you see carrying over into 2023? And then also, I believe you suggested in response to Scott's CASM-X question that you were anticipating some CASM-X relief in the second half, which sounds like just a function of where your capacity is expected to be plus these 3 aircraft. Is that the case? And then B, is that including a labor deal in that scenario? Thank you.

That does not include a labor deal. However, I believe that finalizing a labor deal will provide us with an opportunity to increase or optimize aircraft utilization, which is quite significant. In my earlier comments, I mentioned that each additional hour of utilization per aircraft per day could contribute approximately $0.05 to CASM-X. This could offer us a notable advantage. Regarding your question about the comparison of fourth-quarter costs to next year, there will be a headwind in unit costs due to our bonus accrual. We are excluding it this year but will add it back next year, which will be a challenge. Additionally, some of our unit costs are seasonal, influenced by available seat miles (ASMs). Typically, we'll have more ASMs in the first quarter compared to the fourth quarter, so that needs to be considered too. However, I'll pause here to avoid going into too much detail and providing guidance prematurely since we're still finalizing the budget, and I want to respect that process.

Okay. Just the integration from Boeing, did you say that was $0.5 or $0.05? Thank you.

$0.05 of CASM-X. And then that's added in by 24 at a mature $0.10 of CASM-X.

Okay. Thank you.

I would now like to turn it back to John Redmond, CEO, for closing remarks.

Well, we appreciate the questions.