ALGT Q3 2014 10Q Doc


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
 
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to            

Commission File Number 001-33166

Allegiant Travel Company
(Exact Name of Registrant as Specified in Its Charter)
Nevada
20-4745737
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
1201 North Town Center Drive
 
Las Vegas, Nevada
89144
(Address of Principal Executive Offices)
(Zip Code)

Registrant’s Telephone Number, Including Area Code: (702) 851-7300

8360 S. Durango Drive, Las Vegas, Nevada 89113
(Former name, former address and former fiscal year if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x
Accelerated filer  o
 
 
Non-accelerated filer  o
Smaller reporting company  o
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý

The number of shares of the registrant’s common stock outstanding as of the close of business on November 1, 2014 was 17,484,393.




Allegiant Travel Company

Form 10-Q
September 30, 2014

INDEX

PART I. FINANCIAL INFORMATION
 
 
 
ITEM 1. Unaudited Consolidated Financial Statements
 
 
• Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013
 
 
• Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013 (unaudited)
 
 
• Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013 (unaudited)
 
 
• Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)
 
 
• Notes to Consolidated Financial Statements (unaudited)
 
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
ITEM 4. Controls and Procedures
 
 
PART II. OTHER INFORMATION
 
 
ITEM 1. Legal Proceedings
 
 
ITEM 1A. Risk Factors
 
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
ITEM 6. Exhibits

2



PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements

ALLEGIANT TRAVEL COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share amounts)
 
September 30,
2014
 
December 31, 2013
 
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
86,197

 
$
97,711

Restricted cash
17,682

 
10,531

Short-term investments
272,555

 
253,378

Accounts receivable
16,508

 
16,857

Expendable parts, supplies and fuel, net of an allowance for obsolescence of $2,658 and $1,702 at September 30, 2014 and December 31, 2013, respectively
16,402

 
19,428

Prepaid expenses
24,215

 
26,643

Deferred income taxes
3,003

 
4,206

Other current assets
3,751

 
1,167

Total current assets
440,313

 
429,921

Property and equipment, net
717,058

 
451,584

Restricted cash, net of current portion
305

 
305

Long-term investments
99,143

 
36,037

Investment in and advances to unconsolidated affiliates, net
1,703

 
1,655

Deposits and other assets
11,382

 
10,689

Total assets
$
1,269,904

 
$
930,191

Current liabilities:
 
 
 
Current maturities of long-term debt
$
51,895

 
$
20,237

Accounts payable
18,678

 
15,823

Accrued liabilities
60,260

 
87,203

Air traffic liability
195,128

 
167,388

Total current liabilities
325,961

 
290,651

Long-term debt and other long-term liabilities:
 
 
 
Long-term debt, net of current maturities
554,421

 
214,063

Deferred income taxes
48,289

 
48,160

Total liabilities
928,671

 
552,874

Stockholders' equity:
 
 
 
Common stock, par value $.001, 100,000,000 shares authorized; 22,176,778 and 22,036,893 shares issued; 17,484,393 and 18,544,248 shares outstanding, as of September 30, 2014 and December 31, 2013, respectively
22

 
22

Treasury stock, at cost, 4,692,385 and 3,492,645 shares at September 30, 2014 and December 31, 2013, respectively
(315,614
)
 
(186,291
)
Additional paid in capital
220,229

 
209,213

Accumulated other comprehensive gain (loss), net
672

 
(12
)
Retained earnings
434,690

 
352,811

Total Allegiant Travel Company stockholders' equity
339,999

 
375,743

Noncontrolling interest
1,234

 
1,574

Total equity
341,233

 
377,317

Total liabilities and stockholders' equity
$
1,269,904

 
$
930,191

 
The accompanying notes are an integral part of these consolidated financial statements.

3



ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except for per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
OPERATING REVENUE:
 
 
 
 
 
 
 
Scheduled service revenue
$
166,893

 
$
148,466

 
$
559,587

 
$
493,700

Ancillary revenue:
 
 
 
 
 
 
 
Air-related charges
77,198

 
66,577

 
248,432

 
219,904

Third party products, net
8,051

 
8,646

 
28,338

 
29,733

Total ancillary revenue
85,249

 
75,223

 
276,770

 
249,637

Fixed fee contract revenue
4,899

 
3,985

 
10,508

 
12,267

Other revenue
7,988

 
1,200

 
11,229

 
2,075

Total operating revenue
265,029

 
228,874

 
858,094

 
757,679

OPERATING EXPENSES:
 
 
 
 
 
 
 
Aircraft fuel
94,864

 
89,195

 
308,308

 
294,762

Salary and benefits
52,109

 
38,135

 
145,845

 
118,951

Station operations
21,064

 
19,114

 
63,453

 
58,670

Maintenance and repairs
22,562

 
18,310

 
64,590

 
56,773

Sales and marketing
7,808

 
4,514

 
22,269

 
15,727

Aircraft lease rentals
1,565

 
2,025

 
12,897

 
3,693

Depreciation and amortization
22,174

 
17,106

 
60,355

 
51,890

Other
14,016

 
11,243

 
37,826

 
32,758

Total operating expenses
236,162

 
199,642

 
715,543

 
633,224

OPERATING INCOME
28,867

 
29,232

 
142,551

 
124,455

OTHER (INCOME) EXPENSE:
 
 
 
 
 
 
 
Earnings from unconsolidated affiliates, net
(101
)
 
(214
)
 
(173
)
 
(384
)
Interest income
(106
)
 
(328
)
 
(545
)
 
(806
)
Interest expense
7,097

 
2,257

 
13,817

 
6,739

Total other expense
6,890

 
1,715

 
13,099

 
5,549

INCOME BEFORE INCOME TAXES
21,977

 
27,517

 
129,452

 
118,906

PROVISION FOR INCOME TAXES
7,866

 
10,520

 
47,900

 
44,391

NET INCOME
14,111

 
16,997

 
81,552

 
74,515

Net loss attributable to noncontrolling interest
(61
)
 
(109
)
 
(340
)
 
(283
)
NET INCOME ATTRIBUTABLE TO ALLEGIANT TRAVEL COMPANY
$
14,172

 
$
17,106

 
$
81,892

 
$
74,798

Earnings per share to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.80

 
$
0.91

 
$
4.56

 
$
3.92

Diluted
$
0.80

 
$
0.91

 
$
4.54

 
$
3.90

Weighted average shares outstanding used in computing earnings per share to common stockholders:
 
 
 
 
 
 
 
Basic
17,605

 
18,629

 
17,848

 
18,925

Diluted
17,704

 
18,794

 
17,912

 
19,042

 
The accompanying notes are an integral part of these consolidated financial statements.

4



ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
14,111

 
$
16,997

 
$
81,552

 
$
74,515

Other comprehensive income:
 

 
 

 
 
 
 
Unrealized (loss) gain on available-for-sale securities, net
(202
)
 
63

 
(139
)
 
158

Income tax benefit (expense) related to unrealized gain or loss on available-for-sale securities
66

 
(23
)
 
54

 
(59
)
Unrealized gain on derivative instrument, net
959

 

 
1,221

 

Income tax expense related to unrealized gain or loss on derivative activities
(343
)
 

 
(452
)
 

Total other comprehensive income
480

 
40

 
684

 
99

Total comprehensive income
14,591

 
17,037

 
82,236

 
74,614

Comprehensive loss attributable to noncontrolling interest
(61
)
 
(109
)
 
(340
)
 
(283
)
Comprehensive income attributable to Allegiant Travel Company
$
14,652

 
$
17,146

 
$
82,576

 
$
74,897


The accompanying notes are an integral part of these consolidated financial statements.

5



 ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

 
Nine Months Ended September 30,
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
Net income
$
81,552

 
$
74,515

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
60,355

 
51,890

Loss on aircraft and other equipment disposals
3,967

 
4,967

Provision for obsolescence of expendable parts, supplies and fuel
956

 
540

Amortization of deferred financing costs and original issue discount
(2,209
)
 
481

Stock-based compensation expense
13,813

 
7,930

Deferred income taxes
1,332

 
(980
)
Excess tax benefits from stock-based compensation
(3,339
)
 
(1,628
)
Changes in certain assets and liabilities:
 
 
 
Restricted cash
(7,151
)
 
(3,803
)
Accounts receivable
349

 
2,046

Expendable parts, supplies and fuel
2,070

 
(3,182
)
Prepaid expenses
4,928

 
2,134

Other current assets
(3,741
)
 
2,911

Accounts payable
6,194

 
(1,167
)
Accrued liabilities
8,338

 
1,193

Air traffic liability
27,740

 
12,585

Net cash provided by operating activities
195,154

 
150,432

INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(285,918
)
 
(226,763
)
Proceeds from maturities and sale of investment securities
204,306

 
219,387

Purchase of property and equipment, including pre-delivery deposits
(188,131
)
 
(161,560
)
Interest during refurbishment of aircraft

 
(123
)
Proceeds from sale of property and equipment
295

 
494

Investment in unconsolidated affiliates, net
(48
)
 
(2,310
)
Change in deposits and other assets
506

 
10,224

Net cash used in investing activities
(268,990
)
 
(160,651
)
FINANCING ACTIVITIES:
 

 
 

Cash dividends paid to shareholders
(41,787
)
 

Excess tax benefits from stock-based compensation
3,339

 
1,628

Proceeds from exercise of stock options and stock-settled SARs
370

 
2,041

Proceeds from the issuance of long-term debt
385,300

 
48,000

Proceeds from sale of ownership interest in subsidiary

 
1,400

Repurchase of common stock
(129,323
)
 
(79,990
)
Principal payments on long-term debt
(155,577
)
 
(19,225
)
Payments for deferred financing costs

 
(204
)
Net cash provided by (used in) financing activities
62,322

 
(46,350
)
Net change in cash and cash equivalents
(11,514
)
 
(56,569
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
97,711

 
89,557

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
86,197

 
$
32,988

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

Non- cash transactions:
 

 
 

Assets acquired in sale of ownership interest in subsidiary
$

 
$
473

Long-term debt assumed for aircraft
$
141,960

 
$

Assets sold in acquisition of ownership interest in subsidiary
$

 
$
1,225

The accompanying notes are an integral part of these consolidated financial statements.

6



ALLEGIANT TRAVEL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in thousands, except share and per share amounts)

Note 1 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Allegiant Travel Company (the “Company”) and its majority-owned operating subsidiaries. Investments in affiliates in which the Company’s ownership interest ranges from 20 to 50 percent and in which the Company has the ability to exercise significant influence over operating and financial policies are accounted for under the equity method. All intercompany balances and transactions have been eliminated.

These unaudited consolidated financial statements reflect all normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations, and cash flows of the Company for the respective periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto included in the annual report of the Company on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The interim results reflected in the unaudited consolidated financial statements are not necessarily indicative of the results that may be expected for other interim periods or for the full year.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued new guidance related to reporting discontinued operations. This new standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The new standard is effective for fiscal years beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. The Company is evaluating the impact, if any, of adopting this new accounting standard on its financial statements.

In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning January 1, 2017 and at that time, can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the impact of adopting this new accounting standard on its financial statements.

Note 2 — Investment Securities

The Company’s investments in marketable securities are classified as available-for-sale and are reported at fair market value with the net unrealized gain or loss reported as a component of accumulated other comprehensive income ("AOCI") in stockholders’ equity. Excluded from the table below is the change in fair value attributable to the foreign currency risk being hedged. Refer to Note 7 - Derivative Instruments for additional information related to the Company's foreign currency hedge. Investment securities are classified as cash equivalents, short-term investments and long-term investments based on maturity date. Cash equivalents have maturities of three months or less and short-term investments have maturities of greater than three

7



months but equal to or less than one year and long-term investments are those with a maturity date greater than one year. Investment securities consisted of the following:

 
As of September 30, 2014
 
As of December 31, 2013
 
 
 
Gross Unrealized
 
 
 
 
 
Gross Unrealized
 
 
 
Cost
 
Gains
 
(Losses)
 
Market Value
 
Cost
 
Gains
 
(Losses)
 
Market Value
Money market funds
$
35,795

 
$

 
$

 
$
35,795

 
$
20,172

 
$

 
$

 
$
20,172

Certificates of deposit
10,038

 
3

 

 
10,041

 

 

 

 

Commercial paper
66,956

 
6

 
(10
)
 
66,952

 
75,905

 
8

 
(2
)
 
75,911

Municipal debt securities
137,936

 
30

 
(3
)
 
137,963

 
181,870

 
17

 
(19
)
 
181,868

Government debt securities
28,992

 

 
(29
)
 
28,963

 
10,008

 

 

 
10,008

Corporate debt securities
141,153

 
1

 
(99
)
 
141,055

 
45,150

 

 
(16
)
 
45,134

Federal agency debt securities
$
4,709

 
$
1

 
$

 
$
4,710

 
$

 
$

 
$

 
$

Total
$
425,579

 
$
41

 
$
(141
)
 
$
425,479

 
$
333,105

 
$
25

 
$
(37
)
 
$
333,093

 
The amortized cost of investment securities sold is determined by the specific identification method with any realized gains or losses reflected in other (income) expense. The Company had minimal realized gains for the nine months ended September 30, 2014 and 2013.

Note 3 — Property and Equipment

As of September 30, 2014, the Company owned 53 MD-80 aircraft, six Boeing 757-200 aircraft, seven Airbus A320 aircraft and 15 Airbus A319 aircraft, which include 12 Airbus A319 aircraft on lease to a third party. The Airbus A320 aircraft and Airbus A319 aircraft are sometimes referred to collectively as Airbus A320 series aircraft.

Property and equipment consist of the following:

 
As of September 30, 2014
 
As of December 31, 2013
Flight equipment
$
936,462

 
$
629,715

Ground property and equipment
90,065

 
73,638

Total property and equipment
1,026,527

 
703,353

Less accumulated depreciation and amortization
(309,469
)
 
(251,769
)
Property and equipment, net
$
717,058

 
$
451,584


In August 2014, the Company terminated the existing lease agreements and agreed to purchase eight Airbus A320 series aircraft subject to previously executed lease agreements. Concurrently with the execution of the agreement, the Company closed on the purchase of two of these aircraft which were previously on lease to the Company and were part of the Company’s operating fleet. The Company expects to take delivery of the remaining aircraft between December 2014 and December 2015. The financial impact of this transaction is reflected in the table above for the two purchased aircraft and in the contractual obligations table included in Note 10 - Commitments and Contingencies.

In June 2014, the Company entered into separate agreements to acquire the ownership interests in 12 special purpose companies each owning one Airbus A320 series aircraft currently on lease to a European carrier until 2018. The purchase price for the special purpose companies was approximately $236.1 million, of which approximately $142.0 million was by assumption of debt secured by the aircraft with the remaining balance funded by cash. Refer to Note 4 - Long Term Debt for details on the assumed notes payable.

The Company performed a fair value assessment of the assumed debt and the in-place leases and determined both to be at fair value. Upon expiration of the current leases in 2018, the Company intends to bring these aircraft into its operating fleet. Currently, the Company recognizes lease revenue and incurs minimal administrative costs to maintain the leases during the term these Airbus A320 series aircraft are under lease. Lease revenue and administrative costs related to this transaction are reflected in the Company's results of operations. Additionally, interest expense and depreciation expense related to the assumed

8



notes payable and asset ownership of the acquired Airbus A320 series aircraft since their acquisition in June 2014 are reflected in the Company’s results of operations.

The following table summarizes the Company's total aircraft fleet as of September 30, 2014:

Aircraft Type
 
Owned (1)
 
Seating Capacity (per aircraft)
 
Average Age in Years
MD-88/83
 
53

 
166

 
24.8
B757-200
 
6

 
215

 
21.6
A319 (2)
 
15

 
156

 
10.0
A320
 
7

 
177

 
14.0
Total aircraft
 
81

 
 
 
 
(1)
Two of the Company's owned Airbus A319 aircraft are unencumbered. Refer to Note 4 - Long-Term Debt for further information on the Company's notes payable.
(2)
Of the 15 Airbus A319 aircraft at September 30, 2014, three Airbus A319 aircraft are in revenue service and included in the Company's operating fleet and 12 Airbus A319 aircraft currently are on lease to a European carrier until 2018.

Note 4 — Long-Term Debt

Long-term debt consisted of the following:
 
 
As of September 30, 2014
 
As of December 31, 2013
5.50% Senior Notes, due July 2019
$
300,000

 
$

Notes payable, secured by aircraft, interest at LIBOR plus 3.08%, due November 2018
135,995

 

Notes payable, secured by aircraft, interest at LIBOR plus 2.46%, due November 2019
43,302

 
48,000

Note payable, secured by aircraft, interest at LIBOR plus 2.95%, due April 2018
41,053

 

Notes payable, secured by aircraft, interest at 3.99%, due October 2018
39,110

 
45,775

Notes payable, secured by aircraft, interest at LIBOR plus 2.95%, due May 2018
37,108

 

Note payable, secured by real estate, interest at 2.86%, due October 2018
9,748

 
9,953

Senior secured term loan facility, interest at LIBOR plus 4.25% with LIBOR floor of 1.5%, due March 2017

 
121,230

Note payable, secured by aircraft, interest at 4.65%, due July 2016

 
9,342

Total long-term debt
606,316

 
234,300

Less current maturities
51,895

 
20,237

Long-term debt, net of current maturities
$
554,421

 
$
214,063

 












9



Maturities of long-term debt, as of September 30, 2014, for the remainder of 2014 and for the next four years and thereafter, in aggregate, are:

 
September 30, 2014
2014
$
13,200

2015
53,879

2016
55,554

2017
57,323

2018
112,601

Thereafter
313,759

Total
$
606,316


General Unsecured Senior Notes

In June 2014, the Company completed an offering of $300.0 million aggregate principal amount of senior unsecured obligations (the "Notes") which will mature in July 2019. The Notes constitute general unsecured senior obligations of the Company and rank equally in right of payment with all existing and future senior unsecured indebtedness and liabilities (including trade payables) of the Company. The Notes are effectively junior to the Company’s existing and future secured indebtedness. The Notes are guaranteed by all of the Company’s wholly-owned domestic subsidiaries and rank equally in right of payment with all existing and future unsecured indebtedness and liabilities (including trade payables) of the Company’s guarantor subsidiaries, but effectively junior to the guarantors’ existing and future secured indebtedness.

The Notes bear interest at a rate of 5.50 percent per year, payable in cash semi-annually, on January 15 and July 15 of each year, commencing on January 15, 2015, and will mature on July 15, 2019.

At any time, the Company may redeem the Notes, in whole or in part, at a price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest, plus a “make-whole premium”. The occurrence of specific kinds of changes in control will be a triggering event requiring the Company to offer to purchase from the holders all or a portion of the Notes at a price equal to 101% of the principal amount, together with accrued and unpaid interest, if any, to the date of purchase.

The indenture pursuant to which the Notes were issued includes operating and financial restrictions on the Company. These restrictions limit or restrict, among other things, the Company’s ability and the ability of its restricted subsidiaries to (i) incur additional indebtedness; (ii) incur liens; (iii) make restricted payments (including paying dividends on, redeeming, repurchasing or retiring capital stock); (iv) make investments; and (v) consolidate, merge or sell all or substantially all of its assets. These covenants are subject to various exceptions and qualifications under the terms of the indenture.
    
Other

In June 2014, the Company assumed $142.0 million of debt in connection with the acquisition of 12 separate special purpose companies, each owning one Airbus A320 series aircraft. The notes payable assumed bear interest at LIBOR plus 3.08 percent and are payable in monthly installments through November 2018 when a balloon payment is due.

In May 2014, the Company borrowed $40.0 million secured by six Boeing 757-200 aircraft. The notes payable bear interest at LIBOR plus 2.95 percent and are payable in monthly installments through May 2018 when a balloon payment is due.

In April 2014, the Company borrowed $45.3 million under a loan agreement secured by 53 MD-80 aircraft. The note payable issued under the loan agreement bears interest at LIBOR plus 2.95 percent and is payable in monthly installments through April 2018 when a balloon payment is due.

In September 2013, the Company borrowed $48.0 million under a modified loan agreement secured by four Airbus A320 series aircraft. The notes payable issued under the modified loan agreement bear interest at 3.99 percent per annum and are payable in monthly installments through October 2018. 

In October 2013, the Company borrowed $10.0 million under a loan agreement secured by real estate now used as the Company's headquarter offices. The note payable issued under the loan agreement bears interest at 2.86 percent per annum and is payable in monthly installments through October 2018 when a balloon payment of $8.5 million is due.

10



In November 2013, the Company borrowed $48.0 million under a loan agreement secured by four Airbus A320 series aircraft. The notes payable issued under the loan agreement bear interest at LIBOR plus 2.46 percent per annum and are payable in monthly installments through November 2019 when a balloon payment is due.

In the second quarter 2014, the Company prepaid in full the $8.5 million balance owed on its note payable secured by two Boeing 757-200 aircraft originally due in July 2016.

Note 5 — Stockholders’ Equity

The Company is authorized by the Board of Directors to acquire the Company's stock through open market purchases under its share repurchase program. During the nine months ended September 30, 2014, the Company repurchased 953,309 shares through open market purchases at an average cost of $103.44 per share for a total expenditure of $98,606. In addition to open market purchases during the nine months ended September 30, 2014, the Company repurchased shares through private transactions totaling 246,431 shares at current market prices. Refer to Part II Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds for detail on these transactions. Open market and private repurchases bring total repurchases for the first nine months of 2014 to 1,199,740 shares for a total expenditure of $129,323. During the nine months ended September 30, 2013, the Company repurchased 880,991 shares through open market purchases at an average price of $85.64 per share for a total expenditure of $75,449.

Note 6 — Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 - Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities

Level 2 - Defined as inputs other than Level 1 inputs that are either directly or indirectly observable

Level 3 - Defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company uses the market approach valuation technique to determine fair value for investment securities. The assets classified as Level 1 consist of money market funds for which original cost approximates fair value. The assets classified as Level 2 consist of certificates of deposit, commercial paper, municipal debt securities, government debt securities, federal agency debt securities, and corporate debt securities, which are valued using quoted market prices or alternative pricing sources including transactions involving identical or comparable assets and models utilizing market observable inputs.

For those assets classified as Level 2 that are not in active markets, the Company obtained fair value from pricing sources using quoted market prices for identical or comparable instruments and based on pricing models which include all significant observable inputs, including maturity dates, issue dates, settlement dates, benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers and other market related data. These inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.

Derivative Financial Instruments

The fair value of the Company's derivative instrument is determined using standard valuation models. The significant inputs used in these models are readily available in public markets or can be derived from observable market transactions and therefore have been classified as Level 2. Inputs used in these standard valuation models for derivative instruments include the applicable exchange and interest rates.









11


Assets measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013 were as follows:
 
 
 
 
 
Fair Value Measurements at Reporting Date Using
Description
 
September 30, 2014
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
$
35,795

 
$
35,795

 
$

 
$

Commercial paper
 
9,999

 

 
9,999

 

Municipal debt securities
 
7,283

 

 
7,283

 

Corporate debt securities
 
704

 

 
704

 

Total cash equivalents
 
53,781

 
35,795

 
17,986

 

Short-term investments
 
 

 
 

 
 

 
 

Municipal debt securities
 
122,204

 

 
122,204

 

Corporate debt securities
 
78,647

 

 
78,647

 

Commercial paper
 
56,953

 

 
56,953

 

Certificates of deposit
 
10,041

 

 
10,041

 

Federal agency debt securities
 
4,710

 

 
4,710

 

Total short-term investments
 
272,555

 

 
272,555

 

Long-term investments
 
 

 
 

 
 

 
 

Corporate debt securities
 
61,704

 

 
61,704

 

Government debt securities
 
28,963

 

 
28,963

 

Municipal debt securities
 
8,476

 

 
8,476

 

Derivative instrument
 
1,221

 

 
1,221

 

Total long-term investments
 
100,364

 

 
100,364

 

Total financial assets
 
$
426,700

 
$
35,795

 
$
390,905

 
$


 
 
 
 
Fair Value Measurements at Reporting Date Using
Description
 
December 31, 2013
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
$
20,172

 
$
20,172

 
$

 
$

Municipal debt securities
 
23,506

 

 
23,506

 

Total cash equivalents
 
43,678

 
20,172

 
23,506

 

Short-term investments
 
 

 
 

 
 

 
 

Municipal debt securities
 
122,325

 

 
122,325

 

Commercial paper
 
75,911

 

 
75,911

 

Corporate debt securities
 
45,134

 

 
45,134

 

Government debt securities
 
10,008

 

 
10,008

 

Total short-term investments
 
253,378

 

 
253,378

 

Long-term investments
 
 

 
 

 
 

 
 

Municipal debt securities
 
36,037

 

 
36,037

 

Total long-term investments
 
36,037

 

 
36,037

 

Total investment securities
 
$
333,093

 
$
20,172

 
$
312,921

 
$

 
The Company had no transfers between Level 1 and Level 2 assets for the nine months ended September 30, 2014 and no significant transfers between Level 1 and Level 2 assets during the year ended December 31, 2013.

12


The carrying amounts and estimated fair value of the Company's long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at September 30, 2014, are presented in the table below. The fair value of the Company’s publicly held long-term debt is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized its publicly held debt as Level 2. The remaining six of the Company’s debt agreements are not publicly held. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.

 
As of September 30, 2014
 
Carrying value
 
Estimated fair value
 
Fair value level hierarchy
5.50% Senior Notes, due July 2019
$
300,000

 
$
307,500

 
Level 2
Notes payable, secured by aircraft, interest at LIBOR plus 3.08%, due November 2018
135,995

 
134,842

 
Level 3
Notes payable, secured by aircraft, interest at LIBOR plus 2.46%, due November 2019
43,302

 
43,037

 
Level 3
Note payable, secured by aircraft, interest at LIBOR plus 2.95%, due April 2018
41,053

 
40,753

 
Level 3
Notes payable, secured by aircraft, interest at 3.99%, due October 2018
39,110

 
38,724

 
Level 3
Notes payable, secured by aircraft, interest at LIBOR plus 2.95%, due May 2018
37,108

 
36,836

 
Level 3
Note payable, secured by real estate, interest at 2.86%, due October 2018
9,748

 
9,679

 
Level 3
Total
$
606,316

 
$
611,371

 
 

Note 7 — Derivative Instruments

The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company's financial performance and are referred to as "market risks." When deemed appropriate, the Company will use derivatives as a risk management tool to mitigate the potential impact of certain market risks. The market risk managed by the Company through the use of a derivative instrument is foreign currency exchange rate risk. The Company is currently using a foreign currency swap which is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. The Company does not enter into derivative financial instruments for trading purposes.

For derivatives that will be accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company formally assesses, both at inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any change in fair market value of any ineffective portion of a financial instrument is immediately recognized into earnings.

The Company determines the fair value of its derivative based on quoted market prices or pricing models using current market rates. Refer to Note 6 - Fair Value Measurements. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates or other financial indices. The Company does not view the fair value of its derivative in isolation, but rather in relation to the fair value or cash flows of the underlying hedged transaction or other exposures. The Company's derivative is a straightforward over-the-counter instrument with liquid markets.








13


The following table presents the fair value of the Company's derivative instrument that was designated and qualified as part of a hedging relationship (in thousands):

 
 
 
Fair Value (1)(2)
Derivative Designated as Hedging Instrument
Balance Sheet Location (1)
 
September 30, 2014
 
December 31, 2013
Foreign currency swap
Deposits and other assets
 
$
1,221

 
$


(1) The Company's derivative instrument is carried at fair value in its consolidated balance sheet after considering the impact of legally enforceable master netting agreements and cash collateral held or placed with the same counterparties, as applicable. At September 30, 2014, no amounts were netted under a master netting arrangement and no collateral was held or placed with the counterparty.
(2) Refer to Note 6 - Fair Value Measurements for additional information related to the estimated fair value.

Cash Flow Hedging Strategy

The Company has entered into a foreign currency swap in order to mitigate the foreign currency exchange rate risk associated with the forecasted lease revenue from 12 Airbus A320 series aircraft leased to a European based company. The Company uses a cash flow hedge to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates. The change in the fair value of a derivative designated as a cash flow hedge is recorded in AOCI.    

The Company maintains a foreign currency cash flow hedge to reduce the risk that its eventual U.S. dollar net cash inflows from leased aircraft outside the United States will be adversely affected by fluctuations in foreign currency exchange rates. The Company entered into a forward swap to hedge certain portions of forecasted cash flows denominated in euros. When the U.S. dollar strengthens against the foreign currency, the decline in the present value of future foreign currency cash flows is partially offset by gains in the fair value of the derivative instrument. Conversely, when the U.S. dollar weakens, the increase in the present value of future foreign currency cash flows is partially offset by losses in the fair value of the derivative instrument.

The total notional value of the Company's derivative instrument that was designated and qualified for the Company's foreign currency cash flow hedge was $1.2 million as of September 30, 2014.

The following table presents the pretax impact that changes in the fair values of the derivative instrument designated as a cash flow hedge had on AOCI during the three and nine months ended September 30, 2014 and 2013 (in thousands):

 
 
Gain (Loss) Recognized in Other Comprehensive Income ("OCI")
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Foreign currency swap
 
$
343

 
$

 
$
452

 
$


Note 8 — Income Taxes

For the three and nine months ended September 30, 2014, the Company did not have any material unrecognized tax benefits. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There was no accrued interest or penalties at September 30, 2014.

Note 9 — Earnings per Share

Basic and diluted earnings per share are computed pursuant to the two-class method. Under this method, the Company attributes net income to two classes, common stock and unvested restricted stock awards. Unvested restricted stock awards granted to employees under the Company’s Long-Term Incentive Plan are considered participating securities as they receive non-forfeitable rights to cash dividends at the same rate as common stock.



14


Diluted net income per share is calculated using the more dilutive of two methods. Under both methods, the exercise of employee stock options and stock-settled stock appreciation rights are assumed using the treasury stock method. The assumption of vesting of restricted stock, however, differs:

1.
Assume vesting of restricted stock using the treasury stock method.
2.
Assume unvested restricted stock awards are not vested, and allocate earnings to common shares and unvested restricted stock awards using the two-class method.

Both methods resulted in the same diluted net income per share for the three months ended September 30, 2014 and 2013. For the nine months ended September 30, 2014 and 2013, the second method which assumes unvested awards are not vested, was used in the computation because it was more dilutive than the first method. The following table sets forth the computation of net income per share, on a basic and diluted basis for the periods indicated (shares shown in and below the following table are in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Basic:
 
 
 
 
 
 
 
Net income attributable to Allegiant Travel Company
$
14,172

 
$
17,106

 
$
81,892

 
$
74,798

Less: Net income allocated to participating securities
(90
)
 
(135
)
 
(586
)
 
(563
)
Net income attributable to common stock
$
14,082

 
$
16,971

 
$
81,306

 
$
74,235

Net income per share, basic
$
0.80

 
$
0.91

 
$
4.56

 
$
3.92

Weighted-average shares outstanding
17,605

 
18,629

 
17,848

 
18,925

Diluted:
 

 
 

 
 

 
 

Net income attributable to Allegiant Travel Company
$
14,172

 
$
17,106

 
$
81,892

 
$
74,798

Less: Net income allocated to participating securities

 

 
(584
)
 
(559
)
Net income attributable to common stock
$
14,172

 
$
17,106

 
$
81,308

 
$
74,239

Net income per share, diluted
$
0.80

 
$
0.91

 
$
4.54

 
$
3.90

Weighted-average shares outstanding
17,605

 
18,629

 
17,848

 
18,925

Dilutive effect of stock options, restricted stock and stock-settled stock appreciation rights
99

 
165

 
101

 
151

Adjusted weighted-average shares outstanding under treasury stock method
17,704

 
18,794

 
17,949

 
19,076

Participating securities excluded under two-class method
N/A

 
N/A

 
(37
)
 
(34
)
Adjusted weighted-average shares outstanding under two-class method
N/A

 
N/A

 
17,912

 
19,042


Stock awards outstanding of 50 shares for the three months ended September 30, 2014 and 75 shares for the nine months ended September 30, 2014 were excluded from the computation of diluted earnings per share as they were antidilutive. For the three and nine months ended September 30, 2013, stock awards outstanding of 33 shares and 191 shares were excluded, respectively.

Note 10 — Commitments and Contingencies

As of September 30, 2014, the Company had firm commitments to purchase the following aircraft:

Aircraft Type
 
Number of Firm Commitments
Airbus A319
 
7
Airbus A320
 
3

The aircraft listed in the table above are scheduled for delivery starting in the last quarter of 2014 through 2016.

15


The table below summarizes the Company's commitments as of September 30, 2014, which primarily relate to the acquisition of aircraft, aircraft improvements, operating lease obligations, and other commitments primarily to acquire information technology services and assets and other capital expenditure projects.

 
 
As of September 30, 2014
Last three months of 2014
 
$
73,987

2015
 
156,993

2016
 
47,303

2017
 
6,286

2018
 
46

After 2018
 
91

Total commitments
 
$
284,706


As of September 30, 2014, the Company has adequate liquidity resourses and may use operating cash flows, future financing or cash balances to meet these future commitments. The Company can provide no assurance that financing for aircraft purchases will be available to the Company on acceptable terms when necessary or at all.

The Company is subject to certain legal and administrative actions it considers routine to its business activities. The Company believes the ultimate outcome of any pending legal or administrative matters will not have a material adverse impact on its financial position, liquidity or results of operations.    

Note 11 — Related Party Transactions

The buildings where the Company has maintained its headquarters and training facility during the nine months ended September 30, 2014 are leased from a limited liability company in which our Chief Executive Officer and one outside Director own a significant interest as non-controlling members. Under the terms of these agreements, the Company made rent payments totaling $2.5 million for the nine months ended September 30, 2014 and $2.1 million for the same period in 2013.

For the nine months ended September 30, 2014, Game Plane, LLC, a wholly owned subsidiary of the Company, paid $3.0 million in program development costs to Alpine Labs, LLC. Alpine Labs, LLC has partnered with Game Plane, LLC to produce and distribute game shows filmed on Company flights. The game shows are part of promotional efforts for the Company. The Company’s Chairman and Chief Executive Officer owns a 25 percent interest in and is on the managing board of Alpine Labs, LLC.

The Company, as part of its stock repurchase plan, agreed to repurchase all of Andrew Levy's, former President, Director, and Chief Operating Officer, previously unvested shares of restricted stock (23,623 shares) and all of his previously unexercised stock options (options to purchase 127,512 shares at exercise prices between $36.97 per share and $108.59 per share). The repurchases were made based on a stock price of $124.05 per share, which was the average closing price of the Company’s stock over the five trading days prior to the date of the separation agreement. As a result, the Company paid Mr. Levy approximately $8.5 million for the cancellation of these shares of restricted stock and stock options.

During the quarter, the Company repurchased 200,000 shares of the Company's common stock from Maurice Gallagher, Chairman and Chief Executive Officer, as part of the Company's stock repurchase program. The price paid was $126.20 per share, based on the average closing price over the five days preceding the transaction for a total purchase price of $25.2 million.

Note 12 — Subsequent Events

In October 2014, the Company purchased five additional buildings, totaling 82,000 square feet, adjacent to the Company's headquarters for approximately $10.1 million. The buildings are unencumbered and were acquired to facilitate the Company's future growth opportunities.

In October 2014, the Company entered into an agreement to purchase two Airbus A320 series aircraft. The Company expects to take delivery of the two Airbus A320 series aircraft in 2016.


16



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents factors that had a material effect on our results of operations during the three and nine months ended September 30, 2014 and 2013. Also discussed is our financial position as of September 30, 2014 and December 31, 2013. You should read this discussion in conjunction with our unaudited consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q and our consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 31, 2013. This discussion and analysis contains forward-looking statements. Please refer to the section below entitled “Special Note About Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Third quarter 2014 results

During the third quarter of 2014, we achieved a 10.9 percent operating margin resulting in pretax income of $28.9 million compared to $29.2 million in the third quarter of 2013. The decrease was largely due to the departure of Andrew Levy, our former President and COO, as of September 30, 2014, which resulted in nonrecurring expenses of $7.3 million attributable to the acceleration of vesting of equity grants. Excluding these one-time expenses, we would have achieved a 13.7 percent operating margin and pretax income of $36.2 million.

Our total operating revenues in the third quarter of 2014 increased $36.2 million or 15.8 percent compared to the same period in the prior year. Total operating revenues improved due to an increase in scheduled service passengers of 13.6 percent in addition to a 2.1 percent increase in our average ancillary air-related charges per passenger year-over-year. The increase in average ancillary air-related charges was a result of continued strength in existing ancillary categories such as assigned seat fees, trip flex and priority boarding and newly implemented fee to print a boarding pass at the ticket counter which began in September 2014.

Our operating expense per ASM ("CASM") increased 6.0 percent from 10.58¢ for the three months ended September 30, 2013 to 11.21¢ for the same period of 2014. CASM and CASM, excluding fuel, were impacted by approximately $7.3 million of nonrecurring expenses due to the immediate vesting of all unvested stock options and restricted stock triggered by the departure of Andrew Levy, our former President and COO. Fuel efficiency trends continued during the three months ended September 30, 2014 with a decline of 4.9 percent in our year-over-year fuel expense per ASM. Our ASMs per gallon increased 2.8 percent to 68.9 for the three months ended September 30, 2014 compared to 67.0 for the same period in 2013. These results were driven by having ten Airbus A320 series aircraft in our operating fleet which accounted for approximately 21.6 percent of our ASMs during the quarter and 14.5 percent of our total in-service fleet.

As of September 30, 2014, we had $457.9 million in unrestricted cash and investment securities and $606.3 million of total debt, including current maturities. Our liquidity position continues to provide us with opportunities to return excess capital to shareholders and invest in strategic corporate initiatives, fleet growth, our share repurchase program, and our IT infrastructure. Our cash and non-cash capital expenditures totaled $330.1 million during the first nine months of 2014.






















17


Aircraft

Operating Fleet

As of September 30, 2014, our total aircraft in service consisted of 53 MD-80 aircraft, six Boeing 757-200 aircraft, three Airbus A319 aircraft, and seven Airbus A320 aircraft. The following table sets forth the number and type of aircraft in service and operated by us as of the dates indicated:

 
As of September 30, 2014
 
As of December 31, 2013
 
As of September 30, 2013
 
Own (b)
 
Lease
 
Total
 
Own (b)
 
Lease
 
Total
 
Own (b)
 
Lease
 
Total
MD82/83/88s (a)
53

 

 
53

 
52

 

 
52

 
52

 

 
52

B757-200
6

 

 
6

 
6

 

 
6

 
6

 

 
6

A319
3

 

 
3

 
1

 
2

 
3

 
1

 
2

 
3

A320
7

 

 
7

 
5

 

 
5

 

 

 

Total
69

 

 
69

 
64

 
2

 
66

 
59

 
2

 
61

(a)
Includes the following number of MD-80 aircraft (MD-82/83/88s) modified to a 166-seat configuration: September 30, 2014 – 53; December 31, 2013 – 51; September 30, 2013 – 51.
(b)
Does not include aircraft owned, but not added to our operating fleet or temporarily stored as of the date indicated.

References below to Airbus A320 series aircraft include Airbus A319 aircraft and Airbus A320 aircraft.

Airbus Aircraft

In October 2014, we entered into an agreement to purchase two Airbus A320 series aircraft. We expect to take possession of these two Airbus A320 series aircraft in 2016.    

In August 2014, we entered into an agreement to purchase eight Airbus A320 series aircraft which we had previously committed to lease. As of September 30, 2014, we have purchased two of these Airbus A320 series aircraft which had been in revenue service under leases since 2013. We expect to take possession of the remaining aircraft under this purchase agreement in 2014 and 2015 and expect to place these aircraft in service in 2015 and 2016.

In the second quarter 2014, we entered into purchase agreements for two Airbus A320 series aircraft. We expect to acquire these two Airbus A320 series aircraft in the second quarter of 2015 and first quarter of 2016.

In August 2013, we entered into purchase agreements for two Airbus A320 series aircraft. We expect to acquire these two Airbus A320 series aircraft in the fourth quarter of 2014 and place them in revenue service in 2015.

Fleet Plan
 
The following table provides the expected number of operating aircraft in service at the end of the respective quarters:

 
December 31, 2014
 
December 31, 2015
MD-80 (166 seats)
53

 
53

B757-200
6

 
6

A319
4

 
8

A320
7

 
10

Total
70

 
77


Network

On September 30, 2014, we offered scheduled service on 231 routes into 13 leisure destinations. On September 30, 2014, we served 83 small cities in 39 states (including small cities and destinations) in our route network.


18


The following shows the number of destinations and small cities served, and routes operated as of the dates indicated (includes cities served seasonally):

 
As of September 30, 2014
 
As of December 31, 2013
 
As of September 30, 2013
Leisure destinations
13

 
14

 
14

Small cities served
83

 
86

 
74

Total cities served
96

 
100

 
88

Total routes
231

 
226

 
199


Trends and Uncertainties

Our fuel efficiency metrics continue to improve as we operated ten Airbus A320 series aircraft during the quarter which accounted for 21.6 percent of our total ASM production. Our fuel cost per ASM decreased 4.9 percent from 4.73¢ in third quarter 2013 to 4.50¢ in 2014 primarily due to a 2.8 percent increase in ASMs per gallon. In addition, our system average fuel cost per gallon decreased 2.2 percent from $3.17 for the third quarter of 2013 to $3.10 for the same period of 2014. Fuel costs in the long-term remain uncertain and fuel cost volatility could materially affect our future operating costs.

    During the third quarter 2014, we purchased two Airbus A320 series aircraft which were previously leased and already included in our operating fleet. We expect our MD-80 aircraft fleet to remain at 53 aircraft during 2014 and 2015. We believe our six Boeing 757-200 aircraft, our MD-80 aircraft fleet, the ten Airbus A320 series aircraft in service and the contracted acquisition of additional used Airbus A320 series aircraft will meet our aircraft needs to support our planned growth through 2015.

Our network grew from 199 routes as of September 30, 2013, to 231 routes at September 30, 2014. We expect to continue to aggressively manage capacity in our markets in an attempt to maximize profitability. Total scheduled service revenue per ASM ("TRASM") improved to 12.40¢ in the third quarter of 2014 compared to 12.26¢ for the same period in 2013, primarily due to a 2.1 percent increase in our year-over-year average ancillary air-related charges per passenger as a result of continued strength in existing ancillary categories such as assigned seat fees, trip flex and priority boarding and newly implemented fee to print a boarding pass at the ticket counter which began in September 2014. We continue to focus on operating a higher percentage of our flights during peak windows and a lower percentage of flights during off-peak windows. We believe this approach with our planned departure and ASM growth will contribute to the achievement of our profitability goals in the current operating environment.

We have three employee groups which have voted for union representation: pilots, flight attendants, and flight dispatchers. These three employee groups make up approximately 51.7 percent of our total employee base. We are currently in various stages of negotiations for collective bargaining agreements with the labor organizations representing these employee groups. Any labor actions following an inability to reach collective bargaining agreements could materially impact our operations during the continuance of any such activity.

19


RESULTS OF OPERATIONS

Comparison of three months ended September 30, 2014 to three months ended September 30, 2013

The table below presents our operating expenses as a percentage of operating revenue for the periods indicated:

 
Three Months Ended September 30,
 
2014
 
2013
Total operating revenues
100.0
%
 
100.0
%
Operating expenses:
 

 
 

Aircraft fuel
35.8

 
39.0

Salaries and benefits
19.7

 
16.7

Station operations
7.9

 
8.4

Maintenance and repairs
8.5

 
8.0

Sales and marketing
2.9

 
2.0

Aircraft lease rentals
0.6

 
0.9

Depreciation and amortization
8.4

 
7.5

Other
5.3

 
4.9

Total operating expenses
89.1
%
 
87.4
%
Operating margin
10.9
%
 
12.6
%
 
 Operating Revenue

Our operating revenue increased 15.8 percent to $265.0 million for the three months ended September 30, 2014, up from $228.9 million for the same period of 2013 primarily due to a 12.4 percent increase in scheduled service revenue and a 13.3 percent increase in ancillary revenue. The increase in scheduled service revenue was primarily attributable to a 13.6 percent increase in scheduled service passengers which, in turn, was driven by a 13.7 percent increase in scheduled service departures. Ancillary revenue improved due to a 2.1 percent increase in our year-over-year ancillary average air-related charges per passenger as a result of continued strength in existing ancillary categories such as assigned seat fees, trip flex and priority boarding and a newly implemented fee to print a boarding pass at the ticket counter which began in September 2014. Other revenue increased to $8.0 million for the three months ended September 30, 2014 from $1.2 million for the same period of 2013 as a result of aircraft lease revenue from the purchase in June 2014 of 12 Airbus A320 series aircraft currently on lease to a European carrier. Our operating margin decreased to 10.9 percent for the three months ended September 30, 2014 compared to 12.6 percent for the same period of 2013 due to nonrecurring compensation expenses triggered by the departure of Andrew Levy, our former President and COO. Excluding these nonrecurring compensation expenses, our operating margin would have been 13.7 percent.
Scheduled service revenue. Scheduled service revenue increased 12.4 percent to $166.9 million for the three months ended September 30, 2014, up from $148.5 million in the same period of 2013. The increase was driven by a 13.6 percent increase in the number of scheduled service passengers while scheduled service average fare decreased slightly to $86.01 for the three months ended September 30, 2014 compared to $86.94 for the same period of 2013. Scheduled service departures increased 13.7 percent while load factor and seats per departure remained relatively flat year-over-year.
Ancillary revenue. Ancillary revenue increased 13.3 percent to $85.2 million for the three months ended September 30, 2014, up from $75.2 million in the same period of 2013, primarily driven by a 16.0 percent increase in air-related charges largely attributable to a 13.6 percent increase in scheduled service passengers. Our air-related ancillary revenue per scheduled service passenger increased $0.80 primarily attributable to the implementation of a fee to print a boarding pass at the ticket counter in September 2014 as well as continued strength in existing ancillary categories such as assigned seat fees, trip flex and priority boarding. Third party products revenue decreased primarily due to lower hotel revenue.








20


The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

 
Three Months Ended September 30,
 
Percentage
 
2014
 
2013
 
Change
Air-related charges
$
39.79

 
$
38.99

 
2.1
 %
Third party products
4.15

 
5.06

 
(18.0
)%
Total ancillary revenue per scheduled service passenger
$
43.94

 
$
44.05

 
(0.2
)%
 
The following table details the calculation of ancillary revenue from third party products. Third party products consist of revenue from the sale of hotel rooms, ground transportation (rental cars and hotel shuttle products), attraction and show tickets, and fees we receive from other merchants selling products through our website:
 
 
Three Months Ended September 30,
 
Percentage
(in thousands except room nights and rental car days)
2014
 
2013
 
Change
Gross ancillary revenue - third party products
$
27,451

 
$
28,741

 
(4.5
)%
Cost of goods sold
(18,948
)
 
(19,613
)
 
(3.4
)%
Transaction costs (a)
(452
)
 
(482
)
 
(6.2
)%
Ancillary revenue - third party products
$
8,051

 
$
8,646

 
(6.9
)%
As percent of gross ancillary revenue - third party
29.3
%
 
30.1
%
 
(0.8) pp

Hotel room nights
125,048

 
144,442

 
(13.4
)%
Rental car days
198,794

 
195,259

 
1.8
 %
 
(a) Includes payment expenses and travel agency commissions.
 
During the three months ended September 30, 2014, we generated gross revenue of $27.5 million from the sale of third party products, which resulted in net revenue of $8.1 million. Net third party products revenue decreased 6.9 percent primarily due to a reduction in hotel room nights partially offset by an increase in the sale of rental car days. The 1.8 percent increase in rental car days sold was driven by an increase in scheduled service passengers to those markets where a higher percentage of rental car days are typically sold, such as Florida, and recently launched technology initiatives. Hotel revenue decreased as our previous pre-purchase agreement for discounted rooms in Las Vegas concluded in the third quarter of 2013 and was renewed late in the fourth quarter 2013 with rates that were not as attractive as the prior deal due to the improved Las Vegas hotel market.
Fixed fee contract revenue. Fixed fee contract revenue increased by $0.9 million to $4.9 million for the three months ended September 30, 2014, compared to the same period of 2013. Our fixed fee revenue is largely generated from charter flying for a casino operator and additional ad hoc contracts for football charters during the three months ended September 30, 2014 compared to the same period of 2013.
Other revenue. Other revenue increased $6.8 million to $8.0 million for the three months ended September 30, 2014 compared to the same period of 2013. This was primarily due to the aircraft lease revenue related to the 12 Airbus A320 series aircraft acquired in June 2014 on lease to a European carrier.
Operating Expenses
 
Our operating expenses increased 18.3 percent to $236.2 million for the three months ended September 30, 2014 compared to $199.6 million in the same period of 2013 as we increased capacity (ASMs) by 11.6 percent. We primarily evaluate our expense management by comparing our costs per passenger and per ASMs across different periods, which enables us to assess trends in each expense category.






21


The following table presents operating expense per passenger for the indicated periods (“per-passenger costs”). The table also presents operating expense per passenger, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by the number of passengers carried. This statistic provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility. Both the cost and availability of fuel are subject to many economic and political factors beyond our control.

 
Three Months Ended September 30,
 
Percentage
 
2014
 
2013
 
Change
Aircraft fuel
$
48.10

 
$
51.17

 
(6.0
)%
Salary and benefits
26.43

 
21.88

 
20.8

Station operations
10.68

 
10.97

 
(2.6
)
Maintenance and repairs
11.44

 
10.50

 
9.0

Sales and marketing
3.96

 
2.59

 
52.9

Aircraft lease rentals
0.79

 
1.16

 
(31.9
)
Depreciation and amortization
11.24

 
9.81

 
14.6

Other
7.12

 
6.46

 
10.2

Operating expense per passenger
$
119.76

 
$
114.54

 
4.6
 %
Operating expense per passenger, excluding fuel
$
71.66

 
$
63.37

 
13.1
 %

The following table presents unit costs, defined as Operating CASM, for the indicated periods. The table also presents Operating CASM, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by ASMs. As on a per passenger basis, excluding fuel on a per ASM basis provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility.
 
 
Three Months Ended September 30,
 
 
Percentage
 
2014
 
 
2013
 
 
Change
Aircraft fuel
4.50

¢
 
4.73

¢
 
(4.9
)%
Salary and benefits
2.47

 
 
2.02

 
 
22.3

Station operations
1.00

 
 
1.01

 
 
(1.0
)
Maintenance and repairs
1.07

 
 
0.97

 
 
10.3

Sales and marketing
0.37

 
 
0.24

 
 
54.2

Aircraft lease rentals
0.07

 
 
0.11

 
 
(36.4
)
Depreciation and amortization
1.05

 
 
0.90

 
 
16.7

Other
0.68

 
 
0.60

 
 
13.3

Operating expense per ASM (CASM)
11.21

¢
 
10.58

¢
 
6.0
 %
CASM, excluding fuel
6.71

¢
 
5.85

¢
 
14.7
 %

Aircraft fuel expense. Aircraft fuel expense increased 6.4 percent to $94.9 million for the three months ended September 30, 2014 compared to $89.2 million in the same period of 2013. The increase is primarily attributable to a 12.7 percent increase in total system departures year-over-year, which increased gallons consumed by 8.5 percent. On a fuel expense per ASM basis, we experienced a decrease of 4.9 percent due to a 2.2 percent decrease in average fuel cost per gallon from $3.17 to $3.10 and better fuel efficiency. Fuel efficiency as defined as ASMs per gallon increased predominantly due to a higher percentage of used Airbus A320 series aircraft in our operating fleet which accounted for 21.6 percent of our ASMs during the quarter compared to 5.6 percent of our ASMs in the same period of 2013. As a result of these factors, our aircraft fuel expense per passenger decreased by 6.0 percent for the three months ended September 30, 2014 when compared to the same period of 2013.
Salary and benefits expense. Salary and benefits expense increased 36.6 percent to $52.1 million for the three months ended September 30, 2014 up from $38.1 million in the same period of 2013. The increase is primarily attributable to a 15.6 percent increase in the number of full-time equivalent employees and a one-time expense of $7.3 million due to the departure of Andrew Levy, our former President and COO. Excluding this one-time expense, we would have experienced a 17.4 percent increase in salary and benefits expense. Headcount growth was mostly attributable to flight crews, flight operations and maintenance staff to support an 11.7 percent increase in the average number of aircraft in revenue service year-over-year and

22


increasing Airbus A320 series aircraft operations. Salary and benefits expense continues to be pressured by crew training constraints that have negatively impacted our crew productivity and overall growth.
Station operations expense. Station operations expense increased 10.2 percent to $21.1 million for the three months ended September 30, 2014 compared to $19.1 million in the same period of 2013. A 12.7 percent increase in total system departures was offset by a 2.6 percent decrease in station operations expense per passenger from $10.97 for the three months ended September 30, 2013 to $10.68 for the same period of 2014. Station expense per departure decreased 2.4 percent year-over-year primarily due to our growth on the east coast mostly driven by a 30.8 percent increase in Florida markets where the per departure costs are on average 35.0 percent less than west coast markets such as Las Vegas.

Maintenance and repairs expense. Maintenance and repairs expense increased 23.2 percent to $22.6 million for the three months ended September 30, 2014 compared to $18.3 million in the same period of 2013. The increase was primarily attributable to an 11.7 percent increase in average operating fleet size from 61.8 aircraft for the three months ended September 30, 2013 to 69.0 aircraft for the same period 2014. In addition, we had two more heavy maintenance events during the three months ended September 30, 2014 compared to the same period in 2013. During the three month periods ended September 30, 2014, our maintenance expense per aircraft per month was approximately $109 thousand compared to $99 thousand in the same period last year.
Sales and marketing expense. Sales and marketing expense increased $3.3 million to $7.8 million for the three months ended September 30, 2014 compared to the same period of 2013 primarily due to a 6.3 percent increase of credit card fees per passenger year-over-year. We incurred increased advertising cost for the launch of three destinations from Cincinnati and a national ad campaign. Advertising expenses included a national ad campaign and the production costs related to the completion of our “Game Plane” game show contributed $1.5 million of sales and marketing expenses during the quarter. In the third quarter of 2014, we spent $0.84 per scheduled passenger in advertising versus $0.32 per passenger in the prior year.
Aircraft lease rentals expense. Aircraft lease rentals expense decreased from $2.0 million for the three months ended September 30, 2013 to $1.6 million for the three months ended September 30, 2014. The decrease in aircraft lease rentals expense relates to decreased need to contract for sub-service flying for scheduled routes compared to the same period in 2013 when subservice was required while we temporarily removed aircraft from service for necessary inspections.

Depreciation and amortization expense. Depreciation and amortization expense increased 29.6 percent to $22.2 million for the three months ended September 30, 2014, compared to $17.1 million in the same period of 2013. The increase was a result of our average number of owned aircraft in service increasing 11.7 percent to 69.0 aircraft for the three months ended September 30, 2014 compared to 61.8 aircraft for same period in 2013 and depreciation related to 12 owned Airbus A320 series aircraft currently on lease to a European carrier. Excluding these 12 leased, non-ASM producing aircraft, our depreciation and amortization expense per ASM would have decreased approximately 1.7 percent.
Other expense. Other expense increased 24.7 percent to $14.0 million for the three months ended September 30, 2014 from $11.2 million for the same period of 2013. The increase was primarily attributable to flight operations training costs driven by an 11.7 percent increase in average operating fleet size, transportation and lodging costs to move flight crews to support seasonal bases in Myrtle Beach and Los Angeles and continued use of outside support for ongoing IT projects.
 
Other (Income) Expense

Other (income) expense increased $5.2 million to an expense of $6.9 million for the three months ended September 30, 2014 from $1.7 million for the same period in 2013. The increase is due to additional interest expense from increased borrowings primarily driven by the issuance of $300.0 million of senior unsecured notes in June 2014.

Income Tax Expense

Our effective income tax rate decreased to 35.8 percent for the three months ended September 30, 2014 from 38.2 percent for the same period of 2013. The decrease is primarily due to foreign tax credits related to our acquisition of the ownership interests in 12 special purpose companies and the removal of the executive compensation tax deduction limitation related to the departure of Andrew Levy. While we expect our tax rate to be fairly consistent in the near term, it will vary depending on recurring items such as the amount of income we earn in each state and the state tax rate applicable to such income. Discrete items during interim periods may also affect our tax rates.




23


Comparison of nine months ended September 30, 2014 to nine months ended September 30, 2013
 
The table below presents our operating expenses as a percentage of operating revenue for the periods indicated:

 
Nine Months Ended September 30,
 
2014
 
2013
Total operating revenues
100.0
%
 
100.0
%
Operating expenses:
 

 
 

Aircraft fuel
35.9

 
38.9

Salaries and benefits
17.0

 
15.7

Station operations
7.4

 
7.7

Maintenance and repairs
7.5

 
7.5

Sales and marketing
2.6

 
2.1

Aircraft lease rentals
1.5

 
0.5

Depreciation and amortization
7.0

 
6.8

Other
4.5

 
4.3

Total operating expenses
83.4
%
 
83.5
%
Operating margin
16.6
%
 
16.5
%

Operating Revenue

Our operating margin remained relatively flat year-over-year at 16.6 percent for the nine months ended September 30, 2014 compared to 16.5 percent for the same period of 2013. Our operating revenue increased 13.3 percent to $858.1 million for the nine months ended September 30, 2014, up from $757.7 million for the same period of 2013 primarily due to a 13.3 percent increase in scheduled service revenue and a 10.9 percent increase in ancillary revenue. Increases in scheduled service revenue and ancillary revenue were primarily driven by a 12.2 percent increase in scheduled service passengers as our total average fare increased slightly period over period. In addition, other revenue increased to $11.2 million for the nine months ended September 30, 2014, up from $2.1 million for the same period of 2013 as a result of the aircraft lease revenue from the purchase in June 2014 of 12 Airbus A320 series aircraft currently on lease to a European carrier.

Scheduled service revenue. Scheduled service revenue increased 13.3 percent to $559.6 million for the nine months ended September 30, 2014, up from $493.7 million in the same period of 2013. The increase was primarily driven by a 12.2 percent increase in the number of scheduled service passengers and a 1.0 percent increase in the average scheduled service fare year-over-year. Scheduled service departures increased 12.2 percent while our load factor and seats per departure remained relatively unchanged year-over-year.

Ancillary revenue. Ancillary revenue increased 10.9 percent to $276.8 million for the nine months ended September 30, 2014, up from $249.6 million in the same period of 2013. While air-related charges on a per passenger basis remained relatively flat year-over-year, a 12.2 percent increase in scheduled service passengers contributed to the increased revenues as well as increased revenues from existing ancillary categories such as assigned seat fees, priority boarding and trip flex resulting from the implementation of a new change fee policy. Third party products revenue decreased primarily due to lower hotel revenue.













24


The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

 
Nine Months Ended September 30,
 
Percentage
 
2014
 
2013
 
Change
Air-related charges
$
40.75

 
$
40.49

 
0.6
 %
Third party products
4.65

 
5.47

 
(15.0
)%
Total ancillary revenue per scheduled service passenger
$
45.40

 
$
45.96

 
(1.2
)%

The following table details the calculation of ancillary revenue from third party products. Third party products consist of revenue from the sale of hotel rooms, ground transportation (rental cars and hotel shuttle products), attraction and show tickets, and fees we receive from other merchants selling products through our website:

 
Nine Months Ended September 30,
 
Percentage
(in thousands except room nights and rental car days)
2014
 
2013
 
Change
Gross ancillary revenue - third party products
$
95,552

 
$
96,950

 
(1.4
)%
Cost of goods sold
(65,783
)
 
(65,670
)
 
0.2
 %
Transaction costs (a)
(1,430
)
 
(1,547
)
 
(7.6
)%
Ancillary revenue - third party products
$
28,339

 
$
29,733

 
(4.7
)%
As percent of gross ancillary revenue - third party
29.7
%
 
30.7
%
 
(1.0) pp

Hotel room nights
405,293

 
470,974

 
(13.9
)%
Rental car days
725,138

 
684,149

 
6.0
 %

(a) Includes payment expenses and travel agency commissions
 
During the nine months ended September 30, 2014, we generated gross revenue of $95.6 million from the sale of third party products, which resulted in net revenue of $28.3 million. Net third party products revenue decreased 4.7 percent primarily due to a reduction of hotel room nights partially offset by an increase in rental car days. The increase of 6.0 percent in rental car days was driven by an increase in scheduled service passengers to those markets where more rental car days are typically sold, such as Florida, and recently launched technology initiatives. The reduction in hotel room sales, primarily in the Las Vegas market, was driven by a change in our pre-purchase agreement for discounted room rates in Las Vegas which concluded in the third quarter of 2013 and was renewed with rates which are not as attractive as the prior deal due to the improved Las Vegas hotel market.

Fixed fee contract revenue. Fixed fee contract revenue decreased 14.3 percent to $10.5 million for the nine months ended September 30, 2014, from $12.3 million in the same period of 2013. The decrease was driven by a 12.8 percent decrease year-over-year in fixed fee block hours flown, largely due to lack of crew availability for NCAA March Madness flying in the first quarter of 2014.
 
Other revenue. We generated other revenue of $11.2 million for the nine months ended September 30, 2014 compared to $2.1 million in the same period of 2013. This was primarily due to the aircraft lease revenue related to the 12 Airbus A320 series aircraft acquired in June 2014 on lease to a European carrier.

Operating Expenses
 
Our operating expenses increased 13.0 percent to $715.5 million for the nine months ended September 30, 2014 compared to $633.2 million in the same period of 2013 as we increased ASMs by 9.6 percent. We primarily evaluate our expense management by comparing our costs per passenger and per ASMs across different periods, which enables us to assess trends in each expense category.




25


The following table presents operating expense per passenger for the indicated periods.

 
Nine Months Ended September 30,
 
Percentage
 
2014
 
2013
 
Change
Aircraft fuel
$
49.82

 
$
53.29

 
(6.5
)%
Salary and benefits
23.57

 
21.50

 
9.6

Station operations
10.25

 
10.61

 
(3.4
)
Maintenance and repairs
10.44

 
10.26

 
1.8

Sales and marketing
3.60

 
2.84

 
26.8

Aircraft lease rentals
2.08

 
0.67

 
210.4

Depreciation and amortization
9.75

 
9.38

 
3.9

Other
6.12

 
5.92

 
3.4

Operating expense per passenger
$
115.63

 
$
114.47

 
1.0
 %
Operating expense per passenger, excluding fuel
$
65.81

 
$
61.18

 
7.6
 %

The following table presents unit costs, defined as Operating CASM, for the indicated periods.

 
Nine Months Ended September 30,
 
 
Percentage
 
2014
 
 
2013
 
 
Change
Aircraft fuel
4.55

¢
 
4.77

¢
 
(4.6
)%
Salary and benefits
2.15

 
 
1.92

 
 
12.0

Station operations
0.94

 
 
0.95

 
 
(1.1
)
Maintenance and repairs
0.95

 
 
0.92

 
 
3.3

Sales and marketing
0.33

 
 
0.25

 
 
32.0

Aircraft lease rentals
0.19

 
 
0.06

 
 
216.7

Depreciation and amortization
0.89

 
 
0.84

 
 
6.0

Other
0.56

 
 
0.53

 
 
5.7

Operating expense per ASM (CASM)
10.56

¢
 
10.24

¢
 
3.1
 %
CASM, excluding fuel
6.01

¢
 
5.47

¢
 
9.9
 %

Our overall cost per ASM increased 3.1 percent for the nine months ended September 30, 2014 compared to the same period in the prior year as increases in salary and benefits expense, aircraft lease rentals expense, and sales and marketing more than offset lower fuel cost per ASM. Fuel expense per ASM decreased 4.6 percent year-over-year due to our improved fuel efficiency as we operated ten Airbus A320 series aircraft and the average fuel cost per gallon decreased 1.6 percent. CASM, excluding fuel, was impacted by nonrecurring expenses related to aircraft sub-service, crew training, delay and loss of flight crew productivity, passenger displacement costs related to crew availability, and compensation expense due to the departure of Andrew Levy, our former President and COO. Sales and marketing expense per ASM increased as a result of higher credit card fees attributable to higher revenue and higher advertising expenses related to a national ad campaign and the production costs related to the completion of the first season of our "Game Plane" game show.

Aircraft fuel expense. Aircraft fuel expense increased 4.6 percent to $308.3 million for the nine months ended September 30, 2014, compared to $294.8 million in the same period of 2013. This change was due to a 6.2 percent increase in gallons consumed offset by a 1.6 percent decrease in the average fuel cost per gallon. The increase in gallons consumed is attributable to a 10.8 percent increase in total system departures offset by improved fuel efficiency. Fuel efficiency increased predominantly due to a higher percentage of used A320 series Airbus aircraft in our operating fleet which accounted for 20.4 percent of our ASMs for the nine months ended September 30, 2014 compared to only 3.6 percent during the same period in 2013.
 
Salary and benefits expense. Salary and benefits expense increased 22.6 percent to $145.8 million for the nine months ended September 30, 2014 up from $119.0 million in the same period of 2013. The increase is primarily attributable to a 15.6

26


percent increase in the number of full-time equivalent employees and a one-time expense of approximately $7.3 million due to the departure of Andrew Levy. Excluding this one-time expense, we would have experienced a 16.4 percent increase in salary and benefits expense. Headcount growth was mostly attributable to flight crews, flight operations and maintenance staff to support an 8.7 percent increase in the average number of aircraft in revenue service year-over-year and increasing Airbus A320 series aircraft operations.

Station operations expense. Station operations expense increased 8.2 percent to $63.5 million for the nine months ended September 30, 2014 compared to $58.7 million in the same period of 2013 as system departures increased 10.8 percent year-over-year. On a per passenger basis, station operations expenses decreased by 3.4 percent from $10.61 for the nine months ended September 30, 2013 to $10.25 for the same period in 2014 as an 11.9 percent increase in total system passengers outpaced the percentage increase in this line item. Additionally, on a per departure basis, station operations expense decreased 2.4 percent.

Maintenance and repairs expense. Maintenance and repairs expense increased 13.8 percent to $64.6 million for the nine months ended September 30, 2014, compared to $56.8 million in the same period of 2013. The increase was primarily attributable to an 8.7 percent increase in average operating fleet size from 63.2 aircraft for the nine months ended September 30, 2013 to 68.7 aircraft for the same period in 2014. In addition, we had six more heavy maintenance events during the nine months ended September 30, 2014 compared to the same period in 2013. During the nine months ended September 30, 2014, our maintenance expense per aircraft per month was approximately $104 thousand compared to $100 thousand in the same period last year.
 
Sales and marketing expense. Sales and marketing expense increased by $6.5 million to $22.3 million for the nine months ended September 30, 2014, compared to $15.7 million in the same period of 2013 primarily due to a 5.0 percent increase in credit card fees per passenger year-over-year. During the nine months ended September 30, 2014, we incurred higher advertising expenses related to a national ad campaign and the production costs related to the completion of the first season of our "Game Plane" game show. Additionally, we incurred higher advertising cost to support the launch of 17 new routes in the first nine months of 2014.

Aircraft lease rentals expense. We had $12.9 million in aircraft lease rentals expense for the nine months ended September 30, 2014 compared to $3.7 million in the same period of 2013. During the nine months ended September 30, 2014, we incurred $11.6 million in contracting sub-service flying needed due to crew training delays. Offsetting aircraft rental expense was the reduction of supplemental rents associated with probable return conditions on two Airbus A320 series aircraft which had been under operating leases. These aircraft were purchased from operating leases in the second quarter of 2014.

Depreciation and amortization expense. Depreciation and amortization expense increased 16.3 percent to $60.4 million for the nine months ended September 30, 2014, compared to $51.9 million in the same period of 2013. The increase was driven by an 8.7 percent increase in the average number of operating aircraft year-over-year. Additionally, during the second quarter of 2014, we began to depreciate 12 Airbus A320 series aircraft we purchased in June 2014 currently on lease to a European carrier.
 
Other expense. Other expense increased 15.5 percent to $37.8 million for the nine months ended September 30, 2014 from $32.8 million for the same period of 2013. The increase was primarily attributable to flight operations training costs driven by an 8.7 percent increase in average operating fleet size, non-capitalized IT development costs, and other administrative costs associated with our growth.

Other (Income) Expense

Other (income) expense increased $7.6 million to an expense of $13.1 million for the nine months ended September 30, 2014 from $5.5 million for the same period in 2013. The increase is due to the write off of unamortized deferred financing cost related to the prepayment of the $121.1 million balance of our senior secured term loan facility in the second quarter of 2014 and additional interest expense from increased borrowings primarily driven by the issuance of $300.0 million of senior unsecured notes in June 2014.

Income Tax Expense

Our effective income tax rate was relatively flat at 37.0 percent for the nine months ended September 30, 2014 compared to 37.3 percent for the same period of 2013. While we expect our tax rate to be fairly consistent in the near term, it will vary depending on recurring items such as the amount of income we earn in each state and the state tax rate applicable to such income. Discrete items during interim periods may also affect our tax rates.

27


Comparative Consolidated Operating Statistics

The following tables set forth our operating statistics for the three and nine months ended September 30, 2014 and 2013:
 
Three Months Ended September 30,
 
Percent
 
2014
 
2013
 
Change*
Operating statistics (unaudited):
 
 
 
 
 
Total system statistics:
 
 
 
 
 
Passengers
1,971,917

 
1,742,961

 
13.1

Revenue passenger miles (RPMs) (thousands)
1,867,660

 
1,685,208

 
10.8

Available seat miles (ASMs) (thousands)
2,106,214

 
1,886,698

 
11.6

Load factor
88.7
%
<