Frontier Group Holdings, Inc. (ULCC) Earnings Call Transcript & Summary

So our next presenter is Frontier Group Holdings and their SVP of Commercial, Daniel Shurz. Daniel is actually going to kick off with some slides to walk through so the reason network changes that they talked about on their earnings call and then we'll sit down for Q&A. So with that, I'll turn it over to Daniel.

Thank you very much, Andrew. Good morning, everyone. Happy to be here today, have to in Boston and talk a little bit about Frontier and our continued recovery and our continued movement towards higher margins. Standard disclaimer, and we'll be talking about some forward-looking guidance. Results may materially differ from what I talk about and there's safe harbor language that I think you're probably all aware of, but just to make sure. So look, I think we've got this great story, and I think we want to remind everyone. We're a growth airline. In a business that broadly speaking, it's not really a growth business. We're a growth company. We've had strong relative RASM performance. Our ancillary performance is truly second to none globally, and we continue to grow our performance. We have the lowest total unit costs and our looking at was widening. And so we're going to get -- we're going to get margins back. We're going to get margins back towards and then to pre-pandemic levels. Q1 '19 slides are going to speak for themselves. We've grown more since the first quarter of 2019. This is first quarter later than any other airline. 41%. We continued in the pandemic to take delivery of aircraft. We have large aircraft orders, the airplanes kept coming. We had we kept deploying them. During the pandemic recovery, that meant being aggressive with experimenting with new markets. You can see the relative maturity of the network improving. There's been a trend since the beginning of 2022, we where overall immature capacity has continued to drop. As demand recovers, we continue to see opportunity to increase capacity on existing markets. So our immature ASM share has dropped. And we've seen great revenue growth since 2019. Our total revenue in Q1 '23 was up 55% in Q1 2019. We're driving strong total revenue performance with that capacity with the right market deployments. And so if you look at the 12 months ending Q1 for the growth airlines, we have the strongest unit revenue growth. And we have the best combination, we believe, of growing capacity and healthy unit revenue performance. This model still works. We're a growth company, and we're able to grow unit revenue and grow it strongly. And this has been -- this has been underpinned by very strong ancillary revenue performance. We are the global leader in -- we're the global leader in non-ticket revenue per passenger. We have innovated with the best optimization in the industry with continued new product deployment, obviously, most recently, on GoWild pass and we're on track to hit our fourth quarter goal of $85 a passenger and we continue to work on products and ideas that will drive us to our long-term goal of $100 a passenger. Now talking specifically about recent changes. We've been watching, obviously, now the slightly more than 12 months of domestic -- a full domestic leisure demand recovery and trying to understand what this new world looks like. And what we've seen is in the off-peak periods, the difference between peak day RASM and off-peak day RASM has grown. It's grown from peak days having a 19% unit revenue premium over off-peak days to a 26% premium. So relatively substantial change. And what we're doing in response to that is effectively sculpting the capacity appropriately to the days of week. There's no -- we'll get to this. There's not a fundamental shift in the business model. It's an adjustment to reflect the market dynamic -- the market demand trends and obviously, cost trends we say. So if you look at this graph, this is probably the one that requires the most explanation because it's the most on it. In green, you can see the ASMs by day of week in the second half of 2022. And in the dashed bars, you can see the plan for 2023. We're going to be flying the same or slightly higher effective utilization on the peak days in the second half of this year, and we're going to be flying less on Tuesdays and Wednesdays. But it's not that we -- it's not that historically we flew the same on Tuesdays and Wednesdays as we did, peak days in the past. We already flew less on Tuesdays and Wednesdays. But with the reduction in relative revenue performance on those days, we're doing a detailed analysis. We are getting much more granular in how we do this. So we're looking month by month and in some cases, 2-week period by 2-week period to understand what the right way to design the network is. And we're making sure on the peak days when it's absolutely the right answer to fly the fleet as intensively as possible. We're making sure we fly as intensively as possible. The stage length comes down a little bit with this change because we're running -- we're designing the network to be operationally reliable. And part of that has been increased modularity since the pandemic. And for some of the long-haul markets, the answer is there is no easy way to fly less than daily operations. So long-haul markets either work 7 days a week or they don't and we're making some adjustments there. And by pulling -- look, in off-peak periods by pulling down the network a bit further on the off-peak days a week, we're giving the opportunity to derisk the operation because we're increasing our operational recoverability on those days and getting the fleet into a better position to fly on the peaks. But even with lower midweek flying, we were the highest utilization airline last year and we expect to be the highest utilization airline this year. We're still targeting overall 11.5 to 12 hours. It's an adjustment. It's a little bit lower than we were pre-pandemic, absolutely but it a it's not a fundamental shift in the business. It's reacting in detail to the environment. Maximizing our profitability in the process. And let's not forget about costs. We are the lowest the lowest unit cost producer in the industry totally on a cost basis. And our cost advantage relative to the industry has been widening. And we are going to continue to focus on delivering lower unit costs. Our guidance for the second half of the year includes the expectation of continued reduction in our unit cost and we expect this gap as a result to widen further in 2023. And that's all -- that's part of the -- that's also part of how we get to where we -- to get to where we need to be. So you combine this. You combine the focus on ensuring we're flying profitable flying. Maximizing our revenue opportunity. You combine that cost performance. And you can look at this -- we are working our way back to pre-pandemic margins. We've guided to 7% to 10% in Q2. And you can see compared to the Q1 bar, the central light green bar is the 2020 pre-margins. We closed the gap from Q1 to Q2, and we closed the gap further in the second half of the year from where we are in Q2 and get very much closer to our pre-pandemic margins. And that's obviously despite our continued high capacity growth. And we expect this to continue to improve as we go forward. So the business really is getting back to pre-pandemic performance. The ULCC model and ULCC specifically is absolutely going to be able to perform in this environment. And we're very excited about the future. So we have -- we continue to be a high-growth business. We have over 220 aircraft on order. We absolutely intend to return as we get the comparisons to normalize to sort of the 15% to 20% annual growth rate. We've got the best relative combination of RASM and growth within the industry. We continue to be #1 in ancillary revenue and we continue to improve our ancillary performance. Unit cost performance is going to improve relative to where we are now and increase the GAAP. And we're going to get our pre-tax margin back to -- ultimately back to pre-pandemic levels, and we've got a resilient business model. So with that, I'll sit down and get the tough questions underway.

Daniel, thank you for that. Always helpful to get some more detail around these network changes. I guess maybe kind of starting off, before you, we had a legend up here, right? They run a very similar model in terms of kind of flexing up during the peak kind of keeping flying low during that kind of Tuesday, Wednesday trough. We've been hearing from other airlines kind of maybe some structural changes that they're seeing post pandemic. Is that kind of better peakier peaks and troughier troughs. Frontier has always been very quick to adapt to changes that they see out there. Do you anticipate others to make changes like this? And do you see just the competition on those peak days really picking up as others adjusted maybe this new reality?

So I think -- and you can see it's obviously -- you can see from our data, it's easier to reduce it than it is to increase. I think we -- I think -- you mentioned an agent who -- this has been our approach for a very long time. And obviously, they do it in a form of extreme way than we were planning to. You've had Spirit mentioned in the most recent earnings call that they're moving -- having moved away from cutting Tuesdays and Wednesdays. They're moving back in the direction of reducing. I don't think we're going to broadly see a lot of incremental -- a lot of incremental pay capacity. I don't think it's easy to get it there. I think -- but I think we will see -- I think we will see, which obviously ultimately helps us limit how much we have to cut. I think we probably will see some industry move towards further differentiating off-peak days and peak days.

Does the system, not necessarily your system, but does the net-net is there -- is there enough slack in the system to hand -- I mean I know you're relatively smaller, like your increases aren't going to change things. But if there is that gradual movement towards this peak time flying. Is there a slack within the system to take that on?

So I think broadly, the answer is yes. I think we saw -- we obviously saw when demand recovered last year, when demand recovered very rapidly last spring and summer. So where -- we saw various places in the overall air travel system that weren't exactly prepared for that. I pointed to this time last year, you'd have been asking me about Jacksonville in there. And you look at what happened during the spring break peak this year -- there are occasional delay programs -- pre-pandemic, there were occasional delay programs. But this year, it performed like it used to last year, it certainly did. I think broadly speaking, the risk capacity although, look there are always some places in the transport system broadly where there are -- there's more limitations for sure. We already know that, and we work around that. And -- but broadly speaking, there is capacity.

Yes. Got it. When I look at the bars in terms of the day of week that you had up there, obviously, bigger difference in the bars on Tuesday, Wednesday as opposed to the weekends where you're adding it's marginal, right? But how does that -- I know it's marginal, but during at really, really peak times, how does that change? Or how do you think about the risk of just the recoverability of the airline?

So if you look -- so those bars cover the second half of the year. And so what you're actually seeing underneath that, if you dig further into the detail, we were already flying the -- we were already flying the most peaked periods. Obviously, in the second half, I think in Thanksgiving than Christmas. We're already flying up sort of maximum utilization on the peak days in those periods. They're the highest revenue generators once you get in the off-peak half of the year, as it was. So we're not expecting to push -- we're not expecting to push even higher. And I point you back to sort of all the work we've done around modularity, around sort of trying to building operational resilience into the way we design the network as opposed to having to worry about after we built the schedule. Look at our relative recoverability when we have -- when we have challenges, when we have weather-driven challenges on a given day now in one of the bases in our system, I always like to look at the next day and spot how we basically recovered the full operations because we've built the network in a way that allows us to do that. So I think -- I don't think we're adding more risk.

Got it. actually, maybe talk to your current operation, I haven't seen anything major kind of changing there. And I feel like it's sort of been the theme of the panel so far. Everyone we've had up here, it seems like a lot of the operational kind of headaches that we've seen over the past years certainly seem to be easing even after a pretty busy kind of March spring break, Easter season?

So I think -- I mean a final test as it were are we okay operation. It was our return for the first time to sort of on a scheduled basis over 13.5 hour average daily utilization in the month of March. And if you look at our performance, if you look at our performance since the beginning of the year, if I show you a graph and ask you to tell me when we increased utilization, you wouldn't be able to -- I don't think you get it right because our actual operational metrics have improved since we went to higher utilization. So I'd say, look, everything -- all the pieces you heard about last year, the only things that have come up this year have been much smaller, staffing levels in airports, staffing levels from a crew perspective, staffing to from a maintenance perspective, they're all healthier for us than they were 12 months ago. And the operation is running more smoothly unsurprisingly.

When you take into account all these changes, you're thinking about -- the question I get from investors often is like how costly is this going to be, right? Because I have big picture, right? 2023 capacity came down, your OpEx midpoint [indiscernible] moved higher. So just maybe talk to that the bridge between the two. I know you shouldn't get better RASM out of these new routes, but cost creep higher as well.

So we're -- I think, yes, obviously reducing stage length so if you don't state adjustment, would you will obviously increase CASM on its own. Reducing capacity, obviously, does put pressure on the unit cost. And obviously, also, we have the ongoing delays in delivery of aircraft that are also I think a little bit of pressure there as well. Yes, what you will see as the year goes on is continued improvement in an absolute unit cost performance. And yes, we've seen, obviously, across the business like other airlines. We've seen inflation in a number of the input costs, meaningful inflation since pre-pandemic. We're focused on how to get more efficient to the business. We're focused on what are the different solutions? How do you how do we use technology more effectively all the different pieces. We are going to keep driving costs down. And we're making these network adjustments sort of on a granular basis. We're not making big swinging [ trucks ] to the network, and they're not worrying about what happens is there anything else in the business. We're looking at the truly worst-performing flights and their cash performance and making decisions accordingly, which is why we're -- almost certain it's going to be total margin accretive.

Maybe changing gears from the network changes to just the demand environment. I know you just had your earnings call now just a couple of weeks ago. So I'm sure things haven't changed too much since then. But look, our economics team here at Bank of America has been setting maybe some slowing trends in -- particularly in terms of the higher income consumer. I think that would be helpful, could you maybe just talk to what your core demographic is, what's your typical income cohort is, just to give folks an idea about the type of consumer that Frontier attracts because I think people would be surprised that it's not of where it actually is?