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

And Barry, I just want to -- while we get the results from this question, I just want to thank you for coming down, joining us at this conference.

And I think a great question to lead off here because there's been so much volatility in airlines in the past 2 years, especially post pandemic. And if we were to rewind history and pre-pandemic, say, hey, coming out of this high-cost network airlines, you're going to have the highest profitability, the low-cost growth-oriented carriers are going to struggle with profitability. I wouldn't have expected that. I don't think anyone would have expected that. And for better or worse, some of your larger competitors have kind of called the demise or the doom of the low-cost model, they've even named it some other acronyms that we won't even bring up here. I guess, what do you say to the idea that low-cost, high growth can't work anymore?

Look, I think it's great that the legacy carriers have done well. I think $5,000 fares across Atlantic have covered a lot of sense. So -- and I think if you look at their competitive capacity, it tells a story. I mean it's the opposite of what happened to the LCCs and ULCCs. If you look at Florida and Vegas, right? That's where all the capacity has gone. So if you would ask me pre-pandemic, hey, why would this change? Well, the reason is there was a huge bomb went off called COVID, and it upset the applecart. And then when everybody ramped back up, we all chase the same place. I mean it would be no different than taking -- opening a Costco, a Walmart, a Sam's Club and a Target all on the same block. That's what happened. And so when Nordstrom is left to itself in Cleveland or Cincinnati, don't tell me that they're not going to do better. But we have been actively going and saying, okay, well, I'm going to put my Costco in Cincinnati. I'm going to go put a Costco in Cleveland. And so I think we're making the changes that we've got to do to make sure that we get back to our pre-pandemic margins.

I appreciate that response, Barry. And I want to keep this really focused on the long term. But can you talk about spring break travel trends? There has been a little bit of a buzz at the conference here that domestic travel maybe a little bit better than expectations in the first quarter. Is there any veracity to this?

Yes, I'd say -- look, I don't know, I've only been around like 28 or 29 years in this space. So I don't have a complete history, but Easter moving a week is going to improve it. So I don't know how much is that. So you get a point or 2 from that. But look, I think the demand is fantastic. I mean, look at this conference. I mean, how many people were here. Go to the -- on the street. I mean last night, we couldn't even get a reservation until 8:30 at night. I mean so -- and that was a Tuesday, right? So I think, yes, the demand is solid. I think there were a lot of fears last year, right, about people losing their jobs and the student loan repayment and those kind of fears, and I think a lot of that has subsided. And even though we've had layoffs, what seems to be happening is there's still a robust enough economy that they're finding jobs relatively quickly. And so I think that's given consumers a little more comfort, if you will, and we know they still have plenty of money, and we know that incomes are still up. So I'm not surprised that the demand is so strong.

When you gave annual guidance to returning to pretax profits this year, following a little bit of a loss in the first quarter.

Well, to be fair, we made money last year.

Correct. Sorry. But returning to -- or getting to a better...

To a double digit, yes, on our return to double-digit margins, yes.

Yes. Can you talk about some of the network changes that you guys are making? And especially because your first quarter capacity growth, I think, is high single digits, but you're going to step up to double-digit levels for the full year. So what's your confidence like going into a higher growth second and third quarter that the margins are going to come back?

Well, I think it's just simply that we're unraveling. I think let's go back in time for a moment, to last spring. So in Q2, I know that this doesn't fit the LMA code, but we made almost 10% in Q2. And so we were back on a really good track. We flipped in Q3 to negative 5%, which was a 10-point drop year-over-year. And so what happened was there was a glut of capacity that came in to Florida and Vegas, but mainly Florida, and it was significant. And we had over half our airline in Florida, and it just really punished us. And so what we saw, we had routes like Philly-Orlando, where we went from 4 to 5 trips, but the industry added even more, and we actually had less revenue. And so I wouldn't look at the growth as much as [Technical Difficulty] and so when we've got places that we had incremental [Technical Difficulty] with no more revenue, that's what we're redeploying. So I wouldn't worry about the growth. I can guarantee you that we're finding much better homes for this capacity. And so we feel very good about it. And in fact, this is below the growth rate we've been doing for several years now.

Well, can you talk about some of those network changes? Where is the capacity? So places like Orlando and Vegas is where you're sourcing from? Is that correct?

Sure. So we're growing in general. So we're going to grow 12% to 15% this year, but we're also redeploying about 10% to 15% depending upon the month. So we're moving it out of Orlando. We're moving out of Vegas. We're moving it out of all parts of Florida for the most part. And we're moving it into Cincinnati. We're moving it into Dallas. We're moving it into Philadelphia. We're moving it into Cleveland. We're moving it into other places that are generally high fare, underserved markets. And so we're seeing a really good response there. And if you look at industry fares that are $500, $600, $700 round trip on routes that in many cases are half the distance we fly in and out of Florida. So pretty good trades for us.

So literally taking a flight that didn't add incremental revenue putting it into a market where you can get better fare structure, is that correct?

Absolutely, absolutely. And the average fares that we're chasing in these new markets are on average 15% to 20% higher than the places they're coming from. So we're actually saving consumers a lot of money as well.

I mean, does the price stimulation still work in this model though?

Absolutely. Absolutely. I mean it just doesn't work in a place like a Philly-Orlando, where we'd already been for close to 10 years. We'd already had low fares. And I think us and other competitors, like I said, just put too much capacity there. We literally opened a Costco, Sam's Club, Walmart and Target all on the same block.

Got it. On the cost side, you guys announced a pretty ambitious plan to save $200 million by the end of this year. Is that correct?

Yes. That's right.

Can you talk about with your strategy of having crew bases across the country how that's going to impact those outcomes?

Yes. So a couple of big buckets of that. Half of it is roughly coming from the crew side, so -- which is mainly hotel savings. And then you get some crew efficiencies as well. So that's roughly half of it. And then on the other side, you get reliability, which -- I mean, if you go back to last summer, I mean we had to cancel almost 3% of our flights with all the challenges we had. And so that's just straight. I mean you had the cost and you didn't have the ASMs. So fixing that is huge. And then that also unlocks utilization. So that's kind of the other half. So...

And are you seeing those benefits today? Or what's coming with the new crew bases this year?

So we're starting to see the benefits. It's on the horizon. We got down as low as 1/3 of our flights were out and back last July. By March, we'll be at 68% out and back. So we are seeing the efficiencies in there. We're seeing already. We've had several -- we had a snowstorm and there was actually I don't if you remember a few weeks ago, there was all the flooding [indiscernible] another round of flooding now in California. But there's flooding and then there was a storm that hit Denver and a lot of the Rockies. That weekend, we didn't have any cancellations. And if you look at the other 2 big carriers in Denver, they had a lot of cancellations. So I think the beginnings of this are looking pretty good to us. And by the way, we're second place in completion year-to-date.

And if you had to look back last year, what were the sources of problems with the completion factor?

Look, the multi-day trips are just a challenge, right? I mean, so when you start getting these ground delay programs that we're getting, they're more often and they're longer than we've ever seen. I mean, to give you an idea, I mean, in July alone, we were up 1,000% more ground delay minutes in the system than we had in 2019, in July. So these are big ground delay programs.

And how does the strategy help you mitigate that now going forward?

Yes. So by being out and back, what that enables us is, we're not going to stop that weather event or we're not going to stop that ground delay program that's maybe caused by general aviation traffic or whatever the source is. We may still have to cancel that flight. But we're not going to cancel 5 more over the next day or 2 because of the knock-on effect because that now displaced a plane or displaced a crew. I mean to give you an idea, last summer, we had -- so we do a lot of near-term planning, and we'll plan today for tomorrow night's maintenance. We had as many on some days, as many as 40% of the aircraft ending up in the wrong cities just simply in an 18-hour span just because of what had happened in all these ground delay programs. So that's going to stop that because the plane goes out and back or if you have to cancel it, it's in the right place. So I'm not going to be chasing airplanes around with parts and mechanics to get them fixed. So -- which is huge.

I suspect when it's out of station, then you are going into off-contract pricing on maintenance or...

Absolutely. I mean to give you an idea, we were doing -- not even on -- even on a planned basis, I mean -- so we were doing a service check in Islip, right? And we said one there, it's $1,200 to do a service check with this firm that was there. We can -- we're now going to move that into a base, and we can do it for like $200, $300. So yes, it's very expensive to use these small amounts of maintenance. And by concentrating our maintenance, we're going to save a lot of money on that because we'll have less mechanics per plane and you actually need less parts, too, because we've got a more concentrated.

Well, I think a lot of the airline stocks trade at deep value multiples we could argue, but I think part of the challenge with a lot of investors here is that it's more an industry issue, but the things that we supposedly can control like costs and labor inflation, those have been ongoing pretty high for the industry post pandemic. I know you guys have an open labor contract with your pilots right now. How do you expect to manage what most likely will be higher wages for your pilot workforce?

Yes. So look, we put out our guide, including labor costs, and we said it would be about $0.25. I think I would point to this year and last year. So if I start with 2023, we widened our cost advantage from 2019 to 2023 from 39% to 41%. And so I know there's a story about cost convergence, but let's don't let facts get in the way. We actually raised the cost advantage. Now if I look at this year, we have noticed across the industry probably what, high single digits CASM increases. Is that fair?

Mid to high, sure.

Mid to high, okay? Well, we announced that we're going to be 1% to 3% down on a stage-adjusted basis. So I'll spot you the answer, giving $0.25 in labor increases for next year is less than the difference that we're seeing this year. So I think we can comfortably get to a point in the next year or so with new agreements and continue to maintain our cost advantage.

I mean fundamentally, you do have lower unit cost compared to some of your competitors.

Lowest in the specs.

What do you think is driving this idea that costs are all going to converge?

I don't know. It was a story. I know that some people have invented, but it just hasn't come true. I mean, look, at the end of the day, I think it's -- you've got a lot of people that are not managing our costs well, and they're going up high. And you've got people like us that we are just hell-bent on having the lowest cost. And this is why we have gone to the out and back. We're always thinking of what is the next generation of things that we're going to do. I mean we're not talking about it a lot, but I'll bring it up today. We are moving to a ground loading, front and rear boarding. And so later this year, we'll open a facility in Denver, and we're going to have out and back flying, but we're going to be doing it also with front and rear boarding. This has a dramatic impact on your turn times. I mean we spend close to an hour turning a 321 with 240 seats. If you go to Europe and you see the same aircraft, that can turn that airplane in 30 minutes. And so that's the next evolution of how we're going to further lower cost as we're going to get more and more ground time out of the system. If you do that 5 times a day, that's 2.5 hours, right? So I'm just telling you this because we are constantly figuring out what's going to be the next generation and the next evolution of things that we're going to do to not ensure that we stay the lowest cost, but that the cost advantage continues to widen.

Well, I appreciate that response. If there's any audience -- there is one here. We can get the mic. And Barry, while they run the mic and maybe I can segue into this because some of your competitors say, look, travels become differentiated, people want to pay up for premium economy or a different cabin, and that's the way the market is moving. So it's not good to be on the bottom end with only a low-cost product. How do you respond to that?

Well, so look, so one of the things we've done recently is we've had a stretch product, which is actually a premium economy product. The challenge is we didn't use a name that's common in the vernacular and premium economy is kind of one is that name. So we recently, as an example, changed the name of our stretch to premium economy. We've spent a lot of time promoting it, and we've seen pretty good results. I think we're also, too. You've seen everyone bragging about frequent flyer. We went through last year and actually did a very serious exercise and analyze every airline credit card, we analyzed every hotel credit card. We did all the bank offered runs the credit -- the Capital Ones, the Chase cards and all that. And we're fortunate, we have a partner with Barclays, with the Barclaycard. And so we did 2 things. We said, okay, if you fly an airline and you earn on the airline and you have our credit card and let's say, you spend at least $10,000 a year on a credit card, we geared it so you will earn more free travel on Frontier with the Barclaycard than any other card in the U.S., full stop. Consumers can earn more free travel by spending $10,000. And so by making the changes that we did to the program itself and made it revenue based and how we geared it, we have seen a 20% jump in penetration. So onboard the aircraft. Even though we're growing, we've actually grown our frequent flyer penetration by 20% on board versus same month last year in January and the first part of February. And in -- on the credit card side, we're up -- we announced this before, but we were up double digit in spend. And Barclaycard has told us that we were the only program that was up, not just -- not just up, but up double digits. So we think the changes are really good. We're really excited about what that's going to do. So yes, we have seen people's propensity to spend more, and we're doing everything to get our fair share of it.

I think we had a question over here.

Yes. Just a question on growth. So you're focused on having the lowest unit cost you can and you're driving a lot of capacity growth in the market in the second half of the year. I guess my question is, in the context of if we have a weaker revenue environment or clearly, the revenue environment has been soft for some period of time. How do you think about the level of capacity as it relates to managing yields as we look out over time, meaning at a certain point, does it make more sense to slow capacity growth? I know you have an order book, but planes are in strong demand, why not slow that capacity growth and get your margins back where you'd like them to be?

Yes, sure. I absolutely agree. Capacity is the answer to yields. And I think if you have to look no further than what's happened in Florida. And it's dramatically depressed the yields. Congratulations all of you probably paid less than you should have to come to this meeting. But that is the issue. And so I think we have the luxury of seeing a very specific acute issue. And so when I look at the rest of the United States, the other 2/3 of the marketplace, you have the opposite dynamic. You have in many cases, actually less capacity than you had in 2019. So I think there's -- with the carrier of our size, I mean, for us to grow 10%, I mean, it's 20 bps on the nation. So I think we can continue to grow. We don't see a major thing that would impact that. And history shows that carriers like us and the lowest cost always win if you have an economic downturn. I mean, there's never been a time. I mean if you -- Southwest in the '80s and '90s, The Great recession, the only airline that made money in the United States, in 2009 with Spirit Airlines. We weren't a ULCC then, but I'm just telling you that if that happens, there will be a huge blocking. You may see some of the attractiveness of some of the premium products go down. But you'll see a big jump towards us.

And Barry, what else can you talk about on the commercial side? I think you even introduced BizFare product.

Yes, we did. We did. We actually just announced it a couple of weeks ago. So look, we're doing several things this year. We've got to focus on premium economy. We've got the frequent flyer changes that we talked about. And we have the new website coming out in the second half of this year. We've got a new app coming out second half of this year. We're actually going to launch NDC in the second half of this year. So we've got a lot of things coming on the distribution that will help demand, but we also have products like BizFare. And what we've had, I think it's because we've now gotten big enough that I think we have enough scope and scale, but we have kept having corporations come to us and say, hey, we use a TMC, we use a managed travel provider. And all I can buy is your basic fare. I can't buy anything else or it's very clunky to do. Is there a way to get this done? And so what we did is we just bundled things together. It's bundled fare, and it offers a really low price that you get seat assignment, including premium economy, if it's available. You get a free bag and you get free change fees. And so it's kind of that everything for one low price and it's available through the GDS. Since we've announced it, we've had massive increase about it, huge interest. It's only available so far in a long cell if you're familiar. So this is someone a travel agent actually booking it, which is only like a couple of percent of the market. When we get into an automated configuration, which is in the next few weeks, we expect to see big demand. But I can -- I got to tell you, based on the inbound inquiries from corporations, I think it's going to be a pretty popular product.

Interesting. What about on the ancillary side?

So look, I mean we have been ancillary leaders, but I think what we've had to do this year to focus on the new web and the new distribution capabilities. We kind of had to take a lot of those technology resources and push them towards that. . But I think the benefit that we're going to see in conversion and overall revenue, I think, in the near term is probably the right economic decision. So I think huge on the ancillary just yet. But once we have that new platform, should enable more things.

Okay. I think this might be a little bit more controversial because some of the folks that look at your cost structure would say, well, there's sale leaseback gains on the aircraft portfolio, you have with a pretty big order book with Airbus. You guys negotiated that pretty favorable pricing. So when you do a sale leaseback on the delivery, you do book a gain that comes through the P&L.

That's the accounting.

Well, some carriers would put that below the line. So how do you talk to the idea that maybe we shouldn't be capitalizing...

So let's make it clear that everybody understands the accounting. Some have put it below the line. And the reason for that, it has to be regular and recurring, right? So it's routine and recurring. . So the reason why people have excluded it is because it's not -- maybe they don't do sale leasebacks or maybe they don't have many planes coming in, and it's not regular and recurring, right? So that's why they've excluded it. So not to give everybody an accounting lesson, but call your accountant and figure it out. And that's why self-serving individuals and people that are trying to talk us down have invented this narrative. It's just laughable, right? The bottom line is that we are hell-bent to have the lowest cost, and we do that by buying right. I don't think we overpay for anything. We have buying power with the [indiscernible] portfolio, bigger than Southwest, bigger than Ryanair, any other big carrier in the world. So we buy things cheap. I don't care if it's tires, brakes, airplanes, engine. I don't care. I bet you dollar that if we're not the best price, we're pretty close. We also do really good on financing aircraft. Same thing. We are out there. I mean I'm actually going on a road trip next week to meeting with some of the [indiscernible] companies, and I'm working on stuff 1 year, 1.5 years out all the time. So we pay less than other people for airplanes, just like everything else. The accounting calls this out, shows it as a sale-leaseback gain. But what you need to think about is this is a serious advantage to our company. It's a serious cost advantage, and it's an embedded asset. So when you roll that up, you can do the math. I mean, you can't get into what we contract to do for things. But with the fleet order we have and the gains we get, it's well over $1 billion. That's coming -- it's real cash, it's real earnings, it will hit our P&L. I actually find this really intriguing because Southwest Airlines, because I've been in this business a long time and have studied their public filings and their breakdown and everything else. And theirs manifest itself in a really low ownership cost. So it's just hidden in their margin. No one ever called out. I don't ever remember anybody saying, oh, you know, we should take 1/3 of their profits. And we should just exclude the fact that they buy airplanes really cheap from Boeing. I don't remember anybody ever saying that. Look, this is a core part of our business. It's a real advantage, and it's a major asset. And so I love it that the short sellers are pushing these narratives. I love that some competitors are pushing that because they're jealous of it. But the bottom line is, I'm glad they brought this up because this is a major benefit to Frontier.

Well, can you talk to us about -- and not to get too nitpicky on the most recent quarter, but you did have a gain from extending a couple of leases I think, on the older A320s. Can you explain what happened there?

Yes. So look, I mean, when you go to return an aircraft to the leasing company. They ask for sometimes. They ask for almost a mint-condition. And so satisfying those conditions are very expensive. So back to this is actually the accounting and it's a real expense. We were going to incur expenses to do those lease returns. And sometimes, the intervals of that expense doesn't really line up with the lease return. And so we've been opportunistically looking at certain leases and saying what's more optimal. So the fact is, it wasn't some accounting trick or anything. It was less cost that we're going to incur. And so we just eliminated the cost. So...

I appreciate that. And I guess maybe a bigger picture question around that item. Does maintenance liability become an issue at the end of lease for a lot of these aircraft...

Well, we're constantly always trying to figure this out, right? So you need to try to time. You're -- you can always do this, but you need to try to time your aircraft engine and your airframe maintenance to like line up with a lease return. So if you're already going to do it anyway, that's beneficial. When they don't line up, this can be expensive. I mean, you don't want to have to pay for green time on something that you're not going to realize the benefit. So I think one of the challenges right now, when you take some of the LEAP engines we've had, for example, they had a lot of early shop visits. I mean, we're seeing this with the GTF, right? So it may mess up those intervals. So we're actively looking right now like and trying to anticipate 8, 10, 12 years out. What's going to happen with our utilization and where do these things fall so that you can optimize those lease return costs.

Okay. And we only have a few more minutes. Can we queue up question #4, please, for the audience. In your opinion, what should Frontier do with excess cash, bolt-on M&A, larger M&A, share repurchase, dividends, debt paydown or internal investment?

[indiscernible]

I'm guessing internal investment. All right. Question #5, please. I don't have any debt. So I guess, in your opinion, on what multiple of 2024 earnings should Frontier Group trade? Appreciate all the responses. [indiscernible] And then question #6, please. What do you see as the most significant share price headwind facing Frontier, core growth, margin performance, capital deployment or execution and strategy? Well, Barry, we'll only have a couple more minutes here. I want to come back to the cost issue because I feel like maybe we didn't hash that out fully. But you did say maybe $0.25 on CASM from higher potential labor rates. Is that right? But I think folks are just worried about the sticker shock like how wage is going up 20%, 30% with new contracts. But can you talk to some of the offsets that are going to be available to you with the...

Sure. So look, I mean, we're going to have to pay competitive wages and that kind of gets you in that 20%, 30% range. But we've also got to have competitive work rules. I mean, we have some real outliers in our contracts that I think, are not conducive, especially with the expectations today of reliability and completions. I mean -- and so I think while there's the headwind of the total cost, we've got some productivity opportunities. And I think they're very reasonable. And given they're kind of not available in any other contract out there, we feel pretty solid that we should be able to have a conversation about it. The flight attendants are not as -- I mean, that will just be a straight wage increase. I don't think there's quite as many opportunities there, but it's obviously a smaller pool of costs.

And as we close here, Barry, I guess at the end of the day, though, you still see your cost base to remain the lowest in the industry, still the ability to stimulate traffic. So you're not going away.

We are not going away. We'll have the lowest cost and our cost advantage will continue to stay there or widen as we have seen. So...

Barry, thank you very much for coming down. I appreciate you being here.

No, thanks for having us, Brandon. .