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

All right. Good afternoon, everyone. Welcome to, I think, the closing session of Barclays 42nd Annual Industrial Select Conference. And I'm very pleased to have Barry Biffle up here from Frontier Airlines to close out the day on a solid note of the day where there's actually some interest in airlines, which we haven't seen over the years. So very excited to have you guys up here. I think Mark Mitchell, Chief Financial Officer, will also be joining us here in 1 second. But before we jump into this, I just want to queue up for one last time today, the audience response questions. So question number one, please. I'm sure everyone knows the drill at this point. Do you currently own Frontier: Yes, overweight; two market weight; three underweight or four, no? Like we're on a game show. All right. Question number two. What is your general bias towards Frontier right now, positive, negative or neutral? Favorable skew. And then question number three, please. In your opinion, through cycle EPS growth for Frontier will be above peers, in line with peers or below peers.

All right. Well, Barry, I appreciate you coming down. There's been a lot going on in the industry. A lot of 8-Ks coming out. And I know you probably can't say much, but just give us a quick download of what you can or can't say about Spirit and where that process was and maybe the rationale and why you'd like to do it.

Well, there's plenty I can tell you because there's a lot been disclosed in the 8-Ks. Look, we did a lot of diligence and you can kind of see -- you can read the e-mails, knock yourself out. You can see our offers, their counters and so forth. And look, what we think it made sense, at the end of the day, there are differences of opinion. And we felt like that we made a fair offer. We thought it would be a good combination. In the end, we wish them luck. I think they're going to end up being smaller. They almost have to be smaller in order to get their cash burn under control. And that's going to be good for us, ironically, but I think it's probably bad for them over time. But at the end of the day, that's what they wanted to do. And so we wish them luck.

Okay. Well, there's been a lot of name calling around the industry of low-margin airlines. We don't subscribe to that, but there is some veracity to the idea that the high-cost network airlines, which used to be lower margin are now the high-margin producers. You guys did make a little bit of money last year, but can you talk to the veracity of these claims at the low-cost model just doesn't work anymore?

Yes. Look, I think these are very self-serving, interesting commentary. Look, let's be clear. This business is supply and demand related. It's a commodity business, and there's 3 segments. The first segment is international. The second segment is premium. And the third segment is domestic. International has been fantastic, fantastic, right? They didn't overbuild widebodies. There's plenty of international demand. The dollar is making it cheaper to go places than it's ever been, right? So good for them. If you're leveraged to the international, United, Delta, you won the lottery. It's fantastic. Premium, again, benefits Delta, United, even American to a degree, people are paying for premium products in a way that they never had. In fact, shame on us as an industry, the hotels, we should've invested a long time ago. People pay big money to stay in a nicer hotel out of their own wallet. And so I think as the industry we figured out that they'll do that. The third one is domestic and especially non-premium domestic. Well, that supply and demand has been completely imbalanced, right? We have doubled -- if you include basic economy, low-cost, ultra-low-cost seats, we have doubled those seats in the last 5 years. If you had doubled international seats, do you think for a moment that we would be having this conversation about the business model is broken and network high cost is where it's at? Absolutely not. That would be a train wreck, if you would have doubled international capacity. So it's actually amazing that we made a little money with that backdrop. So now let's talk about this year. There -- and next year, especially, right? The backdrop for domestic non-premium has never been more bullish. In the second half of this year, you are going to actually have a contraction of capacity, non-premium domestic seats. And that's even before, I think [Audio Gap] than what they've got planned. I think Spirit is going to obviously cut more. So you're going to see even more supply come out. So I think you'll finally see the domestic nonpremium actually start to recover, and we're the biggest beneficiary. And that's in addition to all the other tailwinds that we have that are kind of in our control. And so I think we're best positioned for that leverage. And so yes, it's never been more bullish. I mean I don't remember last time, 10, 15 years ago, that you had non-premium domestic shrinking. When has that happened? So you know yields are going up. Margins are going up. And then you throw on all the things that we've done from a self-help perspective as well. And I think we should be well back in making good margins. In addition to that, we're going after that premium space. Later this year, by the end of this year, we will actually introduce first-class seating, and so we're going to get our fair share. I'm sure that I'll be accused like others in Southwest and others in JetBlue of adding more premium and oversupplying that market. It probably will hurt that market, right? You're going to get cheaper first class than you've ever gotten. Frontier will create a first-class seat that no one else will be able to make money at. But I'll be able to make money at it $400, $500 round trip. It will be half what you're paying on other people. And it will be 100% incremental to me because I'm taking the last most marginal seats that I barely get paid for on the plane, and I'm making the most profitable seats on the plane. So these are huge tailwinds for me, but it will hurt the premium. But I think the internationals, they're probably okay. And I think it's great. It's great to have network carriers be successful. But I think to say that our business model is broken is just foolish.

This conversation is great. And Barry, I want to focus on the long term, but I guess, first quarter, you guys guided pretty favorable unit revenue trends just given slower growth in your network and obviously, the industry backdrop. So that's still -- that outlook, is that still consistent with what you're seeing today? And how is that...

Yes. No, look, I mean we've got it to breakeven to a couple of pennies for first quarter, dollar for the year. We feel really good about it. I mean, I think if you just look at this week, speaking of 8-Ks and announcements. While this is terrible for the people involved, the decision of Southwest to actually cut management overhead 15%, I mean, this is a moment. If you're in this space, this is a moment. Seriously. Rakesh Gangwal is one of the smartest people in this business, right? He is now their Chairman, and there is clearly a new sheriff in town, right? And that is fantastic for the domestic industry, right? Because for those of you who haven't been a part of restructurings, I've done around a dozen of them over my career, been a part of a lot of them, some are including bankruptcies. Laying people off, okay, you can sit here and talk about it, but it is a big deal. It's emotionally a big deal to get rid of sometimes your friends, your family, like this is real hardship on these people. So once you make that decision, well, hell, cutting capacity become simple, right? Southwest could cut 10% of their capacity and not lose an O&D. Do they really need to have 60 flights a day from the L.A. Basin to Vegas? They can probably have 50 and keep 100% of the revenue. And Rakesh Gangwal knows that. And so if they're willing to cut that kind of capacity -- cut that kind of workforce, there's nothing that's not on the table. And so I think that is really good for the industry. I think it's good for Southwest, but I think it will ultimately be great for the industry. And I think it gets back to that backdrop of, you're going to see domestic non-premium seats continue to go down. And so I think it's just a great time to be in the industry, and I think it's never had this kind of bullish backdrop in the last 5 to 10 years.

And how does the new Frontier strategy play into all this?

So look, I think the new [Audio Gap] making it very simple to have all the options that you want. [Audio Gap] We're hoping to make this even better this year. We've got a new app that's rolling out now. I think it's out for -- the Android is out. I think Apple comes out next week. So that's going to make it even better. We hope to make it cleaner and more efficient to find those selections you want. And so that's been good on the conversion, but we've also got the premium products. We introduced the Upfront Plus. We were able to get that to 70% paid within the first 6 months, which is actually amazing really, to get our premium product up that fast, which is what gave us the confidence to go with first class. And then on the loyalty side, it's just been huge. I mean, we announced publicly that we jumped our credit card applications 25% last quarter. 25% on basically flat capacity and spend went up 10%, all because we announced that they would be able to upgrade to first class in a year from now. I mean imagine the leverage of that. So we're really excited. I mean we're at $2.50 today in revenue per passenger for loyalty. The industry is like $30. We think that we could easily get that up to $10 within a few years. I mean this is a huge margin accretion. So we're really excited about the new Frontier, but we don't really have the benefits yet. We're starting to see the slow benefits of it. But the big change that kind of popped us was really the network changes that we made in the fourth quarter.

Can you talk to those and how they're performing now?

Yes. So that's done really well. We did the 2, 3, 6. So kind of trimming that Tuesday, Wednesday, Saturday, really kind of took place in October, November. And so that was highly beneficial. Also, kind of the network changes that we made last summer kind of started Memorial Day-ish time frame was fully baked by July. Those are starting to mature a little bit, but you really won't get the full maturity until this summer. But the 2, 3, 6 has been fantastic. And the question is, we just keep looking at it. I mean, we as an industry, not just Frontier, have become much more variable, right? The variable costs are a greater percentage of the total cost now. And so at the end of the day, if I've got a pilot or flight attendant, I've got gas, it all costs the same on a Tuesday that it does on a Thursday, but I get paid 50% more to go on a Thursday. So why should I even -- I mean, why should I ever try to fly so much on Tuesday, Wednesday. And that's a change kind of post COVID. It was something that hit our industry because we were a high utilization. We tried for 2 years. And at the end of the day, people kept going back to the office, but they haven't quite changed their habits back to the old days. And so at the end of the day, like it's probably the biggest thing we did in the fourth quarter and you get the benefit of that 3 more quarters this year. So we don't have it fully optimized yet. I think we could probably trend more on it and be more margin accretive, but we'll see. We need to see how the seasons go.

Well, if there's any questions from the audience, go ahead and raise your hand, we'll get you a mic. But maybe I'll ask it. When you say non-premium seats in the back half of the year, you expect that to go down, is that in anticipation that some of these airlines are going to have to reduce from where they are today?

No, I'm just looking right now at what Southwest is going to be doing with cutting theirs. I'm looking at what Spirit's already loaded. I'm looking at our own -- like we're pulling some seats out as well. I mean, if you just look at the announced changes, and I think it's going to be lower. But I think it will actually accelerate. I mean all these airlines, I mean, capacity discipline is back. I mean if you -- I mean, we haven't seen all the numbers yet, but I mean, people are talking and saying and doing the right things now.

Where do you expect your capacity growth to be this year?

Well, we haven't announced that. We announced that we're working on making a buck. And I will tell you, I'm more focused on growing earnings than I am my capacity. And we will change the capacity to ensure that that's true.

And where is your growth at right now? It's close to flat, right?

Yes, we're in the low single digits.

Okay. Mark, maybe along those lines, how does this impact your ability to keep unit costs low?

Yes. So from a cost standpoint, we adjusted our network, simplified our network in '24. We had a target of getting to an annual run rate of $150 million of cost savings by the end of '24 going into '25. We're positioned to realize that in '25. And when you look at our cost advantage, our cost advantage in '23 was 41%. That cost advantage grew to 48% in '24. And so we've made a lot of strides. And those strides were made with the commercial initiatives that have been in progress that Barry highlighted. So with the lower utilization on the off-peak days, with some of the shift to high revenue pool stations and the impact that focused on unit cost and keeping our [Audio Gap] percent.

When you guys did defer some aircraft deliveries, right? So what's the expectation for deliveries in '25?

So we didn't actually defer them. Okay. Just to be clear, we didn't defer them, per se. We actually just codified and made public the deferrals that Airbus, their delays. So it showed -- it looks like a deferral, but we didn't actually defer them. I mean, they would take a deferral, but those -- we just really just lined up with where their production is finally ending up. So -- and the good news is, I think they finally understand their supply chain challenges and hopefully, we don't see the disruption that we've seen in the past.

And from a GTF engine perspective, you guys are in the newer fleet, but is that going to be problematic in the next few years?

We got them much later. So we just took them in the last 2 years. We don't have any AOGs today. And we kind of have a different program in different engines. I don't think we have anywhere near the challenges that the rest of the industry has in that regard.

Okay. And then where are you in regards to a new pilot contract?

So look, we -- ours became amendable last year. They applied for mediation. Look, I mean you sign up for mediation. It's a multiyear event. I think that we're watching all the things happening in Washington. We're worried this could delay it. But it is what it is. I think the good news is it's enabled everybody to kind of settle down. We don't have the pilot shortage we had. I mean that has completely reversed. We're seeing where it was 1,500 to 2,000 hour, we're seeing 2,500 to 3,000 hour pilots now. We're starting to get to the point where we can almost demand you have flown for the regionals before you come. So I think that we've seen that landscape change a lot. But the current -- I mean, we could guess, but I suspect it's going to take still a while to get through the mediation process.

There will be some costs with that, I assume, but...

Oh, sure. Oh, sure. There'll be some costs. But as we've discussed, I mean, we got to a 48% cost advantage. And as we've said, with all the things we have in the hopper and the tailwinds, we expect to maintain a 40% plus cost advantage with the new pilot deal.

Okay. What are going to be some potential offsets to that, that's going to let you maintain that gap?

Well, one of its -- kind of the simplification that we did last year is actually helping. The big thing now, we just opened a ground loading facility in Denver, which is 14 positions. It's kind of our -- we've done this before in other cities, but now we're starting to do it at scale. So one of the things that we're going to do over the next few years is we're going to try to get as close to 100% ground loading as possible. And if you look at Wiz, you look at Ryanair, you look at other ULCCs outside the United States, none of them use Jet Bridge. A Jet Bridge is just the kiss of death when you're trying to turn an airplane really, really fast. If you have front and rear boarding, you literally double the speed that people get on and off the plane. And so this is a huge cost savings opportunity. And again, back to -- I don't want to fly high utilization on Tuesday, Wednesday, but I want to fly really high utilization on Thursday, Friday, Sunday, Monday. And by getting rid of ground time, that's going to enable us to fly even more on those peak days and get more out of the aircraft. So that is going to lower our cost, but also improve our revenues as well. So I think we've got plenty kind of in the hopper, if you will, to make sure that we've got a trajectory that will manage down any labor inflation.

What's your outlook this summer for ATC, system delays, weather disruptions?

Well, look, I mean, we have a new administration and kind of a new outlook, I guess. I saw Secretary Duffy the other day talking about -- he was talking about raising the retirement age from 56 to he didn't say what. But pilots are 65. If you can fly a plane through 65, surely, you could be the controller too at 65. So I think that is huge, right? I mean -- and I don't know how many you can get back on property that are already trained, but that would be a great opportunity. Ultimately, I think they're going to do some things to mitigate and hopefully manage that. I think President's Day just showed them they do need to watch places like Florida and certain things on peak holiday periods because they need to restrict the general aviation traffic. But as soon as they do that, I think you'll see a lot of the ATC problems go away. But they are short staffed, and then hopefully, they've got some pragmatic approaches to it. So we'll see. Ultimately, I think the big thing and could be a huge catalyst to margins for everybody, and fuel burn and reliability and a better experience for customers. If we can just modernize aircraft control, get to clear direct, you can save 15 to 20 minutes per flight. I mean just start thinking about the math of that. People would pay the same, but they would get there 15 to 20 minutes faster. We would spend 15 to 20 minutes less expense, right? We would burn less gas, we would have less labor costs to produce the same seat. So our margins go up, consumer gets there faster and you have less disruption because now you won't have as many challenges with air traffic control delays, which end up leading the cancellations. So I don't know. I think there's real upside with the vision that the administration has with regard to ATC.

I don't know if I'm going to hold my breath because I've heard about ATC modernization, my whole career. We're still talking.

I've heard about it. But now we're actually talking about doing it. So I think that's the difference. I'm with you. We've all seen the studies. We all know what it's worth, but I'm telling you it's now going to get done is what it looks like.

Okay. I guess, Barry, what's the most exciting for you and -- the biggest lever to get to that $1 in earnings this year.

I think the biggest thing we've got to do is just wrap the calendar. So we made the big change to the network kind of like, like I said, like Memorial Day to Fourth of July. By mid-July, it was in full motion. And so if you take 20% incremental brand new flying, it was actually 22%, and you add 35% RASM because that's the diem we took to put it into new flying. That's 7%. It will start feathering in around, like I said, around Memorial Day on a year-over-year basis. By Q3, it's kind of the full quarter. And so if you just take that and kind of annualize what you saw in the fourth quarter, plus the network maturity, you automatically get to double-digit margins in Q3. That's how you get there. I mean it's -- this isn't hard. And then you couple that with all of our other tailwinds. That's even before first class. It's before the full benefit that, that gives to loyalty. That's before all these other things. And so that's why we feel pretty good about pretty much summer and beyond.

And I know we just talked about the order book and how that's been moved a little bit, but you still have a lot of aircraft on order long term. Has anything that you've seen in the last few years changed the long-term perspective that there's a lot of markets out there that could benefit from...

Yes, I think there's going to be -- I think there's a lot of markets. And I think that our cost advantage is going to enable us to grow. And quite honestly, I think we're going to see our -- one of our largest competitors is going to contract. So that's going to make a pretty big opportunity for us.

And you touched on it earlier, but how does loyalty play into this? And how do you get that revenue from $2 or $3 per passenger to the $10?

At the end of the day, we just need more credit cards and then we need them to spend more. And so it's great that we've seen the pop at 20%, 25% jump in credit card acquisitions. But right now, we're kind of their fourth or fifth card in their wallet. And so that's why it was exciting to see that just the people that already had the card, making the announcement of first class. The first month, they started to spend 10% more. That's just amazing. And so imagine when they can actually upgrade the first class, I mean, that's for the promise of way in the future. So look, we think that this is going to be massively accretive to our loyalty program. I mean it's what everybody really wants. I mean look at what the legacies have done with this. I mean -- and the power of sitting in first class is very, very powerful. So that is one of the main drivers that we can do. The big thing that we're missing then at that point is some type of international access and some type of alliance, which we're going to work on that over the next 2 years, as well.

Okay. Can we queue up question number 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?

Larger M&A or...

All right. Can we go to question number 5, please?

Well, hang on. I don't have any real debt. So people look at our leverage, but we don't have any real debt because it's all aircraft lease. So I would -- I guess I need to buy some more according to these people.

In your opinion, what multiple of 2025 earnings should Frontier trade? All right. At least there's a couple of people out there saying higher than 21, which would be a pretty good outcome. And then if we could go to question...

I didn't know Mark could answer from up here this.

Question 6. What do you see as the most significant share price headwind for Frontier: core growth, margin performance, capital deployment or execution? Mark, along those lines. You touched on it for a second, but you guys did have a pretty big pivot in the way you operate the network, trying to be out and back, was it 80% of flights to crew bases. How has that performed so far? I think you mentioned $150 million of run rate savings.

Yes. No, exactly. Yes. So our target was by June. So keep in mind, in '23, we had about 1/3 of our flying was out and back, returning metal to base. Our target for June of '24 was to get to 80%. We got to 80%, and that is a key underpinning to the cost savings that I touched on. And as part of that simplification, so we leveraged our crew bases, it gave you efficiency across our crew, our non-crew reduced travel expenses, gave us better touch time with maintenance. And at the end of the day, with that simplification allows for better recoverability.

Okay. And how do we think about the other expense line item, too? Because that does move around a lot when you do take a delivery and the sale leaseback. How should that be trending throughout 2025?

Yes. So when you think about 2025, right, so it's a function of the aircraft that we're taking delivery of. So we had 23 deliveries in '24. They were all A321s. When you look at '25, we have 21 aircraft scheduled for delivery, 8 of those are 320s. So you've got a little bit less in the way of inductions and a little bit of a shift in mix. And so I think that's the new one year-over-year in the sale leaseback line.

Okay. Well, gentlemen, we only have a couple of minutes left. And Barry, I just kind of want to give you the floor here because it does sound like the industry is at a pivot point here towards a lot of change and probably favorably for your business. But looking over the next 4 years of this administration, are we going to see significant changes in the industry, especially just thinking through an M&A perspective? And...

Look, I think this administration changes a lot of things, right? I mean, I think it's going to change. It could be very good for ATC. I think with the FAA -- look, if they're going to have to do it with less headcount, you're going to have to be smarter. Right? Don't work harder work smarter. I think you can become safer because they prioritize the things that are good for that. I think on the DOT side, in general, we can stop beating the dead horse of ancillaries and all these kinds of things. So we focus on things that really matter, like I said, and let's focus on safety. I think with regard to the DOJ and M&A, yes, I mean, I think you've got probably several years to catch up. I think the industry is ripe for M&A. You've got a bunch of people that have had some struggles. You've got some excess capacity in pockets of the country. And I think you could do things that you couldn't normally do. I mean this conference and next door, I mean everybody is talking about JetBlue this week. I mean I think that e-mail might have been a joke or something that somebody posted. But the truth is, is, yes, look, I mean I think everybody other than maybe Delta and United could buy JetBlue, right? I mean I think Southwest can get away with it. American can get away with it. It solves a lot of problems internationally with JFK for American. I mean that would force in Alaska. So I mean, yes, there's probably something there. And I think if you want to do M&A, you've got a green light. You should do it now. And I think the industry is ready for it. Like I said, I think capacity discipline is coming in. I think you've got a lot of focus on margins. And I think that consolidation is an obvious answer to help make that happen. And again, back to -- if you're not going to do it now and then when you're going to do it, why would you take risk a few years from now on another administration?

But I guess specific to you guys, you'll be watching your competitor exit bankruptcy pretty closely, I guess.

We'll see. We'll see. Look, I mean, obviously, we're open to M&A. You guys can read all the 8-Ks. So we are pretty focused on it. We think it would be a good thing. We think it will be good for consumers. We think it would be good for employees. We think it will be good for the industry overall, just didn't get that one done.

Gentlemen, this was a great session. Barry, you're always fired up, and I appreciate the bullish outlook here.

Thanks for having us.

Thank you, guys.

Yes. Thanks.

Thanks for coming, everybody.