Our unique model is predicated around expanding and contracting capacity to meet seasonal travel demands. We are maintainingmaintained a broad network and selling presence. We consistently monitor flights to assess for cash profitability.presence during the pandemic and have grown our network as air travel is recovering.
TRENDS
COVID-19
The COVID-19 pandemic has significantly impacted our operating results for the three months ending March 31,in 2020 and 2021 and willwe suffered numerous cancellations due to the effect of the Omicron variant on flight crews into first quarter 2022. COVID-19 may continue to do soimpact our operations into the future. Air traffic demand is down substantially and base air fares are down as well. We cannot predict when air travel will return to customary levels or at what pace. In the meantime, our revenues will be adversely affected. We believe that demand in the foreseeable future will continue tocould fluctuate in response to fluctuations in COVID-19 cases, new variationsvariants of the virus, hospitalizations, deaths, treatment efficacy, and the availability of vaccines.vaccines, CDC recommendations, and government restrictions.
Strong Demand Momentum
As concerns over COVID-19 have declined, we saw significant increases in load factors and average total fare per passenger in March which are continuing into second quarter.
Aircraft Fuel
The cost of fuel is volatile, as it is subject to many economic and geopolitical factors we can neither control nor predict. Significant increases in fuel costs could materially affect our operating results and profitability. We have not sought to use financial derivative products to hedge our exposure to fuel price volatility, nor do we have any plans to do so in the future.
The cost per gallon of fuel began to increase significantly in 2021 and the increases were exacerbated by the geopolitical impact of the war in Ukraine. As a result, the average fuel cost per gallon increased by 65.1 percent in first quarter 2022 over first quarter 2021 and 43.5 percent over first quarter 2019. We expect high fuel costs will continue to impact our total costs and operating results.
Network Growth
Despite the pandemicpandemic and airline industry challenges, since the beginning of 2021 and through March 31, 2021,2022, we have announced service on 50on 123 new routes, 17 hyper seasonal routes, and to threeeight new cities, includingincluding seasonal and temporary routes. We will continue to manage capacity to meet demand, which we believe is a core strength of our business model. However, we have pulled back some of our growth in 2022 due to staffing challenges as mentioned below.
Boeing Agreement
In December 2021, we signed an agreement with The Boeing Company to purchase 50 newly manufactured 737MAX aircraft scheduled to be delivered in 2023 to 2025 with options to purchase an additional 50 737’s. We believe this new aircraft purchase is complimentary with our low cost strategy based on of our intent to retain ownership of the aircraft, the longer useful life for depreciation purposes, expected fuel savings and operational reliability from the use of these new aircraft.
Operations
Staffing challenges and employee call-outs continue to impact our operations and costs and we have pulled back some of our planned growth for 2022 as a result. We believe these issues are not unique to Allegiant nor do we believe they are systemic. Our primary focus duringirregular operations costs are also impacted by our policy to compensate passengers for their inconvenience in addition to the ticket price, not generally done in the airline industry.
We are investing incrementally in our employee hiring and retention and our operations in an attempt to improve performance and this may put pressure on unit costs in the near term. However, if these problems persist, we may suffer reputational damage and incur higher costs for irregular operations.
Union Negotiations
The collective bargaining agreement with our pilots is currently amendable and the parties have begun to discuss the terms of a new labor agreement for this work group. The terms of any new collective bargaining agreement will impact our costs over the term of the contract.
Pilot Scarcity
The supply of pilots necessary for airline industry growth may be a limiting factor. The pandemic has beenresulted in more than 3,000 early pilot retirements across U.S. mainline and cargo carriers and the pipeline for new pilots does not appear at the present time to conserve cash. be sufficiently robust to replace retired pilots and to allow for projected industry growth. The ability to hire and retain pilots will be critical to our and the industry’s growth.
Engagement of Schneider Electric as ESG Consultant
We have suspended paymententered into a three-year partnership with Schneider Electric to help us develop an Environmental, Social and Governance (ESG) program including:
–Identifying and prioritizing relevant ESG topics through a materiality assessment
–Establishing ESG goals and environmental goal achievement plans
–Developing an inaugural ESG report referencing the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) frameworks
–Providing ongoing carbon emissions reporting of cash dividendsScope 1, 2 and stock buybacks.3 greenhouse gas (GHG) emissions
–Supporting the communications efforts around our ESG program
VivaAerobus Alliance
In December 2021, we announced plans for a fully-integrated commercial alliance agreement with VivaAerobus, designed to expand options for nonstop leisure air travel between our markets in the United States and Mexico. We and VivaAerobus have suspendedsubmitted a joint application to the DOT requesting approval of and antitrust immunity for the alliance. The transactions are also subject to clearance by the Mexican Federal Economic Competition Commission.
We and VivaAerobus currently expect to offer new routes under the alliance beginning in the first quarter of 2023, pending governmental approval of the applications.
Sunseeker Resort
We recommenced the construction of theour Sunseeker Resort in Southwest Florida in August 2021 and closed and disposed of our family entertainment centers. We have eliminated other nonessential expenditures and have renegotiated arrangementsconstruction is ongoing with outside vendors, allthe expectation to open the Resort in an effort to conserve cash until revenues more fully recover.second quarter 2023.
Health and Safety
Amid various uncertainties and public concern during the COVID-19 pandemic, we have implemented the below measures to ensure health and safety for all traveling on our flights. Due to our focus on these health and safety measures, we were ranked by Safe Travel Barometer in August 2020 as the #1 airline among North American carriers and among the top five worldwide for best COVID-19 Traveler Safety Measures, with results based on an independent audit of more than 150 airlines.
–Maintain a comprehensive cleaning program for all aircraft that includes a regular schedule of standard and deep-clean procedures that exceed both CDC and Airbus guidance
–Aircraft receive regular treatment with an advanced antimicrobial protectant that kills viruses, germs and bacteria on contact for 14 days
–Utilize VOC (volatile organic compound) filters on board every aircraft, which remove additional organic compounds and ensure that cabin air is changed, on average, every three minutes, exceeding HEPA standards
–Require customers to wear face coverings through all phases of travel, including at the ticket counter, in the gate area and during flight
–Complimentary health and safety kits,which include a single-use face mask and cleaning wipes, available to all of our customers
–Crew members required to wear face masks on board and during any interaction with customers
–Social distancing principles at check-in, boarding and on-board to the extent practicable
–Treat hard surfaces in all office areas, including airport station offices, maintenance facilities, headquarters/administrative offices, withantimicrobial disinfectant/protectant, and utilize wall-mounted and handheld thermometers for employee and crew member temperature checks
–Partner with Quest Diagnostics to provide at home COVID-19 test kits to employees in the event local testing is not immediately available
RESULTS OF OPERATIONS
Comparison of three months ended March 31, 20212022 to three months ended March 31, 20202021
OperationsAs comparisons of our 2022 results to periods during 2021 reflect disproportionate changes due to the first quartercontinued impact of 2020 consisted of two months of pre-pandemic activitythe pandemic on air travel, and March 2020, which was substantially impacted by the pandemic. The entirety ofparticularly during first quarter 2021, was impacted by continuing reduced demand for air travel.we have also provided analysis of certain revenue and expense line items to 2019 results where helpful to understand trends in our performance.
Operating Revenue
Passenger revenue. For the first quarter 2021,2022, passenger revenue decreased 32.3increased 80.7 percent compared to first quarter 2020.the same period in 2021. This declineincrease was largely due to a significant decline inlower passenger demand related to COVID-19 as scheduledduring the first quarter 2021. Scheduled service passengers were down 26.4up 59.6 percent and scheduled service average base fare was down 8.8up 8.3 percent.
Passenger revenue for the first quarter 2022, as compared to first quarter 2019, increased by 10.5 percent, as passengers increased by 8.4 percent on an 18.7 percent increase in capacity resulting in a 5.0 percentage point decrease in load factor. Average scheduled service revenue per passenger increased by 1.9 percent over the same period in 2019 as a result of a 16.5 percent increase in air ancillary revenue per passenger.
The increase in air ancillary revenue per passenger was primarily driven by increased revenue from the sale of bundled products.
Third party products revenue. Third party products revenue for the first quarter 2021 decreased 14.72022 increased 65.0 percent compared to the first quarter 2020. This2021 and 31.1 percent compared to the first quarter 2019. The increase from 2021 is primarily due to decreased net revenue from boththe result of greater travel demand for rental cars and hotels asand increased Allways® Allegiant World Mastercard® revenues. Increased rental car and hotel rates combined with a result of fewer passengers33.2 percent increase in rental car days sold and with respect29.1 percent increase in room nights sold to hotel room revenue, particularly reductions in those traveling to Las Vegas. On a per passenger basis, third party products revenue was up 15.9 percent yeargenerate the substantial increase over year and 17.0 percent year over first quarter 2019.2021.
16The increase from 2019 is attributable to increased rental car rates (which more than offset the impact of fewer rental car days) and growth in our Allways® Allegiant World Mastercard® revenues.
Fixed fee contract revenue. Despite increased fixed fee flying for March Madness in the first quarter 2021, fixedFixed fee contract revenue for the first quarter 2021 decreased 13.82022 increased 74.0 percent compared to the same period in 20202021 as a result of a 16.0 percent increase in related departures due to decreaseslower charter activity during the pandemic. In addition, charter rates were lower in demand. The decreases in fixed fee revenue are related to COVID-19.2021.
Other revenue. OtherFixed fee contract revenue decreased 79.3 percent for the first quarter 2021 from the same period2022, as compared to 2019, increased by 26.6 percent as a result of a 4.9 percent increase in 2020. The decrease was due to decreasedrelated departures driven primarily by March Madness activity, in the non-airline subsidiaries including the closure of the family entertainment centers.higher charter rates and higher fuel cost passthroughs.
Operating Expenses
We primarily evaluate our expense management by comparing our costs per available seat mile (ASM) across different periods, which enables us to assess trends in each expense category. The following table presents unit costs on a per ASM basis, or CASM, for the indicated periods.periods, 2019 being included as a more representative pre-pandemic first quarter comparison. Excluding fuel on a per ASM basis provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility. Both the cost and availability of fuel are subject to many economic and political factors beyond our control.
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Percent |
Unitized costs (in cents) | 2021 | | 2020 | | Change |
Salary and benefits | 2.94 | | | 2.77 | | | 6.1 | % |
Aircraft fuel | 2.06 | | | 2.18 | | | (5.5) | |
Depreciation and amortization | 1.08 | | | 1.07 | | | 0.9 | |
Station operations | 1.07 | | | 1.01 | | | 5.9 | |
Maintenance and repairs | 0.58 | | | 0.54 | | | 7.4 | |
Sales and marketing | 0.29 | | | 0.45 | | | (35.6) | |
Aircraft lease rentals | 0.12 | | | 0.02 | | | 500.0 |
Other | 0.44 | | | 0.66 | | | (33.3) | |
Payroll Support Programs grant recognition | (2.28) | | | — | | | NM |
Operating Special charges | 0.04 | | | 4.25 | | | (99.1) | |
CASM | 6.34 | | | 12.95 | | | (51.0) | |
Operating CASM, excluding fuel | 4.28 | | | 10.77 | | | (60.3) | |
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| Three Months Ended March 31, | | Percent Change |
Unitized costs (in cents) | 2022 | | 2021 | | 2019 | | YoY | | Yo3Y |
Aircraft fuel | 3.55 | | | 2.06 | | | 2.55 | | | 72.3 | % | | 39.2 | % |
Salaries and benefits | 2.90 | | | 2.94 | | | 3.05 | | | (1.4) | | | (4.9) | |
Station operations | 1.42 | | | 1.07 | | | 1.00 | | | 32.7 | | | 42.0 | |
Depreciation and amortization | 1.00 | | | 1.08 | | | 0.93 | | | (7.4) | | | 7.5 | |
Maintenance and repairs | 0.60 | | | 0.58 | | | 0.58 | | | 3.4 | | | 3.4 | |
Sales and marketing | 0.48 | | | 0.29 | | | 0.54 | | | 65.5 | | | (11.1) | |
Aircraft lease rentals | 0.13 | | | 0.12 | | | — | | | 8.3 | | | NM |
Other | 0.59 | | | 0.44 | | | 0.57 | | | 34.1 | | | 3.5 | |
Payroll Support Programs grant recognition | — | | | (2.28) | | | — | | | NM | | NM |
Special charges | 0.00 | | 0.04 | | | — | | | NM | | NM |
CASM | 10.67 | | | 6.34 | | | 9.22 | | | 68.3 | | | 15.7 | |
Operating CASM, excluding fuel | 7.12 | | | 4.28 | | | 6.67 | | | 66.4 | | | 6.7 | |
Sunseeker Resort CASM | 0.06 | | | 0.02 | | | 0.05 | | | 200.0 | | | 20.0 | |
Operating CASM, excluding fuel and Sunseeker Resort activity | 7.06 | | | 4.26 | | | 6.62 | | | 65.7 | | | 6.6 | |
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NM - Not meaningful
SalarySalaries and benefits expense. SalarySalaries and benefits expense increased $5.3$16.1 million, or 4.713.6 percent, for the first quarter 20212022 when compared to the same period in 2020.2021. The increase is primarily due to the classification of $9.5 million as COVID-19 related special chargesan 18.3 percent increase in the first quarter 2020 (consisting almost entirelynumber of salary and benefit expense) offset by a decline in full time equivalent employees of 9.9 percent whenfrom the first quarter 2021 and higher wages offset by the employee retention tax credit recognized in 2022.
When compared to March 31, 2020.the same period in 2019, salaries and benefits expense increased by $14.6 million or 12.2 percent on a 16.3 percent increase in the number of full time equivalent employees year over three-year.
Aircraft fuel expense. Aircraft fuel expense decreased $6.0increased $81.3 million, or 6.798.1 percent, for the first quarter 20212022 compared to first quarter 2020 as2021. This is primarily due to a 65.1 percent increase in average fuel cost per gallon was relatively flat year over year. Systemand a 20.3 percent increase in fuel gallons consumed decreased by 6.4 percent on a 1.315.1 percent decreaseincrease in ASMs. Fuel efficiency (measuredcapacity.
When compared to the same period in 2019, aircraft fuel expense increased by 64.7 percent as ASMsaverage fuel cost per gallon)gallon increased 5.543.5 percent, year over yearASM's increased 18.2 percent, and fuel gallons consumed increased 15.0 percent.
Station operations expense. Station operations expense for the first quarter 2022 increased $22.7 million, or 52.6 percent compared to the same period in 2021 due to fuel saving initiatives, as well as less weight on manyincreased departures of our flights,10.9 percent and increased costs associated with irregular operations.
As compared to the same period in 2019, station operations expense increased by $26.8 million or 68.7 percent due to a 18.5 percentage point decrease13.1 percent increase in load factor as compareddepartures, increased costs associated with irregular operations and airport fees.
Irregular operations costs in 2022 were significantly attributable to COVID absences due to the first quarter 2020.Omicron variant in January and February. These absences resulted in numerous flight cancellations. The amount of irregular operations costs is significantly impacted by our decision to compensate impacted passengers for their inconvenience in addition to the ticket price.
Depreciation and amortization expense. Depreciation and amortization expense for the first quarter 2021 was relatively flat2022 increased by 7.3 percent as compared to the first quarter 2020 with a 1.2 percent decrease due to2021 as the retirement and sale lease-back transactionsaverage number of aircraft during 2020.owned and in service increased 8.6 percent year over year.
Station operations expense. Station operations expense for the first quarter 2021 increased $2.1 million, or 5.1 percent comparedCompared to the same period in 2020 primarily due to a 12.72019, depreciation and amortization expense increased $10.2 million or 28.1 percent increaseas the average number of aircraft owned and in airport and landing fees.service increased 28.8 percent year over three-year.
Maintenance and repairs expense. Maintenance and repairs expense for the first quarter 20212022 increased $1.6$4.4 million, or 7.219.0 percent, compared to the same period in 2020.2021. Routine maintenance costs increased as the average number of aircraft utilizationin service increased 12.5 percent year over year and there was up 1.4a 15.1 percent during the quarter and we incurred incremental costs preparing our fleet to operate at full capacity again.increase in ASMs.
Compared to the same period in 2019, maintenance and repairs expense increased by $5.0 million or 21.9 percent primarily due to a 37.6 percent increase in the average number of aircraft in service and an 18.2 percent increase in ASM's year over three-year.
Sales and marketing expense. Sales and marketing expense for the first quarter 2021 decreased2022 increased by 37.192.5 percent compared to the same period in 2020,2021, due to an increase in net credit card fees as a decreaseresult of an 80.7 percent increase in passenger revenue year-over-year as well as reduced advertising spend in early 2021 during the pandemic.
Compared to the same period in 2019, sales and marketing expense increased by 6.8 percent due to an increase in net credit card fees as a result of a 32.310.5 percent decreaseincrease in passenger revenue year-over-year as well as effortscompared to more adeptly deploy advertising spend during the pandemic.same period in 2019.
Other operating expense. Other expense decreased $8.9increased $8.4 million for the first quarter 20212022 compared to the first quarter 2020, mostly due2021 attributable to decreased activityincreased service and incremental increases in our non-airline subsidiaries.employee training activity.
Payroll Support ProgramPrograms grant recognition.recognition We. During 2021, we received a total of $91.8$203.9 million in direct grants during the first quarter 2021funds through the Payroll Support Extension Program. The direct grants werepayroll support programs and recognized as a credit to operating expense on our statement of income, over the periods for which the funds were intended to compensate. We recognized the entire $91.8 million as an offset to operating expense on our statement of income during the first quarter of 2021.
Special charges. Special charges of $1.7 million The funds were recorded within operating expenses for the first quarter 2021 compared to $172.9 million for the same periodfully utilized in 2020. The special charges relate to expenses that2021. There were unique and specific to COVID-19. These chargesno such funds received in 2021 include accelerated depreciation on airframes and engines resulting from an accelerated retirement plan, and losses within our non-airline subsidiaries. Special charges recorded in the first quarter 2020 primarily consisted of impairments related to our non-airline subsidiaries. See Note 2 of Notes to Consolidated Financial Statements (unaudited) for further information.2022.
Interest Expense
Interest expense for the quarter ended March 31, 2021 declined2022 increased by $1.4$3.0 million, or 7.517.9 percent as a result of declines in LIBOR impacting our variableover first quarter 2021, due to new fixed rate debt.debt and finance lease transactions entered into since first quarter 2021.
Income Tax Expense
Our effective tax rate was 20.825.4 percent and 74.720.8 percent for the three months ended March 31, 20212022 and 2020,2021, respectively. The effective tax rate for the three months ended March 31, 20212022 differed from the statutory federalFederal income tax rate of 21.0 percent primarily due to state income taxes;taxes and the impact of ASU 2016-09 related to share-based payments; and reserve for uncertainpermanent tax positions. The effective tax rate for the three months ended March 31, 2020 was primarily due to the tax accounting impactdifferences of the CARES Act which includes a $39.6 million discrete federal income tax benefit related to the full utilization of 2018 and 2019 net operating losses against taxable income in earlier years in which 35.0 percent was the enacted tax rate; the ability to carryback the 2020 net operating loss at a 35.0 percent rate applicable in earlier years; a deferred tax remeasurement related to the 2020 tax year; and state taxes. While we expect our effective 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.none are individually significant.
Comparative Consolidated Operating Statistics
The following tables set forth our operating statistics for the periods indicated:
| | | Three Months Ended March 31, | | Percent | | Three Months Ended March 31, | | Percent Change (1) |
| | 2021 | | 2020 | | Change(1) | | 2022 | | 2021 | | 2019 | | YoY | | Yo3Y |
Operating statistics (unaudited): | Operating statistics (unaudited): | | | | | | Operating statistics (unaudited): | | | | | | | | | |
Total system statistics: | Total system statistics: | | | | | | Total system statistics: | | | | | |
Passengers | Passengers | 2,334,503 | | | 3,175,450 | | | (26.5) | | Passengers | 3,734,262 | | | 2,334,503 | | | 3,450,278 | | | 60.0 | % | | 8.2 | % |
| Available seat miles (ASMs) (thousands) | Available seat miles (ASMs) (thousands) | 4,013,989 | | | 4,067,671 | | | (1.3) | | Available seat miles (ASMs) (thousands) | 4,620,144 | | | 4,013,989 | | | 3,910,239 | | | 15.1 | | | 18.2 | |
| Operating expense per ASM (CASM) (cents) | Operating expense per ASM (CASM) (cents) | 6.34 | | | 12.96 | | | (51.1) | | Operating expense per ASM (CASM) (cents) | 10.67 | | | 6.34 | | | 9.22 | | | 68.3 | | | 15.7 | |
Fuel expense per ASM (cents) | Fuel expense per ASM (cents) | 2.06 | | | 2.18 | | | (5.5) | | Fuel expense per ASM (cents) | 3.55 | | | 2.06 | | | 2.55 | | | 72.3 | | | 39.2 | |
| Operating CASM, excluding fuel (cents) | Operating CASM, excluding fuel (cents) | 4.28 | | | 10.77 | | | (60.3) | | Operating CASM, excluding fuel (cents) | 7.12 | | | 4.28 | | | 6.67 | | | 66.4 | | | 6.7 | |
| ASMs per gallon of fuel | ASMs per gallon of fuel | 90.4 | | | 85.7 | | | 5.5 | | ASMs per gallon of fuel | 86.5 | | | 90.4 | | | 84.1 | | | (4.3) | | | 2.9 | |
Departures | Departures | 25,684 | | | 26,312 | | | (2.4) | | Departures | 28,494 | | | 25,684 | | | 25,200 | | | 10.9 | | | 13.1 | |
Block hours | Block hours | 60,373 | | | 62,123 | | | (2.8) | | Block hours | 69,655 | | | 60,373 | | | 59,819 | | | 15.4 | | | 16.4 | |
Average stage length (miles) | Average stage length (miles) | 898 | | | 895 | | | 0.3 | | Average stage length (miles) | 920 | | | 898 | | | 904 | | | 2.4 | | | 1.8 | |
Average number of operating aircraft during period | Average number of operating aircraft during period | 97.3 | | | 93.5 | | | 4.1 | | Average number of operating aircraft during period | 109.5 | | | 97.3 | | | 79.6 | | | 12.5 | | | 37.6 | |
Average block hours per aircraft per day | Average block hours per aircraft per day | 7.4 | | | 7.3 | | | 1.4 | | Average block hours per aircraft per day | 7.1 | | | 7.4 | | | 8.3 | | | (4.1) | | | (14.5) | |
Full-time equivalent employees at end of period | Full-time equivalent employees at end of period | 3,998 | | | 4,436 | | | (9.9) | | Full-time equivalent employees at end of period | 4,728 | | | 3,998 | | | 4,067 | | | 18.3 | | | 16.3 | |
Fuel gallons consumed (thousands) | Fuel gallons consumed (thousands) | 44,426 | | | 47,479 | | | (6.4) | | Fuel gallons consumed (thousands) | 53,438 | | | 44,426 | | | 46,474 | | | 20.3 | | | 15.0 | |
Average fuel cost per gallon | Average fuel cost per gallon | $ | 1.86 | | | $ | 1.87 | | | (0.5) | | Average fuel cost per gallon | $ | 3.07 | | | $ | 1.86 | | | $ | 2.14 | | | 65.1 | | | 43.5 | |