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

Frontier Group Holdings, Inc. (NASDAQ:ULCC) Q4 2023 Earnings Call Transcript February 6, 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. Fourth Quarter 2023 Earnings Conference 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 speaker today, David Erdman, Senior Director, Investor Relations. Please go ahead.

David Erdman: Thank you. Good morning, everyone. Welcome to our fourth quarter 2023 earnings call. Today’s speakers will be Barry Biffle, Chief Executive Officer; Jimmy Dempsey, President; and Mark Mitchell, Chief Financial Officer. Each will deliver brief prepared remarks, and then we’ll get to your questions. On today’s call, we will be presenting supplemental materials, which can be viewed on the webcast platform with a PC or a smartphone. If you’re not accessing the call from either or if technical issues arise, you could follow along by downloading the presentation from our website at ir.flyfrontier.com/eventsandpresentations. Before yielding, let me quickly review the customary safe harbor provisions, which are included on Slides 2 and 3.

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 file with the SEC. We will also discuss non-GAAP financial measures, which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement and in the presentation supplementing this call. I’ll now yield the floor to Barry to begin his comments. Barry?

Barry Biffle: Thank you, David, and good morning, everyone. Before beginning the brief slide presentation, I’d quickly — I’d like to quickly recap the fourth quarter results. We generated a pretax margin of nearly 1% for both the fourth quarter and the full-year. Our fourth quarter results significantly outperformed guidance on strong operational performance and cost execution with our CASM excluding fuel 8% lower than the prior year quarter. We achieved a 99.5% completion factor on industry-leading average system utilization of 11.3 hours during the quarter and the highest on-time arrivals and departures for the month of December since 2015, excluding pandemic year 2020. Our operational performance during the December to January holiday season was also notable.

We had 15% more departures than the prior year holiday season, making it our busiest in airline history. In addition, our completion rate and on-time arrivals and departures during the holiday period, all ranked as our best post-pandemic performance. I want to take a moment to thank all of Team Frontier for producing such great results and taking care of our customers. While I’m pleased with the operational performance and that we generated a positive pretax margin for the fourth quarter and full year, I’m disappointed in the absolute result. We are, therefore, focused on taking meaningful steps to address the challenges that impacted our results during 2023 and on returning to double-digit margins. Turning to slide five. One of the largest challenges many low-cost and ultra-low-cost carriers based in 2023 was the industry’s oversupply of capacity in leisure markets, with Las Vegas and Orlando being two significant examples.

Both markets have experienced rapid and disproportionate growth compared to 2019 when demand and capacity were far more balanced. As total U.S. domestic capacity increased just over 4% since 2019, total industry capacity in Las Vegas and Orlando grew by a combined 20% and are expected to continue to grow in 2024 based on current published schedules. This has resulted in a relative RASM and margin headwind to many LCCs and ULCCs, and Frontier is no exception. On slide six. No one is more aggressive in engaging in self-help to address overcapacity in leisure markets than Frontier. By summer, we plan to reduce Las Vegas and Orlando combined capacity by 11 points of our system share year-over-year, reducing the share of these markets by one-third.

To be clear, we’re not retreating from our network footprint in either market, we are merely cutting what we believe is marginal unprofitable flying to return both basis to a rational optimal position for our cost structure and remain the low-cost leader in both markets. Turning to slide seven. Our network growth in 2024 is focused on exploring higher fare visiting friends and relative markets. The market mix of roots by this summer will increase industry average fares in those markets by 5% year-over-year. Not only are we chasing higher fare markets, the total revenue pool of industry revenue in our network this summer will be up over 50%, despite only growing capacity 12% to 15%, meaning we need a much smaller share of industry revenue extremely constructive for increasing RASM.

Additionally, the historical data suggests VFR routes tend to ramp quicker and reach maturity sooner than leisure routes. Turning to slide eight. Another significant challenge we faced last year was the extended ATC ground delay programs, which negatively impacted our completion factor in utilization, particularly during the summer peak. To address this, we are executing on the network simplification strategy that we discussed on our last earnings call, with a focus on increasing the percentage of aircraft that return to base nightly to greater than 80% by peak summer this year. We expect this strategy to enable expanding our industry-leading utilization and improve reliability. A key element of our plan is leveraging our 13 crew bases, including our recently announced crew bases in Cleveland, Cincinnati, Chicago and San Juan, Puerto Rico.

Single day trips flowing from our crew bases support operational reliability, recoverability and higher fares. Our relative cost advantage to the industry outlined on slide nine is a key factor in our ability to stimulate demand with low fares and an increase to over 40% in 2023. We believe unit cost leadership is fundamental to our long-term profitability and expect Frontier will remain the lowest unit cost provider in the United States, particularly as significant cost savings materialize from our network simplification strategy. We expect that our network simplification strategy will underpin the $200 million of associated annual run rate cost savings, which should be implemented by the end of 2024 as we highlighted on our third quarter earnings call.

Further, our order book is heavily weighted to the high gauge A321neo, which will contribute meaningfully to our ability to control costs as we continue to increase gauge. Accordingly, we expect 2024 adjusted CASM ex fuel to be down 1% to 3% on a stage-adjusted basis to 1,000 miles. As highlighted on slide 10, we plan to leverage our network, product, brand and distribution to diversify our revenue and drive sequential RASM improvement. I’ve spoken extensively about network enhancements, so let’s briefly review the latter initiatives. Last week, we launched our innovative biz fares product to cater to cost-sensitive small business travelers while providing a premium experience for one low price. We’ve rebranded our stretch product to promote our premium economy seating starting at $19, consistent with our recent launch of our Get if All for Less campaign.

As we showcased last quarter, our relaunched Frontier Miles program features enhanced elite status tiers that can be earned faster and offers the highest credit card spend-based travel reward earn rate in the industry for each dollar of spending with the Frontiers Barclays Mastercard. A new website and new mobile app as well as NDC are expected to launch by late 2024 and should provide significant distribution, merchandising and conversion benefits as well as improved brand positioning. Further, we’ve seen competitive overlap recede in recent months. To the extent carriers further engage in capacity rationalization, this would drive additional unit revenue benefit to Frontier, which will be accretive to our guide. However, we have only included the published reductions in our base case.

On slide 11, network, cost and revenue initiatives are expected to drive profit and growth in the business. We expect our pretax margin for the full year 2024 to be in the range of 3% to 6%, with capacity growth of 12% to 15% and adjusted CASM ex down 1% to 3% on a stage-adjusted basis to 1,000 miles. First quarter 2024 guidance is reflective of seasonality and off-peak dynamics expected during the quarter. Our guidance is based on fuel pricing as of February 2. Turning to the final slide. With full-year benefit of our network cost and revenue initiatives, we expect 2025 to be between 10% and 14% pretax margins. This includes the expectations of new labor agreements with pilots and flight attendants as both recently became amendable. That concludes the slide presentation, and I’ll now hand the call over to Jimmy for a commercial update.

Jimmy Dempsey: Thank you, Barry, and good morning, everyone. Fourth quarter revenue was $891 million, reflecting RASM of $0.089, down 15% on 15% capacity growth and an 8% decrease in average stage length. This represents a 4-point year-over-year sequential improvement from the third quarter, driven by stabilizing demand trends. As we enter into 2024, we are now seeing improving revenue trends better than our earlier expectations and see positive momentum as we transition to our new network and deliver on multiple revenue initiatives. We expect the revenue trends to continue to show positive year-over-year sequential improvement. We carried a record 8.1 million passengers during the quarter with a 99.5% completion factor. As well on-time arrivals and departures in December were our highest since 2015, excluding the pandemic year of 2020.

During the quarter, as Barry mentioned, we made steady progress toward our objective to increase the percentage of out and back flying, including the announcement of four new crew bases at Cleveland, Cincinnati, Chicago and San Juan, Puerto Rico. The Cleveland base is expected to open in March and will employ 110 pilots and 250 flight attendants in its first year. The Cincinnati basis is scheduled to open in May and will employ 80 pilots and 160 flight attendants while the Chicago base will serve both O’Hare/Midway and employ 110 pilots along with 200 flighted tenants already based there. And finally, San Juan will be our 13th crew base, and will employ 90 pilots and 200 flights attendants in its first year. We’ve been the fastest-growing airline in Puerto Rico, more than doubling sea capacity since 2019 and offering 14 non-stop routes from San Juan alone.

Puerto Rico is playing a key role in our carbine and Latin America growth strategy, not only because it’s a popular tourist destination, but large populations of Puerto Ricans reside in the U.S. mainland, and they frequently travel to the island to visit friends and family or to work remotely. Frontier is well situated to capture a disproportionate share of this volume as we now serve more routes to Puerto Rico from the U.S. than any other carrier. Moreover, we recently announced a significant expansion of our network as part of our strategy to grow in higher fare routes. During the second quarter, we launched nonstop service from 38 airports with our largest concentration of routes and visiting friends and relative markets from Dallas Fort Worth, Charlotte, Raleigh Durham, Los Angeles, New York, Minneapolis St. Paul and San Juan.

Finally, early last month, we officially launched our reimagined Frontier Miles loyalty program, and we’re seeing positive trends. Memberships and engagements, particularly at elite levels have increased. We have also observed improved spend on the co-brand credit card. In fact, December spend was over 10% — was up over 10% year-over-year and was the highest level on record. While it’s still early, we expect to see continued improvement in spend throughout 2024. That concludes my remarks, so I’ll lead the call to Mark.

Mark Mitchell: Thank you, Jimmy. We generated a pretax margin of 0.7% on a GAAP basis and 0.8% on an adjusted basis in the fourth quarter well above our guidance range on solid operational performance, as Barry touched on earlier and cost-related factors. As a result of our fourth quarter performance, we also generated a pretax margin of 0.9% for the full-year. Total revenue was $891 million, down 2% compared to the 2022 quarter, fuel expense was roughly in line with the prior year quarter as the 12% benefit from lower fuel prices and 3% improvement in our industry-leading fuel efficiency to 105 ASMs per gallon was offset by the increase in consumption from capacity growth of 15%. Fuel expense for the quarter reflects an average cost per gallon of $3.18, which was slightly below the low end of our guidance range.

Adjusted nonfuel operating expenses in the fourth quarter totaled $590 million or $0.059 per ASM, 8% lower than the prior year quarter. The improvement in adjusted CASM, excluding fuel, was driven by a $36 million lease return cost benefit during the quarter from the execution in December of an extension of four A320ceo aircraft leases that were otherwise scheduled to return in 2024. Moving forward, we will continue to be opportunistic with our fleet management, including attractive aircraft lease extension opportunities. Our adjusted non-fuel operating expenses also benefited during the quarter from efficiencies realized across the business, given the strong operational performance and our continued focus on costs. While our fourth quarter pretax income was $6 million, we generated a net loss of $37 million driven by the recognition of a $37 million non-cash valuation allowance against our U.S. federal and state net operating loss deferred tax assets, which wasn’t contemplated in our effective tax rate guidance.

Our adjusted net income of $1 million for the quarter excludes this adjustment as it’s a significant special non-cash item. It’s important to note that these NOLs generally don’t expire and can, therefore, continue to be used against future taxable income. Given our full-year adjusted pretax guidance of 3% to 6%, we presently expect to utilize a substantial portion of NOLs this year. Any corresponding reversal to this adjustment as we generate taxable income would also be excluded for non-GAAP purposes. We ended the year with $609 million of unrestricted cash and cash equivalents and $139 million net of total debt. In addition, we have unencumbered loyalty and brand-related assets, which we believe could generate significant additional liquidity if desired.

We had 136 aircraft in our fleet at year-end after taking delivery of four A321neo aircraft and returning two A320ceo aircraft during the quarter. We expect to take delivery of 6 A321neos in the first quarter of 2024 and a total of 23 A321neo aircraft in 2024 all of which are anticipated to be financed through sale-leaseback transactions. With that, I’ll turn the call back to Barry for closing remarks.

Barry Biffle: Thanks, Mark. Our objective for 2024 are clear. Every member of Team Frontier is focused on executing our network, cost and revenue initiatives, improving our operational reliability and delivering an enhanced experience for our customers with a network growth focus on high-fare VFR markets. Alongside our commitment to remain the lowest cost provider in the United States, I’m confident these measures will drive higher margins in the business. Thanks, everyone, for joining the call today, and we will now open up for questions.

Operator: [Operator Instructions] Our first question comes from Duane Pfennigwerth of Evercore ISI.

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Q&A Session

Duane Pfennigwerth: Hey, good morning. Just on the unit cost guidance, can you give us some thoughts on how we should think about stage length this year? Or is there a way to maybe convert the guide to kind of a nominal unit cost guidance? And just broad strokes, what would the underlying kind of tailwinds and headwinds be from a unit cost perspective?

Barry Biffle: Well, so Duane, I think what’s important to note is our stage is going down. So I think to be intellectually honest, that’s why we’re pinning it to 1,000 miles, and we expect to be down 1% to 3% on a stage-adjusted basis, but we expect it to be closer to 900 for the year.

Duane Pfennigwerth: Yes, just maybe broad strokes, the underlying kind of tailwinds and headwinds year-over-year?

Mark Mitchell: Yes. So when you look at that guidance for the full-year, I mean that is underpinned by the network simplification that we’ve touched on and getting our out-and-back-flying to over 80%. And that is going to drive the $200 million of annual run rate cost savings that we expect to have fully implemented by the end of the year. Additionally, as we go through the year, the 23 aircraft that we’re taking delivery of those are 321neos. So you’ll continue to get the gauge benefit there. And so I think those are the main drivers of the 1% to 3% down in the CASM stage length adjusted.

Duane Pfennigwerth: Okay. Appreciate those thoughts. And then I’m sure you get the question a lot. As a team, maybe it’s Barry, maybe it’s Jimmy. But to the extent that Spirit becomes available again, can you just gauge your interest or to the extent you’d be tempted to reengage there? Is there any price on the equity where it would make sense from your perspective?

Barry Biffle: Thanks, Duane. It’s the first time we’ve been asked that question. We are 100% focused on our business and delivering profits for our shareholders. So sorry, but we don’t have anything entertaining to talk about.

Duane Pfennigwerth: Very clear. Thank you.

Operator: Thank you. [Operator Instructions] And our next question comes from Savi Syth of Raymond James.

Savi Syth: Yes. Hi, good morning. I was kind of curious what your thoughts were as you kind of roll forward this network changes, where utilization would go and along those lines, I think how the pilot trends are looking in terms of being able to meet the utilization targets?

Barry Biffle: Well, I’ll talk about the pilots, and I’ll let Mark talk about the utilization. But on the pilot side, we’ve seen a dramatic change in the marketplace. I think — I mean you’ve seen the regionals looking at this. And I think when you see the regionals being able to be staffed, I think that tells you everything you know about the shortage of pilots. So we don’t see any challenges there.

Mark Mitchell: Yes. And then relative to the utilization, so in the fourth quarter, we delivered 11.3 hours on a total system basis. As we progress with the network simplification, we expect the utilization to increase as we go through the year, and we’ll continue to push to drive that higher.

Savi Syth: I appreciate that. And if I might, just a clarification question on Duane’s color. Some of the labor cost — any kind of labor cost increases in the 2024 guide? I know you mentioned it is contemplated in the 2025 outlook.

Barry Biffle: No. These just opened. I know a lot of people that have been open for multiple years are starting to include it. We didn’t include it in ’24, but we have included it for ’25.

Savi Syth: Okay. Thank you.

Operator: Thank you. [Operator Instructions] And our next question comes from Ravi Shanker of Morgan Stanley.

Katherine Kallergis: Good morning, everyone. This is Katherine on for Ravi. Thank you for taking my question. About six months ago at Laguna Conference, you kind of talked about structural pressures from ATC and plane restrictions, which it sounds like you are expecting deliveries, but I was just curious what the lay of the land is today? Have those pressures eased? Are you trying to work around them? Is there an opportunity for a bigger reset in the operating model to kind of deal with the current environment?

Barry Biffle: Yes. No, thanks for the question. I mean we don’t expect the situation to change. I think the weather has been a little more kind to the industry. But we do continue to see kind of hints of these extended ground delay programs. So I think the next test is kind of President’s Day weekend then you’ve got all the weekends through the spring break season in Easter, particularly you have to watch Florida and what that does to ground delay programs. But we are not waiting for the situation to change to improve our trajectory, we are taking control of the situation, and we are designing our schedule around these issues and expect them to continue through the spring and summer. And when we look at last year, we added several percent of our flights that were canceled in the summer.

And the majority of those, like 90% were related to multi-day trips. And so we have to change the network to ensure that we combat these challenges and overcome the reliability issues. So — but we feel really good about it because if we make everything look like the out and back that we had, we expect to continue to improve our reliability as we’ve seen in recent months.

Katherine Kallergis: Got it. Thank you. And just as a quick follow-up, I was curious how close in bookings are trending. I know there was kind of a slight drop off last Labor Day. So any color on what you think normal behavior might look like? Thanks for the questions.

Barry Biffle: Yes. Jimmy kind of alluded to this, we’ll let him answer that question.