Frontier Group Holdings, Inc. (NASDAQ:ULCC) Q1 2024 Earnings Call Transcript

Frontier Group Holdings, Inc. (NASDAQ:ULCC) Q1 2024 Earnings Call Transcript May 4, 2024

Frontier Group Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Frontier Group Holdings, Inc., Q1 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, David Erdman, Senior Director of Investor Relations. David, you have the floor.

David Erdman: Thank you, and good morning. Welcome, everyone, to our first quarter 2024 earnings call. On the call with me this morning is Barry Biffle, Chief Executive Officer; Jimmy Dempsey, President; Mark Mitchell, Chief Financial Officer; and our new Chief Commercial Officer, Bobby Schroeder. Before yielding, I’ll recite the customary safe harbor provisions. During this call, we will be making forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those predicted in these forward-looking statements. Additional information concerning risk factors which could cause such differences are outlined in the announcement we released earlier, along with reports we file with the Securities and Exchange Commission.

We will also discuss non-GAAP financial measures, which are reconciled to the nearest comparable GAAP measure in the appendix of this morning’s earnings announcement. So, I’ll give the floor to Barry to begin his prepared remarks. Barry?

Barry Biffle: Thanks, David, and good morning, everyone. First, I’d like to welcome Bobby Schroeder to the team and introduce him as our new Chief Commercial Officer. Bobby has extensive experience in the industry with nearly 25 years combined at Spirit, U.S. Airways and America West. He’s in the process of relocating his family to Denver and in his new role assumes responsibility for our commercial teams reporting to Jimmy Dempsey. We’re fortunate to have him on Team Frontier. Along with the recent additions of Alex Clerc, our Senior Vice President of Customers and Rajat Khanna, our Chief Information Officer, we now have the strongest senior leadership team we’ve ever had. Turning to the quarter. We reported an adjusted pretax loss margin of 2.8%, significantly better than our guide on cost and revenue performance.

The adjusted pretax loss margin was within 1-percentage point of the prior year quarter despite continuing to encounter far greater excess capacity in some of our key markets, as we’ve previously highlighted. While we’re not insulated from inflation, we continue to hammer on costs with the objective to maintain and widen our relative cost advantage to the industry. To that end, we exceeded our expectations in the first quarter and our cost advantage to the industry widened to 42% on a trailing 12-month basis. Cost divergent between Frontier and the industry is indeed real. We’re on track to achieve our target of 80% out-and-back flying by June and the corresponding $200 million of annual run rate cost savings by year-end. With that, we’re reaffirming our guide of 1% to 3% reduction in our adjusted CASM ex fuel, stage adjusted to 1,000 miles.

Redeployment of our capacity from oversupplied markets is on track and progressing as planned. To this end, we opened our 10th crew base in Cleveland last month, while Cincinnati and Chicago will launch later this month and, finally, San Juan, Puerto Rico in June. The addition of these crew base supports our ability to achieve our target of out-and-back flying by June and drives further network efficiency. Our San Juan base will not only support demand growth from the U.S. Mainland to compete with significantly higher cost carriers, it will also serve as our gateway to other Caribbean destinations. In the second quarter, a significant portion of our flying will be in new markets; more than double we would expect in a normal year. As these new markets mature over the next year, we expect a meaningful improvement in our system RASM.

Further, we have a range of revenue initiatives, including various distribution and merchandising enhancements as well as launching loyalty and premium products, all of which diversify our revenue sources. Jimmy will go into more detail on these products as part of the commercial update. Despite the immaturity of new markets, we expect to generate 3% to 6% adjusted pretax margin in the second quarter. We’re also reaffirming our full year guide of 3% to 6% despite fuel prices, which are $0.10 per gallon higher than they were in early February when we gave our guide for the year. As we move to 2025, we are confident in our 10% to 14% adjusted pretax margin due to our cost tailwinds, expected network maturity and overall revenue diversity initiatives.

Finally, I’d like to thank every member of Team Frontier. They deserve recognition for their significant effort to achieve the milestones I highlighted today. And for the remaining cost discipline and–remaining cost discipline and staying focused on our top priority of delivering a safe and reliable experience to our customers. I’ll now turn the call over to Jimmy for a commercial overview. Jimmy?

Jimmy Dempsey: Thanks, Barry, and good morning, everyone. I want to echo Barry’s comments and welcome Bobby to the team. Briefly recapping the quarter. Total operating revenue increased 2% to $865 million on capacity growth of 8%, both compared to the 2023 quarter, resulting in RASM of $0.92. Departures increased 14% on a 9% shorter average stage length and total revenue per passenger was $124, down 1% all compared to the 2023 quarter. During the quarter, our transition to out-and-back flying developed this planned. By March, we were operating at a 67% out-and-back network and achieved 75% in April. This progression is a key driver in our ability to reduce our cancellation rate by 10% and improve on-time arrivals by over five points; January through April year-over-year.

A key milestone was the opening of our Cleveland crew base, which was successfully launched in mid-March and by summer we’ll serve a total of 30 destinations from Cleveland. Our planned schedule is to achieve 80% out-and-back flying by June, supported by the planned opening of the Cincinnati and Chicago crew bases in May and San Juan, Puerto Rico in June, bringing our crew base footprint to 13 by the end of the second quarter. One of the most significant long-term investments is in our San Juan base where we see a massive opportunity for flights to the mainland United States, given our cost advantage versus the competition. In addition, the geography of San Juan provides a logical gateway to the broader Caribbean region, where we believe our low fare stimulation will have a dramatic effect on traffic flows within the region.

We want to thank the government of Puerto Rico and their elected officials for helping make this investment possible. Today, we fly to more destinations from San Juan Puerto Rico to the main and the United States than any other airline. And by this summer, we will serve Santiago, Punta Cana and Santo Domingo in the Dominican Republic as well as Saint Thomas, Saint Croix, Saint Martin, Barbados and Trinidad with in the region. Overall, we remain focused on maximizing total revenue as evidenced in the first quarter by our trade for yield over load factor, which resulted in total revenue exceeding our expectations. We believe that further revenue initiatives will not only diversify our revenue but improve overall demand and increased load factors as we move through the coming years.

We launched our reimagined Frontier Miles loyalty program late last year and have seen the highest spend on record per cardholder because of these enhancements. It’s very early in our journey to close the gap in our loyalty revenues, but we believe there are several dollars per passenger of opportunity over the next several years. Following our recent introduction of BizFare, we recently launched our UpFront Plus product for customers that value a premium product. UpFront Plus is a new upgraded seating option with extra space and comfort in the first two rows of the aircraft. Customers in UpFront Plus will enjoy a window or aisle seat with extra legroom and a guaranteed empty middle season, providing additional personal space and comfort at an exceptional value.

It’s very similar to the intra-European business class product. The new offering, combined with our premium seating options expand our ability to offer choice to our customers. Later this year, we will introduce NDC, a new website and a mobile app that will include improved merchandising, day of travel and post-travel experience for our customers. We believe the distribution and merchandising changes will increase our revenue per passenger and load factors over the next several years. That concludes my remarks, so I’ll now yield to Mark to provide a finance update.

Jimmy Dempsey: Thanks, Jimmy, and good morning, everyone. Total revenue was $865 million, 2% higher than the comparable 2023 quarter. Fuel expense was $263 million, 10% lower than the 2023 quarter at an average cost per gallon of $2.93. The year-over-year decline in fuel expense was the result of 15% lower fuel prices and 2% greater fuel efficiency, enabling us to achieve an industry-leading 105 ASMs per gallon, partly offset by higher consumption from the 8% capacity growth during the quarter. Adjusted nonfuel operating expenses were $633 million or [$0.071] per ASM due to better-than-expected cost performance. On a stage-adjusted basis to 1,000 miles, adjusted CASM ex fuel was down 3% compared to the 2023 quarter due to three additional sale-leaseback transactions in the quarter, along with our aggressive cost management across the organization that helped mitigate year-over-year inflationary impacts.

As Barry mentioned, our relative cost advantage to the industry widened to 42%, and we remain on track to achieve our annual run rate cost savings target of $200 million by the end of the year. Our first quarter pretax loss margin of 2.8% was lower than anticipated due primarily to better cost and revenue performance than expected. We ended the quarter with $622 million of unrestricted cash and cash equivalents and $156 million of cash net of total debt at quarter end, slightly higher than our net cash position at year-end. We had 142 aircraft in our fleet at quarter end after taking delivery of six A321neo aircraft during the quarter. We expect to take delivery of another six A321neos in the second quarter and 11 A321neo aircraft in the second half of 2024, all of which are expected to be financed through sale-leaseback transactions.

Turning to second quarter guidance. Capacity growth is anticipated to be in the range of 12% to 14% over the 2023 quarter on stage length, which is expected to approximate 900 miles. We expect fuel to remain elevated at $2.80 to $2.90 per gallon based on the blended fuel curve on May 1. Adjusted nonfuel operating expenses are expected to be between $705 million to $720 million, driving an expected sequential decrease in our adjusted CASM ex fuel on a stage-adjusted basis to 1,000 miles. Adjusted pretax margin in the second quarter is expected to be in the range of 3% to 6%, including the impact of higher fuel prices and our network transition. As Barry mentioned, we are also reaffirming our full year 2024 adjusted pretax margin range of 3% to 6% despite the expectation of higher fuel prices.

Additionally, we are also reaffirming our guidance for CASM ex fuel during 2024 on a stage-adjusted basis to 1,000 miles to be lower by 1% to 3% versus the prior year. With that, I’ll turn the call back to Barry for closing remarks.

Barry Biffle: Thanks, Mark. I’m proud of the significant progress we’re making in revenue and cost performance. The hard work and dedication of the Team Frontier are showing that low costs have always mattered, and they will continue to matter. Thanks again for joining us this morning. We’re ready to take the Q&A portion of the call.

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Q&A Session

Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Please stand by while I compile the Q&A roster. Our first question comes from Brandon Oglenski with Barclays.

Brandon Oglenski: Barry or Jimmy, can you guys talk to some of the network changes that you’ve made and the results that you’re seeing in forward bookings, especially in the second quarter here, given the improvement in the margin guide on top of a lot of capacity growth.

Barry Biffle: Yes, sure. I’ll go and take it. I think if you look at the changes we’ve made so far, they really just started in April in terms of the additions and kind of continue to roll through the summer. But I’ll tell you, we’re really excited. We’ve got a lot of new routes that we just started just in the last few weeks that are running in 90s load factors. So, I think that our network planning team has picked well on many of these. So, we’re really excited about how it’s shaping up, but it’s very early, right? I mean we — as I said a while ago, with over double the amount of new flying that we would normally have because of this repositioning, it’s significant. We estimate a 5- to 10-point drag on RASM with this investment, but it’s the right thing to do to get the network optimized.

Brandon Oglenski: And Barry, I guess, going ahead from here, do you expect to be profitable every quarter going ahead, especially with reiterating a much higher margin target for 2025?

Barry Biffle: Yes.

Brandon Oglenski: Okay. Appreciate that. And then on the $200 million of cost reduction, can you give us some idea of where that’s going to impact the cost line as you get to more out-and-back flying in the network?

Jimmy Dempsey: Brandon, this is Mark. So, on the $200 million cost savings plan, so we are on track, as we indicated in the prepared remarks. And where you’re going to see that, I mean, you’re going to see really benefit across the operations. So, you’re going to see, as we’ve talked about previously, lower travel-related costs, you’re going to see crew efficiency benefits, you’re going to see benefits on the station operations front. You’re also going to see a higher capture rate from a maintenance standpoint at our crew bases, which is going to drive some improved favorability on the maintenance front. And then with the initiatives that we have to simplify the network you’re going to see an increase in utilization that’s going to provide benefit across the P&L.

Operator: Our next question comes from Duane Pfennigwerth with Evercore ISI.

Unidentified Analyst: This is Jake on for Duane. So, I appreciate the capacity guidance. But based on what we’re seeing in the schedules, we would expect it to be higher in 2Q than you’re guiding. Is there just a level of conservatism there around completion, or are you still refining the schedule?

Barry Biffle: Yes. I mean, look, we always put in something that there’s going to be air traffic control and weather issues. So, we continue to put in what we believe is going to be realistic capacity.

Unidentified Analyst: Okay. And then just you have this load factor and yield dynamic. How would you think about that evolving over the course of the year? Like would you expect yields to be positive again in 2Q? And then I guess, what impact is that lower load having on ancillary performance?

Jimmy Dempsey: Actually, I’ll just answer the second part of the question first. Actually, the lower load factor actually had a positive impact on non-ticket performance in the quarter. You saw some recovery in the non-ticket through January, February and March. Look, we obviously focus on the total revenue output that’s coming from the business. We are seeking to optimize that total revenue output. And in the quarter, we saw an opportunity to trade some load factor for yield; particularly in the off-peak months. So, it actually worked out very well for us and we exceeded our expectations in terms of revenue output. But like going forward, we’ll always optimize it. So, it will depend on the situation and the environment that we’re in. And certainly, in peak periods, we’ll be pushing for very high load factors.

Operator: Our next question is coming from Ravi Shanker with Morgan Stanley.

Unidentified Analyst: This is Katherine on for Ravi. As you guys had mentioned in your opening remarks, you recently introduced the UpFront Plus seating option and premium has obviously been a large focus. So, how has that kind of been trending since introducing it? And what do you guys think the noncorporate premium domestic opportunity for Frontier is like? And do you think that gets more competitive amongst peers?

Jimmy Dempsey: Look, we introduced UpFront Plus just recently. It’s been in place for a few weeks now. We’re actually quite encouraged by its performance. It’s really exceeding our expectations. It’s giving our customers an opportunity to buy effectively more space at the front of the aircraft. We think that’s really, really helpful to our customer base. And so, we’re quite excited about it. That plus the business fare option that we gave to customers earlier in the year we think is a nice complement to the business that we have today. Clearly, we’re still focused very much on unit costs and delivering very, very strong unit costs. But these options, we think will be helpful to giving choice to our customers.

Unidentified Analyst: And just as a quick follow-up. With domestic yields down in the first quarter and some harder comps coming up, what are you guys seeing in the domestic space as we move into 2Q and maybe in the back half of the year as well?

Barry Biffle: Look, I think you see overall capacity going up. I think Frontier is probably leading the charge and probably bucking the system because we pivoted away. We’re six, eight, months now into this pivoting away from the oversupply in Florida. So, for us, we see a really good landscape setting up for the markets we’re in. We see the fares in the markets that we’re going into, higher than the existing system. And so, we see a lot more kind of ripe opportunities for market stimulation where we’re headed. I can’t really speak for the rest of the industry, but we see good demand for summer, and we’re excited about the network changes and what that can do as these things mature for our revenue over the next year.

Operator: Our next question comes from Savi Syth with Raymond James.

Savi Syth: You mentioned the ability with San Jose to kind of expand into kind of connecting into some of those Caribbean markets. I was curious if you could talk about what you’re seeing in that short-haul leisure given that some of your competitors have talked about a lot of kind of overcapacity in that market and kind of why you find this kind of an attractive place to add capacity?

Jimmy Dempsey: We see a really attractive opportunity in Puerto Rico, Savi. Our cost base gives us a real opportunity to stimulate that market where there’s been very high fares for a long period of time. So, we see great opportunity there. It’s very early days in terms of the investment in Puerto Rico. The base opens next month. And so — but the early results, as Barry mentioned, across the new network changes look promising for our business given our cost base. And so, we’re quite excited about opening up in Puerto Rico.

Savi Syth: So, is the international segment then beyond just maybe Puerto Rico? Is the international segment doing fairly well despite some of the comments by the industry?

Barry Biffle: We’ve done — well, we’ve done really well on our intra San Juan up until now just because it’s relatively small. I think some of that commentary, I mean, look, I don’t know what they’re talking about. We’re not seeing that. I think it’s months — it could be some other destinations in the region, but not necessarily where we’re starting service to.

Savi Syth: That’s helpful. And if I might, just with the comment, Barry, that you mentioned about the new markets being double what they normally are, although it’s probably — and I guess I’m surprised it’s having a 5- to 10-point drag on RASM given that I would think that the reason you’re going into these are because they’re better. So, I just kind of — could you add a little bit more color on like what the percentage is and how you think that, that should kind of progress?

Barry Biffle: Yes, sure. So, here’s the thing. We are chasing higher-yield opportunities, right? So, if we fast forward to a year from now, we’re going to love these markets because once they are mature, they are likely, in many cases, to produce a higher RASM than our existing system. However, when they’re brand new, literally like some of them still starting in the next week or two, I’m doing an inaugural in another week, like they’re brand new. And so, they’re likely to produce a third or even half the revenue that a mature market will when they’re brand new. And so, all we’re saying is that when you have double the amount you would normally have in brand-new markets, that is a bigger drag than normal. And there — and we have calculated this, we believe this to be in the high single digits of a drag on the Company’s RASM and it flows straight through to margin.

because of this much new capacity. But it will mature as we move through the year, especially when we get towards the fourth quarter and into the first quarter, we expect significant improvement. And you should see a natural kind of seven in that case, kind of a natural 7-, 8-point improvement in our RASM over the next year as these markets mature.

Savi Syth: That’s clear. That’s very helpful. And just to clarify, Barry, what’s the percentage of markets on the development in 2Q?

Barry Biffle: Well, we believe it’s over 20% is in new markets.

Operator: Our next question comes from Michael Lindberg of Deutsche Bank.

Shannon Doherty: This is actually Shannon Doherty on for Mike. For my first question, Barry, how many aircraft are you planning to take this year? Presumably you may be getting impacted just like every other carrier by delivery delays even Airbus, right? So, I’m just trying to understand the capacity growth in the back half of the year and corresponding CASM ex trends.

Barry Biffle: Yes. So, real fast, I’m going to let Mark answer the actual numbers. But — are the aircraft delayed from our original order? Yes. However, are the delays known and have they been known now for over six months. And the answer is yes. So, we’re not seeing the disruption that we were seeing before. So yes, they’re late, but that was really just a problem, call it, a year ago when everything got moved to the right. We’re now at a point where, yes, we have airplanes that are delayed from now that were maybe just supposed to be delivered now, but I’m now catching a delivery that was delayed that was supposed to be here three or four months ago, if that makes sense. So, it’s not as impactful to the business anymore. We’ve seen this really smooth out. And Mark —

Jimmy Dempsey: Yes. Yes, from a number standpoint, I mean, we’re still at 23 deliveries for this year, all 321neo’s expected in the second quarter, 11 in the back half of the year.