Allegiant Travel CO - Annual Report: 2017 (Form 10-K)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017 | |
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) | (IRS 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock, $0.001 Par Value | Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 (§ 229.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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) | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 aggregate market value of common equity held by non-affiliates of the registrant was approximately $1.7 billion computed by reference to the closing sale price of the common stock on the Nasdaq Global Select Market on June 30, 2017, the last trading day of the registrant’s most recently completed second fiscal quarter.
The number of shares of the registrant’s common stock outstanding as of the close of business on February 2, 2018 was 16,066,667.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used in connection with the solicitation of proxies to be voted at the registrant’s annual meeting to be held on June 28, 2018, and to be filed with the Commission subsequent to the date hereof, are incorporated by reference into Part III of this Report on Form 10-K.
EXHIBIT INDEX IS LOCATED ON PAGE 70.
Allegiant Travel Company
Form 10-K
For the Year Ended December 31, 2017
Table of Contents
PART I | ||
ITEM 1. | ||
ITEM 1A. | ||
ITEM 1B. | ||
ITEM 2. | ||
ITEM 3. | ||
ITEM 4. | ||
PART II | ||
ITEM 5. | ||
ITEM 6. | ||
ITEM 7. | ||
ITEM 7A. | ||
ITEM 8. | ||
ITEM 9. | ||
ITEM 9A. | ||
ITEM 9B. | ||
PART III | ||
ITEM 10. | ||
ITEM 11. | ||
ITEM 12. | ||
ITEM 13. | ||
ITEM 14. | ||
PART IV | ||
ITEM 15. | ||
ITEM 16. | ||
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PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this annual report on Form 10-K, and in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that are based on our management’s beliefs and assumptions, and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, fleet plan, financing plans, competitive position, industry environment, potential growth opportunities, future service to be provided and the effects of future regulation and competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project” or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in the forward-looking statements. Important risk factors that could cause our results to differ materially from those expressed in the forward-looking statements may be found in this annual report on Form 10-K and in our other periodic reports filed with the Securities and Exchange Commission at www.sec.gov. These risk factors include, without limitation, an accident involving or problems with our aircraft, our ability to protect the confidentiality of personal data, reliance on automation systems, volatility of fuel costs, labor issues and costs, the ability to obtain regulatory approvals as needed, the effect of economic conditions on leisure travel, debt balances and covenants, the ability to finance aircraft under contract, terrorist attacks, risks inherent to airlines, our dependence on our leisure destination markets, the competitive environment, constraints on our ability to grow as we transition to a single fleet type, successful execution of our resort development in Southwest Florida, our reliance on third parties who provide facilities, aircraft or services to us, the possible loss of key personnel, economic and other conditions in markets in which we operate, governmental regulation, increases in maintenance costs and cyclical and seasonal fluctuations in our operating results.
Any forward-looking statements are based on information available to us today and we undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.
Item 1. Business
Overview
We are a leisure travel company focused on providing travel services and products to residents of under-served cities in the United States. We were founded in 1997 and, in conjunction with our initial public offering in 2006, we incorporated in the state of Nevada. Our unique business model provides diversified revenue streams from various travel services and product offerings which distinguish us from other travel companies. We operate a low-cost passenger airline marketed primarily to leisure travelers in under-served cities, allowing us to sell air transportation both on a stand-alone basis and bundled with the sale of air-related and third party services and products. In addition, we provide air transportation under fixed fee flight arrangements. Our developed route network, pricing philosophy, advertising, and product offerings built around relationships with premier leisure companies, are all intended to appeal to leisure travelers and make it attractive for them to purchase air travel and related services and products from us.
Below is a brief description of the travel services and products we provide to our customers:
Scheduled service air transportation. We provide scheduled air transportation on limited-frequency, nonstop flights predominantly between under-served cities and popular leisure destinations. As of February 2, 2018, our operating fleet consisted of 37 MD-80 aircraft and 53 Airbus A320 series aircraft. As of that date, we were selling travel on 396 routes to 119 cities. In this document, references to "Airbus A320 series aircraft" are intended to describe both Airbus A319 and A320 aircraft.
Air-related ancillary products and services. We provide unbundled air-related services and products in conjunction with air transportation for an additional cost to customers. These optional air-related services and products include a customer convenience fee, baggage fees, advance seat assignments, our own travel protection product, change fees, use of our call center for purchases, priority boarding, food and beverage purchases on board, and other air-related services.
Third party ancillary products and services. We offer third party travel products such as hotel rooms, ground transportation (rental cars and hotel shuttle products) and attractions (show and tour tickets) for sale to our passengers. Revenue related to our co-branded credit card is also accounted for in this category.
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Fixed fee contract air transportation. We provide air transportation through fixed fee agreements and charter service on a year-round and ad-hoc basis.
Other revenue. We currently, temporarily, act as a lessor as an avenue to opportunistically acquire aircraft and/or engines and we may choose to do so in the future. Upon the expiration of a lease, we expect to operate the asset(s) ourselves. We are also currently leasing spare engines to a third party and may choose to act as lessor temporarily in the future on an opportunistic basis. In addition, we are currently offering a management solution to golf courses around the country, the revenue from which is reflected in this line item.
Our announced development of Sunseeker Resorts in Southwest Florida exemplifies our expansion in the travel and leisure industry. We expect to expand our travel and leisure offerings in the future.
Our principal executive offices are located at 1201 N. Town Center Drive, Las Vegas, Nevada 89144. Our telephone number is (702) 851-7300. Our website address is http://www.allegiant.com. We have not incorporated by reference into this annual report the information on our website and investors should not consider it to be a part of this document. Our website address is included in this document for reference only. Our annual report, quarterly reports, current reports and amendments to those reports are made available free of charge through the investor relations section on our website as soon as reasonably practicable after electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).
Unique Business Model
We have developed a unique business model that focuses on leisure travelers in small and medium-sized cities. The business model has evolved as our experienced management team has looked differently at the traditional way business has been conducted in the airline and travel industries. Our focus on the leisure customer allows us to eliminate the significant costs associated with serving a wide variety of customers and to concentrate our product appeal on a customer base which is under-served by traditional airlines. We have consciously developed a business model which distinguishes us from the traditional airline approach:
Traditional Airline Approach | Allegiant Approach | |||
• | Focus on business and leisure travelers | • | Focus on leisure travelers | |
• | Provide high frequency service from big cities | • | Provide low frequency service from small and medium-sized cities | |
• | Use smaller aircraft to provide connecting service from smaller markets through hubs | • | Use larger jet aircraft to provide nonstop service from origination cities direct to leisure destinations | |
• | Utilize bundled pricing | • | Utilize unbundled pricing of air-related services and products | |
• | Sell through various intermediaries | • | Sell only directly to travelers | |
• | Offer flight connections | • | Do not offer connecting flights | |
• | Use code-share arrangements to increase passenger traffic | • | Do not use code-share arrangements | |
By unbundling our air-related services and products such as baggage fees, advance seat assignments, travel protection, change fees, priority boarding, and food and beverage purchases, which have typically been bundled by many traditional airlines, we are able to significantly lower our airfares and target leisure travelers who are more concerned with price and the ability to customize their experience with us by only purchasing the additional conveniences they value. This strategy allows us to generate significant additional ancillary revenues.
We have established a route network with a national footprint, providing service on 389 routes (and currently selling 396 routes) between 98 origination cities and 19 leisure destinations, and serving 42 states and Puerto Rico as of February 2, 2018. In most of these small and medium-sized cities, we provide service to more than one of our leisure destinations. We currently provide service to the popular leisure destinations of Las Vegas, NV; Orlando, FL; Phoenix, AZ; Tampa/St. Petersburg, FL; Los Angeles, CA; Ft. Lauderdale, FL; Punta Gorda, FL; the San Francisco Bay Area, CA; Palm Springs, CA; Austin, TX; New Orleans, LA; Jacksonville, FL; Savannah/Hilton Head, GA; Baltimore/Washington, DC; Destin, FL; Newark, NJ (providing service to New York City, NY); and San Juan, Puerto Rico. We also provide service on a seasonal basis to San Diego, CA, and Myrtle Beach, SC.
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The geographic diversity of our route network protects us from regional variations in the economy and helps insulate us from competitive actions, as it would be difficult for a competitor to materially impact our business by targeting one city or region. Our widespread route network also contributes to the continued growth of our customer base.
In developing a unique business model, our ancillary offerings, including the sale of third party products and services, have been a significant source of our total operating revenue growth. We have increased ancillary revenue per passenger from $5.87 in 2004 to $49.36 in 2017. We own and manage our own air reservation system, which gives us the ability to modify our system to enhance product offerings based on specific needs, without being dependent on non-customized product upgrades from outside suppliers. We believe the control of our automation systems has allowed us to be innovators in the industry by providing our customers with a variety of different travel services and products and allowing us to seek to increase revenues through testing of alternative revenue management approaches.
We believe the following strengths from our unique business model allow us to maintain a competitive advantage in the markets we serve:
Focus on leisure traffic from small and medium-sized cities
We believe small and medium-sized cities represent a large, under-served, market, especially for leisure travel. Prior to the initiation of our service, leisure travelers from these markets had limited desirable options to reach leisure destinations because existing carriers are generally focused on connecting business customers through their hub-and-spoke networks. In 2014, we began serving selected medium-sized cities, to which many major carriers have reduced service, creating a void for us to fill with limited or no direct nonstop competition on each route.
We believe our low fare, nonstop service, along with our leisure company relationships, make it attractive for leisure travelers to purchase airfare and travel-related products from us. The size of the markets we serve, and our focus on the leisure customer, allow us to adequately serve our markets with less frequency, and to vary our air transportation capacity to match seasonal and day of the week demand patterns.
By focusing primarily on under-served cities and routes, we believe we avoid the intense competition in high traffic domestic air corridors. In most of our small and medium-sized city markets, travelers previously faced high airfares and cumbersome connections or long drives to major airports in order to reach our leisure destinations. Based on published data from the U.S. Department of Transportation (“DOT”), we believe the initiation of our service stimulates demand, as we have typically seen a substantial increase in traffic subsequent to new service beginning. Our market strategy is neither hostile to legacy carriers, whose historical focus has been connecting small cities to business markets with regional jets, nor to traditional low cost or ultra-low cost carriers generally focused on larger markets. Additionally, many major carriers have reduced service to medium-sized cities which we believe they no longer consider to be core hubs.
Capacity management
We actively manage our seat capacity to match leisure demand patterns. Our ability to quickly adjust capacity helps us maintain our profitability in the dynamic travel industry. Because of our low fixed costs, our low unit costs are not dependent on high utilization.
Our core business model manages seat capacity by increased utilization of our aircraft during periods of high leisure demand and decreased utilization in low leisure demand periods. In 2017, during our peak demand period in June, we averaged 7.8 system block hours per aircraft per day while in September, our lowest month for demand, we averaged 4.6 system block hours per aircraft per day. Our management of seat capacity also includes changes in weekly frequency of certain markets based on identified peak and off-peak travel demand throughout the year. For example, the leisure destination of Palm Springs, CA, is more desirable for our customers from Bellingham, WA during winter months. Therefore, we seasonally decrease the frequency of our Bellingham-Palm Springs flights in the summer, and increase flights per week in the winter. Unlike other carriers which provide a fairly consistent number of flights every day of the week, we concentrate our flights on high demand leisure travel days and fly a smaller portion of our schedule on low demand days such as Tuesdays and Wednesdays.
Our strong ancillary revenue production, coupled with our ability to rapidly deploy or contract capacity, has allowed us to operate profitably throughout periods of high fuel prices and economic recession. We manage our capacity with a goal of being profitable on each route.
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Low cost structure
We believe a low cost structure is essential to competitive success in the airline industry. Our operating expense per available seat mile ("CASM") was 8.02¢ in 2016 and 9.38¢ in 2017. Excluding the cost of fuel, our operating CASM was 5.94¢ in 2016 and also excluding fuel and the impairment charge, 6.60¢ in 2017. Our 2017 CASM was adversely affected by a one-time impairment charge to our MD-80 fleet which is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7. This cost trend is expected to reverse once we have fully transitioned to an all-Airbus fleet.
We continue to focus on maintaining low operating costs through the following tactics and strategies:
Low Aircraft Ownership Costs. We achieve low aircraft ownership costs by purchasing primarily used aircraft with meaningful remaining useful lives, at reduced prices. As of February 2, 2018, we own all of our aircraft and believe that we properly balance lower aircraft acquisition costs and operating costs to minimize our total costs. Although our 12 newly manufactured Airbus A320 series aircraft (ten of which had been delivered by December 31, 2017) have higher purchase prices, we expect the benefits of a greater number of seats, better fuel efficiency, and longer depreciable lives will make these aircraft efficient additions to our fleet. In addition, our network has evolved such that we plan to maintain higher levels of daily utilization on the newly manufactured aircraft. As of February 2, 2018, our operating fleet consists of 37 MD-80 series aircraft and 53 Airbus A320 series aircraft, of which all but 10 were acquired used.
Highly Productive Workforce. Our high level of employee productivity is due to our cost-driven scheduling, fewer unproductive labor work rules, and the effective use of automation and part-time employees. Although the number of our full-time equivalent employees per operating aircraft has increased annually since 2015, this trend is expected to reverse once we have fully transitioned to an all-Airbus fleet and no longer need additional support for multiple aircraft types. In an effort to control costs, we also outsource major maintenance, stations and other functions to reliable third-party service providers.
Simple product. We believe offering a simple product is critical to achieving low operating costs. As such, we sell only nonstop flights; we do not code-share or interline with other carriers; we have a single class cabin; we do not provide any free catered items - everything on board is for sale; we do not provide cargo or mail services; and we do not offer other perks such as airport lounges.
Low distribution costs. Our nontraditional marketing approach results in very low distribution costs. We do not sell our product through outside sales channels, thus avoiding the fees charged by travel web sites (Expedia, Orbitz or Travelocity) and traditional global distribution systems (“GDS”) (Sabre or Worldspan). Our customers can only purchase travel at our airport ticket counters or, for a fee, on our website or through our telephone reservation center. The purchase of travel through our website is the least expensive form of distribution for us and accounted for 94.0 percent of our scheduled service revenue during 2017.
Small and medium-sized city market airports. Our business model focuses on residents of small and medium-sized cities in the United States. Typically, the airports in these cities have lower operating costs than airports in larger cities. These lower costs are driven by less expensive passenger facilities, landing, and ground service charges. In addition to inexpensive airport costs, many of our airports provide marketing support which results in lower marketing costs.
Cost-driven schedule. We build our schedule so that our crews and aircraft return to base each night. This allows us to maximize crew efficiency, and more cost-effectively manage maintenance, spare aircraft and spare parts. Additionally, this structure allows us to add or subtract markets served by a base without incremental costs. We believe leisure travelers are generally less concerned about departure and arrival times than business travelers, so we are able to schedule flights at times that enable us to reduce costs while remaining desirable to our leisure customers.
Ancillary product offerings
We believe most leisure travelers are concerned primarily with purchasing air travel for the least expensive price. As such, we have unbundled the air transportation product by charging fees for services many U.S. airlines have historically bundled in their product offering. This pricing structure allows us to target travelers who are most concerned with low fare travel while also allowing travelers to customize their experience with us by purchasing only the additional conveniences they value. For example, we do not offer complimentary advance seat assignments; however, customers who value this product can purchase advance seat assignments for a small incremental cost. In addition, snacks and beverages are sold individually on the aircraft, allowing passengers to purchase only items they value.
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Ancillary revenue will continue to be a key component in our total average fare as we believe leisure travelers are less sensitive to ancillary fees than the base fare.
Our third party product offerings give our customers the opportunity to purchase hotel rooms, rental cars, airport shuttle service, show tickets, and other attractions. Our third party offerings are available to customers based on our agreements with various travel and leisure companies. For example, we have an exclusive agreement with Enterprise Holdings Inc. for the sale of rental cars packaged with air travel, which generated approximately 55 percent of our third party products ancillary revenue in 2017. The pricing of each product and our margin can be adjusted based on customer demand because our customers purchase travel through our booking engine without any intermediaries.
Financial position
As of December 31, 2017, we had $490.7 million of unrestricted cash, cash equivalents and investment securities, and total debt of $1,164.9 million. As of February 2, 2018, we also had 13 unencumbered aircraft available to use as collateral in the secured debt market. As we have been able to consistently generate cash from operations due to our profitability, we believe we have more than adequate resources to invest in the growth of our fleet, information technology, infrastructure, development, and other initiatives, while meeting short-term obligations.
Our financial position and discipline regarding use of capital allows us to have greater financial flexibility to grow our business and efficiently and effectively adapt to changing economic conditions.
Routes and schedules
Our current scheduled air service (including seasonal service) predominantly consists of limited frequency, nonstop flights into leisure destinations from under-served cities across the continental United States. Our scheduled service route network as of February 2, 2018 is summarized below:
Routes to Orlando | 68 | ||
Routes to Las Vegas | 54 | ||
Routes to Tampa/St. Petersburg | 54 | ||
Routes to Phoenix | 42 | ||
Routes to Punta Gorda | 40 | ||
Routes to Los Angeles | 25 | ||
Other routes | 106 | ||
Total routes | 389 | ||
Marketing and Distribution
Our website is our primary distribution method, and we also sell through our call center and at our airport ticket counters. This distribution approach creates significant cost savings and enables us to continue to build loyalty with our customers through increased interaction with them. We are also able to utilize customer email addresses in our database, which provides multiple cost effective opportunities to market products and services, including at the time of travel purchase, between purchase and travel, and after travel is complete. In addition, we market products and services to our customers during their flight. We believe the breadth of options we offer allows us to provide a “one-stop” shopping solution to enhance the customer travel experience. When we enter new markets, we may advertise in local print publications, on the radio and/or television, to introduce our new service to the community. These activities are often supported by the local airport authority which has sought our initiation of service to the community. We continue to see benefit from marketing contributions of airport authorities and destination marketing organizations.
We continue to enhance our automation and expect the continuous improvements to our website and other automation enhancements will create additional revenue opportunities by allowing us to capitalize on customer loyalty with additional product offerings.
Our low cost distribution strategy results in reduced expenses by avoiding the fees associated with the use of GDS distribution points. This distribution strategy also permits us to closely manage ancillary product offerings and pricing while developing and maintaining a direct relationship with our customers. We believe this continuous communication will result in substantial
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benefits over time. With our own automation system, we have the ability to continually change ancillary product offerings and pricing points, which allows us to find the optimal pricing levels for our various offerings. We believe this would be difficult and impractical to achieve through the use of the GDS.
Competition
The airline industry is highly competitive. Passenger demand and fare levels have historically been influenced by, among other things, the general state of the economy, international events, fuel prices, industry capacity, and pricing actions taken by other airlines. The principal competitive factors in the airline industry are price, schedule, customer service, routes served, types of aircraft, safety record and reputation, code-sharing relationships, and frequent flyer programs.
Our competitors include legacy airlines, low cost carriers ("LCCs"), ultra-low cost carriers ("ULCC"), regional airlines, new entrant airlines, and other forms of transportation to a much lesser extent. Many of the airlines are larger, have significantly greater financial resources, are better known, and have more established reputations than us. In a limited number of cases, following our entry into a market, competitors have chosen to add service, reduce their fares, or both. In a few cases, other airlines have entered after we have developed a market.
We believe our under-served city strategy has reduced the intensity of competition we might otherwise face. As of February 2, 2018, we are the only domestic scheduled carrier operating out of the Orlando Sanford International Airport, Phoenix-Mesa Gateway Airport, and St. Petersburg Airport. Although no other domestic scheduled carriers operate in these airports, most U.S. airlines serve the major airports for Orlando, Phoenix and Tampa. In addition, many U.S. airlines serve our other leisure destinations. As a result, there is potential for increased competition on our routes.
As of February 2, 2018, we face mainline competition on only approximately 22 percent of our operating routes. We compete with Southwest Airlines on 56 routes, Frontier Airlines on 50 routes, Spirit Airlines on 17 routes, American Airlines on 9 routes, Delta Airlines on 6 routes, JetBlue Airlines on 6 routes, United Airlines on 6 routes, and Alaska Airlines on 1 route. We may also experience additional competition based on recent route announcements of other airlines.
Indirectly, we compete with Southwest, American, Delta, United, and other carriers that provide nonstop service to our leisure destinations from airports near our cities. We also face indirect competition from legacy carriers offering hub-and-spoke connections to our markets, although these fares tend to be substantially higher, with much longer elapsed travel times. Several airlines also offer competitive one-stop service from the medium-sized cities we serve.
In our fixed fee operations, we compete with other scheduled airlines in addition to independent passenger charter airlines. We also compete with aircraft owned or controlled by large tour companies. The basis of competition in the fixed fee market is cost, equipment capabilities, service, and reputation.
Data Security
We continue to invest heavily in cyber-security, cyber-risk, and privacy initiatives. We employ experienced staff dedicated to cyber-security and cyber-risk analysis, process and technology. We continue to evaluate and proactively implement new preventive processes and technologies including forward-looking threat intelligence and data-centric security measures.
An example of our adoption of advanced security technologies is the use of Format Preserving Encryption to protect e-commerce payment card transactions. In essence, we do not store any credit card data using stateless tokenization. We believe we were among the first in the world to implement this advanced data-centric security solution.
Aircraft Fuel
The cost of fuel is volatile, as it is subject to many economic and geopolitical factors we can neither control nor predict. Significant increases in fuel costs could materially affect our operating results and profitability. We have not used financial derivative products to hedge our exposure to fuel price volatility in many years, nor do we have any plans to do so in the future.
Employees
As of December 31, 2017, we employed 3,752 full-time equivalent employees, which consisted of 3,544 full-time and 407 part-time employees. Full-time equivalent employees consisted of approximately 890 pilots, 1,130 flight attendants, 230 airport operations personnel, 330 mechanics, 160 reservation agents, 40 flight dispatchers, and 970 management and other personnel.
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As a result of the pilot collective bargaining agreement which went into effect on August 1, 2016, as well as lower fuel prices, salary and benefits expense was our largest expense in 2017, having represented approximately 29 percent of total operating expenses. Our flight attendants also approved their collective bargaining agreement, which was effective in December 2017.
Our relations with labor organizations representing our employee groups are governed by the Railway Labor Act ("RLA"). Under this act, if direct negotiations do not result in an agreement, either party may request the National Mediation Board ("NMB") to appoint a federal mediator. If no agreement is reached in these mediated discussions, the NMB may offer binding arbitration to the parties. If either party rejects binding arbitration, a “cooling off” period begins. At the end of this “cooling-off” period, the parties may engage in self-help, which among other events, could result in a strike from employees or for us to hire new employees to replace any striking workers. The collective bargaining agreements for our pilots and flight attendants last for a contractual term of five years each, expiring in 2021 and 2022, respectively. The table below identifies the status of pending collective bargaining negotiations:
Employee Group | Representative | Status of Agreement | ||
Flight Dispatchers | International Brotherhood of Teamsters, Airline Division, Local 986 | Elected representation in October 2016. Negotiations are ongoing. | ||
If we are unable to reach a labor agreement with any employee groups, they may seek to institute work interruptions or stoppages. We have not previously experienced any work interruptions or stoppages from our non-unionized or unionized employee groups.
Aircraft Maintenance
We have a Federal Aviation Administration ("FAA") approved maintenance program, which is administered by our maintenance department headquartered in Las Vegas. Technicians employed by us have appropriate experience and hold required licenses issued by the FAA. We provide them with comprehensive training and maintain our aircraft in accordance with FAA regulations. The maintenance performed on our aircraft can be divided into three general categories: line maintenance, major maintenance, and component and engine overhaul and repair. Line maintenance is generally performed by our personnel in certain cities of our network and by contractors elsewhere. We contract with outside organizations to provide major maintenance and component and engine overhaul and repair. We have chosen not to invest in facilities or equipment to perform our own major maintenance, engine overhaul or component work. Our management closely supervises all maintenance functions performed by our personnel and contractors employed by us, and by outside organizations. In addition to the maintenance contractors we presently utilize, we believe there are sufficient qualified alternative providers of maintenance services that we can use to satisfy our ongoing maintenance needs.
Community Involvement
We have worked with the Make-A-Wish® Foundation since 2012 by flying "wish kids" and their families to their desired destinations, at no cost, and donating the proceeds from our in-flight Wingz Snack Pack program to the Foundation. Additionally, we donate the use of 7,500 square feet of office space at our headquarters' campus to the Southern Nevada chapter of Make-A-Wish® Foundation, providing a home for the nonprofit organization's administrative headquarters. The site also serves as the host location for volunteer training, meetings and a place of support for families of children receiving wishes.
Non-Airline Initiatives
Sunseeker Resorts
We are pursuing the construction of a hotel-condo resort in Southwest Florida. We have purchased approximately 22 acres on the harbor in Port Charlotte, Florida for the construction of our first Sunseeker Resort. Land acquired for the resort at closings held through December 2017 was purchased for a total cost of approximately $21 million, with approximately $9 million paid at closings held after year-end. Our current plans (which remain subject to change) include the construction of a 277-room hotel, up to ten condo towers offering an estimated 842 one-, two- and three- bedroom units, a 1,000 foot pool, 12 or more bar and restaurant options, a marina and other amenities.
We intend to break ground on the project in mid-2018 with completion of the hotel and initial condo tower(s) in late 2019 or early 2020. We currently intend to build the project in two or more phases and intend to finance a significant portion of the project. Upon completion, we expect we will continue to own the hotel and all food and beverage options on the property.
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We intend to offer condo unit owners an opportunity to participate in an optional rental program. Depending on the level of participation in the program, it may increase the number of rooms the hotel may offer at any time.
This location was particularly attractive to us because of the number of flights we operate to the Punta Gorda airport which is a short drive from the resort site. During 2017, we operated over 7,000 flights to Punta Gorda from our small and medium-sized cities and carried over one million passengers. The resort is also within driving distance from the nearby airports in Fort Myers, Sarasota and St. Petersburg. During 2017, we operated over 13,000 flights to St. Petersburg from our small and medium-sized cities and carried nearly two million passengers to that destination. In addition, we have recently announced service to Sarasota from three cities. Southwest Florida also attracts a substantial number of tourists by car.
Teesnap
We have worked to adapt our “buy-on-board” technology into a golf course management solution. As of December 31, 2017, we were providing these services to approximately 220 golf courses in 48 states around the country. To date, the financial results have not been significant.
Other travel and leisure initiatives
Consistent with our travel and leisure company focus, we intend to pursue other travel and leisure initiatives in the future.
Insurance
We maintain insurance policies we believe are of types customary in the airline industry and as required by the DOT, and are in amounts we believe to be adequate to protect us against material loss. The policies principally provide coverage for public liability, war-risk, passenger liability, baggage and cargo liability, property damage, including coverages for loss or damage to our flight equipment, directors and officers, workers’ compensation, and cyber security insurance. There is no assurance, however, that the amount of insurance we carry will be sufficient to protect us from material loss in all cases. Available commercial insurance in the future could be more expensive, could have material differences in coverage than is currently provided, and may not be adequate to protect us from risk of loss.
Government Regulation
We are subject to federal, state and local laws affecting the airline industry and to extensive regulation by the DOT, the FAA, and other governmental agencies.
DOT. The DOT primarily regulates economic issues affecting air transportation such as certification and fitness of carriers, insurance requirements, consumer protection, competitive practices, and statistical reporting. The DOT also regulates requirements for accommodation of passengers with disabilities. The DOT has the authority to promulgate regulations and to investigate (including by on-site inspections) and institute proceedings to enforce its regulations and related federal statutes, and may assess civil penalties, suspend or revoke operating authority, and seek criminal sanctions. The DOT also has authority to restrict or prohibit a carrier’s cessation of service to a particular community if such cessation would leave the community without scheduled airline service.
We hold DOT certificates of public convenience and necessity authorizing us to engage in scheduled air transportation of passengers, property and mail within the United States, its territories and possessions, and between the United States and all countries that maintain a liberal aviation trade relationship with the United States (known as “open skies” countries). We also hold DOT authority to engage in charter air transportation of passengers, property, and mail on a domestic and international basis.
FAA. The FAA primarily regulates flight operations and safety, including matters such as airworthiness and maintenance requirements for aircraft, pilot, mechanic, dispatcher and flight attendant training and certification, flight and duty time limitations, and air traffic control. The FAA requires each commercial airline to obtain and hold an FAA air carrier certificate. This certificate, in combination with operation specifications issued to the airline by the FAA, authorizes the airline to operate at specific airports using aircraft certificated by the FAA. We have and maintain in effect FAA certificates of airworthiness for all of our aircraft, and we hold the necessary FAA authority to fly to all of the cities we currently serve. Like all U.S. certificated carriers, our provision of scheduled service to certain destinations may require specific governmental authorization. The FAA has the authority to investigate all matters within its purview, to modify, suspend or revoke our authority to provide air transportation, to approve or disapprove the addition of aircraft to our operation specifications, and to modify, suspend or revoke FAA licenses issued to individual personnel, for failure to comply with FAA regulations. The FAA can assess civil penalties for such failures and institute proceedings for the collection of monetary fines after notice and hearing. The FAA also has authority to seek criminal sanctions. The FAA can suspend or revoke our authority to provide air transportation on an
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emergency basis, without notice and hearing, if, in the FAA’s judgment, safety requires such action. A legal right to an independent, expedited review of such FAA action exists. Emergency suspensions or revocations have been upheld with few exceptions. The FAA monitors our compliance with maintenance, flight operations and safety regulations on an ongoing basis, maintains a continuous working relationship with our operations and maintenance management personnel, and performs pre-scheduled inspections as well as frequent spot inspections of our aircraft, employees and records.
The FAA also has the authority to promulgate rules and regulations and issue maintenance directives and other mandatory orders relating to, among other things, inspection, repair and modification of aircraft and engines, increased security precautions, aircraft equipment requirements, noise abatement, mandatory removal and replacement of aircraft parts and components, mandatory retirement of aircraft, and operational requirements and procedures. Such rules, regulations and directives are normally issued after an opportunity for public comment, however, they may be issued without advance notice or opportunity for comment if, in the FAA’s judgment, safety requires such action.
We believe we are operating in compliance with applicable DOT and FAA regulations, interpretations and policies and we hold all necessary operating and airworthiness authorizations, certificates and licenses.
In July 2016, we received the results of the FAA Certificate Holder Evaluation Process ("CHEP") audit conducted throughout the second quarter of 2016. A CHEP audit evaluates the design and performance of all aspects of an airline's operations. All findings identified during this process were determined by the FAA to be minor. We responded to the FAA on a timely basis and the FAA has validated and closed out the CHEP inspection.
Security. Within the United States, civil aviation security functions, including review and approval of the content and implementation of air carriers’ security programs, passenger and baggage screening, cargo security measures, airport security, assessment and distribution of intelligence, threat response, and security research and development are the responsibility of the Transportation Security Administration (“TSA”) of the Department of Homeland Security. The TSA has enforcement powers similar to the DOT’s and FAA’s described above. It also has the authority to issue regulations, including in cases of emergency, the authority to do so without advance notice, including issuance of a grounding order as occurred on September 11, 2001.
Aviation Taxes and Fees. The authority of the federal government to collect most types of aviation taxes, which are used, in part, to finance the nation’s airport and air traffic control systems, and the authority of the FAA to expend those funds must be periodically reauthorized by the U.S. Congress. On September 29, 2017, the Disaster Tax Relief and Airport and Airway Extension Act of 2017 was signed into law extending certain commercial aviation taxes (known generally as Federal Excise Taxes or "FET") through March 31, 2018. All carriers are required to collect these taxes from passengers and pass them through to the federal government. It is anticipated FET will again be extended no later than March 31, 2018.
In addition to FET, there are federal fees related to services provided by the TSA, and, in the case of international flights, the U.S. Customs and Border Protection Agency ("CBP"), and the U.S. Department of Agriculture's Animal and Plant Health Inspection Service ("APHIS"). There are also FAA-approved Passenger Facility Charges ("PFCs") imposed by most of the airports we serve. Like FET, air carriers collect these fees from passengers and pass them through to the respective federal agency or airport authority. These fees do not need to be reauthorized, although their amounts may be revised periodically.
In 2018, Congress may consider reauthorization legislation that could increase the amount of FET and/or one or more of the other government fees identified above. By thus increasing the overall price charged to passengers, such action could lessen demand for air travel or force carriers, including us, to lower fares to maintain demand. Also in 2018, Congress may consider privatization of the U.S air traffic control ("ATC") system with user fee based funding. The effect of such action, if adopted as law, on our operating costs is unknown. Additionally, federal funding to airports and/or airport bond financing could be affected through future legislation, which could result in higher fees, rates, and charges at many of the airports we serve.
Environmental. We are subject to various federal, state and local laws and regulations relating to the protection of the environment and affecting matters such as aircraft engine emissions, aircraft noise emissions, and the discharge or disposal of materials and chemicals, which laws and regulations are administered by numerous state and federal agencies. These agencies have enforcement powers similar to the DOT’s and FAA’s described above. In addition, we may be required to conduct an environmental review of the effects projected from the addition of our service at airports.
In July 2016 the U.S. Environmental Protection Agency (“EPA”) formally concluded that current and projected concentrations of greenhouse gases emitted by various aircraft, including all of the aircraft we operate, threaten public health and welfare. This finding is a precursor to EPA regulation of commercial aircraft emissions in the United States, as has taken effect for operations within the European Union under EU legislation. Binding international restrictions adopted under the auspices of the International Civil Aviation Organization (“ICAO”), a specialized agency of the United Nations, may become effective within several years. The EPA has indicated the regulations it intends to propose will be no less stringent than the ICAO standards.
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Federal law recognizes the right of airport operators with special noise problems to implement local noise abatement procedures so long as those procedures do not interfere unreasonably with interstate and foreign commerce and the national air transportation system. These restrictions can include limiting nighttime operations, directing specific aircraft operational procedures during takeoff and initial climb, and limiting the overall number of flights at an airport. None of the airports we serve currently imposes restrictions on the number of flights or hours of operation that have a meaningful impact on our operations. It is possible one or more such airports may impose additional future restrictions with or without advance notice, which may impact our operations.
Foreign Ownership. To maintain our DOT and FAA certificates, our airline operating subsidiary and we (as the airline’s holding company) must qualify continuously as citizens of the United States within the meaning of U.S. aeronautical laws and regulations. This means we must be under the actual control of U.S. citizens and we must satisfy certain other requirements, including that our president/chief executive officer and at least two-thirds of our board of directors and other managing officers are U.S. citizens, and that not more than 25 percent of our voting stock is owned or controlled by non-U.S. citizens. The amount of non-voting stock that may be owned or controlled by non-U.S. citizens is strictly limited as well. We believe we are in compliance with these ownership and control criteria.
Other Regulations. Air carriers are subject to certain provisions of federal laws and regulations governing communications because of their extensive use of radio and other communication facilities, and are required to obtain an aeronautical radio license from the Federal Communications Commission (“FCC”). To the extent we are subject to FCC requirements, we intend to continue to comply with those requirements.
The quality of water used for drinking and hand-washing aboard aircraft is subject to regulation by the EPA. To the extent we are subject to EPA requirements, we intend to continue to comply with those requirements.
Working conditions of cabin crewmembers while onboard aircraft are subject to regulation by the Occupational Safety and Health Administration ("OSHA") of the Department of Labor. To the extent we are subject to OSHA requirements, we intend to continue to comply with those requirements.
Our operations may become subject to additional federal requirements in the future under certain circumstances. During a period of past fuel scarcity, air carrier access to jet fuel was subject to allocation regulations promulgated by the Department of Energy. Changes to the federal excise tax and other government fees imposed on air transportation have been proposed and implemented from time to time and may result in an increased tax burden for airlines and their passengers.
We are also subject to state and local laws, regulations, and ordinances at locations where we operate and to the rules and regulations of various local authorities that operate the airports we serve. None of the airports in the cities in which we operate have slot control, gate availability, or curfews that pose meaningful limitations on our operations. However, some airports we serve have short runways that require us to operate some flights at less than full capacity.
International air transportation, whether provided on a scheduled or charter basis, is subject to the laws, rules, regulations, and licensing requirements of the foreign countries to, from and over which the international flights operate. Foreign laws, rules, regulations and licensing requirements governing air transportation are generally similar, in principle, to the regulatory scheme of the United States as described above, although in some cases foreign requirements are comparatively less onerous and in others, more onerous. We must comply with the laws, rules and regulations of each country to, from, or over which we operate. International flights are also subject to U.S. Customs and Border Protection, Immigration and Agriculture requirements and the requirements of equivalent foreign governmental agencies.
Future Laws and Regulations. Congress, the DOT, the FAA, the TSA, and other governmental agencies have under consideration, and in the future may consider and adopt, new laws, regulations, interpretations and policies regarding a wide variety of matters that could affect, directly or indirectly, our operations, ownership, and profitability. We cannot predict what other matters might be considered in the future by the FAA, the DOT, the TSA, other agencies, or Congress, nor can we judge what impact, if any, the implementation of any of these proposals or changes might have on our business.
Civil Reserve Air Fleet. We are a participant in the Civil Reserve Air Fleet (“CRAF”) Program which affords the U.S. Department of Defense the right to charter our aircraft during national emergencies when the need for military airlift exceeds the capability of available military resources. During the Persian Gulf War of 1990-91 and on other occasions, CRAF carriers were required to permit the military to use their aircraft in this manner. As a result of our CRAF participation, we are eligible to bid on and be awarded peacetime airlift contracts with the military.
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Item 1A. Risk Factors
Readers should carefully consider the risks described below before making an investment decision. Our business, financial condition or results of operations could be materially and adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.
Risks Related to Allegiant
Our reputation and financial results could be harmed in the event of an accident or restrictions affecting aircraft in our fleet.
As of February 2, 2018, our operating fleet consists of 37 MD-80 series aircraft and 53 Airbus A320 series aircraft, of which all but 10 were acquired used. Our used aircraft range from 11 to 32 years from their manufacture date at February 2, 2018.
An accident involving one of our aircraft, even if fully insured, could result in public perception that we are less safe or reliable than other airlines, which would harm our business. Further, there is no assurance that the amount of insurance we carry would be sufficient to protect us from material loss. Because we are smaller than most airlines, an accident would likely adversely affect us to a greater degree than a larger, more established airline.
In-flight emergencies affecting our aircraft, and resulting media attention, could also contribute to a public perception regarding safety concerns and a loss of business.
The FAA could suspend or restrict the use of our aircraft in the event of actual or perceived mechanical problems or safety issues while it conducts its own investigation, whether involving our aircraft or another U.S. or foreign airline’s aircraft. Our business could also be significantly harmed if the public avoids flying our aircraft due to an adverse perception of the aircraft we utilize because of safety concerns or other problems, whether real or perceived, or in the event of an accident involving these aircraft.
A breach in the security of personal data could severely damage our reputation, cause considerable additional costs and result in regulatory penalties.
We receive, retain, and transmit certain personal information about our customers. Our on-line operations also rely on the secure transmission of this customer data. We use third-party systems, software, and tools in order to protect the customer data we obtain through the course of our business. Although we use these security measures to protect this customer information, a compromise of our physical or network security systems through a cyber-security attack would create the risk that our customers’ personal information might be obtained by unauthorized persons. A compromise in our security systems could adversely affect our reputation, which could impact customers' willingness to do business with us using credit or debit cards, disrupt operations, and could also result in litigation or the imposition of penalties. In addition, it could be costly to remediate.
The way businesses handle customer data is subject to increasing legislation and regulation typically intended to protect the privacy of customer data received, retained, and transmitted. We could be adversely affected if we fail to comply with existing rules or practices, or if legislation or regulations are expanded to require changes in our business practices. These privacy developments are difficult to anticipate and could adversely affect our business, financial condition, and results of operations.
Increases in taxes could impact demand for our services.
In 2018, Congress may consider legislation that could increase the amount of Federal Excise Tax and/or one or more of the other government fees imposed on air travel. By increasing the overall price charged to passengers, any additional taxes or fees could lessen the demand for air travel or force carriers to lower fares to maintain demand. Increased taxes and fees per passenger may impact our load factors more than other airlines as our lower fares are designed to stimulate demand for our services.
The successful development of a resort is dependent on commercial and economic factors, some of which are beyond our control.
We have announced the development of a hotel-condo resort in Southwest Florida with construction expected to begin in mid-2018 and completion of the hotel and initial condo tower(s) expected in late 2019 or early 2020. The successful development of the project will be subject to various risks inherent in construction projects (such as securing sufficient financing on a timely basis, cost overruns and construction delays) as well as risks of gaining sufficient interest from purchasers
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of the condo units at the prices we envision, the desirability of the project’s location, competition and the ability to profitably operate the hotel and related offerings once open.
The acceleration of the retirement of our MD-80 fleet will put pressure on our fleet induction team to complete the fleet transition on a timely basis.
Although we have been able to successfully add 28 Airbus aircraft to our operating fleet during 2016 and 2017, the accelerated retirement of our MD-80 fleet per our fleet transition plan contemplates placing into service an additional 30 Airbus aircraft through the end of 2018. Most of these aircraft are used and they will come from different sources. This is a significant undertaking which will require operational efficiency to accomplish on a timely basis. If we are unable to complete these inductions as contemplated, the fleet replacement plan could be delayed which could increase costs or impact revenues.
Our plan to retire our older fleet types will limit our growth until replacement and additional aircraft are added to our operating fleet.
Our current fleet plan calls for the retirement of all of our MD-80 aircraft by the end of 2018. The retirement of these aircraft will limit our network growth until such time as we have replaced these aircraft and added additional Airbus aircraft for service growth. If we are unable to close on Airbus aircraft now under contract, accept delivery of them, and induct them into service when needed to replace aircraft being retired, we may be limited in our ability to significantly grow revenues and profitability in the interim.
We rely heavily on automated systems to operate our business and any failure of these systems could harm our business.
We depend on automated systems to operate our business, including our air reservation system, telecommunication systems, our website, and other automated systems. Our continuing initiatives to enhance the capabilities of our automated systems could increase the risk of automation failures. Any failure by us to handle our automation needs could negatively affect our internet sales (on which we rely heavily) and customer service, and result in lost revenues and increased costs.
Our website and reservation system must be able to accommodate a high volume of traffic and deliver necessary functionality to support our operations. Our automated systems cannot be completely protected against events that are beyond our control, such as natural disasters, telecommunications failures, malware, ransom ware, security breaches or cyber-security attacks. Although we have implemented security measures, have information systems disaster recovery plans in place and carry cyber-security insurance, we cannot assure investors that these measures are adequate to prevent disruptions or that the insurance would cover all losses. Substantial or repeated website, reservations system, or telecommunication system failures could decrease the attractiveness of our services. Any disruption to these systems could result in the loss of important data and revenue, increase in expenses, and harm to our business.
Increases in fuel prices or unavailability of fuel would harm our business and profitability.
Fuel costs constitute a significant portion of our total operating expenses, representing 26.9 percent, 25.9 percent and 31.3 percent during 2017, 2016 and 2015, respectively. Significant increases in fuel costs have negatively affected our operating results in the past, and future fuel cost volatility could materially affect our financial condition and results of operations.
Both the cost and availability of aircraft fuel are subject to many economic and political factors and events occurring throughout the world over which we have no control. Meteorological events may also result in short-term disruptions in the fuel supply. Aircraft fuel availability is also subject to periods of market surplus and shortage, and is affected by demand for heating oil, gasoline, and other petroleum products. Due to the effect of these events on the price and availability of aircraft fuel, our ability to control this cost is limited, and the price and future availability of fuel cannot be predicted with any degree of certainty. Due to the high percentage of our operating costs represented by fuel, a relatively small increase in the price of fuel could have a significantly negative impact on our operating costs. A fuel supply shortage or higher fuel prices could result in reduction of our service during the period affected.
We have made a business decision not to purchase financial derivatives to hedge against increases in the cost of fuel. This decision may make our operating results more vulnerable to the impact of fuel price increases.
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Increased labor costs could result from industry conditions and could be impacted by labor-related disruptions.
Labor costs constituted approximately 29 percent of our total operating costs in 2017, our largest expense line item. Industry demand for pilots and the supply of available pilots will impact our labor costs as we seek to retain our employees and compete against other airlines for qualified personnel.
Further, we have three employee groups (pilots, flight attendants and flight dispatchers) which have elected union representation. These groups represent approximately half of our employees. In 2016, we reached a collective bargaining agreement with the International Brotherhood of Teamsters which became effective as of August 1, 2016. The agreement provides for enhancements to pay scales, benefits, and limited work rules. Estimated expenses over the five-year agreement term expiring in 2021 are expected to have a significant impact on our results of operations.
An agreement with the Transport Workers Union for the flight attendant group was approved in December 2017, which will also increase costs over the five-year term of the contract. We are also in the early stages of the process with our flight dispatchers as negotiations commenced in February 2017.
Union contracts with these, or other, work groups could put additional pressure on our labor costs.
If we are unable to reach agreement on the terms of collective bargaining agreements in the future, or we experience wide-spread employee dissatisfaction, we could be subject to work slowdowns or stoppages. Any of these events could have an adverse effect on our operations and future results.
FAA limitations could impact our ability to grow in the future.
As with all airlines, the FAA must approve all aircraft and cities to be added to our operation specifications. Although there are no restrictions in place at the current time, future limitations from the FAA could potentially hinder our growth.
Unfavorable economic conditions may adversely affect travel from our markets to our leisure destinations.
The airline industry is particularly sensitive to changes in economic conditions. Unfavorable U.S. economic conditions have historically driven changes in travel patterns and have resulted in reduced discretionary spending for leisure travel. Unfavorable economic conditions could impact demand for airline travel in our small and medium-sized cities to our leisure destinations. During difficult economic times, we may be unable to raise prices in response to fuel cost increases, labor, or other operating costs, which could adversely affect our results of operations and financial condition.
The indenture governing our senior unsecured notes contains various covenants limiting the discretion of our management in operating our business and could prevent us from capitalizing on business opportunities and taking some corporate actions.
The indenture governing our senior unsecured notes imposes significant operating and financial restrictions on us. These restrictions limit or restrict, among other things, our ability, and the ability of our restricted subsidiaries, to:
• | incur additional indebtedness; |
• | incur liens; |
• | make restricted payments (including paying dividends on, redeeming, repurchasing, or retiring our capital stock); |
• | make investments; and |
• | consolidate, merge, or sell all or substantially all of our assets. |
These covenants are subject to exceptions and qualifications which are described in the indenture we have filed with the Securities and Exchange Commission.
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Our indebtedness, debt service obligations and other commitments could adversely affect our business, financial condition and results of operations as well as limit our ability to react to changes in the economy or our industry and prevent us from servicing our debt and operating our business.
We have a significant amount of indebtedness and other commitments with significant debt service and fixed charge obligations which could:
• | make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including financial and other restrictive covenants, could result in an event of default under agreements governing our indebtedness; |
• | make it more difficult to satisfy our other future obligations, including our obligations to pay the purchase price in respect of current and future aircraft purchase contracts; |
• | require us to dedicate a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available to fund internal growth through working capital, capital expenditures, and for other purposes; |
• | limit our flexibility in planning for, or reacting to, changes in our business, the competitive environment, legislation and our industry; |
• | make us more vulnerable to adverse changes in our business, economic, industry, market or competitive conditions and adverse changes in government regulation; |
• | expose us to interest rate and pricing increases on indebtedness and financing arrangements; |
• | restrict us from pursuing strategic acquisitions or exploiting certain business opportunities; |
• | subject us to a greater risk of non-compliance with financial and other restrictive covenants in financing arrangements; |
• | limit, among other things, our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, execution of our business strategy and other purposes or raise equity capital in the future and increasing the costs of such additional financings; and |
• | place us at a competitive disadvantage compared to our competitors who may not be as highly leveraged or who have less debt in relation to cash flow. |
We have outstanding $450.0 million of our 5.5% notes due in July 2019. Although we expect to be able to refinance this debt, refinancing may not be available on acceptable terms, if at all.
In addition, our ability to service our indebtedness will depend on our future performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors. Many of these factors are beyond our control and could materially adversely affect our business, results of operations, cash flows and financial condition.
At maturity, or in the event of an acceleration of payment obligations, we may be unable to pay our outstanding indebtedness with our cash and cash equivalents then on hand. In such event, we would be required to seek alternative sources of funding, which may not be available on commercially reasonable terms, terms as favorable as our current agreements, or at all. If we are unable to refinance our indebtedness or find alternative means of financing our operations, we may be required to take actions that are inconsistent with our current business practices or strategy.
Any inability to obtain financing for aircraft under contract could harm our fleet retirement and growth plan.
We typically finance our aircraft through debt financing after purchase. Although we believe debt financing will be available
for the aircraft we will acquire, we cannot provide assurance that we will be able to secure such financing on terms attractive to
us or at all. To the extent we cannot secure such financing on acceptable terms or at all, we may be required to modify our
aircraft acquisition and retirement plans, incur higher than anticipated financing costs, or use more of our cash balances for
aircraft acquisitions than we currently expect.
Our maintenance costs may increase as our fleet ages.
In general, the cost to maintain aircraft increases as they age, and exceeds the cost to maintain newer aircraft. FAA regulations, including the Aging Aircraft Airworthiness Directives, require additional and enhanced maintenance inspections for older aircraft. These regulations can directly impact the frequency of inspections as an aircraft ages, and vary by aircraft or engine type, depending on the unique characteristics of each aircraft and/or engine. Although we plan to retire all of our MD-80 aircraft by the end of 2018, we will continue to maintain them in accordance with FAA regulations until retirement.
Engine overhaul expenses for our Airbus series 320 aircraft will be significantly higher than similar expenses for our MD-80 aircraft. These major maintenance expenses are capitalized and amortized as part of depreciation and amortization expense.
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In addition, we may be required to comply with any future law changes, regulations, or airworthiness directives. We cannot assure investors our maintenance costs will not exceed our expectations.
We rely on third parties to provide us with facilities, aircraft and services that are integral to our business.
We have entered into agreements with third-party contractors to provide certain facilities and services required for our operations, such as aircraft maintenance, ground handling, baggage services, and ticket counter space. Our reliance on others to provide essential services on our behalf gives us less control over costs and the efficiency, timeliness and quality of contract services.
We also rely on the owners of aircraft under contract, the manufacturer of Airbus aircraft under contract and on the lessees under aircraft leases, to be able to deliver, or redeliver, aircraft in accordance with the terms of executed agreements in a timely manner. Our planned initiation of service with these aircraft in the future could be adversely affected if the third parties fail to perform as contractually obligated.
We may not be able to maintain or grow our ancillary revenues.
Our business strategy includes expanding our ancillary products and services. We cannot ensure that passengers will pay for additional ancillary products and services we offer in the future, or that they will continue to pay for the ancillary products and services we currently offer. Regulatory changes could also adversely affect our ancillary revenue opportunities. Failure to maintain our ancillary revenues could have a material adverse effect on our results of operations, financial condition and stock price. If we are unable to maintain and grow these revenues, we may be unable to execute our strategy to continue to offer low base fares in order to stimulate demand.
Our business could be harmed if we lose the services of our key personnel.
Our business depends upon the efforts of our chief executive officer, Maurice J. Gallagher, Jr., president, John Redmond, and a small number of senior management and operating personnel. We do not currently maintain key-man life insurance on Mr. Gallagher, Mr. Redmond or any other executives. We may have difficulty replacing management or other key personnel who leave and, therefore, the loss of the services of any of these individuals could harm our business.
Risks Associated with the Airline and Travel Industry
The airline industry is highly competitive and future competition in our under-served markets could harm our business.
The airline industry is highly competitive. The smaller cities we serve on a scheduled basis have traditionally attracted considerably less attention from our potential competitors than larger markets, and in most of our small city markets, we are the only provider of nonstop service to our leisure destinations. In 2014, we began service to medium-sized cities which we believe to be under-served for nonstop service to our leisure destinations. If other airlines begin to provide nonstop services to and from these markets, or otherwise target these markets, the increase in the amount of direct or indirect competition could cause us to reconsider service to affected markets or could impact our margins.
A future act of terrorism, the threat of such acts, or escalation of U.S. military involvement overseas could adversely affect our industry.
Even if not directed at the airline industry, a future act of terrorism, the threat of such acts, or escalation of U.S. military involvement overseas could have an adverse effect on the airline industry. In the event of a terrorist attack, the industry would likely experience significantly reduced demand for travel services. These actions, or consequences resulting from these actions, would likely harm our business and the airline and travel industry. If we are called on to provide aircraft in the event of national emergencies as a result of our participation in the CRAF program, our operations would be disrupted.
Changes in government laws and regulations imposing additional requirements and restrictions on our operations could increase our operating costs.
Airlines are subject to extensive regulatory and legal compliance requirements, both domestically and internationally, that involve significant costs. In the last several years, the FAA has issued a number of directives and other regulations relating to the maintenance and operation of aircraft that have required us to incur significant expenditures. FAA requirements cover, among other things, retirement of older aircraft, fleet integration of newer aircraft, security measures, collision avoidance
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systems, airborne windshear avoidance systems, noise abatement, weight and payload limits, assumed average passenger weight, and increased inspection and maintenance procedures to be conducted on aging aircraft. Proposals have also been made to re-regulate the airline industry. The future cost of complying with these and other laws, rules and regulations, including new federal legislative and DOT regulatory requirements in the consumer-protection area, cannot be predicted and could significantly increase our costs of doing business.
In recent years, the DOT has adopted revisions and expansions to a variety of its consumer protection regulations and policies. Additional new regulations or policies may be proposed or take effect in 2018. We are not able to predict the impact of any new consumer protection rules on our business, though we monitor the progress of potential rulings. We are subject to fines or other enforcement actions if the DOT believes we are not in compliance with these or other rules or regulations or with the federal consumer protection laws administered by the DOT. Even if our practices are found to be in compliance with the DOT rules, we could incur substantial costs defending our practices.
In November 2013, the FAA proposed revisions to the method by which air carriers calculate and control aircraft weight-and-balance. The proposal is based on a continuing increase in the average weight of persons in the United States. The FAA accepted industry comment on its proposal as amended, through mid-2017, but to date, no decision has been issued. If the revisions are adopted as proposed by the FAA, the ability of carriers to rely on average weights for this purpose will be complicated significantly, additional costs may result, and we may be required to carry less than full loads on certain flights.
Congress also may consider privatization of the U.S. Air Traffic Control system with user fee based funding; the potential effect on our operating costs is unknown. Additionally, federal funding to airports and/or airport bond financing could be affected through future deficit reduction legislation, which could result in higher fees, rates, and charges at many of the airports we serve.
In the past, legislation to address climate change issues has been introduced in the U.S. Congress, including a proposal to require transportation fuel producers and importers to acquire market-based allowances to offset the emissions resulting from combustion of their fuels. We cannot predict whether this or any similar legislation will be introduced or pass the Congress or, if enacted into law, how it would apply to the airline industry. In addition, the EPA concluded in 2016 that current and projected concentrations of greenhouse gases emitted by various aircraft, including all of the aircraft we operate, threaten public health and welfare. This finding is a precursor to EPA regulation of commercial aircraft emissions in the United States, as has taken effect for operations within the European Union under EU legislation. Certain binding international restrictions adopted under the auspices of the International Civil Aviation Organization (“ICAO”) (a specialized agency of the United Nations) may become effective within several years. The EPA has indicated the regulations it intends to propose will be no less stringent than the ICAO standards. These developments and any additional legislation or regulations addressing climate change are likely to increase our costs of doing business in the future and the increases could be material.
With respect to aging aircraft, aircraft weight-and-balance, consumer protection, climate change, taxation, and other matters affecting the airline industry, whether the source of new requirements is legislative or regulatory, increased costs will adversely affect our profitability if we are unable to pass the costs on to our customers or adjust our operations to offset the new costs.
Airlines are often affected by factors beyond their control, including air traffic congestion, weather conditions, increased security measures, the outbreak of disease and a reduction in demand to any particular market, any of which could harm our operating results and financial condition.
Like other airlines, we are subject to delays caused by factors beyond our control, including air traffic congestion at airports and en route, adverse weather conditions, increased security measures, and the outbreak of disease. Delays frustrate passengers and increase costs, which in turn could affect profitability. During periods of fog, snow, rain, storms or other adverse weather conditions, flights may be canceled or significantly delayed. Cancellations or delays due to weather conditions, traffic control problems, and breaches in security could harm our operating results and financial condition. Contagious illness and fear of contagion could have a material adverse impact on the airline industry. Any general reduction in airline passenger traffic as a result of an outbreak of disease or other travel advisories could dampen demand for our services even if not applicable to our markets. Resulting decreases in passenger volume would harm our load factors, could increase our cost per passenger and adversely affect our profitability.
A substantial proportion of our scheduled flights have Las Vegas, Orlando, Phoenix, Tampa/St. Petersburg, Los Angeles, or Punta Gorda as either their destination or origin. Our business could be harmed by any circumstances causing a reduction in demand for air transportation to one or more of these markets, or our other leisure destinations, such as adverse changes in local economic conditions, negative public perception of the particular city, significant price increases, or the impact of future terrorist attacks or natural disasters.
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Risks Related to Our Stock Price
The market price of our common stock may be volatile, which could cause the value of an investment in our stock to decline.
The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:
• | fuel price volatility, and the effect of economic and geopolitical factors and worldwide oil supply and consumption on fuel availability |
• | announcements concerning our competitors, the airline industry, or the economy in general |
• | strategic actions by us or our competitors, such as acquisitions or restructurings |
• | media reports and publications about the safety of our aircraft or the aircraft types we operate |
• | new regulatory pronouncements and changes in regulatory guidelines |
• | announcements concerning our business strategy |
• | our ability to grow service in the future as rapidly as the market anticipates as we continue to add more cities to our network |
• | general and industry-specific economic conditions |
• | changes in financial estimates or recommendations by securities analysts |
• | substantial sales of our common stock or other actions by investors with significant shareholdings |
• | additional issuances of our common stock |
• | labor work actions |
• | general market conditions |
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of our common stock.
In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management’s attention and resources, and harm our business or results of operations.
Other companies may have difficulty acquiring us, even if doing so would benefit our stockholders, due to provisions under our corporate charter and bylaws, as well as Nevada law.
Provisions in our articles of incorporation, our bylaws, and under Nevada law could make it more difficult for other companies to acquire us, even if doing so would benefit our stockholders. Our articles of incorporation and bylaws contain the following provisions, among others, which may inhibit an acquisition of our company by a third party:
• | advance notification procedures for matters to be brought before stockholder meetings |
• | a limitation on who may call stockholder meetings |
• | the ability of our board of directors to issue up to 5,000,000 shares of preferred stock without a stockholder vote |
We are also subject to provisions of Nevada law that prohibit us from engaging in any business combination with any “interested stockholder,” meaning generally that a stockholder who beneficially owns 10 percent or more of our stock cannot acquire us for a period of time after the date this person became an interested stockholder, unless various conditions are met, such as approval of the transaction by our board of directors and stockholders.
Under U.S. laws and the regulations of the DOT, U.S. citizens must effectively control us. As a result, our president and at least two-thirds of our board of directors must be U.S. citizens and not more than 25 percent of our voting stock may be owned by non-U.S. citizens (although subject to DOT approval, the percent of foreign economic ownership may be as high as 49 percent). Any of these restrictions could have the effect of delaying or preventing a change in control.
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Our corporate charter and bylaws include provisions limiting voting by non-U.S. citizens.
To comply with restrictions imposed by federal law on foreign ownership of U.S. airlines, our articles of incorporation and bylaws restrict voting of shares of our capital stock by non-U.S. citizens. The restrictions imposed by federal law currently require no more than 25 percent of our stock be voted, directly or indirectly, by persons who are not U.S. citizens, and that our president and at least two-thirds of the members of our board of directors be U.S. citizens. Our bylaws provide no shares of our capital stock may be voted by or at the direction of non-U.S. citizens unless such shares are registered on a separate stock record, which we refer to as the foreign stock record. Our bylaws further provide no shares of our capital stock will be registered on the foreign stock record if the amount so registered would exceed the foreign ownership restrictions imposed by federal law. Registration on the foreign stock record is made in chronological order based on the date we receive a written request for registration. Non-U.S. citizens will be able to own and vote shares of our common stock only if the combined ownership by all non-U.S. citizens does not violate these requirements.
Item 1B. Unresolved Staff Comments
Not Applicable.
Item 2. Properties
Aircraft
The following table summarizes our total in-service aircraft as of December 31, 2017:
Aircraft Type | Owned (1) | Seating Capacity (per aircraft) | Age Range (years) | Average Age in Years | ||||||
MD-83/88 | 37 | 166 | 22-32 | 27.8 | ||||||
Airbus A319 (2) | 22 | 156 | 11-14 | 12.4 | ||||||
Airbus A320 (3) | 30 | 177/186 | 0-21 | 11.4 | ||||||
Total aircraft | 89 | |||||||||
(1) | Refer to Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 5 – Long-Term Debt for discussion of notes payable collateralized by our aircraft. |
(2) | Does not include 11 owned aircraft currently on lease to a European carrier until 2018 or three aircraft of which we had taken delivery but not placed into service as of December 31, 2017. |
(3) | Does not include two aircraft of which we had taken delivery but not placed into service as of December 31, 2017. |
The below table includes the number of aircraft expected in service by March 31, 2018:
MD-83/88 | 32 | ||
A319 | 26 | ||
A320 | 31 | ||
Total | 89 | ||
Ground Facilities
We lease facilities at the majority of our leisure destinations and several other airports we serve. Our leases for terminal passenger service facilities (which include ticket counter and gate space, and operations support areas) generally have a term ranging from month-to-month to several years, and may typically be terminated with a 30 to 90 day notice. We have also entered into use agreements at each of the airports we serve which provide for non-exclusive use of runways, taxiways, and other facilities. Landing fees under these agreements are based on the number of landings and weight of the aircraft.
We have operational bases at airports for many of the leisure destinations we serve, as well as Bellingham International Airport, Pittsburgh International Airport, Cincinnati/Northern Kentucky International Airport, and Asheville Regional Airport. Our operational base in Myrtle Beach is maintained on a seasonal basis.
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We use leased facilities at our operational bases to perform line maintenance, overnight parking of aircraft, and other operations support. We lease additional space in cargo areas at McCarran International Airport, Orlando Sanford International Airport and Phoenix-Mesa Gateway Airport for our primary line maintenance operations. We also lease additional warehouse space in Las Vegas, Orlando Sanford, and Phoenix-Mesa for aircraft spare parts and supplies.
The following details the airport locations we utilize as operational bases as of February 2, 2018:
Airport | Location | |
Asheville Regional Airport | Fletcher, North Carolina | |
Bellingham International Airport | Bellingham, Washington | |
Cincinnati/Northern Kentucky International Airport | Hebron, Kentucky | |
Destin-Fort Walton Beach Airport | Destin, Florida | |
Ft. Lauderdale-Hollywood International Airport | Ft. Lauderdale, Florida | |
Los Angeles International Airport | Los Angeles, California | |
McCarran International Airport | Las Vegas, Nevada | |
Myrtle Beach International Airport | Myrtle Beach, South Carolina | |
Oakland International Airport | Oakland, California | |
Orlando Sanford International Airport | Sanford, Florida | |
Phoenix-Mesa Gateway Airport | Mesa, Arizona | |
Pittsburgh International Airport | Pittsburgh, Pennsylvania | |
Punta Gorda Airport | Punta Gorda, Florida | |
St. Petersburg-Clearwater International Airport | St. Petersburg, Florida | |
We believe we have sufficient access to gate space for current and presently contemplated future operations at all airports we serve.
Our primary corporate offices are located in Las Vegas, where we own approximately 11 acres of property containing approximately 211,000 square feet of office space. To date, we occupy approximately 141,000 square feet and the remaining space will be used for growth and expansion as needed.
We also lease other facilities in Las Vegas, Florida and throughout our network with approximately 500,000 square feet of space used for other corporate purposes. These leases expire between 2019 and 2036.
We have purchased approximately 22 acres on the harbor in Port Charlotte, Florida for the construction of our first Sunseeker Resort.
Item 3. Legal Proceedings
We are subject to certain other legal and administrative actions we consider routine to our business activities. We believe the ultimate outcome of any pending legal or administrative matters will not have a material adverse effect on our financial position, liquidity, or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market for our common stock
Our common stock is quoted on the Nasdaq Global Select Market (symbol: ALGT). On February 2, 2018, the last sale price of our common stock was $164.00 per share. The following table sets forth the range of high and low sale prices for our common stock for the periods indicated.
Period | High | Low | ||||||
2017 | ||||||||
1st Quarter | $ | 182.25 | $ | 153.40 | ||||
2nd Quarter | $ | 169.15 | $ | 134.65 | ||||
3rd Quarter | $ | 147.00 | $ | 111.54 | ||||
4th Quarter | $ | 162.35 | $ | 125.95 | ||||
2016 | ||||||||
1st Quarter | $ | 182.50 | $ | 134.64 | ||||
2nd Quarter | $ | 183.91 | $ | 135.57 | ||||
3rd Quarter | $ | 152.81 | $ | 127.70 | ||||
4th Quarter | $ | 173.82 | $ | 131.45 | ||||
As of February 2, 2018, there were 189 holders of record of our common stock. Because many of our shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of beneficial holders.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information regarding options, warrants and other rights to acquire equity securities under our equity compensation plans as of December 31, 2017:
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (b) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (c) | ||||||||
Equity compensation plans approved by security holders (a) | 27,575 | $ | 97.88 | 1,578,456 | ||||||
(a) | There are no securities to be issued under any equity compensation plans not approved by our security holders. |
(b) | The shares shown as being issuable under equity compensation plans approved by our security holders exclude unvested restricted stock awards of 192,890 as all restricted stock awards are deemed to have been issued, and exclude all outstanding stock appreciation rights ("SARs") which are settled in cash. |
(c) | Our 2016 Long-Term Incentive Plan applies a fungible ratio such that a full-value award, such as a restricted stock grant or restricted stock unit grant, will be counted at two times its number for purposes of the plan limit. As a result, only a maximum of 789,228 shares of restricted stock are remaining for future issuance under the 2016 Long-Term Incentive Plan. |
Dividend Policy
In 2017, we continued the payment of a regular quarterly dividend, as was done in 2016. The dividend was set at $0.70 per share for each quarter, bringing total regular cash dividends declared, and paid, in 2017 to $2.80 per share. We declared and paid regular cash dividends of $2.40 per share for 2016. In January 2016, we also paid a $1.65 per share special dividend that was declared in December 2015.
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In addition to our regular cash dividends, our Board of Directors periodically considers the payment of special cash dividends based on our results of operations, cash flow generation, liquidity, capital commitments, loan covenant compliance and other relevant factors.
The indenture governing our senior unsecured notes contains limitations on restricted payments, which includes stock repurchases and cash dividends. However, no limit applies if we meet certain financial ratios at the time of payment. For the four quarters ended December 31, 2017, we exceeded the consolidated total leverage ratio limit, which could affect our ability to make restricted payments in future periods after exhaustion of various exceptions. As a result of the exceptions available, we do not anticipate that we will be restricted from paying dividends or repurchasing shares during 2018. The calculation is made on a quarterly basis based on the trailing 12 months.
Our Repurchases of Equity Securities
The following table reflects repurchases of our common stock during the fourth quarter 2017:
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of our Publicly Announced Plan | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (in thousands) (2) | |||||||||
October | 44 | $ | 141.35 | None | |||||||||
November | 46 | 126.85 | None | ||||||||||
December | None | N/A | None | ||||||||||
Total | 90 | $ | 133.94 | None | $ | 100,000 | |||||||
(1) | Reflects shares repurchased from employees who vested a portion of their restricted stock grants. These share repurchases were made at the election of each employee pursuant to an offer to repurchase by us. In each case, the shares repurchased constituted a portion of vested shares necessary to satisfy income tax withholding requirements. |
(2) | Represents the remaining dollar amount of open market purchases of our common stock which has been authorized by the Board under a share repurchase program. |
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Stock Price Performance Graph
The following graph compares the cumulative total shareholder return on our common stock with the cumulative total return on the Nasdaq Composite Index and the AMEX Airline Index since December 31, 2012. The graph assumes that the value of the investment in our common stock and each index was $100 on December 31, 2012 and the reinvestment of all dividends. Stock price performance presented for the period from December 31, 2012 to December 31, 2017 is not necessarily indicative of future results.
12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | |||||||||||||||||||
ALGT | $ | 100.00 | $ | 146.70 | $ | 211.25 | $ | 238.84 | $ | 240.16 | $ | 228.10 | ||||||||||||
Nasdaq Composite Index | $ | 100.00 | $ | 138.32 | $ | 156.85 | $ | 165.84 | $ | 178.28 | $ | 228.63 | ||||||||||||
AMEX Airline Index | $ | 100.00 | $ | 157.63 | $ | 235.44 | $ | 196.56 | $ | 250.67 | $ | 263.77 | ||||||||||||
The stock price performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this annual report on Form 10-K into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such Acts.
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Item 6. Selected Financial Data
The following financial information for each of the five years ended December 31, has been derived from our audited consolidated financial statements. Readers should consider the selected consolidated financial data set forth below along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. Certain presentation changes and reclassifications have been made to prior year consolidated financial information to conform to 2017 classifications.
For the Year Ended December 31, | ||||||||||||||||||||
FINANCIAL DATA (in thousands except per share amounts): | 2017 (3) | 2016 | 2015 | 2014 (3) | 2013 | |||||||||||||||
Total operating revenue | $ | 1,503,778 | $ | 1,362,831 | $ | 1,262,188 | $ | 1,137,046 | $ | 996,150 | ||||||||||
Total operating expenses | 1,276,609 | 992,273 | 890,486 | 979,701 | 841,413 | |||||||||||||||
Operating income | 227,169 | 370,558 | 371,702 | 157,345 | 154,737 | |||||||||||||||
Total other expense (1) | 31,623 | 24,600 | 24,983 | 20,214 | 8,057 | |||||||||||||||
Income before income taxes | 195,546 | 345,958 | 346,719 | 137,131 | 146,680 | |||||||||||||||
Net income attributable to Allegiant Travel Company | $ | 194,902 | $ | 219,590 | $ | 220,374 | $ | 86,689 | $ | 92,273 | ||||||||||
Earnings per share to common shareholders (2): | ||||||||||||||||||||
Basic | $ | 11.94 | $ | 13.23 | $ | 12.97 | $ | 4.87 | $ | 4.85 | ||||||||||
Diluted | $ | 11.93 | $ | 13.21 | $ | 12.94 | $ | 4.86 | $ | 4.82 | ||||||||||
Cash dividends declared per share | $ | 2.80 | $ | 2.40 | $ | 2.75 | $ | 2.50 | $ | 2.25 | ||||||||||
Total assets | $ | 2,180,157 | $ | 1,671,576 | $ | 1,358,331 | $ | 1,240,986 | $ | 935,889 | ||||||||||
Total long-term debt, net of related costs | 1,164,892 | 808,274 | 641,678 | 588,794 | 236,574 | |||||||||||||||
Shareholders' equity | 547,947 | 473,622 | 350,005 | 294,065 | 377,317 | |||||||||||||||
(1) | Net of capitalized interest of $3.2 million in 2017 and $1.8 million in 2016. |
(2) | Our unvested restricted stock awards are considered participating securities as they receive non-forfeitable rights to cash dividends at the same rate as common stock. The Basic and Diluted earnings per share for the periods presented reflect the two-class method mandated by accounting guidance for the calculation of earnings per share. The two-class method adjusts both the net income and shares used in the calculation. Application of the two-class method did not have a significant impact on the basic or diluted earnings per share for the periods presented. |
(3) | Operating expenses, operating income, net income and earnings per share in these years were impacted by special items: (a) a non-cash impairment charge of $35.3 million to our MD-80 fleet and related assets in the fourth quarter of 2017; (b) a $74.7 million income tax benefit from the remeasurement of deferred taxes due to the passage of the Tax Cuts and Jobs Act of 2017; and (c) a non-cash impairment charge of $43.3 million to six Boeing 757-200 aircraft and related assets in the fourth quarter of 2014. |
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For the Year Ended December 31, | |||||||||||||||||||
OPERATING DATA: (unaudited) | 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||
Total system statistics: | |||||||||||||||||||
Passengers | 12,310,122 | 11,128,191 | 9,500,611 | 8,154,357 | 7,241,063 | ||||||||||||||
Revenue passenger miles (RPMs) (thousands) | 11,106,772 | 10,282,827 | 8,944,952 | 7,825,962 | 7,129,416 | ||||||||||||||
Available seat miles (ASMs) (thousands) | 13,612,003 | 12,375,505 | 10,526,610 | 8,945,616 | 8,146,135 | ||||||||||||||
Load factor | 81.6 | % | 83.1 | % | 85.0 | % | 87.5 | % | 87.5 | % | |||||||||
Operating expense per ASM (CASM) (cents)** | 9.38 | 8.02 | 8.45 | 10.95 | 10.33 | ||||||||||||||
Fuel expense per ASM (cents)*** | 2.52 | 2.08 | 2.64 | 4.34 | 4.73 | ||||||||||||||
Operating CASM, excluding fuel (cents)** | 6.86 | 5.94 | 5.81 | 6.61 | 5.60 | ||||||||||||||
ASMs per gallon of fuel | 72.96 | 71.62 | 70.20 | 69.38 | 67.62 | ||||||||||||||
Departures | 93,061 | 82,341 | 68,653 | 56,961 | 51,083 | ||||||||||||||
Block hours | 212,405 | 190,706 | 160,431 | 135,572 | 125,449 | ||||||||||||||
Average stage length (miles) | 870 | 889 | 900 | 918 | 933 | ||||||||||||||
Average number of operating aircraft during period | 87.3 | 83.3 | 74.3 | 68.8 | 62.9 | ||||||||||||||
Average block hours per aircraft per day | 6.7 | 6.3 | 5.9 | 5.4 | 5.5 | ||||||||||||||
Full-time equivalent employees at end of period | 3,752 | 3,416 | 2,846 | 2,411 | 2,065 | ||||||||||||||
Fuel gallons consumed (thousands) | 186,563 | 172,796 | 149,951 | 128,933 | 120,476 | ||||||||||||||
Average fuel cost per gallon*** | $ | 1.84 | $ | 1.49 | $ | 1.86 | $ | 3.01 | $ | 3.20 | |||||||||
Scheduled service statistics: | |||||||||||||||||||
Passengers | 12,138,146 | 11,003,864 | 9,355,097 | 8,017,442 | 7,103,375 | ||||||||||||||
Revenue passenger miles (RPMs) (thousands) | 10,901,161 | 10,130,675 | 8,821,908 | 7,711,696 | 7,015,108 | ||||||||||||||
Available seat miles (ASMs) (thousands) | 13,031,824 | 11,921,733 | 10,236,075 | 8,693,631 | 7,892,896 | ||||||||||||||
Load factor | 83.7 | % | 85.0 | % | 86.2 | % | 88.7 | % | 88.9 | % | |||||||||
Departures | 88,432 | 78,747 | 65,683 | 54,440 | 48,389 | ||||||||||||||
Block hours | 202,752 | 183,290 | 155,403 | 131,210 | 120,620 | ||||||||||||||
Total scheduled service revenue per ASM (TRASM)* (cents) | 10.88 | 10.89 | 11.82 | 12.66 | 12.37 | ||||||||||||||
Average fare - scheduled service | $ | 67.41 | $ | 68.47 | $ | 78.63 | $ | 91.30 | $ | 91.69 | |||||||||
Average fare - ancillary air-related charges | $ | 45.02 | $ | 45.40 | $ | 46.43 | $ | 41.37 | $ | 40.52 | |||||||||
Average fare - ancillary third party products | $ | 4.34 | $ | 4.08 | $ | 4.29 | $ | 4.56 | $ | 5.21 | |||||||||
Average fare - total | $ | 116.77 | $ | 117.95 | $ | 129.35 | $ | 137.23 | $ | 137.42 | |||||||||
Average stage length (miles) | 876 | 895 | 915 | 934 | 952 | ||||||||||||||
Fuel gallons consumed (thousands) | 178,298 | 166,528 | 145,654 | 125,173 | 116,370 | ||||||||||||||
Percent of sales through website during period | 94.0 | % | 94.2 | % | 95.1 | % | 93.8 | % | 92.0 | % | |||||||||
OTHER DATA: (unaudited) | |||||||||||||||||||
Hotel room nights | 390,986 | 439,942 | 452,272 | 528,329 | 595,697 | ||||||||||||||
Rental car days | 1,415,901 | 1,502,326 | 1,204,982 | 916,640 | 844,858 | ||||||||||||||
* | Various components of this measure do not have a direct correlation to ASMs. These figures are provided on a per ASM basis so as to facilitate comparisons with airlines reporting revenues on a per ASM basis. |
** | Includes effects of special items in 2017 and 2014. 2016 CASM also includes effect of fuel tax refund of $8.3 million. |
*** | Includes effect of fuel tax refund of $8.3 million (approximately $0.05 per gallon) in 2016. |
The following terms used in this section and elsewhere in this annual report have the meanings indicated below:
“Available seat miles” or “ASMs” represents the number of seats available for passengers multiplied by the number of miles the seats are flown.
“Average fuel cost per gallon” represents total aircraft fuel expense for our total system divided by the total number of fuel gallons consumed in our total system.
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“Average stage length” represents the average number of miles flown per flight.
“Block hours” represents the number of hours during which the aircraft is in revenue service, measured from the time of gate departure until the time of gate arrival at the destination.
“Load factor” represents the percentage of aircraft seating capacity that is actually utilized (revenue passenger miles divided by available seat miles).
“Operating expense per ASM” or “CASM” represents operating expenses divided by available seat miles.
“Operating CASM, excluding fuel” represents operating expenses, less aircraft fuel, divided by available seat miles. Although Operating CASM, excluding fuel, is not a calculation based on generally accepted accounting principles and should not be considered as an alternative to Operating Expenses as an indicator of our financial performance, 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 and therefore are beyond our control.
“Passengers” represents the total number of passengers flown on all flight segments.
“Revenue passenger miles” or “RPMs” represents the number of miles flown by revenue passengers.
“Total scheduled service revenue per ASM” or “TRASM” represents scheduled service revenue and total ancillary revenue divided by scheduled service available seat miles.
Item 7. 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 years ended December 31, 2017, 2016 and 2015. Also discussed is our financial position as of December 31, 2017 and 2016. Investors should read this discussion in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this annual report. This discussion and analysis contains forward-looking statements. Please refer to the section entitled “Disclosure Regarding Forward-Looking Statements” at the beginning of this annual report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.
YEAR IN REVIEW
2017 highlights:
• | Solidified plans to transition to an all Airbus fleet by the end of 2018; |
• | added 19 Airbus A320 series aircraft into service, and retired 10 MD-80 aircraft and four Boeing 757-200 aircraft; |
• | returned $131.9 million to shareholders during the year - $86.2 million through open market stock repurchases and $45.7 million through the payment of recurring cash dividends; |
• | realized a one-time tax benefit of $74.7 million resulting from the Tax Cuts and Jobs Act passed in December 2017; |
• | operated 401 routes at December 31, 2017 versus 360 at the end of 2016; and |
• | announced plans to develop Sunseeker Resorts, a hotel/condo resort in Port Charlotte, Florida. |
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AIRCRAFT
Operating Fleet
The following table sets forth the number and type of aircraft in service and operated by us as of the dates indicated:
December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||
MD-80 | 37 | 47 | 51 | |||||
B757-200 | — | 4 | 5 | |||||
A319 (1) | 22 | 17 | 10 | |||||
A320 (2) | 30 | 16 | 14 | |||||
Total | 89 | 84 | 80 | |||||
(1) Does not include 11 owned aircraft currently on lease to a European carrier or three other aircraft for which we have taken delivery as of December 31, 2017.
(2) Does not include two aircraft for which we have taken delivery as of December 31, 2017.
As of February 2, 2018, we are party to forward purchase agreements for 15 Airbus A320 series aircraft and have executed lease agreements for 13 Airbus A320 series aircraft of which we have not yet taken delivery. We expect delivery of 18 of these aircraft in 2018 and the remaining aircraft in 2019 and 2020. In January 2018, we took delivery of two aircraft for which we had purchase agreements as of December 31, 2017. Also in January 2018, we took redelivery of one of our owned aircraft on lease to a European carrier, and also expect redelivery of the remaining 10 aircraft on lease in 2018. Refer to Part I - Item 2 - Properties for further detail regarding our aircraft fleet. We continuously consider aircraft acquisitions on an opportunistic basis.
NETWORK
We use profitability management tools to manage capacity and route expansion through optimization of our flight schedule to, among other things, better match demand in certain markets. We continually adjust our network through the addition of new markets and routes, adjusting the frequencies into existing markets, and exiting under-performing markets, as we seek to achieve and maintain profitability on each route we serve.
As of February 2, 2018 and including recent service announcements, we were selling 396 routes.
Our route network as of December 31, 2017 represents an 11.4 percent increase in the number of routes flown compared to the end of 2016, and the number of mid-sized cities served is now up to 22 after we began to initiate service to larger cities in 2014.
The following table shows the number of leisure destinations and cities served as of the dates indicated (includes cities served seasonally):
December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||
Leisure destinations | 19 | 21 | 17 | |||||
Origination cities | 101 | 97 | 88 | |||||
Total cities | 120 | 118 | 105 | |||||
Total routes | 401 | 360 | 296 | |||||
TRENDS
Continuing with our fleet transition to an all-Airbus fleet, we added 19 Airbus A320 series aircraft to our operating fleet during 2017. We expect to have fully transitioned by the end of 2018, based on our plan to add 30 Airbus A320 series aircraft into service during 2018.
In conjunction with the fleet transition, we retired 10 MD-80 aircraft in 2017 as well as our four remaining Boeing 757-200 aircraft, and expect to retire our remaining 37 MD-80 aircraft by the end of 2018.
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As of February 2, 2018, we were offering service on 140 medium-sized city routes compared to 96 as of the same date in 2017. We initiated service on 30 new network routes in the fourth quarter of 2017, including service into two new cities: Milwaukee, Wisconsin and Norfolk, Virginia.
Sunseeker Resorts planning and development is ongoing and the land is currently being prepared for construction, with the opening of the resort planned for late 2019 or early 2020. Construction of the project and sales efforts are expected to begin in the first half of 2018.
Our flight attendant group approved their collective bargaining agreement effective in December 2017. We expect the collective bargaining agreement to increase our operating costs by approximately $8 million for 2018. Our flight dispatchers have also voted for union representation and negotiations are ongoing. Any labor actions following an inability to reach collective bargaining agreements with these employee groups, or any other labor groups seeking to organize, could materially impact our operations during the continuance of any such activity.
Our Operating Expenses
A brief description of the items included in our operating expense line items follows.
Aircraft fuel expense includes the cost of aircraft fuel, fuel taxes, into plane fees and airport fuel flowage, storage or through-put fees.
Salary and benefits expense includes wages, salaries, and employee bonuses, sales commissions for in-flight personnel, as well as expenses associated with employee benefit plans, stock compensation expense related to equity grants, and employer payroll taxes.
Station operations expense includes the fees charged by airports for the use or lease of airport facilities and fees charged by third party vendors for ground handling services, commissary expenses and other related services.
Maintenance and repairs expense includes all parts, materials and spares required to maintain our aircraft as well as major maintenance costs for our MD-80 aircraft. Also included are fees for repairs performed by third party vendors.
Sales and marketing expense includes all advertising, promotional expenses, travel agent commissions and debit and credit card processing fees associated with the sale of scheduled service and air-related ancillary charges, net of credit card fee reimbursement charges collected from customers and treated as a reduction to expense (program ended in January 2017).
Aircraft lease rentals expense consists of the cost of leasing aircraft and/or engines under operating leases with third parties, as well as costs for sub-service contracted out.
Depreciation and amortization expense includes the depreciation of all owned fixed assets, including aircraft and engines. Also included is the amortization of major maintenance expenses on our Airbus A320 series aircraft and engines, which are deferred under the deferral method of accounting and amortized as a component of depreciation and amortization expense over the estimated period until the next scheduled major maintenance event.
Other expense includes travel and training expenses for crews and ground personnel, facility lease expenses, professional fees, personal property taxes, information technology consulting, expense related to Teesnap, the cost of passenger liability insurance, aircraft hull insurance and all other insurance policies excluding employee welfare insurance. Additionally, this expense includes loss on disposals of aircraft and other equipment disposals, and all other administrative and operational overhead expenses not included in other line items above.
Special charge includes the non-cash impairment charge taken in 2017 on our MD-80 series aircraft, engines and related assets.
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RESULTS OF OPERATIONS
2017 compared to 2016
Operating Revenue
Scheduled service revenue. Scheduled service revenue for 2017 increased by $64.7 million, or 8.6 percent, compared with 2016. The increase was mostly the result of a 10.3 percent increase in the number of scheduled service passengers offset by a 1.5 percent decrease in average base fare. Hurricane Irma’s largest impact was felt in Florida markets during the third quarter 2017. The tragic Las Vegas shooting negatively impacted scheduled service demand in this market for several weeks in the fourth quarter 2017, but bookings returned to more normalized levels later in the quarter. Combined, the negative impact to revenue of these two events was in excess of $8.5 million.
Ancillary air-related revenue. Ancillary air-related revenue for 2017 increased $46.9 million, or 9.4 percent, compared with 2016 due mostly to the increase in scheduled service passengers. The increase was slightly diluted by a 0.8 percent decrease in average ancillary air-related fare per passenger which correlates with a 2.1 percent reduction in stage length, as shorter trips tend to produce lower ancillary charges.
Ancillary third party revenue. Ancillary third party revenue increased $7.8 million, or 17.3 percent, in 2017 from 2016, primarily due to revenue generated from our co-branded credit card program. The increase from co-branded credit card revenue was offset by a decrease in net revenue from third party products (hotel rooms, rental cars, attraction and show tickets) resulting from an 11.1 percent and 5.8 percent decrease in hotel room nights and rental car days, respectively. Hurricane Irma had a significant impact on rental car sales in our Florida markets during the third quarter 2017. Overall, there was a 6.4 percent increase in ancillary third party revenue per passenger year over year as increases from the co-branded credit card more than offset declines in other areas.
Fixed fee contract revenue. Fixed fee contract revenue for 2017 increased $16.7 million, or 52.3 percent, compared with 2016 due to routes added to our Apple Vacations charter, as well as increased flying for the Department of Defense due to additional spare MD-80 aircraft available as additional Airbus aircraft were placed into revenue service.
Other revenue. Other revenue for 2017 increased $4.8 million, or 14.5 percent, due mostly to engine lease revenue generated from leasing spare engines to a third party.
Operating Expenses
We primarily evaluate our expense management by comparing our costs per passenger and per ASM across different periods, which enables us to assess trends in each expense category. The following table presents operating expense per passenger for the indicated periods. The table also presents operating expense per passenger, excluding fuel, a statistic which 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.
For the Year Ended December 31, | Percent | |||||||||
2017 | 2016 | Change | ||||||||
Salary and benefits | $ | 30.19 | $ | 26.24 | 15.1 | % | ||||
Aircraft fuel* | 27.89 | 23.12 | 20.6 | |||||||
Station operations | 11.58 | 11.15 | 3.9 | |||||||
Maintenance and repairs | 9.22 | 9.98 | (7.6 | ) | ||||||
Depreciation and amortization | 9.89 | 9.45 | 4.7 | |||||||
Sales and marketing | 4.28 | 1.84 | 132.6 | |||||||
Aircraft lease rentals | 0.25 | 0.08 | 212.5 | |||||||
Other | 7.54 | 7.29 | 3.4 | |||||||
Special charge** | 2.86 | — | NM | |||||||
Operating expense per passenger | $ | 103.70 | $ | 89.15 | 16.3 | % | ||||
Operating expense per passenger, excluding fuel | $ | 75.81 | $ | 66.03 | 14.8 | % | ||||
*Includes effect of $8.3 million fuel tax refunds in the second quarter of 2016.
**$35.3 million impairment charge on MD-80 fleet in 2017.
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The following table presents unit costs on a per ASM basis, or CASM, for the indicated periods. 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.
For the Year Ended December 31, | Percent | |||||||||
2017 | 2016 | Change | ||||||||
Salary and benefits | 2.73 | ¢ | 2.36 | ¢ | 15.7 | % | ||||
Aircraft fuel* | 2.52 | 2.08 | 21.2 | |||||||
Station operations | 1.05 | 1.00 | 5.0 | |||||||
Maintenance and repairs | 0.83 | 0.90 | (7.8 | ) | ||||||
Depreciation and amortization | 0.89 | 0.85 | 4.7 | |||||||
Sales and marketing | 0.39 | 0.17 | 129.4 | |||||||
Aircraft lease rentals | 0.02 | 0.01 | 100.0 | |||||||
Other | 0.69 | 0.65 | 6.2 | |||||||
Special charge** | 0.26 | — | NM | |||||||
CASM | 9.38 | ¢ | 8.02 | ¢ | 17.0 | % | ||||
Operating CASM, excluding fuel | 6.86 | ¢ | 5.94 | ¢ | 15.5 | % | ||||
*Includes effect of $8.3 million fuel tax refunds in the second quarter of 2016.
**$35.3 million impairment charge on MD-80 fleet in 2017.
Salary and benefits expense. Salary and benefits expense for 2017 increased $79.6 million, or 27.3 percent, compared with 2016. The increase is largely attributable to $52.0 million in incremental expense related to the collective bargaining agreement with our pilots (effective August 1, 2016), which also takes into consideration a 14.1 percent increase in pilot full-time equivalent employees (FTEs), as well as costs associated with an 8.4 percent increase in the number of all other FTEs needed to support additional operating aircraft and the transition to a single fleet type.
Aircraft fuel expense. Aircraft fuel expense for 2017 increased $86.0 million, or 33.4 percent, compared with 2016. Excluding the effect of one-time $8.3 million in fuel tax refunds in the second quarter 2016, fuel expense would have increased 29.3 percent and the system average fuel cost per gallon would have increased by 19.5 percent. Additionally, there was an 8.0 percent increase in system fuel gallons consumed due to an increase in system capacity of 10.0 percent. ASM growth outpaced fuel consumption as average ASMs per gallon increased 1.9 percent year over year, a trend we expect to continue as Airbus aircraft are significantly more fuel efficient than our MD-80 aircraft.
Station operations expense. Station operations expense for 2017 increased $18.5 million, or 14.9 percent, on a 12.3 percent increase in scheduled service departures compared with 2016. The increase in expense outpaced the increase in departures due to servicing more mid-size cities at higher frequencies (these cities generally have higher costs than smaller city airports) as well as various supplementary station expenses.
Depreciation and amortization expense. Depreciation and amortization expense for 2017 increased $16.5 million, or 15.7 percent, compared with 2016, partially related to a 4.8 percent increase in the average number of operating aircraft. Amortization of major maintenance costs under the deferral method of accounting for the Airbus aircraft was $6.7 million for 2017 compared to $1.5 million for 2016, as our first major maintenance event on our Airbus aircraft did not occur until second quarter 2016. Depreciation expense related to Airbus A320 series aircraft was $56.8 million for 2017 compared to $44.9 million for 2016.
Depreciation expense related to MD-80 aircraft declined to approximately $20.9 million for 2017 from $30.0 million in 2016 as we have continued to retire these aircraft. As a result of the $35.3 million impairment charge taken on our MD-80 fleet in fourth quarter 2017 as well as the retirement of our remaining Boeing 757-200 assets, aircraft depreciation expense for future periods will be limited to Airbus A320 series aircraft.
Maintenance and repairs expense. Maintenance and repairs expense for 2017 increased $2.4 million, or 2.2 percent, compared with 2016 due primarily to a 4.8 percent increase in average number of operating aircraft in service, offset by fewer major maintenance events performed on our MD-80 series aircraft. The cost of major maintenance events for our Airbus aircraft is deferred in accordance with the deferral method of accounting and the amortization of these expenses is included under depreciation and amortization expense.
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Sales and marketing expense. Sales and marketing expense for 2017 increased $32.2 million compared to 2016, primarily due to an increase in net credit card fees paid by us. We previously charged for credit card fee reimbursement (a fee charged to customers for using a credit card) at zero margin, which was applied as a reduction to sales and marketing expense, and the net amount paid by us for credit card fees was reduced. We discontinued the charge for credit card fee reimbursement in mid-January 2017, although this charge still applied to travel booked up to the discontinuation date. Consequently, credit card fee reimbursements for 2017 declined from $25.5 million in 2016 to $4.5 million in 2017. There were also year over year increased expenses related to various marketing initiatives for our nationwide network.
Other expense. Other expense for 2017 increased by $11.7 million, or 14.4 percent, compared with 2016. The increase is due to flight crew training needed to support our fleet transition and growing route system, information technology expenses, as well as other administrative expenses incurred to support our operational growth.
Special charge. We incurred a $35.3 million non-cash impairment charge to our MD-80 series aircraft, engines and related assets, triggered in the fourth quarter of 2017.
Income Tax Expense
Our effective tax rate was 0.3 percent and 36.5 percent for 2017 and 2016, respectively. The decrease in the effective tax rate was primarily due to a $74.7 million one-time tax benefit related to the remeasurement of deferred tax balances per the Tax Cuts and Jobs Act enacted in December 2017. We expect our tax rate to be between 24 percent and 25 percent in the near term as a result of the lower federal income tax rate of 21 percent, as well as the estimated impact of state taxes.
2016 compared to 2015
Operating Revenue
Scheduled service revenue. Scheduled service revenue for 2016 increased by $17.9 million, or 2.4 percent, compared with 2015, primarily driven by a 17.6 percent increase in the number of scheduled service passengers on a 16.5 percent increase in ASMs, offset by a 12.9 percent decrease in average base fare. During 2016, we increased scheduled service ASMs for off-peak flying (flights scheduled on off-peak days or during off-peak seasons) by 24.0 percent over 2015 as flights with lower base fares added to our profitability due to lower fuel prices.
Ancillary air-related revenue. Ancillary air-related revenue for 2016 increased $65.2 million, or 15.0 percent, compared with 2015, due mostly to the 17.6 percent increase in scheduled service passengers resulting from capacity growth. This was offset by a 2.2 percent decrease in average ancillary air-related fare per passenger.
Ancillary third party revenue. Ancillary third party revenue increased $4.8 million, or 11.9 percent, in 2016 from 2015. This was due primarily to the 17.6 percent increase in scheduled service passengers which contributed to a 24.7 percent increase in rental car days sold. Rental car sales were bolstered by our network growth in East Coast cities, where rental car take rates are higher. This increase was offset by an overall 4.9 percent decrease in ancillary third party products revenue per passenger, largely attributable to a decline in hotel room take rate. Hotel room night sales slowed in 2016 mostly due to our network shift away from Las Vegas (our largest hotel market) to East Coast cities where hotel room night sales are lower.
Fixed fee contract revenue. Fixed fee contract revenue for 2016 increased $12.2 million, or 61.9 percent, compared with 2015, due mostly to the Apple Vacations charter which began December 2015, as well as increased flying for the Department of Defense.
Other revenue. Other revenue remained relatively flat in 2016 from 2015, at $33.0 million and $32.4 million, respectively.
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Operating Expenses
The following table presents operating expense per passenger for the indicated periods.
For the Year Ended December 31, | Percentage | |||||||||
2016 | 2015 | Change | ||||||||
Aircraft fuel* | $ | 23.12 | $ | 29.30 | (21.1 | )% | ||||
Salary and benefits | 26.24 | 24.19 | 8.5 | |||||||
Station operations | 11.15 | 10.77 | 3.5 | |||||||
Maintenance and repairs | 9.98 | 9.74 | 2.5 | |||||||
Depreciation and amortization | 9.45 | 10.33 | (8.5 | ) | ||||||
Sales and marketing | 1.84 | 2.25 | (18.2 | ) | ||||||
Aircraft lease rentals | 0.08 | 0.24 | (66.7 | ) | ||||||
Other | 7.29 | 6.91 | 5.5 | |||||||
Operating expense per passenger | $ | 89.15 | $ | 93.73 | (4.9 | )% | ||||
Operating expense per passenger, excluding fuel | $ | 66.03 | $ | 64.43 | 2.5 | % | ||||
*Includes effect of $8.3 million fuel tax refunds in the second quarter of 2016.
The following table presents unit costs on a per ASM basis, or CASM, for the indicated periods.
For the Year Ended December 31, | Percentage | |||||||||
2016 | 2015 | Change | ||||||||
Aircraft fuel* | 2.08 | ¢ | 2.64 | ¢ | (21.2 | )% | ||||
Salary and benefits | 2.36 | 2.18 | 8.3 | |||||||
Station operations | 1.00 | 0.97 | 3.1 | |||||||
Maintenance and repairs | 0.90 | 0.88 | 2.3 | |||||||
Depreciation and amortization | 0.85 | 0.93 | (8.6 | ) | ||||||
Sales and marketing | 0.17 | 0.20 | (15.0 | ) | ||||||
Aircraft lease rental | 0.01 | 0.02 | (50.0 | ) | ||||||
Other | 0.65 | 0.63 | 3.2 | |||||||
Operating expense per ASM (CASM) | 8.02 | ¢ | 8.45 | ¢ | (5.1 | )% | ||||
CASM, excluding fuel | 5.94 | ¢ | 5.81 | ¢ | 2.2 | % | ||||
*Includes effect of $8.3 million fuel tax refunds in the second quarter of 2016.
Salary and benefits expense. Salary and benefits expense for 2016 increased $62.2 million, or 27.1 percent, compared with 2015. The increase was partially attributable to a 20.0 percent increase in the number of full-time equivalent employees ("FTEs") associated with the increase in average number of aircraft in service and the planning and training needed to transition to a single fleet type. The collective bargaining agreement with our pilots also drove an increase in salary and benefits expense for this employee group from the effective date of the agreement on August 1, 2016.
Aircraft fuel expense. Aircraft fuel expense for 2016 decreased $21.1 million, or 7.6 percent, compared with 2015. The decrease was primarily the result of a 19.9 percent decrease in system average cost per gallon to $1.49 per gallon (including the effect of $8.3 million fuel tax refund). This was offset by a 15.2 percent increase in system fuel gallons consumed resulting from the increase in ASMs. As we add additional Airbus aircraft, which are more fuel efficient than our MD-80 aircraft, we anticipate our fuel efficiency will continue to improve; our system ASMs per gallon increased from 70.2 in 2015 to 71.6 in 2016 as Airbus aircraft flew 48.5 percent of scheduled service ASMs in 2016 compared to 32.6 percent in 2015.
Station operations expense. Station operations expense for 2016 increased $21.8 million, or 21.3 percent on a 19.9 percent increase in scheduled service departures compared with 2015.
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Depreciation and amortization expense. Depreciation and amortization expense for 2016 increased $7.1 million, or 7.3 percent, compared with 2015 due mainly to a 12.1 percent increase in the average number of operating aircraft. The effect of the increase in operating aircraft was diluted by reduced depreciation on our MD-80 aircraft nearing full depreciation.
Maintenance and repairs expense. Maintenance and repairs expense for 2016 increased $18.5 million, or 20.0 percent compared with 2015. The increase was due mostly to a 12.1 percent increase in the average number of operating aircraft in service as well as the mix of maintenance activities resulting in more expensive events in the current year. Major maintenance events for the MD-80 aircraft are expected to decline as we retire aircraft consistent with our fleet retirement plan. The cost of major maintenance events for our Airbus aircraft is deferred in accordance with the deferral method of accounting and the amortization of these expenses is included under depreciation and amortization expense.
Sales and marketing expense. Sales and marketing expense for 2016 decreased $0.8 million, or 3.9 percent, compared to 2015, primarily due to a reduction in net credit card fees paid by us. We charged for credit card fee reimbursement (a fee charged to customers for using a credit card) at zero margin, which was applied as a reduction to sales and marketing expense, and the net amount paid by us for credit card fees was reduced. In January 2017, we discontinued the charge for credit card fee reimbursement. Credit card fee reimbursements for 2016 and 2015 were $25.5 million and $21.7 million, respectively. The reduction in credit card fees was offset by increased expenses in 2016 related to a national advertising campaign which launched in late 2015.
Other expense. Other expense for 2016 increased by $15.5 million, or 23.7 percent, compared with 2015, due to increased flight crew training needed to support our growing operating fleet and network, information technology expenses, as well as increased property taxes and expenses related to irregular operations over the summer of 2016.
Income Tax Expense
Our effective income tax rate remained flat at 36.5 percent for both 2016 and 2015.
LIQUIDITY AND CAPITAL RESOURCES
Unrestricted cash and investment securities (short-term and long-term) were $490.7 million and $458.8 million at December 31, 2017 and 2016, respectively. Restricted cash represents escrowed funds under fixed fee contracts and cash collateralized against letters of credit required by hotel properties for guaranteed room availability, airports, and certain other parties. Under our fixed fee flying contracts, we require customers to prepay for flights, and the cash is escrowed until the flight is completed. Prepayments are recorded as restricted cash and a corresponding amount is recorded as air traffic liability. Investment securities represent liquid marketable securities which are available-for-sale.
During 2017, our primary source of funds was $391.1 million generated by our operations in addition to $497.5 million in proceeds from notes payable. Our operating cash flows and borrowings have allowed us to return value to shareholders and invest in the growth of our fleet. Our future capital needs are primarily for the acquisition of additional aircraft, including our existing Airbus A320 series aircraft commitments, as well as potential capital outlay related to Sunseeker Resorts as well as other travel and leisure initiatives. Of the aircraft expected to be placed into service in 2018, 13 are structured as capital leases and will not require separate financing, and the additional 10 aircraft (as of February 2, 2018) being returned from lease to a European carrier were purchased in 2014 and have already been paid for.
We believe we have more than adequate liquidity resources through our operating cash flows, borrowings, and cash balances, to meet our future contractual obligations. We financed 10 of our new Airbus aircraft in 2017, and expect to finance the remaining two in 2018 in addition to used Airbus aircraft under purchase contract, subject to acceptable terms. In addition, we continue to consider raising funds through debt financing on an opportunistic basis.
In addition to our recurring quarterly cash dividend, we plan to continue to opportunistically repurchase our stock in the open market subject to availability of cash resources and compliance with our debt covenants. As of December 31, 2017, authority under our board-approved stock repurchase program was $100.0 million. There is no expiration date for the program.
Debt
Our total long-term debt obligations, without reduction for related costs, increased from $813.2 million as of December 31, 2016 to $1,171.0 million as of December 31, 2017 due to borrowings closed to effectively execute the transition of our fleet. As of February 2, 2018, we owned 13 unencumbered Airbus aircraft, as well as had $14.4 million undrawn on our senior secured revolving credit facility.
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Sources and Uses of Cash
Operating Activities. During 2017, our operating activities provided $391.1 million of cash compared to $346.9 million during 2016. Operating cash inflows are primarily derived from providing air transportation and related ancillary products and services to customers, for which the vast majority of tickets are purchased prior to the day travel occurs. The year over year increase in reported cash inflows largely resulted from the increase in earnings after adjustments made for non-cash items such as depreciation and amortization ($16.5 million higher in 2017) and the special charge in 2017 ($35.3 million), and as a result of a $16.2 million increase in air traffic liability.
During 2016, our operating activities provided $346.9 million of cash compared to $365.4 million in 2015. The year over year decrease in reported cash inflows was impacted by the expenditure of $18.9 million related to major maintenance for our Airbus airframes and engines.
Investing Activities. During 2017, cash used for investing activities was $618.5 million compared to $401.8 million in 2016. During 2017, our primary use of cash was for the purchase of property and equipment of $580.2 million (including aircraft pre-delivery deposits and capitalized interest). Cash was also used for the purchase of investment securities, net of maturities, of $43.4 million.
During 2016, our primary use of cash was for the purchase of property and equipment of $325.2 million (including aircraft pre-delivery deposits and capitalized interest). Cash was also used for the purchase of investment securities, net of maturities, of $83.5 million.
During 2015, our primary use of cash was for the purchase of property and equipment of $252.7 million and offset by the proceeds from the maturity of investment securities, net of purchases, of $16.3 million.
Financing Activities. Cash provided by financing activities in 2017 was $222.1 million compared to $32.6 million in 2016. In 2017, proceeds from the issuance of long-term debt net of principal payments were $358.7 million, offset by stock repurchases of $90.5 million and cash dividends paid to shareholders of $45.7 million.
In 2016, proceeds from the issuance of long-term debt net of principal payments of $167.1 million were offset by $67.5 million in cash dividends paid to shareholders and $66.4 million in stock repurchases.
In 2015, cash used in financing activities was $133.6 million, as proceeds from the issuance of long-term debt net of principal payments of $53.1 million were more than offset by $129.5 million of stock repurchases and $62.4 million in cash dividends paid to shareholders.
OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTRACTUAL OBLIGATIONS
The following table discloses aggregate information about our contractual cash obligations and off-balance sheet arrangements as of December 31, 2017 and the periods in which payments are due (in thousands):
Total | Less than 1 year | 2-3 years | 4-5 years | More than 5 years | ||||||||||||||||
Long-term debt obligations (1) | $ | 1,299,828 | $ | 263,742 | $ | 709,348 | $ | 125,067 | $ | 201,671 | ||||||||||
Operating lease obligations (2) (5) | 28,426 | 7,455 | 11,308 | 3,839 | 5,824 | |||||||||||||||
Aircraft acquisition obligations (3) (5) | 574,114 | 150,264 | 163,870 | 61,530 | 198,450 | |||||||||||||||
Airport fees under use and lease agreements (4) (5) | 27,077 | 11,336 | 15,678 | 63 | — | |||||||||||||||
Total future payments under contractual obligations | $ | 1,929,445 | $ | 432,797 | $ | 900,204 | $ | 190,499 | $ | 405,945 | ||||||||||
(1) | Long-term debt obligations (including variable interest entities) include scheduled interest payments, using LIBOR rates as of December 31, 2017, and excludes debt issuance costs. |
(2) | Operating lease obligations include the lease and use of gate space and areas surrounding gates, operating support areas in airport terminals under use and lease agreements, and leases of office, warehouse and other space. |
(3) | Includes aircraft acquisition obligations under existing aircraft purchase agreements and capital lease agreements. |
(4) | Obligations for common and joint use space in the airport terminal facilities under use and lease agreements. |
(5) | Not reflected on our balance sheet. |
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements based on events and transactions occurring during the periods reported. Note 2 to our Consolidated Financial Statements provides a detailed discussion of our significant accounting policies.
Critical accounting policies are defined as those policies that reflect significant judgments about matters that are inherently uncertain. Our actual results may differ from these estimates under different assumptions or conditions. We believe our critical accounting policies are limited to those described below.
Affinity Credit Card Program
The Allegiant World Mastercard® is issued by Bank of America through which arrangement points are sold and consideration is received under an agreement with a seven year scheduled duration. Under this arrangement, we identified the following deliverables: travel points to be awarded (the travel component), use of our brand and access to our member lists, and certain other advertising and marketing elements (collectively the marketing component). Applying guidance under Accounting Standards Update (“ASU”) 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, each of these deliverables is accounted for separately and allocation of the consideration from the agreement is determined based on the relative selling price of each deliverable. We applied a level of management judgment and estimation in determining the best estimate of selling price for each deliverable by considering multiple inputs and methods including, but not limited to, the redemption value of points awarded, discounted cash flows, brand value, volume discounts, published selling prices, number of points to be awarded and number of points to be redeemed.
The travel component is deferred based on its relative selling price and is recognized into scheduled service revenue when the points are redeemed by cardholders. The marketing component is considered earned in the period in which points are sold and is therefore recognized into third party products revenue in the same period.
Accounting for Long-Lived Assets
We record impairment losses on long-lived assets used in operations, consisting principally of property and equipment, when events or changes in circumstances indicate, in management’s judgment, that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In making these determinations, we utilize certain assumptions, including, but not limited to: (i) estimated fair value of the assets; and (ii) estimated future cash flows expected to be generated by those assets, which are based on additional assumptions such as (but not limited to) asset utilization, average fare, block hours, fuel costs, length of service the asset will be used in operations, and estimated salvage values.
In estimating the useful lives and residual values of our aircraft, we have primarily relied upon actual experience with the same or similar aircraft types, current and projected future market information, and recommendations from other industry sources. Subsequent revisions to these estimates could be caused by changing market prices of our aircraft, changes in utilization of the aircraft, and other fleet events. We evaluate these estimates used for each reporting period and adjust when deemed necessary. To the extent a change in estimate for useful lives or salvage values of our property and equipment occurs, there could be an acceleration of depreciation expense associated with the change in estimate.
Aircraft Maintenance and Repair Costs and Major Maintenance Deferral
We account for major maintenance costs of Airbus airframes and the related CFM engines using the deferral method. Under this method, the cost of major maintenance events is capitalized and amortized as a component of depreciation and amortization expense over the estimated period until the next scheduled major maintenance event. The timing of the next major maintenance event is estimated based on assumptions including estimated cycles, hours and months, required maintenance intervals, and the age/condition of related parts. These assumptions may change based on forecasted aircraft utilization changes, updates to government regulations, and manufacturer maintenance intervals, as well as unplanned incidents causing damage requiring a major maintenance event prior to a scheduled visit. If the estimated timing of the next maintenance event changes, the related amortization period would also change.
We account for non-major maintenance and repair costs as well as major maintenance costs of MD-80 airframes and the related JT8D-219 engines under the direct expense method. Under this method, maintenance and repair costs for owned and leased
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aircraft are charged to operating expenses as incurred. Maintenance and repair costs includes all parts, materials, line maintenance, and non-major maintenance activities required to maintain the Company's fleet types.
Share-based Compensation
We recognize share-based compensation expense over the requisite service period using a fair value approach. Determining fair value requires judgment, and we use the Black-Scholes valuation model for stock options and cash-settled SARs issued. Cash-settled SARs are liability-based awards and fair value is updated monthly using the Black-Scholes valuation model for outstanding awards. Judgment is required to establish the assumptions to be used in the model. These assumptions are for the volatility of our common stock price, estimated term over which our stock options and SARs will be outstanding, interest rate, and dividend yield to be applied. We use our closing stock price on the grant date as the fair value for issuances of restricted stock.
USE OF NON-GAAP FINANCIAL MEASURES
Total operating expense less fuel and special item eliminates the effect of fuel and the non-cash impairment charge for the accelerated retirement of the MD-80 fleet. Fuel expense is eliminated because we have limited control over that expense item. The impairment charge is eliminated as it is not reflective of our ongoing operating performance. As such, this is a non-GAAP financial measure.
The SEC has adopted rules (Regulation S-K (10e)) regulating the use of non-GAAP financial measures. Because of our use of non-GAAP financial measures in this report to supplement our consolidated financial statements presented on a GAAP basis,
we are including a presentation of the most directly comparable GAAP measures, which are total operating expenses and operating expenses on a per ASM basis and a reconciliation of the non-GAAP measures to the most comparable GAAP measures. Our utilization of non-GAAP measurements is not meant to be considered in isolation or as a substitute for other measures of financial performance prepared in accordance with GAAP. Total operating expenses less fuel and special item are not GAAP measurements and our use of these measures may not be comparable to similarly titled measures employed by other companies in the airline and travel industry. The reconciliations of these measures to the most comparable GAAP measure for the periods indicated below follow.
Twelve Months Ended December 31, | Twelve Months Ended December 31, | ||||||
2017 | 2016 | ||||||
Reconciliation of operating CASM, excluding fuel and special item (millions) | |||||||
Total operating expense (GAAP) | $ | 1,276.6 | $ | 992.3 | |||
Less aircraft fuel expense | 343.3 | 257.3 | |||||
Total operating expense less fuel* | 933.3 | 735.0 | |||||
Special item: | |||||||
Write down of MD-80 fleet | 35.3 | — | |||||
Total operating expense less fuel and special item* | 898.0 | 735.0 | |||||
System available seat miles | 13,612.0 | 12,375.5 | |||||
Cost per available seat mile (cents) as reported | 9.38 | 8.02 | |||||
Cost per available seat mile excluding fuel and special item (cents)* | 6.60 | 5.94 | |||||
*Denotes Non-GAAP figure.
RECENT ACCOUNTING PRONOUNCEMENTS
See related disclosure at Item 8-Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 2-Summary of Significant Accounting Policies.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are subject to certain market risks, including changes in interest rates and commodity prices (specifically, aircraft fuel). The adverse effects of changes in markets could pose potential loss, as discussed below. The sensitivity analysis does not consider
38
the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.
Aircraft Fuel
Our results of operations can be significantly impacted by changes in the price and availability of aircraft fuel. Aircraft fuel expense for the year ended December 31, 2017 represented 26.9 percent of our total operating expenses. Increases in fuel prices or a shortage of supply could have a material effect on our operations and operating results. Based on our 2017 fuel consumption, a hypothetical ten percent increase in the average price per gallon of aircraft fuel would have increased fuel expense by approximately $33.5 million for the 2017 year. We have not hedged fuel price risk in many years.
Interest Rates
We have market risk associated with changing interest rates due to the short-term nature of our cash and investment securities and variable-rate debt. We invest available cash in government and corporate debt securities, investment grade commercial paper, and other highly rated financial instruments. Because of the short-term nature of these investments, the returns earned closely parallel short-term floating interest rates. A hypothetical 100 basis point change in interest rates for the year ended December 31, 2017 would have affected interest income from cash and investment securities by approximately $4.7 million.
As of December 31, 2017, we had $704.0 million of variable-rate debt including current maturities and excluding related costs of $4.5 million. A hypothetical 100 basis point change in interest rates would have affected interest expense by approximately $5.2 million in 2017.
As of December 31, 2017, we had $467.0 million of fixed-rate debt, including current maturities and excluding related costs of $1.6 million, which had a fair value of $477.7 million. A hypothetical 100 basis point change in market interest rates would not impact interest expense or have a material effect on the fair value of our fixed-rate debt instruments as of such date.
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Item 8. Financial Statements and Supplementary Data
Selected Quarterly Financial Data (unaudited)
Quarterly results of operations for the years ended December 31, 2017 and 2016 are summarized below (in thousands, except for per share amounts).
March 31 | June 30 | September 30 | December 31 | ||||||||||||
2017 | |||||||||||||||
Operating revenues | $ | 375,837 | $ | 400,614 | $ | 348,769 | $ | 378,558 | |||||||
Operating income | 72,888 | 85,196 | 42,916 | 26,168 | |||||||||||
Net income attributable to Allegiant Travel Company | 41,632 | 48,475 | 22,293 | 82,502 | |||||||||||
Earnings per share to common shareholders: | |||||||||||||||
Basic | 2.50 | 2.94 | 1.39 | 5.13 | |||||||||||
Diluted | 2.50 | 2.94 | 1.39 | 5.13 | |||||||||||
2016 | |||||||||||||||
Operating revenues | $ | 348,615 | $ | 344,851 | $ | 333,481 | $ | 335,883 | |||||||
Operating income | 121,126 | 104,476 | 76,840 | 68,115 | |||||||||||
Net income attributable to Allegiant Travel Company | 71,980 | 60,847 | 45,453 | 41,310 | |||||||||||
Earnings per share to common shareholders: | |||||||||||||||
Basic | 4.29 | 3.69 | 2.76 | 2.49 | |||||||||||
Diluted | 4.29 | 3.68 | 2.75 | 2.48 | |||||||||||
The sum of the quarterly earnings per share amounts does not equal the annual amount reported as per share amounts are computed independently for each quarter and for the full year, based on respective weighted average common shares outstanding and other potentially dilutive common shares.
Income and earnings per share in the fourth quarter of 2017 were impacted by a non-cash impairment charge of $35.3 million on the Company's MD-80 fleet and related assets and a $74.7 million income tax benefit from the remeasurement of deferred tax assets and liabilities due to the passage of the Tax Cuts and Jobs Act in December 2017.
40
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Allegiant Travel Company:
We have audited the accompanying consolidated statement of income, and comprehensive income, shareholders' equity and cash flows of Allegiant Travel Company and subsidiaries for the year-ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of Allegiant Travel Company’s operations and its cash flows for the year-ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Las Vegas, Nevada
February 22, 2016
41
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Allegiant Travel Company:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Allegiant Travel Company and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two‑year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2016.
Dallas, Texas
February 28, 2018
42
ALLEGIANT TRAVEL COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, 2017 | December 31, 2016 | ||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 59,449 | $ | 64,711 | |||
Restricted cash | 11,190 | 11,647 | |||||
Short-term investments | 352,681 | 269,269 | |||||
Accounts receivable | 71,057 | 40,667 | |||||
Expendable parts, supplies and fuel, net of reserve of $13,756 and $7,205 | 17,647 | 16,797 | |||||
Prepaid expenses | 23,931 | 16,277 | |||||
Other current assets | 5,320 | 2,686 | |||||
TOTAL CURRENT ASSETS | 541,275 | 422,054 | |||||
Property and equipment, net of accumulated depreciation of $276,548 and $466,151 (including $112,750 and $0 from VIEs, Note 5) | 1,512,415 | 1,095,314 | |||||
Long-term investments | 78,570 | 124,834 | |||||
Deferred major maintenance, net of accumulated amortization of $8,218 and $1,510 | 31,326 | 17,347 | |||||
Deposits and other assets | 16,571 | 12,027 | |||||
TOTAL ASSETS | $ | 2,180,157 | $ | 1,671,576 | |||
CURRENT LIABILITIES: | |||||||
Accounts payable | $ | 20,108 | $ | 16,010 | |||
Accrued liabilities | 105,127 | 96,661 | |||||
Air traffic liability | 210,184 | 194,001 | |||||
Current maturities of notes payable, net of related costs of $2,298 and $1,868 (including $8,935 and $0 from VIEs, Note 5) | 214,761 | 86,226 | |||||
TOTAL CURRENT LIABILITIES | 550,180 | 392,898 | |||||
LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES: | |||||||
Long-term debt, net of current maturities and related costs of $3,812 and $3,035 (including $92,424 and $0 from VIEs, Note 5) | 950,131 | 722,048 | |||||
Deferred income taxes | 118,492 | 75,338 | |||||
Other noncurrent liabilities | 13,407 | 7,670 | |||||
TOTAL LIABILITIES: | 1,632,210 | 1,197,954 | |||||
COMMITMENTS AND CONTINGENCIES (NOTE 12) | |||||||
SHAREHOLDERS' EQUITY: | |||||||
Common stock, par value $.001, 100,000,000 shares authorized; 22,515,997 and 22,469,413 shares issued; 16,066,404 and 16,633,425 shares outstanding, as of December 31, 2017 and 2016, respectively | 23 | 22 | |||||
Treasury stock, at cost, 6,449,593 and 5,835,988 shares at December 31, 2017 and 2016, respectively | (605,655 | ) | (517,803 | ) | |||
Additional paid in capital | 253,840 | 238,236 | |||||
Accumulated other comprehensive loss, net | (2,840 | ) | (230 | ) | |||
Retained earnings | 902,579 | 753,397 | |||||
TOTAL EQUITY | 547,947 | 473,622 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 2,180,157 | $ | 1,671,576 | |||
The accompanying notes are an integral part of these consolidated financial statements.
43
ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
OPERATING REVENUE: | |||||||||||
Scheduled service revenue | $ | 818,136 | $ | 753,414 | $ | 735,563 | |||||
Ancillary revenue: | |||||||||||
Air-related charges | 546,476 | 499,542 | 434,317 | ||||||||
Third party products | 52,707 | 44,940 | 40,177 | ||||||||
Total ancillary revenue | 599,183 | 544,482 | 474,494 | ||||||||
Fixed fee contract revenue | 48,708 | 31,972 | 19,747 | ||||||||
Other revenue | 37,751 | 32,963 | 32,384 | ||||||||
Total operating revenue | 1,503,778 | 1,362,831 | 1,262,188 | ||||||||
OPERATING EXPENSES: | |||||||||||
Salary and benefits | 371,599 | 291,974 | 229,802 | ||||||||
Aircraft fuel | 343,333 | 257,332 | 278,394 | ||||||||
Station operations | 142,581 | 124,052 | 102,294 | ||||||||
Depreciation and amortization | 121,713 | 105,216 | 98,097 | ||||||||
Maintenance and repairs | 113,481 | 111,070 | 92,575 | ||||||||
Sales and marketing | 52,711 | 20,527 | 21,349 | ||||||||
Aircraft lease rentals | 3,098 | 924 | 2,326 | ||||||||
Other | 92,840 | 81,178 | 65,649 | ||||||||
Special charge | 35,253 | — | — | ||||||||
Total operating expenses | 1,276,609 | 992,273 | 890,486 | ||||||||
OPERATING INCOME | 227,169 | 370,558 | 371,702 | ||||||||
OTHER (INCOME) EXPENSE: | |||||||||||
Interest income | (5,808 | ) | (3,010 | ) | (1,452 | ) | |||||
Interest expense | 38,990 | 28,836 | 26,510 | ||||||||
Other, net | (1,559 | ) | (1,226 | ) | (75 | ) | |||||
Total other expense | 31,623 | 24,600 | 24,983 | ||||||||
INCOME BEFORE INCOME TAXES | 195,546 | 345,958 | 346,719 | ||||||||
PROVISION FOR INCOME TAXES | 644 | 126,368 | 126,389 | ||||||||
NET INCOME | 194,902 | 219,590 | 220,330 | ||||||||
Net loss attributable to noncontrolling interest | — | — | (44 | ) | |||||||
NET INCOME ATTRIBUTABLE TO ALLEGIANT TRAVEL COMPANY | $ | 194,902 | $ | 219,590 | $ | 220,374 | |||||
Earnings per share to common shareholders: | |||||||||||
Basic | $ | 11.94 | $ | 13.23 | $ | 12.97 | |||||
Diluted | $ | 11.93 | $ | 13.21 | $ | 12.94 | |||||
Shares used for computation: | |||||||||||
Basic | 16,073 | 16,465 | 16,923 | ||||||||
Diluted | 16,095 | 16,489 | 16,962 | ||||||||
Cash dividends declared per share: | $ | 2.80 | $ | 2.40 | $ | 2.75 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Net income | $ | 194,902 | $ | 219,590 | $ | 220,330 | |||||
Other comprehensive (loss) income: | |||||||||||
Change in available for sale securities, net of tax | 49 | 318 | (185 | ) | |||||||
Foreign currency translation adjustments | (681 | ) | 88 | 226 | |||||||
Change in derivatives, net of tax | (871 | ) | (424 | ) | 874 | ||||||
Reclassification of derivative gains into Other revenue | (1,107 | ) | (1,046 | ) | (1,292 | ) | |||||
Total other comprehensive loss | (2,610 | ) | (1,064 | ) | (377 | ) | |||||
TOTAL COMPREHENSIVE INCOME | 192,292 | 218,526 | 219,953 | ||||||||
Comprehensive loss attributable to noncontrolling interest | — | — | (44 | ) | |||||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO ALLEGIANT TRAVEL COMPANY | $ | 192,292 | $ | 218,526 | $ | 219,997 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Total | ||||||||||||||||||||||||||||||||||
Allegiant | ||||||||||||||||||||||||||||||||||
Accumulated | Travel | |||||||||||||||||||||||||||||||||
Common | Additional | other | Company | Total | ||||||||||||||||||||||||||||||
stock | Par | paid-in | comprehensive | Retained | Treasury | shareholders' | Noncontrolling | shareholders' | ||||||||||||||||||||||||||
outstanding | value | capital | income (loss) | earnings | shares | equity | interest | equity | ||||||||||||||||||||||||||
Balance at December 31, 2014 | 17,413 | $ | 22 | $ | 221,257 | $ | 1,211 | $ | 395,783 | $ | (325,396 | ) | $ | 292,877 | $ | 1,188 | $ | 294,065 | ||||||||||||||||
Share-based compensation | 37 | — | 7,307 | — | — | — | 7,307 | — | 7,307 | |||||||||||||||||||||||||
Issuance of common stock, net of forfeitures | 40 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Tax benefit from share-based compensation | — | — | 3,865 | — | — | — | 3,865 | — | 3,865 | |||||||||||||||||||||||||
Liquidation of ownership interest in subsidiary | — | — | (3,484 | ) | — | 3,926 | — | 442 | (1,144 | ) | (702 | ) | ||||||||||||||||||||||
Shares repurchased by the Company and held as treasury shares | (695 | ) | — | — | — | — | (129,455 | ) | (129,455 | ) | — | (129,455 | ) | |||||||||||||||||||||
Stock issued under employee stock purchase plan | 8 | — | — | — | — | 1,436 | 1,436 | — | 1,436 | |||||||||||||||||||||||||
Cash dividends declared, $2.75 per share | — | — | — | — | (46,464 | ) | — | (46,464 | ) | — | (46,464 | ) | ||||||||||||||||||||||
Other comprehensive (loss) | — | — | — | (377 | ) | — | — | (377 | ) | — | (377 | ) | ||||||||||||||||||||||
Net income (loss) | — | — | — | — | 220,374 | — | 220,374 | (44 | ) | 220,330 | ||||||||||||||||||||||||
Balance at December 31, 2015 | 16,803 | $ | 22 | $ | 228,945 | $ | 834 | $ | 573,619 | $ | (453,415 | ) | $ | 350,005 | $ | — | $ | 350,005 | ||||||||||||||||
Share-based compensation | 5 | — | 9,291 | — | 9,291 | — | 9,291 | |||||||||||||||||||||||||||
Issuance of common stock, net of forfeitures | 214 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares repurchased by the Company and held as treasury shares | (402 | ) | — | — | — | (66,371 | ) | (66,371 | ) | — | (66,371 | ) | ||||||||||||||||||||||
Stock issued under employee stock purchase plan | 13 | — | — | — | 1,983 | 1,983 | — | 1,983 | ||||||||||||||||||||||||||
Cash dividends declared, $2.40 per share | — | — | — | — | (39,812 | ) | (39,812 | ) | — | (39,812 | ) | |||||||||||||||||||||||
Other comprehensive (loss) | — | — | — | (1,064 | ) | (1,064 | ) | — | (1,064 | ) | ||||||||||||||||||||||||
Net income | — | — | — | — | 219,590 | 219,590 | — | 219,590 | ||||||||||||||||||||||||||
Balance at December 31, 2016 | 16,633 | $ | 22 | $ | 238,236 | $ | (230 | ) | $ | 753,397 | $ | (517,803 | ) | $ | 473,622 | $ | — | $ | 473,622 | |||||||||||||||
Share-based compensation | 16 | — | 15,604 | — | — | — | 15,604 | — | 15,604 | |||||||||||||||||||||||||
Issuance of common stock, net of forfeitures | 31 | 1 | — | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||
Shares repurchased by the Company and held as treasury shares | (632 | ) | — | — | — | — | (90,457 | ) | (90,457 | ) | — | (90,457 | ) | |||||||||||||||||||||
Stock issued under employee stock purchase plan | 18 | — | — | — | — | 2,605 | 2,605 | — | 2,605 | |||||||||||||||||||||||||
Cash dividends declared, $2.80 per share | — | — | — | — | (45,720 | ) | — | (45,720 | ) | — | (45,720 | ) | ||||||||||||||||||||||
Other comprehensive (loss) | — | — | — | (2,610 | ) | — | — | (2,610 | ) | — | (2,610 | ) | ||||||||||||||||||||||
Net income | — | — | — | — | 194,902 | — | 194,902 | — | 194,902 | |||||||||||||||||||||||||
Balance at December 31, 2017 | 16,066 | $ | 23 | $ | 253,840 | $ | (2,840 | ) | $ | 902,579 | $ | (605,655 | ) | $ | 547,947 | $ | — | $ | 547,947 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
46
ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
OPERATING ACTIVITIES: | |||||||||||
Net income | $ | 194,902 | $ | 219,590 | $ | 220,330 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 121,713 | 105,216 | 98,097 | ||||||||
Loss on aircraft and other equipment disposals | 9,334 | 4,981 | 4,630 | ||||||||
Special charge | 35,253 | — | — | ||||||||
Provision for obsolescence of expendable parts, supplies and fuel | 4,576 | 2,598 | 1,604 | ||||||||
Amortization of deferred financing costs | 1,357 | 1,688 | 1,099 | ||||||||
Share-based compensation expense | 13,856 | 9,389 | 10,474 | ||||||||
Deferred income taxes | 42,473 | 29,846 | 8,979 | ||||||||
Excess tax benefits from share-based compensation | — | — | (3,865 | ) | |||||||
Changes in certain assets and liabilities: | |||||||||||
(Increase) decrease in accounts receivable | (30,568 | ) | (18,201 | ) | (1,693 | ) | |||||
(Increase) decrease in prepaid expenses | (7,654 | ) | 1,999 | 6,030 | |||||||
Increase (decrease) in accounts payable | 4,798 | 9,209 | (6,431 | ) | |||||||
Increase (decrease) in accrued liabilities | 9,251 | 7,596 | 14,673 | ||||||||
Increase (decrease) in air traffic liability | 16,183 | (4,135 | ) | 12,821 | |||||||
Change in deferred major maintenance | (20,687 | ) | (18,857 | ) | — | ||||||
Other, net | (3,656 | ) | (4,058 | ) | (1,381 | ) | |||||
Net cash provided by operating activities | 391,131 | 346,861 | 365,367 | ||||||||
INVESTING ACTIVITIES: | |||||||||||
Purchase of investment securities | (363,300 | ) | (444,532 | ) | (357,546 | ) | |||||
Proceeds from maturities of investment securities | 319,915 | 361,082 | 373,816 | ||||||||
Aircraft pre-delivery deposits | (11,810 | ) | (125,434 | ) | — | ||||||
Purchase of property and equipment, including capitalized interest | (568,439 | ) | (199,743 | ) | (252,686 | ) | |||||
Other investing activities | 5,115 | 6,790 | 2,198 | ||||||||
Net cash used in investing activities | (618,519 | ) | (401,837 | ) | (234,218 | ) | |||||
FINANCING ACTIVITIES: | |||||||||||
Cash dividends paid to shareholders | (45,720 | ) | (67,540 | ) | (62,439 | ) | |||||
Excess tax benefits from share-based compensation | — | — | 3,865 | ||||||||
Proceeds from the issuance of debt | 497,540 | 321,160 | 121,000 | ||||||||
Repurchase of common stock | (90,457 | ) | (66,371 | ) | (129,455 | ) | |||||
Principal payments on debt | (138,858 | ) | (154,080 | ) | (67,930 | ) | |||||
Other financing activities | (379 | ) | (594 | ) | 1,312 | ||||||
Net cash provided by (used in) financing activities | 222,126 | 32,575 | (133,647 | ) | |||||||
Net change in cash and cash equivalents | (5,262 | ) | (22,401 | ) | (2,498 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 64,711 | 87,112 | 89,610 | ||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 59,449 | $ | 64,711 | $ | 87,112 | |||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||||||||
Cash payments for: | |||||||||||
Interest paid, net of amount capitalized | $ | 35,998 | $ | 26,454 | $ | 26,307 | |||||
Income taxes, net of refunds | $ | (17,954 | ) | $ | 110,612 | $ | 111,399 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
47
ALLEGIANT TRAVEL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017, 2016 and 2015
Note 1 — Organization and Business of Company
Allegiant Travel Company (the “Company”) is a leisure travel company focused on providing travel services and products to residents of under-served cities in the United States. The Company operates a low-cost passenger airline which sells air transportation both on a stand-alone basis and bundled with the sale of air-related and third party services and products. The Company also provides air transportation under fixed fee flying arrangements, and generates aircraft and engine lease revenue. Scheduled service and fixed fee air transportation services have similar operating margins, economic characteristics, production processes (check-in, baggage handling and flight services) which target the same class of customers, and are subject to the same regulatory environment. As a result, the Company believes it operates in one reportable segment and does not separately track expenses for scheduled service and fixed fee air transportation services.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Allegiant Travel Company (the "Company") and its wholly-owned operating subsidiaries. The Company has no independent assets or operations, and all guarantees of the Company's publicly held debt are full and unconditional and joint and several. Any subsidiaries of the parent company other than the subsidiary guarantors are minor. The Company's investments in unconsolidated affiliates, which are 50 percent or less owned, are accounted for under the equity and cost method. All intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the prior period amounts to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 based on events and transactions occurring during the periods reported, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include investments and interest bearing instruments with maturities of three months or less at the balance sheet date. Such investments are carried at cost which approximates fair value.
Restricted Cash
Restricted cash represents escrowed funds under fixed fee contracts, and cash collateral against letters of credit required by hotel properties for guaranteed room availability, airports and certain other parties. Restricted cash at December 31, 2017 and 2016 was $11.2 million and $11.6 million, respectively.
Accounts Receivable
Accounts receivable are carried at face amount which approximates fair value. They consist primarily of amounts due from credit card companies associated with the sale of tickets for future travel, commission amounts due from Enterprise Holdings Inc., based on terms in the rental car provider agreement, income tax receivables, and amounts due related to fixed fee charter agreements. If deemed necessary, the Company records charges to its allowance for doubtful accounts for amounts not expected to be collected. The allowance for doubtful accounts was zero as of December 31, 2017 and 2016. The Company also had an outstanding receivable from a third party as of December 31, 2017, for which $6.3 million is due more than one year after the balance sheet date and is classified with the Company's other assets.
Short-term and Long-term Investments
The Company’s investments in marketable securities are classified as available-for-sale and are reported at fair value with the net unrealized gain or (loss) reported as a component of accumulated other comprehensive income in shareholders’ equity.
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Investment securities are classified as cash equivalents, short-term investments and long-term investments based on maturity date as of the balance sheet date. Cash equivalents have maturities of three months or less, short-term investments have maturities of greater than three months but equal to or less than one year, and long-term investments are those with a maturity date greater than one year. As of December 31, 2017, the Company’s long-term investments consisted of corporate debt securities, federal agency debt securities, US Treasury Bonds, and municipal debt securities with contractual maturities of less than 24 months.
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 losses during the years ended December 31, 2017, 2016, and 2015. The Company believes unrealized losses related to debt securities are not other-than-temporary and does not intend to sell these securities prior to amortized cost recoverability.
The Company attempts to minimize its concentration risk with regard to its cash, cash equivalents, and investment portfolio. This is accomplished by diversifying and limiting amounts among different counterparties, the type of investment, and the amount invested in any individual security, commercial paper, or money market fund.
Expendable Parts, Supplies and Fuel, Net
Expendable parts, supplies and fuel inventories are valued at cost using the first-in, first-out method. Such inventories are charged to expense as they are used in operations. An obsolescence allowance for expendable parts and supplies is based on the remaining useful lives of the corresponding fleet type and salvage values. The allowance for expendable parts and supplies was $13.8 million and $7.2 million at December 31, 2017 and 2016, respectively. Rotable aircraft parts inventories are included in property and equipment.
Software Capitalization
The Company capitalizes certain internal and external costs related to the acquisition and development of computer software during the application development stage of projects. The Company amortizes these capitalized costs using the straight-line method over the estimated useful life of the software, which typically ranges from three to five years. The Company had unamortized computer software development costs of $41.0 million and $40.4 million as of December 31, 2017 and 2016, respectively. Amortization expense related to computer software was $15.9 million, $13.3 million and $10.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. Costs incurred during the preliminary and post-implementation stages are expensed as incurred.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives less an estimated salvage value. The estimated useful lives of the principal asset classes are shown below. As of December 31, 2017, our MD-80 fleet has been fully impaired and has no remaining depreciable book value.
Aircraft, engines and related rotable parts | 10-25 years |
Buildings | 25 years |
Equipment and leasehold improvements | 3-7 years |
Computer hardware and software | 3-5 years |
In estimating the useful lives and residual values of aircraft, the Company primarily has relied upon actual experience with the same or similar aircraft types, current and projected future market information, and recommendations from other industry sources. Subsequent revisions to these estimates could be caused by changing market prices of the Company’s aircraft, changes in utilization of the aircraft, and other fleet events. These estimates are evaluated each reporting period and adjusted if necessary. Changes in the estimate for useful lives or residual values of the Company’s property and equipment could result in an acceleration of depreciation expense associated with the change in estimate.
Payments required to be made in advance of aircraft delivery are qualifying assets and interest attributable to these payments is capitalized as part of the cost of the related asset until the aircraft has been delivered and is ready to enter revenue service. Interest is capitalized at the Company’s weighted average borrowing rate and depreciated over the estimated useful life of the asset. Capitalized interest for 2017 was $3.2 million and $1.8 million in 2016.
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Aircraft Maintenance and Repair Costs
The Company accounts for non-major maintenance and repair costs incurred under the direct expense method. Under this method, maintenance and repair costs for owned and leased aircraft are charged to operating expenses as incurred. Maintenance and repair costs includes all parts, materials, line maintenance, and non-major maintenance activities required to maintain the Company's multiple fleet types.
The Company accounts for major maintenance costs of its MD-80 airframes and the related JT8D-219 engines using the direct expense method. Under this method, major maintenance costs are charged to expense as incurred.
The Company accounts for major maintenance costs of its Airbus airframes and the related CFM engines using the deferral method. Under this method, the Company capitalizes the cost of major maintenance events, which are amortized as a component of depreciation and amortization expense, over the estimated period until the next scheduled major maintenance event. During 2017 and 2016, the Company deferred $20.7 million and $18.9 million of costs for major maintenance with associated amortization expense charged to depreciation and amortization of $6.7 million and $1.5 million, respectively.
Measurement of Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations, consisting principally of property and equipment, when events or changes in circumstances indicate, in management’s judgment, that the assets might be impaired, and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In making these determinations, the Company utilizes certain assumptions, including, but not limited to: (i) estimated fair value of the assets; and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service for which the asset will be used in operations, and estimated salvage values.
For the year ended December 31, 2017, the Company recorded a non-cash impairment charge of $35.3 million on its fleet of MD-80 aircraft, engines, and related assets, as a result of its review of fleet value. This represents a full impairment of these assets, and as such, these assets have no remaining book value. The Company analyzed many factors, including the accelerated retirement dates of the MD-80 fleet, a reduction in aircraft utilization due to the continued induction of Airbus A320 series aircraft, and the significantly decreased level of demand in the secondary market for MD-80 aircraft, spare engines, and parts.
For the years ended December 31, 2017, 2016 and 2015, the Company incurred impairment losses related to various aircraft parts, of $1.3 million, $3.0 million, and $1.1 million, respectively and classified within Other operating expense.
Revenue Recognition
Scheduled service revenue
Scheduled service revenue consists of passenger revenue generated from nonstop flights in the Company’s route network, recognized either when the travel-related service or transportation is provided or when the itinerary expires unused. Nonrefundable scheduled itineraries expire on the date of the intended flight, unless the date is extended by notification from the customer in advance. Itineraries sold for transportation not yet used, as well as unexpired credits, are included in air traffic liability.
Various taxes and fees, assessed on the sale of tickets to customers, are collected by the Company serving as an agent, and remitted to taxing authorities. These taxes and fees are not included as revenue in the Company’s consolidated statements of income and are recorded as a liability until remitted to the appropriate taxing authority.
Ancillary air-related revenue
Ancillary air-related revenue is generated from fees paid by ticketed passengers and consists of baggage fees, the use of the Company’s website to purchase scheduled service transportation, advance seat assignments, and other services. Revenues from air-related charges are recognized when the transportation is provided if the product is not deemed distinct of the original ticket sale. Change and cancellation fees for nonrefundable itineraries are air-related charges deemed distinct of the original ticket sale, and are recognized as revenue when the fee is incurred by the customer.
Ancillary third party revenue
Ancillary revenue is also generated from the sale of third party products such as hotel rooms, rental cars and ticket attractions. Revenue from the sale of third party products is recognized at the time the product is utilized, such as the time a purchased hotel room is occupied. The Company follows accounting standards for determining whether it is a principal or an agent in
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revenue arrangements to determine the amount of revenue to be recognized for each element of a bundled sale involving air-related charges and third party products in addition to airfare. Revenue from the sale of third party products is recorded net (treatment as an agent) of amounts paid to wholesale providers, travel agent commissions, and transaction costs.
Fixed fee contract revenue
Fixed fee contract revenue consists of agreements to provide charter service on a year-round and ad hoc basis. Fixed fee contract revenue is recognized when the transportation is provided.
Other revenue
Other revenue is generated from leased aircraft, engines, and other miscellaneous sources. Lease revenue is recognized ratably over the lease term.
Affinity Credit Card Program
The Allegiant World Mastercard® is issued by Bank of America through which arrangement points are sold and consideration is received under an agreement with a seven year scheduled duration expiring in 2023. Under this arrangement, the Company identified the following deliverables: travel points to be awarded (the travel component), use of the Company’s brand and access to its member lists, and certain other advertising and marketing elements (collectively the marketing component). Applying guidance under Accounting Standards Update (“ASU”) 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, each of these deliverables is accounted for separately and allocation of the consideration from the agreement is determined based on the relative selling price of each deliverable. The Company applied a level of management judgment and estimation in determining the best estimate of selling price for each deliverable by considering multiple inputs and methods including, but not limited to, the redemption value of points awarded, discounted cash flows, brand value, volume discounts, published selling prices, number of points to be awarded and number of points to be redeemed.
The travel component is deferred based on its relative selling price and is recognized into scheduled service revenue when the points are redeemed by cardholders. The marketing component is considered earned in the period in which points are sold and is therefore recognized into third party products revenue in the same period.
Advertising Costs
Advertising costs are charged to expense in the period incurred. Advertising expense was $20.9 million, $13.6 million and $12.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Earnings per Share
Basic and diluted earnings per share are computed pursuant to the two-class method as opposed to the treasury 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 because they receive non-forfeitable rights to cash dividends at the same rate as common stock.
Diluted net income per share is calculated using the more dilutive of two methods. Under both methods, the exercise of employee stock options is assumed using the treasury stock method. The assumption of vesting of restricted stock, however, differs as described below:
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. |
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For the years ended December 31, 2017, 2016 and 2015, the second method above 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 (in thousands, except per share amounts):
Year ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Basic: | |||||||||||
Net income | $ | 194,902 | $ | 219,590 | $ | 220,374 | |||||
Less net income allocated to participating securities | (2,917 | ) | (1,748 | ) | (961 | ) | |||||
Net income attributable to common stock | $ | 191,985 | $ | 217,842 | $ | 219,413 | |||||
Net income per share, basic | $ | 11.94 | $ | 13.23 | $ | 12.97 | |||||
Weighted-average shares outstanding | 16,073 | 16,465 | 16,923 | ||||||||
Diluted: | |||||||||||
Net income | $ | 194,902 | $ | 219,590 | $ | 220,374 | |||||
Less net income allocated to participating securities | (2,914 | ) | (1,746 | ) | (958 | ) | |||||
Net income attributable to common stock | $ | 191,988 | $ | 217,844 | $ | 219,416 | |||||
Net income per share, diluted | $ | 11.93 | $ | 13.21 | $ | 12.94 | |||||
Weighted-average shares outstanding | 16,073 | 16,465 | 16,923 | ||||||||
Dilutive effect of stock options and restricted stock | 74 | 42 | 69 | ||||||||
Adjusted weighted-average shares outstanding under treasury stock method | 16,147 | 16,507 | 16,992 | ||||||||
Participating securities excluded under two-class method | (52 | ) | (18 | ) | (30 | ) | |||||
Adjusted weighted-average shares outstanding under two-class method | 16,095 | 16,489 | 16,962 | ||||||||
Stock awards outstanding of 5,752; 1,918; and 28,789 shares for 2017, 2016, and 2015, respectively, were excluded from the computation of diluted earnings per share as they were antidilutive.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with accounting standards which require the compensation cost related to share-based payment transactions be recognized in the Company’s consolidated statements of income. The cost is measured at the grant date, based on the calculated fair value of the award using the Black-Scholes option pricing model for cash-settled SARs, and is remeasured monthly for cash-settled SARs. Fair value is based on the closing price of the Company’s stock on the grant date for restricted stock awards. The cost is recognized as an expense over the requisite service period (the vesting period of the award) which is generally three years. Forfeiture rates for each type of award are estimated at time of grant. The Company’s share-based employee compensation plan is more fully discussed in Note 11- Employee Benefit Plans.
Income Taxes
The Company recognizes deferred income taxes based on the asset and liability method required by accounting standards. Deferred tax assets and liabilities are determined based on the timing differences between book basis for financial reporting purposes and tax basis of the asset and liability and measured using the enacted tax rates. A valuation allowance for deferred tax assets is provided if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company determines the net non-current deferred tax assets or liabilities separately for federal, state, foreign and other local jurisdictions.
The Company’s income tax returns are subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities in the jurisdictions where the Company operates. The Company assesses potentially unfavorable outcomes of such examinations based on the criteria set forth in uncertain tax position accounting standards. The accounting standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
Accounting standards for income taxes utilize a two-step approach for evaluating tax positions. Recognition (Step I) occurs when the Company concludes that a tax position, based on its technical merits, is more likely than not to be sustained upon examination. Measurement (Step II) is only addressed if the position is deemed to be more likely than not to be sustained.
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Under Step II, the tax benefit is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.
The tax positions failing to qualify for initial recognition are recognized in the first subsequent interim period they meet the “more likely than not” standard. If it is subsequently determined that a previously recognized tax position no longer meets the “more likely than not” standard, it is required that the tax position be derecognized. As applicable, the Company will recognize accrued penalties and interest related to unrecognized tax benefits in the provision for income taxes.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" intended to create a unified model to determine when and how revenue is recognized. Under this ASU and subsequently issued amendments, 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 for which the entity expects to be entitled in exchange for those goods or services. The Company will adopt this standard using the full-retrospective approach on January 1, 2018.
Under the new standard, revenue for certain air-related ancillary fees that are directly related to ticket revenue, such as seat fees and baggage fees, will no longer be considered distinct performance obligations separate from passenger travel and will be reclassified into scheduled service revenue. The amounts expected to be reclassified from air-related charges into scheduled service revenue will be between approximately $536 million and $546 million for 2017 and between $490 million and $500 million for 2016. In addition, certain fees previously recognized when incurred by the customer, will be deferred and recognized as revenue when air travel is provided and reclassified into scheduled service revenue, as well as reclassification of certain expense items to scheduled service revenue. Although the Company is in the process of finalizing analysis needed to recast prior periods, it is believed that adoption will not have a material effect on earnings.
In January 2016, the FASB issued ASU 2016-01, a standard which includes several changes to financial instruments, including the elimination of the available-for-sale classification of equity investments, requiring those with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. The standard is effective for annual and interim periods beginning after December 15, 2017, and the Company will adopt it effective January 1, 2018. The Company does not expect the adoption will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 related to leases. This standard will require leases with durations greater than twelve months to be recognized on the balance sheet as a lease liability and a corresponding right-of-use asset, and is effective for interim and annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company has not completed the assessment of this new standard. The Company believes adoption will have a significant impact on its consolidated balance sheets but is not expected to significantly change the recognition or measurement of associated expense within the consolidated statements of income or cash flows.
In August 2016, the FASB issued ASU 2016-15, which amends the guidance in Accounting Standards Codification ("ASC") 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistency on this topic. The standard is effective for annual and interim periods beginning after December 15, 2017, and the Company will adopt it effective January 1, 2018. Significant classification modifications are not expected as a result of adoption.
In November 2016, the FASB issued ASU 2016-18 which clarifies the presentation of restricted cash and restricted cash equivalents on the statement of cash flows. This ASU requires that the change in total cash, cash at beginning of period and cash at end of period on the statement of cash flows include restricted cash and restricted cash equivalents and also requires companies reporting cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. The standard is to be applied retrospectively and is effective for annual and interim periods beginning after December 15, 2017. The Company will adopt it effective January 1, 2018 and does not expect the adoption will have a material impact on its consolidated financial statements.
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Note 3 — Property and Equipment
Property and equipment consisted of the following (in thousands):
As of December 31, 2017 | As of December 31, 2016 | ||||||
Flight equipment, including pre-delivery deposits | $ | 1,539,433 | $ | 1,377,829 | |||
Computer hardware and software | 123,675 | 101,850 | |||||
Other property and equipment | 125,855 | 81,786 | |||||
Total property and equipment | 1,788,963 | 1,561,465 | |||||
Less accumulated depreciation and amortization | (276,548 | ) | (466,151 | ) | |||
Property and equipment, net | $ | 1,512,415 | $ | 1,095,314 | |||
As of December 31, 2017, the Company had firm commitments to purchase 16 new and used Airbus A320 series aircraft which are expected to be delivered between 2018 and 2020. In addition, the Company expects to take delivery, in 2018, of its remaining 11 owned Airbus A320 series aircraft on lease to a European carrier.
As of December 31, 2017, Other property and equipment included $20.8 million in land acquired for the development of Sunseeker Resorts.
Note 4 — Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
As of December 31, 2017 | As of December 31, 2016 | ||||||
Salaries, wages and benefits | $ | 35,516 | $ | 38,860 | |||
Interest | 13,326 | 11,891 | |||||
Station expenses | 12,026 | 14,799 | |||||
Passenger fees | 11,420 | 11,200 | |||||
Property taxes | 7,851 | 6,613 | |||||
Maintenance and repairs | 5,481 | 4,953 | |||||
Advertising accruals | 4,154 | 676 | |||||
Passenger taxes | 447 | 394 | |||||
Other accruals | 14,906 | 7,275 | |||||
Total accrued liabilities | $ | 105,127 | $ | 96,661 | |||
As of December 31, 2017, the balance in Other accruals is related to various accruals, including $5.0 million in information technology related accruals.
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Note 5 — Long-Term Debt
Long-term debt consisted of the following (in thousands):
As of December 31, 2017 | As of December 31, 2016 | ||||||
Fixed-rate notes payable due through 2020 | $ | 465,462 | $ | 465,748 | |||
Variable-rate notes payable due through 2027 | 699,430 | 342,526 | |||||
Total long-term debt, net of related costs | 1,164,892 | 808,274 | |||||
Less current maturities, net of related costs | 214,761 | 86,226 | |||||
Long-term debt, net of current maturities and related costs | $ | 950,131 | $ | 722,048 | |||
Weighted average fixed-interest rate | 5.4 | % | 5.4 | % | |||
Weighted average variable-interest rate | 3.3 | % | 3.2 | % | |||
Maturities of long-term debt as of December 31, 2017, for the next five years and thereafter, in the aggregate, are: 2018 - $214.8 million; 2019 - $561.6 million; 2020 - $95.2 million; 2021 - $68.0 million; 2022 - $41.5 million; and $183.8 million thereafter. Total long-term debt is presented net of related costs of $6.1 million and $4.9 million at December 31, 2017 and 2016, respectively.
Secured Debt
As of December 31, 2017 and 2016, respectively, the Company had $699.4 million and $342.5 million of variable rate debt secured by 57 and 34 Airbus A320 series aircraft. Each note bears interest at a floating rate based on LIBOR and most are payable in quarterly installments over five or ten year terms. These amounts include debt and secured aircraft under the Company's variable interest entity ("VIE") and revolving credit facility agreements, which are discussed in further detail below.
As of December 31, 2017 and 2016, the Company had $15.7 million and $16.2 million, respectively, of fixed rate debt secured by real estate owned by the Company. These notes bear interest at a fixed rate and are payable in monthly installments over five year terms, with one loan maturing in 2018 and one loan maturing in 2020.
Consolidated Variable Interest Entity
The Company evaluates ownership, contractual lease arrangements and other interest in entities to determine if they are variable interest entities ("VIEs") based on the nature and extent of those interests. These evaluations are complex and involve judgment and the use of estimates and assumptions based on available historical information and management’s judgment, among other factors. The Company consolidates a VIE when, among other criteria, it has the power to direct the activities that most significantly impact the VIE’s economic performance as well as the obligation to absorb losses or the right to receive benefits of the VIE, thus making the Company the primary beneficiary of the VIE.
In December 2017, the Company entered into an agreement with a trust to finance three Airbus A320 aircraft, under which the aircraft serve as collateral for the financing. The trust was funded on inception by a $102.0 million long-term debt agreement entered into by the trust. These borrowings bear interest at a floating rate based on LIBOR and will be payable in quarterly installments through December 2027. As this transaction is a common control transaction, the Company, as the primary beneficiary, has measured and recorded the assets and liabilities at their carrying values, which were $112.8 million and $102.0 million, respectively, as of December 31, 2017. The Company did not have a variable interest in any entity in 2016.
Senior Secured Revolving Credit Facility
In 2015, the Company, through a wholly owned subsidiary, entered into a senior secured revolving credit facility under which it is able to borrow up to $56.0 million. As of December 31, 2017, the balance under this facility was $41.3 million, net of related costs, with five Airbus aircraft included in the collateral pool. The notes will mature in December 2018. The facility may be extended for an additional one-year period, to 2019, at the lender’s option. Any notes under the facility bear interest at a floating rate based on LIBOR. An individual aircraft may remain in the collateral pool for up to two years.
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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. In December 2016, the Company completed an offering of an additional $150.0 million principal amount of these notes, which were issued at a price of 101.5 percent of the principal amount, plus accrued interest from July 15, 2016.
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 5.5 percent per year, payable in cash semi-annually, on January 15 and July 15 of each year, 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 percent 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 holders, all or a portion of the Notes at a price equal to 101 percent of the principal amount, together with accrued and unpaid interest 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. For the four quarters ended December 31, 2017, the Company exceeded the consolidated total leverage ratio limit, which could affect the ability to make restricted payments in future periods after exhaustion of various exceptions. The calculation is made on a quarterly basis based on the trailing 12 months.
Note 6 — Shareholders’ Equity
The Company is authorized by its Board of Directors to acquire the Company’s stock through open market and private purchases under its share repurchase program. As repurchase authority is used, the Board of Directors has, to date, authorized additional expenditures for share repurchases.
Share repurchases consisted of the following during the periods indicated:
Twelve Months Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Shares repurchased (1) | 604,497 | 391,972 | 682,003 | ||||||||
Average price per share | $ | 142.66 | $ | 164.99 | $ | 186.43 | |||||
Total (in thousands) | 86,240 | 64,673 | 127,147 | ||||||||
(1) Share amounts shown above include only open market repurchases and do not include shares withheld from employees for tax withholding obligations related to restricted stock vestings, which were 27,606, 10,103, and 12,682 shares for 2017, 2016 and 2015, respectively.
As of December 31, 2017, the Company had $100.0 million in unused share repurchase authority remaining under the Board approved program.
During 2017, the Board declared, and the Company paid, total quarterly cash dividends of $2.80 per share for a total of $45.7 million.
During 2016, the Board declared, and the Company paid, total quarterly cash dividends of $2.40 per share for a total of $39.8 million.
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During 2015, the Board declared, and the Company paid, total quarterly cash dividends of $1.10 per share for a total of $18.7 million. Prior to year-end 2015, the Board declared a special cash dividend of $1.65 per share on outstanding common stock payable to shareholders of record on December 18, 2015. On January 8, 2016, the Company paid $27.7 million to these shareholders.
Note 7 — Fair Value Measurements
Investments
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 commercial paper, municipal debt securities, federal agency debt securities, corporate debt securities, and US treasury bonds, which are valued using quoted market prices or alternative pricing sources including transactions involving identical or comparable assets and models utilizing market observable inputs. The Company has no investment securities classified as Level 3.
For those assets classified as Level 2 that are not in active markets, the Company obtains fair value from pricing sources using quoted market prices for identical or comparable instruments, and uses pricing models which include all significant observable inputs: 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.
The fair value of the Company's foreign currency 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.
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Financial instruments measured at fair value on a recurring basis (in thousands):
As of December 31, 2017 | As of December 31, 2016 | |||||||||||||||||||||||
Description | Total | Level 1 | Level 2 | Total | Level 1 | Level 2 | ||||||||||||||||||
Cash equivalents | ||||||||||||||||||||||||
Commercial paper | $ | 27,910 | $ | — | $ | 27,910 | $ | — | $ | — | $ | — | ||||||||||||
Municipal debt securities | 2,782 | — | 2,782 | 1,843 | — | 1,843 | ||||||||||||||||||
Money market funds | 1,297 | 1,297 | — | 123 | 123 | — | ||||||||||||||||||
Federal agency debt securities | — | — | — | 19,399 | — | 19,399 | ||||||||||||||||||
Total cash equivalents | 31,989 | 1,297 | 30,692 | 21,365 | 123 | 21,242 | ||||||||||||||||||
Short-term | ||||||||||||||||||||||||
Commercial paper | 108,678 | — | 108,678 | 108,372 | — | 108,372 | ||||||||||||||||||
Corporate debt securities | 107,878 | — | 107,878 | 76,570 | — | 76,570 | ||||||||||||||||||
Municipal debt securities | 101,290 | — | 101,290 | 78,826 | — | 78,826 | ||||||||||||||||||
Federal agency debt securities | 31,428 | — | 31,428 | 3,895 | — | 3,895 | ||||||||||||||||||
US Treasury Bonds | 3,407 | — | 3,407 | 1,606 | — | 1,606 | ||||||||||||||||||
Total short-term | 352,681 | — | 352,681 | 269,269 | — | 269,269 | ||||||||||||||||||
Long-term | ||||||||||||||||||||||||
Corporate debt securities | 60,396 | — | 60,396 | 25,048 | — | 25,048 | ||||||||||||||||||
Municipal debt securities | 9,405 | — | 9,405 | 72,623 | — | 72,623 | ||||||||||||||||||
Federal agency debt securities | 5,775 | — | 5,775 | 24,160 | — | 24,160 | ||||||||||||||||||
US Treasury Bonds | 2,994 | — | 2,994 | 3,003 | — | 3,003 | ||||||||||||||||||
Derivative instruments | 282 | — | 282 | 1,660 | — | 1,660 | ||||||||||||||||||
Total long-term | 78,852 | — | 78,852 | 126,494 | — | 126,494 | ||||||||||||||||||
Total financial instruments | $ | 463,522 | $ | 1,297 | $ | 462,225 | $ | 417,128 | $ | 123 | $ | 417,005 | ||||||||||||
There were no significant transfers between Level 1 and Level 2 assets for the years ended December 31, 2017 or 2016.
Long-term Debt
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 debt agreements are not publicly held. The Company has determined the estimated fair value of these notes to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable and, therefore, could be sensitive to changes in inputs. The Company utilizes the discounted cash flow method to estimate the fair value of Level 3 debt.
Carrying value and estimated fair value of long-term debt, including current maturities (in thousands):
As of December 31, 2017 | As of December 31, 2016 | |||||||||||||||||
Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | Level | ||||||||||||||
Publicly held debt | $ | 451,321 | $ | 462,604 | $ | 452,179 | $ | 468,005 | 2 | |||||||||
Non-publicly held debt | 719,681 | 660,065 | 360,999 | 340,866 | 3 | |||||||||||||
Total long-term debt | $ | 1,171,002 | $ | 1,122,669 | $ | 813,178 | $ | 808,871 | ||||||||||
Other
In the fourth quarter of 2017, the Company recorded a non-cash impairment charge of $35.3 million on its fleet of MD-80 aircraft, engines, and related assets as a result of a recent review of fleet value. The Company concluded that the carrying value of these aircraft and related assets was no longer fully recoverable when compared to the estimated remaining future
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undiscounted cash flows from these assets. Therefore, an adjustment to their fair value with inputs classified as Level 3 was recorded.
Due to the short term nature, carrying amounts of cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value.
Note 8 — Derivative Instruments
In 2014, the Company 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 carrier until 2018, at which point the foreign currency swap will conclude. One aircraft has re-delivered to the Company as of December 31, 2017. The Company uses a cash flow hedge to minimize the variability in cash flows of assets or liabilities of forecasted transactions caused by fluctuations in foreign currency exchange rates. At December 31, 2017, 2016 and 2015, respectively, the change in fair value recorded in accumulated other comprehensive income was a decrease of $0.9 million and $0.4 million and an increase of $0.9 million.
At inception, the Company formally designated and documented this financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the strategy for undertaking the hedge transaction. The Company also assessed whether the financial instrument used in the hedging transactions was effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. This assessment is monitored on at least a quarterly basis, and the change in fair value of any ineffective portion of a financial instrument would be immediately charged against earnings. The Company realized $1.1 million and $1.0 million in net gains from its cash flow hedge in Other revenue from amounts settled under the forward contract in 2017 and 2016, respectively. As of December 31, 2017, it is expected that approximately $3.0 million will be reclassified from Other comprehensive income into Other revenue within the next 12 months.
At December 31, 2017 and 2016 respectively, the fair value of the Company's derivative instrument was $0.3 million and $1.7 million and is reported in the Company's consolidated balance sheet within Deposits and other assets. Refer to Note 7 - Fair Value Measurements for additional information related to the estimated fair value.
Note 9 — Income Taxes
Impact of U.S. Federal Income Tax Reform
In December, 2017, the “Tax Cuts and Jobs Act” (the “Tax Act”) was signed into law. The significant provisions impacting the Company are as follows:
• | Effective January 1, 2018, the U.S. corporate income tax rate reduced from 35.0 percent to 21.0 percent; |
• | the Company recognized a one-time tax benefit of $74.7 million due to the remeasurement of deferred tax balances to the new statutory rate; |
• | the Company is eligible to claim 100 percent bonus depreciation on qualified property placed in service from September 28, 2017 through December 31, 2022 - this provision phases out 20 percent annually after 2022 through 2027. |
ASC 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin ("SAB") 118 which allows companies to record provisional amounts during a one-year measurement period in order to complete the accounting for income tax effects of the Tax Act. The Company recognized provisional estimates which may be impacted by the Company’s understanding and application of the Tax Act related to the deductibility of acquired assets, state conformity and additional guidance from federal and state agencies as well as the FASB and the SEC. We are continuing to assess the tax effects of the Tax Act, but do not anticipate that the net impact will be material to our 2018 effective tax rate.
The Company is subject to income taxation in the United States, foreign countries and various state jurisdictions in which it operates. In accordance with income tax reporting accounting standards, the Company recognizes tax benefits or expense on the temporary differences between the financial reporting and tax bases of its assets and liabilities.
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Components of Income before Income Taxes from Continuing Operations
The components of income before taxes for domestic and foreign operations consisted of the following (in thousands):
Twelve Months Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Domestic | $ | 176,853 | $ | 329,818 | $ | 331,813 | ||||||
Foreign | 18,693 | 16,140 | 14,906 | |||||||||
Total | $ | 195,546 | $ | 345,958 | $ | 346,719 | ||||||
Income Tax Provision/(Benefit)
The provision for income taxes is composed of the following (in thousands):
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Current: | |||||||||||
Federal | $ | (44,385 | ) | $ | 89,014 | $ | 108,119 | ||||
State | 664 | 5,204 | 6,501 | ||||||||
Foreign | 558 | 1,262 | 996 | ||||||||
Total current | (43,163 | ) | 95,480 | 115,616 | |||||||
Deferred: | |||||||||||
Federal | 40,816 | 27,950 | 9,458 | ||||||||
State | 1,962 | 1,673 | 125 | ||||||||
Foreign | 1,029 | 1,265 | 1,190 | ||||||||
Total deferred | 43,807 | 30,888 | 10,773 | ||||||||
Total income tax provision | $ | 644 | $ | 126,368 | $ | 126,389 | |||||
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Reconciliation of Effective Tax Rate
The effective tax rate on income before income taxes differed from the federal statutory income tax rate as follows (in thousands):
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Income tax expense at federal statutory rate | $ | 68,441 | $ | 121,085 | $ | 121,352 | |||||
State income taxes, net of federal income tax benefit | 2,723 | 5,487 | 4,293 | ||||||||
Federal tax reform impact | (74,738 | ) | — | — | |||||||
Other | 4,218 | (204 | ) | 744 | |||||||
Total income tax expense | $ | 644 | $ | 126,368 | $ | 126,389 | |||||
Deferred Taxes
The major components of the Company’s net deferred tax assets and liabilities are as follows (in thousands):
As of December 31, | |||||||
2017 | 2016 | ||||||
Deferred tax assets: | |||||||
Accrued vacation | $ | 690 | $ | 1,183 | |||
Accrued bonus | 628 | 9,340 | |||||
State taxes | 318 | 2,187 | |||||
Accrued property taxes | 1,573 | 2,077 | |||||
Other | 3,679 | 1,910 | |||||
Stock-based compensation expense | 1,983 | 3,126 | |||||
Net operating loss | 635 | — | |||||
Less: valuation allowance | 422 | — | |||||
Total deferred tax assets | 9,084 | 19,823 | |||||
Deferred tax liabilities: | |||||||
Prepaid expenses | 4,275 | 5,049 | |||||
Depreciation | 118,743 | 86,981 | |||||
Foreign deferred | 4,569 | 3,131 | |||||
Total deferred tax liabilities | 127,587 | 95,161 | |||||
Net deferred tax liabilities | $ | 118,503 | $ | 75,338 | |||
Net Operating Loss and Tax Credit Carryforwards
At December 31, 2017, the Company recognized $0.2 million of state net operating loss carryforward which will expire between 2032 and 2037. The Company also recognized $0.4 million of foreign net operating loss carryforward which does not expire.
As of December 31, 2016, the Company recognized a federal capital loss carryforward which was remeasured to $0.7 million, pursuant to the Tax Act. The carryforward begins to expire in 2021. As of December 31, 2017, the Company also recognized $0.7 million and $0.2 million of foreign tax credit and charitable contribution carryforward balances which will expire in 2028 and 2023, respectively.
Note 10— Related Party Transactions
In December 2017, the Company completed a transaction with ISM Connect, LLC ("ISM"), an entity in which the Company's Chairman and CEO owns a majority interest. In exchange for a noncontrolling minority interest in ISM, the Company licensed the right to use certain portions of its internally developed software, but strictly limited to ISM's digital media signage business. The Company retains all rights in the software without restriction. This interest has been valued at $2.3 million and no subsequent transactions with ISM are expected.
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The Company previously entered into lease agreements for approximately 70,000 and 10,000 square feet of office space in buildings in which the Company’s Chairman and Chief Executive Officer ("CEO") and the Company's President own minority interests as limited partners. The Company exercised its option to terminate the lease for 70,000 square feet of office space effective in May 2015. In connection with the termination of this lease, the Company paid $1.3 million for unamortized expenses in January 2016. Additionally, as of January 2016, payments for the remaining 10,000 square feet of space are no longer being made to a related party entity as the lender has taken ownership of the property. Under the terms of these agreements, the Company made no rent payments to related parties in 2017 or 2016, and made payments of $1.2 million in 2015.
Game Plane, LLC, was a wholly owned subsidiary of the Company that produced game shows filmed on Company flights. Prior to its dissolution in 2016, Game Plane, LLC partnered with Alpine Labs, LLC to produce and distribute the shows. The Company’s Chairman and CEO owns a 25 percent interest in, and is on the managing board of, Alpine Labs, LLC. The Company made no payments to Alpine Labs, LLC in 2017 or 2016, and paid $0.4 million in 2015.
Entities owned or controlled by the Company's Chairman and CEO have been paid for the building of corporate training content. During 2017, 2016 and 2015, the Company made payments to these entities of $0.2 million, $1.7 million and $2.9 million, respectively, and no further payments are expected.
GMS Racing LLC competes in the NASCAR Camping World Truck Series and ARCA Racing Series. The Company's Chairman and CEO owns a controlling interest in GMS Racing LLC. The Company made no sponsorship payments to GMS Racing in either 2016 or 2017, and made payments totaling $2.5 million in 2015. No future payments are expected.
Note 11 — Employee Benefit Plans
401(k) Plan
The Company has a defined contribution plan covering all eligible employees. Under the plan, employees may contribute up to 90 percent of their eligible annual compensation with the Company making matching contributions on employee deferrals of up to 5 percent of eligible employee wages. In January 2017, the Company increased its matching contributions on pilot deferrals to 10 percent of eligible wages resulting from the pilot collective bargaining agreement.
The Company recognized expense under this plan of $14.2 million, $5.8 million and $4.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Share-based employee compensation
In 2016, the Board of Directors adopted and the shareholders approved the 2016 Long-Term Incentive Plan (the "2016 Plan"). The Company reserved 2,000,000 shares of common stock for the Company to grant stock options, restricted stock, cash-settled stock appreciation rights ("SARs") and other stock-based awards to certain officers, directors and employees of the Company under the 2016 Plan. The 2016 Plan is administered by the Company’s compensation committee of the Board of Directors. As of December 31, 2017, a portion of unvested restricted stock, and unexercised stock options and cash-settled SARs remain outstanding under the 2006 Long-Term Incentive Plan which has otherwise expired.
Employee Stock Purchase Plan
In 2014, the Company adopted the 2014 Employee Stock Purchase Plan ("ESPP") and reserved 1,000,000 shares of common stock for employee purchases under the plan. Shares are purchased semi-annually, at a 10 percent discount, based on the market value at period-end. Employees may contribute up to 25 percent of their base pay per offering period, not to exceed $25,000 each calendar year, for the purchase of common stock. The ESPP is a compensatory plan under applicable accounting guidance and results in the recognition of compensation expense. During 2017, 2016 and 2015, employees purchased 18,498, 13,400 and 8,306 shares under the ESPP, respectively.
Compensation expense
For the years ended December 31, 2017, 2016 and 2015, the Company recorded compensation expense of $14.0 million, $9.6 million and $10.6 million respectively, related to stock options, restricted stock, cash-settled SARs and the ESPP. Forfeiture rates are estimated at the time of grant based on historical actuals for similar grants, and are matched to actuals over the vesting period.
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The unrecognized compensation cost and weighted-average period over which the cost is expected to be recognized for non-vested awards as of December 31, 2017, are presented below:
Unrecognized Compensation Cost (thousands) | Weighted Average Period (years) | |||||
Restricted stock | $ | 19,730 | 1.74 | |||
Cash-settled SARs | 481 | 1.62 | ||||
Stock options | — | — | ||||
Total | $ | 20,211 | 1.73 | |||
Stock options
The fair value of stock options granted is estimated as of the grant date using the Black-Scholes option pricing model. The contractual terms of the Company’s stock option awards granted range from five to ten years. A summary of option activity as of December 31, 2017, 2016 and 2015, and changes during the years then ended, is presented below:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value (thousands) | |||||||||
Outstanding at December 31, 2014 | 88,749 | $ | 69.43 | 3.29 | $ | 7,180 | ||||||
Exercised | (36,968 | ) | $ | 52.06 | ||||||||
Forfeited | (3,000 | ) | $ | 3.50 | ||||||||
Outstanding at December 31, 2015 | 48,781 | $ | 86.65 | 2.62 | $ | 3,960 | ||||||
Exercised | (5,192 | ) | 108.59 | |||||||||
Outstanding at December 31, 2016 | 43,589 | $ | 84.04 | 1.55 | $ | 3,590 | ||||||
Exercised | (16,014 | ) | $ | 60.20 | ||||||||
Outstanding at December 31, 2017 | 27,575 | $ | 97.88 | 0.72 | $ | 1,568 | ||||||
Fully vested and expected to vest at December 31, 2017 | 27,575 | $ | 97.88 | 0.72 | $ | 1,568 | ||||||
Exercisable at December 31, 2017 | 27,575 | $ | 97.88 | 0.72 | $ | 1,568 | ||||||
During the years ended December 31, 2017, 2016 and 2015, the total intrinsic value of options exercised was $1.3 million, $0.2 million and $5.8 million, respectively. Cash received from option exercises for the years ended December 31, 2017, 2016 and 2015 was $1.0 million, $0.6 million and $1.9 million, respectively.
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Restricted stock awards
The closing price of the Company's stock on the date of grant is used as the fair value for the issuance of restricted stock. A summary of the status of the Company’s non-vested restricted stock grants during the years ended December 31, 2017, 2016 and 2015 is presented below:
Shares | Weighted Average Grant Date Fair Value | |||||
Non-vested at December 31, 2014 | 98,782 | $ | 91.15 | |||
Granted | 47,810 | 178.68 | ||||
Vested | (54,825 | ) | 83.35 | |||
Forfeited | (8,810 | ) | 130.35 | |||
Non-vested at December 31, 2015 | 82,957 | $ | 155.30 | |||
Granted | 224,018 | 144.74 | ||||
Vested | (43,310 | ) | 129.96 | |||
Forfeited | (10,007 | ) | 158.74 | |||
Non-vested at December 31, 2016 | 253,658 | $ | 146.01 | |||
Granted | 125,442 | 165.61 | ||||
Vested | (91,338 | ) | 145.08 | |||
Forfeited | (94,872 | ) | 157.95 | |||
Non-vested at December 31, 2017 | 192,890 | $ | 153.32 | |||
The total fair value of restricted stock that vested during the years ended December 31, 2017, 2016 and 2015 was $13.3 million, $5.6 million and $4.6 million, respectively.
Cash-settled SARs
Cash-settled SARs are liability classified awards for which the fair value and compensation expense recognized are updated monthly, also using the Black-Scholes option pricing model.
The following range of assumptions in the Black-Scholes pricing model was used to determine fair value as of December 31 of the years indicated below:
2017 | 2016 | 2015 | ||||||
Weighted-average volatility | 32.8 | % | 33.2 | % | 30.2 | % | ||
Expected term (in years) | 0.2 - 1.9 | 0.3 - 3.1 | 0.3 - 2.5 | |||||
Risk-free interest rate | 0.6% - 1.9% | 0.4% - 1.5% | 0.3% - 1.2% | |||||
Dividend yield | 1.62 | % | 1.51 | % | 1.47 | % | ||
Expected volatilities used for award valuation are based on the historical volatility of the Company's common stock price.
Expected term represents the weighted average time between the award’s grant date and its expected exercise date. The Company estimated the expected term assumption in 2017, 2016 and 2015 using historical award exercise activity and employee termination activity.
The risk-free interest rate for periods equal to the expected term of an award is based on a blended historical rate using Federal Reserve rates for U.S. Treasury securities.
The dividend yield reflects the effect that paying a dividend has on the fair value of the Company's stock.
The contractual terms of the Company’s cash-settled SARs awards granted are five years.
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A summary of cash-settled SARs awards activity during the years ended December 31, 2017, 2016 and 2015 is presented below:
# of SARs | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (thousands) | ||||||||||
Balance at December 31, 2014 | 119,513 | $ | 86.23 | ||||||||||
Granted | 77,396 | 181.47 | |||||||||||
Forfeited | (21,722 | ) | 135.16 | ||||||||||
Exercised | (43,446 | ) | 80.10 | ||||||||||
Balance at December 31, 2015 | 131,741 | 136.13 | |||||||||||
Granted | 15,000 | 146.03 | |||||||||||
Forfeited | (10,083 | ) | 170.21 | ||||||||||
Exercised | (32,050 | ) | 89.19 | ||||||||||
Balance at December 31, 2016 | 104,608 | 153.86 | |||||||||||
Forfeited | (14,682 | ) | 177.6 | ||||||||||
Exercised | (9,462 | ) | 106.25 | ||||||||||
Balance at December 31, 2017 | 80,464 | $ | 155.13 | 2.13 | $ | — | |||||||
Vested or expected to vest at December 31, 2017 | 74,122 | $ | 155.02 | 2.14 | $ | — | |||||||
Exercisable at December 31, 2017 | 57,433 | $ | 150.74 | 1.85 | $ | 230 | |||||||
Note 12 — Commitments and Contingencies
Future minimum fixed payments for commitments as of December 31, 2017 (in thousands):
2018 | 2019 | 2020 | 2021 | 2022 | 2023 -Thereafter | ||||||||||||||||||
Operating lease obligations | $ | 7,455 | $ | 6,592 | $ | 4,716 | $ | 2,768 | $ | 1,071 | $ | 5,824 | |||||||||||
Aircraft acquisition obligations (1) | 150,264 | 97,310 | 66,560 | 32,375 | 29,155 | 198,450 | |||||||||||||||||
Airport fees under use and lease agreements | 11,336 | 10,454 | 5,224 | 63 | — | — | |||||||||||||||||
Total future payments | $ | 169,055 | $ | 114,356 | $ | 76,500 | $ | 35,206 | $ | 30,226 | $ | 204,274 | |||||||||||
(1) Includes purchase obligations and capital lease obligations.
Operating Lease Obligations
The Company leases assets including office facilities, office equipment, certain airport and terminal facilities, and other space leases. These commitments have remaining non-cancelable lease terms, which range from 2019 to 2036. Total rental expense for operating leases for the years ended December 31, 2017, 2016 and 2015 was $9.0 million, $8.1 million and $7.9 million, respectively.
Aircraft sub-service expense was $3.1 million, $0.9 million, and $2.1 million, in 2017, 2016 and 2015, respectively.
Aircraft Commitments
During 2017, the Company entered into three purchase agreements for six Airbus A320 series aircraft. Four of these aircraft were acquired in 2017 and the remaining two were acquired after the end of the year.
During 2017, the Company also entered into 13 capital lease agreements, each for one Airbus A320 series aircraft, which are scheduled to be delivered in 2018.
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During 2016, the Company entered into four purchase agreements for 27 Airbus A320 series aircraft yet to be purchased by the end of 2016, including an agreement for 12 newly manufactured Airbus A320 aircraft. Of these aircraft, 13 were acquired in 2017, seven are scheduled to be acquired in 2018, and the remaining seven are expected to be acquired in 2019 and 2020.
During 2015, the Company entered into one purchase agreement for four Airbus A320 series aircraft yet to be purchased by the end of 2015 or 2016. These aircraft were acquired in 2017.
Airport and Other Facility Lease Obligations
The Company leases other facilities in Las Vegas, Florida and throughout our network with approximately 500,000 square feet of space used for other corporate purposes. These leases expire between 2019 and 2036. The Company is responsible for its share of common area maintenance charges under each lease.
Airport and terminal facility leases are entered into with a number of local governments and other third parties. These lease arrangements have a variety of terms and conditions.
Contingencies
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 13 — Valuation and Qualifying Accounts (in thousands)
Balance at Beginning of Year | Changes Charged to Statement of Income Account | Balance at End of Year | |||||||||
Allowance for expendable parts and supplies | |||||||||||
For the Year Ended December 31, 2017 (1) | $ | 7,205 | $ | 6,551 | $ | 13,756 | |||||
For the Year Ended December 31, 2016 | 4,607 | 2,598 | 7,205 | ||||||||
For the Year Ended December 31, 2015 | 3,003 | 1,604 | 4,607 | ||||||||
(1) Changes during the year and ending balance include additional reserve of $2.0 million related to the MD-80 impairment charge.
Note 14 — Subsequent Events
In January 2018, the Company executed a purchase agreement for one Airbus A320 series aircraft, for which delivery is expected in the second quarter 2019.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, under the supervision and with the participation of our management, including our CEO and chief financial officer (“CFO”), we evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, management, including our CEO and CFO, has concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information we are required to disclose is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during the fourth quarter of our year ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control- Integrated Framework (2013 Framework). Based on our assessment, management has concluded that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria.
We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting on a regular basis, to improve these controls and procedures over time, and to correct any deficiencies that may be discovered. Future events affecting our business may cause us to modify our controls and procedures.
The Company's independent registered public accounting firm has issued an attestation report regarding its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2017.
Item 9B. Other Information
Not applicable.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Allegiant Travel Company:
Opinion on Internal Control Over Financial Reporting
We have audited Allegiant Travel Company’s and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”), and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Dallas, Texas
February 28, 2018
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this Item is incorporated herein by reference to the data under the headings “ELECTION OF DIRECTORS,” “EXECUTIVE OFFICERS” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held June 28, 2018, which Proxy Statement is to be filed with the Commission.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the data under the headings “EXECUTIVE COMPENSATION” and “REPORT OF THE COMPENSATION COMMITTEE” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held June 28, 2018, which Proxy Statement is to be filed with the Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the data under the heading “STOCK OWNERSHIP” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held June 28, 2018, which Proxy Statement is to be filed with the Commission. The information required by this item with respect to securities authorized for issuance under our equity compensation plans is included in Part II, Item 5 of this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the data under the heading “RELATED PARTY TRANSACTIONS” and “Director Independence” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held June 28, 2018, which Proxy Statement is to be filed with the Commission.
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference to the data under the heading “PRINCIPAL ACCOUNTANT FEES AND SERVICES” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held June 28, 2018, which Proxy Statement is to be filed with the Commission.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
— | Financial Statements and Supplementary Data. The financial statements included in Item 8 - Financial Statements and Supplementary Data above are filed as part of this annual report. |
— | Financial Statement Schedules. Schedules are not submitted because they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. |
— | Exhibits. The Exhibits listed below are filed or incorporated by reference as part of this Form 10-K. Where so indicated, exhibits which were previously filed are incorporated by reference. |
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Exhibit Number | Description | ||
3.1 | |||
3.2 | |||
3.3 | |||
4.1 | |||
4.2 | |||
4.3 | |||
4.4 | |||
4.5 | |||
10.1 | |||
10.2 | |||
10.3 | |||
10.4 | |||
10.5 | |||
10.6 | |||
10.7 | |||
10.8 | |||
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Exhibit Number | Description | ||
10.9 | |||
10.10 | |||
10.11 | |||
10.12 | |||
10.13 | |||
10.14 | |||
10.15 | |||
10.16 | |||
10.17 | |||
12 | |||
21 | |||
23.1 | |||
23.2 | |||
31.1 | |||
31.2 | |||
32 | |||
101 | The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 21, 2018, formatted in XBRL includes (i) Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016 (ii) Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 (iv) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015 (v) Consolidated Cash Flow Statements for the years ended December 31, 2017, 2016 and 2015 (vi) the Notes to the Consolidated Financial Statements. (3) | ||
(1) | Management contract or compensation plan or agreement required to be filed as an Exhibit to this Report on Form 10-K pursuant to Item 15(b) of Form 10-K. |
(2) | Portions of the indicated document have been omitted pursuant to a grant of confidential treatment and the document indicated has been filed separately with the Commission as required by Rule 24b-2 of the Securities Exchange Act of 1934, as amended. |
(3) | Pursuant to Rule 406 of Regulation S-T, the XBRL related information in Exhibit 101 to this annual report on Form 10-K shall be deemed to be not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
Item 16. Form 10-K Summary
None
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Las Vegas, State of Nevada on February 28, 2018.
Allegiant Travel Company | ||
By: | /s/ Scott Sheldon | |
Scott Sheldon | ||
Chief Financial Officer | ||
POWERS OF ATTORNEY
Each person whose signature appears below hereby appoints Scott Sheldon and Maurice J. Gallagher, Jr., and each of them acting alone, as his or her true and lawful attorneys-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents full power and authority to perform each and every act and thing appropriate or necessary to be done, as fully and for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Maurice J. Gallagher, Jr | Chief Executive Officer and Director | February 28, 2018 | ||
Maurice J. Gallagher, Jr. | (Principal Executive Officer) | |||
/s/ John Redmond | President and Director | February 28, 2018 | ||
John Redmond | ||||
/s/ Scott Sheldon | Chief Financial Officer | February 28, 2018 | ||
Scott Sheldon | (Principal Financial Officer) | |||
/s/ Gregory Anderson | Principal Accounting Officer | February 28, 2018 | ||
Gregory Anderson | ||||
Director | February 28, 2018 | |||
Montie Brewer | ||||
/s/ Gary Ellmer | Director | February 28, 2018 | ||
Gary Ellmer | ||||
/s/ Linda Marvin | Director | February 28, 2018 | ||
Linda Marvin | ||||
/s/ Charles W. Pollard | Director | February 28, 2018 | ||
Charles W. Pollard | ||||
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