Allegiant Travel Company 2026 Q2 Earnings Call

Good afternoon, everyone. Welcome to Allegiant Travel Company's second quarter 2026 earnings call. On the call with me today are Greg Anderson, Chief Executive Officer, Drew Wells, Chief Commercial Officer, and Robert Neal, President and Chief Financial Officer. Earlier this afternoon, we issued our second quarter earnings release, which is available on the investor relations section of our website, along with the supplemental materials accompanying today's call. The company's comments today will contain forward-looking statements, including our third quarter and full year 2026 outlook, statements regarding the integration of Sun Country and expected synergies, and other statements concerning our future performance and strategic plans. These statements are subject to risks and uncertainties. Actual results could differ materially from those anticipated.

For additional information, please refer to the safe harbor language in this afternoon's earnings release and our filings with the SEC. We will also be discussing non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures, where available, is included in the earnings release posted on our investor relations website. Before we begin, a brief note on comparability. Second quarter results presented in this afternoon's earnings release include the full quarter of Allegiant as well as Sun Country results from May 13th, the date of acquisition, through June 30th. Prior year results are Allegiant standalone. In order to provide the most meaningful commentary, some results will be discussed on an Allegiant standalone basis on today's call and will be noted as such. Outlook commentary on today's call is generally for the combined entity unless otherwise specified.

Finally, in order to fully outline the results of the combined entity, our prepared remarks today are a bit longer than usual. In the interest of time, we ask that each analyst limit themselves to one question. If a follow-up is required, please re-enter the question queue and we will get to as many questions as time allows. With that, I'll turn the call to Greg.

Thank you, Sherry, and thanks to everyone joining our call. I also want to welcome the Sun Country team members that are on the call for the first time as part of the Allegiant family. We are thrilled to have you with us. Let me begin with our results. The second quarter delivered record quarterly revenue, with both Allegiant and Sun Country achieving year-over-year TRASM improvement of more than 20%. Importantly, unit revenue growth outpaced unit costs, driven in part by strong execution across several new commercial initiatives. This performance helped us lead the industry in operating margin for the third consecutive quarter, underscoring the strength and resilience of both standalone business models and the exceptional contributions of our team members. We delivered strong operational results, including industry-leading controllable completion and mishandled bag performance, while in-flight NPS remains very healthy.

These achievements are even more impressive given we delivered them while closing the Sun Country acquisition and beginning integration. June, our first full month post-closed in a peak summer demand period, was particularly strong for both companies. We are excited about what we can achieve together, we remain focused on disciplined growth from a strong operating foundation, and our performance shows we are doing just that. While I'm pleased with the quarter's results, I'm proud of why we believe they are sustainable. Our performance is supported by a distinct competitive moat that is difficult to replicate. First, outstanding service to our customers is the foundation of our business and is the key to building a loyal customer base that continues to fly with us. Roughly 70% of our customers are repeat flyers. Second, our operating philosophy is the engine behind our success.

We run a low utilization model, maximizing flying during high-demand periods while reducing capacity on days that do not meet our financial hurdles. Third, owning our aircraft at attractive prices gives us significant operational flexibility and adds to our cost advantage versus our peers. MAX deliveries are contributing meaningfully to our results. With these aircraft representing 21% of scheduled service ASMs in the second quarter, this is up from 11% during the same period last year. Together with Sun Country, our well-timed MAX order gives us valuable aircraft access and expands our attractive route opportunities. Fourth, our deep community relationships create powerful local brand equity in markets we serve. Together, Allegiant and Sun Country are the number 1 or number 2 carriers in roughly 95% of our originating markets. Finally, our strong balance sheet is a critical advantage.

Thanks to our deleveraging efforts over the past year and our combination with Sun Country, an already strong balance sheet is even stronger. The true sustainability of our business comes from checking all of those boxes. In short, we are better positioned today than at any point in our history. Next, I want to turn to our commercial initiatives, which are gaining real momentum. Over the past two years, we've modernized our commercial technology, and we are now building on that foundation with enhanced digital, data, and distribution capabilities as we build greater flexibility to personalize customer offerings. Previous highlighted initiatives such as Allegiant Extra, improved bundling, and schedule and network optimization continue to mature and are contributing meaningfully to our TRASM outperformance. I'm also encouraged by the new initiatives our teams continue to advance. Our co-brand credit card is a clear example.

With remuneration to us up 24% year-over-year, coupled with planned enhancements to this program, we remain confident we can double co-brand remuneration over time from 5% of revenue today to 10%. Third-party distribution is another example. Our recently launched Expedia partnership marks Allegiant's entry into OTAs. Retaining control of our brand, product offering, and customer relationship is non-negotiable. Our direct API connection with Expedia enables us to reach new travelers while complementing, not replacing, the direct channels that remain at the core of our strategy. Additionally, building on the success of Allegiant Extra and strong demand for premium products, we recently announced plans to debut Allegiant First, which will be phased in on select aircraft in 2027. Together, these initiatives further strengthen our customer value proposition and are expected to support sustained earnings momentum in the years ahead. Turning to the integration. The quick close of our Sun Country acquisition reflects strong team alignment and early momentum.

We remain very confident in the synergies we outlined. Both airlines continue to perform well independently. Importantly, we have already made some good progress with our integration. Customers can now search for flights across both airlines, access a broader range of destinations, and complete bookings through a redirect to the operating carrier. Our commercial teams are beginning to form a holistic view of the combined network with an eye towards the future of optimizing schedules and route decisions based on demand, financial returns, and the seasonal strengths of each network. Our procurement teams are finding ways to streamline the supplier base and leverage the combined company scale. In fact, in the coming days, we will integrate our Las Vegas airport real estate.

On the regulatory front, we submitted our single operating certificate transition plan to the FAA and are targeting approval in the first half of 2028. That said, over the past few months, Sun Country has experienced elevated pilot attrition, concentrated among its junior MSP pilots and largely driven by increased hiring at the largest carrier in the Twin Cities. In response to this attrition and elevated fuel prices, we are reducing off-peak capacity in the Twin Cities during the back half of the year. We have already taken steps to expand training classes in preparation for the first quarter of 2027. The supply of qualified pilots remains strong. Our training classes are full. These pilots are scheduled to enter service later this year.

We are confident this capacity reduction is temporary. We expect to grow MSP capacity in 2027 through a combination of Sun Country and Allegiant flying. Turning to our Allegiant pilots, we're pleased to have reached a new collective bargaining agreement with nearly 80% voting in favor. This is an important milestone that recognizes the hard work of our pilots while preserving the work rules that support our differentiated scheduling model. I want to thank both negotiating teams for their tireless work in getting this agreement across the finish line. In looking ahead, we expect unit revenue growth to be in line with the second quarter's 24.6% increase for the third quarter.

We also expect the combined company to generate an operating profit in the third quarter, a meaningful improvement from the modest operating losses reported in the same period over the last 2 years, despite much lower fuel prices at that time. As a reminder, the September quarter is seasonally the weakest period for both carriers. For the full year, we continue to see broad-based demand supported by strong bookings, and we will remain aggressive in managing capacity through this volatile fuel environment. As a result, we expect full year 2026 EPS for the combined company to be at least $6 per share. This assumes fuel per gallon at $3.75 for the remainder of the year, which reflects the recent forward curve.

I should note that fuel prices remain volatile, and for reference, a $0.10 increase in fuel is worth roughly $0.50 of earnings per share in the combined company. We are proud of our ability to navigate a wide range of challenges while remaining an industry profitability leader. We remain focused on what we can control, delivering great service to our loyal customers, operating safely and reliably, maintaining capacity discipline, managing costs tightly, and seamlessly integrating Sun Country to unlock operating synergies. Before I hand things over, I want to again thank our team members across both airlines. This quarter, we delivered strong operating and financial results while closing a historic transaction. For the full year, we remain on track for margin expansion despite significantly higher fuel costs. Allegiant is better positioned than ever, and our commitment to building the leading leisure carrier in the U.S. remains unwavering.