Welcomed Bobby Schroeder as the new Chief Commercial Officer, bringing extensive industry experience to Frontier.
Financial Highlights
Reported an adjusted pretax loss margin of 2.8%, outperforming guidance due to better cost and revenue performance.
Achieved a cost advantage of 42% compared to the industry on a trailing 12-month basis.
Target of 80% out-and-back flying by June to achieve $200 million annual run rate cost savings.
Reaffirmed adjusted CASM ex fuel reduction guidance of 1% to 3%.
Anticipate 3% to 6% adjusted pretax margin in Q2 and reaffirm full-year guidance of 3% to 6% despite higher fuel costs.
Total operating revenue increased 2% to $865 million with capacity growth of 8% compared to Q1 2023.
Fuel expense decreased 10% year-over-year with a pretax loss margin improvement to 2.8%.
Operational Updates
Progressed towards 80% out-and-back flying, improving cancellation rates and on-time arrivals.
Opened 10th crew base in Cleveland and planning new bases in Cincinnati, Chicago, and San Juan.
Expanded service from San Juan, positioning as a gateway to the Caribbean.
Revenue and Network Strategy
Expect system RASM improvement as new markets mature over the next year.
Launched loyalty and premium products to diversify revenue sources and improve demand.
Introduced BizFare and UpFront Plus for premium seating options.
Fleet and Capacity Guidance
Ended Q1 with 142 aircraft, taking delivery of six A321neo aircraft.
Plan to add another six A321neos in Q2 and 11 in the second half of 2024, financed through sale-leaseback transactions.
Q2 capacity growth projected to be 12% to 14% over Q2 2023.
Financial Outlook and Guidance
Expect fuel costs to remain elevated at $2.80 to $2.90 per gallon in Q2.
Adjusted nonfuel operating expenses forecasted between $705 million to $720 million for Q2.
Reaffirmed full-year adjusted pretax margin and CASM ex fuel guidance despite higher anticipated fuel prices.
Question and Answer
Network Changes and Forward Bookings
Question
Can you discuss the network changes made and the results seen in forward bookings, particularly in the second quarter, considering the margin improvement guidance and capacity growth?
Answer
The network changes, which started in April and will continue through the summer, have resulted in new routes with load factors in the 90s, exceeding expectations.
While these changes are expected to have a 5 to 10-point drag on RASM due to the significant increase in new flying, the company believes it is the right investment for optimizing the network.
Profitability Outlook and Margin Targets
Question
Do you expect to be profitable every quarter going forward, given the higher margin target for 2025?
Answer
Yes, the company expects to be profitable in every quarter going forward.
Cost Reduction and Impact on Cost Line
Question
Can you provide insight into where the $200 million of cost reductions will impact the cost line as the company transitions to more out-and-back flying?
Answer
The $200 million cost savings plan is on track and will benefit operations across the board.
Areas of impact include lower travel-related costs, crew efficiency improvements, benefits in station operations, higher capture rates from maintenance at crew bases, and increased utilization from network simplification.
Capacity Guidance and Schedule Refinement
Question
The observed schedules suggest that second-quarter capacity may be higher than the guidance provided. Is there a level of conservatism around completion or ongoing schedule refinement?
Answer
The company acknowledges potential air traffic control and weather issues while striving to provide realistic capacity guidance.
Yield and Load Factor Dynamics
Question
How do you expect the yield and load factor dynamic to evolve throughout the year, and what impact is the lower load having on ancillary performance?
Answer
The lower load factor had a positive impact on non-ticket performance in the quarter, with some recovery observed in January, February, and March.
The company focuses on optimizing total revenue output and will adjust load factors and yields accordingly.
UpFront Plus and Domestic Yield Trends
Question
How has the recently introduced UpFront Plus seating option trended since its launch, and what are your observations on domestic yield trends as we move into the second quarter and the back half of the year?
Answer
UpFront Plus has exceeded expectations and provides customers with the option to purchase more space at the front of the aircraft, catering to a specific customer segment.
The company sees overall capacity increasing and anticipates a positive landscape for the markets it serves, with higher fares and good demand for the summer.
Short-Haul Leisure and International Performance
Question
Can you discuss the short-haul leisure market, particularly in Puerto Rico, and the performance of the international segment beyond Puerto Rico?
Answer
The company sees an attractive opportunity in Puerto Rico due to its cost base and the potential to stimulate a market with historically high fares.
While the international segment has performed well, the commentary on overcapacity may apply to other destinations in the region, not necessarily where Frontier is starting service.
New Market Performance and RASM Impact
Question
Can you elaborate on the comment about new markets having a 5 to 10-point drag on RASM, considering the expectation that these are better markets?
Answer
The company is pursuing higher-yield opportunities with these new markets and expects them to produce a higher RASM once matured.
However, as brand-new markets, they are likely to generate lower revenue initially, resulting in a temporary drag on RASM.
This drag is expected to be in the high single digits and flow through to margin due to the significant increase in new capacity, but improvements are anticipated as these markets mature.
Aircraft Deliveries and Capacity Growth
Question
How many aircraft are you planning to take delivery of this year, and are you experiencing any delays similar to other carriers?
Answer
The company is still expecting 23 deliveries for the year, with all 321neo aircraft expected in the second quarter and 11 in the back half of the year.
While there have been delays from the original order, these delays have been known for over six months and are not significantly impacting the business.
Aircraft Utilization and Out-and-Back Flying
Question
What drove the 6% decline in aircraft utilization, and are you still aiming to achieve 12-plus hours of utilization with the network changes?
Answer
The decline in aircraft utilization was due to managing oversupply in the January and February off-peak periods.
The company expects utilization to be up in the high 11s and 12s for the rest of the year as the network changes and out-and-back flying progress.
Flight Attendants and New Schedule
Question
Was the issue raised by flight attendants regarding the new schedule and potential earnings impact resolved?
Answer
The issue was resolved through negotiation, as the company did not agree to a guarantee of a minimum amount of multi-day trips.
While some flight attendants prefer multi-day trips, the company’s growth and hiring strategy are expected to provide more opportunities for such trips within a year.
Cost Advantage and Competitive Landscape
Question
How significant is your cost advantage relative to the PR Group, and does it still matter given changes in route network operations across the industry?
Answer
The cost advantage remains crucial, as evidenced by the company’s outperformance and ability to achieve its margin targets despite challenges in the industry.
The company’s focus on maintaining and widening its cost advantage through continued efficiency and cost-saving initiatives is key to its success.
Sale-Leasebacks and Business Model
Question
As sale-leaseback proceeds become increasingly important in offsetting CASM, have you considered potential changes to how the business is managed when these proceeds eventually fade?
Answer
The company reiterates that the sale-leaseback model is a core part of its business and provides real cash flows and earnings, similar to debt financing.
The company has a clear path with 200 aircraft on order and does not foresee any changes to this strategy unless the financing market shifts.
The market value for aircraft, particularly the A321neo, is strong, contributing to the benefit derived from the sale-leaseback model.
Crew Base Costs and Network Changes
Question
Is there a cost mismatch when opening new crew bases, such as Cleveland, as the company transitions to an out-and-back network, or do the cost savings from network simplification offset the initial investment in base openings?
Answer
The $200 million cost savings target is underpinned by network simplification and the shift to over 80% out-and-back flying, providing efficiency and cost savings across the operation.
The upfront investment in base openings is relatively small compared to the benefits of moving assets to locations where they generate revenue.
Pilot Negotiations and Market Dynamics
Question
Can you provide an update on pilot negotiations and any new developments in the current market environment?
Answer
The landscape has changed significantly, with airlines canceling classes and attrition rates slowing.
Negotiations are in the early stages, and the process typically takes one to two years.
Competitive Response and Regulatory Changes
Question
What competitive responses are you seeing, particularly from network airlines, in light of your new products and route network changes? Additionally, what are your thoughts on recent DOT rule changes regarding customer compensation for flight delays and lost bags?
Answer
The company is observing typical reactions from competitors, but the industry as a whole is focused on margins, and rational carriers are expected to adjust pricing and capacity accordingly.
The company is implementing changes to its website, app, and merchandising to address transparency concerns and comply with the new DOT rules.
Supply Dynamics and Revenue Initiatives
Question
Can you provide more details on the current supply dynamics in your network and how they relate to your confidence in revenue initiatives, such as business rework and loyalty programs?
Answer
The company believes it peacefully coexists with network airlines by catering to a different market segment and offering a different product.
The company’s focus on optimizing revenue through yield and load factor management is expected to lead to improvements as the year progresses and the network changes take full effect.
