Frontier Group Holdings, Inc. (NASDAQ:ULCC) Q1 2024 Earnings Call Transcript May 4, 2024
Frontier Group Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Frontier Group Holdings, Inc., Q1 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, David Erdman, Senior Director of Investor Relations. David, you have the floor.
David Erdman: Thank you, and good morning. Welcome, everyone, to our first quarter 2024 earnings call. On the call with me this morning is Barry Biffle, Chief Executive Officer; Jimmy Dempsey, President; Mark Mitchell, Chief Financial Officer; and our new Chief Commercial Officer, Bobby Schroeder. Before yielding, I’ll recite the customary safe harbor provisions. During this call, we will be making forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those predicted in these forward-looking statements. Additional information concerning risk factors which could cause such differences are outlined in the announcement we released earlier, along with reports we file with the Securities and Exchange Commission.
We will also discuss non-GAAP financial measures, which are reconciled to the nearest comparable GAAP measure in the appendix of this morning’s earnings announcement. So, I’ll give the floor to Barry to begin his prepared remarks. Barry?
Barry Biffle: Thanks, David, and good morning, everyone. First, I’d like to welcome Bobby Schroeder to the team and introduce him as our new Chief Commercial Officer. Bobby has extensive experience in the industry with nearly 25 years combined at Spirit, U.S. Airways and America West. He’s in the process of relocating his family to Denver and in his new role assumes responsibility for our commercial teams reporting to Jimmy Dempsey. We’re fortunate to have him on Team Frontier. Along with the recent additions of Alex Clerc, our Senior Vice President of Customers and Rajat Khanna, our Chief Information Officer, we now have the strongest senior leadership team we’ve ever had. Turning to the quarter. We reported an adjusted pretax loss margin of 2.8%, significantly better than our guide on cost and revenue performance.
The adjusted pretax loss margin was within 1-percentage point of the prior year quarter despite continuing to encounter far greater excess capacity in some of our key markets, as we’ve previously highlighted. While we’re not insulated from inflation, we continue to hammer on costs with the objective to maintain and widen our relative cost advantage to the industry. To that end, we exceeded our expectations in the first quarter and our cost advantage to the industry widened to 42% on a trailing 12-month basis. Cost divergent between Frontier and the industry is indeed real. We’re on track to achieve our target of 80% out-and-back flying by June and the corresponding $200 million of annual run rate cost savings by year-end. With that, we’re reaffirming our guide of 1% to 3% reduction in our adjusted CASM ex fuel, stage adjusted to 1,000 miles.
Redeployment of our capacity from oversupplied markets is on track and progressing as planned. To this end, we opened our 10th crew base in Cleveland last month, while Cincinnati and Chicago will launch later this month and, finally, San Juan, Puerto Rico in June. The addition of these crew base supports our ability to achieve our target of out-and-back flying by June and drives further network efficiency. Our San Juan base will not only support demand growth from the U.S. Mainland to compete with significantly higher cost carriers, it will also serve as our gateway to other Caribbean destinations. In the second quarter, a significant portion of our flying will be in new markets; more than double we would expect in a normal year. As these new markets mature over the next year, we expect a meaningful improvement in our system RASM.
Further, we have a range of revenue initiatives, including various distribution and merchandising enhancements as well as launching loyalty and premium products, all of which diversify our revenue sources. Jimmy will go into more detail on these products as part of the commercial update. Despite the immaturity of new markets, we expect to generate 3% to 6% adjusted pretax margin in the second quarter. We’re also reaffirming our full year guide of 3% to 6% despite fuel prices, which are $0.10 per gallon higher than they were in early February when we gave our guide for the year. As we move to 2025, we are confident in our 10% to 14% adjusted pretax margin due to our cost tailwinds, expected network maturity and overall revenue diversity initiatives.
Finally, I’d like to thank every member of Team Frontier. They deserve recognition for their significant effort to achieve the milestones I highlighted today. And for the remaining cost discipline and–remaining cost discipline and staying focused on our top priority of delivering a safe and reliable experience to our customers. I’ll now turn the call over to Jimmy for a commercial overview. Jimmy?
Jimmy Dempsey: Thanks, Barry, and good morning, everyone. I want to echo Barry’s comments and welcome Bobby to the team. Briefly recapping the quarter. Total operating revenue increased 2% to $865 million on capacity growth of 8%, both compared to the 2023 quarter, resulting in RASM of $0.92. Departures increased 14% on a 9% shorter average stage length and total revenue per passenger was $124, down 1% all compared to the 2023 quarter. During the quarter, our transition to out-and-back flying developed this planned. By March, we were operating at a 67% out-and-back network and achieved 75% in April. This progression is a key driver in our ability to reduce our cancellation rate by 10% and improve on-time arrivals by over five points; January through April year-over-year.
A key milestone was the opening of our Cleveland crew base, which was successfully launched in mid-March and by summer we’ll serve a total of 30 destinations from Cleveland. Our planned schedule is to achieve 80% out-and-back flying by June, supported by the planned opening of the Cincinnati and Chicago crew bases in May and San Juan, Puerto Rico in June, bringing our crew base footprint to 13 by the end of the second quarter. One of the most significant long-term investments is in our San Juan base where we see a massive opportunity for flights to the mainland United States, given our cost advantage versus the competition. In addition, the geography of San Juan provides a logical gateway to the broader Caribbean region, where we believe our low fare stimulation will have a dramatic effect on traffic flows within the region.
We want to thank the government of Puerto Rico and their elected officials for helping make this investment possible. Today, we fly to more destinations from San Juan Puerto Rico to the main and the United States than any other airline. And by this summer, we will serve Santiago, Punta Cana and Santo Domingo in the Dominican Republic as well as Saint Thomas, Saint Croix, Saint Martin, Barbados and Trinidad with in the region. Overall, we remain focused on maximizing total revenue as evidenced in the first quarter by our trade for yield over load factor, which resulted in total revenue exceeding our expectations. We believe that further revenue initiatives will not only diversify our revenue but improve overall demand and increased load factors as we move through the coming years.
We launched our reimagined Frontier Miles loyalty program late last year and have seen the highest spend on record per cardholder because of these enhancements. It’s very early in our journey to close the gap in our loyalty revenues, but we believe there are several dollars per passenger of opportunity over the next several years. Following our recent introduction of BizFare, we recently launched our UpFront Plus product for customers that value a premium product. UpFront Plus is a new upgraded seating option with extra space and comfort in the first two rows of the aircraft. Customers in UpFront Plus will enjoy a window or aisle seat with extra legroom and a guaranteed empty middle season, providing additional personal space and comfort at an exceptional value.
It’s very similar to the intra-European business class product. The new offering, combined with our premium seating options expand our ability to offer choice to our customers. Later this year, we will introduce NDC, a new website and a mobile app that will include improved merchandising, day of travel and post-travel experience for our customers. We believe the distribution and merchandising changes will increase our revenue per passenger and load factors over the next several years. That concludes my remarks, so I’ll now yield to Mark to provide a finance update.
Jimmy Dempsey: Thanks, Jimmy, and good morning, everyone. Total revenue was $865 million, 2% higher than the comparable 2023 quarter. Fuel expense was $263 million, 10% lower than the 2023 quarter at an average cost per gallon of $2.93. The year-over-year decline in fuel expense was the result of 15% lower fuel prices and 2% greater fuel efficiency, enabling us to achieve an industry-leading 105 ASMs per gallon, partly offset by higher consumption from the 8% capacity growth during the quarter. Adjusted nonfuel operating expenses were $633 million or [$0.071] per ASM due to better-than-expected cost performance. On a stage-adjusted basis to 1,000 miles, adjusted CASM ex fuel was down 3% compared to the 2023 quarter due to three additional sale-leaseback transactions in the quarter, along with our aggressive cost management across the organization that helped mitigate year-over-year inflationary impacts.
As Barry mentioned, our relative cost advantage to the industry widened to 42%, and we remain on track to achieve our annual run rate cost savings target of $200 million by the end of the year. Our first quarter pretax loss margin of 2.8% was lower than anticipated due primarily to better cost and revenue performance than expected. We ended the quarter with $622 million of unrestricted cash and cash equivalents and $156 million of cash net of total debt at quarter end, slightly higher than our net cash position at year-end. We had 142 aircraft in our fleet at quarter end after taking delivery of six A321neo aircraft during the quarter. We expect to take delivery of another six A321neos in the second quarter and 11 A321neo aircraft in the second half of 2024, all of which are expected to be financed through sale-leaseback transactions.
Turning to second quarter guidance. Capacity growth is anticipated to be in the range of 12% to 14% over the 2023 quarter on stage length, which is expected to approximate 900 miles. We expect fuel to remain elevated at $2.80 to $2.90 per gallon based on the blended fuel curve on May 1. Adjusted nonfuel operating expenses are expected to be between $705 million to $720 million, driving an expected sequential decrease in our adjusted CASM ex fuel on a stage-adjusted basis to 1,000 miles. Adjusted pretax margin in the second quarter is expected to be in the range of 3% to 6%, including the impact of higher fuel prices and our network transition. As Barry mentioned, we are also reaffirming our full year 2024 adjusted pretax margin range of 3% to 6% despite the expectation of higher fuel prices.
Additionally, we are also reaffirming our guidance for CASM ex fuel during 2024 on a stage-adjusted basis to 1,000 miles to be lower by 1% to 3% versus the prior year. With that, I’ll turn the call back to Barry for closing remarks.
Barry Biffle: Thanks, Mark. I’m proud of the significant progress we’re making in revenue and cost performance. The hard work and dedication of the Team Frontier are showing that low costs have always mattered, and they will continue to matter. Thanks again for joining us this morning. We’re ready to take the Q&A portion of the call.
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