Frontier Group Holdings, Inc. (NASDAQ:ULCC) Q4 2022 Earnings Call Transcript

Frontier Group Holdings, Inc. (NASDAQ:ULCC) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good day, and thank you for standing by. Welcome to the Frontier Group Holdings’ Fourth Quarter 2022 Earnings Conference Call. Please be advised that today’s conference is recorded. I would now like to hand the conference over to your speaker today, David Erdman, Senior Director, Investor Relations. Please go ahead.

David Erdman: Thank you, and good afternoon, everyone. Welcome to our fourth quarter 2022 earnings call. Today’s speakers will be Barry Biffle, President and CEO; Jimmy Dempsey, EVP and CFO; and Daniel Shurz, Senior Vice President, Commercial. Each will deliver brief prepared remarks, and then we’ll get to your questions. First though, let me cover the 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 published earlier, along with reports we filed with the SEC.

We will also be discussing non-GAAP financial measures, which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement. And so with that, I’m going to give the floor to Barry to begin his comments. Barry?

Barry Biffle: Thank you, David, and good afternoon, everyone. Frontier posted strong fourth quarter results, achieving an adjusted pretax margin of 5.7%, our third straight quarterly profit. Results were underpinned by a record ancillary revenue performance along with meaningful improvements in our unit cost and utilization. The strong result was hampered by major disruptions followed by winter storm early during the busy holiday travel period. However, we were able to minimize the impact through the recoverability of our modular network and the dedication of team Frontier who worked tirelessly to ensure our passengers arrive safely at their destination. I’d like to extend my gratitude and recognize the team’s efforts as they overcame treacherous weather conditions with extended shifts and managed customer disruptions to get them to their destination safely.

At our Investor Day last November, we’ve highlighted how leisure travel demand has undergone a fundamental shift and how we’re uniquely positioned to exploit it. Customers have more flexibility and more propensity to traveling than they did pre-pandemic and its compelling evidence points to the resiliency in the leisure travel segment. We expect the benefits from this resilient demand to be amplified by industry capacity constraints predominantly by pilot shortages and supply chain bottlenecks. But this creates a significant opportunity for Frontier. Although we’re not immune to these issues dominated by the A321neo, together with our Robust Pilot Recruiting and Training platforms uniquely provides us the foundation to harness the growth opportunity before us.

Last year we launched our Cadet and Program, and both are driving strong demand in candidates who applied to Frontier. Over 100 pilots have already been accepted into the Cadet Program, and we have nearly 5,000 applications last year through all of our hiring channels. In fact, the first cadets from the program will be joining us as first officers in just a few weeks. Although aircraft manufacturers are dealing with supply chain issues, the delays we’re experiencing from Airbus are between 1 to 5 months. While we’re disappointed with these delays, they effectively represent a manageable 1 quarter shift on average across our orderbook. Our strategy has been to focus on the areas that we can control. We’ll focus on hitting our near-term target of $85 in ancillary revenue per passenger, and we achieved $82 for the fourth quarter, enhancing our confidence that hitting the $85 in the fourth quarter will happen.

Moreover we lowered our total adjusted CASM, including interest by 8% from the prior quarter and widened our total cost advantage with the industry to an equivalent of over $70 per passenger. Our costs are our competitive edge, and we expect to maintain this advantage for years to come. Put simply, our strong ancillary performance and industry-leading unit costs are the variables that make it possible for us to capitalize on the strong leisure market and stimulate profitable growth for the rest of the decade. All of the team Frontier are unified in this pursuit and it gives me confidence to reaffirm our target of returning the airline to pre-pandemic profit per plane by the second half of 2023 on a run rate basis. With that, I’ll hand the call over to Daniel for a commercial update.

Daniel Shurz: Thank you, Barry, and good afternoon, everyone. Fourth quarter revenue was $906 million, a 38% increase from the 2019 quarter, marking the fourth consecutive quarter in which revenue has grown by double-digits over the respective 2019 quarter. Travel reached a high level of capacity. Total revenue per passenger was $133 supported by impressive performance on the ancillary front, which, as Barry mentioned, reached a record $82 per passenger. Our ancillary performance demonstrates our customers’ preference for unbundled products, enable them to personalize their travel experience for a more stable and predictable source of revenue. This has affected our ancillary performance that we saw throughout 2022 with achieving our target of $85 per passenger in the fourth quarter of 2023 as well as our long-term target of $100 per passenger by 2026.

utilization improved by approximately 25 per day over the prior quarter to 11.5 hours, on average daytime to 1,032 miles. With the continued progression in our utilization throughout 2022 towards pre-pandemic levels, we’re on track to achieve average daily utilization of over 12 hours and an average of 1,050 hours during 2023 as set forth at our Investor Day. In the fourth quarter, we opened market were 140 now based. With the we launched in the fourth quarter was and that’s up 23 destinations . Additionally, during the fourth quarter, we announced a new in May 2023, where we expect to employ 120 pilot from 220 by the end of the first year of operation. We’ve been the fastest-growing carrier at DFW since 2019. And once we launch will be the first largest carrier at the airport based on destinations served.

And last, we announced service point of retail. With additional long-term routes to a new service to key destinations on the island. Once the we also have more destinations from the Caribbean Island than any other airline. Finally, since we launched in November have been strong. This unique product provides travelers the opportunity for unlimited flights to all of our domestic and international destination for one low annual price. Just last week, we introduced the second product to travel during the summer months. We’re seeing strong demand since it went on sale. encouraged by the increasing engagement this product creates with our brand, both for existing and new customers. That concludes my remarks. I’ll now hand over the floor to Jimmy.

Jimmy Dempsey : Thank you, Daniel. We generated a pretax margin of 5.5% on a GAAP basis, 5.7% on an adjusted basis during the fourth quarter, above the midpoint of our guidance range despite the impact of the holiday winter storm. Our adjusted pretax margin excludes $2 million in employee retention termination — terminated the combination with Spirit, the recognition of which is expected in the March 2023 quarter. The sequential margin improvement hampered by storm impact was largely driven by record ancillary revenue and lower fuel cost per day. Adjusted CASM ex-fuel declined sequentially to $0.64, which was 7% lower than the prior quarter, the lowest expense since exiting the pandemic. The decline was driven by higher utilization along with the timing of aircraft deliveries and aircraft returns, partially offset by higher other nonfuel expenses, particularly lease return costs.

We ended the year in a strong financial position with $761 million of unrestricted cash and cash equivalents and $332 million of net of total debt. In addition, as previously highlighted, we have the ability, if needed, to access substantial liquidity through our loyalty program and brand related asset. We had 120 aircraft in our fleet at year-end after taking delivery of 2 A320neo and 3 A321neo aircraft during the quarter. We expect to take delivery of another 6 A321neos in the first quarter of 2023, of which 3 are direct leases. As noted in our earnings release, Airbus’ delay in aircraft has reached by 1 to 5 months for delivery scheduled in 2023. Accordingly 9 A321neo aircraft deliveries previously expected this year will shift into 2024, resulting in about 5% capacity in 2023 than we expected in November.

We therefore expect to encounter slight upward pressure on adjusted CASM ex in the near term given the unit cost efficiencies unlocked by the A321neo. Accordingly we anticipate being below $0.06 during the second half of 2023 and largely above for the full year, a level which we believe is materially below the industry average. Recap and guidance, first quarter capacity is anticipated to grow 17% to 19% over the 2022 quarter, while full year 2023 is expected to grow 23% to 28% over the prior year. Fuel costs are expected between $3.50 and $3.55 per gallon in the first quarter and $3.05 to $3.15 per gallon for the full year 2023 as of the fuel curve on January 30. Adjusted nonfuel operating expenses in the first quarter are expected to be between $570 million and $595 million and $2.425 billion to $2.525 billion for the full year.

Our effective tax rate is expected to be 24% for the entire year. Finally, first quarter adjusted pretax margin is expected to be in the range of minus 2% to minus 6%, largely reflecting elevated fuel prices and seasonal softness. With that, I’ll turn the call back to Barry for closing remarks.

Barry Biffle: Thanks, Jimmy. Our objectives for 2023 are clear. All 13,000 members of team Frontier are focused on completing the post-pandemic turnaround. I’m confident we can sustain the momentum from the last 3 quarters as we execute on widening our relative total cost advantage as we deliver on revenue enhancements, particularly on the ancillary front. Together these 2 factors will enable us to return the airline to pre-pandemic profit levels. Thanks again everyone for joining the call today. We’re now happy to take your questions.

Q&A Session

Operator: And our first question will come from the line of Stephen Trent from Citi.

Stephen Trent: Definitely appreciate the color and everything you mentioned about the cadet program and what have you, and that’s great to hear. I was wondering if you wouldn’t mind giving us some color on what you’re seeing in terms of mechanics and sort of availability of mechanics and if you’re seeing sort of any hiccups in terms of engine maintenance throughput issues of any kind?

Barry Biffle: Yes, thanks, Steve. So look, we’ve been talking about the mechanic shortage for years, and everyone is focused on the pilots, but actually the mechanic shortage is just as problematic. We have seen some of our business partners. As a reminder, the majority of our maintenance on the line is actually provided by business partners, and we have seen some challenges there. In particular, we’ve seen issues, especially in places where we have still on-call maintenance where we don’t do maintenance every day. Sometimes the availability, lots of times, how quickly they respond has deteriorated a lot as a result of their staffing levels. But we are working with them. We’ve had a lot of talks with them recently. The other thing that’s been impacting us, you mentioned the engines which hasn’t been a major issue for us.

However, there has been significant challenges with parts overall. And we have seen in many cases over the last several months, we’ve had multiple instances with aircraft out 5 to 7 days, waiting on parts. And so we’ve kind of seen the supply chain issue that a lot of people have had. And so we are working with all our providers and spending a lot of time on that, but the supply chain issue this year across other industries, and including our own, they are real.

Operator: Our next question will come from the line of Jamie Baker from JPMorgan.

Jamie Baker: So this first question, I wasn’t planning to ask until last night. Of your total ancillary take, what percentage comes from the seat assignment fees on reservations with more than one traveler in the PNR?

Daniel Shurz: Jamie, we don’t disclose the breakdown, that’s something I don’t have breakdown of. I don’t have a breakdown of exactly what — what the mix is of how many passenger is on the PNR and what’s going on we’re obviously conscious of the things that you’ve talked about.

Jamie Baker: Yes, yes, which is why I’m asking.

Barry Biffle : Well, Jamie, I know why you’re asking the question. And first of all, we have 4 years and is the standard practice across the industry, we have shown every option available to a customer before they complete their booking. So everyone knows prices well in advance. If a flight is canceled or if they’re significantly delayed, we provide prompt refunds on request. And also as it comes to families and seating families, we actually do that today for free and we have high success in actually getting families seated together. There are operational challenges last time, and flexible and there is plenty of other seats in, the last few seats were sold to a family, it’s a little harder. But we do a really good job with that. So, I think there’s a lot of confusion with that.

Jamie Baker: Well, and I appreciate that, Barry. So let me just ask, and I apologize because I’m going to give away the fact that I don’t fly Frontier very often. But if I go to book a flight right now for a party of 5 for travel in June, you’re telling me that all 5 of us will be able to make adjacent seat assignments for free?

Barry Biffle: No, no, we will make every if you don’t have seat assigned, we’ll make every effort to get you together, but not the whole family together, we will put an adult with the smaller children.

Jamie Baker: Okay, fair enough. I’ll experiment more with it in a second. I’m sure, the 5% reduction in 2023 capacity, it takes some pressure off pilot hiring and I know you made an excellent point at Investor Day emphasizing new crew bases out and back flying as lifestyle benefits. But given the recent wage increases, it looks like you’re now bringing up the rear in the industry in terms of pay save, I guess, for maybe Avelo and Breeze. Obviously this will change the new pilot contract in 2024. But until then, why shouldn’t we assume that the pilot shortage hurts you more than other low-cost airlines in the U.S.?

Barry Biffle: Because it happened. We have an aggressive hiring program and we’re not bringing up the rear. I think we’ve gotten the brunt of a lot of this dialog. This is a regional situation, right. We are significantly higher than the regionals and we are successful in all of our classes and we’re still getting over 10 applications a day of qualified applicants. So I think you’re welcome to come out, Jamie. I’ll introduce you to recruiting, go around the recruiting, we can show you our classes. It’s not the problem that I think that the perception is out the there. In fact, we’ll have to slow our hiring in order to accommodate the Airbus.

Operator: Our next question will come from the line of Helane Becker from Cowen.

Helane Becker: Appreciate the color. Just 1 or 2 questions here. I heard what you said about demand in the fourth quarter. But as you’re looking at the cadence of demand in the first quarter, can you just talk about what you saw in January and what you’re seeing for the rest of this quarter into maybe the second quarter?

Barry Biffle: Yes. So look, we’ve seen continued robust demand for leisure travel, and it continues to do very well. In fact, I think if you look at our results, you can see in the fourth quarter, I think we were second place in terms of capacity compared to 2019, and we put up an impressive RASM number against that. And in Q1, we continue to see that trend continue. We’re going to be in a really good RASM position even though we are now the largest carrier in terms of size relative to our 2019 size. So even with significant growth in capacity, we are seeing continued strength in leisure demand and especially when we look to the peaks, and we’ve got presence there right around the corner, and we’ve got the spring break period. We see really robust demand, probably the best we’ve ever seen. And I expect at the current rate, we will have never seen a spring break that is as good as this year.

Helane Becker: That’s hugely helpful. And then I think — I don’t know if it was the last earnings call or the one before that, you talked about seeing trade down from other carriers to you guys. Are you still seeing that among maybe a nontraditional Frontier customer?

Barry Biffle: We’ve seen a significant uptick in customers that did not fly us before. So as a growing carrier, you’re always seeing new customers because you’re in new markets and so forth. And you’re always adding new customers and say, I think that you already applied to. But we did see a significant uptick in customers over the past year that has not flown us before. We’ve seen a significant uptick in customers that are buying our GoWild pass, as an example, who we’ve never seen before at Frontier. It’s hard to say if that’s a price pressure of them being priced out of the legacy carrier or is it just simply that our brand is getting that much stronger. It’s hard to say. But yes, we continue to see a significant amount of new customers.

Operator: Our next question will come from the line of Michael Linenberg from Deutsche Bank.

Michael Linenberg: I guess to Barry, I guess you’re sort of in a unique position in the sense that you’re one of the few carriers that I think you have both the LEAP engine on your A320neo and I believe you’re bringing in the GTF on your A321neos. Curious if you’re seeing anything now or is it just because you just started getting the GTFs in your fleet? And what — from maybe conversations that you’re having with the OEMs, what is the issue? What do you think is the root cause, so that when a year or 2 or 3 down the road, you’re not taking engines off the way?

Barry Biffle: Well, I think that’s a question for the engine manufacturers. But yes, we operate both engines. We — in fact, it seems like yesterday, but we’ve been operating the neo now for, oh gosh, for 7 years. And we had a lot of teething challenges with the LEAP. There were shroud issues. There were a number of challenges of fuel nozzles, all types of things as there is with every new technology that has come in. We are past most of those issues now, there’s maybe still a few lingering. We’re not as familiar with the GTF, as you pointed out. We just started operating this aircraft basically in the fourth quarter. And so we’re very new to it. We haven’t had many of the issues. A lot of the issues, as we understand them, are earlier production series parts and we’re fortunate to have many of those upgrades later, but there obviously could be challenges.

I think the biggest issue is not — is the reliability is there, but the turnaround time on the engines themselves. So how long it takes, if you have an engine come off wing, how long it takes to get that engine overhauled and back. And I think what we’re seeing, not just in engines, but in all types of components, we’re seeing it take longer to get components repaired and back to the airlines. This is one of the challenges we’re seeing with our provider on parts. It’s just things are taking longer to get repaired. And so it takes longer to get them back on the shelf. And I do know, yes, there’s another airline that called us out recently in the United States, but there’s several around the world that have, in the engine space, that actually have aircraft sitting without engines.

And so we’re watching this closely. But yes, we’re pretty good ways away from having any of these challenges and hopefully, given the improvements that they’ve already made to the engines, it’s not as profound at Frontier.

Michael Linenberg: Okay, that’s helpful. That kind of reinforces the adage that you kind of never want to be first in line for the new technology, let it teeth and be the airline #4 or 5. So that’s good. And then my second question, and maybe this is Barry, to you, and Jimmy, the comment in the release about second half of 2023 getting back to the profitability per aircraft in 2019. I go back to 2019, and I see 14% pretax margins, that makes me salivate, probably makes you guys salivate as well. Is it a margin? Is it EBITDA per aircraft? What are you referring to? What metric do you hope to hit in the back half of the year?

Jimmy Dempsey: Yes, Michael, we have an internal target of getting back to pre-pandemic profit levels, obviously. I think the entire industry is trying to do that, but like we have a real line of sight to moving back to a pre-profit per plane on a net income basis, on a run rate basis in the second half of the year. Obviously there’s a lot of work to do to get there, moving our unit costs and widening the cost advantage against the competition and gives us a real runway to moving margins higher. And obviously we want to move margins higher, but it’s not necessarily a margin race. It’s more of a profit level per plane.

Barry Biffle: Yes. So Mike, it’s total dollars of net income per plane. And again, and just what we did with the fourth quarter kind of illustrates, if you look sequentially at the last 3 quarters, you can see the cost trajectory is clear. And so €“ and you can see that the ancillary revenue trajectory is clear. And so it’s just math. And if you look, we’re already back pretty close to pre-pandemic utilization. We got maybe half hour to go, but we already did 11.5 hours just in €“ just in the fourth quarter. So it’s all systems go, and then we have a clear path. It’s not a maybe, someday, it’s right upon us.

Operator: Our next question will come from the line of Duane Pfennigwerth from Evercore ISI.

Duane Pfennigwerth: Yes, the takedown on full year growth makes sense. More near term, can you just speak to the March quarter? How many — how much of this is just short on deliveries in the here and now versus some increased conservatism in your planning assumptions?

Daniel Shurz: Duane, it’s all delays in aircraft deliveries. We have been working with Airbus for some time on understanding the supply chain issues that they have in their business. And we’ve been notified recently of significant delays across this year that we were previously unaware of. What we have been seeing is delays of between 4 and 6 weeks in aircraft deliveries. We’ve now seen that extend out between, as we said in the release, between 1 and 5 months. So the change in capacity is really driven by those aircraft delivery delays.

Duane Pfennigwerth: And how many, sorry, go ahead.

Barry Biffle: Well, in Q1, in particular, this is the first time we’ve had kind of this close in with this many aircraft be late, but we had full 4 lines out as a result. So it’s pretty significant, even close to it, Duane.

Duane Pfennigwerth: Yes, how many are you short like right now? Where do you think you would be and where are you?

Daniel Shurz: What we’re seeing, Duane, is aircraft delays start to like extend it. So you’re seeing today that were occurring months, 6 weeks, 2 months, now going to 3, 4 months. And so that’s what you’re seeing cascading across the year. So if you go all the way to the end of the year, given the profile of our delivery schedule, you see 9 aircraft actually dropping out of the fourth quarter and into the first quarter and a bit beyond the first quarter of next year. And so that’s what you’re seeing. Right now, we’ve taken, as Barry said, 4 lines, we expect it to be 4 aircrafts.

Barry Biffle: And there was already one. So we’re actually down 5 now end of this quarter, and it grows to 9 by the end of the year.

Duane Pfennigwerth: Okay. That’s helpful. And then just maybe a hypothetical, maybe more than hypothetical, on Spirit, slots and gates, if there was a package that became available, can you comment on your willingness to bid on that? Any thoughts on that conceptually?

Barry Biffle: No, we can’t comment.

Duane Pfennigwerth: Okay.

Operator: Our next question will come from the line of Brandon Oglenski from Barclays.

Brandon Oglenski : Barry, can you talk to, I guess, the resiliency of your network and your operation? I mean I know I hear you on the pilot issue that maybe that’s not really one that’s fair to apply to you guys. But last summer, you did have constraints across the network, whether it was like airport capacity or FAA, ATC capacity. So what are you doing to mitigate those challenges this year? And what gives you the confidence you can grow at the levels you think you are?

Barry Biffle: Yes, so actually it wasn’t the summer. It was actually in the spring, we saw some challenges, particularly in Florida. Some carriers got, I guess, a bigger run than we did. But what we did is we reoriented our flying on pairing, crew pairing actually cross Jacksonville Center. And so effectively, you don’t have any aircraft or any crew that actually crosses Jacksonville more than twice. And so this helps mitigate if we ended up with 3 and 4-hour ground lay programs again, we can just trim the flying and for ATC, but it doesn’t disrupt the aircraft for the next several days, right? So you don’t get any situations where these carriers that have airplanes that are kind of duties daily chain, multi-leg all across the United States that lead through all super cities, we don’t — we’re not impacted by that.

And so that’s one of the reasons why I think you look at the storm, we did so much better, I think, recovering after the fact, even though we were much more impacted than most when you look at our geography. I don’t know, Dan, do you want to talk about scheduled construction?

Daniel Shurz: Well, I was going to say one thing I’ll say is, one thing that’s changed since last spring and summer is we’ve increased the level of modularity. We’ve further tightened up in terms of — with a higher percentage of crew just during the 1 day pairing, we’ve got on almost 4 are flying in 1 and 2-day pairings from a crew perspective. We’ve got more aircraft. We’ve got more aircraft based overnight in our biggest crew base. We’ve just simply — we’ve simply created more resiliency with the further increase in the modularity of the network, but it sets us in a good place going into the summer of 2023.

Brandon Oglenski: I guess I appreciate the outlook as well for second half profitability, just like the earlier question. But Barry, what’s the view, or Jimmy maybe, right now that you can’t generate that profitability? Because you have got your cost down here recently, aircraft utilization is coming up. Is it really just the outlook for lower fuel prices, that’s the difference?

Jimmy Dempsey: I mean, there is a relationship between fuel prices and revenue that we’ve seen over the course of the last year. And so, I mean, no, it’s not just lower oil price. If you look in our guide today, we’ve given you the market price for oil for Q1. We’ve given you what the curve is for — that we’re seeing for oil prices for the year, and that’s reflected in what we believe we can achieve throughout the year. What we’ve seen so far this year, particularly going actually towards the end of last year and going into the peak parts of this quarter, there is a real strength in demand coming through into the business. And that allied to $82 going to $85 in non-ticket plus your unit costs moving towards $0.06 plus the business in a really good position to improve profitability, which is really the objective that we’re working towards.

Barry Biffle: Specifically to your question, Brandon, about why not now, well, seasonally in Q1 is actually the worst for our network, the lowest random time. So the seasonality does come back. But also, your costs continue to sequentially go down. And so it’s just mechanical. I mean, as the revenue comes up seasonally and the costs continue to go down and we’ve also got further tailwinds coming in the ancillary that Daniel kind of mentioned, 82 going to 85 by year-end. Those things come together to put us back to pre-pandemic profitability.

Operator: Our next question comes from the line of Conor Cunningham from Melius Research.

Conor Cunningham: Maybe talk a little bit more about just the pilots in general and staffing. So some of the other airlines have talked about needing to be like 5%, have 5% more pilots to hit their like prior production levels. And you appear to be overstaffed right now, but I assume it has to do with delays and hopes of growth. But just long-term, do you think that there’s a structural change in staffing and maybe employee productivity at Frontier?

Barry Biffle: We don’t completely understand that. We’ve heard that commentary, but we do not have more pilots per plane. We don’t — we have not seen a need for more pilots per plane. There is slightly higher pilot costs because we do have attrition that we’ve talked about in the past, we have a higher level of attrition causes, you’d have to train more. But if you look at like , for example, that’s the main source. In fact, we see more efficiencies as Daniel kind of talked about the modularity network, we actually see more efficiencies come to this. So we’re not sure what those businesses — what other things are doing, but we don’t understand why they would need a more positive plan.

Conor Cunningham: Okay, I’ll take that. And then just on crew bases in general, you’ve opened up a lot, and I understand the idea around the modularity of your network and I get the benefits to the operational side of the business. But when a crew base is opened, why shouldn’t we just turn around and assume that there’s a — there’s an additional cost to Frontier, like a structurally higher cost, the fact that — I mean, it is a much different stance than you had pre-pandemic. So just curious on how you think about crew bases and the impact to your overall profitability?

Barry Biffle: Yes, so we spend a lot of time on this, and Daniel can spend hours with you explaining it. But as long as we have a minimum amount of sizing, in fact, today, we’re in Phoenix hosting the call, and we just opened a base here. And we’re already at the minimum scale that we need. So the only inefficiencies, if you will, that you get with a base are in reserves. And so as long as your reserve ratios don’t get too high as a result of your base coverages, it’s not a big deal. Sometimes what we have learned is depending upon the windows that you cover for your reserves, you could end up with percentages that don’t make sense, if the base gets too small. But we believe we’ve largely cracked the nut on this, and we are not opening bases that we don’t believe fit our efficiency on a ratio perspective. And then when we think about from a reliability perspective and resiliency, there’s just €“ there’s not a better way to operate.

Operator: Our next question will come from the line of Christopher Stathoulopoulos from Susquehanna Investment Group.

Christopher Stathoulopoulos: Barry, the — going back to the outlook for pre-pandemic profitability per plane, what are the assumptions around seasonality there and utilization? Does the outlook assume any macro softening or is it seasonally in line plus or worse? Any color here on how you’re thinking about demand as we move through the quarters and utilization?

Barry Biffle: Yes, so from a utilization perspective, we look to be at 12 hours. We were actually at 11.5 in the fourth quarter. We’ve been operating plus that level now. So there’s not much more to go in utilization. So utilization will be what it is. The big leverage that you get is the delivery of the 321neo, I mean, with 240 seats. It just simply delivers as a major CASM advantage. We actually do assume, as a result of that, that RASM is going down. I mean, we actually have assumed that those incremental seats will come at a marginal fare. So we expect that there will be a kind of ability to withstand any kind of weakness, if you will, in the economy by us further reducing our cost levels. And so– but — and we plan on a major 2009 type event, no, but we can withstand a medium to mild recession.

Christopher Stathoulopoulos: And my follow-up, so November’s outlook modestly above 6, I think it was to — or yes, today’s outlook, modestly above 6 to November is less than 6. I understand the slippage here. But if there are more delays, you called out the 4 to 6 weeks, has moved to 1 to 5 months. What are some of the levers that you could pull here because it sounds like an 11.5 or 12, there’s not much more you can do on utilization to offset what could be perceived as upward pressure on unit cost should the additional tails slip?

Daniel Shurz: Well, let’s just start. Our trajectory on unit cost is heading in a really good direction. What you’re — what’s happening with the Airbus delays is a delay in that benefit of the 321neo coming into the fleet. And that’s maybe a quarter. And so you’re on a very strong trajectory on a unit cost benefit and efficiency benefit in the business. In order to mitigate the delays, I mean, we’ve certainly looked at infilling some capacity by extending leases or looking at distressed aircraft around the world to replace some of the capacity. What we believe is that this is not a single year event where the manufacturer has delays and supply chain issues and deliveries. We believe this is a multiyear event. And so we’re looking to plan our business accordingly.

And so we may look to infill some capacity from outside of the business probably from within the business by expanding some leases in order to manage the capacity profile of the business because the changes that we’re seeing in deliveries create some lumpiness in capacity the business, and we may choose to smooth that out.

Barry Biffle: And just to clarify on the €“ what we thought versus November, I mean, we were looking at sub-6 and now we’re talking low 6 for the year, right? And we expect it to still be below 6 in the second half, even with the delays.

Operator: Our next question will come from the line of Savi Syth from Raymond James.

Savi Syth: Just for the first question, just a follow-up on fourth quarter, your cost came in much better than you had thought, even though you had these storms. So I was just curious what was driving that and just trying to gauge what level of conservatism might be there in your kind of nonfuel guide here for 2023?

Jimmy Dempsey: I mean, look, the big driving force in our business, as you know, is overcoming the fixed overhead exits and moving utilization to 11.5 hours for the full quarter as it has a big impact on unit cost metrics, if you measure CASM ex-fuel or something like that. And I mean, look, I mean, we are giving you what we know today in terms of our outlook on costs for the year. Where the business is very focused is ensuring that we have a structural cost advantage versus the industry that’s sustainable. And so as we move towards the $0.06, that puts us in a very strong place versus the competition. I mean, if we come in at $0.06 or $0.061, I mean, it still puts us in a place overall on total cost less net interest somewhere in the mid-30s percent lower cost than the entire industry average.

And I think Barry talked about it earlier, like we were over $70 a passenger, a lower cost than the industry average in the last quarter, and that’s moving higher as your unit costs come down. So that’s in a great place to grow the business in the short-term, in the medium-term. And that’s something that we’re very focused on achieving. What we’re trying to do with you guys is educate you on how we get there. And in the fourth quarter, you’re seeing a really good move towards $0.06. If you look sequentially across the year, utilization was lower, came up, unit cost came down, and we expect that to continue as we progress through this year. That’s where we get our competitive edge.

Barry Biffle: And just to clarify, we were $70 — over $70 advantage for the full year of 2022. And by the fourth quarter, that has expanded to over $80 for the past year. So with this cost advantage, this is what gives us the confidence that the momentum is going to continue, and we’ll be back to a pre-pandemic profit per plane in the second half.

Savi Syth: That makes sense. And then if I might, at the Investor Day, you talked about some of the moving from high touch to self-service and some of those things should drive some cost benefits as well, not as much as A321s. But I was curious on how the kind of the switch in call center and saw how some of those initiatives are being kind of accepted by customers?

Barry Biffle: Yes, so look, I think contrary to maybe some of the news reports. So we’ve actually seen really good performance. In fact we were just reviewing it this morning. We’ve seen NPS go up dramatically compared to the call center. And the reality is, I mean, if you just think about it in your personal life, how often do you text versus how often do you call. And I think this is the way people want to interact. And as long €“ what we see is the biggest driver, can you solve their issue and do you do it promptly. And when I think when you compare to some of these other carriers that recently have had 10, 20, 30-minute waits to get a hold of an agent, that’s . So look, customers like it, and it’s working well.

Operator: Our next question will come from the line of Scott Group from Wolfe Research.

Scott Group: So if I look in the fourth quarter, capacity is up about 15% versus 19% and CASM ex is up low 20s. If I look at Q1, capacity is now going to be up about 40% versus 2019, but CASM ex is still up low 20s. Why aren’t we — I guess my question is, why aren’t we seeing better sort of unit cost leverage as capacity is really already ramping up pretty meaningfully?

Daniel Shurz: Well, Q1, you have a lower utilization quarter than is typical in our business. So you’ve got to see that progression throughout the year where utilization moves higher in the second, third, fourth quarters on those than Q1. So just purely comparing Q4 and Q1 was a challenge under unit metric. But we’ve made no — we haven’t hidden behind the fact that the 321 introduction to the fleet drives substantial efficiency into our business. The 321neo, just sort of to remind you, has 240 seats. Our fleet today is dominated by the 320neo with 186 seats. So your average seats per departure moved quite dramatically creating a lot of efficiency in the business. So the more deliveries of those, they operate in our business, more efficiency that comes into our area. So that’s a large part of the efficiency and drive from where it is in Q4, $0.064 CASM ex fuel down to where our targets are greater.

Scott Group: Okay. And then any thoughts on…

Daniel Shurz: Sorry, Scott, and look, we like to look at total unit costs. And so one of the things that we’ve watched in our business as a metric is watching our comparison total cost versus the industry. And that includes that is CASM including fuel because we have a very fuel-efficient fleet. It’s very important to how you price your tickets. The input cost of fuel is very important, plus also net interest. And so if you’re looking at just purely our CASM ex-fuel and you’re ignoring the ownership cost that a lot of the other airlines have in their business and also the investment that we’ve made in our business on fuel-efficient aircraft over the last 7 years and continue.

Scott Group: Yes, that’s a good point. Can you just talk about within your view of getting back to the margins you are at or the profitability you are at per plane, what — how should we think about full year revenue growth or RASM? Just what’s in the plan?

Daniel Shurz: We don’t guide at unit revenue. It’s obviously a function of what happens with oil prices across the year. We’ve given you a sense of where we see oil prices at the moment based on €“ I think it was January 30 but we’re not guiding unit revenues across the year.

Operator: I’m not showing any further question in the queue. I’d like to turn the call back over to the company for any closing remarks.

Barry Biffle: I want to thank everybody for joining our call today. I especially want to thank the Phoenix Airport for hosting our call. And we look forward to talking again after the first quarter. That concludes our call. Thanks, everyone.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.