Allegiant Travel CO Q2 FY2023 Earnings Call

Thank you, Michelle. Welcome to the Allegiant Travel Company's Second Quarter 2023 Earnings Call. On the call with me today are John Redmond, the company's Chief Executive Officer; Greg Anderson, President; Scott DeAngelo, our EVP and Chief Marketing Officer; Drew Wells, our SVP and Chief Revenue Officer; Robert Neal, SVP and Chief Financial Officer 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 plans. 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, please feel free to visit the company's Investor Relations site at ir.allegiantair.com. And with that, I'll turn it over to John.

Thank you very much, Sherry, and good morning, everyone. I'm thrilled to report an 18% operating margin and 99.7% controllable completion for the second quarter, among the highest in the industry during the quarter, both operationally and financially. In the face of high demand and operational complexity, the team continues to deliver. It is their exceptional efforts that have allowed us to meet and exceed our customers' expectations. Over the last year, we have increased our NPS scores by an average of 10 points and are now at the highest scores since the pandemic. I could not be prouder of the work our team members do each and every day. Thank you very much for your continued passion and dedication. Our commitment to enhancing the travel experience remains a key driver of our success. Over the years, we have invested in our services and our brand, ensuring we not only meet the evolving needs of our customers but also create new opportunities for growth and expansion. One area that continues to pay dividends is our co-branded credit card. With over 600,000 credit cards issued, the program continues to surpass expectations. Cardholder spend has increased by 220% since 2019 and shows no signs of slowing. We believe the opening of Sunseeker Resort later this year will provide further value propositions for our cardholders and guests and help drive cardholder sign-ups well into the future. Last quarter, I spoke about the key strategic initiatives of this management team. I'd like to provide a quick update on our progress. First and foremost, finalizing our outstanding labor contracts remains our top priority. Greg will provide additional detail around our status, but it is of the utmost importance that we continue making progress and deliver contracts that our teams are proud to support. Secondly, we are committed to continuing to deliver high operational performance. It is our obligation to our guests to strive for industry-leading performance as shown in our Q2 results. It is a necessary pillar in ensuring we protect the investments we've made over the years in our brand. Finally, I'm happy to report we remain on track to open Sunseeker Resort in Port Charlotte, Florida, in mid-October. This has been a long time coming. The project faced challenges and delays outside of our control, so to see the end in sight is remarkable. Bookings for Sunseeker continue coming in from all corners of the country, 42 states in total, which speaks volumes about the breadth of the database. To date, excluding group bookings, we have sold approximately 3,300 transient room nights at an average room rate of $410 per night. This transient room nights booked to date are impressive, as most people book hotel rooms within 50 days of arrival. Regarding group bookings, over 50 groups have contracted or are in the process of contracting nearly 40,000 room nights. The team continues to bring in high-quality groups and I fully expect this group room nights booked number to grow to roughly 75,000 by year-end, covering all years booked. These are incredible group numbers for our property and brand that has never existed in the market. The team in Florida is in full hiring mode, looking to onboard a targeted headcount of around 1,200 personnel. We received over 5,700 applications, with over 70% of those applicants residing within a 50-mile radius of the resort, demonstrating our commitment to supporting the local economy. Underpinning this influx in applications is a unique retention bonus we announced in early July for our inaugural non-management Sunseeker Resort team members. It provides an annual retention bonus of $10,000 for 10 years after completing 10 years of continuous full-time employment. Interestingly, we have received applications from people residing in 49 states. Given the early response, we would expect the application pool to exceed 7,000 people. With an application pool that continues to grow, this innovative program should help us attract and retain the very best hospitality professionals, and we already see evidence of this within the pool. From a financial perspective, the Sunseeker Resort budget remains at $695 million. As indicated in prior calls, costs will ramp in the third quarter due to pre-opening expenses. We estimate the total cost impact will be roughly $15 million this quarter. Consistent with last quarter, the full-year impact to consolidated EPS remains at $1.25 loss. I continue to be encouraged by the long-term value creation of Sunseeker Resorts. Upon completion of the project, the team will shift focus to begin laying the groundwork for our asset-light growth trajectory. With the opening around the corner, some of you will continue to speculate about our future intentions regarding expansion plans or future projects requiring material capital outlays. We will not pursue any such projects without an equity partner. In closing, I could not be happier with where we sit today. Our upward guidance revisions reflect our conviction about the balance of the year and to continue to deliver strong performance in the coming years. As such, I am pleased to announce that the Allegiant Travel Board of Directors has authorized an annual dividend of $2.40, payable in equal amounts quarterly, beginning September 1, through the second quarter of 2023. We remain committed to growing profitably by enhancing our offerings, driving customer satisfaction and delivering increased value to our shareholders. With that, I'll turn it over to Greg Anderson.

John, thank you. Over the past year, the industry has faced a uniquely challenging operating environment. Despite these many obstacles, Team Allegiant is delivering exceptional results. In our business, everything begins and ends with operations, and here at Allegiant, we are only days away from having the heaviest flying periods of the year behind us, March and summer. Through July, we are running an impressive 99.8% controllable completion factor year-to-date. In addition, during the month of June, we were among the industry leaders in on-time performance. The results we see today represent a significant improvement over where we were a year ago. This improvement has driven our year-to-date irregular operation costs down by $80 million compared to the same period in 2022. An unreliable operation is much more expensive to run. It also leads to unnecessary disruption and frustration for our guests and our frontline team members. Overly ambitious scheduling may lead to higher revenues, but when it results in excessive delays and cancellations, the juice isn't worth the squeeze. We are committed to maintaining a balanced scheduling approach. This approach is executed jointly by our planning and operational teams as they expertly manage a schedule to meet the leisure demand environment while maintaining operational integrity. Our unique ability in adjusting capacity is differentiated by our low fixed cost structure. One of the interesting themes you are hearing from other carriers has been around leisure traffic. Moreover, some carriers are reshaping their network and adjusting their schedules accordingly by lowering off-peak capacity. This leisure focus and focused flying on peak days has been our approach for over 20 years. We are ideally suited for this leisure peak flying approach, and you can see this in our results. Going forward, we believe this approach will continue to pay dividends. In addition to our operational and financial performances, there is also an incredible amount of work being accomplished behind the scenes to strengthen our foundation and to be able to support a 200-plus aircraft airline in roughly 5 years. Our major system implementations are a key step in getting there, and I'm happy to report SAP went live on July 1, a major milestone along this journey. This once-in-a-generation system changeover will help drive internal efficiencies across our back office teams. Additionally, we plan to cut over to Navitaire in late August. We delayed its go-live date to move any potential operational disruption to outside of our peak summer travel period. Navitaire is expected to drive incremental ancillary revenue due to its dynamic pricing capabilities. In addition, the system will support our expansion into Mexico with our joint venture partner, Viva Aerobus. However, due to recent actions undertaken by Mexico affecting U.S. carrier operations at Mexico City Airport, our ATI application with the DOT has been temporarily put on hold. We want to be clear, though, that this does not affect the merits of our application. It's also worth noting that we have readied the areas within our control to be able to launch once ATI is approved. The execution of the incredible team members at Allegiant truly amazes me. Not only do they continue to strengthen our foundation, but their efforts delivered industry-leading controllable completion and operating margins during the first half of 2023. This triggered a maximum profit share amount, paying out over $12 million to our airline team members. We could not be prouder of the work Team Allegiant does and thank you. We believe we are incredibly well positioned for the future and are uniquely set up to be a destination airline for all of our team members. A key element of this is to ensure we maintain competitive labor contracts. Last quarter, our dispatchers, who are represented by the IBT, ratified a 2-year contract extension more than a year before the amendable date of their CBA, which included pay rate increases at the higher end of the industry. Similarly, we are happy to have reached a formal tentative agreement with mechanics, also represented by the IBT more than 3 years prior to their amendable date. This TA provides for significant increases in rates and is a 2-year extension to the current contract. The TA is subject to approval by the mechanics in the coming weeks. In June, we announced a tentative agreement with the TWU, which represents our flight attendants. While this initial TA was unfortunately voted down, we remain focused and committed to reaching a deal with our flight attendants and re-engaging at the table with the TWU in short order. Regarding our pilot group, who are represented by the IBT, we remain in mediation and are working towards pathways to a deal. Given the uncertainty around the timing of a deal, we felt it necessary to address pilot compensation outside of bargaining and recognize the importance our pilots play in our ongoing success. As such, in early June, we were pleased to announce a retention bonus for all pilots that remain with the company through the ratification of the deal. We began banking a 35% increase to their current rates, except for first-year first officers, which accrue at an even higher rate of 82%. These retention bonuses are intended to bring our pilot pay more in line with the industry, with the understanding final pay rates will continue to be negotiated through the mediation process. We are pleased the IBT supported this retention bonus as we continue to work with them towards a contract that our pilots deserve. In closing, I want to thank all of Team Allegiant. You are the best in the business. We appreciate everything you do. With that, I'll turn it over to Scott.

Thanks, Greg. Our second quarter saw continued strong domestic leisure travel demand and capture that remain near our historic highs in 2022. Thanks to improved operations, a testament to the strong leadership of our Chief Operating Officer, Keny Wilper, along with his expert leadership team and the great work by all in the Allegiant family, this year's controllable completion rate being far above last year's level means we're keeping and recognizing a much greater portion of booked revenue year-to-date. Looking forward, while there's no shortage of opinions regarding macroeconomic conditions and their impact on consumer domestic leisure travel behavior, we spend less time trying to predict the future and more time ensuring we're prepared to succeed in it. It all starts with keeping our fingers on the pulse of customer sentiment and their leisure travel intention. Just as we did following the past two quarters, we surveyed a representative sample from both our most frequent flying repeat customers and those who flew us for the first time this past quarter. The results remain strong and unchanged from the past two quarters. Among both groups, about 50% said that economic conditions will have no impact on their flying behavior with Allegiant in the next 12 months and more than 30% said that economic considerations will actually make them more likely to fly with Allegiant in the next 12 months. The market is moving toward us. For our most frequent flying repeat customers, the rationale for their unchanged sentiment and intention stems from the fact that the vast majority of them are either flying to visit family or relatives, more than 40% of the group, or are flying between their primary residence and their vacation home, just under 40% of the group. These remain the most resilient forms of leisure travel during any macroeconomic environment. Quarter rewarding our most frequent flying repeat customers, along with engaging new customers and turning them into repeat customers, is our Allways Rewards loyalty program. Year-to-date, nearly 90% of our customer bookings have come from Allways Rewards members. The number of members with activity year-to-date is up nearly 30% versus last year, and the number of new members with their first activity is up nearly 15% versus last year. Ultimately, having such broad coverage with Allways Rewards enables us to reward the vast majority of our customers with points that can be easily used as currency, in any amount, at any time, for anything sold at allegiant.com. Year-to-date, on average, Allways Rewards members are 1.5 times more valuable than nonmembers. Most notably, this value was largely driven by them spending 60% more on air ancillary products than nonmembers do. Their take rates of core air ancillary products, seats and bags, are 10 to 20 percentage points higher than that of nonmembers. Our most loyal and engaged segment within the Allways Rewards program is, of course, our co-brand credit card holders who are three times more valuable than nonmembers. Currently, about 2.5% of our total active customer database of 17 million has the card. As such, we believe there is significant growth potential. In seven years, we have grown the program into a $100 million business unit, and we expect to double that in the next three years. To that end, I'm excited to announce an upcoming change to our program. Later this month, we will be transitioning our co-brand credit card network partner from Mastercard to Visa. Our Allegiant World Mastercard will be renamed and rebranded as the Allegiant Allways Rewards Visa Card. While Bank of America remains our issuing partner and no cardholder benefits will change, we made the decision to move to Visa, the nation's leading brand in credit card issuance and acceptance, because we believe it will enable us to drive higher levels of both new cardholders and cardholder spend, the two largest ways that we derive revenue from the program. We asked Allegiant customers who do not currently have our co-brand credit card which card they would be most likely to apply for. Sixty percent said Visa, while only 25% said Mastercard. In addition, one of the nation's largest retailers, Costco, only accepts Visa and more than 40% of our customers say they regularly shop there. What's more, Visa will provide stronger financial, technical and analytic support for growing the Allegiant Allways Rewards Visa Card program and in providing additional benefits through their exclusive partnerships and proprietary capabilities. Wrapping up, year-to-date, as much as demand is slightly below last year's historic high levels, we believe this simply represents a continued return to normalized pre-pandemic peak and non-peak seasonal travel patterns. We continue to view domestic leisure travel in the cities and among the customers we serve as strong, but we remain close to our customers. As it's been the hallmark of our company throughout its history, we stand ready to adapt to any changes in the demand environment. And with that, I'll turn it over to our Chief Revenue Officer, Drew Wells.

Thank you, Scott, and thanks, everyone, for joining us this morning. I'm extremely pleased with the record second quarter performance of $684 million in total revenue, growth of nearly 9% on system ASM growth of 1.3%. This combination produced TRASM that surpassed any previous second quarter by $0.005 and grew year-over-year by 7.5%. As Greg mentioned, we achieved remarkable operational results in the second quarter on top of financial results among the best in the industry. The current operating environment has proven challenging and we are not immune to this. Three months ago, we talked about trimming about 2.5 points of capacity from the summer schedule, and we believe it was absolutely worth it. I want to reiterate how impressed I am with the planning and operations teams coming together to do an incredible job aligning our schedule with available resources and anticipating risk areas to help mitigate potential issues, both controllable and uncontrollable alike. The buffer is added into our schedule enables better recovery options when faced with regular operations, including ATC-related concerns, especially out of Florida. We've done the commercial piece as well or better than anyone else in the world, as measured by margins and returns, but candidly, often at the expense of operational excellence. In the first half of 2023, we showed that we could do the operational piece while maintaining that industry-leading financial position. Those two in harmony is an elite combination. We still have more work to do to continually improve, but this summer will serve as a great foundation going forward to ensure operational reliability in conjunction with the appropriate deployment of capacity. Diving into revenue a bit, the strength in the quarter was well balanced as yields and ancillary products each contributed roughly $5 incremental per passenger versus the second quarter in 2022. We exceeded $70 per passenger in ancillary revenue once again, largely thanks to Allegiant Extra and continued success with our bundled ancillary products, as well as the Allegiant co-brand program, which continues to thrive. Allegiant Extra is now featured on 14 aircraft and continues to exceed expectations. While we don't expect any incremental aircraft with this layout in 2023, all Boeings coming in 2024 will have the Allegiant Extra option. Additionally, the strength of our operations and diligence from the charter team allowed us to capitalize on additional fixed fee business from both new and current clients to grow fixed fee revenue over 30%. As previously mentioned, we are still maintaining the expectation of TRASM over the last 9 months to be up mid-single digits, though now expected to narrow to the lower side of the mid-single-digit range. In addition to the continued story of incredible demand, the upside factors for Allegiant remain the same, continued operational stability and an expanded Allegiant Extra product we've talked about. Another upside factor is a historically mature network, but that doesn't mean zero routes in development. Five new routes and three re-introduced routes started service this summer, including growth in Portland, Oregon, Provo, Utah and Denver, among other cities. I'm extremely happy that all 8 have their own with some even exceeding system average profitability from the start. Additionally, last month, we announced 6 new routes for the winter season, mainly focused on Florida with one added to our Mesa base. These announcements are booking above average compared to prior announcements, which is continued evidence of a strong leisure demand presence. Lastly, Navitaire should provide a lift to our ancillary program. However, given the integration delay, we will not see the previously anticipated upside in the third quarter, though we are still baking that lift into the fourth. Furthermore, we did see some yield compression through the heart of the summer booking curve, somewhat offset by atypical close-in demand. As you all know, Allegiant prides itself on matching capacity with demand. For more than 20 years, our daily and monthly levels of flying have fluctuated meaningfully. We have a great understanding of the leisure customer and when they most want to fly. The third quarter will be no different as roughly 80% of our ASMs will fall on our peak leisure days, and September ASMs look to be roughly 55% of July's flying, both generally in line with the third quarter of 2022. Scheduled service ASMs are expected to be very slightly negative in the quarter, while a full year guide remains intact at flat to up 3%. And with that, I'd like to turn it over to Robert.

Thanks, Drew, and thank you, everyone, for joining us on the call today. We're pleased to report another quarter of strong financial results. Allegiant produced $76.9 million of consolidated adjusted net income for the second quarter, resulting in adjusted EPS of $4.35, in line with 2019 earnings. We recognized record total operating revenue in the quarter of $684 million, up 8.6% over the prior year on 1.3% higher capacity. Our nonfuel unit cost increased 12.9% year-over-year, with 4 points of that increase attributable to pilot payroll accruals and other frontline labor cost increases, which, as Greg noted, we announced in June that were effective beginning May 1. Similar to our last call, unit costs were pressured in comparison to the same period last year by lower productivity, which accounts for about 3 points of the increase. Improved operational performance drove a nice tailwind by reducing a regular operations expense in the quarter that was largely offset by inflationary cost pressure in stations. Variable team member compensation related to improved financial performance drove roughly 2.5 points of the increase over the second quarter last year, and 2 points of CASM increase in the quarter came from some one-time, nonrecurring costs that included the cancellation fee related to the transition of our co-brand credit card from Mastercard to Visa, and the remainder of our ex-fuel unit cost increase was related to various other items. Fuel costs came in below our expectations at $2.69 per gallon, helping to drive an airline operating margin of 18.6%. Shifting to full-year guidance, we are increasing our estimated airline earnings per share by $0.75 at the midpoint to $11.75. The increase in expected full-year EPS is fully attributable to a $0.10 decrease in our full-year estimated fuel cost per gallon from $3 to $2.90. As John noted, we continue to expect a full-year loss related to Sunseeker Resort of $1.25 per share. We expect pre-opening costs to ramp during the third quarter at approximately $15 million, ahead of opening the property early in the fourth quarter. When taken in conjunction with the midpoint of our guide, we expect the consolidated full-year adjusted earnings per share of roughly $10.50. Turning to the balance sheet, we ended the June quarter with $1.4 billion in available liquidity. That's just over $1 billion in cash and investments and $356 million in capacity and undrawn revolvers and PDP financing facilities after a prepayment of $61 million in aircraft-secured debt in late June. Net debt remained consistent with last quarter at $1.1 billion. Our net debt was down to 2.2 turns, a reduction from 3.7 at year-end, driven by strong EBITDA production during the first six months of the year. We do expect to add some incremental debt leading up to the delivery of our first 737 MAX aircraft late in the fourth quarter and would expect net leverage to be up just slightly above the current level at the end of the year. Second quarter capital expenditures included $147 million related to aircraft purchases, induction, pre-delivery deposits, and other fleet-related costs. We spent an additional $29 million in other airline capital expenditures and deferred heavy maintenance CapEx came in at $21.7 million. CapEx for our Sunseeker Resort property was $92 million during the quarter. Moving to fleet, we inducted two Airbus A320 aircraft into operation and ended the quarter with 91 A320 and 35 A319 aircraft in service. We had one additional A320 aircraft owned and undergoing induction work as of the quarter-end and expect to purchase two additional A320 aircraft during the remainder of 2023. On the 737 fleet, updates from Boeing indicate that our first two MAX aircraft, which were scheduled for delivery at the end of this year, will each be delayed by approximately four weeks, leaving one aircraft for delivery to us in 2023 and moving the second into 2024. While the follow-on effect on the remainder of our 2024 delivery schedule is still under discussion, our 2023 capacity plans are not impacted by this delay. As we've shared previously, we expect to begin operating our first 737 aircraft in the first quarter of next year and expect to take delivery of approximately two aircraft per month throughout 2024. Our updated full-year CapEx guide today implies just under $500 million in aircraft engine and induction-related spend this year, with the reduction from prior guidance related to the timing of pre-delivery deposits and timing of aircraft deliveries. All in, we expect full-year airline CapEx to be roughly $640 million. I'm very pleased with the financial trajectory we've seen in the past few quarters and excited for the earnings potential in our business. We can start to unlock the benefits of the infrastructure investments we've been making. EBITDA in the trailing 12 months is approximately $4.5 million per aircraft on a trailing 12-month fuel cost of $3.38 per gallon. Adjusting for fuel, we would be back to our 2019 level of $6 million in EBITDA per aircraft, notwithstanding some of the added cost pressures I mentioned earlier. While I recognize there are certainly many moving parts here, we expect continued improvement on this metric as our numerous initiatives come online. Running a reliable operation has been paramount to achieving the results that we're sharing today. We're extremely proud of our team members and the way that they have worked together to schedule and operate the airline during a time that remains challenging. I want to just end by thanking our 5,400 team members for all of their contributions during this busy peak summer travel season. Michelle, we're ready to begin taking analyst questions.

The first question comes from Duane Pfennigwerth with Evercore.

John, what would you envision the segmentation mix for Sunseeker to be? I mean if you had to guess, how much would be group versus transient? And for the groups that you have contracted with, what do those rates look like relative to the transient rate that you cited?

Duane, good questions. I think when you look at that, you have to kind of look at it by year. So in '24, we'll start with the full year of '24, you're probably looking at something in the range of, I'd say, maybe 12% to 18%, could get as high as 20%, but probably in that range of 12% to 18%. When you're looking at the out years starting with '25, you're probably looking at 20% to 25% would be more normal as we move forward. Just to give you some color on that, when you look at the roughly 40,000 group room nights that have already been booked, about 26,300 of those fall into '24. So that's roughly more than 10%, slightly over 10% of the total room nights that we would have in a given year. So that kind of gives you a good barometer, and that’s why I think that’s where it’s going to fall. But again, we're dealing with a brand and a property that hasn't existed to run these percentages as we are is incredibly impressive, but I think that’s kind of like the 25% range would be where it starts to peak in '25.

And John, on the group rates, they are 250 to 300 or thereabouts.

Yes, they've been averaging around 290 when looking at all 40,000 room nights. I would expect those to increase as awareness of the property grows and we are selling into a known entity now. The rates we are currently achieving are higher than we anticipated, given that we were initially selling an unknown property. These rates will likely continue to increase in the coming years, particularly in '25 and '26. This is just another data point, as we already have group room nights booked into '27.

Got it. Appreciate the thoughts. I know it's somewhat hypothetical at this point. And then just on the OpEx run rate, can you give us a little help in the quarter? I know you got some insurance reimbursement. So what was kind of the OpEx run rate for Sunseeker in 2Q? And how do you see that kind of ramping into 3Q and 4Q?

I think in the second quarter, the number was less than half of the $15 million we are discussing for the third quarter, which is all related to pre-opening activities. I don't recall the exact second quarter number right now.

Yes. I think we had...

Go ahead, B.J.

Like $5 million to $7 million, I want to say, between the first and second quarter, per quarter.

Yes.

And sorry, that $15 million when you're sort of up and running with the full fourth quarter, what does that look like?

Once we're up and operating, we haven't put out any financial data from an operating standpoint. We intend to do that probably, at the same time, provide guidance for the airline, which should be historically we do after Q4. So we would provide operating guidance for the resort at that same time. So right now, we are only providing the OpEx, a piece before opening. So adjust just pre-opening numbers. There are public numbers that we put out there a few years ago. Obviously, they're dated and I would expect results to be significantly better because I think the ADR in those projections was something around the $250 range, $250 a night. And as you can see, we're running much better even when you blend group and transient.

The next question comes from Savi Syth with Raymond James.

Just if I could talk a little bit about the pilot bonus that you're offering and has that improved kind of the attrition rates that you're seeing there? And if you could talk a little bit about the retention and hiring capabilities today?

Sure, it's Greg. Thanks for the question. Regarding the bonus, as we move forward, we believe it was the right decision. Many of our pilots have expressed interest in staying at Allegiant, but they pointed out that the pay rates are low compared to the industry. Although they want to be here, the lower rates are a concern. We felt that increasing the bonus was the right step for our pilots, as they appreciate the unique quality of life that Allegiant offers. However, this is just one step; attaining a new contract is crucial, and we need to make significant improvements in various areas such as quality of life, pay rates, and retirement. Now, in terms of staffing, let's break it down into two parts. First, regarding the schoolhouse, we have seen a significant increase in the number of pilots training here. Classes have been full recently, with around 20 to 25 pilots per class, compared to about 12 to 14 earlier this year. I'm really encouraged by this development. Our team, led by Tyler Hollingsworth, has successfully focused on various pathway programs and attracting pilots who value Allegiant's unique quality of life. Looking ahead, we remain optimistic about maintaining full classes for the rest of the year. As for staffing and attrition, in April and May, we were receiving close to one resignation notice per day. However, since June, that number has dropped to about a fourth of that. We are seeing positive trends, which may be seasonal, but we hope they also reflect the impact of the retention bonus and our efforts to improve outside of collective bargaining. Ultimately, securing a new deal is the most crucial step in making Allegiant a destination airline for all of our pilots and team members.

That's super helpful color. And if I might, on the MAX deliveries and just early thoughts on 2024, is 2024 going to be another year where capacity is somewhat constrained as you kind of make these investments to operate well and kind of the MAX uncertainty? Or how are you thinking about like what type of kind of capacity growth you could target in 2024, recognizing it's still very early?

Savi, it's Drew here. First and foremost, one of the biggest components will be the timing of getting a CBA done with our flight crews above and beyond the MAX delivery. As we focus on the MAXs, though and the constraints we have today, we'll still have training requirements that will drive through all of '24. So I would expect there to be a little bit of a ceiling relative to the fleet we're bringing on in terms of what we're able to produce ASM-wise until maybe the end of the year. I think we can start to get a lot closer to our historic run rate, but I might pull that back a little bit.

Yes. Savi, the only other thing I would mention there is that we haven't yet confirmed our retirement schedule on some of the A320s we expect to take out of the fleet. And so that gives us a little bit of flexibility. And so we haven't come out with the 2024 fleet plan specifically as we want to wait and gain some certainty around the MAX delivery schedule.

This is Greg. I want to add one more quick comment. I mentioned in my remarks that over the next five years, we plan to have more than 200 aircraft. I want to emphasize that we are building a strong foundation to support an airline of that size. We are reinforcing that foundation, focusing on long-term growth, and investing in the right areas, especially in our people. We believe we have a clear path to achieve this goal. We might not know the exact timeline, but this is our plan, and many of our current moves are in preparation for that. We are confident that we can continue to grow and do so profitably as we reach the 200-plus aircraft mark in the next five years.

The next question comes from Andrew Didora with Bank of America.

Just a couple of questions on CASM. I think you had been targeting kind of low double-digit growth this year. Were the pilot retention bonuses paid out in June, part of that number? And then I think you were including maybe about from the pilots in that outlook. Any change to that number given all the tentative agreements out there with others in the industry?

Andrew, it's B.J. I'll start, and Greg, if you want to jump in on the second part of that. But yes, no, we continue to think about it as around 1/3 of a cent. I will mention, in the second quarter, we only included 2 months of those accruals. And so moving throughout the rest of the year, you'll burden through each of the 3 months in the quarter. But yes, you're right, kind of low double-digit growth year-over-year on unit costs for the back half of the year.

And Andrew, just a couple of maybe clarifying points. It's not paid out in June. It is actually a retention bonus and it's paid out upon ratification of an agreement for those pilots that are still actively employed at that time. We've locked in the rates at that 35% for all pilots with the exceptions of the first year, first officers at. That's locked in over that period. But we'll continue to negotiate final rates through the mediation process, but this is a retention bonus.

Right. Understood. And look, I know there are a lot of moving parts between timing a pilot deal, training requirements for the MAXs. But you mentioned in response to Savi's question about maybe it's suboptimal, lower than historical growth in 2024 in that type of scenario? How should we think about kind of CASM growth next year? Any puts and takes you can provide around that would be helpful?

Yes. Andrew, I'm sorry, I don't have a lot in front of me, but I'll just say it's real early to give kind of CASM guidance on '24. Just there's a lot of moving parts, like you mentioned around the actual delivery schedule of the MAX, which will determine how many pilots are useful in producing ASM at each different period throughout the year? And then what are we doing on retirements of the 320s? I hope by the time of the next call, we've got a little bit more color to share with you. So apologies, just a little early to give that kind of guidance.

Got it. And maybe I could ask one more question. I noticed in your guidance that interest expense decreased slightly. In your prepared remarks, you mentioned that you will be taking on a bit more debt by year-end as the MAXs are delivered. I'm just curious about what caused the decrease in interest expense.

The driver of the lower interest expense this year is that we prepaid approximately $61 million in some aircraft-secured debt at the end of the second quarter, which provides us some relief for the final two quarters of this year. I also want to set expectations regarding year-end leverage; we will be adding a bit more debt as we continue making PDP payments in the last two quarters of the year. Additionally, there's still one MAX delivery scheduled for the end of the year.

And Andrew, I want to emphasize that the equity value in those 737 aircraft from day one is significant, providing B.J. and the team with the chance to secure effective and efficient financing. We are very confident in our ability to finance those aircraft. Additionally, I want to remind our investors and the market about the opportunistic nature of the 737 deal, especially concerning the tax law and the bonus appreciation we received. Essentially, we expect to receive approximately $250 million in an interest-free loan from the government by proceeding with this deal, which will help offset future cash taxes.

The next question comes from Katherine Kallergis with Morgan Stanley. We're very comfortable being able to finance those aircraft. I also want to remind our investors about the opportunistic nature of the 737 deal, especially regarding the timing and the benefits we received from the tax law and bonus appreciation. Essentially, we estimate that we'll receive approximately $250 million in an interest-free loan from the government by proceeding with this deal, which will help offset future cash taxes.

This is Katherine Kallergis on for Ravi. I wanted to follow up on a previous comment, in which you said airlines have started to favor peak periods, and that Allegiant has done this for some time. But I was curious if you could provide some color around the competitive dynamics during these periods. And if what you consider peak might be different than industry peers? Also just curious if these dynamics might be different in the Florida market specifically.

Yes, this is Drew. When we talk about peak, we're specifically referring to domestic leisure peak, which usually aligns with school holidays like spring break, summer, and the holiday season. Most people would likely describe leisure peak similarly. I'm speculating here, but it seems carriers are getting more accustomed to how these dynamics operate. One significant aspect of peak is that if there is generally excess demand, even when capacity was high before the pandemic, the peak capacity effectively absorbed that demand. I don't expect competitive dynamics to change significantly. Peaks are peaks for a reason, and overall, I think that's positive. Moreover, the demand patterns align exceptionally well with Allegiant's model, which we've been catering to for over 20 years. We are well-prepared for this kind of situation.

As a quick follow-up, I found your statistic about 50% of those surveyed stating that economic conditions will have no impact on flying to be interesting. I’m curious about how inelastic you believe the demand actually is and how you have observed its performance in past recessionary environments.

No, thanks for that question. For those frequent flyers, the answer is it is pretty inelastic because they're traveling to and from family where they're staying and/or doing from their second and vacation homes. So in many of those instances, high interest rates, inflation, it's not as meaningful as say, a family vacation to an Orlando theme park or a Las Vegas casino. So among our core customers, it's fairly inelastic because they're flying to and from family and/or a second home.

Yes. But more broadly, the customer that we serve is generally still a very price-sensitive customer. Less so in summer peaks or peaks in general, when we have a thicker demand pool to choose from. And certainly, in the off-peaks, you still see that. Just by way of example, we're already pricing higher, closer in, taking advantage of relative inelasticity if you will, the ability to pass through more was a bit muted, especially in the face of $70 plus ancillary per passenger that we're trying to balance as we build load. So there's a pretty heavy mix on our aircraft that can be tricky to revenue manage. And I think it's a place where a product like Allegiant Extra can really help differentiate between the customer segments that we have and find that right balance of Allegiant type premium experience versus the main cabin, that's right for all of our customers.

The next question comes from an unidentified analyst.

Would you mind providing any color on what you're seeing in Las Vegas, just given some of the runway challenges that have been happening there? And then just any of the drivers of the operational performance just beyond having more of a buffer, some learnings that you're taking with you for next year, that would be great?

Yes, that’s a great question. Three months ago, we noted that Vegas had a significant portion of that 2.5%. April and May faced some challenges due to specific days and periods of impact. However, this improved significantly in June and July, with Vegas performing exceptionally well throughout the summer. Aside from a few heat-related issues, we are very pleased with how things turned out in Vegas. Looking ahead, we are considering our schedule in a broader sense, including implementing firebreaks and adding some flexibility to allow for recovery, especially in Florida where we typically have thunderstorms around 3:30 every afternoon. We have become better at viewing these operations in their entirety, considering how firebreaks relate to extended wait times and the critical minutes that can affect our performance. One of the most significant factors is the overnight preparation time for our mechanics and crews to ensure our planes are at the gate on time each morning, which is crucial for starting our operations smoothly and giving us a chance to succeed throughout the day. I believe we have made progress toward achieving the right balance this year, but there is still much work to be done to refine our processes and maintain our position at the top of the industry.

Yes. I want to add a brief comment here. Currently, we feel very confident about the second half of the year, particularly regarding the coordination between planning and operations led by Keny Wilper. Our staffing levels are strong, and apart from pilots, this is the best we've seen since 2019, which is encouraging. As we move past the peak summer flying season, the teams will come together for a post-mortem debrief to identify process efficiencies and areas for improvement. We are committed to enhancing our performance in every possible way.

If I could just squeeze one more in. Just you mentioned a little bit on the outlook for revenue in the rest of the year. I was just wondering if you can unpack that and any color on the cadence for base fares and ancillaries for what you can see from right now.

Yes. I'll probably disappoint you a little bit as we get into kind of cadence related, the two things I'll point out. One, I would look towards last year's comp set and kind of ASM cadence to help guide how you think about the third and fourth order. And the second, I'll point out, and maybe not one that I communicated well or maybe even appreciated enough as we talked about the last 9 months previously was the second quarter of '22 cadence. And I think there was still a fair amount of recovery from the variant that we experienced in the first half of that quarter. Not to disparage the 2Q they probably helped bolster the relative TRASM year-over-year there a little bit. So I kind of think of those two pieces in concurrence as you think about the last 9 months in totality.

The next question comes from Michael Linenberg with Deutsche Bank.

Just a few quick ones here. John, just in response to Duane's question on you talking about Sunseeker where the numbers were better, and you were referring to the rates. How should we think about it just from with all the cost inflation there if we kind of go back to the original plan, I think the guide was EBITDA margins sort of in that 30% range. Is that still a reasonable sort of ballpark profit margin?

I believe those EBITDA margins are still achievable. It's similar to what's happening on the air side, where revenue is growing faster than the cost increases, despite rising capital expenditures or CASM-X. We're seeing a similar trend on the resort side, where increased costs are more than balanced by rising room rates in that market. This is very positive, and Florida has been particularly strong. The hotel industry across the U.S. has performed well, but Florida stands out as exceptionally successful. I believe the EBITDA margins we initially projected have the potential to be even stronger.

Very good. And then just a second one for you, John, and probably Greg as well and maybe the team. We've seen an announcement by Frontier to take up some of the assets of the JetBlue Spirit proposed merger assets that they would potentially divest at this point. It looks like it's still slots. Obviously, there's a lot more that they've already indicated that they would be willing to divest, maybe its runway timings at Newark, Gates in Fort Lauderdale, space in Boston. Is any of that of interest to Allegiant.

Michael, it's Greg. It's good to talk with you. Drew and his team are exploring all opportunities in airports and are certainly aware of the situation. However, I don’t have any substantial updates to share at this time.

Very good. And then just if I could squeeze in one quick last one for Scott. We have heard other carriers talk about this traffic patterns where people are spending a lot more time this summer going to Europe rather than flying domestically and Scott, you do a lot of different surveys and other carriers have said that they've surveyed their own customer base and some percentage are electing to go to Europe. What are you seeing amongst your customer base, which I know you're very close to? Are you seeing something similar where you're just losing a lot of flow because they're going maybe outside of the United States? Any color on that would be great.

Absolutely. And thank you, Michael, because the last several weeks, we have asked exactly that. So I'm prepared to tell you. First, we asked our customer base to make sure they had the ability to travel internationally. Turns out that about 80% of Allegiant customers have a passport. But we're seeing some very different than what Frontier and others have reported. When asked, do you plan to travel internationally in the next 6 months or have you traveled internationally in the last 6 months? The answer is the same between like 16% and 19% say, yes. That means the vast majority of our customers, 80% have no plans and have not traveled internationally in 2023.

And I think maybe, Scott, it's worth elaborating on too. The 16% to 19% you're talking about hasn't changed year-over-year.

That's right. It hasn't been a zero-sum as much as now it's open, and they've taken an additional trip.

The next question comes from Conor Cunningham with Melius Research.

On the doubling of the Allways credit card contribution, just trying to understand the cadence there. I assume that's both card growth and spend. But in your prepared remarks, you mentioned the potential of Sunseeker contributing. Just curious about the ramp there going forward.

Absolutely. So the comment that in the next three years will, in effect, double from roughly where we ended last year at $97 million, going to post over $100 million. It's largely based without Sunseeker assumed in it. So it is from the key things you mentioned. Increased cardholder growth, compounded cardholder spend right as that portfolio grows and we achieve at or above the same spend per cardholder. So I think John's comments in the beginning represent upside that could even make it faster. My comments were not based on any additional goodness, which we'll absolutely get from Sunseeker opening.

Yes. I think, a huge data point that Scott has pointed out is the channels that were in the past with a Mastercard program not available to a cardholder that are now or will be available to a cardholder, most notably Costco, is significant. So that type of increase then doesn't require necessarily an increase in the number of cardholders although we are planning on that. But just the channels of use are going to expand significantly with moving to Visa.

Okay. That's helpful. And then on Sunseeker, great commentary on ADRs and bookings. But the question that I get, and maybe this is kind of the Mike's point as well is just around the inflection point on profitability, like I realize that you're working towards opening. I'm just trying to get some color on your path to profitability there. When we could expect a potential contribution over? Again, I realized that it's still early days, but just any thoughts there would be helpful.

When discussing cash contributions, particularly EBITDA, we do not plan to show negative figures on a quarterly basis at any point. We anticipate maintaining positive cash flow throughout the year, with potential for growth in the future. We have intentionally set the prices for our products in 2023 and 2024 below market rates to introduce a new brand and property effectively. As we operate and gain momentum—within just a month, not years—you will likely observe a rise in those rates. We've strategically priced lower, and despite that, our average daily rates are commendable, and we expect to see substantial increases, particularly reaching 25.5%.

I would like to turn the call back to John Redmond for closing remarks.

Well, I appreciate everyone's time. We're very proud of our team and the management here and what we've been able to accomplish year-to-date. And we're very excited about the balance of this year. An incredible amount of time and resources have gone into systems over the last couple of years. You're starting to see the rollout of all that time and effort will start to happen this year, which really sets the backbone for this company going forward. So we will have no restrictions, limitations, what have you from a system standpoint as we move into the 200 aircraft environment, I should say that Greg referred to, everything is allowing us to do everything we need to and want to do going forward. So absolutely, no restrictions. And our focus now is just finishing up the last labor agreements. We're very encouraged by where we are today and where we're going to end up tomorrow with those agreements. So again, very bullish about the out years for this company. Very exciting times ahead, and stay tuned. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.