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Allegiant Travel CO - Quarter Report: 2019 March (Form 10-Q)



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
 
 
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
algtheaderq417a05.jpg
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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
Accelerated filer  o
 
 
Non-accelerated filer  o
Smaller reporting company  o
 
 
(Do not check if a smaller reporting company)
Emerging growth company  o
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 number of shares of the registrant’s common stock outstanding as of the close of business on April 30, 2019 was 16,286,963.



Allegiant Travel Company
Form 10-Q
Table of Contents

PART I.
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 
 

2


PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

ALLEGIANT TRAVEL COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)

 
March 31, 2019
 
December 31, 2018
 
(unaudited)
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
243,282

 
$
81,520

Restricted cash
14,496

 
14,391

Short-term investments
286,955

 
314,464

Accounts receivable
34,209

 
36,014

Expendable parts, supplies and fuel, net
19,527

 
19,516

Prepaid expenses and other current assets
35,477

 
29,343

TOTAL CURRENT ASSETS
633,946

 
495,248

Property and equipment, net
1,940,480

 
1,847,268

Long-term investments
24,605

 
51,526

Deferred major maintenance, net
83,869

 
67,873

Operating lease right-of-use assets, net
22,788

 
—

Deposits and other assets
44,789

 
36,753

TOTAL ASSETS:
$
2,750,477

 
$
2,498,668

CURRENT LIABILITIES
 
 
 
Accounts payable
$
28,690

 
$
27,452

Accrued liabilities
136,075

 
122,027

Air traffic liability
276,241

 
212,230

Current maturities of long-term debt and finance lease obligations, net of related costs
154,027

 
152,287

TOTAL CURRENT LIABILITIES
595,033

 
513,996

Long-term debt and finance lease obligations, net of current maturities and related costs
1,203,709

 
1,119,446

Deferred income taxes
180,136

 
164,027

Other noncurrent liabilities
33,145

 
10,878

TOTAL LIABILITIES:
2,012,023

 
1,808,347

SHAREHOLDERS' EQUITY
 
 
 
Common stock, par value $.001
23

 
23

Treasury stock
(607,316
)
 
(605,037
)
Additional paid in capital
276,247

 
270,935

Accumulated other comprehensive loss, net
(190
)
 
(661
)
Retained earnings
1,069,690

 
1,025,061

TOTAL EQUITY:
738,454

 
690,321

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY:
$
2,750,477

 
$
2,498,668

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

3


ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 (unaudited)

 
Three Months Ended March 31,
 
2019
 
2018
OPERATING REVENUES:
 
 
 
Passenger
$
419,977

 
$
396,771

Third party products
17,141


10,325

Fixed fee contracts
10,575

 
10,556

Other
3,929

 
7,792

   Total operating revenues
451,622

 
425,444

OPERATING EXPENSES:
 
 
 
Salary and benefits
119,411

 
112,963

Aircraft fuel
99,682

 
106,027

Station operations
38,965

 
37,584

Maintenance and repairs
22,824

 
19,270

Depreciation and amortization
36,182

 
28,149

Sales and marketing
20,926

 
19,078

Other
22,554

 
22,405

   Total operating expenses
360,544

 
345,476

OPERATING INCOME
91,078

 
79,968

OTHER (INCOME) EXPENSES:
 
 
 
Interest expense
18,083

 
12,908

Capitalized interest
(1,503
)
 
(184
)
Interest income
(3,201
)
 
(1,907
)
Loss on debt extinguishment
3,677

 
—

Other, net
103

 
(240
)
   Total other expenses
17,159

 
10,577

INCOME BEFORE INCOME TAXES
73,919

 
69,391

PROVISION FOR INCOME TAXES
16,795

 
14,198

NET INCOME
$
57,124

 
$
55,193

Earnings per share to common shareholders:
 
 
 
Basic
$
3.52

 
$
3.43

Diluted
$
3.52

 
$
3.42

Shares used for computation:
 
 
 
Basic
16,011

 
15,889

Diluted
16,013

 
15,898

 
 
 
 
Cash dividends declared per share:
$
0.70

 
$
0.70


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

4


ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
NET INCOME
$
57,124

 
$
55,193

Other comprehensive income (loss):
 

 
 

Change in available for sale securities, net of tax
477

 
(956
)
Foreign currency translation adjustments
(6
)
 
101

Change in derivatives, net of tax
—

 
(264
)
Total other comprehensive income (loss)
471

 
(1,119
)
TOTAL COMPREHENSIVE INCOME
$
57,595

 
$
54,074


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

5


ALLEGIANT TRAVEL COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Common
 
 
 
Additional
 
other
 
 
 
 
 
Total
 
stock
 
Par
 
paid-in
 
comprehensive
 
Retained
 
Treasury
 
shareholders'
 
outstanding
 
value
 
capital
 
income (loss)
 
earnings
 
shares
 
equity
Balance at December 31, 2018
16,183

 
$
23

 
$
270,935

 
$
(661
)
 
$
1,025,061

 
$
(605,037
)
 
$
690,321

Share-based compensation
118

 
—

 
5,312

 
—

 
—

 
—

 
5,312

Shares repurchased by the Company and held as treasury shares
(17
)
 
—

 
—

 
—

 
—

 
(2,279
)
 
(2,279
)
Cash dividends declared, $0.70 per share
—

 
—

 
—

 
—

 
(11,394
)
 
—

 
(11,394
)
Other comprehensive income (loss)
—

 
—

 
—

 
471

 
(551
)
 
—

 
(80
)
Net income
—

 
—

 
—

 
—

 
57,124

 
—

 
57,124

Cumulative effect of the New Lease Standard (see Note 5)
—

 
—

 
—

 
—

 
(550
)
 
—

 
(550
)
Balance at March 31, 2019
16,284

 
$
23

 
$
276,247

 
$
(190
)
 
$
1,069,690

 
$
(607,316
)
 
$
738,454


 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Common
 
 
 
Additional
 
other
 
 
 
 
 
Total
 
stock
 
Par
 
paid-in
 
comprehensive
 
Retained
 
Treasury
 
shareholders'
 
outstanding
 
value
 
capital
 
income (loss)
 
earnings
 
shares
 
equity
Balance at December 31, 2017
16,066

 
$
23

 
$
253,840

 
$
(2,840
)
 
$
907,943

 
$
(605,655
)
 
$
553,311

Share-based compensation
98

 
—

 
5,385

 
—

 
—

 
—

 
5,385

Shares repurchased by the Company and held as treasury shares
(13
)
 
—

 
—

 
—

 
—

 
(2,233
)
 
(2,233
)
Cash dividends declared, $0.70 per share
—

 
—

 
—

 
—

 
(11,295
)
 
—

 
(11,295
)
Other comprehensive income (loss)
—

 
—

 
—

 
(1,119
)
 
562

 
—

 
(557
)
Net income
—

 
—

 
—

 
—

 
55,193

 
—

 
55,193

Balance at March 31, 2018
16,151

 
$
23

 
$
259,225

 
$
(3,959
)
 
$
952,403

 
$
(607,888
)
 
$
599,804


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


6


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

 
Three Months Ended March 31,
 
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net income
$
57,124

 
$
55,193

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
36,182

 
28,149

Gain on aircraft and other equipment disposals
(6,696
)
 
(132
)
Share-based compensation expense
4,538

 
3,796

Deferred income taxes
16,103

 
12,735

Other adjustments
4,971

 
1,080

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
1,805

 
6,713

Prepaid expenses
(5,988
)
 
(4,439
)
Accounts payable
(368
)
 
9,959

Accrued liabilities
7,877

 
14,267

Air traffic liability
64,011

 
52,474

Deferred major maintenance
(18,376
)
 
(4,476
)
Other assets/liabilities
(1,086
)
 
(2,392
)
Net cash provided by operating activities
160,097

 
172,927

INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(68,447
)
 
(93,933
)
Proceeds from maturities of investment securities
124,472

 
97,224

Purchase of property and equipment, including capitalized interest
(122,551
)
 
(69,167
)
Other investing activities
6,973

 
521

Net cash used in investing activities
(59,553
)
 
(65,355
)
FINANCING ACTIVITIES:
 
 
 
Cash dividends paid to shareholders
(11,394
)
 
(11,295
)
Proceeds from the issuance of debt
494,000

 
—

Principal payments on debt and finance lease obligations
(386,329
)
 
(102,914
)
Debt issuance costs
(30,060
)
 
(176
)
Other financing activities
(4,894
)
 
(679
)
Net cash provided by (used in) financing activities
61,323

 
(115,064
)
Net change in cash, cash equivalents, and restricted cash
161,867

 
(7,492
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD
95,911

 
70,639

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
257,778

 
$
63,147

 
 
 
 
CASH PAYMENTS (RECEIPTS) FOR:
 
 
 
Interest paid, net of amount capitalized
$
20,924

 
$
17,902

Income tax (refunds)/payments
$
(4,490
)
 
$
37

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
 
 
 
Property capitalized under operating leases
$
23,320

 
$
—

Flight equipment acquired under finance leases
$
—

 
$
77,162




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


7


ALLEGIANT TRAVEL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Allegiant Travel Company (the “Company”) and its majority-owned operating subsidiaries. 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 or cost method. All intercompany balances and transactions have been eliminated.

These unaudited consolidated financial statements reflect all normal recurring adjustments which management believes are necessary to present fairly the financial position, results of operations, and cash flows of the Company for the respective periods presented. Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto included in the annual report of the Company on Form 10-K for the year ended December 31, 2018 and filed with the Securities and Exchange Commission.

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

Recent Accounting Pronouncements

Recently Adopted Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), (the "New Lease Standard"). This standard requires leases, other than short-term, to be recognized on the balance sheet as a lease liability and a corresponding right-of-use asset.

Lease payments include fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, and others as required by the standard. Lease payments do not include variable lease payments other than those that depend on an index or rate, any guarantee by the lessee of the lessor’s debt, or any amount allocated to non-lease components. This standard is effective for interim and annual reporting periods beginning after December 15, 2018 and the Company adopted the New Lease Standard as of January 1, 2019. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.

The Company adopted the New Lease Standard using the modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11, "Targeted Improvements - Leases (Topic 842)." Under this method, the cumulative effect adjustment to the opening balance of retained earnings is recognized at the adoption date. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption on January 1, 2019.

The Company's consolidated balance sheet was affected by this standard, but the consolidated statement of income and liquidity were not significantly impacted. The most significant change to the consolidated balance sheet upon adoption on January 1, 2019 relates to the recognition of new right-of-use (ROU) assets of $18.0 million and operating liabilities of $19.1 million. The Company's accounting for finance leases remains substantially unchanged.

See Note 5, "Leases," for more information.


8

Note 2 — Revenue Recognition

Passenger Revenue

Passenger revenue is the most significant category in our reported operating revenues. Passenger revenue is primarily composed of scheduled service revenue (includes passenger ticket sales and credit voucher breakage), revenue from ancillary air-related charges (includes seat fees, baggage fees, and other travel-related services performed in conjunction with a passenger’s flight), as well as co-brand point redemptions, as outlined below:

 
Three Months Ended March,
(in thousands)
2019
 
2018
Scheduled service
$
234,772

 
$
238,520

Ancillary air-related charges
181,700

 
154,717

Co-brand redemptions
3,505

 
3,534

Total passenger revenue
$
419,977

 
$
396,771


Sales of passenger tickets not yet flown are recorded in air traffic liability. Passenger revenue is recognized when transportation is provided or when ticket voucher breakage occurs, to the extent different from estimated breakage.

The contract term of passenger tickets is 12 months and revenue associated with future travel will principally be recognized within this time frame. $175.7 million was recognized into passenger revenue during the three months ended March 31, 2019 that was recorded in the air traffic liability balance of $212.2 million at December 31, 2018.

Co-brand redemptions

In relation to the travel component of the contract with Bank of America, the Company has a performance obligation to provide cardholders with points to be used for future travel award redemptions. Therefore, consideration received from Bank of America related to the travel component is deferred based on its relative selling price and is recognized into passenger revenue when the points are redeemed and the transportation is provided.

The following table presents the activity of the co-brand point liability as of the dates indicated:
 
Three Months Ended March,
(in thousands)
2019
 
2018
Balance at January 1
$
10,708

 
$
8,903

Points awarded (deferral of revenue)
4,164

 
3,233

Points redeemed (recognition of revenue)
(3,505
)
 
(3,534
)
Balance at March 31
$
11,367

 
$
8,602


As of March 31, 2019 and March 31, 2018, $8.9 million and $5.7 million, respectively, of the current points liability is reflected in Accrued liabilities and represents our current estimate of revenue to be recognized in the next twelve months based on historical trends, with the remaining balance reflected in Other noncurrent liabilities expected to be recognized into revenue in periods thereafter.


9


Note 3 — Property and Equipment

Property and equipment (in thousands):

 
As of March 31, 2019
 
As of December 31, 2018
Flight equipment, including pre-delivery deposits
$
2,002,777

 
$
1,905,157

Computer hardware and software
143,369

 
140,385

Land and buildings/leasehold improvements
85,925

 
85,925

Other property and equipment
106,159

 
89,778

Total property and equipment
2,338,230

 
2,221,245

Less accumulated depreciation and amortization
(397,750
)
 
(373,977
)
Property and equipment, net
$
1,940,480

 
$
1,847,268


Note 4 — Long-Term Debt

Long-term debt and finance lease obligations (in thousands):

 
As of March 31, 2019
 
As of December 31, 2018
Fixed-rate debt and finance lease obligations due through 2030 (1) (2)
$
325,353

 
$
640,806

Variable-rate debt due through 2028
1,032,383

 
630,927

Total long-term debt and finance lease obligations, net of related costs
1,357,736

 
1,271,733

Less current maturities, net of related costs (1)
154,027

 
152,287

Long-term debt and finance lease obligations, net of current maturities and related costs
$
1,203,709

 
$
1,119,446

 
 
 
 
Weighted average fixed-interest rate on debt
3.9
%
 
5.3
%
Weighted average variable-interest rate on debt
5.5
%
 
4.2
%
(1) As of March 31, 2019, and December 31, 2018, respectively, $80.1 million and $428.0 million of the Company's Unsecured Senior Notes were classified as long-term as management refinanced the borrowings on a long-term basis in February 2019, as discussed below. 
(2) Includes finance lease obligations secured by five A320 series aircraft.

Maturities of long-term debt and finance lease obligations for the remainder of 2019 and for the next four years and thereafter, in the aggregate, are: remaining in 2019 - $196.2 million; 2020 - $124.0 million; 2021 - $144.4 million; 2022 - $70.1 million; 2023 - $57.2 million; and $765.8 million thereafter.

Consolidated Variable Interest Entity

The Company evaluates ownership, contractual lease arrangements and other interests in entities to determine if they are variable interest entities ("VIEs") based on the nature and extent of those interests. These evaluations can be 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 March 2019, the Company, through a wholly owned subsidiary, entered into agreements with a trust to borrow $44.0 million secured by one Airbus A320 series aircraft. The trust was funded on inception. These borrowings bear interest at a blended rate of 3.8 percent, payable in quarterly installments through March 2029, at which time the Company will have a purchase option at a fixed amount. 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 $39.1 million and $44.0 million, respectively, at the time of borrowing.

10



Senior Secured Revolving Credit Facility

The Company has a senior secured revolving credit facility under which it is able to borrow up to $81.0 million, and $46.9 million is outstanding as of March 31, 2019. The facility has a current term of 24 months and is based on the value of Airbus A320 series aircraft placed in the collateral pool. Aircraft may remain in the collateral pool for up to two years, and, as of March 31, 2019, there were nine aircraft in the collateral pool. The notes for the amounts borrowed under the facility bear interest at a floating rate based on LIBOR and are due on March 31, 2021.

Term Loan

In February 2019, the Company entered into a Credit and Guaranty Agreement (the “Term Loan”) to borrow $450.0 million, guaranteed by all of the Company's subsidiaries, excluding Sunseeker Resorts Inc. and its subsidiaries, and other insignificant subsidiaries (the "Term Loan Guarantors"). The Term Loan is secured by substantially all property and assets of the Company and the Term Loan Guarantors, excluding aircraft and aircraft engines, and excluding certain other assets. The Term Loan has a five-year term, bears interest based on LIBOR and provides for quarterly interest payments along with quarterly principal payments of $1.1 million through February 2024, at which time the Term Loan is due. The Term Loan may be prepaid at any time without penalty.

In connection with the Term Loan, the Company conducted a tender offer for its 5.5 percent senior unsecured obligation, as outlined below.

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 bear interest at a rate of 5.5 percent per year, payable in cash semi-annually, on January 15th and July 15th of each year.

In connection with the Term Loan discussed above, the Company completed a tender offer, whereby it purchased $347.9 million of the Notes, and incurred related debt extinguishment costs of $3.7 million. The indenture governing the Notes was amended to eliminate most of the restrictive covenants and certain events of default, reduce the minimum notice period required for redemptions of the Notes from 30 days as previously required by the indenture to three business days, and amend certain other provisions applicable to the Notes. The $428.0 million net proceeds from the Term Loan have been, or will be, used to purchase the Notes. The Company expects to call the remaining balance of the Notes in advance of their July 2019 maturity.

Construction Loan Agreement

In March 2019, Sunseeker Florida, Inc. (“SFI”), a wholly-owned subsidiary of the Company, entered into a Construction Loan Agreement with certain lenders affiliated with TPG Sixth Street Partners, LLC (the “Lender”). Under the Construction Loan Agreement, SFI may borrow up to $175.0 million (the “Loan”) to fund the construction of Phase 1 of Sunseeker Resort -Charlotte Harbor (the “Project”). No amount has been drawn under this agreement as of March 31, 2019.

Under the Construction Loan Agreement, the Lender is to provide the final $175.0 million of funding for the Project, with initial funding to come from the Company. The loan is secured by the Project and, for a period of time, the surrounding land owned by SFI. The Company has guaranteed one-third of the debt, has agreed to bear responsibility under a Non-Recourse Carve-Out Guaranty, and has agreed to guarantee completion of the Project in accordance with approved plans and specifications. All of the shares in SFI are also pledged to secure the loan. The Loan bears interest based on LIBOR and matures in March 2023.

Note 5 — Leases

The Company determines if an arrangement is a lease at inception and has lease agreements for office facilities, office equipment, certain airport and terminal facilities, and other space and assets. These commitments have remaining non-cancelable lease terms, with lease expirations which range from 2019 to 2036.


11

As a result of the New Lease Standard, certain real estate and property leases, and various other operating leases have been measured on the balance sheet with a lease liability and right-of-use asset ("ROU"). Airport terminal leases mostly include variable lease payments outside of those based on a fixed index, and are therefore excluded from consideration.

Application of this standard resulted in the recognition of $23.3 million in ROU assets and a corresponding lease liability of $24.2 million (with $22.0 million classified as long-term within Other non-current liabilities and the remainder classified as short-term within Accrued liabilities) as of March 31, 2019. Accounting for finance leases is substantially unchanged.

Operating leases are included in operating lease ROU assets, accrued liabilities, and other noncurrent liabilities on the consolidated balance sheets. Finance leases are included in property and equipment, current maturities of long-term debt and finance leases, and long-term debt and finance leases, net of current maturities, on the consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make scheduled lease payments. ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is calculated using the incremental borrowing rate at lease commencement, which takes into consideration recent debt issuances as well as other applicable market data available.

Lease terms include options to extend when it is reasonably certain that the option will be exercised. Leases with a term of 12 months or less are not recorded on the balance sheet. Additionally, lease and non-lease components are accounted for as a single lease component for real estate agreements.

In addition to operating leases the Company leases certain aircraft and, as of March 31, 2019, had five aircraft under finance leases with remaining terms to 2029.

See Note 8, Commitments and Contingencies, for further detail.

Lease Costs

The components of lease expense were as follows:

 
 
Three Months Ended
(in thousands)
Classification on the Statements of Income
March 31, 2019
Finance lease costs:
 
 
Amortization of assets
Depreciation and amortization
$
1,629

Interest on lease liabilities
Interest expense
1,346

Operating lease cost
Station operations; Maintenance and repairs; Other operating expense
775

Variable lease cost
Station operations; Maintenance and repairs; Other operating expense
3,092

Total lease cost
 
$
6,842


Lease position as of March 31, 2019

The table below presents the lease-related assets and liabilities recorded on the balance sheet.


12

(in thousands)
Classification on the Balance Sheet
As of March 31, 2019
Assets
 
 
Operating lease assets
Operating lease right-of-use assets, net
$
22,788

Finance lease assets
Property and equipment, net
116,553

Total lease assets
 
$
139,341

 
 
 
Liabilities
 
 
Current
 
 
Operating
Accrued liabilities
$
2,101

Finance
Current maturities of long-term debt and finance lease obligations
7,417

Noncurrent
 
 
Operating
Other noncurrent liabilities
22,049

Finance
Long-term debt and finance lease obligations
113,710

Total lease liabilities
 
$
145,277

 
 
 
Weighted-average remaining lease term
 
 
Operating leases
 
9.5 years

Finance leases
 
10.6 years

Weighted-average discount rate
 
 
Operating leases
 
4.2
%
Finance leases
 
4.4
%

Other Information

The table below presents supplemental cash flow information related to leases during the three months ended March 31, 2019.

 
Three Months Ended
(in thousands)
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows for operating leases
$
629

Operating cash flows for finance leases
1,346

Financing cash flows for finance leases
1,804


Maturities of Lease Liabilities

The table below indicates the future minimum payments of lease liabilities as of March 31, 2019.


13

(in thousands)
Operating Leases
 
Finance Leases
Remaining in 2019
$
2,269

 
$
9,450

2020
3,206

 
12,600

2021
3,249

 
12,600

2022
3,295

 
11,095

2023
3,147

 
10,500

Thereafter
14,325

 
103,458

Total lease payments
29,491

 
159,703

Less imputed interest
(5,341
)
 
(38,576
)
Total lease obligations
24,150

 
121,127

Less current obligations
(2,101
)
 
(7,417
)
Long-term lease obligations
$
22,049

 
$
113,710


The Company adopted the New Lease Standard on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption. Future annual minimum lease payments as of December 31, 2018 were as follows:

(in thousands)
Operating Leases
 
Capital Leases
2019
$
8,102

 
$
12,600

2020
6,031

 
12,600

2021
3,643

 
12,600

2022
1,630

 
11,095

2023
1,626

 
10,500

Thereafter
8,297

 
103,458

Total lease payments
$
29,329

 
162,853

Less imputed interest
 
 
(39,922
)
Total lease obligations
 
 
122,931

Less current obligations
 
 
(7,336
)
Long-term lease obligations
 
 
$
115,595



Note 6 — Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received by selling 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. These tiers include: 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; and 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, US Treasury Bonds, and corporate debt securities, which are valued using quoted market prices or alternative pricing sources including transactions involving identical or comparable assets and models utilizing market observable inputs. 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

14

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.

Financial instruments measured at fair value on a recurring basis (in thousands):
 
 
As of March 31, 2019
 
As of December 31, 2018
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
Cash equivalents
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
125,394

 
$
125,394

 
$
—

 
$
43,281

 
$
43,281

 
$
—

Commercial paper
80,760

 
—

 
80,760

 
29,138

 
—

 
29,138

Municipal debt securities
3,792

 
—

 
3,792

 
—

 
—

 


US Treasury Bonds
880

 
—

 
880

 
1,415

 
—

 
1,415

Total cash equivalents
210,826

 
125,394

 
85,432

 
73,834

 
43,281

 
30,553

Short-term
 

 
 

 
 
 
 

 
 

 
 

Commercial paper
182,608

 
—

 
182,608

 
180,846

 
—

 
180,846

Corporate debt securities
74,331

 
—

 
74,331

 
101,489

 
—

 
101,489

Municipal debt securities
13,927

 
—

 
13,927

 
14,252

 
—

 
14,252

Federal agency debt securities
11,367

 
—

 
11,367

 
11,887

 
—

 
11,887

US Treasury Bonds
4,722

 
—

 
4,722

 
5,990

 
—

 
5,990

Total short-term
286,955

 
—

 
286,955

 
314,464

 
—

 
314,464

Long-term
 

 
 

 
 

 
 

 
 

 
 

Corporate debt securities
20,300

 
—

 
20,300

 
37,334

 
—

 
37,334

US Treasury Bonds
3,050

 
—

 
3,050

 
2,901

 
—

 
2,901

Federal agency debt securities
1,255

 
—

 
1,255

 
11,291

 
—

 
11,291

Total long-term
24,605

 
—

 
24,605

 
51,526

 
—

 
51,526

Total financial instruments
$
522,386

 
$
125,394

 
$
396,992

 
$
439,824

 
$
43,281

 
$
396,543


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 Company's remaining debt is not publicly held, and the Company has determined the estimated fair value of these notes to be Level 3, as certain inputs used to determine the fair value 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 and without reduction for related costs are as follows (in thousands):

 
As of March 31, 2019
 
As of December 31, 2018
 
 
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
 
Hierarchy Level
Publicly held debt
$
102,133

 
$
102,389

 
$
450,463

 
$
451,026

 
2
Non-publicly held debt
1,160,772

 
937,134

 
703,372

 
619,379

 
3
Total long-term debt
$
1,262,905

 
$
1,039,523

 
$
1,153,835

 
$
1,070,405

 
 

Due to the short-term nature, carrying amounts of cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value.


15

Note 7 — Earnings per Share

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

Diluted net income per share is calculated using the more dilutive of the 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:

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.

For the three months ended March 31, 2019 and 2018, respectively, the second method, which assumes unvested awards are not vested, was used in the computation because it was more dilutive than the first method.

The following table sets forth the computation of net income per share, on a basic and diluted basis, for the periods indicated (share count and dollar amounts other than per-share amounts in table are in thousands):

 
Three Months Ended March 31,
 
2019
 
2018
Basic:
 
 
 
Net income
$
57,124

 
$
55,193

Less net income allocated to participating securities
(799
)
 
(768
)
Net income attributable to common stock
$
56,325

 
$
54,425

Earnings per share, basic
$
3.52

 
$
3.43

Weighted-average shares outstanding
16,011

 
15,889

Diluted:
 

 
 

Net income
$
57,124

 
$
55,193

Less net income allocated to participating securities
(798
)
 
(768
)
Net income attributable to common stock
$
56,326

 
$
54,425

Earnings per share, diluted
$
3.52

 
$
3.42

Weighted-average shares outstanding
16,011

 
15,889

Dilutive effect of stock options and restricted stock
31

 
46

Adjusted weighted-average shares outstanding under treasury stock method
16,042

 
15,935

Participating securities excluded under two-class method
(29
)
 
(37
)
Adjusted weighted-average shares outstanding under two-class method
16,013

 
15,898


For the three months ended March 31, 2019 and 2018, respectively, anti-dilutive shares excluded from the calculation of earnings per share were 4,046 shares and 1,463 shares (not in thousands).

Note 8 — Commitments and Contingencies

As of March 31, 2019, the Company had firm commitments to purchase twelve Airbus A320 series aircraft and four CFM engines.


16

The Company's contractual purchase commitments consist primarily of aircraft and engine acquisitions. The total future commitments are as follows (in thousands):

 
As of March 31, 2019
Remaining in 2019
$
198,110

2020
33,800

2021
500

2022
18,000

Total commitments
$
250,410


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 9 — Segments

Operating segments are components of a company for which separate financial and operating information is regularly evaluated and reported to the Chief Operating Decision Maker ("CODM"), and is used to allocate resources and analyze performance. The Company's CODM is the executive leadership team, which reviews information about the Company's three operating segments: the Airline, Sunseeker Resort, and Other non-airline.

Airline Segment

The Airline segment operates as a single business unit and includes all scheduled service air transportation, ancillary air-related products and services, third party products and services, fixed fee contract air transportation and other airline-related revenue. The CODM evaluation includes, but is not limited to, route and flight profitability data, ancillary and third party product and service offering statistics, and fixed fee contract information when making resource allocation decisions with the goal of optimizing consolidated financial results.

Sunseeker Resort Segment

The Sunseeker Resort segment represents activity related to the development and construction of Sunseeker Resort in Southwest Florida, as well as the operation of Kingsway golf course. Plans for the resort include a 500-room hotel and two towers offering an estimated 180 one, two and three bedroom suites, bar and restaurant options, and other amenities. The golf course is a short drive from the resort site and is considered, from a planning and strategic perspective, to be an additional resort amenity. The construction of Sunseeker Resort is an extension of the Company's leisure travel focus and it is expected that many customers flying to Southwest Florida on Allegiant will elect to stay at this resort and enjoy its amenities.

Other non-Airline Segment

The other non-airline segment includes the Teesnap golf course management solution and Allegiant Nonstop family entertainment centers, both of which fit with the Company's leisure focus. Allegiant Nonstop family entertainment centers are comprised of games, attractions, and food facilities.

Selected information for the Company's segments and the reconciliation to the consolidated financial statement amounts are as follows (in thousands):

17


 
Airline
 
Sunseeker Resort
 
Other non- airline
 
Consolidated
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
Operating revenue:
 
 
 
 
 
 
 
    Passenger
$
419,977

 
$
—

 
$
—

 
$
419,977

    Third party products
17,141

 
—

 
—

 
17,141

    Fixed fee contract
10,575

 
—

 
—

 
10,575

    Other
631

 
902

 
2,396

 
3,929

Operating income (loss)
98,490

 
(1,222
)
 
(6,190
)
 
91,078

Interest expense, net of capitalized interest and interest income
13,221

 
158

 
—

 
13,379

Depreciation and amortization
35,229

 
156

 
797

 
36,182

Total assets, end of period
2,640,003

 
68,742

 
41,732

 
2,750,477

Capital expenditures
108,920

 
5,275

 
8,356

 
122,551

Three Months Ended March 31, 2018
 
 
 
 
 
 
 
Operating revenue:
 
 
 
 
 
 
 
    Passenger
$
396,771

 
$
—

 
$
—

 
$
396,771

    Third party products
10,325

 
—

 
—

 
10,325

    Fixed fee contract
10,556

 
—

 
—

 
10,556

    Other
6,666

 
—

 
1,126

 
7,792

Operating income (loss)
81,950

 
(145
)
 
(1,837
)
 
79,968

Interest expense, net
10,817

 
—

 
—

 
10,817

Depreciation and amortization
27,766

 
7

 
376

 
28,149

Total assets, end of period
2,248,340

 
33,910

 
6,715

 
2,288,965

Capital expenditures
59,574

 
8,140

 
1,453

 
69,167


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

The following discussion and analysis presents factors that had a material effect on our results of operations during the three months ended March 31, 2019 and 2018. Also discussed is our financial position as of March 31, 2019 and December 31, 2018. You should read this discussion in conjunction with our unaudited consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q and our consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 31, 2018. This discussion and analysis contains forward-looking statements. Please refer to the section below entitled “Cautionary Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

First Quarter 2019 Review
Highlights:

–
Achieved 22 percent airline operating margin;
–
recognized record ancillary air-related revenue per passenger of $53.10, which represents an increase of 12.5 percent compared to 2018;
–
added eight aircraft into service and expect an additional nine to be added throughout 2019;
–
announced 35 new routes, including inaugural service into Anchorage, AK; and
–
broke ground on Sunseeker Resort - Charlotte Harbor.


18

AIRCRAFT

The following table sets forth the aircraft in service and operated by us as of the dates indicated:

 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
MD-80
—

 
—

 
32

A319
37

 
32

 
26

A320 (1)
47

 
44

 
30

Total
84

 
76

 
88

(1) Does not include three aircraft for which we have taken delivery, but were not yet in service as of March 31, 2019.

As of March 31, 2019, we had firm commitments to purchase twelve aircraft. We expect delivery of nine of these aircraft in 2019 and the remaining aircraft in 2020 and 2022. We continually consider aircraft acquisitions on an opportunistic basis.

Fleet Plan

The below table indicates the number of aircraft expected to be in service as of the dates indicated, based on currently scheduled additions to our operating fleet.

 
As of June 30, 2019
 
As of September 30, 2019
 
As of December 31, 2019
A319
37

 
38

 
38

A320
51

 
53

 
55

Total
88

 
91

 
93


NETWORK

As of March 31, 2019, we are currently selling 450 routes versus 419 as of the same date last year, which represents a 7.4 percent increase. Our total number of origination cities and leisure destinations (for operating routes) were 98 and 23, respectively, as of March 31, 2019. Based on our currently published schedule through early-February 2020, and service announcements and cancellations by other airlines to date, we will have direct competition (which we consider to be similar non-stop service between markets) on 114 of our routes as of that date.

During the first quarter of 2019, we announced 35 new routes including our inaugural scheduled flights to Anchorage, AK and additional service to Destin, FL, Nashville, TN, and Savannah, GA, among other route announcements. The new routes are all planned to begin service in the second quarter 2019.

In April 2019, we filed an application with the U.S. Department of Transportation to offer scheduled service to Mexico. This is the first step in beginning to offer international service to our leisure travelers, with non-stop flights between the United States and Mexico.

TRENDS

As we have completed our fleet transition, Airbus aircraft flew 100 percent of our scheduled service ASMs for the quarter, compared to 72.4 percent for the same time period in 2018, which drove a 9.6 percent increase in fuel efficiency (measured as ASMs per gallon). Despite having an average of 11 fewer operating aircraft in the fleet compared to 2018, scheduled service ASMs increased 5.6 percent and scheduled service passengers increased 4.3 percent. Higher utilization of the Airbus fleet (with a 16.9 percent year-over-year increase in average block hours per aircraft per day) enabled system growth with fewer aircraft. We expect to return to lower aircraft utilization during the year, as more aircraft are added to our operating fleet. Airline operating income increased more than $16 million quarter-over-quarter, and produced a 22 percent operating margin.

We continue to improve our operation, as evidenced by a 100 percent controllable completion rate for the first quarter 2019, and a total completion factor of 99.2 percent. We also achieved a record 123 consecutive days without a maintenance cancellation.


19

In April 2019, our dispatchers, represented by the International Brotherhood of Teamsters, (IBT) voted to ratify their first collective bargaining agreement. The agreement has a five year term beginning May 1, 2019 and is not expected to have a significant effect on our operating results.

In March 2019, we began construction for Sunseeker Resort - Charlotte Harbor in Southwest Florida, and entered into a Construction Loan Agreement with affiliates of TPG Sixth Street Partners to provide $175 million in construction financing for the project. We also opened our first Allegiant Nonstop family entertainment center in Clearfield, UT, in January 2019 and our second location in Warren, MI, in April 2019.

RESULTS OF OPERATIONS

Comparison of three months ended March 31, 2019 to three months ended March 31, 2018

Operating Revenue

Passenger revenue. For the first quarter 2019, passenger revenue increased 5.8 percent compared to first quarter 2018. The increase was driven primarily by a 4.6 percent increase in scheduled service departures, which resulted in a 4.3 percent increase in scheduled service passengers (slightly diluted by a 1.2 percentage point drop in load factor). The higher number of passengers resulted in year-over-year increases in ancillary revenues, the most significant of which were increases in the customer convenience fee and carry on and checked baggage fees throughout the network. These increases contributed to a 12.5 percent increase in unit ancillary revenue to $53.10 per passenger, the highest quarterly performance in our history.

Third party products revenue. Third party products revenue for the first quarter 2019 increased 66.0 percent, or $6.8 million, compared to the same period in 2018. This is primarily the result of a 26.5 percent increase in net revenue from rental cars resulting from the increase in scheduled service passengers coupled with a higher take rate, as well as an increase in revenue generated from our co-branded credit card program.

Fixed fee contract revenue. Fixed fee contract revenue for the first quarter 2019 remained relatively flat when compared to 2018, despite a 6.5 percent decrease in fixed fee departures quarter-over-quarter. The decrease in departures resulted from the government shutdown early in the quarter, as the FAA was not available to provide certification for aircraft that we had available and ready for service; thus, we were operating fewer aircraft than planned.

Other revenue. Other revenue decreased by $3.9 million for the first quarter 2019 from 2018, primarily due to a decrease in aircraft lease revenue. We took redelivery of the final aircraft previously on lease to a European carrier in December 2018, whereas 10 aircraft were on lease during the first quarter 2018. The decline in lease revenue was partially offset by increased revenue from Teesnap, our golf course management solution.

Operating Expenses

We primarily evaluate our expense management by comparing our costs per ASM across different periods, which enables us to assess trends in each expense category. The following table presents unit costs on a per ASM basis, or CASM, for the indicated periods. Excluding fuel on a per ASM basis 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.


20

 
Three Months Ended March 31,
 
Percent
 
2019
 
2018
 
Change
Salary and benefits

3.05
¢
 

3.03
¢
 
0.7
 %
Aircraft fuel
2.55

 
2.84

 
(10.2
)
Station operations
1.00

 
1.01

 
(1.0
)
Maintenance and repairs
0.58

 
0.52

 
11.5

Depreciation and amortization
0.93

 
0.75

 
24.0

Sales and marketing
0.54

 
0.51

 
5.9

Other
0.57

 
0.61

 
(6.6
)
CASM

9.22
¢
 

9.27
¢
 
(0.5
)%
Operating CASM, excluding fuel
6.67

 
6.43

 
3.7

Non-airline operating CASM*
0.27

 
0.08

 
NM

Operating CASM, excluding fuel and non-airline activity

6.40
¢
 

6.35
¢
 
0.8
 %
*Includes operating costs associated with Sunseeker Resort and other non-airline related activity.

Salary and benefits expense. Salary and benefits expense increased $6.4 million, or 5.7 percent, for the first quarter 2019 when compared to the same period in 2018. The increase is largely due to a 7.7 percent increase in full-time equivalent employees, as well as labor inefficiencies as we continue to grow into the increased number of flight personnel we maintained during the fleet transition.

Aircraft fuel expense. Aircraft fuel expense decreased $6.3 million, or 6.0 percent, for the first quarter 2019 compared to first quarter 2018. The decrease is largely due to a 4.5 percent decrease in system fuel gallons consumed, coupled with a 1.8 percent decrease in the system average fuel cost per gallon. Fuel efficiency (measured as ASMs per gallon) increased 9.6 percent year over year, allowing us to increase system ASMs by 4.9 percent, while reducing total fuel consumption. The Airbus aircraft are more fuel efficient than the MD-80 aircraft, which we still had in operation during the first quarter 2018.

Station operations expense. Station operations expense for the first quarter 2019 increased $1.4 million, or 3.7 percent compared to the same period in 2018, and is in line with a 4.6 percent increase in scheduled service departures.

Maintenance and repairs expense. Maintenance and repairs expense for the first quarter 2019 increased $3.6 million, or 18.4 percent, compared to the same period in 2018, as the average number of Airbus aircraft in service increased by 49.2 percent. Although repairs for the Airbus fleet type tend to be less frequent, associated costs are also generally higher than for the MD-80 fleet.

Depreciation and amortization expense. Depreciation and amortization expense for the first quarter 2019 increased 28.5 percent year over year. The average number of Airbus aircraft in service increased 49.2 percent year over year and our Airbus aircraft have a higher monthly depreciation expense than our MD-80 aircraft previously in service. In comparison, during the first quarter 2018, the MD-80 fleet was fully depreciated, yet produced 27.6 percent of ASMs during the quarter. Amortization of major maintenance costs was $4.8 million for the first quarter 2019 compared to $2.5 million for the first quarter 2018.

Sales and marketing expense. Sales and marketing expense for the first quarter 2019 increased $1.8 million compared to the same period in 2018 due to increased expenses related to various marketing initiatives, including our multi-year partnerships with the Vegas Golden Knights and Minor League Baseball.

Non-airline expenses

Non-airline expenses are included in the various line items discussed above, as appropriate. The non-airline expenses include those from our Teesnap golf management business, expenses incurred to operate the Kingsway golf course, pre-opening expenses incurred in connection with Allegiant Nonstop family entertainment centers (locations opened in January 2019 and April 2019), and operating expenses attributable to Sunseeker Resort (most Sunseeker Resort expenses are being capitalized at this time).


21

Income Tax Expense

Our effective tax rate was 22.7 percent for the three months ended March 31, 2019, compared to 20.5 percent for the three months ended March 31, 2018. The effective tax rate for the three months ended March 31, 2019 differed from the statutory federal income tax rate of 21.0 percent primarily due to state taxes. While we expect our tax rate to be fairly consistent in the near term, it will vary depending on recurring items such as the amount of income we earn in each state and the state tax rate applicable to such income. Discrete items during interim periods may also affect our tax rates. We expect to be non-cash taxpayers for federal income tax purposes for 2019.

22

Comparative Consolidated Operating Statistics

The following tables set forth our operating statistics for the periods indicated:

 
Three Months Ended March 31,
 
Percent
 
2019
 
2018
 
Change (1)
Operating statistics (unaudited):
 
 
 
 
 
Total system statistics:
 
 
 
 
 
Passengers
3,450,278

 
3,302,951

 
4.5

Revenue passenger miles (RPMs) (thousands)
3,228,594

 
3,094,805

 
4.3

Available seat miles (ASMs) (thousands)
3,910,239

 
3,728,563

 
4.9

Load factor
82.6
%
 
83.0
%
 
(0.4
)
Airline operating expense per ASM (CASM) (cents)
8.95

 
9.19

 
(2.6
)
Fuel expense per ASM (cents)
2.55

 
2.84

 
(10.2
)
Airline operating CASM, excluding fuel (cents)
6.40

 
6.35

 
0.8

ASMs per gallon of fuel
84.1

 
76.7

 
9.6

Departures
25,200

 
24,248

 
3.9

Block hours
59,819

 
57,803

 
3.5

Average stage length (miles)
904

 
910

 
(0.7
)
Average number of operating aircraft during period
79.6

 
90.7

 
(12.2
)
Average block hours per aircraft per day
8.3

 
7.1

 
16.9

Full-time equivalent employees at end of period
4,067

 
3,776

 
7.7

Fuel gallons consumed (thousands)
46,474

 
48,640

 
(4.5
)
Average fuel cost per gallon
$
2.14

 
$
2.18

 
(1.8
)
Scheduled service statistics:
 
 
 
 
 
Passengers
3,421,538

 
3,279,368

 
4.3

Revenue passenger miles (RPMs) (thousands)
3,191,045

 
3,064,619

 
4.1

Available seat miles (ASMs) (thousands)
3,802,132

 
3,602,015

 
5.6

Load factor
83.9
%
 
85.1
%
 
(1.2
)
Departures
24,344

 
23,264

 
4.6

Block hours
57,963

 
55,689

 
4.1

Total passenger revenue per ASM (TRASM) (cents) (2)
11.50

 
11.30

 
1.8

Average fare - scheduled service (3)
$
69.64

 
$
73.81

 
(5.6
)
Average fare - air-related charges (3)
$
53.10

 
$
47.18

 
12.5

Average fare - third party products
$
5.01

 
$
3.15

 
59.0

Average fare - total
$
127.75

 
$
124.14

 
2.9

Average stage length (miles)
908

 
916

 
(0.9
)
Fuel gallons consumed (thousands)
45,068

 
46,872

 
(3.8
)
Average fuel cost per gallon
$
2.13

 
$
2.17

 
(1.8
)
Rental car days sold
471,598

 
398,587

 
18.3

Hotel room nights sold
105,015

 
108,984

 
(3.6
)
Percent of sales through website during period
93.6
%
 
93.8
%
 
(0.2
)
(1) Except load factor and percent of sales through website during period, which are presented as a percentage point change.
(2) Various components of this measure do not have a direct correlation to ASMs. This measure is provided on a per ASM basis so as to facilitate comparison with airlines reporting revenues on a per ASM basis.
(3) Reflects division of passenger revenue between scheduled service and air-related charges in the Company's booking path.


23

LIQUIDITY AND CAPITAL RESOURCES

Current liquidity

Cash, cash equivalents and investment securities (short-term and long-term) increased at March 31, 2019 to $554.8 million, from $447.5 million at December 31, 2018. Investment securities represent highly liquid marketable securities which are available-for-sale.

The increase in cash is due primarily to $178.5 million in cash from operating activities (excluding capital expenditures related to heavy maintenance), as well as $428.0 million in net Term Loan proceeds received in February 2019.

As of March 31, 2019, $347.9 million of the Term Loan proceeds were used to purchase our unsecured senior notes. The remaining proceeds of approximately $80.1 million will be used when we retire the remaining $102.1 million balance of these notes. We expect to call the remainder of the notes prior to their maturity in July 2019.

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. Under our fixed fee flying contracts, we require our customers to prepay for flights to be provided by us. The prepayments are escrowed until the flight is completed and are recorded as restricted cash with a corresponding amount reflected as air traffic liability.

Our operating cash flows and long-term debt borrowings have allowed us to invest in our fleet transition and return capital to shareholders in the form of recurring regular quarterly dividends. Our future capital needs are primarily for the acquisition of additional aircraft, including our existing aircraft commitments, as well as planned capital outlay related to Sunseeker Resort and other travel and leisure initiatives.

We believe we have more than adequate liquidity resources through our operating cash flows, borrowings, and cash balances, to meet our future contractual obligations. In addition, we continue to consider raising funds through debt financing on an opportunistic basis.

In addition to our recurring quarterly cash dividend, our current share repurchase authority is $100 million. There is no expiration to this program.

Debt

Our long-term debt and finance lease obligations balance, without reduction for related issuance costs, increased from $1.3 billion as of December 31, 2018 to $1.4 billion as of March 31, 2019 as we borrowed $450.0 million under the Term Loan plus an additional $44.0 million secured by aircraft, while repurchasing $347.9 million of our unsecured notes and making principal payments on our other existing debt.

In March 2019, we entered into a Construction Loan Agreement with certain lenders affiliated with TPG Sixth Street Partners, LLC under which we may borrow up to $175.0 million to fund the construction of Phase 1 of Sunseeker Resort - Charlotte Harbor. No amounts under this loan agreement have been drawn to date.

Sources and Uses of Cash

Operating Activities. During the three months ended March 31, 2019, our operating activities provided $160.1 million of cash compared to $172.9 million during the same period of 2018. The year-over-year decrease in cash inflows is mostly the result of the net effect of changes in certain asset and liability accounts, including an increase in deferred major maintenance.

Operating cash inflows are primarily derived from providing air transportation and related ancillary products and services to customers, and we expect to use that cash flow to purchase aircraft and equipment, make scheduled debt payments, invest in Sunseeker Resort - Charlotte Harbor and other travel and leisure initiatives, and return capital to shareholders through share repurchases and dividends. 

Investing Activities. Cash used in investing activities was $59.6 million during the three months ended March 31, 2019 compared to $65.4 million for the same period in 2018. A $53.4 million year-over-year increase in cash outlay for the purchase of property and equipment was offset as cash proceeds from maturities of investment securities (net of purchases) were $56.0 million during the three months ended March 31, 2019, compared to $3.3 million for the same period in 2018. Additionally, in

24

the first quarter of 2019 we had a $6.5 million increase in other investing activities compared to the same period last year, mostly related to proceeds received from the sales of MD-80 parts.

Financing Activities. Cash provided by financing activities for the three months ended March 31, 2019 was $61.3 million, compared to $115.1 million cash used in financing activities during the same period in 2018. This year-over-year fluctuation is primarily due to debt proceeds, as we entered into debt agreements totaling $494.0 million during the three months ended March 31, 2019, but did not enter any debt agreements in the first quarter 2018. The increase in debt proceeds was partially offset by an increase in principal payments on long-term debt and finance lease obligations, as we repurchased $347.9 million of our unsecured notes due July 2019 in a tender offer, made $38.4 million of other debt and finance lease payments and incurred $30.1 million of debt issuance costs during the quarter. This compared to $102.9 million of principal payments on debt for the same period in 2018.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this quarterly report on Form 10-Q, 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, the effects of future regulation and competition, and the development of a resort in Southwest Florida. 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 our 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, public perception of our safety, our reliance on our automated systems, limitation on growth after our transition to a single fleet type, our reliance on third parties to deliver aircraft under contract to us on a timely basis, risk of breach of security of personal data, 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 covenants and balances, the ability to finance aircraft under contract, terrorist attacks, risks inherent to airlines, our competitive environment, our reliance on third parties who provide facilities or services to us, the possible loss of key personnel, economic and other conditions in markets in which we operate, the ability to successfully develop and finance a resort in Southwest Florida, 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 publicly update any forward-looking statements, whether as a result of future events, new information or otherwise.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There were no changes to our critical accounting policies and estimates, as of March 31, 2019, from those disclosed in the Consolidated Financial Statements and accompanying notes contained in our 2018 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to certain market risks, including commodity prices (specifically aircraft fuel). The adverse effects of changes in these markets could pose potential losses as discussed below. The sensitivity analysis provided does not consider 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, as aircraft fuel expense represented 27.6 percent of our operating expenses for the three months ended March 31, 2019. Increases in fuel prices, or a shortage of supply, could have a material impact on our operations and operating results. Based on our fuel consumption for the three months ended March 31, 2019, a hypothetical ten percent increase in the average price per gallon of fuel would have increased fuel expense by approximately $9.5 million. We have not hedged fuel price risk for many years.


25

Interest Rates

As of March 31, 2019, we had $1.1 billion in variable-rate debt, including current maturities and without reduction for related costs. A hypothetical 100 basis point change in market interest rates for the three months ended March 31, 2019, would have affected interest expense by approximately $2.1 million.

As of March 31, 2019, we had $204.8 million of fixed-rate debt, including current maturities and without reduction for related costs. A hypothetical 100 basis point change in market interest rates would not impact interest expense on our fixed rate debt as of such date.

Item 4. Controls and Procedures

As of March 31, 2019, under the supervision and with the participation of our management, including our chief executive officer ("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 and is accumulated and communicated to the Company’s management, including the CEO and the CFO, as appropriate to allow timely decisions regarding required disclosure.

Except as noted below, there were no changes in our internal control over financial reporting that occurred during the quarter ending March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Effective January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842). Although the New Lease Standard will not have a material impact on our ongoing net income, changes were made to relevant business processes and the related control activities in order to monitor and maintain appropriate controls over financial reporting. The operating effectiveness of these changes will be evaluated as part of our annual assessment on the effectiveness of internal controls over financial reporting.

 PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to certain 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 impact on our financial position, liquidity or results of operations.

Item 1A.  Risk Factors

We have evaluated our risk factors and determined there are no changes to those set forth in Part I, Item 1A of our Annual Report on Form 10-K.


26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Our Repurchases of Equity Securities

The following table reflects the repurchases of our common stock during the first quarter 2019:

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)
January
 
459

 
$
123.09

 
None
 
 
February
 
12,921

 
136.87

 
None
 
 
March
 
3,565

 
126.82

 
None
 
 
Total
 
16,945

 
$
134.38

 
 
 
$
100,000

(1) Includes 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 the 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.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None


27

Item 6. Exhibits
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
(1) Incorporated by reference to Exhibit filed with Registration Statement #333-134145 filed by the Company with the Commission and amendments thereto.
(2) Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Commission on April 25, 2018.
(3) Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed with the Commission on February 5, 2019
(4) Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the Commission on February 5, 2019.
(5) Portions of the indicated document have been omitted pursuant to a request for 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.


28


SIGNATURES

Pursuant to the requirements 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.

 
 
ALLEGIANT TRAVEL COMPANY
 
 
 
 
 
 
Date:
May 7, 2019
By:
/s/ Gregory Anderson
 
 
Gregory Anderson, as duly authorized officer of the Company (Chief Financial Officer) and as Principal Financial Officer

29