Q2 2022 Frontier Group Holdings Inc Earnings Call

July 27, 2022

Okay.

Yeah.

Ladies and gentlemen, thank you for standing by and walked through the Frontier Group Holdings.

Turning to earnings call at this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the special need to press Star one one.

I would now like to turn the call over to your host David Erdman you may begin.

Thank you and good afternoon, everyone welcome to our second quarter 2022 earnings call. Today's speakers will be Barry before president and CEO , Jimmy Dempsey, EVP, and CFO and Daniel <unk> Senior Vice President commercial each will deliver brief prepared remarks, and then we'll get to your questions, but first let me quickly cover the cut.

Tamara Safe Harbor provisions during this call, we will be making forward looking statements, which are subject 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 the reports we file with the SEC.

We may also discuss non-GAAP financial measures, which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement.

And then lastly, we will be participating in several investor conferences in August and September and we certainly hope to see you at one of those events and so I'll give the floor to Barry to begin his comments Barry.

Thanks, David and good afternoon, everyone Needless to say, it's been an interesting few months since our last earnings call.

Public attention was largely centered on the merger behind the scenes, we realized our highest quarterly revenue in history at $909 million, 43% above the comparable 2019 quarter and a record ancillary revenue of $75 per passenger.

The strong revenue performance in the second quarter enabled us to overcome elevated fuel prices and generate an adjusted pre tax margin of 3%.

We were able to lessen the impacts of the weather and air traffic control limitations through proactive measures, which led to an improvement in our completion factor as the quarter progressed with a completion factor of 99% during June and over 99% during the busy fourth of July week.

In addition, unlike many other carriers, we're not experiencing disruptions due to shortages related to pilot staffing levels. In fact, we have surplus staffing today and a capacity to train eight additional pilots a month.

<unk> common paradigms misconceptions about the LCC segment, where a highly attractive landing spot for the pilots given our career growth and resulting pay opportunities as compared to the legacy carriers, along with a desirable footprint of basis, including the opening of the Phoenix crew base later this year.

To further strengthen our pilot recruitment capabilities, we're working with a major flight schools to develop a cadet program, which will provide an opportunity to train 250 <unk>.

Zero time flight applicants per year, who might otherwise have chosen a different career path due to employment uncertainty.

Upon completion of training, we will assist in placing them into flying assignments to continue to build experience and we'll be able to hire them once they reach requisite flying times.

We will continue to focus on generating profitable growth in the business as we increase utilization and successfully overcome the challenges with dependent.

Accordingly, we expect to turn a second consecutive quarterly profit in the third quarter with an adjusted pre tax margin in the range of 1% to 5%.

I'd like to thank Tim frontier for their continued dedication professionalism and commitment to provide safe and reliable service to our customers. They are at the core of our low fares done right model with that I'll now hand, the call over to Daniel.

Thanks, Barry and good afternoon, everyone second quarter revenue performance was exceptional on many levels revenue growth of 43% over the comparable 2019 quarter was driven by 29% increase in RASM from nine to seven.

To $11 97.

Along with a 10% increase in capacity over the 2019 quarter.

Revenue per passenger grew an impressive 24% to $139 with ancillary revenue contributing nearly $75 a vast amount of record for the business above our expectations.

And third performance was driven by recent project Spansion on enhancement along with strong attachment rates, we will continue to expand and enhance our ancillary offerings to allow our customers to personalize the travel experience and to allow us allow us to continue to offer ultra low SaaS.

Given our strong performance in future plans, we're now targeting ancillary per passenger to reach $85 by the end of 2023.

We achieved an eight 4% lower class during the second quarter, an improvement of 10 percentage points over the prior quarter utilization was an average of 10.9 hours per day roughly in line with the prior quarter and we expect a gradual trend towards 12 plus hours, we realized in 2019 consistent with our recovery plan.

In response to high fuel prices, we designed our second and third quarter average stage length to be between 960, and 980 miles which is considerably below historical levels.

We expect to return the airlines to pre pandemic average stages, starting in the fourth quarter.

As we built out capacity, our ASM growth relative to 2019 is expected to accelerate during the current quarter with capacity up 5% in July 8% to 9% in August and 14% to 16% in September .

<unk> and a higher proportion of our fleet is being deployed in an off peak month, and creating an approximate 3% drag on RASM in the quarter.

With these new routes from <unk> 57 destinations from our Las Vegas space, making us the fastest growing online and one of the top leisure destinations in North America.

In response to strong demand since we launched service in Houston, helping in May we're adding a daily nonstop routes to Denver beginning in September .

Just last month, we expand our international and Caribbean service from our time for base launching nonstop flights monthly Goodbye in Taiwan, along with expanded service to conquer.

And lastly, I will debate will formally break ground for our innovative new terminal at Denver International Airport, while we're planning construction of 14 ground loading gains, which will facilitate expedited and planning in the planning through the front and rear aircraft doors, leading to shorter term times.

This and other streamlining initiatives across our network of design to improve operational performance and.

To enhance the customer experience.

And with that I'll hand, it over to Jimmy dosing.

Thank you Daniel and welcome everybody.

Second quarter results were in line with our guidance.

<unk> demand environments drove record setting revenue growth compared to the same quarter in 2019, and along with the exceptional considering performance enabled us to term our first adjusted profit in over two years.

We've employed rigorous financial discipline through through this difficult period to ensure frontier is a strong platform to deliver profitable growth.

Results in the second quarter were impacted by elevated fuel prices, resulting in $335 million of fuel expenses at an average fuel costs of $4 41 per gallon.

Total operating expense was approximately $900 million, including $9 million of transaction and merger related costs and $7 million related to an asset impairment, while adjusted non fuel operating expense of $550 million.

This resulted in the CASM ex fuel was seven <unk>, which.

Which was impacted by lower utilization and lower average stage higher station related costs in the short term cost of surface group.

Inflationary pressures on the business we.

We ended the second quarter in a strong financial position with $766 million of unrestricted cash and cash equivalents frontier.

Frontier is in the enviable position of having access to a substantial liquidity source by leveraging our co brand credit card program and related brand assets should the need arise.

As planned we have enhanced our pre delivery payment facility to align with the short term obligations under the Airbus Order book for <unk>.

The facility was increased from 200 million to $280 million.

We ended the second quarter with 114 aircraft in our fleet after taking delivery of three <unk> hundred 20 Neo aircraft during the quarter, we expect to take delivery of another four aircrafts in the fourth quarter or in the third quarter and eight in the fourth quarter, including the first of 36% to <unk> hundred 20, <unk> by the end of 2023.

Looking forward to the third quarter, we expect a continuation of the favorable demand environment. We saw in the second quarter capacity is anticipated to grow by 8% to 10% over the comparable 2019 quarter RASM is expected to improve by over 20% in the third quarter versus the comparable 2019 quarter bolstered by continued strength in ancillary revenue per pass.

Fuel costs are anticipated to be between $3 75, and $3 80 per gallon based upon the blended jet fuel curve on July 20 <unk>.

Adjusted non fuel operating expenses are expected to be between 565 million to $585 million in the third quarter. The increase from the prior quarter due largely to capacity growth adjusted pre.

Pre tax margin is expected to be in the range of 1% to 5% constrained by the 3% RASM drag Daniel mentioned earlier.

With that I will turn the call back to Barry to deliver closing remarks before we move to Q&A.

Thanks, Jimmy before closing I'd like to offer my thoughts on the termination of our merger agreement with spirit.

Obviously, we're disappointed in this outcome and as spear shareholders will Miss an opportunity to meaningfully participate in the rebound of leisure travel of which we're in the early stages.

Our board took a disciplined approach throughout the course of our negotiations rather than overpay for spirit. The board prioritize the interests of frontier, our employees and our shareholders.

As a standalone entity and potentially Americas ultra low cost carrier frontier has a fantastic platform for profitable growth underpinned by a strong balance sheet and unmatched 321, Neo order order book, a clear path to CASM ex below <unk> and exceptional ancillary performance with plenty of room to run collectively these elements are key contributors.

The resiliency of our business model.

I could not be more confident in our future, especially given the growing demand for affordable air travel.

Our proven and resilient ultra low cost model continues to provide the foundation for our strategy and long term value creation, even with rising fuel prices, we continue to keep costs in fares low while generating record revenues in providing reliable service. We have one of the highest completion rates in the industry and our recent performance further validates our business model and string.

Things are confidence.

We appreciate everyone's time. This afternoon, we will not be commenting any further on the termination of the merger agreement, nor a potential tie up between spirit and Jetblue.

I am however, happy to take questions about how we grow our business and add shareholder value as Americas ultra low cost carriers.

Ladies and gentlemen, if you have a question or a comment at this time. Please press star one one we will pause for a moment, while we compile the Q&A roster.

Our first question comes from Jamie Baker with Jpmorgan. Your line is open.

Hey, good afternoon.

So.

Airbus cut its production forecast today also delayed the planned ramp.

In 2020 production rates, just wondering how you expect that to impact planned capacity over the next 24 months or so.

Whether there is any flexibility within the indigo portfolio to shift around deliveries.

You don't flip.

Yes look Jamie.

We don't I mean, we've been a little focus on our own things right now.

It.

But look I mean, we have a we have a large order book with with Airbus and <unk>.

Obviously, we buy a lot of plans I know a lot of people may be moved some orders around I'm not sure. What this has to do with US yes, we do have the ability as been disclosed before to move to move aircraft among the indigo portfolio carriers that participated in the.

In the Dubai order a few years ago.

We are unaware of any any material difference.

Versus our order book as we stand today, Okay and second there is no shortage of data at this point.

Proving that sort of lower end consumers are certainly trying to find ways to economize. Your third quarter guide looks fine to us just curious if youre seeing any change in trip duration, obviously lobbing off Dave holiday is one way to save on the aggregate expense.

Any changes in the booking curve.

Or maybe you or David just implies complete immunity.

Slowing economic trends any thoughts there.

Well I'll start and I'll, let Barry I'll, let Barry add on.

Jeremy Spaniel.

We're not ready we're not really we're not really seeing any difference we've seen no we've seen no change.

Trip duration we've.

We've not we've not seen that we've not seen that we've not seen any slow we don't see any slowdown in demand and so we don't we don't.

We don't see we don't see this at the moment, so we're not being affected at the moment.

Confident that we are offering the right value to customers to keep them to come and choose frontier.

Yes, we have seen two things there are interesting one.

Just kind of.

Work from home phenomenon, we have seen an extension of some people's itinerary. So so I think.

In the composite there may be some people Jamie that are actually or are cutting off a day I've read articles just like you have about some hotels, maybe they cut a day or two off their vacation, but they still go. Thank you save money at the same time, you've got people moving around that are working from home, but really working from somewhere else and so they are actually expanding so the averages.

I think may be clouding that the one piece of data. We do have debt that is pretty empirical is that we have seen.

An increase in incomes of our travelers and so a significant increase in the 100000 household income and a significant increase in the 200000 plus household income which suggests that you are seeing the buy down effect to frontier.

Okay very interesting thank you gentlemen.

And one moment for our next question.

Our next question comes from Duane <unk> with Evercore ISI. Your line is open.

Hey, Thank you.

Yes.

I wanted to ask you about.

New markets understand you've been.

Busy and focused on other things, but as you sort of think through the implications of.

Staffing shortages for the industry staffing shortages for regional carriers.

More white space in small markets.

Are there any obvious targets or.

Markets that you feel are really.

Constrained or overly constrained from a capacity perspective.

And I certainly appreciate your comments about not wanting to go there but.

You have spent a fair amount of time studying potential overlap.

What would you might see as the opportunities that could develop.

If they do pursue a relationship.

I'm going to let Daniel talk about the more recent kind of phenomena with shortages of regional capacity and he's probably got some examples because I know, it's been exploiting and yes, we would.

We've seen.

We always try and watch what's going on in the industry, we've seen that with what we've seen actually less I think it's less I think regional <unk> regional service and the trend in the traditional sense, but they tend to be quite small quite small markets fundamentally probably we drove market, even though for us a little bit too small, but while we are also seeing as islands of consolidated capacity again the Crs.

We've seen it we've seen a we've seen a pullback in certain in certain markets you can.

You can see notably we've looked from a very from a vegas from a Vegas space. One of the reasons. We went into the markets. We went into as you can see.

Meaningfully reduce capacity in some of those markets.

Other airlines have sort of consolidated the way that the way that fly. So for example, Las Vegas, Buffalo Las Vegas, Hartford substantial substantial markets much less much less much less competitive service then you would assume would.

The same pre pandemic.

There are other examples in our key leisure basis of where we are where we're seeing a similar phenomenon. Those are the ones, we're going to take advantage of.

As far as your second question. Thanks, Duane I said, we were going to talk about.

Our exciting future as America's Ultra low cost carrier so answer to your question in that in that vein. So.

In the event that they do emerge.

Take a carrier Thats, probably one of the most similar to US you slap on 40% more cost and that creates a lot of runway ahead of us.

And thanks for that maybe.

Get you to expand a little bit.

There was a period of time and I don't recall, the exact quarter or when but.

To manage your cost to focus on your cost you sort of deemphasize.

Some expensive northeast airports for example.

What would it ever make sense to come back to Laguardia or.

Could you envision having a bigger footprint in south, Florida, if assets became available.

Yes.

Absolutely I mean look I mean, youre referencing what we did in Newark, and some other places.

It's not that they were expensive in addition to being expensive we were unable to put together an efficient operation with the with the landing slots that we had and so so we would absolutely if we can get the right opportunity and Laguardia.

We would be really excited about it.

I think consumers would be too.

I appreciate the thoughts.

Operator next question My apologies My line was muted. Our next question comes from Michael Lindenberg with Deutsche Bank. Your line is open.

Hey, good afternoon, guys and congrats to getting back to profitability.

First question just on.

Looking at the.

The differentials the year over year year over two year in sort of your base there.

Does your ancillary and it is interesting.

Obviously successful in pushing both App, which is a good thing in a highly inflationary environment.

That ancillary increases roughly double and I'm just I'm curious about.

Either barrier Danielle.

They are different products different price elasticity, presumably one is more stickier than the other.

But it wasn't big increase.

Talking about $2025 or so plus or minus a few dies what were the big components or is there just an inflationary piece in there.

Your bag fees are now three to $5 higher than seat fees and insurance fees are all three to five is that really what's flowing through here because it does look like a step function change if you could add color Greg.

So look we took we took a boat we took advantage of the pandemic to continue developing new products. So it's a mix it's a mix it's a mix of everything.

They are in place for FX.

It's new products new products new products, we've introduced.

It's the continued work we've done and I think we lead the industry and how we how we optimize our pricing our pricing of our cancel rate products.

Reflective of our customer are reflective of what customers want and it's just a continued work to improve this and Thats why we now have confidence given what we've seen we now have confidence to increase our target to $85 by the end of 2023.

And I would just add Michael.

We learned in the pandemic, we used to think that that <unk>.

50, 50 was a good split.

And.

And you use it you said, it's just a moment ago. We use this word literally youll hear this around our office multiple times today, we talked about the stickiness.

Non ticket and the truth is as is payers and fuel are largely out of our control, but non ticket is not.

So what we like about non ticket is that we can get closer and closer.

Guarantee profits, but we can get closer and closer to protect our profits going forward. So that's why we've laid out today that we plan to get to $85 by the end of next year and that is to not only get us back in profit solid profitability in 2023, but maintenance picture that we can maintain it for decades to come.

Great and then just my second Barry because you brought this up and it seems like you guys are sort of on the leading edge here with respect to <unk>.

Zero hour pilot.

Helping them get through training and getting them to I guess that 250 hours.

And the question that Hasnt been well answered is okay.

<unk> 58.

At what point do you get them to 500, and I know, there's part 135 opportunities, but theres. Some theres only so many that are out there.

It sounds like you've studied this what is it a two year three year, what's the timeframe from getting from $2 50 to 500. It seems like everybody talks about it and it seems like you get them through the program and Theyre ready to fly, but it sounds like it's a few years can you just give us at least a little bit more on sort of your thoughts on that.

Yeah, I'll start it off and we thought there might be some questions. So we are we're fortunate today to have Brad <unk>, our vice president of flight operations, but.

There's a couple of phases, you have got to get your private at roughly 40 hours.

Commercial <unk> CFO .

<unk> and then and then yes, you can get it ATP at 1000, if you're a 60 college hours of aviation you can get it at $12 50, if you have 30 college hours and you get it 500, if you don't have any college hours of aviation.

The cadet program that we're rolling out will target.

Using some of the college hours to limit that but Brad we're really excited about it and Brad can tell you more about the kind of opportunities that we're going to work with them to do here and abroad to build their hours from $2 50 up great styling.

Hey, Brad.

Hey.

Definitely got opportunities, obviously with 135 carriers, you're right. There is limited capacity there, but the nice thing about our agreement with ATP as they are the biggest call manufacturer of pilots out there in the country and theres lots of opportunities there for them to instruct and build time very quickly. So we look at the program 24 months or so but again, we want to control our <unk>.

<unk> and we think we've got enough opportunity for them to build a flight time up to the minute okay great.

24 months looking forward Thats actually very helpful. Thanks.

And we're also looking for international opportunities as well there is a lot of other countries out there that accept USA licenses and we can fly them at 250 hours Bill time up to that HP minimums.

Good.

Okay.

Thanks.

Sorry.

The main thing I would just say Michael is we're just going to no longer.

Entertain these speculations that we're going to run out of products, we're going to source, our pilots and have control of it.

One moment for our next question.

Our next question comes from Scott Group with Wolfe Research. Your line is open.

Hey, Thanks, good afternoon. So.

As you think about the stand alone.

Growth potential I guess, what I'm trying to understand is what do you think your capacity growth looks like over the next several years in an environment where spear.

Experienced standalone, and then where Jetblue acquired spirit I don't know if thats in violation of your.

You want to talk about but I guess I'm trying to understand like how your growth story is different now on a standalone basis, and how do you navigate sort of that regular regulatory uncertainty potentially over the next year plus do we have to wait for some of that accelerated growth.

So we are so well.

We found that we already have we already have an aggressive growth plan next year as we return to normal utilization levels, we anticipate.

And anticipate 30% growth in flextronics rate over 2022, as we fully get the online back to normal utilization and then going forward. After that we already have a fleet plan that provides for 15% to 20% of your growth.

What happens in the environment, what happens with what happened in central formulations.

Can always we can always accelerate that movie club move it closer to 20, if necessary above 20.

We will watch for opportunities.

By controlling our costs as discussed by driving our non ticket we are controlling our destiny and we can make the choices about where we fly.

Okay did I hear that the plan is to grow 30% next year versus 22.

Yes, Scott as Jimmy Dempsey here.

Given that we are constrained capacity across this year next year as you move back to full utilization.

Get to 30% slightly above 30% growth.

Okay, Great and then maybe just last thing just as I focus on.

The report in the guidance can you just talk about the monthly.

The monthly trends in trends and I know you were talking about 20% plus but if you feel like it should be closer to the upper Twenty's you did in Q2 and any color there. Thank you.

Okay.

We are seeing we are seeing right now typical seasonality we're not.

I'm not going to go into more detail on that what was same for Q3 is just typical a typical seasonality patterns.

But because obviously because the issue is with discuss is because we have the higher amount of capacity growth at the end of the quarter because of a grow over 5% in July on 14, 16% in September that is creating a drag on the overall RASM for the quarter of around three points.

Because we pushed more capacity more protracted growth into them into an off peak month.

Gotcha, Okay. Thank you guys appreciate it.

And one moment for our next question.

Our next question comes from Savi <unk> with Raymond James Your line is open.

Hey, good afternoon.

Just follow up on.

Jamie's question earlier, and it looks like maybe even this theory youre kind of aircraft deliveries and getting a little bit delayed.

Are you seeing that delay this year and just as you kind of plan out your capacity, what's your confidence level in <unk>.

Much of that 30% is dependent on fleet deliveries versus just getting utilization back up.

Roughly half of it is fleet deliveries.

And the other half comes from from increased utilization.

Okay.

And Savi near term, we've seen some delays I mean, it's been relatively modest it's nothing like we're obviously on the Airbus program nothing compared to the Boeing program Youre seeing six six week delays four to six weeks eight weeks delays in aircraft deliveries for some of the aircrafts.

Yes.

But all relatively near term store and we.

Typically it's the delays have generally been in days and weeks.

And so we typically put in a 45 day up 45 day kind of cushion between the delivery and when we have it scheduled to fly.

That's helpful.

Mike One thing you've shown last year and this year.

Environment, Brian Smith, with Covid or anything else just kind of curious.

What kind of environment youre, receiving in that 30% and if we do see a slowing down or kind of a recessionary environment.

But what you are kind of comfortable maybe.

Maybe moderating that two or how should we think about that.

Well look I think we're always probably the fastest to react if things were to dramatically change, but thats I think our confidence in the 30% is driven by couple of things one we're headed to sub six CASM. So if anybody can can be successful with with.

Airline business it'll be with low prices if demand were to fall off and so we will be one of the few that can afford to actually carry low prices and it will be further subsidize not just on the cost side by the.

The fact that we have the $85 target by the end of next year in non ticket and we're already producing 75. So so we're pretty confident in the growth. Obviously, we will reevaluate that if there were a deeper recession than what we're seeing but so far the demand looks very good and we've seen some seasonal changes, but nothing major and I think what seems to be.

Mist in the airline space is even if there is a recession.

The capacity cut the airline space is even if there is a recession.

The capacity cuts are already built in I think if you. If you track back what we should have had with normal GDP growth over the last three years, we are significantly lower than where you would normally see capacity you would normally see capacity and so if you get a 10% to 20% cut from a recession, while the customer it yet so thats why youre seeing.

A lot of the pricing power that across the industry, even as other other industries are having a tough time right now.

Okay. Thank you.

And one moment for our next question.

Our next question comes from Helane Becker with Cowen Your line is open.

Alright, thanks, very much operator, hi, everybody and thank you very much for the time.

Two questions two follow up that comment Barry that you just made about.

Our capacity reduction already factored in.

Do you.

Do you think that the.

Hiring will look like at the airline.

Environment, where things do slow would you parse the hiring or would you just continue to forge ahead.

No I think we would be the last airline to stop hiring because our slow even slow hiring because when you are the lowest cost producer in the space.

You're the first one that should be growing.

Got it thats.

Helpful. And then the other question I have I'm not.

Sure.

Yes.

The answer but.

What responsibility do you think the pilots union itself like Alpha national paths for training.

They seem to want a lot of.

And there are no assurances, but they don't seem to want to accept responsibility for building up the pilot ranks.

Yes.

Do they bear any responsibility.

Negotiations with your pilots can you get them to extract some of that.

I guess im not understanding your question.

Well think about it this way.

If you want to become a pilot the 250000 dollar cost is 100%.

And part of the reason for that is the rules around which you can become a pilot it's not that easy a career path right. If you don't go military or something like that so don't you think Alfa itself bear some responsibility for helping.

18 year old or a 22 year old yet the necessary hours.

To build a career.

It's our responsibility to I think I think it's dean.

They have some maybe we everyone as the responsibility across the entire aviation community.

Just to clarify it's not 202000.

It's less than $100000 to get your commercial yes. If you paid for all of your hours and you didn't get any type of job yes.

Yes, it would cost considerably more maybe in the $2 50 300000 range.

But the challenge with that Youre not going to be as good a pilot is someone that we can can hold through our cadet program place. It at a great place, where they get good training and real life experiences flying from a commercial perspective.

But look I think we as an industry and an overall need to take responsibility, but I can just tell you what we're doing.

We're in the we see the shortages coming down the line and while we haven't had challenges. We're just taking control of our destiny and we're going to have the sourcing that we need no different than we source airplanes no differently source engines parts everything else, we're going to source training of our pilots from zero hours and to be quite honest.

Last few hours, it's been one of the most exciting times at that.

That frontier I mean look our head of HR got across smiling right now I mean, he's been inundated today.

We have a bunch of flight attendants that already are like Hey, I've always want to be a pilot and so this is really exciting to have a program that kind of handhelds them gets them through it helps them get up get set up with a really good training program and then get them the right type of experience that they need to be safe pilots and so not only are we going to control the sourcing of our pilots, but we're also going to control the quality.

City and the training so that we can ensure that there'll be successful and safe pilots for us and we hope that we can partner with alpha.

They come in but they are generally not involve until once they become.

And active line holder are actually.

A pilot.

Frontier.

Got it okay. That's really helpful. Thanks, Barry have a nice day.

And im not showing any further questions at this time I will turn the call back over to Barry for any closing remarks.

Well thanks, everyone. We appreciate everyone joining us today and again as I said, we're excited to be America's Ultra low cost carrier really excited to talk to you. Soon talk to you next quarter conclude today's presentation. You may now disconnect. In today's presentation. You may now disconnect and have a wonderful day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Yes.

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Ladies and gentlemen, thank you for standing by and walk through the Frontier Group Holdings.

I would now like to turn the call over to your host David Herman you may begin.

Tamara Safe Harbor provisions during this call, we will be making forward looking statements, which are subject subject to risks and uncertainties.

We may also discuss non-GAAP financial measures, which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement.

Thanks, David and good afternoon, everyone Needless to say, it's been an interesting few months since our last earnings call.

The strong revenue performance in the second quarter enabled us to overcome elevated fuel prices and generate an adjusted pre tax margin of 3%.

In addition, unlike many other carriers, we're not experiencing disruptions due to shortages related to pilot and flight attendant staffing levels. In fact, we have surplus staffing today and a capacity to train eight additional pilots a month.

<unk> common paradigms misconceptions about the LCC segment, where a highly attractive landing spot for the pilots given our career growth and resulting pay opportunities as compared to the legacy carriers, along with a desirable footprint of phases, including the opening of the Phoenix crew base later this year.

To further strengthen our pilot recruitment capabilities, we're working with a major flight schools to develop a cadet program, which will provide an opportunity to train 250 <unk>.

Zero time flight applicants per year, who might otherwise have chosen a different career path due to employment uncertainty.

Upon completion of training, we will assist in placing them into flying assignments to continue to build experience and we will be able to hire them once they reach requisite flying times.

As we look forward to the third quarter, we expect the demand environment to remain strong with RASM growth anticipated to be over 20% versus the comparable 2019 quarter supported by continued strength in our ancillary revenue per passenger we will continue to focus on generating profitable growth in the business as we increase utilization and successfully overcome the challenges with dependent right.

Accordingly, we expect to turn a second consecutive quarterly profit in the third quarter with an adjusted pre tax margin in the range of 1% to 5%.

I would like to thank Tim frontier for their continued dedication professionalism and commitment to provide safe and reliable service to our customers. They are at the core of our low fares done right model with that I'll now hand, the call over to Daniel.

To $11 97.

Along with a 10% increase in capacity over the 2019 quarter.

Revenue per passenger grew an impressive 24% to $139 with ancillary revenue contributing nearly $75 a vast amount of record for the business are above our expectations.

And third performance was driven by recent project Spansion on enhancements along with strong attachment rates, we will continue to expand and enhance our ancillary offerings to allow our customers to personalize the travel experience and to allow us allow us to continue to offer ultra low SaaS.

Given our strong performance in future plans, we're now targeting ancillary per passenger to reach $85 by the end of 2023.

In response to high fuel prices, we designed our second and third quarter average stage length, three between 960, and 980 miles which is considerably below historical levels.

We expect to return the airlines to pre pandemic average stages, starting in the fourth quarter.

As we built out capacity, our ASM growth relative to 2019 is expected to accelerate during the current quarter with capacity of 5% in July 8% to 9% in August and 14% to 16% in September <unk>.

And a higher proportion of our fleet is being deployed in an off peak month, and creating an approximate 3% drag on RASM in the quarter.

Touch on commercial highlights, we recently announced expanded service turned from Las Vegas, Beginning August 9th will launch service from <unk> International Airport to Baltimore, Buffalo Hartford in Kansas City with these new routes from <unk> 57 destinations from our Las Vegas base, making us the fastest growing Atlanta, one of the top leisure destinations in North America.

In response to strong demand since we launched service in Houston Hobby in May we're adding a daily nonstop routes to Denver beginning in September .

Just last month, we expand our international and Caribbean service from our time for base launching nonstop flights months ago by Amazon law, along with expanded service to conquer.

And lastly on August eight will formally break ground for our innovative new terminal at Denver International Airport, while we're planning construction of 14 ground loading gains, which will facilitate expedited and planning in the planning through the front and rear aircraft doors.

The shorter term times.

This and other streamlining initiatives across our network of design to improve operational performance and enhancing the customer experience.

And with that I'll hand, it over to Jimmy Dempsey.

Thank you Danielle and welcome everybody.

Second quarter results were in line with our guidance.

<unk> demand environments drove record setting revenue growth compared to the same quarter in 2019, and along with the exceptional considering performance enabled us to turn our first adjusted profit in over two years with.

We've employed rigorous financial discipline through through this difficult period to ensure frontier is a strong platform to deliver profitable growth.

In the second quarter were impacted by elevated fuel prices, resulting in $335 million of fuel expenses at an average fuel costs of $4.41 per gallon.

This resulted in the CASM ex fuel of seven two for.

Which was impacted by lower utilization and lower average stage higher station related costs in the short term cost of surplus group.

Though our CASM ex fuel is currently elevated we're still targeting a return to sub six during 2023 as our utilization of stage length normalized and seats per departure increase with the planned introduction of the $3 21 neo to help mitigate inflationary pressures on the business. We ended the second quarter in a strong financial position with $766 million of unrestricted cash.

Cash equivalents.

Frontier is in the enviable position of having access to a substantial liquidity source by leveraging our co brand credit card program and related brand assets should the need arise as planned we have enhanced our pre delivery payment facility to align with the short term obligations under the Airbus Order book, whereby the facility was increased from 200 million to $280 million.

We entered the second quarter with 114 aircraft in our fleet after taking delivery of three <unk> hundred 20 Neo aircraft during the quarter, we expect to take delivery of another four aircrafts in the fourth quarter or in the third quarter and eight in the fourth quarter, including the first of 36% to <unk> hundred 21, <unk> by the end of 2023 looking.

Fuel costs are anticipated to be between $3 75 from $3 80 per gallon based upon the blended jet fuel curve on July 20.

Adjusted non fuel operating expenses are expected to be between 565 million to $585 million in the third quarter the increase from the prior quarter due largely to capacity growth adjusted.

Adjusted pre tax margin is expected to be in the range of 1% to 5% constrained by the 3% RASM drag Daniel mentioned earlier.

With that I will turn the call back to Barry to deliver closing remarks before we move to Q&A.

Thanks, Jimmy before closing I'd like to offer my thoughts on the termination of our merger agreement with spirit.

Obviously, we are disappointed in this outcome and as spear shareholders will Miss an opportunity to meaningfully participate in the rebound of leisure travel of which we're in the early stages.

Our board took a disciplined approach throughout the course of our negotiations rather than overpay for spirit. The board prioritize the interests of frontier, our employees and our shareholders.

As a standalone entity and potentially Americas ultra low cost carrier frontier has a fantastic platform for profitable growth underpinned by a strong balance sheet and unmatched <unk> hundred 21, Neo order order book, a clear path to CASM ex below <unk> and exceptional ancillary performance with plenty of room to run collectively these elements are key contributors.

To the resiliency of our business model.

I could not be more confident in our future, especially given the growing demand for affordable air travel.

<unk> our confidence.

We appreciate everyone's time. This afternoon, we will not be commenting any further on the termination of the merger agreement, nor a potential tie up between spirit and Jetblue.

I am however, happy to take questions about how we grow our business and add shareholder value as Americas ultra low cost carriers.

Ladies and gentlemen, if you have a question or a comment at this time. Please press star one one we will pause for a moment, while we compile the Q&A roster.

Our first question comes from Jamie Baker with Jpmorgan. Your line is open.

Hey, good afternoon.

So.

Airbus is.

Reduction forecast today also delayed the planned ramp.

In 2020 production rates, just wondering how you expect that to impact planned capacity over the next 24 months or so.

Whether there is any flexibility within the indigo portfolio to shift around deliveries.

You don't slip.

Yes, Jamie.

We don't I mean, we've been a little focus on our own things right now so we have I got it.

But look I mean, we have a we have a large order book with with Airbus and <unk>.

Obviously, we buy a lot of plans I know a lot of people and maybe move some orders around I'm not sure. What this has to do with US yes, we do have the ability as been disclosed before to move to move aircraft among the indigo portfolio carriers that participated in the.

In the Dubai order a few years ago.

We are unaware of any any material difference.

Versus our order book as we stand today, Okay and second there is no shortage of data at this point.

Proving that sort of lower end consumers are certainly trying to find ways to economize. Your third quarter guide looks fine to us just curious if youre seeing any change in trip duration, obviously lobbing off day of holiday is one way to save on the aggregate expense.

Any changes in the booking curve.

Or maybe you or David just implies complete immunity.

Slowing economic trends any thoughts there.

Well I'll start and I'll, let Barry I'll, let Barry add on.

Jeremy Spaniel.

No. We're not we're not really we're not really seeing any difference we've seen no we've seen no change.

Trip duration we've.

We've not we've not seen that we've not seen that we've not seen any slow we don't see any slowdown in demand and so we don't we don't we.

We don't see we don't see this at the moment, so we're not being affected at the moment.

Confident that we are offering the right value to customers to keep them to come and choose frontier.

Yes.

Have seen two things they're interesting one.

Just kind of.

Work from home phenomenon, we have seen an extension of some people's itinerary. So so I think.

In the composite there may be some people Jamie that are actually or are cutting off a day I've read articles just like you have about some hotels, maybe they cut a day or two off their vacation, but they still go save money at the same time, you've got people moving around that are working from home, but really working from somewhere else and so they are actually expanding so the averages.

I think may be clouding that the one piece of data. We do have debt that is pretty empirical is that we have seen.

Okay very interesting thank you gentlemen.

And one moment for our next question.

Our next question comes from Duane <unk> with Evercore ISI. Your line is open.

Hey, Thank you.

Yes.

I wanted to ask you about.

New markets understand you've been.

Busy and focused on other things, but as you sort of think through the implications of.

Staffing shortages for the industry staffing shortages for regional carriers.

More white space in small markets.

Are there any obvious targets or.

Markets that you feel are really.

Constrained or overly constrained from a capacity perspective.

And certainly I appreciate your comments about not wanting to go there but.

You have spent a fair amount of time studying potential overlap.

What would you might see as the opportunities that could develop.

If they do pursue a relationship.

I'm going to let Daniel talk about the more recent kind of phenomena with shortages of regional capacity and he's probably got some examples because I know it's been exploiting and yes, we are.

We are seeing.

As we always do on what's what's going on in the industry, we've seen that with what we've seen actually less I think it's less I think regional <unk> regional service and the trend in the traditional sense, but they tend to be quite small quite small markets fundamentally probably we drove market even for us a little bit too small, but while we are also seeing as airlines are consolidated capacity again the Crs.

We've seen it we've seen a we've seen a pullback in certain in certain markets you can.

You can see notably we've looked from a very from a vegas from Omega space. One of the reasons. We went into the markets. We went into as you can see.

Meaningfully reduce capacity in some of those markets.

Other airlines have sort of consolidated the way the way that fly. So for example, Las Vegas, Buffalo Las Vegas, Hartford substantial substantial markets much less much less much less competitive service then.

What are the same pre pandemic.

There are other examples in our key leisure basis of where we are where we're seeing a similar phenomenon. Those are the ones, we're going to take advantage of.

As far as your second question. Thanks, Duane I said, we were going to talk about.

Our exciting future as America's Ultra low cost carrier. So I'll answer your question in that in that vein. So.

In the event that they do emerge you take a carrier thats, probably one of the most similar to US you slap on 40% more cost and that creates a lot of runway ahead of us.

And thanks for that maybe we'll get you to expand a little bit.

There was a period of time and I don't recall, the exact quarter or when but.

To manage your cost to focus on your cost you sort of deemphasize.

Some expensive northeast airports for example.

What would it ever make sense to come back to Laguardia or.

Could you envision having a bigger footprint in.

In South, Florida, if assets became available.

Yes.

I mean look I mean, youre referencing what we did in Newark, and some other places.

We would be really excited about it.

I think consumers would be too.

I appreciate the thoughts.

Operator next question My apologies My line was muted. Our next question comes from Michael Lindenberg with Deutsche Bank. Your line is open.

Good afternoon, guys and congrats Keith getting back to profitability.

My first question just on.

Looking at.

The differentials the year over year year over two year in sort of your base there.

Does your ancillary and it is interesting.

Obviously successful in pushing both App, which is a good thing in a highly inflationary environment.

That ancillary increases roughly dabo.

And I'm just I'm curious about.

Either barrier Danielle.

They are different products different price elasticity, presumably one is more stickier than the other.

But it wasn't big increase.

Talking about $2025 or so plus or minus a few dollars what were the big components there.

And inflationary piece and air bag.

Bag fees are now three to $5 higher than seat fees and insurance fees are all three to five is that really what's flowing through here because it does look like a step function change if you could add color Greg.

So look we took we took a boat we took advantage of the pandemic to continue developing new products. So it's a mix it's a mix it's a mix of everything.

I'd say the inflationary effects.

It's new products new products new products, we've introduced.

It's the continued work we've done and I think what we lead the industry and how we how we optimize our <unk>.

Our pricing of our cancel rate products.

And I would just add Michael.

We learned in the pandemic, we used to think that debt.

50, 50 was a good split.

And the <unk>.

You use it you said it just a moment ago. We use this word literally youll hear this around our office multiple times today, we talked about the stickiness.

Non ticket and the truth is as is payers and fuel are largely out of our control, but non ticket is not.

So what we like about non ticket is that we can get closer and closer.

Okay, and then just my second Barry because you brought this up and it seems like you guys are sort of on the leading edge here with respect to <unk>.

Zero hour pilot.

Helping them get through training and getting them to I guess that 250 hours.

And the question that Hasnt been well answered is okay. There at 258.

At what point do you get them to 500, and I know, there's part 135 opportunities, but theres. Some theres only so many that are out there.

It sounds like you've studied this what is it a two year three year whats the timeframe for.

Im getting from 250% to 1500, it seems like everybody talks about it and it seems like you get them through the program and they are ready to fly, but it sounds like it's a few years can you just give us at least a little bit more sort of your thoughts on that.

Yeah, I'll start it off and we thought there might be some questions. So we are we're fortunate today to have Brad <unk>, our vice president of flight operations.

There's a couple of phases, you have got to get your private at roughly 40 hours.

The commercial <unk> <unk> and then and then yes, you can get it ATP at 1000, if you're a 60 college hours of aviation you can get it at $12 50, if you have 30 college hours and you'll get it 500, if you don't have any college hours of aviation.

The cadet program that we're rolling out will target yeah.

This filing.

Hey, so definitely.

<unk> got opportunities, obviously with 135 periods, you're right. There is limited capacity there, but the nice thing about our agreement with ATP as they are the biggest call manufacturer of pilots out there in the country and theres lots of opportunities there for them to construct and build time very quickly. So we look at the program 24 months or so but again, we want to control our destiny.

And we think we've got enough opportunity for them to build a flight time up to the minute.

Okay great.

Four months looking forward Thats actually very helpful. Thanks.

And we're also looking for international opportunities as well there is a lot of other countries out there that accept USA licenses and we can fly them at 250 hours Bill time up to that HP minimums.

Very good thank.

Thank you.

Yes.

And wanted to move forward.

Sorry go ahead Michael.

The main thing I would just say Michael is we're just going to no longer.

Entertain. These these speculations that we're going to run out of products, we're going to source, our pilots and have control of it.

One moment for our next question.

Our next question comes from Scott Group with Wolfe Research. Your line is open.

Yes.

Hey, Thanks, good afternoon. So.

As you think about the stand alone.

Growth potential I guess, what I'm trying to understand is what do you think your capacity growth looks like over the next several years and in an environment where.

Spirit is stand alone and then where Jetblue acquired spirit I don't know if thats in violation of your.

You want to talk about but I guess I'm trying to understand like how your growth story is different now on a standalone basis, and how do you navigate that regular regulatory uncertainty potentially over the next year plus do we have to wait for some of that accelerated growth.

So we are so well.

We found that we already have we already have an aggressive growth plan next year as we return to normal utilization levels, we anticipate.

Anticipated, 30% growth in towards penetrate over 2022, as we fully get the island back to normal utilization and then going forward. After that we already have a fleet plan that provides for 15% to 20% of your growth.

What happens in the environment what happens what's happened.

Combinations.

Can always we can always accelerate that movie club move it closer to 20, if necessary above 20.

We will watch for opportunities.

By controlling our costs as discussed by driving our non ticket we are controlling our destiny and we can make the choices about where we fly.

Okay did I hear that the plan is to grow 30% next year versus 22.

Yes, Scott as Jimmy Dempsey here.

Given that we are constrained capacity across this year next year as you move back to full utilization.

Get to 30% slightly above 30% growth.

Okay, Great and then maybe just last thing just as I focus on.

The report in the guidance can you just talk about the monthly.

The monthly trends in trends and I know you were talking about 20% plus but if you feel like it should be closer to the upper Twenty's you did in Q2 and any color there. Thank you.

We are we are seeing we are seeing right now typical seasonality will not win.

I'm going to go into more detail on that what we're seeing for Q3 is just typical typical seasonality patterns.

But because obviously.

The issue is with discuss it because we have the higher amount of capacity growth at the end of the quarter because of a grow over 5% in July of 14% to 16% in September that is creating a drag on the overall RASM for the quarter of around three points.

Because we pushed more capacity more attractive growth until into an off peak months.

Got you Okay. Thank you guys appreciate it.

And one moment for our next question.

Our next question comes from Savi <unk> with Raymond James Your line is open.

Hey, good afternoon.

Just follow up on.

Jamie's question earlier, and it looks like maybe even this year youre kind of aircraft deliveries and getting a little bit delayed. So are you seeing that delay this year and just as you kind of plan out your capacity, what's your confidence level in <unk>.

How much of that 30% is dependent on fleet deliveries versus just getting utilization back up.

Roughly roughly half of it is fleet deliveries and the other half comes from from increased utilization.

Okay.

Yeah, and Savi near term, we've seen some delays I mean, it's been relatively modest it's nothing like we're obviously on the Airbus program.

Compared to the Boeing program Youre seeing six six week delays four to six weeks eight weeks delays in aircraft deliveries for some of the aircrafts.

But all relatively near term.

We typically.

The delays have generally been in days and weeks.

And so we typically put in a 45 day up 45 day kind of cushion between the delivery and when we have it scheduled to fly.

That's helpful and then Mike one thing you've shown last year and this year you're at is kind of a.

Our nimbleness to kind of react to the demand environment or whatever.

Environment, Brian Smith, with Covid or anything else just kind of curious.

What kind of environment, you are assuming in that 30% and if you do see a slowing down or kind of a recessionary environment.

But what you are kind of comfortable.

Maybe moderating that two or how should we think about that.

Well look I think we're always probably the fastest to react if the.

Things were to dramatically change, but thats I think our confidence in the 30% is driven by couple of things one we're headed to sub six CASM. So if anybody can can be successful with.

Airline business there'll be with low prices if demand were to fall off and so we will be one of the few that can afford to actually carry low prices and it will be further subsidize not just on the cost side by the.

To be missed in the airline space is even if there is a recession.

The capacity cut the airline space is even if there is a recession.

The capacity cuts are already built in and I think if you. If you track back what we should have had with normal GDP growth over the last three years, we are significantly lower than where you would normally see capacity you would normally see capacity and so if you get a 10% to 20% cut from a recession, while the customer it yet so thats why you are.

Seeing a lot of the pricing power that across the industry, even as other other industries are having a tough time right now.

Glenn Thank you.

And one moment for our next question.

Our next question comes from Helane Becker with Cowen Your line is open.

Alright, thanks, very much operator, hi, everybody and thank you very much for the time.

Just have two questions two follow up that comment Barry that you just made about.

Our capacity reduction already factored in.

Do you.

What do you think that the.

Hiring will look like at the airline and an environment, where things do slow would you parse the hiring or would you just continue to forge ahead.

No I think we would be the last airline to stop hiring because our slow even slow hiring because when you are the lowest cost producer in the space.

You're the first one that should be growing.

Got it that's helpful. And then the other question I have I'm not.

Sure.

Yes.

The answer but.

What responsibility do you think the pilots union itself like Alpha National has for training.

They seem to want a lot of them.

And there are no assurances, but they don't seem to want to accept responsibility for building up the pilot ranks.

Yes.

Do they bear any responsibility.

Our negotiations with your pilots can you get them to extract some of that.

I guess im not understanding your question.

Well think about it this way.

If you want to become a pilot the 250000 dollar cost is 100%.

In order to build a career.

I don't think its alphas responsibility I think I think it's dean.

They have some maybe we everyone as a responsibility across the entire aviation community.

We just to clarify it's not 202000.

It's less than $100000 to get your commercial yes. If you paid for all of your hours and you didn't get any type of job yes.

Yes, it would cost considerably more maybe in the $2 50 300000 range.

But look I think we as an industry and an overall need to take responsibility, but I can just tell you what we're doing.

We're in the we see the shortages coming down the line and while we haven't had challenges. We're just taking control of our destiny and we're going to have the sourcing that we need no different than we source airplanes no different we source engines parts everything else, we're going to source training of pilots from zero hours and to be quite honest I mean in the <unk>.

Last few hours, it's been one of the most exciting times at.

At Frontier I mean look our head of HR about across smiling right now I mean, he's been inundated today.

We have a bunch of flight attendants that already are like Hey, I've always want to be a pilot and so this is really exciting to have a program that kind of handhelds them gets them through it helps them get ups to get set up with a really good training program and then get them the right type of experience that they need to be safe pilots and so not only are we going to control the sourcing of our pilots, but we're also going to control the quad.

<unk> and the training so that we can ensure that there'll be successful and safe pilots for us and we hope that we can partner with alpha.

They come in but they are generally not involve until once they become.

And active line holder are actually.

A pilot.

Frontier.

Got it okay. That's really helpful. Thanks, Barry have a nice day.

And im not showing any further questions at this time I will turn the call back over to Barry for any closing remarks.

Well, thanks, everyone and we appreciate everyone joining us today and again as I said, we're excited to be America's Ultra low cost carrier really excited to talk to you. Soon talk to you next quarter conclude today's presentation. You may now disconnect. In today's presentation. You may now disconnect and have a wonderful day.

Q2 2022 Frontier Group Holdings Inc Earnings Call

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