Allegiant Travel CO Q4 FY2023 Earnings Call

Hello and welcome to the Allegiant Travel Company Fourth Quarter and Full Year 2023 Earnings Call. After the speakers' remarks, there will be a question-and-answer session. I will now turn the conference over to Sherry Wilson, Managing Director of Investor Relations. Please go ahead.

Thank you, Sarah. Good afternoon, everyone, and welcome to the Allegiant Travel Company's fourth quarter and full year 2023 earnings call. On the call with me today are Maury Gallagher, the Company's Executive Chairman and CEO; 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 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. And with that, I'll turn it to Maury.

Good afternoon, ladies and gentlemen. Thank you for your time today and welcome from Super Bowl headquarters here in Las Vegas. As you saw in our release, we continued to move ahead in our efforts to return to pre-pandemic performance. I'm happy to report on a number of areas that we're moving forward on all fronts. Sunseeker opened on December 15. It's a terrific destination. Micah Richins, who's on the call with us today and his partner in crime, Jason Shkorupa, and their team have done excellent work completing and operating this magnificent destination resort. Stay tuned for more updates in the coming months. Our operational performance for this past year, our completion factor and on-time performance looks to exceed our 2019 industry-leading stats, and we were among the top 3 in operating margin for the year. Aircraft deliveries, while Boeing deliveries will be delayed based on recent news and comments, we are excited about our introduction of the MAX 8200 aircraft. It's one of the most reliable airplanes in the world. Its performance profile as well will provide us enhanced economic benefits in the coming years. On the labor front, we've faced challenges for the past 3 years, particularly with our pilots. However, I'm cautiously optimistic about our recent progress. Our updated labor agreements will allow us to continue to do what we do best: grow Allegiant in our non-competitive markets in the coming months and years. As I mentioned, during Super Bowl week here in Las Vegas, the town is ablaze with excitement. This week will be a large payback for our investment in the naming rights for the Las Vegas Stadium. The exposure to the impressions we have already received and will continue to receive this next week have been and will be exceptional. Allegiant Stadium has a nice ring to it. We made this investment in 2019, a significant step for us. But it was part of our efforts to separate ourselves from the crowd and promote our Allegiant brand. Our operations this past year were industry-leading. This level of performance in today's social media world is critical. Consumer products are continuously on stage. There is nowhere to hide. It seems simple. We want a reliable, on-time airline with friendly people. Easy to say, but tough to do. However, our focus on this approach for the past many years is paying dividends. Our Net Promoter Scores are industry-leading. In recent surveys of our customers, they assigned us what we believe to be the top of the field with an NPS of 51. This is ahead of all domestic carriers as far as we know. Our results compare extremely well to other low-cost carriers, some of whose scores are meaningfully negative. As you are all aware, competition has become much more intense for a number of low-fare carriers recently. The major airlines have stepped into our space with low-priced competing products and a better reputation, and again, the NPS scores tell the tale. Being the carrier of last choice in today's world is declining. Over the past 20 years, there has been a generic low-fare label or ULCC moniker assigned to a number of carriers, specifically us, Frontier, Spirit, and more recently, carriers such as Sun Country. While we all share this timeline, we do not share the same model and how the companies have been managed. Unlike the other carriers in this grouping, our model has allowed us to build a robust moat around our business. We are focused on building that non-competitive nonstop network. Today, 75% of our routes do not have any direct competition. This approach is paying substantial dividends in today's more confrontational environment. With most of our routes operating just 2 times per week, we can support a much larger network of cities and routes. Currently, we serve 124 cities with 555 routes, 450 of which are non-competitive. In contrast, Spirit and Frontier have on average just 300 routes each, of which only about 30 are non-competitive. One might analogize the ULCC crowd to the famous bank robber Willie Sutton. When asked why he robbed banks, his answer was because that's where the money is. Well, in today's airline space, the banks are the big cities and the major air carrier hubs and networks. Virtually all of the ULCC labeled airlines are focused on these big banks. Historically, these have been easy money but not anymore. The banks have developed fierce defenses to combat their historic robbers. Allegiant has stayed away from those big banks. Instead, we have focused on earning our money the old-fashioned way by creating our own customers, those who have previously gone unnoticed. In the coming months and years, we will continue to grow our model. It is strong, it works, and it has significant room to run. Lastly, I want to thank our team members. This has been a difficult 3 to 4 years, as we all know. You have supported our passengers with reliable and friendly service and you have run the best airline this year, boasting an industry-leading 99.8% controllable completion factor. Well done. In today's era, poor service and canceled flights could put us back where we belong: at the top of the pack. Thank you. Greg?

Thank you, Maury. Entering 2023, one of our primary objectives was to improve our operational gains and reduce our operating costs. Team Allegiant delivered significantly, closing out the year with an industry-leading 99.8% controllable completion rate and a reduction in IROC costs of nearly $100 million. These results didn't go unnoticed, as the Wall Street Journal ranked Allegiant among the best-performing airlines of 2023, trailing only Delta and Alaska. This turnaround performance is not possible without a dedicated and highly talented team. Throughout 2023, I had the great privilege of visiting most of our bases, and the passion of Team Allegiant is truly a sight to behold. Our base structure, combined with our out-and-back model, allows us to provide our frontline team members with the rare industry perk of starting and ending their shifts in their home cities. This unique feature plays a key role in helping us retain and grow our flight crew ranks, evidenced by the increase of more than 100 net new pilots during the latter half of 2023. While being home every night is a valuable benefit, we are overdue in updating our inflight and flight crew contracts. This remains a top priority and is in the best interest of all parties. As mentioned last quarter, an area of value to monitor is restoring our utilization during peak leisure demand periods. We have been strengthening our foundation to begin increasing our peak day flying, which should provide us a substantial tailwind in 2024. We expect this tailwind to gain momentum into 2025, with the potential to increase peak utilization by as much as 20% compared to 2023. Allegiant's key differentiator is our adherence to peak season and peak day week flying patterns, something that will continue even with the new Boeing MAX aircraft. We are confident that the recent challenges regarding the MAX will be resolved by Boeing and the FAA. Given the continued uncertainty around the timing of our MAX deliveries, we are being extra flexible with our 2024 capacity plans. Each MAX delivery will come equipped with Allegiant Extra, and we are concurrently configuring our A320 aircraft to carry this premium product. These improved cabin layouts are expected to be a big hit among our customers through our expansive domestic network of approximately 124 communities and 555 routes. Interestingly, we are the only nonstop option on roughly 450 of the routes we currently serve. Surprisingly, Allegiant serves more unique nonstop domestic routes than JetBlue, Alaska, Spirit, Frontier, Hawaiian, Sun Country, and Freeze combined. We are positioned to grow our number of unique nonstop flights via the 1,400 incremental routes we have identified, including many routes to Mexico's premier beach destinations alongside our JV partner, Viva Aerobus. While the timing of governmental approval of our ATI application is uncertain, we believe its approval is a matter of when, not if. Additionally, we have upgraded our systems by transitioning to Navitaire, which will support our long-term growth plans, including international expansion. We migrated our legacy passenger service system to Navitaire in late 2023, and a dedicated team is working to maximize its capabilities by improving our dynamic pricing models and unlocking further efficiencies. We expect these enhancements to be in place by the first half of 2024. Our Sunseeker Resort opened in mid-December. It is elegantly designed and features popular amenities as well as a spectacular service-oriented staff. Guests are having a wonderful experience. The resort is still new, having been open for roughly 45 days. Encouragingly, we see meaningful improvements to booking trends each week as we continue to build awareness of the Sunseeker brand. While we are still in the early stages, we expect the resort could contribute as much as $15 million in EBITDA in 2024. In closing, we are extremely proud of Team Allegiant for reclaiming our rightful position at the top of the industry, both operationally and financially, and for the progress made in strengthening our foundation. We are positioned to enhance utilization during peak leisure demand periods, our brand has never been stronger, and the number of unique routes we can expand our network with has never been greater. Aspirational products like Allegiant Extra and our always loyalty program remain in high demand. Sunseeker is open and contributing. Many more opportunities remain on the horizon, including our international expansion with Viva Aerobus. We will continue to build off this momentum to strengthen our competitive advantages and further reshape the leisure travel space. With that, I'll turn it over to Scott.

Thank you, Greg. The fourth quarter concluded a year that witnessed the post-pandemic normalization of domestic leisure travel demand. Despite minimal capacity growth, Allegiant managed to maintain booking and passenger levels that slightly surpassed the historic highs of 2022. Our ability to match capacity with demand, particularly in generating and fulfilling demand for peak travel periods, has never been greater for our Allegiant brand. This brand stands out due to its focus on two critical factors for leisure travelers: low fares and nonstop flights. As Maury mentioned, this week, a significant number of nonstop flights will be Super Bowl-bound here in Las Vegas, where the Allegiant brand is slated to gain an unprecedented increase in visibility from the expected 100 million U.S. viewers tuning into Super Bowl 58 at Allegiant Stadium this Sunday. We are prepared to capitalize on this increased brand awareness during one of our busiest booking periods, as leisure travelers make their plans for spring break and early summer peak travel season. For the full year 2023, we retained nearly one-third of customers who flew with us the prior year, and those customers accounted for nearly half of our total revenue. This year-to-year customer retention rate was 16% higher than it was in 2022. Our loyalty programs, Always Rewards and the Always Rewards Visa card, continue to engage a greater portion of our customer base, motivating them to travel and spend more with Allegiant each year. 2023 marked the fifth consecutive year that the Allegiant co-brand credit card was named Best Airline Credit Card in USA TODAY's Readers' Choice Awards. We ended the year with 484,000 cardholders, up 16% year-over-year. Total co-brand credit card compensation reached nearly $120 million for the year, an increase of 18% compared to 2022. We expect similar growth rates for both new cardholders and program compensation in 2024. Our cardholders continue to exhibit strong travel frequency and spending, with cardholders flying and spending more than double that of non-cardholders. We also continue to see significant impact from our Always Rewards non-credit card program. In 2023, 2.8 million Always Rewards members were active, a 25% increase from the prior year, and these members flew 24% more and spent 69% more than non-members. Our ever-increasing loyal customer base enables us to further differentiate by showing interest in premium economy products like Allegiant Extra and buy-on-board products, as well as our third-party hotel and rental car offerings, including the recently opened Sunseeker Resort, Charlotte Harbor. Nearly three-quarters of our customers are aware of the resort, and almost half of those in cities served by Allegiant in Southwest Florida would consider staying there. To date, approximately two-thirds of Sunseeker bookings have come from Allegiant customers, with 40% being Always Rewards members and 20% being Allegiant co-brand credit cardholders. Sunseeker is a welcome addition to the Allegiant Travel Company family, enabling us to offer our customers more leisure travel products and rewards, allowing them to, as we like to say, live their best nonstop life with Allegiant. I will now turn it over to Drew.

Thank you, Scott, and thanks to everyone for joining us today. A strong fourth quarter capped off our first full year revenue figure over $2.5 billion. While our fourth-quarter TRASM of $0.1316 was down 6.2% compared to the prior year, it was still more than 4% better than any previous fourth quarter. Furthermore, the full-year TRASM of $0.338 was nearly 6% better than any prior year, highlighted by record ancillary performance, more than $5 better year-over-year. The fourth quarter featured modest ASM growth of plus 5.7%, finishing strong with incredible close-in demand for the holiday periods. These weeks met expectations and surpassed our lofty goals. As anticipated, the resilience in the peak weeks was met with normalizing peak to off-peak variations in a typical leisure environment. Lastly, for 2023, following a record month in September, our fixed fee strength continued to ramp in both the fourth quarter and full year, setting revenue records. A sincere thank you to all our Allegiant team members for making that happen, achieving $611 million in total revenue for the quarter. As we shift our focus to the first quarter, growth will be back to muted at roughly 1%. Across the industry, weather affected mid-January and led to an impact on Allegiant of approximately 0.5 points ASM headwind for the quarter and around $2.5 million in revenue impact. Hats off to our operations teams for their excellent performance in keeping the airline on track during the inclement weather. I expect many of the same attributes discussed last quarter to persist, with peak weeks remaining incredibly strong, likely aligning to be higher than the previous year. Easter shifts into March, while it should be a positive TRASM indicator toward the end of the month, the shift is generally negative overall. A significant portion of spring break travel is compressing into one week, and we have limited capacity to deploy. This is beneficial for unitized figures in that week at the expense of some total potential and contribution from other weeks, including those earlier in March. Maintaining the theme of normalcy in my remarks, I expect the first quarter sequential increase in TRASM to align with what's typical for the fourth quarter 2023. As with most first quarters, the revenue will depend on the peak weeks at the end, and with over 50% of the revenue still to be booked, there is much left to anticipate. Another result of the Easter shift will be a pull-down of April capacity by around 10% year-over-year. However, we are excited to introduce much more capacity into our summer plans than originally forecasted. Our capacity from June through August should see mid- to high-single-digit ASM growth compared to the same months in 2023, along with an increase in utilization per aircraft per day. We still have work to do to return to our peak utilization levels, but achieving these gains while navigating the challenges of the Boeing Max transition is incredibly encouraging. For context, our plan, beginning around June, aligns largely with our 2018 utilization levels. It's worth noting how significant our 2018 to 2019 utilization jump was and aligns with Greg's comments regarding our 2025 potential. Additionally, we expect to begin retrofitting our existing 186-seat A320s with the popular Allegiant Extra seating configuration in the second quarter, as well as introduce a new travel insurance product through our partners. Both initiatives are expected to bolster our already strong, but still improving, ancillary program. For the full year, we are guiding an ASM range of positive 2% to 6% year-over-year. This includes a more conservative approach to planning capacity for the latter half of the year to provide downside risk mitigation as Boeing MAX deliveries are delayed, while also allowing for upside potential. There are many unknowns, and we aim to be prudent in our plans. I will now turn it over to Robert Neal to provide more details on this and much more.

Thanks, Drew, and good afternoon, everyone. Today, we reported our full-year 2023 financial results, which included an adjusted consolidated net income of $2.4 million and an adjusted earnings per share of $0.11 for the fourth quarter. This figure includes approximately $12.8 million in preopening expenses for Sunseeker Resort. The airline recorded $15.9 million in adjusted net income for the quarter, leading to an adjusted airline-only EPS of $0.86. Adjusted consolidated net income for the full year 2023 was roughly $137 million, yielding an adjusted earnings per share of $7.31, including approximately $33 million in expenses related to Sunseeker. EBITDA for the full year was $472 million, excluding special charges, representing a 45% increase over 2022. The airline recorded an adjusted net income of $165 million for the year, resulting in an adjusted airline full-year EPS of $8.82, slightly ahead of our initial expectations. The airline generated over $500 million in EBITDA, excluding special items during the year. Fuel costs came in at $3.09 per gallon for the full year, approximately 17% below the 2022 level. Our adjusted non-fuel airline unit costs ended 10.8% higher at $0.0812 for the full year, primarily driven by wage increases for frontline labor groups, accounting for about 8.5 points of the increase. This includes our pilot retention bonus accrual, which was in effect from May through December. The other main driver of unit cost increase was depreciation expense on lower asset utilization, which accounted for 1.5 points, and other items contributed to the remaining increase. On the balance sheet, we closed the year with just over $1.1 billion in total liquidity, comprised of $870 million in cash and investments and $275 million in undrawn revolvers. Net debt at year-end was just under $1.4 billion. During the year, we prepaid approximately $210 million in 2024 debt maturities, including a $150 million payoff of senior secured notes in the fourth quarter. Fourth-quarter capital expenditures were $143 million, made up of $120 million for payments related to aircraft and engines and $23 million in other airline CapEx. Deferred heavy maintenance spending was $17 million during the quarter. Total airline CapEx for the full year was $568 million, while CapEx for Sunseeker Resort construction reached $321 million, including $53 million in the fourth quarter. Turning to our fleet, we retired one A319 aircraft during the fourth quarter and took delivery of one A320 that began revenue service in January 2024. We expect to take delivery of one additional A320 during the first quarter, which should enter service in the second quarter of 2024. Currently, we plan to retire eight of our oldest A320 aircraft during the year, down from the previously planned 11. As expected, we are actively discussing changes to our 737 MAX delivery schedule with Boeing for 2024. At the time of our last investor update, we anticipated taking delivery of our first MAX aircraft in the first week of 2024. Presently, we estimate that deliveries will start in late March or early April. While the timing of these deliveries is uncertain, we plan conservatively to take delivery of 12 and place into service 10 737 MAX 200 aircraft by the end of this year. Given the uncertainty around these deliveries, we are currently only prepared to speak to the first quarter of 2024. We expect to record an airline operating margin between 8% and 10% on an ASM growth of just over 1% in the March quarter. This guidance assumes an average fuel cost of $2.85 per gallon. We anticipate year-over-year non-fuel unit cost pressure in the first quarter due to our pilot retention bonus accrual, which was not in place during the first quarter of 2023. In closing, I want to express my gratitude to all Allegiant team members for their hard work and achievements in 2023. Our people dedicated themselves tirelessly throughout the year, particularly in managing various major systems implementations. Achieving a 99.8% controllable completion factor has been a key driver in improving our financial performance, and a stabilized operation provides a strong foundation for us to improve peak period fleet utilization and better leverage our investments. Thank you. Sarah, we can now begin taking analyst questions.

Your first question comes from the line of Savi Syth with Raymond James.

If I might, I can appreciate the lack of clarity on the full year with capacity. But I was wondering if you can provide a little bit more color on what's a historical Q-over-Q unit revenue is? And also just on the unit cost, like what you're expecting for the first quarter on a year-over-year basis.

Sherry, I'll take the first part of that. If you go back probably 2011 through 2019, the historical trend has been right about 2.5% on TRASM.

And then, Savi, on the cost side, as I mentioned, the first quarter should show elevated costs on a year-over-year basis, which should be the high point for the year. This is primarily driven by increases in wages for frontline labor groups. You'll see some elevated costs throughout the year, but I would expect that on a full-year basis, we would have a unit cost level below what we finished in the first quarter.

That's helpful. And if I might just follow up in terms of what you're seeing on the demand side, is there any improvement in pricing? I know in the fourth quarter, you mentioned that off-peak pricing was really weak. It sounds like peak pricing is still holding on. Just curious if you're seeing any change in the off-peak pricing? Or is the fact that you're pointing to normal historical Q-over-Q maybe not much of a change there?

Yes. I would look back to just normal leisure seasonality right now. The spread we see between peak and off-peak pricing has certainly maintained its position well above pre-pandemic levels, but the variance between them appears to be what we would consider normal for this time of year.

Your next question comes from the line of Brandon Oglenski with Barclays.

Maybe following up on Savi's line of questioning there. I understand you are only providing airline-only guidance for the first quarter, but how do we think about margin seasonality going into 2Q? Any initial indications on bookings, especially since Greg mentioned that your peak capacity is going to increase significantly versus where you were in ’23. Is that right?

Brandon, it's Greg. I touched on it at a high level, and then Drew could add any color on the peak capacity. My point is that we've adjusted operations to build back and fly more during peak periods. In March, it will be somewhat challenging to start ramping that up due to the uncertainty surrounding the Boeing deliveries. However, we have a clear path to ramping this up for the summer and are looking to achieve a 20% increase by 2025. For the full year, despite the uncertainty with MAX deliveries, we anticipate a strong showing in '24.

I'll add a bit here that Easter falls in April, which will create a meaningful revenue headwind and impact capacity by about 10% year-over-year. The summer capacity should increase beginning at the end of May into early June, and we’re optimistic about that growth.

Okay. Appreciate it, guys. And then a quick one for Robert. How are you guys planning to finance that capital spending this year? What alternatives are you considering?

Sure. We actually issued a request for proposals just in the first week of the year and have received favorable feedback regarding financing the MAX aircraft. Our first four aircraft are already committed to a financing agreement from last year which is a blend between finance lease and an EETC structure, financing at 100% of appraised value. After that, I believe we'll tap into the bank market a bit and look at finance leases. We're focused on financing products that offer us flexibility, and depending on delivery numbers, we may look into the EETC product later in the year. Overall, we want financing solutions that leave the assets on the balance sheet.

Your next question comes from the line of Conor Cunningham with Melius Research.

You mentioned that your pilots and flight attendants are currently up, and there's been considerable movement with Southwest and others. Can you provide an update on where discussions are today? Have your accruals changed at all given market conditions?

I’ll touch on it and then BJ may want to comment on accruals. We are eager to finalize agreements with both our flight attendants and pilots. The flight attendant agreement went out for a vote late last year, which was rejected by a 60% to 40% margin. We've returned to negotiations with the TWU leadership to address the concerns that influenced that vote and aim to bring it back for vote soon. We are cautiously optimistic about progress with our pilots in federal mediation. We've made strides in recent months and expect to settle additional sections of the agreement soon.

The accrual for the pilot retention bonus built up until we finalize an agreement with our pilots. We have not made recent changes to that or started accruing bonuses for flight attendants.

That's helpful. Regarding the Sunseeker contribution, what needs to improve? Is it primarily occupancy, or are there additional costs impacting the early part of this year?

There will be additional costs necessary to finalize operations, while we opened quicker than ideal, we're performing well overall. The revenue side should see normal growth as we recover from our delayed opening. We were unfortunate to shift our planned October opening date into December. This timing hindered advanced bookings and left the end of December as a weaker sales month. We're seeing positive trends now as we gain traction.

We've made notable progress with operational readiness within the past 45 days. Opened venues are performing well, and we've hosted various groups this January and will continue to in February. This bodes well for us as we need to ensure that we are hosting groups effectively to generate positive word-of-mouth and repeat business.

Your next question comes from the line of Duane Pfennigwerth with Evercore ISI.

Can you provide an update on room count towards full operational capacity? How many rooms will be ready by quarter?

We will have about 700 rooms occupied as of tomorrow as we start to host groups, with the full 785 expected by the end of this month.

That's great. Could you provide any anecdotes on distribution so far? Are you mainly attracting customers already going to the area, or are you able to entice people to book a trip based on the resort offering? What other channels are you considering over time?

We have a robust database, currently upwards of 15 million emails, but we didn't kick off our marketing campaign as soon as we should have. Over the past month and 6 weeks, our efforts have focused on creating an introduction. We're starting to see good results as we engage customers. However, we need to refine our strategies. Our use of OTAs right now seems insignificant, comprising only 10-20% of our revenue. This will allow us to experiment with distribution in larger cities since we do not serve them directly.

To add to Maury's comments, about two-thirds of our bookings so far have come from Allegiant customers. We've seen significant traffic from big metro feeder markets, so leveraging OTAs is a good way to connect with customers outside our direct reach. We capture revenue directly for food and beverage, golf, spa, and retail purchases, which all go through our proprietary systems. This allows us to collect customer data and entice them to return directly to us for future bookings.

To clarify, the airline will not be listed on OTAs. Direct distribution for airline tickets will remain solely on our site, so any packaged offerings will also need to be booked through Allegiantair.com.

Your next question comes from the line of Ravi Shanker with Morgan Stanley.

You've done a commendable job on the airline side improving operational reliability. When do you expect to see normalized EPS? Is that a 2024 expectation? What timeline are you considering for a full return?

Ravi, it's Greg. I believe we have a clear path to restoring margins back to pre-pandemic levels. Labor costs remain a significant headwind, affecting not only us but the entire industry. However, we anticipate various tailwinds such as utilization and the anticipated economic advantage of the MAX aircraft. We also have several revenue initiatives in the pipeline. We believe by 2025, we can fully restore our earnings based on what we see with our current model.

Thank you, Greg. What impact do recent headlines regarding Mexico have on the Viva Aerobus collaboration?

We remain confident regarding our ATI approval, which we believe is a matter of when, not if. Our focus is on fostering competition and benefiting consumers. We are diligently working towards resolving the situation but have encountered some delays due to political factors.

The U.S. and Mexican governments have wrangled lately, which has slowed the process. I remain optimistic about moving forward but can't provide a clear timeline yet.

Your next question comes from the line of Helane Becker with TD Cowen.

Can you outline how we can return to 2018 and 2019 margins?

The pathway back to 2019 margins involves stabilizing fuel prices, which were around $2.12 per gallon during that time. That drop would be favorable from a margin perspective. We also need to keep in mind that labor cost increases have been considerable. Just restoring one hour of increased utilization during peak periods is estimated to be worth around $100 million to our margins. We aim to leverage cost-control measures and enhance efficiencies detailed and build a strong growth plan.

We’re not constrained operationally but rather by the fuel prices and demand during off-peak periods. High fuel prices curtailed some operations and we believe by lowering those costs, we can expand our offering and improve profitability.

Remember, we averaged 17% to 18% operating margins in the first half of the year last year, even with higher fuel costs. We need to adjust for one-off costs, especially in labor, to create momentum towards restoring those margins. We are committed to reaching those numbers for our future quarters.

Your next question comes from the line of Dan McKenzie with Seaport Global.

Could you clarify the 20% upside in utilization? If I understood correctly, that timeline was set for 2025 or 2026? Are we looking at normalized earnings around then?

Yes, that's correct, but there are multiple aspects at play. For instance, in July 2023, our average utilization was 7.5 hours compared to 9.8 hours in 2019, which reflects the 20% gap. We expect to narrow that gap in 2024 but fully restore it by 2025.

Understood. Regarding the booking experience for Sunseeker, could you clarify when improvements will be made? How significant is the revenue penalty anticipated for 2024?

Based on our current observations, we're confident in the revenue guidance shared previously but recognize that many factors will ultimately influence the final trajectory. We believe we're currently set at a solid benchmark.

There are many factors affecting our operations and revenue. We've seen unprecedented highs and lows throughout development and expansion, thus we need to maintain realistic expectations. However, we remain hopeful regarding demand trends as we continue building.

To clarify, the enhancements to allegiant.com, needed to align functionalities with our peer set, are expected to be completed by March. While we enhance our website, users notice redirects to the hotel's website, ensuring that even if they book via OTAs, we retain their information for direct marketing.

That is all the time we have for Q&A. I will turn the call to Maury Gallagher for closing remarks.

Thank you all very much for your time as usual. We appreciate your interest and your questions. Follow-up questions can be directed through Sherry and her team, and we'll talk to you in 90 days. Thank you very much. Have a good week.

This concludes your conference call. Thanks for listening. You may now disconnect your lines.