Q3 2024 Frontier Group Holdings Inc Earnings Call
David Erdman: Yes, thank you and good morning everyone. Welcome to our third quarter, 2024 earnings call. On the call with me this morning, our Barry Biffle chief executive officer, Jimmy Dempsey, President, Mark Mitchell, Chief Financial Officer and Bobby Schroeter, Chief Commercial Officer.
David Erdman: Each will deliver brief prepare of your marks, but before they do, I'll recite the Custon Mary Safe Harbor provisions. During this call, we will be making forward-looking statements which are subject to risks and uncertainties.
David Erdman: Actual results may differ materially from those predicted in these forward-looking statements.
David Erdman: Additional Information Concerning Risk Factors, which could cause its differences, or outlined in the announcement we released earlier, along with reports we filed with the Securities and Exchange Commission. We will also discuss non-gap financial measures.
David Erdman: actual results of which are reconciled to the nearest comparable gap measure in the appendix of the earnings announcement. So I'll give the floor to Barry to begin his prepared remarks. Barry?
Barry Biffle: Thanks, David, and good morning, everyone. Our revenue and network initiatives helped to overcome headwinds from excess domestic capacity, and we saw green shoots midway through the quarter as we optimized our capacity and other carriers made needed cuts of their own.
Barry Biffle: Domestic capacity growth has now slowed to its lowest rate post-pandemic, and in fact, for the first time in 10 years, it's trailing gross domestic product excluding COVID years.
Barry Biffle: September RASM inflected higher by approximately 5% excluding lean impact and while lower capacity was a factor we're seeing continued progress with our sales platform, the new Frontier, and loyalty program enhancements. Bobby will expand on these items in just a moment.
Barry Biffle: Our third quarter adjusted pre-tax margin loss of 1.1% was at the midpoint of our guidance despite a challenging conclusion in the quarter as Hurricane Helene struck the southeast United States.
Barry Biffle: Excluding the impact from the hurricane and the Microsoft CrowdStrike outage, our operation delivered year-over-year improvements across nearly every operational metric.
Barry Biffle: This is a strong validation of our network simplification strategy, which also contributed to our 4% reduction in adjusted CASM-X fuel on a stage-adjusted basis during the quarter. Improvements in our operation...
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Thank you so much for helping to drive the lowest complaint rate we've had in three years.
Speaker Change: We expect the wrath of inflection to strengthen in the fourth quarter, including the headwinds from Hurricane Milton, supported by the maturity of our Network and Revenue Initiatives and Moderating Capacity Group.
Speaker Change: In addition, the schedule overlap with our closest two competitors is expected to significantly lower in the fourth quarter and into 2025 across nearly all Frontier crew bases.
Speaker Change: Milton forced the cancellation of nearly 20% of our scheduled flights over a four-day period and caused demand softness for travel impacted areas on top of the lingering effects from Helene.
Speaker Change: I'd like to extend our thoughts to those affected by recent hurricanes, including many of our own employees who endured the brunt of them.
Speaker Change: As well, I'm grateful to the valued team member, Frontier, for safely navigating these challenges and working diligently to quickly and safely recover the operation. I now turn the call over to Jimmy for a commercial overview. Jimmy?
Jimmy Dempsey: Thanks Barry and good morning everyone. Briefly recapping the quarter, total operating revenue increased 6% versus the prior year to $935 million on capacity growth of 4%, our slowest quarterly post-pandemic rate, resulting in a rasm of $9.28.
Jimmy Dempsey: Departures increased 17% on a 14% shorter average stage. Total revenue per past year was $106, down 8% versus a 23 quarter, largely driven by oversupplied domestic seeds prior to broad industry capacity reductions.
Jimmy Dempsey: which began to take effect midway through the quarter.
Jimmy Dempsey: As Barry mentioned, we saw a year-over-year inflection in stage length adjusted RASM as we progressed through August and into September as a direct result of our own capacity adjustments and the constructive capacity adjustments across the industry.
Jimmy Dempsey: We removed 37% of off-peak flying, shaping the week on the higher-demand days, whilst adding new routes which increased our revenue pool by 17%.
Jimmy Dempsey: This strategy is proving to be a successful adjustment to our deployed capacity, whereby in addition to leisure traffic flows, we enhance our attractiveness to vehicle and small business traffic.
Jimmy Dempsey: Seed capacity in the fourth quarter will continue to grow, with deployed seeds increasing by six and a half percent, albeit on a shorter stage of 875 miles, resulting in ASM production reducing by two to three percent year-over-year.
Jimmy Dempsey: Thank you very much.
Jimmy Dempsey: We opened three new stations during the third quarter, Bridgetown, Barbados, Port of Spain, Trinidad, and San Jose, California, and launched 17 new markets. We continue to expand our network in the fourth quarter, including the addition of 33 new markets launched from Palm Springs, Vail, Eagle, Burlington, Vermont, and Washington Dulles.
Jimmy Dempsey: Although the Hurricane Helene and Milton dented our end of Q3 and early Q4 performance, we have seen a strong bounce back in bookings that is now in line with the trajectory we were experiencing in late August and September.
Jimmy Dempsey: off-peak traffic flows remain challenging.
Jimmy Dempsey: And it is our expectation that we continue to moderate flying on Tuesdays, Wednesdays, Saturdays and red-eye flying throughout 2025 with a focus on improving our RASM performance as the significant network shift from overcapacity underperforming markets at the end of 2023 and early 2024 results in maturing redeployed capacity across our 13 base footprint.
Jimmy Dempsey: We expect capacity growth in 2025 to be in the mid-single digits, on an average stage length of approximately 900 miles.
Jimmy Dempsey: Our simplified out-and-back network enters into its second year of operation as we progress through Q2 2025, with our new 2024 bases of Cleveland, Cincinnati, Tampa, Chicago, and San Juan, Puerto Rico maturing from a commercial and operational perspective.
Speaker Change: Throughout 2024, we've been working diligently to improve our merchandising to the customer and launch a new frontier together with some enhancements to our day of travel experience with our customers. I'll hand it over to Bobby to go through some of these, together with an update on our performance in our newly launched premium products and enhanced loyalty program.
Bobby Schroeter: Thanks, Jimmy, and good morning, everyone. Our customer experience and revenue initiatives are showing significant momentum, and I'm excited to highlight some of the key advances we've made recently. We continue to prioritize improving the customer experience through technology.
Bobby Schroeter: This quarter we introduced self-service international travel document verification in the Frontier mobile app, allowing travelers to easily verify their documents before arriving at the airport.
Bobby Schroeter: Over 80% of our customers now use the app on the day of travel for fast and easy check-in, bag drop, and boarding, which has greatly enhanced the overall airport experience.
Bobby Schroeter: To that end, we will be delivering a new mobile app toward the end of this year, which will provide a significantly better customer experience from today. Additionally, on the airport front, we opened new ground-loading gates in Denver, expanding our capacity at our home base and improving efficiency during peak travel periods.
Bobby Schroeter: Turning to revenue, the new frontier bundles, economy, premium, and business, have been a significant driver of growth since their launch.
Bobby Schroeter: Due to the success on FlyFrontier.com, we added these bundles to the mobile app in mid-September allowing customers to choose their preferred bundle not only at the time of booking, but also before travel and at check-in.
Bobby Schroeter: This multi-stage offering has increased attachment rates for bundles, and we're on track to extend this functionality to MVC-enabled third-party platforms early next year.
Bobby Schroeter: The simplicity and transparency of bundle pricing has resonated well with customers, who appreciate the clear options and the ability to easily understand total costs of their trip. This success positions us well to continue attracting new customers and to retain existing ones.
Bobby Schroeter: Our premium products, Upfront Plus and BizBear, have also continued to perform very well.
Bobby Schroeter: Paid load factor for Upfront Plus, which is still in its maturity phase, is approaching 70%, generating 30% more ancillary revenue per passenger compared to the previous stretch seating.
Bobby Schroeter: Similarly, BizFair has also been a strong performer, with the utilization rate over 250 basis points higher in the third quarter compared to the second, and a revenue premium nearly 50% higher than basic fairs.
Bobby Schroeter: As we expand BizFair into search engines like Google Flights and Kayak and Q4, and further into corporate booking tools next year, we expect these products to continue driving incremental revenue.
Bobby Schroeter: Our co-branded credit card partnership is yielding strong results as well.
Bobby Schroeter: The introduction of two free check bags in August and instant elite gold status in May for cardholders has helped to drive co-brand revenue up 15% year-over-year for the third quarter, with applications up 39% and spending increasing by 9%, the highest on record.
Bobby Schroeter: These enhancements have made our card more competitive and appealing, particularly for customers in key markets and crew bases, and we believe there is a large untapped revenue opportunity for us that we will be pursuing even more heavily in the future. That concludes my remarks, and I'll turn it over to Mark for the financial updates.
Mark Mitchell: Thanks, Bobby, and good morning, everyone. Briefly recapping the quarter, total revenue was $935 million, 6% higher than the 2023 quarter.
Mark Mitchell: Fuel expense was $261 million, 10% lower than the 2023 quarter, at an average cost of $2.67 per gallon.
Mark Mitchell: The decrease in fuel expense was driven by 13 percent lower fuel prices, partially offset by 4 percent higher consumption, resulting from higher flown ASMs of a similar rate.
Mark Mitchell: Adjusted non-fuel operating expenses were $693 million within guidance excluding most of the benefits from the $40 million legal settlement reached in September related to litigation brought against the former aircraft flesser.
Mark Mitchell: Approximately 2 million of this settlement is related to legal fees we incurred and thus were not adjusted for our non-GAAP earnings presentation. Proceeds from this settlement were received in early October.
Mark Mitchell: Adjusted CASMX fuel with 6.89 cents or 6.37 cents on a stage-adjusted basis.
Mark Mitchell: 4% lower than the 2023 quarter, driven by our cost savings program, which has delivered greater than $100 million of annual run rate savings since inception in the third quarter last year, and the cost benefit from two additional aircraft sale leaseback transactions in the quarter.
Mark Mitchell: Partially offsetting these items were higher costs tied to an increase in departures related to our decision to reduce average stage and higher costs due to fleet growth and the lower capacity on off-peak days to better align with demand trends.
Mark Mitchell: Third quarter pre-tax income was $27 million while adjusted pre-tax loss was $10 million yielding a 1.1% loss margin, the difference primarily related to the non-recurring legal settlement I just mentioned.
Mark Mitchell: Net income was $26 million, while adjusted net loss was $11 million. Our adjusted net loss is greater than our adjusted pre-tax loss due largely to the impact of non-deductible tax items and the resulting impact to our quarter-to-date tax rate, particularly as our year-to-date adjusted pre-tax loss is close to break-even.
Mark Mitchell: We ended the quarter with $781 million of total liquidity comprised of unrestricted cash and cash equivalents of $576 million and $205 million of availability under our new revolving line of credit that closed in September and was undrawn at quarter end.
Mark Mitchell: As previously disclosed, our new revolver is secured by our loyalty and brand-related assets. It features expansion capabilities, which, subject to certain terms, conditions, and additional lending commitments, may be increased to $500 million.
Mark Mitchell: We're also able to enter into additional indebtedness secured by our loyalty and brand-related assets, which may provide for significant incremental liquidity, as desired, to the extent such indebtedness is parapursue to that of the revolving credit facility.
Mark Mitchell: As part of establishing a new revolver, we also updated our existing PDP financing facility and secured two additional PDP facilities in September, which, in the aggregate, expands our PDP financing capacity by $113 million and covers aircraft deliveries through 2027 and certain deliveries scheduled in 2028.
Mark Mitchell: We had 153 aircraft in our fleet at quarter end, after taking delivery of five A321neo aircraft during the quarter, all financed with sale-leaseback transactions.
Mark Mitchell: We expect to take delivery of two spare aircraft engines and six A321NFOs in the fourth quarter, all of which are planned to be financed with sale-leaseback transactions, and exit the year with 159 aircraft.
Mark Mitchell: Our fleet plan for 2025 remains consistent with the amended delivery schedule we disclosed last quarter, with the pace of deliveries in 2025 weighted towards the back half of the year.
Mark Mitchell: We expect to take delivery of 21 sale-leaseback financed aircraft next year.
Mark Mitchell: 8 in the first half, all of which are A321 NEOs, and 13 in the second half, of which 5 are A321 NEOs and 8 are A320 NEOs, with the second half deliveries heavily weighted towards the fourth quarter.
Mark Mitchell: The aircraft leasing market today is strong, and we've secured sale-leaseback financing commitments for expected deliveries through 2025, along with approximately one-third of 2026 expected deliveries.
Mark Mitchell: Our fourth quarter guidance was published in the earnings announcement we issued this morning.
Speaker Change: Recapping Key Highlights
Speaker Change: Fourth quarter non-fuel operating expenses are expected to be $725 to $745 million, including an estimate of approximately $10 million related to cost inefficiencies from hurricane-related impacts and temporary excess crew-related costs tied to capacity reductions.
Speaker Change: Also bear in mind, the prior year quarter included a $36 million lease return benefit as we extended leases on four aircraft.
Speaker Change: On a full-year basis, we expect stage-adjusted CASMX fuel for 2020-2024 to be down approximately 1% versus the prior year at the low end of prior guidance despite the significant reduction in off-peak day-of-week capacity in the last four months of the year that wasn't initially contemplated in our guide.
Speaker Change: The average fuel price per gallon for the fourth quarter is expected to be in the range of $2.40 to $2.50.
Speaker Change: based on the fuel curve as of October 24th.
Speaker Change: Adjusted pre-tax margin is expected to be in the range of break-even to two percent, which includes an estimated two percentage point impact related to weather, resulting in an expected full-year adjusted pre-tax margin of break-even to just modestly above.
Speaker Change: With that, I'll turn the call back to Barry for closing remarks.
Barry Biffle: Thanks Mark. I'm proud of the progress Team Frontier has made in executing our revenue and cost initiatives, while also improving our operational performance and customer experience.
Barry Biffle: We expect the continued progress and maturation of these initiatives in the fourth quarter and into 2025 to drive further inflection and rasm on a stage-adjusted basis, which, combined with our significant cost advantage, is expected to support our objective of getting back to double-digit margins by the summer of 2025.
Speaker Change: Thanks again for joining us this morning. Before we begin the Q&A, I want to flag that we will not be commenting on any potential M&A in our industry. Operator, we're ready to begin the Q&A.
Speaker Change: Thank you. At this time we will conduct a question and answer session. As a reminder to ask a question, you need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: Our first question comes from the line of Robbie Shanker of Morgan Stanley. Your line is now open.
Speaker Change: Thank you.
Speaker Change: Great, thanks everyone. So maybe to kick off just on the on the ASM guidance for next year, we're going to
Speaker Change: What do you think the TRASM trajectory looks like for 25, given, like, you think it can now grow only mid-single digits?
Speaker Change: Given some of the new initiatives, do you think there can be a little bit of a revenue offset there?
Speaker Change: Yes, so look, we look at the path to back two double-digit margins as being driven at this point by the revenue initiatives.
Speaker Change: you know, whether it's the network.
Speaker Change: maturing, the maturing of the new frontier and all the premium products that we've got, the continued maturation of the loyalty programs we've got, plus the industry backdrop, just in general, I think is very accretive to this. So I think you can pretty much draw out a line from here. And you can see why we're really bullish about getting back there, especially if you consider fourth quarter, if we wouldn't have had Hurricane Milton, we'd have made several points in margin this quarter.
Speaker Change: Gaurav, just a follow-up just to that point. I think your guidance of getting to double-digit margin in the summer of 25, I think the street is below half that number, right? So what's the street not getting? Is it just the potential for converting that TRASM or where do you think we need to close the gap versus expectations?
Speaker Change: Well, I think the biggest bucket is probably just the maturation of all the new network initiatives that we did this year. I mean, you've got to go back and look. We grew our revenue pool.
Speaker Change: by over a third year over year, and now you're looking at growth sub 10%, so a much bigger revenue pool, but yet that flying was very immature. So when you lap year over year,
Speaker Change: 20 to 30% increase in maturation, multiplied times 20% of your capacity. This is one of the simplest things I think for the street to get. That's in the 4 to 5% range.
Speaker Change: of RASM.
Speaker Change: then you've got what we've got, you know, kind of the beginnings of the new frontier. I mean, we're just now getting the 70% paid load factor with upfront.
Speaker Change: and Robert Schroeter. Thank you. Thank you.
Speaker Change: We're seeing real attraction in our premium products. We're seeing real success in the new frontier in that merchandising. That's for, that's mature. That's worth a couple of bucks. And then we have a new app coming out as well as NDC, which we've seen across the industry has been very creative as well. So we've just got a lot of things in the tank. And I think probably more than anyone.
Speaker Change: on a tailwind perspective for RASM. And that's before you get to the overall industry backdrop of capacity, which I think what we're seeing now is people are cutting and they're going to continue cutting until they hit their target margins. So I think that's probably the best backdrop.
Speaker Change: that we've had, I think, probably in seven to 10 years.
Speaker Change: Very helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. We'll move on to our next question.
Speaker Change: Barry, we want to take a break here for a bit.
Speaker Change: Our next question comes from the line of Brian Oglinsky of Park Place. Your line is now open.
Speaker Change: Hi, this is John Dorset on for Brandon. Thank you for taking my question.
Speaker Change: Capacity up mid-signal digits next year, how are you able to control costs and then can you also just talk a little bit about your rent line and with all the sale lease backs expected to come, how should this affect rent over the next year?
Speaker Change: Thank you.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Yeah, sure, go ahead. Yeah, yeah, so I mean, specific to next year, so as I mentioned, we are expecting 21 deliveries next year with eight of those 320 NEOs and the balance 321 NEOs. And so we have those sale lease back financed. And so similar to what we've highlighted before, you would expect the,
Speaker Change: a similar amount of gains tied to that. And then as we turn the page to 2025, we're on target as we stand now to achieve the $150 million annual run rate benefit from our cost savings program by the end of this year. And then as we look to next year with the moderated capacity, you know, the, you know, that those capacity adjustments, you know, are investments that from a commercial perspective, you know, are expected to help drive incremental, you know, RASM, you know, and a better overall margin outcome.
Speaker Change: So, I think that's the overview.
Speaker Change: I just think I would add, too, I think if you look at the latest...
Speaker Change: costs, even including the fact that we reduced capacity. I mean, we're becoming the premier ULCC, and in order to do that, you've got to have the lowest cost in space.
Speaker Change: It's in our DNA. We're managing everything about it, everything that Mark just mentioned on the simplification of the network and so forth. But what we've seen is the cost, you know, convergence.
Speaker Change: is true across most of the industry, but not in the case of Frontier. And I think that's kind of misunderstood and not really highlighted. We are over 40% in Q3, and it looks like based on the guidance that we're seeing, we'll continue to maintain that over 40% cost advantage, even as we roll into 25.
Speaker Change: Thank you. Bye-bye.
Speaker Change: Thank you.
Speaker Change: Okay, great, thank you.
Speaker Change: Yep.
Speaker Change: Thank you, one moment, for our next question.
Speaker Change: Our next question comes from a line of Savvy Seth of Raymond James. Your line is now open.
Speaker Change: Hey, good morning. Just to follow up on that last question, so for unit costs,
Speaker Change: pressure next year. Could you help us kind of think through that? Like you've seen kind of mid-single digits again next year, or should it be better, or at least help us think about like the moving parts on a year-over-year basis?
Speaker Change: Yeah, Savi, at this point, yeah, we're not guiding, you know, next year. I mean, what we're focused on right now is getting to that $150 million, you know, annual run rate target as part of our cost savings program, but we're still working through, you know, the guide for next year, so we're not guiding at this point.
Speaker Change: Got it. And maybe, Barry, you've alluded to this, but I wonder if you could give a little bit more color on, you know, you did do a lot of, kind of, capacity that you put in other markets, and so a lot of markets that are maturing. Could you talk about, like, what the, you know, ASMs under maturity were in, like, as you progress through this year and what that looks like next year?
Barry Biffle: Yeah, sure. It's a great question. So, look, we did a significant redeployment from last year.
Barry Biffle: mainly out of Florida, a little bit of Las Vegas.
Barry Biffle: and we moved that across several of our new bases. I think in large part we saw, you know, hitting normal historical averages, call it two-thirds of those routes worked.
Barry Biffle: I think the only disappointing
Barry Biffle: really area was was actually New Orleans. We just didn't see universally anything work out of New Orleans. We think there's some local issues there, but by and large we're seeing really good
Barry Biffle: early, early results and we expect that maturity curve
Barry Biffle: to come through and you're going to hit the historical averages. So that's why I mentioned I think in the first question.
Barry Biffle: what's most misunderstood. I don't think people are understanding that 20% of our capacity
Barry Biffle: was outsized redeployment, and you're going to have a 20% to 30% bump on maturity as we wrap into 2025. So I don't think there's anyone out there that's got the tailwinds that we have on the revenue side.
Speaker Change: So starting 25, do you get back to kind of your normal mix of kind of new versus mature markets?
Speaker Change: Yeah, I think it's going to come down. You're still going to have a little bit of new. We've kind of got a few, you know, kind of lingering, I'd say, couple opportunities that we're really interested. But yeah, I think you're going to, by spring, summer, you'll get back to kind of a normal mix of new markets is largely part of our growth. And I think you'll
Speaker Change: Over time, you know, probably, yeah, I think sometime by July, you probably have your growth rate tied to the new markets.
Speaker Change: Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Michael Lindenberg of Deutsche Bank. Your line is now open.
Speaker Change: Hi there, this is Shannon Darity on for Mike. Thanks for taking my question.
Speaker Change: So can you provide us with more detail on the drivers of this year's $150 million cost savings program?
Speaker Change: Thank you.
Speaker Change: Yeah, so from a, yeah, cost savings program standpoint, you know, the
Speaker Change: high level, you know, by the network simplification, you know, that we've talked about getting to over 80% out and back, you know, the crew footprint, crew base footprint that we put in place.
Speaker Change: In addition, really across the business, aggressive cost management from a headcount per aircraft standpoint and various other metrics, as well as a number of automation initiatives across the business that collectively are getting us to that $150 million annual run rate target.
Speaker Change: Thank you.
Speaker Change: Got it. Thanks. And, you know, Barry, on the revenue side, you have a lot of basically, you know, revenue initiatives going on, and I know we've talked about them extensively, but which one are you most bullish on, you know, or said differently, like, what initiative is going to be the largest contributor to hitting your 10 to 14% pre-tax margin guide?
Barry Biffle: Well, I think the largest contributor is the network maturity, if it took a single bucket.
Barry Biffle: and it's just math, right? It's going to happen.
Barry Biffle: I think the one we're probably the most excited about is actually what we've been doing from a premium perspective and from a loyalty perspective. You know, we're seeing a huge uptake.
Barry Biffle: in our credit card, as an example. You know, we're in a situation with relatively low growth right now in the fall, but yet we're seeing the highest...
Barry Biffle: credit card applications in our history.
Barry Biffle: and they're jumped massively year over year because of all the initiatives that we've done this year. So I think if you flow that out, the maturity over the next several years is massive in the loyalty. I mean, if you take the loyalty revenue that the industry gets compared to us,
Barry Biffle: We are several dollars.
Barry Biffle: of Apps in Europe.
Barry Biffle: below where we should be.
Barry Biffle: and I think you don't get there through little small steps. You get there through some big changes, but it takes a while for that to be assured. So we think we've made a lot of those changes. We've got more to come. But I think the one area that we're most excited about is probably loyalty. Because again, if you look at the industry, this is something they get up in the teens and $20 plus per passenger, we're in a couple of bucks a passenger. So this is a huge opportunity.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Andrew DeDora of Bank of America. Your line is now open.
Andrew DeDora: Thank you.
Andrew DeDora: Hey, good morning everyone. Barry, just to clarify on the double-digit margins by summer of next year, is that a comment just on margins over the summer or is that a true run rate figure that we, you know, that we can kind of build off of going forward?
Barry Biffle: No, run rate.
Speaker Change: Got it. And just, you know, in terms of some of the...
Speaker Change: credit facility moves that you made over the quarter. Why was now the right time to raise additional liquidity? Was there something in the credit markets or your business trends that made you think differently about it at this point in time? Thank you.
Speaker Change: Yeah, I mean, I think overall, we have a very attractive base of, you know, loyalty assets, you know, and we're always going to look at ways to optimize our balance sheet. And for us, you know, establishing a revolver, you know, with that as the collateral gave us a very cost efficient way, you know, to increase, you know, our liquidity. And so it just
Speaker Change: made a lot of sense, and then from a PDP financing perspective, you know, just given, you know, the growth in our fleet, you know, looking forward, you know, it was the right opportunity to expand that facility, you know, had significant interest, you know, and so, you know, had a successful outcome with that as well as we highlighted in the prepared remarks.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Mark Mitchell: Thank you, Mark.
Speaker Change: Thank you, one moment for our next question.
Speaker Change: Our next question comes from Linus Scott Group of Wolf. Your line is now open.
Speaker Change: Hey, thanks. Good morning. So, Barry, any color on how to think about first half, 25th capacity, and then I know you don't want to talk about
Speaker Change: Spirit, and I'm sure you love hypothetical questions, but just hypothetically, if you have a deal with someone and you're waiting on approval for that deal, how does that change your mid-single-digit standalone capacity? Do you think it's more likely to be higher or lower than that if you have a deal with someone?
Speaker Change: Thank you.
Speaker Change: Nice try, Scott. We're not commenting on M&A. But look, yeah, we're targeting mid-single digits for capacity growth and we're not actually putting it out by quarter, but that's the plan for the year.
Speaker Change: I'll let you ask another question since I'm not going to answer it. But to give you a little bit of color, Scott, you know...
Speaker Change: We obviously adjusted the network as you progress through the second half of this year. That has to lap into next year and so the first half of the year will obviously have slower growth. Stage normalizes around 900 miles or so plus or minus as you progress through next year. So you're going to see some ASM growth come into the business.
Speaker Change: in the back half of next year, but lower actual seat growth in the business. But that's kind of how the year will shape next year, as you see the effect of taking down Tuesdays and Wednesday capacity predominantly flow through the first six months of next year.
Speaker Change: Okay and then when we look at your cost guidance for Q4, I think it's something, you know, order of magnitude seven and a half cents of CASMX, right? What? I guess there's some hurricane in there but like...
Speaker Change: What is not sustainable there? Like what goes lower from there? Where does CASM-X grow from that level?
Speaker Change: When you step back and you look at the year over year, first of all, you've got to keep in mind last year had a $36 million benefit from some lease extensions we did.
Speaker Change: And then, you know, as you look at, you know, the number for this year, first of all, you know, you've got, you know, fleet growth is up 17% because of lower stage.
Speaker Change: You've got departure growth that's up as well, and so those items combined with just some of the maintenance tied to a larger fleet, right, is what, along with just
Speaker Change: Some of the station mix that we're in and some rates tied to that drive the year over year increase.
Speaker Change: And so, you know, when you look from an overall year perspective, I mean, we have been consistent from the beginning of the year that our stage-adjusted CASM-X was going to be down, and it was, or it still is, is what we're, you know, projecting to be down, you know, 1% for the full year. And as Barry mentioned earlier as well, I mean, our cost advantage remains over 40% on a per-passenger basis versus the rest of the industry.
Barry Biffle: Yeah, I think optically, Scott, you need to look at the stage. So if you look at it stage-adjusted, you won't see it's a big amount.
Speaker Change: No, I get the year-over-year increase, I'm just trying to figure out the absolute chasm seven and a half cents. Is that sort of the right run rate to be thinking about going forward?
Speaker Change: that's
Speaker Change: You're not stage adjusting it, Scott. Yeah, I mean, I think on a stage-adjusted basis, right, for the fourth quarter, I mean, you're closer to, you know, seven, you know, and within, you know, that number, you know, there are items in there that are, you know, tied to, you know, the lower capacity, you know, on off-peak days and the other items I mentioned, but still get you to the, you know, the full year down 1%.
Speaker Change: Okay. All right. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you, one more for next question.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jamie Baker of J.P. Morgan Securities. Your line is now open.
Jamie Baker: Hey, good morning, everybody.
Jamie Baker: So let me try a couple of questions admittedly inspired by my competitors earlier on the call. On 2025 axial chasm
Jamie Baker: It feels like saleesback games could turn from a tailwind this year.
Jamie Baker: to a headwind next year. I know you don't want to give a full year, fully loaded chasm guide. Thanks to Savi for asking. But have you worked up just what the sale leaseback strategy could contribute next year? And is it indeed a headwind?
Speaker Change: You're on air? Yes, sir.
Speaker Change: Yes, I mean, just, you know, isolating on the sale-leaseback gains, given the mix and the number of aircraft, you know, certainly, you know, that would drive lower sale-leaseback gains. But, I mean, as you look at next year, I mean, you know, we believe we've got more than enough, you know, tailwinds, you know, to mitigate that. And, you know, you're going to have next year, the full-year benefit, you know, with the network simplification, and there's a number of other items, right, that we're looking to, you know, to continue to aggressively manage our costs.
Speaker Change: Okay and then Barry, this is not asking you to comment on future, I mean my question is wholly
Speaker Change: backward-looking. So let me try that strategy. It's been 36, 37 months. So what percentage of the original, the original Spirit Frontier rationale
Jamie Baker: might still apply given everything that's happened at the industry level.
Jamie Baker: So just looking in the rear view mirror, not asking you to comment, looking forward.
Barry Biffle: Jamie, you know I love you, but I can't comment on that.
Speaker Change: We're really excited about being the premier ULCC. I think we have proven that we have the lowest costs. We have proven that we can expand our cost advantage.
Speaker Change: We have probably, I think, deployed on the revenue side and executed better for network, for all these initiatives, loyalty, premiumization, and so forth. And we're going to buck the excess capacity, and I think that everything's coming together. So we're excited about our future right now.
Speaker Change: and we'll see what happens.
Speaker Change: Could I squeeze another one in? I'll let you have one as long as it's not the same variety. Okay.
Speaker Change: Notwithstanding the comments you've made already on the call, I don't want you to just sort of pee yourself, but...
Speaker Change: You know, if I compare the fourth quarter guide to the second quarter outcome, you know, your margins were, you know, let's call it flattish in the second quarter, you're guiding something in that ballpark for the fourth quarter, and I totally understand seasonality in the airline business, but
Speaker Change: You know, domestic capacity is so much tighter today.
Speaker Change: Fuel is 40 cents lower. I mean, what headwinds would you identify?
Speaker Change: to help explain why your margin guide isn't better than the second quarter, or is it just completely seasonality?
Speaker Change: Thank you very much.
Speaker Change: Well your seasonality, but I mean don't underestimate the Florida impact. We we don't know how good it would have been We just know that our sales kept climbing climbing climbing and then we had two back-to-back hurricanes
Speaker Change: and having a base in Tampa was not very helpful this year. It's great on the cost that Mark wants to brag about.
Speaker Change: It's not good on the revenue side when you have hurricanes, and two of them that hit that area, plus its impact on Central Florida as well with the Orlando Basin.
Speaker Change: But look, I think we are disappointed that we didn't get to that single digits, but I think we would have gotten much closer had we not had it. The other issue is just the maturity of the – we've got a lot of brand new markets right now.
Speaker Change: And so we're kind of taking a pretty healthy drag.
Speaker Change: from that. And I think there's one other factor that will definitely normalize as we move into the next season. But there were a lot of cheap seats, Jamie, this summer.
Speaker Change: I mean, if you wanted to go in July, it has never been that cheap. I mean, not only were the fares low, you had September fares in July.
Speaker Change: So anybody that wanted to travel during the peak time was able to. And so that bomb went off and on the capacity world. And we're still kind of reeling from that. I think now as we move to the winter season.
Speaker Change: You know, we're optimistic that this is going to change. I mean, for the first time, we're going to have capacity growth actually lower than GDP in a long time. And so I think we don't need to underestimate, not to bring up how long you've been around, but you know what that's going to do for industry rather.
Speaker Change: All right, speaking to the bald spot. Thank you Barry, I appreciate it. Thanks James.
Speaker Change: Thank you.
Speaker Change: Thank you, one moment, for our next question.
Speaker Change: and I'm going to be talking about the the the the the the the the the the the the the the
Speaker Change: Thank you. Thank you.
Speaker Change: Our next question comes from the line of Stephen Trent. Let's say your line is now open.
Speaker Change: Yeah.
Stephen Trent: Thank you very much, gentlemen, and I appreciate you taking the time. Most of my questions have been answered, but if I could ask one about your expectations around future growth. So when you think about your passenger flow, for example, you know, any high level view
Stephen Trent: on how much of that's going to come from your guys' sort of organic growth versus attrition from other carriers versus your alliance with Mexico's Vomiris. Thank you.
Speaker Change: That's great questions. Look, I think...
Speaker Change: I can start it and Bobby can talk about some network. But I think at the end of the day, we're going to focus on organic growth. But to the extent that someone with higher costs or someone leaves a market and it makes an opportunity, I think folks know we're probably the most nimble in the business and we will probably jump on that opportunity faster than anybody.
Bobby Schroeter: Yeah, and I think, I mean, that speaks to the history here. Look, we did, we, we modified the network and we're nimble in what we did there. You've heard this, this word quite a bit during this conversation, but it's real, which is the maturation of this. So as we go through this,
Bobby Schroeter: Some of it is things that we set up months ago, and we'll continue into next year, and we'll build and be able to get, you know, natural
Bobby Schroeter: growth there in terms of the maturation of the network itself.
Bobby Schroeter: And then, of course, you know, we talk about the premiumization and a variety of other things. These are things that, you know, we have the lowest cost and we're providing a product at a lower cost than anybody else could provide it.
Bobby Schroeter: that our customers have wanted but haven't had necessarily access to. So that's still in this maturation phase as well. It helps us as we're trying to both grow our customer base and retain who we've got. So lots of opportunity there as we move into the future.
Speaker Change: Okay, I appreciate the time. Thank you.
Speaker Change: Thank you, Rona, for our next question.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Alana Dwayne Finneward of Evercore ISI. Your line is now open.
Speaker Change: Hey, thanks. Can you talk a little bit about the recent schedule changes to the month of December specifically? Was that aircraft deliveries getting pushed or you know that you had to react to or was that something else?
Speaker Change: Thank you very much.
Speaker Change: Yeah look, Dwayne, we've been adjusting our network over the last number of months obviously to manage Tuesday, Wednesday, Saturday flying that we've been taking down. The recent change is just to the first half of the month, adjusting for some movement and aircraft deliveries. So there's nothing really significant in that, other than us finalizing our network as we get closer to the month.
Speaker Change: Got it, got it.
Speaker Change: And then just for my follow-up, contractually, not saying you're interested in doing this, but would your contracts allow you...
Speaker Change: to sell future delivery positions in your book. Not saying sale leasebacks, but outright sale for future delivery. Understand your plan sounds like it's baked for 2025.
Speaker Change: on the sale lease back front. But if you're going to grow 5%, let's say if that's the plan in 2026, which I assume it's not, but if it were,
Speaker Change: Do you need to take, you know, 21 aircraft to hit that 5% or could you actually monetize some of the value in your book through outright sale?
Speaker Change: Thank you.
Speaker Change: So we can't get into commercial terms of confidential deals but I think right now we've spent a lot of time recently on our fleet and we're very comfortable with profile and feel very good about the delivery schedule as it exists. I know a lot of it you know Airbus deferred a bunch of it and and it got
Speaker Change: I guess kind of lumpy.
Speaker Change: and we had the opportunity to work with them this summer to kind of smooth that out and so we took all their deferrals from the various challenges they had with their supply chains.
Speaker Change: and we were able to fix kind of, you know, the problems that were created from those deferrals and it kind of really smoothed it out so we feel very good about the the profile.
Speaker Change: Okay, appreciate the thoughts.
Speaker Change: Thanks Gwen.
Speaker Change: Thank you. One moment for next question.
Speaker Change: Our next question comes from the line of Christopher Stathopoulos of SIG. Your line is now open.
Christopher Stathopoulos: Morning everyone. Thanks for getting me on. So Barry, just I'm going to keep it to one question but two parts here.
Christopher Stathopoulos: I just want to better understand how we should think about the network for 25. So the earlier question, there was a question that relates to, I think it was a mix of maturity versus kind of longer standing or new versus mature capacity, if you could give that.
Christopher Stathopoulos: and others. Thank you. Thank you.
Christopher Stathopoulos: that mix there. And then also, remind us of the criteria that you consider when evaluating new markets. So is that profitability by origination?
Christopher Stathopoulos: Cash Profit by Flight Segment, and then B, looking at your selling schedule for next year, still taking shape, but, you know, just how should we think about whether it's, you want to contextualize it in so far as breadth or placement of capacity, so regions or perhaps crew versus non-crew base routes?
Christopher Stathopoulos: Thank you.
Speaker Change: Okay, so there's a couple parts in there. So what happened this year is with the redeployment...
Speaker Change: You know, we had months we were over a third of our blind was in kind of new
Speaker Change: routes, if you will. And to be specific, what I said is we hope that by the time I get to mid next year
Speaker Change: that new flying very closely mirrors kind of the amount of growth we have. So said another way, if we were growing 10%, we might have 10% in new markets. So we'll probably likely grow outside our footprint.
Speaker Change: for some time, for several years, rather than density within our existing. But if we see opportunities, we'll look at that.
Speaker Change: I'm sorry, on the other parts of your criteria for new routes. Yeah.
Speaker Change: We look for things that we think will make solid double-digit margins.
Speaker Change: and so
Speaker Change: We look at our cost structure relative to what we think the revenue production is going to be.
Speaker Change: We
Speaker Change: I don't know, I'd say we're probably 97, 98% accurate.
Speaker Change: on costs. Every now and then we get surprised, good or bad, on costs. And we've got about a two-thirds hit rate on the revenue estimates. And sometimes, like I mentioned, New Orleans didn't materialize. It didn't stimulate. We're not sure why, but we don't second-guess why market dynamics happen. It just didn't. And then so the last question is what regions
Speaker Change #100: You know, it's hard to say. There could be some interesting opportunities. We tend to wait. We have the benefit of, you know, largely, I think probably a closer-in booking curve.
Speaker Change #100: than most of the industry. And so we look at the opportunities. So what's everybody going to be doing by next summer? And it could open up an opportunity or two. We have a long list. We have kind of a rolling three to five year plan. And if someone
Speaker Change #100: It's a bunch of, you know, we're going to go after it. And I'm actually staring at our planning head who's nodding his head. And that's going to be really market driven, you know, what opportunities present themselves. But we'll be the first ones to jump on it.
Speaker Change #101: Great. Thank you.
Speaker Change #101: Thanks.
Speaker Change #102: Thank you. One moment for our next question.
Speaker Change #103: Thank you.
Speaker Change #104: Our next question comes from the line of Connor Cunningham of Millie's Research. Your line is now open.
Connor Cunningham: Hi, everyone. Thank you. Maybe following up to that question, Barry, you talked about being the premier ULCC, so maybe you could just comment on the segment as a whole. Do you think the ULCC segment has made enough structural change at this point, or is there further capacity rationalization that needs to come? And then within that, within your double-digit margin, do you expect further supply to come out? Thank you.
Connor Cunningham: Thank you.
Barry Biffle: Well, so, look, I think we have validated that the ULCC model is fantastic. I think if we look at domestic-only revenues and domestic-only flying,
Barry Biffle: and parse that out from carriers that have, you know, a huge subsidy on half their business flying international, we think we're probably one of the top tier margins and if you include loyalty, we are by far the best best performing on a margin basis domestically in the United States, hands down.
Barry Biffle: And so we think we've validated our model. What's happened in the United States has just been simply too much capacity.
Barry Biffle: and there's in particular been too much narrow body capacity and those tend to have to fly the same similar type routes. We are seeing the market forces
Barry Biffle: push capacity out. And I think you're going to continue to see that happen. The industry will pull capacity until people reach their target margins. And I would argue you're a long way away from that.
Barry Biffle: And so we expect to continue to see positive momentum. We've made the tough decisions ourselves.
Barry Biffle: We've seen other other carriers do that and history shows they'll continue to do it so I remain pretty confident that that you will right size the capacity in the domestic US and The margins will come back in shape and the ULCC model will be the highest margin in that domestic space
Speaker Change #106: Okay, that's helpful. And then maybe you could just talk a little bit about, you know, in the past, we've just talked about why scale matters a lot. Can you talk about why that matters to Frontier at this point, from a sustained earnings perspective and cash flows over the long term? Thank you.
Speaker Change #107: Sure, I think the biggest benefit to scale is actually on the revenue side.
Speaker Change #108: I mentioned it a while ago, the thing that we're most excited about is actually loyalty.
Speaker Change #108: And if you think about the opportunity that exists.
Speaker Change #108: If we could get.
Speaker Change #108: You know, from the low single digits to upper single digits, you can do the math. Five bucks a passenger on 40 million passengers, that's $200 million a year. And that is benefited from scale.
Speaker Change #108: And so the more scale you have, the more, you know, top of mind your card and your loyalty currency is.
Speaker Change #108: and so the more usability they have. So that is one of the biggest benefits to scale. I would argue some carriers without kind of our cost DNA oftentimes benefit from the, I guess, the buying power, but we believe that we've kind of overcome some of those. So it's mainly on the revenue side.
Speaker Change #109: Appreciate it, thank you.
Speaker Change #110: Thank you, one moment, for our next question.
Speaker Change #111: Thank you.
Speaker Change #111: Thank you.
Speaker Change #112: Our next question comes from the line of Tom Fitzgerald, TD Talent. The line is now open.
Tom Fitzgerald: Thanks so much for the time. Just sticking with that comment about other revenues per passenger, you know, going from a couple bucks to, I think you said five dollars here, what is like the timeline? Is that something you're expecting next year or just going over the next handful of years? That's like your North Star that you're working towards?
Speaker Change #114: Yeah, I think it'll take a couple years. We haven't laid out kind of a, I guess, a target yet, but we believe it is very realistic to get, you know, in the five to seven dollar range over the next, you know, several coming years.
Speaker Change #115: Okay, that's really helpful. And then just a housekeeping one, it looks like a fuel efficiency just in ASMs per gallons. It's kind of been pretty muted year on year this quarter and last quarter, even though you're still taking a lot of NEOs. Just wondering if I'm missing anything there, any comment on that? Thanks again for the time.
Speaker Change #116: Yeah so that's kind of a factor. We talked a little bit about the stage while ago. You have to look at the fuel burn by stage and so when we pull down the stage the taxi time stayed the same.
Speaker Change #117: The climb stayed the same and where you get efficiency is at cruise when you're running 500 miles an hour But it's still industry-leading and especially at that stage
Speaker Change #118: Thank you. I'm showing no further questions at this time. I'll now turn it back to Barry Biffle for closing remarks.
Barry Biffle: I want to thank everybody for joining today. We look forward to talking to you in 2025. We believe we are the premier ULCC and we're really excited about the tailwinds that we've got going in to next year. We'll talk to you in 2025.
Speaker Change #119: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.