Shannon Doherty: Very helpful. And then my second question, what drove the 6% decline in aircraft utilization? Are you still pursuing to get to 12-plus hours with the network changes, were getting to the 80% out-and-back flying, it sounds like you got to 75 already. I thought that we would have had much better aircraft utilization by now, but maybe to your earlier point because the [mortgage] are still ramping. Any color here would be helpful.
Jimmy Dempsey: Yes. Shannon, we’re still managing the oversupply that we saw in the back six months of last year, particularly in the January and February period. And so, in managing that, we took utilization down like we’ve done previously in the January and February off-peak periods, but we’re expecting utilization to be up in the high 11s, 12s for the rest of the year.
Operator: Stand by for our next question. Our next question comes from Helane Becker with TD Cowen.
Helane Becker: Two questions. One, at one point your flight attendants were objecting to the new schedule because they would earn less. Was that issue ever resolved?
Barry Biffle: Yes. Thanks, Helan. So, we actually negotiated on this very issue. They had wanted a guarantee of a minimum amount of multi-day trips in past negotiations, and we did not agree to that. So, it’s not really a dispute. It’s been settled. We do know that there are flight attendants that prefer multi-day trips, right, and that prefer to get the per diem and stay in hotels. This is a challenge for some of them. However, when you look at our growth, as we grow, if you think about it, every day, even though it’s only 20%, call it, multi-day trips, versus, call it, 40%, 45% maybe six months ago, we cut that in half, but every day we grow, the percentage of the total grows and within a year or so, we’ll likely be close to the number of people that want multi-day trips will be able to have them.
And when you look at the fact that what we’ve done in our hiring for the last six months, we have targeted specifically into bases, especially as the out-and-back, but Cleveland is a great example. Like almost everyone in Cleveland, we hired locally, and they are doing out-and-back from that city. So, it’s — I know it’s a challenge for a small minority that still want the out-and-back. But as we continue to grow, we expect those that want it within a year, all of them should be able to get it. So, we don’t see it as being a major challenge.
Helane Becker: Okay. That’s really helpful, thanks for explaining that. And then my other question is, you guys talk a lot about your cost advantage relative to the PR Group. And I’m just wondering how much does that advantage matter anymore, given everybody’s changes in the way they’re operating their route networks.
Barry Biffle: Well, I think it matters a lot. I think we have clearly shown, Helane — I know that there’s been this thought of bifurcation that the network carriers are somehow in a different place and that low-cost carriers are now in trouble. I think it — I think number one, the capacity deployment and the oversupply and the imbalances of that across the network is very clear and well understood now, which had a greater impact to low-cost carriers. But I think more materially, I think when you look at those that call themselves low-cost carriers, but yet their costs have been going up 5%, 10% a year. That eats into margins. That eats into margins and the fact that we’re hell-bent to be number one and continue to widen our cost advantage is why we’re starting to outperform.
Why we have the 3% to 6% guide for Q2 despite a 5% to 10% drag of new markets and why we’re confident with the cost tailwinds that we’re going to have from completing the out-and-back, the $200 million that Mark and I have talked about over and over and over, plus these things, that cost advantage is what’s going to deliver us and get us back to 10% to 14% margins in our target next year. So, costs matter and they always will, Helane.
Helane Becker: Okay. Yes, that’s really fair. I appreciate it. Just one quick one for Mark. How do we model the sale leasebacks for the rest of the year?
Jimmy Dempsey: Yes. So, from an overall perspective, I mean, I think if you just follow the fleet profile that we’ve outlined, so 23 deliveries this year, all sale leaseback financed, six expected in the second quarter, 11 in the back half of the year. So, I think that’s the way to look at it.
Helane Becker: Okay. All right. So, divide that 11 by 2-ish?
Jimmy Dempsey: Yes. I mean we haven’t guided specifically, but I mean I think it’s not a bad approximation.
Operator: Our next question comes from Jamie Baker of JPMorgan.
Jamie Baker: So, a follow-up on that. It looks like you had $71 million of sale-leaseback proceeds in the first quarter that you used to offset CASM. I mean, it feels like the business model is becoming increasingly dependent on aircraft financing decisions as opposed to the RASM and CASM stuff that we’re all kind of accustomed to. So, I guess my first question is, when sale-leaseback proceeds begin to fade, have you given any thoughts on how you might manage the business differently?
Barry Biffle: Thanks, Jamie. This horse has been beaten pretty dead. We covered this significantly, I think, a few months ago. But the bottom line is this. If you buy aircraft and you’re able to deliver them at likely below market rates, you’re going to get a gain. And we have illustrated that whether you do this through a sale leaseback or whether you do it through debt finance, the economics and the net income is the same. So, your gain that we’re calling out is simply because of the accounting rules that changed a few years ago. But if you actually — but if you’re being fair, you would give the same gains to American and United, Southwest and back those out. And to your point of when they fade away, well, that’s not happening anytime in the near term.
We have 200 aircraft on order. We have a clear, clear path. This needs to stop being talked about as a negative, Jamie, and talked about as an asset and a positive to the business. You need to look at the guaranteed cash flows that come from this over the next decade. This will not change, and we don’t plan on changing this unless the financing market changes. It’s a core part of the business. The cash is real, the earnings are real, and it’s the same as if we had debt financed.
Jamie Baker: Well, I guess the question though, if you were debt financed, wouldn’t that be more similar to amortizing the gain over the life of the lease. So, I guess put differently, if you would amortize the gain over whatever leases you struck in the first quarter, it wouldn’t be a $71 million benefit. Do you know what the approximate benefit would have been because, I mean, it’s obviously going to be a much smaller number?
Barry Biffle: Those aircraft would be a much smaller number, but then you would have been brought in the gains from all the other aircraft that you’ve delivered over the last 10 years. This is why we keep saying it, and there’s a really good presentation we put out on this.
Jamie Baker: No, no, I remember.
Barry Biffle: Okay. Well, that’s why we did it. If you go back and look, we showed you whether you did this over the old accounting, whether you did it through debt finance or whether you do it the way it’s being done now, which we’re following proper accounting, it’s the economic answer, the net income answer is the same.
Jamie Baker: I appreciate the color.
Jimmy Dempsey: Jamie, just to add to what Barry said. The market value for aircraft, particularly the 321neo is really, really strong. The issues that have been happening with the manufacturers in terms of delays in aircraft, the market price for selling an aircraft into the leasing community is higher than it’s ever been. It isn’t diminishing. Sure, the financing costs associated with that are going up with higher interest rates, but that market price of the aircraft is very, very strong. And we happen to buy aircraft at a material discount to the market. And so that’s why we’re getting the benefit. There’s a real asset value intrinsic in our aircraft order, and you see that every quarter.
Barry Biffle: I think let’s get back to focusing on what’s important. I mean what we’re excited about is we gave you a guide for Q1 that included it. Nothing changed with that. And we had really great performance and that is leading us to where we are now with what we believe is a solid guide for Q2 in the year even despite a high single-digit RASM hit and margin hit, which gives you the confidence to get back to the 10 to 14 points that we labeled as our target next year. That’s what we need to focus on.
Jamie Baker: Yes. And I don’t disagree as to the strength of the aircraft market, and we’re not looking for that to reverse any time soon. I mean on that point, we are in full agreement. So, thank you.
Operator: The next question comes from Conor Cunningham of Melius Research.
Conor Cunningham: On the 13 new crew bases that you’ve — or, I guess, the 13 crew bases that you have and the couple that you’re introducing now, I’m just trying to understand the cost mismatch that is currently kind of happening in 2024. Like as you open up Cleveland, for example, and then you kind of move more to this out-and-back network, is there a cost mismatch where you’re actually holding too many costs, too much cost this year before it starts to kind of become a good guide next year? I’m just trying to understand the dynamic on the cost side as you open up new bases.
Barry Biffle: Yes. I don’t think there is a cost mismatch. I mean, I think the $200 million cost savings target that we have, that run rate that we expect to get to by the end of the year, it is underpinned by this network simplification and the shift to over 80% out-and-back. That simplifies the operation, that provides efficiency across the operation. And so, we think it goes hand in hand, and we don’t think that there is a mismatch.
Jimmy Dempsey: And just to add to what Mark, the actual cost of opening the base, there are dollars involved, but they’re relatively small in the context of moving really valuable assets around the network and putting them in places where actually they’re making real money. And so, the upfront investment in a base opening is relatively small from a cost perspective. So, there isn’t a material cost drag from the opening event itself. There’s actually cost savings that come quite quickly after you open the base.
Conor Cunningham: Okay. Okay. Perfect. And then just on your pilots, the market’s obviously moved a lot. You have some airlines that are shedding pilots now for lowering pilots. Can you just talk about where you are in terms of your negotiation? What have been the sticking — anything new that’s kind of happening there? I mean obviously, I don’t want you to negotiate public. Just curious on what’s kind of going on right now and our expectations around when that could potentially get rectified.
Barry Biffle: The landscape is completely changed, right? I mean airlines have canceled classes, attrition rates have completely dried up. And if you want the canary in the coal mine — you actually saw this a while back. The fact that the regional airlines have been able to get staffed and hiring again tells you everything you need to know. There’s not the shortage. So yes, there’s not the pressure that there was building. As far as our negotiations, it is very early. It is — I mean we just started. And so — and we’re in mediation. And the history of these things are one to two years. Most of them are kind of center around the two-year time frame. So, I wouldn’t expect us anytime soon to be able to get through that process. It’s just a process. Once you sign up for mediation, you’re kind of locked into it. So, it’s going to take a while.
