Frontier Group Holdings, Inc. ($ULCC)

Happy St. Patrick's Day. Yes. All right, folks, moving right along with Frontier Airlines, Jimmy Dempsey. Actually, I was going to [ set ] you as the most newly appointed airline executive this year, and there always seems to be some change right before our conference. And then after you assume the role, Delta reconstituted their bench. So there's been a lot of managerial change, but this is the first time I've welcomed you up here as a CEO. Also joined by David Erdman, who runs Investor Relations in the front row. You don't have any prepared boiler plate remarks that you need to be. Okay. All right. I'll admit I'm a little nervous because the last time I saw Jimmy just last week, he was being firesided by Steve Hazy, and I know Steve Hazy. So I'll do my best.

Well, best of luck. I wish you well...

Thank you very much. So I want to call on your Ryanair background for a moment because I'd be interested in hearing what you think helps explain the incredible structural profitability of that franchise and to a lesser extent, that business model in Europe and sort of compare and contrast that with some of the challenges that the ultra-low-cost carrier model in the United States have had? Because if I better understand your perception of those differences, it helps me frame some of the questions that are admittedly will be more unique to Frontier.

Yes. Look, thank you guys for hosting us here today. Look, Ryanair is a phenomenal business. I was in Ryanair for nearly 11 years. It is a machine that not only has grown quite meaningfully across Europe, it's done at a very successful profitable way. There's one key difference between the United States and Europe. There is obviously country borders and language barriers across Europe that don't exist in here in the States, and you have a very different legacy airline structure than you have in Europe. But the one big difference is you do not have credit card loyalty programs in Europe like you have here. I think that, that has changed the dynamic quite considerably in terms of how ULCCs in the U.S. compete against legacy airlines. And you've certainly seen that post COVID, where a lot of the legacy airlines have performed very, very well. Their loyalty programs or credit card programs have been phenomenally successful over the last number of years. That also gives us an opportunity. We have a very immature loyalty program. We've had a credit card program for many years. We haven't invested in it as much as we should. And look, we shouldn't be ashamed to say we can learn from what the legacies have done in terms of how they have attracted loyalty to their business. We're clearly much smaller than all the legacy airlines. And we'll continue to be significantly smaller than the legacy airlines for a long period of time. But that doesn't mean we can't improve the performance of our loyalty program and invest quite heavily in it. You've seen that over the last 2 years or so where we've actually focused quite heavily on the areas that we think will actually drive cardholder retention, loyalty into the business. And we've seen substantial improvements in our cash flows driven from loyalty. In Q4, actually, we had a 30% improvement in cash flows off a very relatively low base. But that puts huge leverage in the business where you can actually leverage the loyalty program for improved cash flows. And it's a key component of the 4 areas that I want to focus on as I transferred into the CEO role, where we want to rightsize our fleet, which is very, very important to us. We put a deal in place with AerCap and with -- separately with Airbus in order to rightsize the fleet to the number of aircraft that we actually can support in the airline while still growing the airline, but growing at a much more modest pace. We're moving the airline from a growth rate of well over 20% to less than half of that, somewhere in the high single digits. And we think that creates a much more stable environment. We're obviously focused on costs, as you mentioned, Ryanair. That is an area that I think is very important to create that discipline in the airline where we're chasing unit cost savings and making the airline efficient and productive. And I think that's fundamentally important. And so we announced a $200 million cost saving plan going into 2027. We get half of that from reducing rent from the deal we did with AerCap, which is extremely helpful to the business. And then we're focused on 2 areas that we think -- that I believe that are very important to the airline, creating a stable revenue base through loyalty and repeat customers, but also improving the customer service elements of the airline. So on-time performance and completion factor and focusing on those areas, so that we actually give our customers an opportunity to be loyal to us and get repeat travelers. And I think that's the big difference between here and Europe is that loyalty is very highly valued in the United States as the credit card programs.

Do you think there's a sort of a demographic difference as well? I mean one thing that Mark Streeter and I have noticed is that our colleagues at JPMorgan in London and elsewhere in Europe, just fly discount carriers with Infinity. I mean it's just how they get around, whereas I think there's less patronage of your business model here in the United States. Is that just a function of Ryanair and to a lesser extent, easyJet being in the channels where people want to go? Or is there just sort of a different acceptance of the product?

I think the product is much more widely accepted, particularly in London, right, where you're probably referring to. We're not in New York as big as Ryanair, say is in London. And so there is a disconnect there in terms of your sample size. Look, I just think that there's a shorter sector in Europe. The average flight distance is much shorter. The opportunity to travel to multiple different cities and leisure travel is different in Europe. You have U.K. and Ireland, which is 2 effectively island nations flying to Europe. You have opportunities to drive here on shorter sectors that are different to Europe. And then you have -- in here, you have 4 very large domestic airlines in the U.S. And I think that marketplace is different. And so Frontier performed phenomenally well pre-COVID. There's no doubt that we have struggled post-COVID to bring the airline back to a sustainable profitable place. That's where we're focused on today. And the key difference, in my opinion, is around loyalty and bringing repeat customers back into the business. The credit card programs and the loyalty to your credit card program is a fundamental difference here to Europe. I think that is clear.

Yes. And the reason I wanted to explore this is because when you made the announcement on the earnings call, restoring capacity in the off-peak, really, really pushing aircraft utilization, all of which have been core tenets of the ultra-low-cost carrier model over time, it did strike me as sort of Ryanair [ esc ] in execution, which is why I was left wondering this. Did you consider at any point the sort of alternative iteration of ultra-low-cost flying, which -- I mean, just to sort of paraphrase some country or Allegiant is just only fly very limited schedules just when you know you can make money. I mean, was that an internal debate? Or were you just firmly in the camp that you ultimately chose?

Well, I come firmly from the camp that costs matter, right? And keeping your unit costs low absolutely are fundamentally important to running a good airline irrespective of the type of airline you are. I think it's different in the United States in terms of the field that we play on, and we've got to adapt our business model for that. So I think if you compartmentalize the ULCC business model, the costs matter, but also in the United States, loyalty, repeat customers, you're flying longer stages. And certainly, the lessons that we've learned in the last couple of years is that the legacy airlines have actually deployed considerable volume into basic economy, and we've recognized that. But also, they've done phenomenally well in terms of premium revenue that they've generated. And we can copy that. And so we're bringing -- we brought a product on board in the last 2 years called UpFront Plus, which is effectively blocking the middle seat of the aircraft in the front 2 rows. The load factors on that have been phenomenally good. The revenue generated off those seats have been phenomenally good. That's anathema to a ULCC in terms of removing a middle seat on an aircraft. And that drove us to actually introducing first-class seat on board the aircraft. And so you'll have the front 2 rows with first-class seats by the end of this year. And then the big product gap that we have, and we mentioned this on our earnings call, we're working on is actually putting connectivity onto the aircraft. That's a significant product gap. And people don't choose Ryanair. We're not in their decision set -- or sorry, the Frontier. We're not in their decision set if we don't have connectivity. And so we'll introduce that sometime in 2027. And we think that closes the product gap that we have between us and a lot of our peers in the industry. And really, what I'm trying to do is focus the airline on costs and productivity, whilst also encouraging customers to recognize the value that we provide and ensure that we provide a good value to them so that they come back for more. And that's where our focus is because slowing the growth in the airline creates a more stable revenue base, improving the customer appreciation of the airline and the product that we have is very important to having that repeat customer come back for more. And that's something that we're working very hard on at the moment. And that will take time. That will take a year to 2 years in order to move the airline from where it is today into a place where our on-time performance has improved. Our cancellation rate has improved. The performance of the airline, the core tenets of the airline are in a very, very good place, so that we can actually grow the airline again in 2028 and beyond.

So I don't know if you were in the room when we were talking at JetBlue a few minutes ago, but one observation that I made is that with premium products, the airline industry used to give it away and then figured out how to monetize it over time. Presumably, you'd like to skip the giving away phase and go straight to monetization. So curious about your thoughts on that. And then, again, not saying JetBlue is right or Frontier is right, but they've already decided to go with 3 or 4 rows, you're at 2. How do we think about the evolution of the product and hopefully being able to monetize it from day 1?

Look, I mean, we're putting 2 rows in. If 2 rows sell like gangbusters and it makes sense to change another row, we'll look at that and make a decision at that time. It will be based on data. I think it's important for us to look at the data that exists and see, okay, is that selling? It encourages you to do it. You can see it from UpFront Plus. We've migrated from UpFront Plus now to first-class seats at the end of this year.

When you turned on UpFront plus, right? it...

Yes. No. But you will have an opportunity to upgrade -- you have an opportunity to upgrade into Upfront Plus today from our loyalty program, and you'll continue to do that. But obviously, our objective is to sell those seats, not give them away for free. We're not going to sell 100% of those seats. And so there's always going to be some areas that you can actually upgrade some people from the loyalty program to give them value. Mean the one difference between Frontier and the rest of the industry from a loyalty perspective is aspirational travel and ability to upgrade. And I think that's something that we're working on trying to close that gap. That's one of the reasons why your credit card program won't necessarily go from $4 a passenger to $35 a passenger. But if it goes to double digits over a reasonable period of time, it gives the airline huge leverage in terms of monetizing the loyalty program and bringing the airline back to sustained profitability.

Okay. So one thing I probably should have started at before -- started with before going like a full Ryanair, discuss the first quarter because you did provide some additional color this morning. If you could just kind of rehash that for the sake of folks in the audience.

Yes. We updated our guide today, clearly to reflect the impact of higher oil prices from the Iranian conflict. And so we updated our fuel guidance, but also our revenue guidance. What we've seen in the airline over the last 2 or 3 or 4 months really is progressively improved revenue performance in the business. We've moved our pricing strategy to a much more disciplined set pricing strategy, which we think is actually making a significant difference. We talked about this on our earnings call a few weeks ago, where we think about half the improvement in revenue is to do with actions that we have taken ourselves. The other half of the improvement in revenue is linked to the overall supply-demand dynamic that exists in the industry today. And so today, we updated our RASM to stage length adjusted 15% improvement or I think it was like mid-single teens. It's around 15% improvement in RASM and stage length adjusted RASM today. That's a phenomenal performance and turnaround for the airline from that discipline. One of the things that we're actually seeing is we've moved into -- we've had NDC for a while. We haven't moved the big OTAs into NDC. And so you're now seeing Frontier display quite clearly on the OTAs, our fare plus our all-in pricing, and that's allowing us to sell into that. And we're seeing really strong attachment to our bundles through the OTAs. That's giving us a boost in terms of revenue. But just our core discipline around revenue management has improved quite significantly and is driving an outsized improvement in unit revenues, which we're really, really happy about.

And how should we be thinking about fuel price recovery for Frontier? Because where I sit, there are sort of 2 potentially opposing phenomenon. On one end, I do think that you cater to a demographic that might be experiencing some more spending pain given the price that they're paying at the pump. On the other hand, my understanding is that you've got a steeper-than-average booking curve because you really do fill up a little bit later than some of your competitors, certainly the ones with large international networks since those tend to book very far out. So maybe your demographic is hurting a little bit more than Delta's. But on the other hand, you've got this steeper booking curve, you take a larger percentage inside of 30 days. So maybe that helps the fuel recovery. How do those 2 -- one, do you agree with the premise? And if you do, how do those 2 observations reconcile? Well, firstly, I disagree if you think I'm wrong because that's what makes it.

Well, it's interesting, right, because no one's right or wrong at the moment. We're actually all experiencing this at the moment and going through what's happening with the industry in terms of fare increases, trying to pass on higher oil prices. I mean you got to start from where we sit, right? Our fuel burn per passenger is 40% below our peer set in the industry. So we start from a better place on a per passenger basis given the high-density business model we have and the new aircraft -- the predominance of new aircraft in the fleet. So that's one very strong place. We obviously are seeing fare increases across the industry at the moment, and we're following suit. I think that's constructive to the industry that you're seeing the supply-demand dynamic that exists is allowing airlines to pass on higher fares or higher fuel prices through higher fares. That's very, very constructive. But we're also seeing things that are different in our business, like our Q1 guide update was largely set prior to the fuel price increase, right? And so you're seeing the underlying business perform very, very well in today's environment. And then you see -- you have a jump in oil prices and a change in the fare management across the industry. And you're seeing that across the next 2 or 3 months. And really, we haven't seen volumes skip a beat in terms of bookings over the last 2 weeks since the crisis -- the oil crisis started and which is very constructive into the business. And it's a very, very comforting fact that's happening in the industry. And so we'll watch it. We'll see how this develops over the next couple of months because like we've got to plan our business on the base that there's going to be elevated fuel for a while. We don't know how high that fuel price is. And we'll make decisions around the business and what we do based on how high and elevated that oil price is and what the industry is capable of doing in terms of passing that on. But our starting point is really, really good.

It looks like Mark Streeter has a question from the front row.

Jimmy, when you answered Jamie's initial question on Ryanair versus ultra-low-cost carriers in the U.S., I thought you might throw in airport costs, landing fees, cost per passenger and how different it is in Europe versus the U.S. And we just had JetBlue on stage pointing out complaining about LaGuardia costs. We had a dinner with Delta last night talking about projected cost in -- at LAX, for example, projected to double over the next couple of years. So does that force you -- when you look at the network and think about Frontier of the future, does that force you more into a sort of mid-continent sort of focused network away from the coast because the coastal airports are so expensive? Or is that reading too much into sort of where the U.S. market is headed?

I mean not necessarily. And irrespective of whether it's Ryanair or Frontier or any airline, you look at the profitability of the route and the revenue performance overcoming costs. And so I mean, if we can overcome the airport cost that's rising through higher fares and pass it on, we'll obviously operate from that airport. We are clearly very focused on keeping our costs low, but we're more focused on making the airline profitable and generating higher profitability in the airline. And that's where our focus is. So irrespective of the location. I think it's very hard in the United States to avoid the 2 coasts given the population densities that exist. And so I think it would be I think it would be negative to the business to say, okay, we'll just exit those 2 areas because their airport charges are high. I think there's large population densities. There's also large spending power. And so we'll watch that balance and see what the best network to deploy is for the airline. I couldn't see a scenario that has us not in those areas in the business.

So one of the slides that we had up yesterday, I honestly don't remember which panel it was, but it highlighted your growth in Atlanta. JFK appears to have been an experiment that might not have achieved your return hurdles, however, you want to put it. Southwest made a run, obviously, ever since the AirTrain acquisition. And I would say through in the towel in Atlanta, why is it going to work for Frontier?

Well, I mean, we...

A pretty high level of operations that you have planned.

Yes, it's one of our largest bases in the network. I mean we see an opportunity that has presented itself where Southwest has reduced its capacity considerably and as has Spirit. And so we've effectively replaced not all of that capacity, but some of that capacity to move it to one of the higher bases in terms of volume in our business. It makes absolute sense commercially. The performance that we're seeing in the airport is very strong. And so we'll continue to manage that. The airport itself is quite constrained in terms of capacity. And so it's -- I would be surprised if the growth rate in Atlanta continues at the pace it's been in the last 2 years, really, we're getting an opportunity to grow the airport because other airlines are shrinking in that location. We'll take advantage of things like that as they occur across across the U.S. We're doing the same in Vegas, where Spirit has reduced capacity quite considerably. We've not replaced all their capacity, but we've added some capacity into that marketplace, and that market is doing very well. And what we see is probably increased capacity, modest capacity growth over time in that marketplace. So we'll just react to structural change that exists across the industry and see if there's opportunities to grow in certain airports. Take Denver as an example. We haven't grown Denver in 10 years. And we're in the sort of 60 to 75 departures a day zone in Denver, but we operate very successfully in Denver given the history of the airline in that marketplace. If opportunities exist to grow that market, we look at it, but we haven't seen that in the last 10 years.

And since you brought Spirit up, and you may not have these figures committed to memory, but could you just discuss sort of the overlap trajectory over time where that now stands today? And then, of course, Spirit, I mean, we're not here to debate the potential for them to emerge from bankruptcy, but the latest plan is a further 17% capacity reduction, '27 over '26. How does that play into Frontier's fortunes?

Look, Spirit has gone from over 200 aircraft to -- they will end up in 75 to 80 aircraft zone. I mean I think the big impact to Frontier is you had 2 low-cost carriers or ULCCs butting heads for quite some time on between 45% and 50% of their capacity. You've now seen that capacity reduce, that overlap capacity reduced to in the less than 30% zone in that sort of area code. But largely that overlap is on large markets that exist that both airlines are relatively small in comparison to the other airlines. And so I think the structural change and benefit to Frontier has happened. You're seeing it certainly in the West of the United States, where Spirit historically was connecting a lot of traffic through Vegas and offering heavily discounted fares all across the West. You've seen them deconstruct that network quite considerably. And so we get the benefit of that. And you're seeing part of that probably in the RASM improvements that we have that's outsized in comparison to the industry. I think at 75 aircraft, they're largely in markets that don't overlap with us other than on major volume routes, which we don't see as being an impact to our RASM. And so it is what it is. We wish them well and see how they perform as they emerge from bankruptcy. We're very focused on fixing our business, putting the airline on to a sustainable profitable path. That's where our focus is. So I'm not really up to speed as much as probably you are in terms of where Spirit is today.

Yes. Back to the utilization decision that you reached, something that your larger competitors have shared with me. I don't need to name names, and I'm sure you've heard this before. But when I've discussed Frontier with others, what has often been expressed to me is, well, in low-frequency markets or where they don't have a consistent day of the week schedule, they don't really get on our nerves. But if they are running high frequency peak and off -- if there's a consistent high utilization schedule, that's when we kind of sit up and take notice of them. One, I'm curious if that's been your competitive experience over the years. But two, if that's accurate, as part of the high utilization plan, did you build any OA yield aggression into your forecast? I mean it does seem that they compete more aggressively with you, the more consistently high frequency you are.

I mean, look, we are filling out a network that exists at the moment as opposed to adding like 3 to 5 times a day on specific routes. Most of the utilization flying is filling that network out on a Tuesday, Wednesday and Saturday, where capacity came down. So it's effectively the existing network, but with slightly more frequency by day of week as opposed to multiple times per day. We think that that's attractive for our business to encourage loyalty into our business and repeat customers. We think we pushed away some customers in the last 2 years by dropping the frequency on off-peak days of the week. And so we think this is a positive change for the business. We'll run our business in terms of frequency where we see opportunities for higher frequency. We're typically a very low frequency business model. You can look at our route network out of most of the major bases that we have. It's not a multi-frequency daily departure route network. But if frequency is needed in the business, we'll add it. We'll do it based on what we see in terms of the marketplace.

Okay. Fair enough. I think Mark has another one.

Jamie and I had some spirited debates with your predecessor about sale-leaseback accounting and the appropriateness of it all and so forth. But more importantly, it really was the negative impact, if you will, from the reliance on sale leasebacks in terms of how you were growing your business and network decisions and so forth. You seem to have come in with a change of thought regarding that. So maybe you could just explain that a little bit more and sort of how you're thinking about the previous reliance on those gains and how that sort of impacts how you're thinking about running the airline?

I mean I think there's 2 separate issues, right? I think sale and leasebacks in isolation are pretty good. It's a very good structure to -- for a growing airline to use in order to put the business in a position where you don't have a big capital expenditure at the point of purchase of a brand-new aircraft, right? What I don't like about the sale and leaseback gains themselves is the accounting that exists here in the U.S. where you take the gain straight upfront. I think that -- that's a U.S. GAAP issue that previous to 2018, you spread the gain over the life of the asset in your fleet. I think that was a much better accounting tool than what exists today in the industry. And so -- so that's my preference. If you separate that from the underlying business, the underlying business needs to make money. And so I would agree with you on that the underlying business needs to generate cash flow and make money. And that's why we're very focused on managing our growth rate, stabilizing our revenue base and lowering our costs. Those 3 things are very, very important in terms of bringing the airline back to profitability. We'll continue to do sale and leasebacks in the future when we deliver aircraft in '28, '29, '30. We may have a better blend in terms of on-balance sheet and off-balance sheet financing in the airline. But fundamentally, what we're focused on is generating cash flow within the airline itself from an operating perspective as opposed to sale and leaseback gains. And sale and leaseback gains will be what they are when we deliver aircraft.

We would agree with that approach.

I have a question in the back.

As a follow-on to that question, I'm curious if -- what do you guys think, if at all, around the pace of lessor consolidation? Is that on your radar? And how do you think about that?

I mean, look, consolidation happens in every industry. We actually haven't seen an impact in terms of pricing yet from consolidation. We have quite a broad spectrum of leasing companies in our portfolio, and we wish them all well with their consolidation, but it doesn't impact our business.

On the topic of lessors, clearly, the changes with AerCap, the changes with Airbus are significant profit drivers for 2026. How do we think about margin expansion in 2027 as we anniversary the fleet changes that you've announced for this year?

Look, we want to bring...

Aside from the macro.

Obviously. We haven't set targets, multiyear targets into the business. It's something we'll consider as we progress through this transformation program that we're putting in place. The objective is clearly to bring the airline back to sustainable profitability and cash flow generation. We believe we're on a very, very strong track to do that. You can see it in the RASM numbers that we've published today that the constructive supply-demand dynamic that exists today and our performance within that is very constructive to bring the airline back to profitability. We'll see where fuel prices go. It is what it is in terms of fuel prices and how elevated they will be and for how long they will be elevated. And we'll adapt our business to adjust to that. I think having the airline with the same fleet at the beginning of 2026 with effectively around the same fleet at the end of 2027. So effectively 2 years where we're bringing productivity into the airline by using our assets, but not growing the shell count in the airline. I think that makes a huge difference to the business, and it creates more stability in terms of revenue production and should bring the airline back to reasonable profitability in the next year to 2 years.

Current fuel prices, though, assuming no knock-on impact to the U.S. consumer, profitability in 2026 seems like a stretch?

I don't know, we'll see. I mean we're obviously, like every other airline, giving you an update today in terms of where the marketplace is for fuel. It's very constructive, the ability for airlines today to pass on higher oil prices. I really don't know where oil prices go in the next month, 2 months or 6 months. And we'll adapt our business from what we see and judge. Like we've got 2 hurdles in our business, right? We set our schedule 6 to 8 months out before we hire -- if we're growing the airline and hire pilots. And then about 6 to 8 weeks out, we will determine, is that flying right before we actually send it to crew to do the crew pairings for the airline. Those 2 hurdles are important. And so we've already hired the pilots through the next 6 months. If we were to adjust the capacity in the airline, it's in the fourth quarter at this point. And actually, what we're seeing in terms of bookings through off-peak April and May is very constructive at the moment. And so the decision at the moment is just to wait and see and continue with our capacity deployment plans right now and see how high oil prices are and whether we're passing them on in full or the large majority of them will determine what we do in terms of capacity in the latter parts of this year.

I'm really glad you made it. I really appreciate it, Jimmy.

Thanks.