10-K 1 algt201310kdoc.htm 10-K ALGT 2013 10K Doc


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, 2013
 
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to            

Commission File Number 001-33166

Allegiant Travel Company
(Exact Name of Registrant as Specified in Its Charter)

Nevada
20-4745737
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
8360 S. Durango Drive,
 
Las Vegas, Nevada
89113
(Address of Principal Executive Offices)
(Zip Code)

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

(Former name, former address and former fiscal year if changed since last report)

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. 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):


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
 
The aggregate market value of common equity held by non-affiliates of the registrant as of June 30, 2013, was approximately $1,600,000,000 computed by reference to the closing price at which the common stock was sold on the Nasdaq Global Select Market on that date. This figure has been calculated by excluding shares owned beneficially by directors and executive officers as a group from total outstanding shares solely for the purpose of this response.

The number of shares of the registrant’s common stock outstanding as of the close of business on February 1, 2014 was 18,595,051. 
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 18, 2014, 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 69


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Allegiant Travel Company

Annual Report on Form 10-K
For the Year Ended December 31, 2013

INDEX

PART I
 
ITEM 1. Business
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Mine Safety Disclosures
 
 
PART II
 
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
 
 
PART III
 
ITEM 10. Directors, Executive Officers, and Corporate Governance
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
ITEM 14. Principal Accountant's Fees and Services
 
 
PART IV
 
ITEM 15. Exhibits and Financial Statement Schedules
Signatures

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PART I
Item 1.  Business
 
Overview
 
We are a leisure travel company focused on providing travel services and products to residents of small, underserved 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 service and product offerings which distinguish us from other travel companies.  We operate a low-cost passenger airline marketed primarily to leisure travelers in small 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 flying 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 travel services and products from us.

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 small city markets and popular leisure destinations. As of February 1, 2014, our operating fleet consisted of 53 MD-80 aircraft, seven Airbus A320 aircraft, three Airbus A319 aircraft and six Boeing 757-200 aircraft providing service on 225 routes to 99 cities.

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 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 tickets) for sale to our passengers.

Fixed fee contract air transportation.  We provide air transportation through fixed fee agreements and charter service on a year-round and ad-hoc basis.

Our principal executive offices are located at 8360 South Durango Drive, Las Vegas, Nevada 89113. 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 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 industry.  Our focus on the leisure customer allows us to eliminate the costly complexity burdening others in our industry in their goal to be all things to all customers, particularly most other airlines who target a business customer.

Traditional Airline Approach
 
Allegiant Approach
Focus on customers (business and leisure)
 
Focus on leisure traveler
Provide high frequency service from big cities
 
Provide low frequency service from small cities
Use smaller aircraft to provide connecting service from smaller markets through hubs
 
Use larger jet aircraft to provide nonstop service from small cities direct to leisure destinations
Sell through various intermediaries
 
Sell only directly to travelers
Offer flight connections
 
No connecting flights offered
Use code-share arrangements to increase passenger traffic
 
Do not use code-share arrangements

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We have established a route network with a national footprint, providing service on 225 routes between 86 small cities and 13 leisure destinations, and serving 39 states as of February 1, 2014.  In most of these cities, we provide service to more than one of our leisure destinations.  We currently provide service to the popular leisure destinations of Las Vegas, Nevada, Orlando, Florida, Phoenix, Arizona, Tampa/St. Petersburg, Florida, Los Angeles, California, Ft. Lauderdale, Florida, Punta Gorda, Florida, the San Francisco Bay Area, California, Honolulu, Hawaii, Maui, Hawaii and Palm Springs, California.  We currently provide service on a seasonal basis to San Diego, California, and Myrtle Beach, South Carolina. The geographic diversity of our route network protects us from regional variations in the economy and helps to 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 in our customer base.

As we have developed our 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 $45.73 in 2013.  We own and manage our own air reservation system which gives us the ability to modify or upgrade 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 in providing our customers with a variety of different travel services and products.

We believe the following strengths from our unique business model allow us to maintain a competitive advantage in the markets we serve:

Leisure customers in small cities

We believe small cities represent a large underserved market, especially for leisure travel.  Prior to the initiation of our service, leisure travelers from small city markets had limited desirable options to reach leisure destinations as existing carriers are generally focused on connecting business customers through their hub-and-spoke networks.  These limited options provide us with significant growth opportunities in these small city markets.  We believe our nonstop service, along with our low prices and leisure company relationships, make it attractive for leisure travelers to purchase our travel services and products.  The size of these markets 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 demand patterns.

By focusing on small cities, we believe we avoid the intense competition in high traffic domestic air corridors. In our typical small city market, travelers faced high airfares and cumbersome connections or long drives to major airports to reach our leisure destinations before we started providing service.  Based on published data from the U.S. Department of Transportation (“DOT”), we believe the initiation of our service stimulates demand as there is typically a substantial increase in traffic after we begin service on new routes. We believe our market strategy has had the benefit of not being hostile to either legacy carriers, whose historical focus has been connecting small cities to business markets with regional jets, or traditional low cost carriers (“LCCs”), which have tended to focus more on larger markets than the small city markets we serve.

Capacity management

We aggressively manage seat capacity to match leisure demand patterns.  The management of our seat capacity includes increasing utilization of our aircraft during periods of high leisure demand and decreasing utilization in low leisure demand periods.  During 2013, our system average block hours per aircraft per day, was 5.5 system block hours for the full year.  During our peak demand period in March we averaged 7.1 system block hours per aircraft per day while in September, our lowest month for demand, we averaged 3.9 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 have a seasonal adjustment to the frequency of our Bellingham-Palm Springs route from two flights per week during a period of low demand in the summer to six or more flights per week during a period of high demand in the winter.  With our ability to generate strong ancillary revenue and the ability to spread out our costs over a larger number of passengers, we price our fares and actively manage our capacity to target a 90 percent load factor which has allowed us to operate profitably throughout periods of high fuel prices and economic recessions.  Our low ownership cost aircraft facilitate our ability to adjust service levels quickly and maintain profitability during difficult economic times.

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 (“ASM”) or operating CASM was 10.33¢ and 10.37¢ in 2013 and 2012, respectively. Excluding the cost of

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fuel, our operating CASM was 5.60¢ for 2013 and 5.32¢ for 2012.  We continue to focus on maintaining low operating costs through the following tactics and strategies:
 
Cost-driven schedule.  We design our flight schedule to concentrate our aircraft each night in our crew bases.  This concentration allows us to better utilize personnel, airport facilities, aircraft, spare parts inventory, and other assets.  We can do this because we believe leisure travelers are generally less concerned about departure and arrival times than business travelers.  Therefore, we are able to schedule flights at times that enable us to reduce our costs but are desirable for our leisure customer base.

Low aircraft ownership costs.  We believe we properly balance low aircraft ownership costs and operating costs to minimize our total costs.  As of February 1, 2014, our operating fleet consists of 53 MD-80 series aircraft, seven Airbus A320 aircraft, three Airbus A319 aircraft and six Boeing 757-200 aircraft.  Our MD-80 aircraft have been substantially less expensive to acquire than newer narrow body aircraft and have been a reliable aircraft.  Our Boeing 757-200 aircraft allow us to serve longer haul routes which could not be reached with the MD-80 aircraft, while maintaining low aircraft ownership costs consistent with our business model. 
    
During 2013 we introduced used Airbus A320 series aircraft into our fleet. We purchased seven A320 Airbus aircraft and one A319 Airbus aircraft and acquired two additional A319 Airbus aircraft through operating leases. As of February 1, 2014, we have committed to purchase two additional A320 Airbus aircraft and entered into operating lease agreements for seven additional A319 Airbus aircraft to be delivered in 2014 and 2015. We believe the current environment to acquire high quality used Airbus aircraft is similar to the used aircraft market we experienced when we began adding MD-80 aircraft to our fleet in 2001.  We believe the decline in used Airbus aircraft market conditions has been driven by significant overproduction of classic engine option ("CEO") aircraft, restricted global capacity and refleeting strategies for new engine option ("NEO") narrow body aircraft by both air carriers and aircraft lessors. We believe the addition of these used Airbus A320 series aircraft will allow us to maintain low aircraft ownership costs consistent with our business model.

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 overbook our flights; 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 to avoid the fees charged by travel web sites (such as Expedia, Orbitz or Travelocity) and traditional global distribution systems (“GDS”) (such as Sabre or Worldspan). Our customers can only purchase travel at our airport ticket counters or, for a fee, through our telephone reservation center or website.  The purchase of travel through our website is the least expensive form of distribution for us and accounted for 92 percent of our scheduled service revenue during 2013. We believe our percentage of website sales is the highest in the U.S. airline industry. Further, we are 100 percent ticketless, which saves printing, postage, and back-office processing expenses.

Small city market airports.  Our business model focuses on residents of small cities in the United States.  Typically the airports in these small 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 small cities provide marketing support which results in lower marketing costs.

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 historically bundled in their product offering. We offer a simple base product at an attractive low fare which enables us to stimulate demand and we generate incremental revenue as customers pay additional amounts for 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 items they value.

Our third party product offerings allow our customers the opportunity to purchase hotels, rental cars, show tickets, and other attractions.  Our third party offerings are available to customers based on our agreements with various premier travel and leisure companies.  For example, we have direct contracts with more than 525 hotel and casino resort properties throughout the country, which allow us to provide hotel rooms in packages sold to our customers.  In addition, we have an exclusive agreement with Enterprise Holdings Inc. for the sale of rental cars packaged with air travel.  Pricing of most third party products is based

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on a net-pricing model. The pricing of each product and our margin can be adjusted based on customer demand as 100 percent of our customers purchase travel through our booking engine without any intermediaries.

Closed distribution

Since approximately 92 percent of our scheduled service revenue was purchased directly through our website in 2013, we are able to establish direct relationships with our customers by utilizing their email addresses in our database. This information provides us multiple cost effective opportunities to market products and services, including at the time they purchase their travel, between the time they purchase and initiate their travel, and after they complete their travel. In addition, we market products and services to our customers during the flight. We believe the breadth of options we offer allows us to provide a “one-stop” shopping solution to enhance our customer's travel experience.

Strong financial position

As of December 31, 2013, we had $387.1 million of unrestricted cash, cash equivalents and investment securities, total debt of $234.3 million and a debt to total capitalization ratio of 38.3 percent.  The majority of our debt is from a $125.0 million senior secured term loan facility closed in 2011 (“Term Loan”).  Our ability to generate operating cash flows with our capital structure has allowed us to grow profitably with generation of net income in 11 consecutive years.  We believe we have more than adequate resources to invest in the growth of our fleet, information technology infrastructure and development, while meeting our short-term obligations.

Marketing and Distribution

Our website is our primary distribution method, which provided 92 percent of scheduled service air transportation bookings for 2013.  We also sell through our call center and at our airport ticket counters.  This distribution mix creates significant cost savings and enables us to continue to build loyalty with our customers through increased interaction with them.  

We do not sell through Expedia, Travelocity, Orbitz or any other online travel agency nor is our product displayed and sold through the global distribution systems which include Sabre, Galileo, Worldspan and Amadeus. This 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. The direct relationship enables us to engage continuously in communications with our customers which we believe will result in substantial benefits over time.  With our own automation system, we have the ability to continually change our ancillary product offerings and pricing points which allows us to experiment 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 global distribution systems.

We continue to make progress on our automation projects including the upgrade of our current distribution platform.  We have fully integrated all internet traffic to our new booking engine.  We expect the continuous improvement to our new website and other automation enhancements will create additional revenue opportunities by allowing us to capitalize on customer loyalty with additional product offerings.

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, 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, LCCs, regional airlines and new entrant airlines. Many of these airlines are larger, have significantly greater financial resources and serve more routes than we do. In a limited number of cases, following our entry into some markets, 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 small city strategy has reduced the intensity of competition we might otherwise face.   As of February 1, 2014, we are the only domestic scheduled carrier operating out of the Orlando Sanford International Airport, Phoenix-Mesa Gateway Airport, St. Petersburg-Clearwater International Airport, and Punta Gorda Airport.  Although no other domestic scheduled carriers operate in these four airports, virtually all U.S. airlines serve the nearby major airports serving Orlando,

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Phoenix, Tampa and Ft. Myers.  On the other hand, virtually all U.S. airlines serve Las Vegas, Los Angeles, Ft. Lauderdale, the San Francisco Bay area, San Diego and Honolulu, as a result, there is potential for increased competition on these routes.

As of February 1, 2014, we face mainline competition on only 23 of our 225 routes.  Our entrance into the Hawaii market in 2012 and the recent addition of service to a number of new small cities on the east coast increased the amount of routes on which we face direct competition.  We compete with Southwest on 12 routes; six routes into Las Vegas, one route into Phoenix, two routes into Orlando, two routes into Tampa and one route into Ft. Myers.  We compete with Frontier on one route into Orlando and with American on three routes into Phoenix.  The introduction of our Hawaii service has resulted in competition with Alaska Airlines and Hawaiian Airlines.  We compete with Alaska Airlines on two routes into Hawaii (Honolulu and Maui) and on one route into Las Vegas.  We compete with Hawaiian Airlines on three routes into Honolulu, including our Los Angeles-Honolulu route, where we also compete with American, Delta and United.  We compete with Delta on one route into Orlando and one into Ft. Myers. We also compete on one route with Spirit (Plattsburgh-Ft. Lauderdale).  In addition, we compete with smaller regional jet aircraft on several routes, including Fresno-Las Vegas (United), Eugene-Los Angeles (American), Medford-Los Angeles (United), Northwest Arkansas-Los Angeles (American), Wichita-Los Angeles (United).
 
Indirectly, we compete with Southwest/Airtran, American, Delta and other carriers that provide nonstop service to our leisure destinations from airports near our small city markets. For example, we fly from Bellingham, Washington, which is a two-hour drive from Seattle-Tacoma International Airport, where travelers can access nonstop service to Las Vegas, Los Angeles, Phoenix, San Diego, Palm Springs and San Francisco on various other carriers. We also face indirect competition from legacy carriers offering hub-and-spoke connections to our markets. For example, travelers can travel to Las Vegas from Peoria on United, American or Delta, although all of these legacy carriers currently utilize regional aircraft to access their hubs and mainline jets to access Las Vegas. Legacy carriers offering hub-and-spoke service with connecting flights tend to charge substantially higher, restrictive fares and have a much longer elapsed time of travel.
 
We also face indirect competition from automobile travel in our short-haul markets, primarily in our Florida leisure destinations. We believe our low cost pricing model and the convenience of air transportation help us compete favorably against automobile travel.
 
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.
 
Aircraft Fuel
 
Fuel is our largest operating expense. 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 do not currently use financial derivative products to hedge our exposure to jet fuel price volatility. 
 
In an effort to reduce our fuel costs, we have a wholly-owned subsidiary which entered into a limited liability company operating agreement with an affiliate of Orlando Sanford International Airport to engage in contract fueling transactions for the provision of aviation fuel to airline users at that airport. In addition, we have invested in fuel storage units and fuel transportation facilities involved in the fuel distribution process. By reason of these activities, we could potentially incur material liabilities, including possible environmental liabilities, to which we would not otherwise be subject.

Employees

As of December 31, 2013, we employed 2,065 full-time equivalent employees, which consisted of 1,894 full-time and 341 part-time employees.  Full-time equivalent employees consisted of 373 pilots, 629 flight attendants, 159 airport operations personnel, 214 mechanics, 130 reservation agents, 37 flight dispatchers and 523 management and other personnel.
 
Salaries and benefits expense represented approximately 19 percent of total operating expenses during 2013 and 17 percent during 2012 and 2011.  We have three employee groups which have voted for union representation, consisting of approximately 50 percent of our total employees.  We are in various stages of negotiations for collective bargaining agreements with the labor organizations representing these employee groups.

Our relations with these labor organizations 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

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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 table below identifies the status of these initial collective bargaining agreements:

 
 Employee Group   
 
Representative   
 
Status of Agreement
 
 
 
 
 
Pilots   
 
International Brotherhood of Teamsters, Airline Division
 
Elected representation in August 2012.  In negotiation.
Flight Attendants
 
Transport Workers Union
 
Elected representation in December 2010.  In mediation phase of the negotiation process.
Flight Dispatchers
 
International Brotherhood of Teamsters, Airline Division
 
Elected representation in December 2012.

In addition, if we are unable to reach a labor agreement with these employee groups, these employee groups may seek to institute work interruptions or stoppages.  We have never previously experienced any work interruptions or stoppages from our nonunionized employee groups or from these employee groups which have voted for union representation.
  
Maintenance

We have a Federal Aviation Administration ("FAA") approved maintenance program, which is administered by our maintenance department headquartered in Las Vegas. Consistent with one of our core values, safety, all 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, heavy maintenance, and component and engine overhaul and repair. Scheduled line maintenance is generally performed by our personnel. We contract with outside organizations to provide heavy maintenance, component and engine overhaul and repair. We have chosen not to invest in facilities or equipment to perform our own heavy 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.

 Insurance
 
We maintain insurance policies we believe are of types customary in the industry and as required by the DOT and are in amounts we believe are adequate to protect us against material loss. The policies principally provide coverage for public liability, passenger liability, baggage and cargo liability, property damage, including coverages for loss or damage to our flight equipment, directors and officers, and workers’ compensation insurance. There is no assurance, however, that the amount of insurance we carry will be sufficient to protect us from material 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 investigate and institute proceedings to enforce its regulations 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 a DOT certificate of public convenience and necessity authorizing us to engage in (i) 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), and (ii) charter air transportation of passengers, property and mail on a domestic and international basis. We also

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hold DOT authority to engage in scheduled air transportation of passengers, property and mail between Las Vegas, Cabo San Lucas and Hermosillo, Mexico (a non "open skies" country).
 
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 and to modify, suspend or revoke our authority to provide air transportation, or 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 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 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.
 
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. The statutory authority for 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. In 2012, Congress adopted the FAA Modernization and Reform Act of 2012, which extends most commercial aviation taxes through September 30, 2015. In addition to FAA-related taxes, there are additional federal fees related to the Department of Homeland Security. These taxes do not need to be reauthorized periodically. However, in an effort to reduce the federal deficit and generate more government revenue, Congress approved legislation in December 2013 that will generate more net federal revenue by (i) increasing the Transportation Security Fee paid by passengers from $2.50 per passenger segment to $5.60 per one-way passenger trip, effective July 2014; and (ii) eliminating a security fee paid by airlines directly, called the Aviation Security Infrastructure Fee, effective October 2014. In 2014, Congress may consider legislation that could increase one or more of the passenger-paid fees used to support the operations of U.S. Customs and Border Protection (“CBP”). Grants to airports and/or airport bond financing may also be affected through future deficit reduction legislation, which could result in higher fees, rates, and charges at many of the airports the Company serves.

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.
 

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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 a citizen 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 and at least two-thirds of our board of directors and other managing officers must be U.S. citizens, and that not more than 25 percent of our voting stock may be 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 Environmental Protection Agency (“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.
 
We are responsible for collection and remittance of federally imposed and federally approved taxes and fees applicable to air transportation passengers. We believe we are in compliance with these requirements, and we intend to continue to comply with them.

Our labor relations are covered under Title II of the Railway Labor Act of 1926, as amended, and are subject to the jurisdiction of the National Mediation Board. 
 
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 small cities in which we operate have slot control, gate availability or curfews that pose meaningful limitations on our operations. However, some small city airports 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. 

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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.

Item 1A. Risk Factors

Investors 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
 
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 approximately 45.8 percent, 48.7 percent and 47.7 percent during 2013, 2012 and 2011, 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. Because of 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 significant negative impact on our operating costs.  A fuel supply shortage or higher fuel prices could possibly result in curtailment 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.
 
Increased labor costs could result in the long-term from unionization and labor-related disruptions.
 
Labor costs constitute a significant percentage of our total operating costs. In general, unionization has increased costs in the airline industry. We have three employee groups (pilots, flight attendants and flight dispatchers) who have elected for union representation by labor organizations.  We are currently in negotiations with these labor organizations for collective bargaining agreements with our flight attendant and pilot employee groups.  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.

The International Brotherhood of Teamsters (“IBT”) filed suit against us in November 2013 on behalf of the Allegiant Air pilots. The lawsuit seeks injunctive and make whole relief, primarily as a result of the unilateral institution of new work rules in connection with the implementation of a new flight crew scheduling system to comply with FAA pilot flight, duty and rest regulations that became effective in January 2014. The IBT claims this violated an obligation under the Railway Labor Act (“RLA”) to maintain the status quo during the course of labor negotiations, arguing that the existing pilot work rules are a collective bargaining agreement that was reached between us and the Allegiant Air Pilot Advocacy Group (“AAPAG”), which IBT contends was its predecessor as the collective bargaining representative for the Allegiant Air pilots. Although we do not believe the RLA imposes any restriction on the right to make the disputed changes because, among other reasons, AAPAG was not a "representative" under the RLA and the pilot work rules did not constitute a collective bargaining agreement, and although we do not believe an injunction or any other relief would be appropriate, there are inherent risks in any litigation and we cannot guarantee there will not be material consequences from this lawsuit.
 
Unfavorable economic conditions may adversely affect travel from our small city 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

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travel. Unfavorable economic conditions could impact demand for airline travel in our small city markets or 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.

Our reputation and financial results could be harmed in the event of an accident or new regulations affecting aircraft in our fleet. 

As of February 1, 2014, our operating fleet consists of 53 MD-80 series aircraft, seven Airbus A320 aircraft, three Airbus A319 aircraft and six Boeing 757-200 aircraft. All of our aircraft were acquired used and range from 7 to 29 years from their manufacture date at February 1, 2014.

An accident involving one of our aircraft, even if fully insured, could cause a public perception that we are less safe or reliable than other airlines, which would harm our business. There is no assurance, however, 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.

The Federal Aviation Administration (“FAA”) could suspend or restrict the use of our aircraft in the event of actual or perceived mechanical problems, whether involving our aircraft or another U.S. or foreign airline’s aircraft, while it conducts its own investigation. Our business could also be significantly harmed if the public avoids flying our aircraft due to an adverse perception of the aircraft we utilize or associated engine types because of safety concerns or other problems, whether real or perceived, or in the event of an accident involving these aircraft or associated engine types.
 
Covenants in our senior secured term loan facility could limit how we conduct our business, which could affect our long-term growth potential.

As of December 31, 2013, we owed $121.2 million under a senior secured term loan facility (the “Term Loan”).  The Term Loan contains restrictive covenants that, among other things, limit:

· Capital expenditures
· Incurrence of future indebtedness
· Mergers and acquisitions
· Certain investments
 
These restrictive covenants could potentially limit how we conduct our business and could affect our ability to raise additional debt financing in the event we do not choose to prepay the debt with our cash resources.
 
The addition of a new aircraft type could increase our costs and increase the complexity of our operations.

During 2013, we added ten used Airbus A320 series aircraft into our operating fleet. The addition of the Airbus A320 series aircraft type to our operating fleet could increase our costs and increase the complexity of our operations, flight schedules, parts provisioning and maintenance and repair program. We expect to be active in the secondary market for the purchase or lease of additional used Airbus A320 series aircraft. There is no assurance we will be able to acquire additional used Airbus aircraft on acceptable terms.

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, our telecommunication systems, our website and other automated systems. Our continuing work on enhancing the capabilities of our automation 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 or computer viruses.  Although we have implemented security measures and have in place disaster recovery plans, we cannot assure investors these measures are adequate to prevent disruptions.  Substantial or repeated website, reservations system or telecommunication systems failures could reduce the attractiveness of our services. Any disruption in these systems could result in the loss of important data, loss of revenue, increase in expenses and generally harm our business.
 

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We receive, retain, and transmit certain personal information about our customers. Our online 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 data, a compromise of our physical and network security systems through a cyber security attack, could create a risk that our customers’ personal information might be obtained by unauthorized persons. A compromise in our security systems could adversely affect our reputation and disrupt operations and could also result in litigation or the imposition of penalties. In addition, it could be costly to remediate. In addition, the way businesses handle customer data is increasingly subject to 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.

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 require additional and enhanced maintenance inspections for older aircraft. These regulations include Aging Aircraft Airworthiness Directives, which typically increase as an aircraft ages and vary by aircraft or engine type depending on the unique characteristics of each aircraft and/or engine.
 
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 believe our aircraft are and will continue to be mechanically reliable. We cannot assure our aircraft will continue to be sufficiently reliable over longer periods of time. Furthermore, given the age of our fleet, any public perception that our aircraft are less than completely reliable could have an adverse effect on our bookings and profitability.
 
Our business is heavily dependent on the attractiveness of our leisure destinations and a reduction in demand for air travel to these markets could harm our business.
 
A substantial proportion of our scheduled flights have Las Vegas, Orlando, Phoenix, Tampa/St. Petersburg, Los Angeles, Ft. Lauderdale, Honolulu, Punta Gorda, or Oakland (the San Francisco Bay Area) 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, 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.
 
We rely on third parties to provide us with facilities 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 also gives us less control over costs and the efficiency, timeliness and quality of contract services.

We also rely on the owners of the aircraft under contract to be able to deliver aircraft in accordance with the terms of executed agreements and on a timely basis.  Our planned initiation of service with these aircraft could be adversely affected if the third parties fail to perform as contracted. 

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., our president and chief operating officer, Andrew C. Levy, and a small number of management and operating personnel. We do not currently maintain key-man life insurance on Mr. Gallagher or Mr. Levy. 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 small city markets could harm our business.
 
The airline industry is highly competitive. The small 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 markets, we are the only

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provider of nonstop service to our leisure destinations. It is possible other airlines will begin to provide nonstop services to and from these markets or otherwise target these markets. An increase in the amount of direct or indirect competition could harm our profitability.
 
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.
 
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 make significant expenditures.  FAA requirements cover, among other things, retirement of older aircraft, fleet integration of newer aircraft, security measures, collision avoidance 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. 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 January 2011, the FAA adopted aging-aircraft regulations applicable to all large commercial aircraft.  These rules obligate aircraft design approval holders (typically the aircraft manufacturer or its successor) to establish a limit of validity ("LOV") of the engineering data that supports the aircraft’s structural maintenance program, demonstrate that widespread fatigue damage will not occur in aircraft of that type prior to reaching LOV, and establish or revise airworthiness limitations applicable to that aircraft type to include LOV.  Once an LOV has been established for a given aircraft type, LOV-related maintenance actions must be incorporated into the operator’s maintenance program, and commercial operation of the aircraft beyond the LOV is prohibited unless an extended LOV is obtained for the aircraft.  In August 2012, the FAA approved an LOV, established by Boeing, for the MD-80 aircraft of 110,000 cycles (a cycle consists of one takeoff and one landing) or 150,000 flight hours, whichever is reached first.  Under these parameters, we do not believe the LOV rules will limit our use of MD-80 aircraft before we decide to retire them from our fleet in years to come as the average number of cycles on our MD-80-series fleet was approximately 35,800 per aircraft as of February 1, 2014, and the highest number of cycles on any aircraft as of that date was approximately 50,500.  In addition, we historically operate approximately 1,000 cycles per aircraft per year. In the case of our Airbus and Boeing 757 aircraft, establishment of LOV values generally similar to the above is anticipated, with a deadline of January 2016 to incorporate the resulting maintenance program revisions. It is not yet possible to predict the future cost of complying with aging aircraft requirements.
 
In December 2011, in response to federal legislation requiring that the FAA adopt updated regulations regarding flight crewmember duty and rest requirements, the FAA published new regulations on that topic.  Based on internal assessments of these new rules (Part 117 of the FAA regulations), we do not anticipate significant operational or financial impact of the regulations which took effect on January 4, 2014.

In April 2011, the DOT adopted revisions and expansions to a variety of its consumer-protection regulations.  Among other changes, the new rules (all of which became effective in early 2012) substantially reduce flexibility concerning airline advertising and sales practices, including on websites.  These regulations have curtailed our ability to advertise, price and sell our services in the particular manner we have developed and found most advantageous, forcing a more homogenized industry approach to advertising and sales.  We could be subject to fines or other enforcement actions if the DOT believes we are not in compliance with these rules.  Even if our practices are found to be in compliance with the DOT rules, we could incur substantial costs defending our practices.  In addition, the DOT has announced its intention to propose additional new consumer protection regulations which could impact our costs and revenues if and when the new regulations become effective.
 
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. 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 and additional costs may result.


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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 if this or any similar legislation will pass the Congress or, if enacted into law, how it would apply to the airline industry. In addition, the Environmental Protection Agency (EPA) has concluded that current and projected concentrations of greenhouse gases in the atmosphere threaten public health and welfare. Although legal challenges and additional legislative proposals are expected, the finding could ultimately result in strict regulation of commercial aircraft emissions, 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 (a specialized agency of the United Nations) may become effective within several years.  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. 
  
In respect of aging aircraft, crewmember duty and rest, 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.
 
Airlines are often affected by factors beyond their control, including air traffic congestion, weather conditions, increased security measures and the outbreak of disease, 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 cancelled 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. An outbreak of a disease that affects travel behavior, such as severe acute respiratory syndrome (SARS) or H1N1 virus (swine flu), 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.
 
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
general and industry-specific economic conditions
changes in financial estimates or recommendations by securities analysts
sales of our common stock or other actions by investors with significant shareholdings
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.
 

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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 more than 10 percent 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.
 
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.
 
The value of our common stock may be negatively affected by additional issuances of common stock or preferred stock by us and general market factors.
 
Future issuances or sales of our common stock or any issuances of convertible preferred stock by us will likely be dilutive to our existing common stockholders. Future issuances or sales of common or preferred stock by us, or the availability of such stock for future issue or sale, could have a negative impact on the price of our common stock prevailing from time to time. Sales of substantial amounts of our common stock in the public or private market, a perception in the market that such sales could occur, or the issuance of securities exercisable or convertible into our common stock, could also adversely affect the prevailing price of our common stock.

Substantial sales of our common stock could cause our stock price to fall.
 
If our existing stockholders sell a large number of shares of our common stock or the public market perceives existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. All of our outstanding shares are either freely tradable, without restriction, in the public market or eligible for sale in the public market at various times, subject, in some cases, to volume limitations under Rule 144 of the Securities Act of 1933, as amended.
 
We cannot predict whether future sales of our common stock or the availability of our common stock for sale will adversely affect the market price for our common stock or our ability to raise capital by offering equity securities.

Item 1B.  Unresolved Staff Comments
 
Not Applicable. 



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Item 2.  Properties
 
Aircraft
 
As of December 31, 2013, our total aircraft fleet consisted of 54 MD-80 aircraft, six Boeing 757-200 aircraft, three Airbus A319 aircraft, and seven Airbus A320 aircraft.  During 2013, we placed into service five owned Airbus A320 aircraft, two leased Airbus A319 aircraft and one owned Airbus A319 aircraft. We retired three MD-80 aircraft and placed in temporary storage two MD-80 aircraft. We expect to return the two MD-80 aircraft out of temporary storage and place them in revenue service during the first quarter of 2014 once modification to a 166 seat configuration is complete. The following table summarizes our total aircraft fleet as of December 31, 2013:
 
Aircraft Type
 
Owned (1)
 
Leased
 
Total
 
Seating Capacity
(per aircraft)
 
Average Age
in Years
MD-88/82/83 (2)
 
54

 

 
54

 
150/166

 
24.0
B757-200
 
6

 

 
6

 
223

 
20.8
A319
 
1

 
2

 
3

 
156

 
9.2
A320 (3)
 
7

 

 
7

 
177

 
13.2
Total aircraft
 
68

 
2

 
70

 
 

 
 
 
(1)
All of our owned aircraft are encumbered.  Refer to “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 5 – Long-Term Debt” for discussion of our notes payable and senior secured term loan facility.
(2)
Of the 54 MD-80 aircraft, 52 were in revenue service and two were in temporary storage. The two MD-80 aircraft will be removed from temporary storage and placed in revenue service during the first quarter of 2014 once modification to a 166 seat configuration is complete. One MD-80 aircraft was retired on February 1, 2014. During 2013, we continued our MD-80 seat reconfiguration program.  As of December 31, 2013, 51 of our 52 MD-80 aircraft in service have 166 seats and one aircraft has 150 seats.
(3)
Of the seven Airbus A320 aircraft at December 31, 2013, two were being prepared for revenue service. As of February 1, 2014 these two Airbus A320 aircraft had been placed in revenue service.

As of December 31, 2013, we had entered into lease agreements for seven additional Airbus A319 aircraft and purchase agreements for two additional Airbus A320 aircraft.  Based on scheduled delivery dates, these used aircraft will have an average age of approximately 9.6 years at induction into the fleet.  The table below provides the expected number of operating aircraft at the end of each respective year based on scheduled deliveries of aircraft under contract.
 
 
 
Number of aircraft at end of year
 
 
2014
 
2015
MD-80
 
53

 
53

B757-200
 
6

 
6

A319
 
4

 
10

A320
 
7

 
9

Total
 
70

 
78


The following table shows the age range for each aircraft type in our fleet as well as an average age per aircraft type as of February 1, 2014:
 
As of February 1, 2014
 
Age range (years)
 
Average age (years)
MD-80
18-28
 
24.1

757
20-22
 
20.9

A319
7-10
 
9.3

A320
13-14
 
13.3


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Ground Facilities
 
We lease facilities at the majority of our leisure destinations and several of the other airports we serve. Our leases for terminal passenger services facilities, which include ticket counter and gate space, and operations support areas, generally have a term ranging from month-to-month to two years and may be terminated with a 30 to 60 day notice. We have also entered into use agreements at each of the airports we serve that 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 at each of the major leisure destinations we serve.  In addition, we have an operational base in Wendover, Nevada to support our fixed fee flying under our agreement with Peppermill Resorts Inc. and an operational base in Bellingham, Washington.  During 2013, we established operational bases at Oakland International Airport and Punta Gorda Airport, which required the leasing of additional facilities to support operations.  We served these airports prior to the establishment of these operational bases.

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 the McCarran International Airport, Orlando Sanford International Airport and the Phoenix-Mesa Gateway Airport for our primary line maintenance operations. We also lease additional warehouse space in Las Vegas, Sanford and Mesa for aircraft parts and supplies.

The following details the airport locations we utilize as operational bases:

Airport
 
Location
 
 
 
McCarran International Airport
 
Las Vegas, Nevada
Orlando Sanford International Airport
 
Orlando, Florida
Phoenix-Mesa Gateway Airport
 
Mesa, Arizona
St. Petersburg-Clearwater International Airport
 
St. Petersburg, Florida
Ft. Lauderdale-Hollywood International Airport
 
Ft. Lauderdale, Florida
Oakland International Airport
 
Oakland, California
Punta Gorda Airport
 
Punta Gorda, Florida
Honolulu International Airport
 
Honolulu, Hawaii
Bellingham International Airport
 
Bellingham, Washington
Wendover Airport
 
Wendover, Nevada

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 lease approximately 70,000 square feet of space under a lease that expires in April 2018 with an early termination option exercisable by us in May 2015. We also lease approximately 10,000 square feet of office space in a building adjacent to our corporate offices which is utilized for training and other corporate purposes.  In addition to base rent, we are also responsible for our share of common area maintenance charges. In both leases, the landlord is a limited liability company in which our Chief Executive Officer owns a significant interest as a non-controlling member.

During the second quarter 2013, we purchased approximately 10 acres of property in northwest Las Vegas on which there are five office buildings containing approximately 130,000 square feet of office space. The total price for the purchase was approximately $12.3 million. We expect to begin to move our corporate headquarters to the new facility after improvements to the space are completed.

Item 3.  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 effect on our financial position, liquidity or results of operations.

19




Item 4.  Mine Safety Disclosures
 
Not applicable.


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. On February 1, 2014, the last sale price of our common stock was $91.07 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
2013
 
 
 
 
 1st Quarter
 
$
89.46

 
$
72.17

 2nd Quarter
 
$
108.56

 
$
82.79

 3rd Quarter
 
$
109.72

 
$
91.06

 4th Quarter
 
$
114.77

 
$
96.69

2012
 
 

 
 

 1st Quarter
 
$
57.76

 
$
47.32

 2nd Quarter
 
$
71.42

 
$
54.20

 3rd Quarter
 
$
75.93

 
$
61.63

 4th Quarter
 
$
77.97

 
$
63.40

 
As of February 1, 2014, there were approximately 153 holders of record of our common stock. We believe that a substantially larger number of beneficial owners hold shares of our common stock in depository or nominee form.
 
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, 2013:
 
 
 
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)
 
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
 
Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (b)
Equity compensation plans approved by security holders
 
281,631

 
$
53.93

 
1,373,607

Equity compensation plans not approved by security holders
 
None

 
N/A

 
None

Total
 
281,631

 
$
53.93

 
1,373,607

 
(a)
The shares shown as being issuable under equity compensation plans approved by our security holders excludes restricted stock awards as these shares are deemed to have been issued. In addition to the above, there were 145,247 shares of nonvested restricted stock as of December 31, 2013.
(b)
The shares shown as remaining available for future issuance under equity compensation plans is reduced for cash-settled stock appreciation rights (“SARs”).  Although, these cash-settled SARs will not result in the issuance of shares, the number of cash-settled SARs awarded reduces the number of shares available for other awards.


20


Dividend Policy
 
On November 14, 2013, our Board of Directors declared a special cash dividend of $2.25 per share on our outstanding common stock payable to stockholders of record on December 13, 2013.  On January 3, 2014, we paid cash dividends of $41.8 million to these stockholders.

We paid special cash dividends of $2.25 per share in 2014, $2.00 per share in 2012, and $0.75 per share in 2010. We do not have a formal dividend policy. Our Board of Directors periodically considers the payment of dividends based on our results of operations, cash flow generation, liquidity, capital commitments, loan covenant compliance and other relevant factors.

Our Term Loan limits the amount of restricted payments, including cash dividends, which may be paid.  In November 2012, we entered into an amendment to our Term Loan which increased the available amount for restricted payments and other company expenditures.  As of December 31, 2013, the limitation is not material based on the amount of cash dividends paid in recent years.
  
Our Repurchases of Equity Securities
 
The following table reflects our repurchases of our common stock during the fourth quarter of 2013: 
 
ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of
Shares Purchased as Part of Publicly
Announced Plans or Programs
 
Approximate Dollar Value of Shares that
May Yet be Purchased
Under the Plans or
Programs (1)
October 2013
 
None

 
N/A

 
None
 
$
43,286,244

November 2013
 
None

 
N/A

 
None
 
$
43,286,244

December 2013
 
32,815

 
$
105.82

 
32,815
 
$
39,813,611

Total
 
32,815

 
$
105.82

 
32,815
 
$
39,813,611

 
(1)
Represents the remaining dollar value of open market purchases of our common stock which has been authorized by our Board of Directors under a share repurchase program. In April 2013, our Board of Directors increased the authorization to $100,000,000 of stock repurchases. There is no expiration date for the program.

Stock Price Performance Graph
 
The following graph compares the cumulative total stockholder return on our common stock with the cumulative total return on the Nasdaq Composite Index and the AMEX Airline Index for the period beginning on December 31, 2008 and ending on December 31, 2013.  The graph assumes an investment of $100 in our stock and the two indices, respectively, on December 31, 2008, and further assumes the reinvestment of all dividends. Stock price performance, presented for the period from December 31, 2008 to December 31, 2013, is not necessarily indicative of future results.


21


 
 
12/31/2008
 
12/31/2009
 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
ALGT
 
$
100.00

 
$
97.12

 
$
102.92

 
$
111.37

 
$
156.80

 
$
227.38

Nasdaq Composite Index
 
$
100.00

 
$
143.89

 
$
168.22

 
$
165.19

 
$
191.47

 
$
264.84

AMEX Airline Index
 
$
100.00

 
$
139.32

 
$
193.82

 
$
133.72

 
$
182.40

 
$
287.51

 
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.


















22


Item 6.  Selected Financial Data
 
The following financial information for each of the five years ended December 31, 2013, has been derived from our consolidated financial statements. Investors should read 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 2013 classifications.
 
 
For the Year Ended December 31,
FINANCIAL DATA:
 
2013
 
2012
 
2011
 
2010
 
2009
Total operating revenue
 
$
996,150

 
$
908,719

 
$
779,117

 
$
663,641

 
$
557,940

Total operating expenses
 
841,413

 
776,415

 
693,673

 
558,985

 
435,687

Operating income
 
154,737

 
132,304

 
85,444

 
104,656

 
122,253

Total other expense
 
8,057

 
7,657

 
5,930

 
1,324

 
1,689

Income before income taxes
 
146,680

 
124,647

 
79,514

 
103,332

 
120,564

Net income
 
91,779

 
78,414

 
49,398

 
65,702

 
76,331

Net loss attributable to noncontrolling interest
 
(494
)
 
(183
)
 

 

 

Net income attributable to Allegiant Travel Company
 
$
92,273

 
$
78,597

 
$
49,398

 
$
65,702

 
$
76,331

Earnings per share to common stockholders(1):
 
 

 
 

 
 

 
 

 
 

Basic
 
$
4.85

 
$
4.10

 
$
2.59

 
$
3.36

 
$
3.81

Diluted
 
$
4.82

 
$
4.06

 
$
2.57

 
$
3.32

 
$
3.76

Cash dividends per share
 
$
2.25

 
$
2.00

 
$

 
$
0.75

 
$

Cash and cash equivalents
 
$
97,711

 
$
89,557

 
$
150,740

 
$
113,293

 
$
90,239

Investment securities
 
289,415

 
263,169

 
168,786

 
37,000

 
141,231

Total assets
 
930,191

 
798,194

 
706,743

 
501,266

 
499,639

Long-term debt (including capital leases)
 
234,300

 
150,852

 
146,069

 
28,136

 
45,807

Stockholders' equity
 
377,317

 
401,724

 
351,504

 
297,735

 
292,023

Operating margin %
 
15.5
%
 
14.6
%
 
11.0
%
 
15.8
%
 
21.9
%
Cash provided by (used in):
 
 

 
 

 
 

 
 

 
 

Operating activities
 
$
196,888

 
$
176,772

 
$
129,911

 
$
97,956

 
$
131,674

Investing activities
 
(192,832
)
 
(208,827
)
 
(208,223
)
 
6,782

 
(97,213
)
Financing activities
 
4,098

 
(29,128
)
 
115,759

 
(81,684
)
 
(41,375
)
 
(1)
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 and Diluted earnings per share for the periods presented.

23


 
 
For the Year Ended December 31,
OPERATING DATA:
 
2013
 
2012
 
2011
 
2010
 
2009
Total system statistics:
 
 
 
 
 
 
 
 
 
 
Passengers
 
7,241,063

 
6,987,324

 
6,175,808

 
5,903,184

 
5,328,436

Revenue passenger miles (RPMs) (thousands)
 
7,129,416

 
6,514,056

 
5,640,577

 
5,466,237

 
4,762,410

Available seat miles (ASMs) (thousands)
 
8,146,135

 
7,487,276

 
6,364,243

 
6,246,544

 
5,449,363

Load factor
 
87.5
%
 
87.0
%
 
88.6
%
 
87.5
%
 
87.4
%
Operating revenue per ASM (RASM)* (cents)
 
12.23

 
12.14

 
12.24

 
10.62

 
10.24

Operating expense per ASM (CASM) (cents)
 
10.33

 
10.37

 
10.90

 
8.95

 
8.00

Fuel expense per ASM (cents)
 
4.73

 
5.05

 
5.20

 
3.90

 
3.03

Operating CASM, excluding fuel (cents)
 
5.60

 
5.32

 
5.70

 
5.05

 
4.97

Operating expense per passenger
 
$
116.20

 
$
111.12

 
$
112.32

 
$
94.69

 
$
81.77

Fuel expense per passenger
 
$
53.25

 
$
54.13

 
$
53.54

 
$
41.28

 
$
30.97

Operating expense per passenger, excluding fuel
 
$
62.95

 
$
56.99

 
$
58.78

 
$
53.41

 
$
50.80

ASMs per gallon of fuel
 
67.62

 
63.00

 
59.10

 
58.90

 
58.30

Departures
 
51,083

 
53,615

 
49,360

 
47,986

 
43,795

Block hours
 
125,449

 
124,610

 
113,691

 
111,739

 
98,760

Average stage length (miles)
 
933

 
872

 
858

 
874

 
836

Average number of operating aircraft during period
 
62.9

 
60.2

 
52.2

 
49.0

 
42.7

Average block hours per aircraft per day
 
5.5

 
5.7

 
6.0

 
6.2

 
6.3

Full-time equivalent employees at end of period
 
2,065

 
1,821

 
1,595

 
1,614

 
1,569

Fuel gallons consumed (thousands)
 
120,476

 
118,839

 
107,616

 
106,093

 
93,521

Average fuel cost per gallon
 
$
3.20

 
$
3.18

 
$
3.07

 
$
2.30

 
$
1.76

Scheduled service statistics:
 
 

 
 

 
 

 
 

 
 

Passengers
 
7,103,375

 
6,591,707

 
5,776,462

 
5,609,852

 
4,919,826

Revenue passenger miles (RPMs) (thousands)
 
7,015,108

 
6,220,320

 
5,314,976

 
5,211,663

 
4,477,119

Available seat miles (ASMs) (thousands)
 
7,892,896

 
6,954,408

 
5,797,753

 
5,742,014

 
4,950,954

Load factor
 
88.9
%
 
89.4
%
 
91.7
%
 
90.8
%
 
90.4
%
Departures
 
48,389

 
46,995

 
42,586

 
41,995

 
37,115

Average passengers per departure
 
147

 
140

 
136

 
134

 
133

Average seats per departure
 
168.4

 
159.7

 
150.8

 
154.3

 
157.0

Block hours
 
120,620

 
113,671

 
101,980

 
101,242

 
87,939

Yield (cents)
 
9.28

 
9.42

 
9.69

 
8.21

 
7.73

Scheduled service revenue per ASM (PRASM) (cents)
 
8.25

 
8.43

 
8.88

 
7.45

 
6.99

Total ancillary revenue per ASM* (cents)
 
4.12

 
3.90

 
3.62

 
3.38

 
3.29

Total scheduled service revenue per ASM (TRASM)* (cents)
 
12.37

 
12.33

 
12.50

 
10.83

 
10.28

Average fare - scheduled service
 
$
91.69

 
$
88.90

 
$
89.15

 
$
76.26

 
$
70.38

Average fare - ancillary air-related charges
 
$
40.52

 
$
35.72

 
$
31.18

 
$
30.25

 
$
29.06

Average fare - ancillary third party products
 
$
5.21

 
$
5.48

 
$
5.18

 
$
4.34

 
$
4.01

Average fare - total
 
$
137.43

 
$
130.10

 
$
125.51

 
$
110.85

 
$
103.45

Average stage length (miles)
 
952

 
918

 
901

 
912

 
891

Fuel gallons consumed (thousands)
 
116,370

 
109,257

 
96,999

 
96,153

 
83,047

Average fuel cost per gallon
 
$
3.25

 
$
3.37

 
$
3.30

 
$
2.43

 
$
1.90

Percent of sales through website during period
 
92.0
%
 
90.1
%
 
88.8
%
 
88.8
%
 
86.3
%
*
Various components of these measures 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.

 

24


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 or in scheduled service divided by the total number of fuel gallons consumed in our total system or in scheduled service, as applicable.
 
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 before take-off 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.
 
Operating revenue per ASM” or “RASM” represents operating revenue divided by available seat miles.
 
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 revenue per ASM” or “TRASM” represents scheduled service revenue and total ancillary revenue divided by available seat miles.
 
“Yield” represents scheduled service revenue divided by scheduled service revenue passenger 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, 2013, 2012 and 2011. Also discussed is our financial position as of December 31, 2013 and 2012. 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 “Special Note About Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

2013 results

During 2013, we completed our 11th straight profitable year, with net income of $92.3 million or $4.82 earnings per share (diluted) on operating revenues of $996.2 million. Net income was 17.0 percent higher compared to 2012 results of $78.6 million. Earnings per share of $4.82 were 18.7 percent higher in 2013 when compared to 2012 results of $4.06. Operating revenue in 2013 grew by 9.6 percent compared to operating revenue of $908.7 million in 2012.  We achieved an operating margin of 15.5 percent in 2013 primarily driven by our highest ever annual ancillary revenue per passenger of $45.73, an 11.0 percent increase compared to 2012.

Our total operating revenue in 2013 increased $87.4 million or 9.6 percent over 2012 due to a 7.8 percent increase in scheduled service passengers and a 5.6 percent increase in total average fare to $137.43 in 2013 from $130.10 in 2012.  Total average fare rose as ancillary revenue per passenger increased by 11.0 percent and scheduled service average base fare increased by 3.1 percent.  An increase in charges for bags resulting from the implementation of a new carry-on bag fee in April 2012 which was in effect for the full year during 2013, the ability to sell additional assigned seats as all of our in-service MD-80 aircraft were reconfigured to 166 seats, and new boarding procedures were the main drivers of the increase in ancillary

25


revenue per passenger.  Our load factor remained relatively unchanged at 88.9 percent in 2013 compared to 89.4 percent in 2012. TRASM improved to 12.23¢ in 2013 from 12.14¢ in 2012 despite capacity growth driven by an increase in our average number of aircraft, larger gauge aircraft and a longer stage length.

 Our average number of aircraft in revenue service increased by 4.5 percent from 60.2 aircraft during 2012 to 62.9 aircraft during 2013.  We added additional capacity with the introduction of used A320 series Airbus aircraft into our operating fleet, additional seats from our MD-80 seat reconfiguration program and having six Boeing 757-200 aircraft in revenue service for the majority of 2013. We had two Boeing 757-200 aircraft in revenue service for the majority of 2012 compared to six in 2013. Year-over-year, the additional capacity coupled with a 3.7 percent increase in our scheduled service average stage length drove a 13.5 percent increase in scheduled service ASMs.  This ASM growth was despite a year-over-year 3.5 percent decline in our overall fleet average block hours per aircraft per day. Our fuel cost per ASM declined 6.3 percent from 5.05¢ in 2012 to 4.73¢ in 2013 as a result of larger gauge aircraft, which are more efficient on a per seat fuel basis, and the introduction of the Airbus A320 series aircraft in our fleet which led to a 7.3 percent increase in ASMs per gallon of fuel.

CASM, excluding fuel, rose by 5.3 percent due to a decline in our aircraft utilization rate, and the de-funding of the US government starting October 1, 2013 until October 16, 2013.  The FAA shutdown delayed us from placing A320 Airbus aircraft into service as anticipated and also delayed the progress needed to train the necessary number of crews to operate our full flying schedule. The delayed placing of Airbus A320 series aircraft in our fleet resulted in higher aircraft lease rental expense as we contracted with other carriers for sub-service to fly scheduled flights, reduced crew productivity for in transit crews, and increased expenses to temporarily assign flight crews to bases to support unplanned MD-80 flying in place of planned Airbus A320 series flying.
 
As of December 31, 2013, we had $387.1 million in unrestricted cash and investment securities. Our liquidity position continues to provide us opportunities to invest in the growth of our fleet, with $177.5 million in capital expenditures during 2013. In 2013, we purchased and took delivery of seven Airbus A320 aircraft and one Airbus A319 aircraft under existing purchase agreements. This use of cash was practically offset by proceeds received from total borrowings in 2013 of $106.0 million secured by eight Airbus aircraft and our new headquarters property. We also used $22.7 million of these proceeds to prepay certain existing debt obligations on Boeing 757-200 aircraft.

During 2013 our board of directors declared a special cash dividend of $2.25 per share to shareholders of record on December 13, 2013, paid in January 2014. Total capital distribution for the declared dividend was $41.8 million. In addition, under our approved stock repurchase program, we repurchased 913,806 shares at an average cost of $91.33 per share during 2013 for a total expenditure of $83.5 million.

During September 2013, a compliance concern was identified with respect to evacuation slides in as many as 32 of our MD-80 aircraft. These MD-80 aircraft were temporarily removed from service until all slides could be reinspected. Reinspections were completed in September 2013 and all MD-80 aircraft that were inspected were found to be compliant. All of the temporarily removed MD-80 aircraft were returned to service by the end of September 2013.

During 2013, fixed fee contract revenue declined to $17.5 million. The decrease was mainly due to the expiration of our largest fixed fee flying contract in December 2012. Effective January 1, 2014, we entered into a three-year contract extension with Peppermill Casinos, Inc. for flying for its casino properties in Wendover, Nevada.
 

















26


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:
 
 
As of December 31, 2013
 
As of December 31, 2012
 
As of December 31, 2011
 
Own (b)
 
Lease
 
Total
 
Own (b)
 
Lease
 
Total
 
Own (b)
 
Lease
 
Total
MD82/83/88s (a)
52

 

 
52

 
56

 

 
56

 
52

 
2

 
54

MD87s (c)

 

 

 
2

 

 
2

 
2

 

 
2

B757-200
6

 

 
6

 
5

 

 
5

 
1

 

 
1

A319
1

 
2

 
3

 

 

 

 

 

 

A320
5

 

 
5

 

 

 

 

 

 

Total
64

 
2

 
66

 
63

 

 
63

 
55

 
2

 
57

 
(a)
Includes the following number of MD-80 aircraft (MD-82/83/88s) modified to a 166-seat configuration: December 31, 2013 – 51; December 31, 2012 – 45; December 31, 2011 – seven.
(b)
Excludes aircraft acquired but not yet in revenue service or temporarily stored as of the date indicated.
 (c)
Used almost exclusively for fixed fee flying.

MD-80 aircraft

As of December 31, 2013, 51 MD-80 aircraft had been modified to 166 seats as part of our seat reconfiguration program. We plan to complete the seat configuration for two additional MD-80 aircraft and place these aircraft in revenue service in the first quarter of 2014. We expect our MD-80 aircraft fleet to remain at 53 aircraft during 2014.

Airbus aircraft

In August 2012, we entered into lease agreements for nine used Airbus A319 aircraft with expected deliveries through the third quarter of 2015.  As of December 31, 2013, we have inducted two of these leased Airbus A319 aircraft into revenue service. We expect to take possession of the remaining aircraft under these lease agreements in 2014 and 2015.

In December 2012 and August 2013, we entered into purchase agreements for nine used Airbus A320 aircraft. Of the nine Airbus A320 aircraft under contract, two were acquired in the second quarter of 2013 and five were acquired in the third quarter of 2013. Five of the Airbus A320 aircraft were placed into our operating fleet in the fourth quarter of 2013 and two additional Airbus A320 aircraft were placed in revenue service as of February 1, 2014. The final two Airbus A320 aircraft under contract are expected to be acquired in the fourth quarter of 2014 and placed in revenue service in 2015.

Fleet plan
 
The following table provides the expected number of operating aircraft in service at the end of the respective year based on scheduled contracted deliveries of Airbus aircraft and the reinstatement of two MD-80 aircraft which had been temporarily placed in storage:

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

 
53

B757-200
6

 
6

A319
4

 
10

A320
7

 
9

Total
70

 
78



27


We continually consider other aircraft acquisitions on an opportunistic basis.

Network
 
As of December 31, 2013, we operated 226 routes into our leisure destinations, including service from 86 small cities, compared to 195 routes from 74 small cities as of December 31, 2012.  During 2013, we added one leisure destination to our route network.
    
The growth in network in 2013 was primarily on the East Coast with seven new routes to each of St. Petersburg and Orlando Sanford and ten new routes to Punta Gorda, Florida.  The majority of our new markets and routes were announced in late third quarter of 2013.  We do not currently expect to add many new markets and routes in the first half of 2014 as we will let our new routes mature.

The following shows the number of leisure destinations and small cities served as of the dates indicated (includes cities served seasonally):
 
 
As of December 31, 2013
 
As of December 31, 2012
 
As of December 31, 2011
Leisure destinations
14

 
13

 
11

Small cities served
86

 
74

 
65

Total cities served
100

 
87

 
76

Total routes
226

 
195

 
171


Trends and Uncertainties
 
Although fuel cost volatility has significantly impacted our operating results in prior years, crude oil prices stabilized during 2013, and we experienced a slight year-over-year increase in our system average cost per gallon from $3.18 in 2012 to $3.20 in 2013.  Our fuel cost per ASM declined 6.3 percent from 5.05¢ in 2012 to 4.73¢ in 2013 due to a 7.3 percent increase in ASMs per gallon. We added additional capacity over which we spread our fuel cost with the introduction of used A320 series Airbus aircraft into our operating fleet, having six high capacity Boeing 757-200 aircraft in revenue service and additional seats from our MD-80 seat reconfiguration program. Fuel costs in the long-term remain uncertain and fuel cost volatility would materially affect our future operating costs.

For over a two week period in October 2013, all nonessential government functions were shut down when the United
States Congress failed to approve funds for the ongoing operation of the federal government. As a result of the furlough of
FAA personnel deemed nonessential during this period, we experienced delays impacting our scheduled service expansion. FAA approval was required for recently hired and trained crews, operation of purchased Airbus A320 aircraft and completion of certain activities necessary for operation at recently announced airports. The FAA shutdown delayed us from placing Airbus A320 aircraft into service as anticipated and caused increased aircraft lease rental expense as we contracted with other carriers for sub-service of scheduled flights for which we originally planned to use Airbus A320 aircraft. The FAA shutdown also reduced crew productivity and increased expenses to temporarily assign flight crews to bases to support unplanned MD-80 flying in place of planned Airbus A320 flying. We expect additional costs in the first quarter of 2014 but otherwise do not believe these setbacks will have a significant impact on our financial results as we implemented alternatives to mitigate the risks of the FAA delays. Currently, we are not anticipating additional costs associated with the aircraft and crew training delays will extend past April 2014.

We have three employee groups which have voted for union representation; pilots, flight attendants, and flight dispatchers.  These three employee groups make up approximately 50 percent of our total employees.  We are currently in various stages of negotiations for a collective bargaining agreement with the labor organizations representing these employee groups. Any labor actions following an inability to reach collective bargaining agreements could materially impact our operations during the continuance of any such activity.

During 2013, we acquired and placed into service three Airbus A319 and five A320 Airbus aircraft under operating leases and purchase agreements entered into in 2012.  We believe the introduction of these Airbus aircraft into our operating fleet will provide a good fit for our existing business model. When compared to our MD-80 aircraft, we expect the additional cost of ownership of these aircraft will be offset by cost savings from increased fuel efficiency and the ability to generate

28


additional revenue with the higher capacity Airbus A320 series aircraft.  During 2013 we incurred costs related to the introduction of the aircraft and incurred additional training and pre-operating costs as we added the aircraft type to our operating certificate.

During 2013, we removed five MD-80 aircraft from service, comprised of one 130 seat MD-87 aircraft and four 150 seat MD-83 aircraft.  Two of the MD-83 aircraft and the MD-87 aircraft were permanently retired. The remaining two MD-83 aircraft were placed in temporary storage. As of December 31, 2013, 51 MD-80 aircraft had been modified to 166 seats as part of our seat reconfiguration program. In the first quarter of 2014, we expect to complete the seat reconfiguration for two additional MD-80 aircraft at which time, they will be returned to revenue service. We expect our MD-80 aircraft fleet to remain at 53 aircraft during 2014. We believe our six Boeing 757-200 aircraft, our MD-80 aircraft fleet, and the purchase and acquisition of used Airbus A320 series aircraft will meet our aircraft needs to support our planned growth through 2015.

Our network grew from 195 total routes as of December 31, 2012, to 226 total routes at December 31, 2013, and we have announced additional service to increase the number of routes to 231 routes by the end of the first quarter of 2014.  We expect to continue to aggressively manage capacity in our markets in an attempt to maximize profitability. TRASM improved to 12.23¢ in 2013 compared to 12.14¢ in 2012 despite our significant capacity growth in 2013, primarily due to increased ancillary per-passenger revenues. CASM, excluding fuel, rose by 5.3 percent due to a decline in aircraft utilization, costs related to the operational disruption in September 2013 and the effects of the FAA shutdown relating to the delays in flying our Airbus A320 aircraft in the fourth quarter.  We continue to focus on operating a higher percentage of our flights during peak windows and a lower percentage of flights during off-peak windows.  We believe this approach with our planned departure and ASM growth, primarily in our Florida markets, will contribute to the achievement of our profitability goals in the current operating environment.

Our Operating Revenue
 
Our operating revenue is comprised of both air travel on a stand-alone basis and bundled with hotels, rental cars and other travel-related services. We believe our diversified revenue streams distinguish us from other U.S. airlines and other travel companies.
 
Scheduled service revenue.  Scheduled service revenue consists of base air fare.
Ancillary revenue.  Our ancillary revenue is generated from air-related charges and third party products. Air-related revenue is generated through charges for baggage, carrier usage charges, advance seat assignments, travel protection product, change fees, use of our call center for purchases, priority boarding and other services provided in conjunction with our scheduled air service. We also generate revenue from third party products through the sale of hotel rooms, ground transportation (rental cars and hotel shuttle products), attraction and show tickets and fees we receive from other merchants selling products through our website. We recognize our ancillary revenues net of amounts paid to wholesale providers, travel agent commissions and payment processing fees.
Fixed fee contract revenue.  Our fixed fee contract revenue is generated from fixed fee agreements and charter service on a year-round and ad-hoc basis.    
Other revenue.  Other revenue is primarily generated from aircraft and flight equipment leased to third parties.

Seasonality.  Our results of operations for interim periods are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations.  We can be adversely impacted during periods with reduced leisure travel spending.  Traffic demand for our business historically has been weaker in the third quarter and stronger in the first quarter. 

Our Operating Expenses
 
A brief description of the items included in our operating expense line items follows.
 
Aircraft fuel expense.  Aircraft fuel expense includes the cost of aircraft fuel, fuel taxes, into plane fees and airport fuel flowage, storage or through-put fees. Under the majority of our fixed fee contracts, our customer reimburses us for fuel costs.  These amounts are netted against our fuel expense.
 
Salary and benefits expense.  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.
 

29


Station operations expense.  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 such as deicing of aircraft.
 
Maintenance and repairs expense.  Maintenance and repairs expense includes all parts, materials and spares required to maintain our aircraft. Also included are fees for repairs performed by third party vendors.

Sales and marketing expense.  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 charges.
 
Aircraft lease rentals expense.  Aircraft lease rentals expense consists of the cost of leasing aircraft under operating leases with third parties.  
 
Depreciation and amortization expense.  Depreciation and amortization expense includes the depreciation of all fixed assets, including aircraft that we own.
 
Other expense.  Other expense includes 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, travel and training expenses for crews and ground personnel, facility lease expenses, professional fees, personal property taxes and all other administrative and operational overhead expenses not included in other line items above.


RESULTS OF OPERATIONS

2013 Compared to 2012

The table below presents our operating expenses as a percentage of operating revenue for the periods indicated:
 
 
For the Year Ended December 31,
 
2013
 
2012
Total operating revenues
100.0
%
 
100.0
%
Operating expenses:
 

 
 

Aircraft fuel
38.7

 
41.6

Salaries and benefits
15.9

 
14.7

Station operations
7.9

 
8.6

Maintenance and repairs
7.3

 
8.1

Sales and marketing
2.2

 
2.1

Aircraft lease rentals
0.9

 

Depreciation and amortization
7.0

 
6.3

Other
4.6

 
4.0

Total operating expenses
84.5
%
 
85.4
%
Operating margin
15.5
%
 
14.6
%
 
 Operating Revenue

Our operating revenue increased 9.6 percent to $996.2 million in 2013, up from $908.7 million in 2012, primarily due to a 19.6 percent increase in ancillary revenue and an 11.1 percent increase in scheduled service revenue.  Scheduled service revenue and ancillary revenue increases were driven by a 7.8 percent increase in scheduled service passengers and a 5.6 percent increase in our total average fare to $137.43 in 2013 compared to $130.10 in 2012.

Scheduled service revenue. Scheduled service revenue increased 11.1 percent to $651.3 million for 2013, up from $586.0 million in 2012. The increase was driven by a 7.8 percent increase in the number of scheduled service passengers and a 3.1 percent increase in our scheduled service average base fare. Passenger growth was attributable to a 5.0 percent increase in

30


the average number of passengers per departure, associated with a 5.4 percent growth in scheduled service seats per departure, and a 3.0 percent increase in the number of scheduled service departures. We added 44 new routes in 2013 which increased the number of passengers as our load factor remained relatively unchanged at 88.9 percent in 2013 compared to 89.4 percent in 2012.

Ancillary revenue. Ancillary revenue increased 19.6 percent to $324.9 million for 2013, up from $271.6 million in 2012, driven by an 11.0 percent increase in ancillary revenue per scheduled passenger from $41.20 to $45.73 and a 7.8 percent increase in the number of scheduled service passengers.  The increase in our ancillary revenue per scheduled service passenger of $4.53 was mainly attributable to an increase in charges for bags resulting from the implementation of a new carry-on bag fee, introduced in April 2012 and in effect for the full year during 2013, and sales of assigned seats as the completion of our MD-80 modification program allowed us to sell additional assigned seats on these aircraft. The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:
 
For the Year Ended December 31,
 
Percentage
 
2013
 
2012
 
Change
Air-related charges
$
40.52

 
$
35.72

 
13.4
 %
Third party products
5.21

 
5.48

 
(4.9
)%
Total ancillary revenue per scheduled service passenger
$
45.73

 
$
41.20

 
11.0
 %
 
The following table details the calculation of ancillary revenue from third party products. Third party products consist of revenue from the sale of hotel rooms, ground transportation (rental cars and hotel shuttle products), attraction and show tickets, and fees we receive from other merchants selling products through our website:
 
 
For the Year Ended December 31,
 
Percentage
(in thousands except room nights and rental car days)
2013
 
2012
 
Change
Gross ancillary revenue - third party products
$
120,730

 
$
119,027

 
1.4
 %
Cost of goods sold
(81,904
)
 
(78,979
)
 
3.7
 %
Transaction costs (a)
(1,797
)
 
(3,924
)
 
(54.2
)%
Ancillary revenue - third party products
$
37,029

 
$
36,124

 
2.5
 %
As percent of gross ancillary revenue - third party
30.7
%
 
30.3
%
 
0.4 pp

Hotel room nights
595,697

 
690,116

 
(13.7
)%
Rental car days
844,858

 
763,353

 
10.7
 %
 
(a) Includes payment expenses and travel agency commissions
 
During 2013, we generated gross revenue of $120.7 million from the sale of third party products, which resulted in net revenue of $37.0 million.  Net third party products revenue increased 2.5 percent primarily due to the impact on our margin from lower transaction costs. The 10.7 percent increase in rental car days sold was driven by an increase in scheduled service passengers to those markets where a higher percentage of rental car days are typically sold, such as Florida and Phoenix. Hotel room nights sold in 2013 decreased by 13.7 percent compared to 2012. In the fourth quarter of 2012, we phased out offering an air discount tied to hotel sales in order to generate higher levels of overall company profitability.   Hotel net revenue in 2013 excluding the effect of an air discount increased 25 percent compared to 2012. 

Fixed fee contract revenue. Fixed fee contract revenue decreased 59.3 percent to $17.5 million in 2013, from $42.9 million in 2012. The decrease was driven by a 66.7 percent reduction in fixed fee block hours flown, slightly offset by a 22.3 percent higher per-block hour rate.  The significant reduction in our fixed fee block hours flown was mainly due to the expiration of our fixed fee flying contract in December 2012.
 
Other revenue. We generated other revenue of $2.5 million for 2013, compared to $8.2 million in 2012, primarily from lease revenue for aircraft and flight equipment.  Aircraft previously leased in 2012 were added to our fleet and placed into revenue service in 2013 which led to the decrease in other revenue for the current year. We leased out three Boeing 757-200 aircraft to third parties on a short-term basis for the majority of 2012 while we leased out one A320 Airbus aircraft in 2013 with a lease term from June through September. We took possession of the A320 Airbus aircraft from lease expiration and placed it into our operating fleet during the fourth quarter of 2013.


31


Operating Expenses
 
Our operating expenses increased 8.4 percent to $841.4 million in 2013 compared to $776.4 million in 2012 in line with an 8.8 percent increase in system capacity. We primarily evaluate our expense management by comparing our costs per passenger and per ASMs across different periods, which enables us to assess trends in each expense category. The following table presents operating expense per passenger for the indicated periods:
 
For the Year Ended December 31,
 
Percentage
 
2013
 
2012
 
Change
Aircraft fuel
$
53.25

 
$
54.13

 
(1.6
)%
Salary and benefits
21.91

 
19.08

 
14.8

Station operations
10.80

 
11.21

 
(3.7
)
Maintenance and repairs
10.06

 
10.58

 
(4.9
)
Sales and marketing
2.99

 
2.75

 
8.7

Aircraft lease rentals
1.27

 

 
NM

Depreciation and amortization
9.57

 
8.23

 
16.3

Other
6.35

 
5.14

 
23.5

Operating expense per passenger
$
116.20

 
$
111.12

 
4.6

Operating expense per passenger, excluding fuel
$
62.95

 
$
56.99

 
10.5
 %
 
The following table presents unit costs, defined as Operating CASM, for the indicated periods:
 
 
For the Year Ended December 31,
 
 
Percentage
 
2013
 
 
2012
 
 
Change
Aircraft fuel
4.73

¢
 
5.05

¢
 
(6.3
)%
Salary and benefits
1.95

 
 
1.78

 
 
9.6

Station operations
0.96

 
 
1.05

 
 
(8.6
)
Maintenance and repairs
0.89

 
 
0.99

 
 
(10.1
)
Sales and marketing
0.27

 
 
0.26

 
 
3.8

Aircraft lease rentals
0.11

 
 

 
 
NM

Depreciation and amortization
0.85

 
 
0.77

 
 
10.4

Other
0.56

 
 
0.47

 
 
19.1

Operating expense per ASM (CASM)
10.32

¢
 
10.37

¢
 
(0.5
)%
CASM, excluding fuel
5.59

¢
 
5.32

¢
 
5.1
 %
 
Aircraft fuel expense. Aircraft fuel expense increased only 1.9 percent to $385.6 million for 2013, up from $378.2 million in 2012 on a 1.4 percent increase in gallons consumed, from 118.8 million in 2012 to 120.5 million in 2013. Fuel cost per gallon remained relatively flat year-over-year. Despite an 8.8 percent increase in total system ASMs in 2013, our fuel cost per ASM declined 6.3 percent from 5.05¢ in 2012 to 4.73¢ in 2013 due to a 7.3 percent increase in ASMs per gallon. Fuel efficiency increased from the introduction of used A320 series Airbus aircraft into our operating fleet, having six high capacity Boeing 757-200 in revenue service, and 16 additional seats per aircraft from our MD-80 seat reconfiguration program. The higher gauge aircraft in our fleet provided us additional capacity over which to spread our fuel costs.

     Salary and benefits expense. Salary and benefits expense increased 19.0 percent to $158.6 million for 2013, up from $133.3 million in 2012.  The increase is primarily attributable to a 13.4 percent increase in the number of full-time equivalent employees, adjustments to our pilot pay scales as a result of our increased profitability, stock-based compensation and increased bonus expense resulting from our higher profitability in 2013 compared to 2012. The increase in the number of average full-time equivalent employees was driven by additional headcount for flight attendants as we increased the gauge of our aircraft and the hiring of information technology staff to support our ongoing commitment to enhance our technology infrastructure.  As a result of pilot compensation being tied to our overall margin performance, pilot pay scales were higher in 2013 compared to 2012, as the most recent adjustment to pay scales was in effect during the entire year in 2013 but only for two months during 2012.

32



Station operations expense. Station operations expense remained relatively flat at $78.2 million for 2013 compared to $78.4 million in the same period of 2012. Our cost per departures increased 4.8 percent offsetting a 4.7 percent decrease in system departures. We continue to experience cost pressures in certain of the major destinations we service, primarily in Las Vegas, where we have limited ability to reduce costs.

Maintenance and repairs expense. Maintenance and repairs expense decreased 1.5 percent to $72.8 million for 2013, compared to $73.9 million in 2012 despite a 4.5 percent increase in average number of aircraft. The decrease in maintenance expense is due to lower number of scheduled overhaul engine events in the 2013 compared to 2012. In 2013 we had ten overhaul engine events compared to 13 events in 2012.
 
Sales and marketing expense. Sales and marketing expense increased by 12.8 percent to $21.7 million for 2013, compared to $19.2 million in 2012. Since the introduction of our debit card discount option in 2012, we have experienced an increase in debit card usage as a form of payment.  This increase in debit card take rate has resulted in a reduction of our transaction costs as a percentage of scheduled service and ancillary revenue.  This trend continued into 2013 as our scheduled service and ancillary revenues increased 13.8 percent which outpaced our 12.8 percent increase in sales and marketing expense. During 2013 we ran our first national commercial campaign which led to increased advertising spending. 

Aircraft lease rentals expense. We had $9.2 million in aircraft lease rentals expense for 2013 and no expense in 2012. During 2013, we took delivery of two leased Airbus A319 aircraft, with one aircraft placed into service in the first half of 2013. We expect to accept delivery of the remaining seven Airbus A319 aircraft under existing lease contracts during 2014 and 2015. Additional factors were our contracting for sub-service as a result of the operational disruption in September related to the MD-80 slide reinspections and the delay in placing Airbus A320s into service in December as a result of the FAA shutdown.

Depreciation and amortization expense. Depreciation and amortization expense increased 20.5 percent to $69.3 million for 2013, compared to $57.5 million in 2012.  The increase was driven by a higher cost of our larger gauge aircraft fleet compared to the prior year and additional depreciation resulting from a change in the estimate of residual values and remaining useful lives for our MD-80 engine pool in 2013. We also incurred additional expenses due to amortization of capitalized IT infrastructure costs.
 
Other expense. Other expense increased 28.0 percent to $46.0 million for 2013 from $35.9 million for 2012. The increase was primarily attributable to a $5.3 million write-down of engine values in our consignment program compared to 2012, non capitalizable information technology development costs, costs to support a seasonal operating base in Los Angeles and crew training for our Airbus fleet.

Other (Income) Expense

Other (income) expense increased 5.2 percent to $8.1 million in 2013 compared to $7.7 million in 2012. The increase is due to higher interest expense from increased borrowings.
 
Income Tax Expense

Our effective income tax rate was relatively flat at 37.4 percent for 2013 compared to 37.1 percent for 2012. 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.
 













33


2012 Compared to 2011
 
The table below presents our operating expenses as a percentage of operating revenue for the periods presented:

 
For the Year Ended December 31,
 
2012
 
2011
Total operating revenues
100.0
%
 
100.0
%
Operating expenses:
 

 
 

Aircraft fuel
41.6
%
 
42.4
%
Salaries and benefits
14.7
%
 
15.4
%
Station operations
8.6
%
 
8.6
%
Maintenance and repairs
8.1
%
 
10.4
%
Sales and marketing
2.1
%
 
2.6
%
Aircraft lease rentals
%
 
0.1
%
Depreciation and amortization
6.3
%
 
5.4
%
Other
4.0
%
 
4.1
%
Total operating expenses
85.4
%
 
89.0
%
Operating margin
14.6
%
 
11.0
%
 
Operating Revenue
 
Our operating revenue increased 16.6 percent to $908.7 million in 2012, up from $779.1 million in 2011, primarily due to a 29.3 percent increase in ancillary revenue and a 13.8 percent increase in scheduled service revenue.  Scheduled service and ancillary revenue increases were driven by a 14.1 percent increase in scheduled service passengers and a 3.7 percent increase in total average fare from $125.51 to $130.10.

Scheduled service revenue.  Scheduled service revenue increased 13.8 percent to $586.0 million for 2012, up from $515.0 million in 2011. The increase was primarily driven by a 14.1 percent increase in scheduled service passengers as the scheduled service average base fare was relatively flat year over year.  Passenger growth was driven by a 10.4 percent increase in the number of scheduled service departures, as we increased the average number of aircraft in service by 15.3 percent and we also added more 166 seat MD-80 aircraft and Boeing 757 aircraft to our operating fleet.  Scheduled service load factor declined by 2.3 points from 2011 to 2012 as our 20.0 percent increase in scheduled service ASMs outpaced our 14.1 percent increase in scheduled service passengers.  The addition of routes to our Florida markets in 2012 was a significant driver of this year-over-year departure increase, as a result of profitability from these markets and identified opportunities for service from certain markets previously served by Airtran which were discontinued after its acquisition by Southwest.  The relatively flat year-over-year scheduled service average base fare was impacted by revenue softness we experienced in markets outside of Florida, such as new markets where we began service in 2012.

Ancillary revenue.  Ancillary revenue increased 29.3 percent to $271.6 million in 2012, up from $210.0 million in 2011, driven by a 14.1 percent increase in scheduled service passengers and a 13.3 percent increase in ancillary revenue per scheduled passenger from $36.36 to $41.20. The increase in our ancillary revenue per scheduled service passenger of $4.84 was primarily attributable to the implementation of a new carry-on bag fee in April 2012 and our new boarding process rolled out during 2012.  The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

 
For the Year Ended December 31,
 
Percentage
 
2012
 
2011
 
Change
Air-related charges
$
35.72

 
$
31.18

 
14.6
%
Third party products
$
5.48

 
$
5.18

 
5.8
%
Total ancillary revenue per scheduled service passenger
$
41.20

 
$
36.36

 
13.3
%


34


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

 
For the Year Ended December 31,
 
Percentage
(in thousands except room nights and rental car days)
2012
 
2011
 
Change
Gross ancillary revenue - third party products
$
119,027

 
$
106,362

 
11.9
 %
Cost of goods sold
(78,979
)
 
(71,984
)
 
9.7
 %
Transaction costs (a)
(3,924
)
 
(4,462
)
 
(12.1
)%
Ancillary revenue - third party products
$
36,124

 
$
29,916

 
20.8
 %
As percent of gross ancillary revenue - third party
30.3
%
 
28.1
%
 
2.2 pp

Hotel room nights
690,116

 
647,716

 
6.5
 %
Rental car days
763,353

 
577,749

 
32.1
 %
 
(a)
Includes payment expenses and travel agency commissions

During 2012, we generated gross revenue of $119.0 million from the sale of third party products, which resulted in net revenue of $36.1 million. A major contributor to our 20.8 percent increase in third party products net revenue was the sale of rental car days, which grew 32.1 percent year-over-year and outpaced our scheduled service passenger growth of 14.1 percent.  The increase in sale of rental car days was driven by an increase in scheduled service passengers to those markets where more rental car days are typically sold, such as Florida and Phoenix, and increased promotions with our national rental car operator.

Fixed fee contract revenue.  Fixed fee contract revenue decreased 1.8 percent to $42.9 million in 2012, down from $43.7 million in 2011.  The decrease was the result of a reduction in total fixed fee block hours flown of 10.4 percent, offset by a 9.6 percent increase in our per-block hour rate.  The reduction in block hours flown was driven by our decision to reduce the availability of aircraft for ad-hoc flying compared to the prior year.

Other revenue.  We generated other revenue of $8.2 million for 2012, compared to $10.5 million in the same period of 2011, primarily from lease revenue for aircraft and flight equipment. In the first quarter of 2011, we leased three Boeing 757-200 aircraft to third parties on a short term basis.  During 2012, these aircraft were returned to us, one in the second quarter and two in the fourth quarter.

Operating Expenses
 
Our operating expenses increased only 11.9 percent to $776.4 million in 2012 compared to $693.7 million in 2011 despite a 17.6 percent increase in system capacity.  We primarily evaluate our expense management by comparing our costs per passenger and per ASMs across different periods which enable us to assess trends in each expense category.
 
The following table presents Operating expense per passenger for the indicated periods (“per-passenger costs”). The table also presents Operating expense per passenger, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by the number of passengers carried. This statistic provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility. Both the cost and availability of fuel are subject to many economic and political factors beyond our control.


35


 
For the Year Ended December 31,
 
Percentage
 
2012
 
2011
 
Change
Aircraft fuel
$
54.13

 
$
53.54

 
1.1
 %
Salary and benefits
19.08

 
19.41

 
(1.7
)%
Station operations
11.21

 
10.80

 
3.8
 %
Maintenance and repairs
10.58

 
13.15

 
(19.5
)%
Sales and marketing
2.75

 
3.22

 
(14.6
)%
Aircraft lease rentals

 
0.18

 
(100.0
)%
Depreciation and amortization
8.23

 
6.80

 
21.0
 %
Other
5.14

 
5.22

 
(1.5
)%
Operating expense per passenger
$
111.12

 
$
112.32

 
(1.1
)%
Operating expense per passenger, excluding fuel
$
56.99

 
$
58.78

 
(3.0
)%

The following table presents unit costs, defined as Operating expense per ASM (“CASM”), for the indicated periods. The table also presents Operating CASM, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by available seat miles. 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,
 
 
Percentage
 
2012
 
 
2011
 
 
Change
Aircraft fuel
5.05

¢
 
5.20

¢
 
(2.9
)%
Salary and benefits
1.78

 
 
1.88

 
 
(5.3
)%
Station operations
1.05

 
 
1.05

 
 
 %
Maintenance and repairs
0.99

 
 
1.28

 
 
(22.7
)%
Sales and marketing
0.26

 
 
0.31

 
 
(16.1
)%
Aircraft lease rentals

 
 
0.02

 
 
(100.0
)%
Depreciation and amortization
0.77

 
 
0.66

 
 
16.7
 %
Other
0.47

 
 
0.50

 
 
(6.0
)%
Operating expense per ASM (CASM)
10.37

¢
 
10.90

¢
 
(4.9
)%
CASM, excluding fuel
5.32

¢
 
5.70

¢
 
(6.7
)%

Aircraft fuel expense.  Aircraft fuel expense increased $47.5 million, or 14.4 percent, to $378.2 million for 2012, up from $330.7 million 2011. This change was due to a 10.4 percent increase in system gallons consumed from 107.6 million to 118.8 million and a 3.6 percent increase in our average total system fuel cost per gallon from $3.07 to $3.18. The increase in gallons consumed is attributable to an 8.6 percent increase in our total system departures, our larger gauge aircraft and a 1.6 percent increase in total system average stage length.
 
Salary and benefits expense.  Salary and benefits expense increased 11.2 percent to $133.3 million for 2012, up from $119.9 million in 2011.  Excluding accrued employee bonus expense and stock compensation expense, salary and benefits expense increased only 9.7 percent attributable to a 14.2 percent increase in the number of full-time equivalent employees.  The number of full-time equivalent employees increased from 1,595 at December 31, 2011, to 1,821 at December 31, 2012, to support the growth of our aircraft fleet, our ongoing significant information technology enhancements and other company growth activities.  These increases were offset by improved crew efficiency in 2012 and the impact of our variable pilot base pay scale.  In addition, our accrued employee bonus expense increased 54.9 percent in 2012 as a result of the year-over-year increase in operating income.
 
Station operations expense.  Station operations expense increased 17.5 percent to $78.4 million for 2012, compared to $66.7 million in the same period of 2011, as a result of an 8.6 percent increase in system departures and an 8.1 percent increase in station operations expense per departure. The increase in station operations expense per departure was attributable to increased fees at several airports where we operate, primarily Las Vegas, and the outsourcing of our station operations in Las Vegas beginning in May 2011.
  

36


Maintenance and repairs expense.  Maintenance and repairs expense decreased 9.0 percent to $73.9 million for 2012, compared to $81.2 million in 2011 despite a 15.3 percent increase in average number of aircraft in service and a 17.6 percent increase in system ASMs.  We incurred $11.1 million more in engine overhaul expenses during 2011 as a result of our engine overhaul program, in which we made a substantial investment to increase the reliability and reduce the overall age of our engine portfolio.  The decrease in engine overhaul expenses in 2012 was offset by an increase in heavy airframe checks, repair of rotable parts and usage of expendable parts associated with our aircraft fleet growth.
 
Sales and marketing expense.  Sales and marketing expense decreased 3.4 percent to $19.2 million in 2012 compared to $19.9 million for the same period of 2011 despite a 13.8 percent increase in scheduled service revenue.  Sales and marketing expense per passenger declined 14.6 percent from $3.22 to $2.75 primarily due to lower advertising expenses and a reduction in payment processing costs per passenger attributable to increased debit card usage.
   
Aircraft lease rentals expense.  We had no aircraft lease rentals expense in 2012, compared to $1.1 million in 2011. In December 2011, we exercised purchase options on two of our MD-80 aircraft under operating leases and took ownership of the aircraft in January 2012.  Upon taking ownership of these two aircraft in January 2012, we did not have any aircraft under operating leases during 2012.

Depreciation and amortization expense.  Depreciation and amortization expense increased 37.0 percent to $57.5 million in 2012 from $42.0 million in 2011.  The increase was driven by a 15.3 percent increase in the average number of operating aircraft, the MD-80 seat reconfiguration costs, and the acceleration of depreciation from a change in estimated remaining useful lives for a limited number of MD-80 aircraft we retired in 2013.  As of December 31, 2012, we owned 63 aircraft in service (including five Boeing 757-200 aircraft and 45 MD-80 aircraft reconfigured to 166 seats) compared to 57 aircraft in service (including one Boeing 757-200 aircraft and seven MD-80 aircraft reconfigured to 166 seats) at December 31, 2011.
 
Other expense.  Other expense increased 11.5 percent to $35.9 million in 2012 compared to $32.2 million in 2011.  The increase was primarily driven by an increase in pre-operating expenses related to certification of our Airbus aircraft and other administrative costs associated with our growth.
 
Other (Income) Expense
 
Other (income) expense increased from a net other expense of $5.9 million for 2011, to a net other expense of $7.7 million for 2012. The increase is due to a $1.6 million increase in interest expense in 2012 primarily associated with our $125.0 million Term Loan borrowing in March 2011. 

Income Tax Expense
 
Our effective income tax rate was 37.1 percent for 2012 compared to 37.9 percent for 2011. The higher effective tax rate for 2011 was largely due to the impact of apportionment factor adjustments to filed state income tax returns which contributed to an increase in our state income tax expense.  While we expect our tax rate to be fairly consistent in the near term, it will tend to 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 particular to a given year may also affect our effective tax rates.

LIQUIDITY AND CAPITAL RESOURCES

During 2013, our primary source of funds was cash generated by our operations.  Our operating cash flows, along with the proceeds of financing, have allowed us to invest in the growth of our fleet and information technology infrastructure and development, while meeting our short-term obligations, returning cash to our stockholders and growing our cash position.  Our future capital needs are primarily for the acquisition of additional aircraft to meet our growth and operational needs.  As of December 31, 2013, we had $23.4 million of obligations under existing aircraft purchase agreements and $123.7 million of obligations under existing aircraft operating lease agreements.  We believe we have more than adequate liquidity resources through our operating cash flows and cash balances to meet our future contractual obligations.  As we have done in the past, we opportunistically consider raising funds through debt financing on acceptable terms from time to time.

For 2014, we expect between $60 million and $80 million dollars of gross capital expenditures. Future capital expenditures could vary from our current expectations.



37


Current liquidity

Cash, restricted cash and investment securities (short-term and long-term) increased from $362.9 million at December 31, 2012 to $397.7 million at December 31, 2013.  
Restricted cash represents escrowed funds under fixed fee contracts, cash collateral against notes payable and cash collateral against letters of credit required by hotel properties for guaranteed room availability, airports and certain other parties. Investment securities represent highly liquid marketable securities which are available-for-sale. 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.  Prepayments are recorded as restricted cash and a corresponding amount is recorded as air traffic liability.  Our restricted cash balance increased from $10.0 million as of December 31, 2012 to $10.5 million at December 31, 2013.
Sources and Uses of Cash

Operating Activities. During 2013, our operating activities provided $196.9 million of cash compared to $176.8 million during 2012. Operating cash inflows are primarily derived from providing air transportation to customers. The vast majority of tickets are purchased prior to the day on which travel was provided. Operating cash outflows are related to the recurring expenses of airline operations. The operating cash flows for 2013 and 2012 were impacted primarily by our results of operations, adjusted for non-cash depreciation and amortization expense, as well as changes in air traffic liability and accounts payable and accrued liabilities. Net cash provided during 2013 increased compared to 2012 primarily as a result of a $13.4 million increase in net income and a $11.8 million increase in non-cash items such as depreciation and amortization expense.
During 2012, our operating activities provided $176.8 million of cash compared to $129.9 million during 2011. The higher cash provided by operating activities in 2012 compared to 2011, were primarily the result of net income and the increase in air traffic liability which results from passenger bookings for future travel.
Investing Activities. Cash used in investing activities for 2013 was $192.8 million compared to $208.8 million in 2012. During 2013, our primary use of cash was for the purchase of property and equipment of $177.5 million and the purchase of investment securities, net of maturities, of $26.2 million. Purchase of property and equipment during 2013 consisted primarily of the purchase of eight Airbus aircraft, the purchase of office space for our new corporate headquarters, MD-80 engine purchases, and aircraft induction costs. These investing activities were offset by cash provided by returned aircraft deposits of $10.2 million.
During 2012, our primary use of cash was for the purchase of investment securities, net of maturities, of $94.4 million and purchase of property and equipment of $105.1 million. Purchase of property and equipment during 2012 were associated with our 166 seat configuration project, engine purchases and costs related to our ongoing automation enhancement projects.
Financing Activities. Cash provided by financing activities in 2013 was $4.1 million as we received $106.0 million in proceeds from the issuance of notes payable associated with two loans secured by eight Airbus aircraft, each for $48.0 million, and one loan secured by our new building for $10.0 million. Cash provided by financing activities was offset by stock repurchases of $83.6 million and debt repayments of $22.7 million.
In 2012, cash used in financing activities was $29.1 million, the majority of which was related to payment of cash dividends to shareholders of $38.6 million and principal debt payments of $9.3 million.
Debt 
Our long-term debt obligations increased from $150.9 million as of December 31, 2012 to $234.3 million as of December 31, 2013.  As of December 31, 2013, all of our owned aircraft were pledged to secure our debt obligations.











38


COMMITMENTS AND CONTRACTUAL OBLIGATIONS
 
The following table discloses aggregate information about our contractual cash obligations as of December 31, 2013 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)
 
$
268,076

 
$
30,747

 
$
59,922

 
$
163,370

 
$
14,037

Operating lease obligations (2)
 
135,991

 
9,278

 
34,833

 
31,584

 
60,296

Aircraft purchase obligations (3)
 
23,360

 
23,360

 

 

 

Airport fees under use and lease agreements (4)
 
30,930

 
10,544

 
20,386

 

 

Total future payments under contractual obligations
 
$
458,357

 
$
73,929

 
$
115,141

 
$
194,954

 
$
74,333

 
(1)
Long-term debt obligations include scheduled interest payments.  
(2)
Operating lease obligations include aircraft operating leases, obligations for the lease and use of gate space and areas surrounding gates and operating support areas in airport terminals under use and lease agreements, and leases of office, warehouse and other space.
(3)
Aircraft purchase obligations under existing aircraft purchase agreements.
(4)
Obligations for common and joint use space in the airport terminal facilities under use and lease agreements.

OFF-BALANCE SHEET ARRANGEMENTS
 
As of December 31, 2013, we had $136.0 million of obligations under operating leases, primarily for aircraft, which were not reflected on our balance sheet.  In August 2012, we entered into operating lease agreements for nine Airbus A319 aircraft with lease term expiration dates ranging from 2021 to 2023.  As of December 31, 2013, we had accepted delivery of the first two of these Airbus A319 aircraft. The remaining Airbus A319 aircraft are scheduled to be delivered in 2014 and 2015.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The discussion and analysis of our financial condition and results of operations is based upon 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. 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. These estimates and judgments 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. 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. 
 
Revenue Recognition.  Scheduled service revenue consists of passenger revenue generated from limited frequency nonstop flights in our route network recognized 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, but 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 us as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in our consolidated statements of income and recorded as a liability until remitted to the appropriate taxing authority.
 
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.
 
Ancillary revenue consists of passenger revenue from air-related charges and sale of third party products. Air-related charges include optional services provided to passengers such as baggage fees, the use of our website to purchase scheduled

39


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 independent of the original ticket sale.  Fees imposed on passengers making changes and cancellations to nonrefundable itineraries are air-related charges deemed independent of the original ticket sale.  Therefore, revenues from change fees or cancellation fees are recognized as they occur.

Ancillary revenue is also generated from the sale of third party products such as hotel rooms, rental cars, ticket attractions and other items. Revenues from the sale of third party products are recognized at the time the product is utilized, such as the time a purchased hotel room is occupied. The amount of revenues attributed to each element of a bundled sale involving air-related charges and third party products in addition to airfare is determined in accordance with accounting standards for revenue arrangements with multiple deliverables. The sale of third party products is recorded net of amounts paid to wholesale providers, travel agent commissions and transaction costs in accordance with revenue reporting accounting standards.

Other revenue is generated from leased out aircraft and flight equipment and other miscellaneous sources. Lease revenue is recognized on a straight-line basis over the lease term.
 
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 market 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 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 aircraft manufacturers.  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, when deemed necessary, adjust these estimates. To the extent a change in estimate for useful lives or salvage values of our property and equipment occurs, there could result an acceleration of depreciation expense associated with the change in estimate. 
 
Aircraft maintenance and repair costs.  We account for aircraft maintenance activities under the direct expense method. Under this method, maintenance and repair costs for owned and leased aircraft, including major aircraft maintenance activities, are charged to operating expenses as incurred. As a lessee, we may be required under provisions of our lease agreements to make payments to the lessor in advance of the performance of major maintenance activities. These payments of maintenance deposits are calculated based on a performance measure, such as flight hours or cycles, and are available for reimbursement to us upon the completion of the maintenance of the leased aircraft. Accounting guidance for maintenance deposits requires these payments to be accounted for as an asset until reimbursed for incurred maintenance costs or until it is determined that any portion of the estimated total of the deposit is less than probable of being returned. We had no maintenance deposits as of December 31, 2013 or December 31, 2012.

Investment Securities.  We maintain a liquid portfolio of investment securities available for current operations and to satisfy on-going obligations. We have classified these investments as “available for sale” and accordingly, unrealized gains or losses are reported as a component of comprehensive income in stockholders’ equity.
 
Stock-based compensation.  We issued stock-based awards, including restricted stock, stock options and stock appreciation rights (“SARs”) to certain officers, directors, employees and consultants.

We recognize stock-based compensation expense over the requisite service period using a fair value approach. Determining the fair value requires judgment, and we use the Black-Scholes valuation model for stock options and SARs issued.  Cash-settled SARs are liability-based awards and fair value is updated each reporting period using the Black-Scholes valuation model for outstanding awards.  Significant judgment is required to establish the assumptions to be used in the Black-Scholes valuation model. These assumptions are for the volatility of our common stock, estimated term over which our stock options and SARs will be outstanding, and interest rate to be applied.

Expected volatilities used were based on the historical volatility of our common stock.  

Expected term represents the weighted average time between the award’s grant date and its exercise date. We estimated our expected term assumption using historical award exercise activity and employee termination activity.

40



The risk-free interest rate for periods equal to the expected term of the award is based on a blended historical rate using Federal Reserve rates for U.S. Treasury securities.

We use our closing share price on the grant date as the fair value for issuances of restricted stock.

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.”

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this annual report on Form 10-K, and in this 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 our periodic reports filed with the Securities and Exchange Commission at www.sec.gov. These risk factors include, without limitation, volatility of fuel costs, labor issues, the effect of economic conditions on leisure travel, debt covenants, terrorist attacks, risks inherent to airlines, our introduction of an additional aircraft type, demand for air services to our leisure destinations from the markets served by us, our dependence on our leisure destination markets, the competitive environment, problems with our aircraft, our reliance on our automated systems, economic and other conditions in markets in which we operate, aging aircraft and other 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 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 these markets could pose a potential loss as discussed below. The sensitivity analysis 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. See the notes to our consolidated financial statements in this annual report on Form 10-K for a description of our significant accounting policies and additional information.

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 years ended December 31, 2013, 2012 and 2011 represented 45.8 percent , 48.7 percent and 47.7 percent of our operating expenses, respectively. Increases in fuel prices or a shortage of supply could have a material effect on our operations and operating results. Based on our 2013 fuel consumption, a hypothetical ten percent increase in the average price per gallon of aircraft fuel would have increased fuel expense by approximately $38.5 million, $37.5 million and $32.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. We have not hedged fuel price risk in recent years.
 
Interest Rates

We have market risk associated with changing interest rates due to the short-term nature of our cash and investment securities at December 31, 2013, which totaled $97.7 million in cash and cash equivalents, $253.4 million of short-term investments and $36.0 million of long-term investments. We invest available cash in government and corporate debt securities,

41


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 years ended December 31, 2013, 2012 and 2011, would have affected interest income from cash and investment securities by $3.7 million , $3.4 million and $2.3 million, respectively.
 
As of December 31, 2013, we had $121.2 million, including current maturities, of variable-rate debt from borrowings under our Term Loan. A hypothetical 100 basis point change in interest rates in 2013 would not have affected interest expense associated with variable rate debt as a result of the LIBOR floor under the Term Loan.
 
As of December 31, 2013, we had $113.1 million, including current maturities, of fixed-rate debt. A hypothetical 100 basis point change in market interest rates in 2013 would not have a material effect on the fair value of our fixed-rate debt instruments. Also, a hypothetical 100 basis point change in market rates would not impact our earnings or cash flow associated with our fixed-rate debt.

Item 8.  Financial Statements and Supplementary Data
 
The following consolidated financial statements as of December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013 are included below.
 
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements



42


Report of Independent Registered Public Accounting Firm
 
 
 
The Board of Directors and Shareholders of
Allegiant Travel Company
 
 
We have audited the accompanying consolidated balance sheets of Allegiant Travel Company and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. 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 audits 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 financial position of Allegiant Travel Company and subsidiaries at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, 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), Allegiant Travel Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 28, 2014, expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP
 
Las Vegas, Nevada

February 28, 2014



43


Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders of
Allegiant Travel Company

We have audited Allegiant Travel Company and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). The Allegiant Travel 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 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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.

In our opinion, Allegiant Travel Company and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 and our report dated February 28, 2014, expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP
 
Las Vegas, Nevada

February 28, 2014



44




ALLEGIANT TRAVEL COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share amounts)
 
December 31, 2013
 
December 31, 2012
Current assets:
 
 
 
Cash and cash equivalents
$
97,711

 
$
89,557

Restricted cash
10,531

 
10,046

Short-term investments
253,378

 
239,139

Accounts receivable
16,857

 
18,635

Expendable parts, supplies and fuel, net of an allowance for obsolescence of $1,702 and $875 at December 31, 2013 and December 31, 2012, respectively
19,428

 
18,432

Prepaid expenses
26,643

 
24,371

Deferred income taxes
4,206

 
796

Other current assets
1,167

 
14,291

Total current assets
429,921

 
415,267

Property and equipment, net
451,584

 
351,204

Restricted cash, net of current portion
305

 
150

Long-term investments
36,037

 
24,030

Investment in and advances to unconsolidated affiliates, net
1,655

 
2,007

Deposits and other assets
10,689

 
5,536

Total assets
$
930,191

 
$
798,194

Current liabilities:
 
 
 
Current maturities of long-term debt
$
20,237