Allegiant Travel (ALGT) Q1 2020 Earnings Call Transcript

Allegiant Travel (ALGT -4.22%)
Q1 2020 Earnings Call
May 12, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the first-quarter 2020 Allegiant Travel Company earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Sherry Wilson, director of investor relations. Please go ahead.

Sherry Wilson -- Director of Investor Relations

Thank you, Sarah. Welcome to the Allegiant Travel Company's first-quarter 2020 earnings call. On the call with me today are Maury Gallagher, the company's chairman and chief executive officer; John Redmond, the company's president; Greg Anderson, our chief financial officer; Scott Sheldon, our EVP and chief operating officer; Scott DeAngelo, our EVP and chief marketing officer; Drew Wells, our VP of revenue and planning; and a handful of others to help answer questions. We will start with some commentary and then open it up to questions.

The company's comments today will contain forward-looking statements concerning our future performance and strategic plan. Various risk factors could cause the underlying assumptions of these statements and our actual results to differ materially from those expressed or implied by our forward-looking statements. These risk factors and others are more fully disclosed in our filings with the SEC. Any forward-looking statements are based on information available to us today.

We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. The company cautions investors not to place undue reliance on forward-looking statements, which may be based on assumptions and events that do not materialize. To view this earnings release as well as the rebroadcast of the call, feel free to visit the company's investor relations site at ir.allegiantair.com. With that, I'll turn it over to Maury.

Maury Gallagher -- Chairman and Chief Executive Officer

Thank you, Sherry, and thank you, everyone, for joining us today. It's been a while. First, let me thank all of our team members, their spouses and families as we continue to fly our passengers during these difficult and this disturbing times. Thank you all very much.

As I said in our press release, these are unprecedented times we're living through, most of you have been listening to calls from the different carriers in the past two weeks. And the story from each of them is more from TRASM, CASM, capex and capacity changes to liquidity, liquidity and more liquidity. To that end, we'll provide you with some thoughts on where we are today and going forward. And you'll hear from our management team on the specifics regarding liquidity as well as how we are managing our schedule and how we're responding to our customers.

Over the years, we prided ourselves on being different. You will hear today how we continue to differentiate ourselves from our industry, a critical component for us has been our model. It's always been a core strength. Based on our model, our management team and our terrific team members, we believe we will emerge stronger from this life-changing experience in the coming months and years.

Clearly, none of us has ever seen an environment where booked revenues, as well as booked future revenues disappeared in less than a month. During the last three weeks of March, each week's falloff was so much worse than what we thought it might be. And our team members that fear is a lack of knowledge. The lack of knowledge was definitely the case from the middle of March through April.

We were starting to have some clarity, some knowledge and beginning to understand the path out of this calamity that we find ourselves in. There are three main types of traffic, in my opinion, in this industry, international, business and leisure. I believe the first two will be slow to return. In the case of our business, you're seeing another important evolution.

The world is learning to do things online to work from home. In our specific case, we've had multiple board meetings by video conferencing and plan to do it for the foreseeable future. This would not have happened but for COVID. Will it change our habits? Some think it will.

Historically, coming out of downturns, leisure customers have been the first to return. In January '09, with the onset of the GFC, we found leisure traffic responded very quite well in that first quarter. We believe that will be the case with respect to this downturn that leisure traffic will respond faster than business and international. And while we do not have any specific forecast to make, we are seeing some increases in the past few weeks.

I want to stress to our audience that how fortunate I feel to be involved with such a quality management team. This group has done extraordinary work in the past eight weeks, not only are they talented, but just as important, they are working very well together. I'm comfortable stating this group will continue to shine for us in the coming months, and you'll hear from most of them today. So judge for yourself.

We believe we are among the first to react to the COVID situation, recognizing quickly this was not a passing phenomenon. We immediately began shrinking our scheduled cutting expenses and capital investments, working with vendors on delaying payables and renegotiating our relationships with them as well. We have approximately 25% of our team members participating in some form of pay reduction program to date, and I want to thank them for that effort. We quickly ceased all construction expenditures on Sunseeker.

Scott DeAngelo, our CMO, since late March, has been focused on how we are going to recover. He's been surveying our customers weekly for the past eight weeks about their opinions on the pandemic, how they feel about it, when they plan to travel next and other key questions. He'll provide you with some further detail in a few minutes. I would never wish for an event such as this pandemic, but be that as it may is here.

It has dramatically altered the economic landscape. Bankruptcies have begun as I'm sure you're aware. Avianca, this past weekend, who operated approximately 45 A320s with CFM motors R type recently filed Chapter 11. Others will follow.

U.S. carriers, as you know, have a little park over 2,500 aircraft in the next few weeks. In the space of 30 to 60 days, what was once a robust seller's market for airplanes and equipment of the sort has been turned on in test. The most powerful liquidity tool we have today is to stop cash from leaving the building, both operating expenses and capital expenditures.

But for some aircraft, we agreed to purchase for delivery in the back half of this year and a few in the first quarter of '21, we have dramatically reduced our capex. Beyond the early 2021 deliveries, we do not have any further aircraft commitments. As a result, we'll be able to exploit one of our core competencies, our ability to trade into the aircraft marketplace. We have a long history in trading used aircraft.

Regarding our fleet, near term, we are looking at what is the right size. As a cash saving move, we want to retire a number of aircraft, perhaps as many as 10 to 15 because of upcoming expensive maintenance work. We will put these retired aircraft to good use. In addition to saving capital for repairs, we will benefit from parting out the aircraft, particularly the motors.

We are facing a great deal of expense in the coming years, particularly in motor overhauls. Now, however, between our motors from retirement and the inevitable availability of turned out aircraft, we will substantially reduce cash outlays, in my opinion, for planned motor work and other parts costs in the coming years. It's my belief we will begin to see numbers of older 320s and 319s in their motors available as part out opportunities in the not-too-distant future, and prices will begin to react accordingly. Furthermore, we will be one of the few players, I believe, in the market with the wherewithal to purchase these assets.

As you've heard repeatedly in the recent calls, companies are planning for the worst and hoping for the best. You will hear today, our version of this truth. We are definitely planning for the worst. To that end, near term, we are reviewing parking as many as 10 aircraft because of demand softness.

However, I believe you can conclude from our release and our comments today that our financial strength is among the best. This strength gives us the flexibility to respond if the market snaps back. The combination of the purchased aircraft I mentioned earlier for the rest of this year and into early 2021, and the return of the parked aircraft that we'll put down here shortly to service will give us a feet for 2021 roughly the size it is today. So we want to grow or take advantage of opportunities we believe there will be a wide variety of reasonably priced aircraft that we can pursue and purchase.

As I mentioned a moment ago, our model has always been one of our core strengths. First and foremost, we maintain optionality with our parked aircraft. Annually, we expand and contract our network based on seasonal demands. We also have simple network, out and back.

It's the idle approach when one has to cancel so many of their operations given the dramatic reduction in demand that we have been seeing. By trading in used aircraft, we also have an expensive model. Over the years, no one has been able to match our combination of a low-cost structure and low utilization. In the coming months, you will see our costs come in noticeably as we refocus on operational efficiencies.

As I said previously, reducing costs and capital expenditures is the best way for a carrier to [inaudible] their liquidity. One of my favorite sayings when we operated MD-80s was, we were a noncapital-intensive business competing in a capital-intensive industry. I believe we'll be able to use this description in the not-too-distant future. I'm the largest shareholder in this company with almost 20% position.

I want to assure you all that we are doing the necessary things to guarantee our future. We are still the same hard-nosed disciplined company and industry leader you're used to seeing. We are rightsizing the company. We are managing expenses and capital outlays.

We have sufficient liquidity. Our flexibility in managing capacity continues to pay dividends. 80% of our markets do not have any competition. We will continue these traditions.

In closing, I have been amazed that the varying options one sees and how to act during this pandemic. In my own family, Those who don't want to come out, they want to stay locked down. They believe there's a virus in every hard surface and floating everywhere in the air. Others are ready to rumble looking to get back out and resume their lives.

If one were to choose a 100-person sample, perhaps 40 to 50 would want to return to normal times while the balance do not. We, as an airline, have to be able to cope with this level of uncertainty, be able to rightsize ourselves to service those 40 or 50 looking to rumble in the coming months and hopefully see the remaining 50 return later this year and in 2021.In my opinion, we have the ability to size ourselves better than any other carrier. This flexibility will serve us well in the coming months and years as it has the past 19 years. Lastly, I want to personally thank each one of our team members for all they have done during this trying past six to eight weeks.

You are the backbone of the company. And while we are still in the woods, the sunlight is shining through a bit more each day. Thank you. John?

John Redmond -- President

Thank you, Maury, and good afternoon, everyone. Over these unprecedented times, there have been comments made by most, if not, all companies across industries, how they will come out at the end of this a different but better company. You have to ask yourself, what exactly does that mean? Our answer I'm sure is much different than most and probably the least expected given the earnings season commentary. It's a better balance sheet.

That's right, a better, stronger balance sheet. The steps to get there are difficult, painful and not without a motion, but required in order to come out the other side, better positioned, greater financial flexibility and more option. One of these difficult but required decisions was to shut down the Sunseeker Resort development. We have said from the outset, the most important component of our model is the airline.

We have to do everything we can to preserve the cash register and the earnings release outlines numerous additional steps that have been taken to date. We will not put any more capital into the project for at least the next 18 months as we deliver on our expectations to have the strongest balance sheet when we come out of this. The Allegiant model has been well tested over its history, and there is no doubt COVID-19 is the ultimate hurdle. Having said that, the financial discipline, the willingness and creativity to adapt and change and our dedicated, passionate Allegiant team will create opportunities this model never dreamed of.

Furthermore, the power of the model and the speed at which the team has reacted to date have put us in a position to not pursue equity dilutive transactions at this time, given what we are seeing to date. And with that, I'll turn it over to Scott Sheldon.

Scott Sheldon -- Executive Vice President and Chief Operating Officer

Thank you, John, and good afternoon, everyone. First, I'd like to thank our 4,500-plus team members across the network for their outstanding service and professionalism in the face of this global COVID-19 pandemic. Your efforts have been tremendous. I realize this call is mostly entirely about liquidity, capital raising efforts and cash preservation, but our team members and partners across the U.S.

are the backbone and the face of our organization and their unwavering commitment and loyalty to our customers is why our organization has and will continue to be successful in the future. You've embraced the uncertainty. You've remained flexible in incredibly challenging times. And for that, all of your senior leadership, thanks you.

From the onset of the pandemic, we have three immediate focus areas: first was to ensure the safety of our passengers and Allegiant team members; second is the rapidly adjusting of our daily operations to reflect a near zero demand environment, while also positioning our operational cost structure for a long-term slow recovery; and third was to develop an aircraft storage program for potential fleet management scenarios as the recovery curve progresses. As indicated in our release, we began to experience some booking softness in late February. And although we hadn't experienced a COVID-19-related flight cancellation, we activated our ECC, which is our emergency command center on March 6 to coordinate all aspects of our emergency response program, an anticipatory step that proved to be invaluable from an execution standpoint over the next 60 days. Without going into too much detail, this group was responsible for developing many of the COVID-related safety and health strategies, policy and procedure enhancements and overall operational execution in the first hours, days of the pandemic.

Some of the key highlights. [inaudible] champion, along with the marketing team, Allegiant is going the distance for health and safety, revamps our cleaning program for all aircraft to include scheduled and deep cleaning procedures, implemented hospital-grade standards across the system, established routine treatment schedule for all aircraft with advanced antimicrobial protectant that kills viruses, germs and bacteria on contact. We were the first to provide customers with a complementary health and safety kit upon boarding, which included a single-use face mask, disposable non-latex gloves and sanitizing wipes. We deployed VOC filters on our aircraft, which exceed HEPA air quality standards.

Social distancing practices have been put in place wherever possible during check in and at our gates and onboard aircraft. Health acknowledgment certification during online mobile check in. Also, we've extended our voucher redemption policy from one year to two years from initial booking, and that's important because for basically the 60-day period beginning first of March, we have returned $235 million in vouchers to consumers. So that allows them to extend for an additional year.

Moving on to our near-term scheduling philosophy. We wanted to create as much selling opportunities as possible coming out of a negative to net zero demand environment. This meant keeping as wide of the selling footprint as possible. In this case, this means maintaining 18 operational bases, fully staffed for a baseline of activity that we could reasonably be fine.

Basically, initial schedule reflecting a relatively free, full pre-COVID selling profile with a few exceptions to take advantage of potential opportunities as states and communities come online, travel restrictions are eases and nonessential businesses and entertainment experiences present themselves. This is in no way the most cost-effective approach. There are lots of obstacles and challenges in executing to a public schedule that will largely go on phone and it creates significant costs that could otherwise be mitigated, but we feel the trade-off is worth it in the near term. A byproduct of this is the micromanaging of our flight schedules by our network team on a weekly, if not, daily basis, looking at individual dispatch decisions based on cash profitability.

At the end of the day, we ultimately have to get back to flying the schedule we publish. There has to be scheduled integrity given the traditional frequency profile we fly. But as loads and demand slowly build, we can continue to execute on this strategy, basically, low load cancellations equals minimal passenger disruptions. Overall, it's proven to be successful, relatively speaking.

And we are capturing more flying than we would have otherwise captured. Drew and Scott will speak more on that in a second. And lastly, our fleet, aircraft induction and maintenance and engineering teams have done a tremendous job launching an Airbus aircraft storage program on the fly to accommodate any number of fleet scenarios as we progress through the back half of the year. Our teams have done a great job at positioning majority of our fleet to be ready on a short notice.

This is particularly important given how we are overscheduling the airline in the near term. Long term, as indicated in the release, we expect to retire and/or store as many as 25 aircraft, which can be action based on a number of different scenarios. Once again, thanks to all involved. You give the network and planning team the tools that they need to navigate a very troubling environment.

And with that, I'll turn it over to Scott DeAngelo.

Scott DeAngelo -- Executive Vice President and Chief Marketing Officer

Thanks, Scott. As Maury alluded to, since late March, our commercial approach has been focused tightly on executing a recovery road map that leverages our robust monitoring of the COVID-19 situation in order to lay the foundation for recovery and the next generation of air travel post COVID-19 and ultimately to drive a recovery that capitalizes on new opportunities that may arise. Our direct-to-customer distribution model and moreover, the direct customer relationships it enables us to maintain has been invaluable during this period, both in terms of gauging customer sentiment in these uncertain times and in terms of capturing customer demand as it returns to the market. We stay close to our customers, and we've been continuously gauging their sentiments through proprietary tracking surveys that we filled in each of the past eight weeks.

As of Sunday, our customers are telling us they overwhelmingly believe things are getting better. And while most expect it will take more than six months for life to return to "normal," nearly two-thirds plan to travel by air before the end of the year. Also promising news for the leisure travel sector overall is that about half so they plan to stay in a hotel or vacation rental property, while nearly one-third plan to visit friends or relatives and the remaining 20% plan to travel between their primary resident and a second vacation home. Also, in close partnership with our corporate intelligence and data science teams, we've been able to monitor health, economic and other factors impacting the cities we serve.

To date, both the personal help and the economic help as well as the overall sentiment for most of our key origin cities in the Midwest and Mid-Atlantic have been consistent with a near-term recovery scenario for much of our network. The foundation for recovery, as Scott mentioned, has been going the distance for health and safety, an integrated holistic approach to fundamentally enhancing our cleaning, health and social distancing practices, complete details of which can be found in allegiant.com and have been shared far and wide across national media, thanks to industry-leading measures such as providing each and every passenger who boards with a free health and safety kit. Building off this strong foundation, our data-driven direct-to-customer marketing approach has enabled us to surgically identify and capture demand on a route-by-route basis, which began to lift off the bottom in mid-April. Since then, we've seen steady growth in the number of qualified flight searches being conducted by web users at allegiant.com with some time periods in market at levels even higher than last year.

More importantly, we've seen this elevated web traffic begin to translate into an uptick in bookings for select markets over the past few weeks correlated with beaches opening on Florida's West Coast in Panhandle. That being said, our two largest summer travel destinations, Orlando and Las Vegas, will need to reopen their flagship theme parks and casino resorts, and for that matter, NFL stadiums for us to see the next step change in demand recovery. Finally, as we continue up the recovery curve, we're also benefiting from other aspects of our unique business model, namely the proprietary booking platform, which is enabling us to fast-track development of contactless or touch-free elements to the customer travel journey as well as offer hotel and only booking capabilities for those looking to drive to Las Vegas or Florida resorts. Drive market travel is expected to recover faster than air to these destinations, and we've been working closely with the leading agencies and bureaus in both regions to play a role in their comeback.

Remaining true to our purpose, even while flexing during these challenging times, we're exploring all natural options to capture greater share of leisure travel spend as it returns to the market. And with that, I'll turn it over to Drew Wells.

Drew Wells -- Vice President of Revenue and Planning

Thank you, Scott, and thanks, everyone, for joining us this afternoon. I want to build a bit on what you've heard so far and expand briefly on our approach and our differences from the industry at large. We have taken in this environment with largely the same detailed process that we used to assess capacity in a normal state just at a significantly more frequent rate. We have maintained a very broad network and selling presence, and all future round trips are assessed for cash profitability.

While most carriers offered less than 30% of their schedule for May, we held about 75% of flights available. We made some hard decisions on entire routes and got in front of some low-hanging fruit such as lower demand Tuesday flying or consolidating flying in the event we have multiple daily flights on the same route. For the remaining 75%, we are monitoring net bookings and making decisions on a round-trip basis as we get clarity into the final strength of the flights a week or more in advance. As Maury mentioned, our business model is set up to quickly and appropriately respond to any level of demand.

Like all others, our capacity was significantly reduced in April, as we operated just 12.6% of the expected departures. However, we completed weeks flying as low as 9.6% of the original expectation and as high as 24.6%. Our out and back routing structure and relative simplicity of scheduling provide a tremendous benefit when making very granular decisions. While this certainly drives a lot of work in the short-term reviewing and forecasting flying that is likely to be canceled, I believe strongly that it puts us in an advantageous position to have both the visibility and more importantly, the ability to react immediately whenever and wherever demand begins to return, whether in a one-off or sustained form.

Bookings are not there yet. However, as you've heard today, we are seeing mild sequential improvement. There's a long way to go still, but leveraging the flexibility of this business model will put us in a remarkable position when systemwide demand does return. And with that, I'd like to turn it over to Greg.

Greg Anderson -- Chief Financial Officer

Thanks, Drew, and thanks, everyone, for joining us today. For the first quarter of 2020, we reported a consolidated GAAP net loss of $2.08 per share, and this was due to an impairment charge of over $160 million related to our non-airline subsidiaries. On an airline-only basis, we recorded over $50 million in op income or a 12.6% op margin. This is despite seeing a precipitous drop in revenue during March, our busiest month of the year, and is a testament of the earnings power and flexibility of our unique model.

Rather than discuss the puts and takes of these results, we felt it is appropriate to focus on the metrics that matter most in the current environment, maintaining sufficient liquidity and minimizing cash burn. Due to the impact from COVID-19, we took quick and aggressive action to cut costs and preserve liquidity. This is outlined in our earnings release. So far, we estimate these actions will result in nearly $375 million of total cash outflow reductions to our initial full year 2020 plan, with approximately 80% of the reductions in the form of capex and the suspension of our quarterly dividend.

The remaining balance is attributed to the removal of non-flight relating operating costs, including, but not limited to, marketing, contractors, travel, subscriptions, non-airline labor and renegotiating contracts with vendors. Perhaps worth noting, the $375 million reduction in cash outflows did not take into account further cost reductions we achieved by pulling back capacity, such as variable costs associated with airline labor, fuel, stations and maintenance. Regarding liquidity, in February, we went to the market to reprice our Term Loan B facility and achieved 150 basis point reduction to our rate. Due to strong demand, we also upsized the facility by $100 million.

At the time, it was unclear the importance of this move as a short couple of weeks later, the impact from COVID-19 began to put pressure on the capital markets. Including this upsize, we ended the March quarter with $464 million in total cash. In April, we obtained financing of $31 million secured by two A320 aircraft at a very low interest rate. Also in April, we received our first installment of the CARES Act payroll support for $86 million, and our monthly cash burn was reduced to $65 million or $2.1 million per day.

The cash burn partially offset these two liquidity inflows to bring our ending April total cash balance to $516 million. In addition, Allegiant's portion of the payroll support under the CARES Act is $172 million, half of which we received in April, and we will receive the bulk of the remaining amount in the second quarter. As we look ahead, we expect the cadence of average cash burn for the second and third quarters to be approximately $2.1 million and $1.5 million per day, respectively. These average burn rates assume gross bookings per day of $750,000 for both quarters, which is based on booking trends we saw in mid-April.

We have continued to see modest improvements in bookings since that time, as Drew mentioned. This is down more than 85% from 2019 levels. In comparison, a year ago, this amount would have been approximately $5.5 million per day in gross bookings. For reference, our low point in gross bookings during the last two months was about $250,000 per day.

So to be clear, the $750,000 average bookings per day is not our forecast, it is just simply held constant to highlight the area we can control our costs. However, should demand stay at these low levels, in the fourth quarter, we estimate an average cash burn well under $1 million per day. Reducing our cash burn is the most efficient liquidity strategy we can effect. Another efficient mode of increasing liquidity comes through our federal tax refunds as afforded to us by the CARES Act.

This legislation allows for a five-year carryback on tax operating losses. So for Allegiant, this means a $94 million cash refund on our 2018/'19 NOLs. In early April, we submitted these NOL carryback claims with the IRS and expect to receive this cash refund in the coming weeks. We expect an even larger cash refund, more than $100 million to come in for our estimated 2020 NOLs early next year.

We also applied for a portion of the CARES Act loan of up to $276 million. We are currently evaluating our need to tap this program for liquidity. A terrific benefit of the loan program is the optionality it provides, not only does it serve as the backstop through September, it has the added benefit of being a benchmark that is proving helpful for us in discussions with other lenders for additional financing. I would like to add my most sincere thanks to the treasury department, their advisors at PJT and Cleary.

They've been working tirelessly around the clock to ensure quick access to as much needed liquidity. The CARES Act alone has provided up to nearly $650 million in available liquidity to Allegiant via NOLS, PSPs and loans. Of this amount, $350 million pertaining to the NOLs and PSPs does not have to be paid back. This $350 million of nondebt liquidity would cover more than 85% of our total cash burn from April through December.

This assumes that down case scenario previously mentioned of daily bookings down 85% with an average of $1.5 million in daily cash burn throughout the period. This example helps illustrate why our No. 1 priority in terms of liquidity is further reducing our costs. While there have been many tough decisions to date and likely more many to come, doing so is the best defense of our balance sheet, improve vital and coming out as healthy as possible on the other side.

As it relates to the additional alternative sources of liquidity, we have several levers available, and we are keeping all options on the table. However, based on our current numerous scenario planning, at this time, we think it is unlikely we will need to pull any of these levers. As noted earlier, the optionality of the treasury loan provides us additional time to continue monitoring this environment. The available amount of up to $276 million through September provides us confidence we have the access to ample liquidity to make it to the other side.

Turning to capex. For the remaining nine months of 2020, gross capex is now under $200 million. This amount includes the potential acquisition of up to 7, 320 aircraft and four CFM engines. We are in ongoing discussions with the respective counterparties of these assets, but any we may take will be financed.

Regarding fleet, no one knows when demand will return. Therefore, fleet flexibility is critical. Accordingly, we are working on plans to strategically park up to 25 of our existing aircraft depending on the demand environment. Our current expectation is up to half of these aircraft may be permanently retired.

We intend to maintain flexibility with the other half by either retiring or reinstating based on the recovery timing of travel demand. Retiring and/or parking these aircraft allows us to meaningfully optimize spend on engine maintenance down the road. By a way of example, we now expect our 2020 and '21 heavy maintenance capex to be reduced by $60 million and $75 million, respectively. Additionally, strategically parking aircraft now will provide optionality for us to bring some of them back beginning in '21, should travel demand warranted.

We have commitments for only two future aircraft next year, and if we purchase, we expect to finance them. Including these two aircraft, we would expect total gross capex for '21 to be less than $150 million. Core to Allegiant Travel is our airline. Our No.

1 priority is to ensure survival and long-term success. In order to make this happen, we have suspended construction indefinitely on Sunseeker and restructured Teesnap and nonstop to be self-sufficient in terms of cash flow. As a result of suspending construction on Sunseeker, coupled with no current plans to complete, we have recognized $137 million impairment over its related assets writing them down to a fair market value of roughly $35 million. A focus of ours coming out of this environment will be to quickly restore our balance sheet.

We are planning to maintain our regular debt servicing schedule during the crisis and make nearly $300 million of principal payments from now until the end of '21. These principal payments should help to offset the incremental debt added as a result of COVID-19. In closing, we are a nimble airline uniquely built on a flexible capacity strategy. We believe this will help us during this crisis.

However, we will continue to maintain discipline and further rightsizing our cost structure to support any demand environment to help restore our earnings power as timely as possible. And with that, I'll turn it over for Q&A.

Questions & Answers:

Operator

[Operator instructions] Our question comes from the line of Mike Linenberg with Deutsche Bank. Your line is now open.

Mike Linenberg -- Deutsche Bank -- Analyst

Oh Hey. Good afternoon. Actually, two questions here for Greg. So Sunseeker, no capex tied to it, basically, nothing for the next 18 months.

Isn't there some debt? Or is there any sort of liability? Is there any sort of cost associated with it over the next 18 months, keeping it in sort of this more [inaudible] in state? Is there going to be cash out the door? Any sort of charges? It's not completely zero or is it?

Greg Anderson -- Chief Financial Officer

Hey Michael, thanks for the question. As far as debt, there's no debt that we've drawn on that. So there's no debt obligations at this point. In terms of additional costs, now there is some outstanding payables that we've committed to before stopping down that we're bleeding out over the next few months.

So we intend to make those payments, and that's built into our cash burn number that we provided. And then there's some minor investments or there's some minor costs, I'd say, nominal to just secure our investment in that property, but nothing to write home about.

Mike Linenberg -- Deutsche Bank -- Analyst

OK. Like tax payments too, right, you have to pay -- or maybe there's none? There's nothing there. I'm just thinking of property tax or maybe there's actually none in the state of Florida, now that I think about it, so?

Greg Anderson -- Chief Financial Officer

Yes. And everything is pretty minor. It's not a meaningful investment or not a meaningful amount of investment.

Mike Linenberg -- Deutsche Bank -- Analyst

OK. That's helpful. And then just my second question. When we think about unencumbered assets and anything that you could potentially sort of pledge to secure additional financings, whether it's the loan program under the CARES Act, what do you currently have? And can you give us just a rough estimate of what available unencumbered clutter would be?

Greg Anderson -- Chief Financial Officer

Sure, Michael. So all of our nonaircraft and engine collateral, that's pledged to the term loan. So really the dry powder we have, for the most part, is our unencumbered aircraft and engines. And then I'd also add, we have a lot of equity in our aircraft because it's currently under secured financing because we're paying it off so quickly.

But in total, our unencumbered assets, aircraft and engines, I think we have about 28 aircraft, eight spare CFM engines that are unencumbered. So that gives us $36 million. I think the fair market value currently is about $430 million to $450 million on these assets. And so depending on the LTVs between 50% to 75%, you could probably raise $215 million to $250-or-so million.

Mike Linenberg -- Deutsche Bank -- Analyst

That's fantastic. Thanks for it. Thanks for the detail Greg.

Greg Anderson -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Catherine O'Brien with Goldman Sachs. Your line is now open.

Catie O'Brien -- Goldman Sachs -- Analyst

Hi. Good afternoon everyone. Thanks for the time. So maybe just a couple on a cash burn.

So I guess, first, are you including the impact of the CARE grants in that cash burn? I just wasn't entirely clear. And then I have a couple on the cash burn as well.

Greg Anderson -- Chief Financial Officer

Sure. No problem, Catie. No, we're not. The impact of the PSP grants are excluded from our cash burn number.

Catie O'Brien -- Goldman Sachs -- Analyst

OK. Perfect. And then just on the $750,000 daily gross bookings, is that offset at all by refunds? And so maybe the net revenue assumption is lower? And then how does that net assumption compare to what you're seeing right now? And then lastly, on the cash burn, what's driving the improvement on the cost side from 2Q to 3Q since you're assuming revenue assumptions are static?

Greg Anderson -- Chief Financial Officer

Sure. Yes, the $750,000 gross, that's a gross number. So refunds would net that down. We've seen, I think, relative to others and I don't want to get into the exact amounts, relative to other carriers, I think we have modest cash refunds out the door.

And then as far as the cost reductions that you're seeing in the cadence, I would say a lot of the efforts that we outlined in the release that take place, that's kind of the driver from where we've seen the second quarter average to go down to the third quarter average. But what really is driving that down or just we have outstanding payable, as Maury mentioned this in his opening remarks. Once this started in early March, we reached out to all of our vendors, we started working on deferred payment plans, and it was a monumental effort across the board. We appreciate our vendor partners and everyone, but we're committed to paying all our vendors.

And so you're seeing us bleed that outstanding payables out over the next few months, and then we'll get back to a normal rate. So that's worth about, I guess, $500,000 per day, if you do the quick math. And then I think the fourth quarter drop that we're alluding to is that would be just the rightsizing of our cost structure just based on where demand is at. And so that $750,000 gross booking numbers, we're just trying to keep that constant to show you a down case scenario and just to really highlight where the cost puts and takes would be.

Catie O'Brien -- Goldman Sachs -- Analyst

OK. Understood. And then maybe if I could just sneak a couple in on Sunseeker. So just to be clear, all these impairments were noncash.

And then on the future of Sunseeker, you're saying not going to receive any funds from Allegiant for at least 18 months. Two on that, if you can't find a strategic partnership, would you be able to just pause construction for that entire period? Are there any costs to locking down the site? I think you kind of already answered a bit on that to Mike. And then second, if you do find a strategic partner to continue construction and start-up costs, would you move forward with that? And I guess, if you do move forward with that, would you only consider a partner that would allow you the same flexibility and bundling packages, etc., that you would have had without a partner? Thanks so much.

Maury Gallagher -- Chairman and Chief Executive Officer

Catie, you're like 17 months ahead of us right now. We just had [inaudible]. So it's shut down. It's not what we're doing.

We had to pick a number. It's an asset. We got to do something eventually. But like I said, that's moons ahead of us.

Greg Anderson -- Chief Financial Officer

And it is. The impairment is noncash, Catie, just to answer that, your first part, the impairment, yes, that's a noncash impairment.

Operator

Our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is now open.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Hey thanks. Thanks for the time. So one, I just wanted to say that the commentary on declining cash burn with no improvement in underlying demand is perfectly clear, and I think that's a really interesting perspective. Regarding demand, you said it got as low as, I think, $250,000 a day, and you're seeing $750,000 per day at some point or recovered to that, where is that now? Is it better than the $750,000?

Drew Wells -- Vice President of Revenue and Planning

No. I think this is Drew. That's a pretty good look at where we're at today.

Duane Pfennigwerth -- Evercore ISI -- Analyst

OK. And then big picture, 2021, obviously, you guys can flex up, flex down depending upon how you think this is going to play out. And my guess is July is sort of a pivot month into the rest of the year. But can you just give us a range of outcomes into 2021? And then just as a follow-up, how confident are you in your ability to sort of resize the cost structure to those various scenarios?

Drew Wells -- Vice President of Revenue and Planning

This is Drew. I'll kind of kick it off with, I guess, scenarios, and it will be kind of a nonanswer that anything is pretty much still on the table. You're right that July is a pivot month, but to be able to give a lot of insight into what's going to happen in three and 4Q depends on, I guess, what you think about second wave, what you think may happen with Orlando and Vegas. And I think there's just so many moving parts that the spectrum of possible scenarios is gigantic, at least from my vantage point.

I'll look to others around the table to if there is different thing.

Maury Gallagher -- Chairman and Chief Executive Officer

Well, let me just make a macro comment, Duane. This is all about cash management. And what Drew is doing right now is we're cash forecasting each flight literally. And if it makes sense, we're running it.

Certainly, at a point once you get to be big enough, you have to be more discerning in capturing and canceling flights with impacting customers and things like that, but we're certainly in a transition. So for the foreseeable future, it's going to be a cash call on just what we're going to do going forward. And that's the whole liquidity burn. The things we can control, the capex, all those investment types of things.

I think Greg put in the numbers, $375 million we've taken out so far of this onetime and ability to do that. We're going to continue to focus on that, and we'll slowly but surely react to the marketplaces that presents itself. I'm personally optimistic, like I said in my comments. I know a lot of people that just want to get out and use the tongue in cheek rumble.

People are tired of sitting at home, and we just -- we travel among ourselves on the weekends, and John can speak for it. Coming out of Southern California, they just -- people are on the beaches. Somebody told me they were down in [indiscernible] in this weekend as the river runs through there. The place was packed with people as well as a lot people.

Social distancing was not in their lexicon, according to him. So you're getting all kinds of signals. And the thing that I see personally is there is really no hard data you can point out in many ways, its opinions. And some people have an opinion that they're going to go out.

And other people, they wouldn't be caught outdoors if God came down and said it was all clear. So it's just going to be a wait and see as we kind of feel our way through this.

John Redmond -- President

I think, Duane, the only other thing that worth commenting on in your question, well, it's had to do with the confidence around rightsizing our cost structure and whether or not we're confident about doing that. And the emphatic answer is yes. We've demonstrated that in the past, and we'll demonstrate that going forward. So you've heard in our commentary and you can see the language in the release that we're very confident about being able to do that.

Duane Pfennigwerth -- Evercore ISI -- Analyst

If I could sneak one more in, not that you're a Vegas story, but you are there. And I think in many respects, the airlines are somewhat ahead of the resorts and the hotels. What are you hearing from Vegas? What is your view of the reopening plan? And how far before customers can sort of confidently book vacation packages in Vegas?

John Redmond -- President

Well, I mean, I don't know that there's any visibility in that regard. I mean I think when you look at a lot of the Vegas hotels, they were hoping to open early, as you can see, just by their booking windows, a lot of them are allowing people to book into Memorial weekend. That didn't happen. Having said that, the governor made pretty quick announcements when it came to opening up some of the local elements that we have here, didn't give a lot of advanced notice in that regard.

But I'd imagine at least maybe our hope would be that when it comes to the strip and the resort corridor that there would be a lot of advanced notice on that, realizing that people need advanced notice to be able to book and react to it properly, especially operators. So my guess would be that, that would happen, but trying to predict anything would be very difficult in this environment as to when that would happen.

Maury Gallagher -- Chairman and Chief Executive Officer

Well, we've had some operators, Duane, I think [inaudible] a gentleman, Matt Maddix. He suggested that he wanted to open on Memorial Day weekend. I talked to him personally. But you've not had the powers to be throw the switch, so they could do things.

Other people have suggest they wanted to open May 15. So I think [inaudible] have to bid. I think we talked to one hotel, said he was fully booked for June.

Drew Wells -- Vice President of Revenue and Planning

When you look at it too, in a lot of jurisdiction, hotels are open. What the wrinkle here in Nevada is you have gaming which is a privileged license, right? So that requires not only the governor, but we tried the Gaming Control Board to approve that. So that's the added wrinkle that you have here in Nevada. I would imagine both bodies will act in concert and they arrive at that too soon.

And I would hope that happens sooner rather than later, but predicting a date would be impossible.

Maury Gallagher -- Chairman and Chief Executive Officer

Our two weakest, if you want to pick our big five or four markets, the two tougher ones right now are Orlando and Las Vegas. And they're trailing the others that we're seeing pretty good activity on. So we've got upside. We're looking forward to that.

And I would think Disney World in Orlando is going to be opened in Shanghai. So they've got to be in the power or moving toward that date. It's coming. I think we all understand that you just can't pick date certain as when it's coming.

But I would be absolutely astonished if these hotels here in Vegas aren't open within the next 30 to 45 days.

Drew Wells -- Vice President of Revenue and Planning

I would too. And I think when you look at Florida, they've been out in front of this opening the state, so to speak. And Disney, they're taking bookings on the Disney World resorts beginning on July 1. So that's somewhat of a statement that they're kind of making that they think they're going to probably open up around that time frame.

They've started to open up their retail locations already. So I'm sure Disney is in conversations as the operators are here. So I would agree with Maury that this is probably in that 30 to 45-day time frame.

Maury Gallagher -- Chairman and Chief Executive Officer

Thank you. That was great.

Operator

Our next question comes from the line of Joseph DeNardi with Stifel. Your line is now open.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Good evening guys. Maury, can you just maybe opine on what you think this means for air travel demand longer term, I guess, is going to lead to any structural changes in your business? I mean obviously, you've placed some pretty big bets on kind of the resiliency of travel and the secular drivers of growth behind that. Does this change how you view any of that longer term?

Maury Gallagher -- Chairman and Chief Executive Officer

Well, I think you've got two fundamental issues. It's how long does people's memories last, and how fast does this disappear. We are very predictable species. I think in many cases, wanting to do things and the like.

I think the main structural change in many ways is it's going to be in the business world where you've proven that you can do a lot of work with the Zooms of the world. Having said that, when times get good, they forget these things. I mean you look back at the mentality going into March 1 in this country and mentality on April 1, it was a sea change. Can you get back there? Well, it was 12 years getting to March 1.

Does it happen this week or next? Obviously, no. And I think you'll just go back and study your history. It's going to be structural, I think, around those types of things. As far as sizing and the like, who knows? I like our prospects because we're niche, and we can play in places that other people can't or aren't comfortable.

Remind of our folks, in 2005, Northwest came after us and put airplanes on top of us from Fargo and Des Moines and the like into Vegas, and they stayed around for a year, but they just didn't work for them because they're not built to work like we are. So that's a plus. Is there short-term problems with people coming down hill? Maybe, but long term, I don't think it works that way for us. But the industry, it's got to shrink, obviously, but I'm reasonably bullish that as a population, we're going to grow.

We're going to be, right now, I don't see any material weakness in the economy that other than we're spending like drunken sailors and whether or not that will have any problem. But there'll be short-term problems with unemployment, certainly, but Scott DeAngelo probably better than this, it doesn't seem from our surveys that it's like, "Oh, my God, people are doing nothing."

Scott DeAngelo -- Executive Vice President and Chief Marketing Officer

That's right. In fact, the majority of people in our surveys report their personal financial situation has largely stayed the same and/or gotten better. Obviously, most of those and stayed the same, getting better than the ones that might have got the bigger checks. But the fact is, in the Midwest, mid-Atlantic, the Upper West, I got to tell you, they don't share the opinion that the evening news is putting out there.

And we see and hear that one more step before you fall, most tracking surveys out there have asked the question about, do you go all in for public health? Or do you balance public health with the needs of the economy? The nation as a whole has been 50-50. The Allegiant customer base has been 75-25, every time we've asked that question in favor of you balance public health with the needs of the economy and you get out there. So our footprint just so happens to mirror where the sentiment is very different than a general pop survey that captures, New York, Dallas, Atlanta and Los Angeles.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

OK. Yes, that's helpful. And then maybe one for Greg or Scott, one of the key differences you guys have is the ability to flex up and down. And so can you just maybe quantify a little bit more like if you shrink the fleet by 25 aircraft, what does your opex do in that environment? If you shrink it by 35, like what does it do? Are there certain pain points the long way where it gets harder to scale up and down? Can you just maybe quantify that a little bit?

Scott DeAngelo -- Executive Vice President and Chief Marketing Officer

Thank you. Sure.

Greg Anderson -- Chief Financial Officer

Sure. Joe, it's Greg. I'll kick it off, and Scott will jump in. Just wanted to say real quick, we enjoyed your spirited debate with Hunter the other day, moderated by our good friend, Mr.

Davis. That was interesting information on the loyalty programs. But just given our cost structure, Joe, and I think maybe just a tag line or punch line, as a good example is like September, we don't fly in September. So we built the cost structure around fleet, buying used fleet and low ownership costs.

And if we think about the current environment we're in, say, ownership costs were pretty much variable, and we'll kind of rightsized that as we come out. So and by that, I mean, the fuel, obviously variable, we're seeing low fuel costs. We're seeing on the labor for the next couple of quarters. That's the pass through, if you kind of want to think about it that way.

Our stations, our airports, we don't have evergreen or long-term contracts with our airports, very small cost, I think, relative and again, variable. And on the maintenance side, same thing. The vast majority of that's variable. Advertising sales, if you think about that, pretty much we pulled all our marketing spend.

And so the cost coming through that will be our interchange, which is variable. And then other, I think there's some of that is fixed and variable, but we've done a good job of pulling a lot of that back as we've alluded to in that $375 million number. And then I think perhaps worth mentioning, too, is just our compensation strategy. Maury and team has set this up in the beginning is for a lot of our particularly our corporate overhead folks, we keep low base salaries and pay high variable on the upside with bonuses.

And to put that into perspective, I think last year, Joe, we paid roughly 10% of our total labor costs were profit sharing and bonuses. So that, obviously, in this type of situation will meaningfully move down, and Scott, I didn't know if you want to add anything else on that?

Scott DeAngelo -- Executive Vice President and Chief Marketing Officer

Yes. I think the only thing I would add, there's been a conscious effort to grow kind of small and mid-sized cities. To Greg's point, we don't have much of a long-term expensive facility footprint. It's largely variable.

But these commitments to grow in small cities is relatively expensive. Obviously, you don't get much or very good productivity out of flight crews. So those come on as those cities grow. So assuming demand does not snap back in any meaningful way, if you're going to get efficient on the cost structure, you'd likely reduce some of the really small cities that you do have and consolidate those into larger bases where you can drive productivity.

But labor is a big piece of this, and we're going to see in the near-term to see where demand shakes out, but that's definitely a lever that we're going to have to look at longer term.

Greg Anderson -- Chief Financial Officer

Thanks guys.

Operator

Thank you. Our next question comes from the line of Savi Syth with Raymond James. Your line is now open.

Savi Syth -- Raymond James -- Analyst

Hey good afternoon. I was just wondering, I know you're being very tactical with the planning currently, but I was wondering if you can give some high-level thoughts on how you're thinking about 2Q in terms of capacity and opex? And then also just a clarification on 2020 capex with the reduction, are you expecting business spend around $380 million this year?

Drew Wells -- Vice President of Revenue and Planning

Sure. So this is Drew. I'll kick it off with kind of capacity then and maybe turn it over to Greg. Like I mentioned, we're trying to keep as broad as a selling footprint as possible.

We still have about 75%, 70% of June available for sale, and we'll monitor those as we get closer in. May is obviously come in is roughly half a month is past, and we've actioned some of those cancels. But for Memorial Day week and beyond I think we little over 50% on sales. But we're watching these closely.

That will come down, but it's hard to give a lot of guidance as we're going to be following these to seven, 14 days out before making final calls on anything.

Greg Anderson -- Chief Financial Officer

And Savi, on the capex question, yes, it's about just over $300 million for the full year. Kind of what's remaining left is about $200 million. The vast majority of that is through aircraft and engines, which we expect to finance. And then there's some minor amounts on the other kind of what we call our other capex with IT and things like that.

And then there's just some minor trail off on the heavy maintenance spend.

Savi Syth -- Raymond James -- Analyst

Got it. And then if I might follow-up on a question as we think about costs going forward, are there kind of the changes that you're making related to COVID, the stuff that might kind of linger on, such as cleaning procedures and things like that, is that a significant cost burden? Or is that pretty minor when you kind of think about the grand scheme of things?

Greg Anderson -- Chief Financial Officer

I'll kick it off, and I think Sheldon might want to jump in too. But I think what we've done, particularly with the kind of personal safety and the masks and the kits and everything we've done, that was a good investment by our company. While I wouldn't say it's not minor, minor, I mean, there's a decent amount of it. It's not going to meaningfully impact our numbers moving forward, and that is built into the cash burn that we've provided.

Scott Sheldon -- Executive Vice President and Chief Operating Officer

Yes. I think the only thing I'd add is maybe not in lease times because there's a real is not a lot of decline, but the actual cost of product isn't substantial. But if you're building extra time, if you're doing kind of midterm cleaning, so if you're going to increase the duty day, it's really going to change your profile and your staffing models. So the other possible is, how do you do this while still maintaining kind of a crew productivity metric in mind.

And so we're not a set yet, but that's something that we're mindful of as we move forward.

Savi Syth -- Raymond James -- Analyst

That's helpful. Thank you.

Operator

Our next question comes from the line of Hunter Keay with Wolfe Research.

Hunter Keay -- Wolfe Research -- Analyst

Greg, who won the debate, dude?

Greg Anderson -- Chief Financial Officer

So I thought it was a draw. It was very well done.

Hunter Keay -- Wolfe Research -- Analyst

Very good. Actually, Greg, what triggered the $137 million write down? Was there some sort of accounting test that was just a subjective call? Just from a pure accounting perspective, what triggered that?

Greg Anderson -- Chief Financial Officer

Yes. So the triggering event was the suspension of construction. And I guess, kind of the way to think about it is because we have no clear line of sight of when that resumes. When you go through an impairment analysis, you'll do like a cash flow recoverability test.

But without the clear line of sight, we're unable to kind of come up with, I think, an appropriate number, if you will, just because there's so much uncertainty right now. And so what you do is then you write that down to the fair market value.

Hunter Keay -- Wolfe Research -- Analyst

OK. And then Maury, I'd ask you a dream a little bit on this with me here. Is there a way to totally rethink how you pay your frontline people? Maybe you give them like higher pay on an hourly basis, but you take away minimum guarantees or maybe even put some of these frontline folks on annual salaries and you give them an annual bonus based on company performance, is there anything like that, that you can effect pay-wise that could give you even more variability that works out both for you and for the company? Obviously, I realize this all to be done in collective bargaining, of course, but is there anything that you can think about long term about effecting long-term changes as it relates to compensating people out of this thing, particularly the front line?

Maury Gallagher -- Chairman and Chief Executive Officer

Well, you hit the nail on the head. It's all tied to contracts and the way that people are paid, and we're creatures of have it. And we're used to thinking the way we think and there's these contracts get build up, some of them are 50, 60 years old that are buildup of all the over arching, little things that the average person would look to. I'd like to think that the nice thing about our model is we don't interchange a lot of people.

So in Orlando is a contained base, it goes out and back and the like. One of the constructive things I'd like to see us do is work with the pilots flying terms in particular to see about what's a better way to compensate you in a base and test it. You got to out and test it and you got to schedule and pay the two fundamentals for these folks and appropriately. So if you want to do some things that enhance for both sides, it's hard to sit across the table and just say, let's try this because it's easy for the whole group, and that's a hard sell.

But I would recommend to our folks that let's pick a base, let's try some ideas and we should be testing something all the time. It's just a good way for businesses and organizations to be continually checking what they're doing and could we do it better. But there won't be anything short term, I don't think at this point, Hunter, with people looking to change. Candidly, to their defense, they're scared to death too.

I mean on February 1, your choice of jobs, if you were a pilot, and I think we did an internal calculation that showed there to be as many as 25,000 pilots how to work here in the not-too-distant future. That's a life changing for a lot of these folks that have never seen anything like this. That's pretty tough pill to swallow.

Hunter Keay -- Wolfe Research -- Analyst

OK. Thanks a lot. Sure.

Operator

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Maury Gallagher for closing remarks.

Maury Gallagher -- Chairman and Chief Executive Officer

Thank you all very much. Appreciate your time, and we'll see you in July, I would guess, at this point. Thanks again. Bye-bye.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Sherry Wilson -- Director of Investor Relations

Maury Gallagher -- Chairman and Chief Executive Officer

John Redmond -- President

Scott Sheldon -- Executive Vice President and Chief Operating Officer

Scott DeAngelo -- Executive Vice President and Chief Marketing Officer

Drew Wells -- Vice President of Revenue and Planning

Greg Anderson -- Chief Financial Officer

Mike Linenberg -- Deutsche Bank -- Analyst

Catie O'Brien -- Goldman Sachs -- Analyst

Duane Pfennigwerth -- Evercore ISI -- Analyst

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Savi Syth -- Raymond James -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

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