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

It's freezing here.

It's cold and lots of bright lights.

Golden bright, yes.

There you go.

Sort of like being a cold fusion sun. Great. Let's keep the airline content going. And next will be Frontier Airlines here, Barry Biffle with us. Barry, thanks so much for being here.

Sorry for a bit of a quiet start to the day, but not quite. Would love to get kind of your take on the 8-K you put out this morning and kind of what you're seeing out there, because it sounds like something has changed.

Yes. Look, I think we've put out what I think you've seen in a lot of public data, the ARC sales data, Airlines Reporting Corporation has kind of shown you that over the last couple of weeks, things have changed and sequentially gotten worse. You've gone from industry sales being up to flat, to now being down versus 2019, and that's coming at a time that capacity is going up. And then the third leg of that stool is fuel. So you've got fuel, capacity and demand all head in the wrong direction.

Interesting. So can you unpack a little bit more kind of what are you seeing in your airline, kind of is it: a, does something slip off for Labor Day; b, what do you think was the cause of that? And is it like broad based? Or is it in select routes and select areas?

Well, it's relatively new. I mean look, there was some concern. I think there were those hurricanes in the second half of August. And so I think could have started a little sooner. It was probably masked by that. We've continued to have ATC challenges and so forth even as recently last weekend. But the truth is, yes, we started seeing some close-in demand challenges. And you wonder if it's you until you see a lot of public data, right?

Yes.

And we're probably more impacted than others. Just simply, we do have a short booking curve, and so we're kind of the canary in the coal mine, if you will. So generally, we'll see this sooner rather than later. But at the end of the day, you see the overall demand picture, when total sales are down and capacity is going up, this is tough. And all I would say about Frontier is that everyone's going to be engaging in self-help, and we're going to go to simplifying our business even more and doubling down on costs, because we think that an environment like this, this is where we thrive. I mean history shows that post-Gulf War Southwest, post-9/11 Ryanair, post-Great Recession Spirit where I was at, before only airline to make money in '09. So we think that doubling down on cost is the right thing to do, and we'll see what happens. But one of those 3 things will change or multiple in the fuel demand or capacity dynamic. And so meanwhile, we can control our costs. So we think we can win in this environment.

Got it. I'll come back to the cost in a second. But again, just to get a better understanding of what you're seeing in the demand picture. So you're saying, this is not something that's unique to the ULCCs or unique to a low-end flyer, if you will. You think it may start that way, but it is absolutely -- you think it's likely to spread till...

Yes. I mean we don't have international long haul to kind of subsidize this. But yes, domestic in the U.S., there is an imbalance between capacity and demand.

Got it. And again, is this something that can be rectified with pricing? Or kind of is the capacity the only way to fix that? Or kind of what do you think?

So encouragingly, in the last few days, we've actually seen some of the biggest record volume days that we've had in the year, but the challenge is the price points that it's taking to drive that is actually very, very low. And so I mean, maybe we can make these work, but I don't think the industry can. So that's why we're doubling down on the cost, because we think that that's what's going to be necessary over the next 6 to 12 months to win.

Got it. I'm sorry to press this point, but kind of with some of the other kind of mainline carriers saying, "Hey, we are not seeing this yet," you're saying that, and we heard from Alaska yesterday saying that they had seen something change with the close-in bookings, but the forward curve is totally fine. You're saying that the close-in behavior, which you're more exposed to, is a symptom of something broader that's likely to come in the future?

Look, we don't know the makeup of -- take the ARC sales. You've got ARC sales, you've got fare data. There's plenty of public data sources. But just take the ARC sales alone. If total dollars are going down, it could be close in, is driving part of it, but it also can be further out. I don't know what everyone's advanced bookings are. Maybe they were sitting well for December, but we've been selling December for months. This change has happened in the last few weeks. So you still could be ahead for December. Why don't we ask what their sales were for the last 2 weeks for December?

Understood. What are your December sales like? So what is your forward booking curve telling you? I know you're close in, but kind of...

It's very early. And I would just say that there's -- it was more pronounced because we sell the majority of our sales close in, so the downshift has affected us more close in. We don't sell enough further out to have seen a change. So yes, I was feeling good about the holidays 3 weeks ago. I still look at them and okay, but I worry about the builds between now and then, because the most recent close-in builds have not been strong.

Got it. And last question on this. So -- and from what you're seeing, you're confident isn't just a both summer overhang, shoulder season saying it's going to continue through the holiday season.

Well, I'm never confident, but 3 weeks starts to make a trend.

I see. Understood. So what can you do? So kind of in your seat right now, kind of what would you do on the cost side to kind of offset the pressure you're seeing on revenues?

Well, look, this is very new. So we don't have a presentation to give today, but I will tell you that before I jumped on the plane and came out here last night, I held a meeting for close to 2 hours with all of our senior leadership and directors and so forth about what we are going to do. And we're doubling down on costs. Not only do we think that we need lower cost to be thriving in this environment, but the ATC is a big issue, and it's not going away any time soon. And so when we look at our business today and look back at the summer and even back into the spring, the things that are most impacted by ATC are the multi-day trips. So we have about half of our flying goes out and back, the other half is 2- and 3-day trips. And we see the majority of the complications in those 2- and 3-day trips for our crew. When they get -- they'll end up in the wrong city, they'll strand the airplanes, they strand the crew. That's where all the disruption happen. We had, this summer, we lost almost 40% of our maintenance kind of manpower planning, because the airplanes just ended up in the wrong places, all because of GDP programs and so forth. So what we're going to do is go -- we're going to get as close to 100% as we can in terms of out and back, because that is going to simplify the business, will look a lot more like a Wizz. And so you need less reserves for your pilots, your flight attendants, you need less mechanics, you need less parts because all the planes go home every night. And so we're going to spend a lot of time on simplifying the business, and we think it's going to be good for liability, and we think it's going to be good for our cost. And that also will unlock even more utilization. I think the only way we see in this new ATC environment to get back to our previous utilization levels is to go to all out and back. And that's going to unlock it, and that's a significant amount of money.

Got it. Well, you said that kind of the situation is a result of an imbalance between demand and supply, right? So I think one of the more logical questions would be, you don't control the demand, you do control the supply. So would you consider taking down your capacity plans for the next 12 months?

So we've been growing 20% to 30% for a while now, and that was kind of putting planes to work that we took delivery of during COVID. We've already announced we're going to be back in the mid-teens, but I'll spot you the answer for the industry. If industry capacity is up 10% or more and ARC sales are down and total industry sales are down 15% or more, that's over 20% spread in unit revenues. At some point, that will flow through the industry. We're less than a couple of percent of the total capacity in the industry. We're literally a rounding error. We can't fix that imbalance. This is going to be -- the history shows that the industry will fix it. Of the 3 things, we don't yet know the macro environment. There's some bad things out there. I mean Dollar General, Nike, a Foot Locker, some pretty bad consumer things recently. But if there is a slowdown in demand, you've got the credit card debt at the highest level, you've got student loans starting to be paid back the next few weeks. You've got gas prices at the highest level you're paying at the pump. So if the consumer is slowing down, you probably see fuel come down, but I don't think that alone kind of fixes things. And so then the second thing that's within the industry's controls capacity, we can't change demand. And we've all seen this movie before. This is when 700s go out. This is when the all 319s, all the gas guzzlers, the most marginal high-cost capacity will leave the market. And the question is how much of that do you need, but I can't solve that. But what I can solve is my cost.

Right. So again, it goes back to some of the network changes that you announced in the last conference call even before all of this happened, right? So how much of that is -- how much of what are you telling me right now is turbocharging of what you had already planned versus kind of new steps or kind of a completely new page that you're turning because of what's happening?

So this is completely new because this is further simplifying the out-and-back type of structure. We talked about, yes, the midweek being a challenge, but this is different. This is about the structure of the schedules of the airline in simplifying our business.

Got it. Where do you think this takes you? Obviously, it puts you -- everybody is going to be a hole in the near term maybe, but what kind of your margins now are kind of negative low single digits or mid-single digits? What's the path to profitability, let alone the high standards in margins you had before the pandemic?

I think what's in our control, I think obviously dropping the cost will give us some amount. We're not ready to talk about the amount of margin that we get from there. That's going to be a big factor. I think the overall industry capacity will likely change, history shows it does or fuel is going to come down. I think one of those 2 are going to be the second kind of piece to the puzzle for us.

Got it. So yes. So let's see how this evolves. Obviously, we're all digesting this into the news. And maybe kind of take a step back and look at your overall business kind of, again, you say that you obviously are rounding at or kind of you won't be able to fix the capacity problem, it's absolutely true. But when you think of the dots that you're adding to the map, right, is that something that you're potentially looking to slow down? Or is that expansion actually going to help you reduce the cost in '24?

Yes. So I don't know that we're going to be adding that many more dots. We have a really good, robust kind of footprint of dots on the map. We need to connect more of the dots. And that's very inefficient up until today to have a lot of dots and not a lot of flights from it. But so we can get further scale. So no, I mean we're excited about it. I mean look, I think, I think, look, this is new, and I know it's tough on everybody that invest in the industry and maybe works in the industry. But I can say at Frontier, we run to a fire. And so we thrive on this, and we see this as a huge opportunity for us because lowest cost win. And if we continue to double down, then we're going to win through this environment. And not to mention, I know a lot of the people that we've been talking to today, people keep asking about what does this mean for JetBlue-Spirit. I think it probably suggests, based on what we're seeing, that the probability goes up because their financial wherewithal is dependent upon this merger now. So it improves that odds. Well, so if that happens, we're even better positioned. We become the lone national ULCC. So I think the story for Frontier is really, really good.

Got it. And the story for ULCCs overall, you guys have obviously been making the case that the share of ULCC carriers in general should be higher. Again, it doesn't sound like you're saying that this is a function of a low-end flyer kind of falling out of bed. It feels like something broader than that. But over time, as macro comes back, do you think ULCCs can get a bigger share of that market?

Well, look, I think it's -- look, I've only been in the space like 28 years, so I haven't seen -- I'm not that old. So I've only seen a few of these times. But in the late '90s, and again, in the late 2000s, I heard the story about how the leisure affluent customer at this time is different, and they'll buck the trend and all that. I've heard this story before. If there's a slowdown, there's a slowdown, and it impacts everything. And people are going to stop going to Europe if they're stopping to travel overall. So these things come home to roost. I mean at the end of the day, we've seen this movie before and lowest cost win.

Got it. Just kind of shifting gears and going back to the ATC issues you spoke of. What's the solution to that? Is that something that the industry just needs to build into their plans and build into their capacity and know that every summer, you're going to have the ATC tell you how much you can fly.

Well, there's how do you fix it and then there's what can I do about it? So what Frontier can do about it is it's very limited. Let's talk about what needs to be done, right? They need to be hiring more than they're losing in attrition. There's ways to solve both of those. One, they should look at the retirement age, right? They should also look at people that are qualified, that are sitting in back-office positions. So how many do they have that they could bring to the floor right now? And what incentives could they do to change that? So they could change the attrition makeup. They could change -- bring people on the floor, and they need to do a massive amount of hiring and training, right? And we should be demanding that as an industry, and I think investors should be demanding and Americans should be demanding it. I mean the FAA reauthorization, I find it ironic, we're talking about things like consumer things for the airline. Let's talk about basic blocking and tackling within the FAA, providing air traffic control services should be one of those things. And I think that -- I hope our representatives demand through this FAA reauthorization, accountability that they're going to get it staffed and so forth. The second piece they can do, which is a little bit longer, but they do need to revamp the United States air traffic control system. We are behind Canada. We're behind Europe. And if we care about being green and we care about fuel burn, then you could eliminate significant minutes off every flight in America by having much more direct modernized routing. And so we need to tackle that as well. So I would really support the FAA reauthorization having 2 things in it. One, getting a real plan about the controller shortage; and a long term, what are we doing about the modernization? Now what can we do in Frontier? We're going to schedule around it, because it is clear and I became galvanized in this view over the weekend, because we had storms -- not even storms, this was rain. I think it's wrong to call it rain. In the East Coast, I mean, you're laughing because you know what I'm [indiscernible].

I know exactly [indiscernible].

You know what I'm about to tell you. We were shocked, shocked, that rain is causing like hurricane proportion-type cancellation. We have 1,500 cancellations on Thursday or Friday. I mean it took it to a Monday to clean this up. We were in -- yesterday, I was in Denver. We have -- we had some little puffy white clouds, blue skies though behind it. And there was a little thunderstorm about 35, 40 miles south of Denver, and we put in a ground delay program. We never had an issue. Now they eventually turned it off, but this has got to stop. And so we are going to be working with them to stop some of these like kind of knee-jerk reactions. But ultimately, what we've got to do is schedule around it. And so we are not going to have high-risk routings that go through congested areas that are prone to having these issues. And I'll take in Orlando as an example. We are going to put much bigger buffers in the afternoon, when they have propensity for more thunderstorms to make sure this doesn't happen. We made a bunch of changes and became more out and back last year. The challenge is we still have a lot of our out and back is in the morning and in the evenings it's more the multi days. So the multi days keep getting hit. If we make everything out and back, you may get hit by ATC, but you can clean cancel that out, if it's this afternoon, and it doesn't impact tomorrow. And so that's what we're going to do to simplify our business. And so I know you can't do that if you run a hub-and-spoke system and you've got to have things in outstation and so forth. But for our business, it makes sense, and we're just going to schedule around it.

Is there a mix impact or yield impact of going to same-day back and forth versus multi-day? Is there a yield or mix impact from going to same-day back and forth?

So it depends, right? So if you're in an origin point or in a point that has real good both direction traffic, no. If you're in a destination, this is like Vegas, for example. Vegas, it's a little harder because people don't want to arrive at midnight and leave at 6:00 a.m., right? They want to get in as early as possible and leave later possibly. So whereas if you're coming from Philadelphia, there's more people that go from Philly to Miami, then go from Miami to Philly. A strange phenomena, right? So in that case, a Philly base, in our case makes sense. I don't take a penalty, but from a destination, it does. But we're looking at that, too. And I think you'll see, for example, the next few bases we open are very origin-centric as a result. So no, you do not take a hit. And we'll probably run later flights, but not red eyes. So I suspect we'll probably be reducing our red eyes, which have a heavy reserve cost on the pilot side. And our pilots, nobody likes flying them anyway.

That's fair. Just kind of switching gears a little bit. Your competitor may potentially have an issue next year with the GTFs, potentially you're kind of grounding part of their fleet. Is that an opportunity? What do you think it does for capacity across the industry?

Look, I don't know their numbers. I mean we have some GTF, but we just got them in the last year. And so we don't have any of the impacted engines. They were earlier series. I don't know what it does to them, so I don't know their exact numbers. I think what's better for us than the GTF is the fact that if they're going to merge with JetBlue, which is looking more and more likely based on news out today, that I think that's the bigger opportunity for Frontier.

Got it. Sounds good. Any questions in the audience? [ Anil ]?

You described some blocking and tackling operations to fix the issues, but I have a broader question. If you look at your performance this year, about $0.30 in earnings, and compare that to what we thought you could do when you became public, well above $1, $1.50. And then I look at the issues you're having, you're cutting fares by 20%. You're adding 20% more capacity, but you still don't have utilization under control. You mentioned cost control, you had $0.06 as a target, but that's nowhere in sight. So the broader question I'm asking is, is your -- do you need to step back and rethink your business model? Is this the right direction to go?

So I don't think we need to rethink our business model. We've been -- this is something that has bothered us long before this most recent last couple of weeks of demand change. We've been hell-bent on getting the cost back down for some time, and you know this very well. We have been impeded though by this ATC environment. That has changed. This is a material difference in the operating environment today than what we saw in 2019. To the point of like 10x, 1,000% more GDP minutes that we're dealing with, they're simply in a high utilization world. The way that we have scheduled in the past, there's not an ability to do that. So we've been looking at this for a while, I mean, several months now. And what we need to do and the ATC is impeding us from hitting our utilization targets, and that's what's impeding us from hitting our cost targets. And so that's why we're doubling down on simplification. And I think what's happened to us in the last 10 days looking at this demand picture is we become galvanized in this view. And the answer is no. Our business models are broken. This time isn't different, and the world is not flat. The lowest cost will win, and we're doubling down on it.

But is this an -- again, the #1 question I've got is, do the low-cost carriers need to take their foot off the gas in terms of capacity growth, not just you, obviously, all of your peers, all of them are doing [ and clean ] Southwest, right? So does that...

And we have. Look, I mean, to his point, part of the thing that kind of held back our margins was ATC. The other thing is that we continue to take airplanes during COVID, and we did not have them in full utilization. So we absorbed a lot of capacity, right? I mean when you think -- let's just for simplicity's sake, if we've historically grown at a 15% rate, which was we were kind of mid-teens and we've been knocking on 30%, even higher in some quarters, especially some months. If you take that difference, so new flying is typically 30% to up to 40% lower RASM than mature. So if I multiply 35% times 15%, this is a 5-point drag on your RASM and it's a 5-point drag on your margin. And we are moderating it back down. So we are already planning before this current environment, we'd already planned on moderating our capacity back out into the teens. So we are focused on that. We are focused on getting back, and we're hell-bent on getting back to our old costs and our old margins.

When can we expect a road map from you? Is that something we can get in the next call, what that plan looks like?

Look, I mean, I think it's nothing like a change in the demand environment to focus the mind. But I think we're very early. We held some meetings yesterday. I'm flying back tonight. We're holding more meetings tomorrow. We're going to be pretty darn busy the next couple of weeks. I'd like to be able to update at some point this fall. But yes, you're going to see changes come out of Frontier. We will be doubling down and getting back the cost. The other reality is I think overall, I think this isn't just a Frontier thing, this is a society-wide. We got lazy in COVID. I mean seriously, people are still allowing people to work from home, all this silliness, right? I mean all that's out the window, right? So when you get people back in the office, our overhead -- when we look at our overhead versus 2019 adjusted for capacity, it's up dramatically, dramatically. Why is that? Why do I have more people per plane in overhead than I had in 2019? It's because they're not as productive. And so we're just looking at it. And look, we're not alone in this. I mean you hear every company out there talking about the productivity challenges. But enough, enough. And so we're going to focus on it. So I don't have all that. I don't have a presentation to give, I don't have a target to give you. But yes, we will have more to talk to you in the weeks and months to come.

On the inflation side of it, do you think you have visibility on that and that's under control?

Based on everything I'm seeing, the pressures are off, right? I mean let's take -- pick a work group. So take flight attendants. I've seen this now a couple of times in my career. I've only been doing this for 28 years, so I'm not that old yet. But every time flight attendant attrition goes down, it's usually your canary in the coal mine, and that just started happening. And it's real simple. It happens because they don't have the opportunities that they were looking for outside, right? We've seen the same thing in airport staff attrition. It's fallen like a rock just in the last few weeks, right? We're seeing -- I mean, did you see on the pilot side, I mean, you've got UPS doing early retirements. My understanding is FedEx is right behind them, right? Pilot starts were up 40% last month versus 2019. So I think you're going to have all the supplies of all these things. So I think the pressures on labor inflation is going down. And you'll see those things flow through to other things that you buy. So yes, I think the inflation pressure is over.

Got it. Any more questions from the audience?

Except for fuel, by the way, which is hurting consumers as well.

Well, that's supply. Let's see, we have one left.

Can you talk about some of your ancillary revenue opportunities and maybe what you see through the remainder of the year in that segment, just what opportunities will be?

Yes. Look, we've been the ancillary leader for a while now, and we spend a lot of time on this. We have said this for, I guess, a couple of years now. Our main focus now is -- people like to talk about dollars, we'd like to look at profit, right? And so we're really focused on less dollars but more high-margin products. So subscription loyalty businesses like our credit card. We're really focused on how do we grow the credit card. We just launched the GoWild! product this year. So that's another kind of subscription business. And so these are high-margin products, and we're going to spend more time on that. I mean even onboard sales. You take a drink mini. You can buy a drink mini for $0.50 and sell it for $7, like a bag. You don't have any kind of margin on a bag or a seat like that, right? So we're looking at the products that you can get high margin on. So I'm much more focused on getting a few more dollars that is 50% to 70% margin, versus just trading $1 and the fare for ancillary.

And what's your relationship with the -- not as an industry, your relations with the regulators are like, because there's been a lot of focus on airlines as a concentrated industry that's kind of beating up the consumer. And obviously, this industry is going to struggle to make money for a very long period of time. So it may not remain true. But do you feel like your efforts to have a more transparent fare kind of increase that disclosure, give people more choice is being recognized by the DOT?

I think consumers have started to see it. I think there's still some people that maybe don't understand how transparent it now is. We've had rules for a long time. You have to -- I mean, in fact, we're so transparent that we even hide taxes from the consumer. I said -- the only thing that we're not transparent on anymore is the full fare rule that hid the taxes. Everything else is completely disclosed before you purchase. And by the way, there's a movement to get rid of what they call the full fare rules. So the people can see the taxes broken out. And I think the American consumer should see what their PFCs and taxes costs.

Got it. So maybe just to kind of wind up here. Obviously, it's going to be a pretty tough end to 3Q. If things don't materially improve, how quickly can you put in place these cost actions? Is that something that can salvage 4Q? Or do you think you're looking at a pretty tough negative?

I think it takes more than just 4Q. I mean you're largely -- I mean, we're already about to crew November. So you're a little close in. But I think you could start to see things by the first of the year that start to materialize by spring, for sure. We move -- I mean, that may sound like a long time, we move fast for an airline, right?

Barry, I appreciate you coming here and sharing this with us again, as you pointed out and it is absolutely true, you're the first one to kind of call out the impact of Delta variant 2 years ago. You're the first one to -- you're basically the canary in the coal mine, right? So I hope you're wrong, I hope you remain wrong.

I hope we're wrong, and I hope we wake up and go, that 3 weeks, I don't know why it happened.

Yes, what happened, yes.

I don't know why consumers stopped spending. But it's -- one week you say, "Oh, is this hurricane hangover? Is this 2 weeks? Is this just Labor Day?"

Yes. Or COVID, it was an interesting one. There has been many resurgence, right? So maybe that's it then.

Yes. Maybe. I don't know. That is also -- look, we've racked our brains in the last 10 days on what are all the things causing this. But a 16% drop in overall industry sales is a big number. I mean this is not maybe down from basically flat 3 weeks ago.

Got it.

That's a lot.

We will closely track this and see what happens, but thank you for being here.

No, thanks for having us.

Thank you, sir.