Frontier Group Holdings, Inc. (ULCC), the parent company of Frontier Airlines, is an ultra-low-cost carrier (ULCC) headquartered in Denver, Colorado. The company has reported an annual net income of -$11 million, annual revenue of $3,589 million, annual operating cash flow of -$261 million, and annual free cash flow of -$348 million. In the latest quarter, the company has continued to demonstrate its commitment to cost discipline and revenue diversification, positioning itself for long-term success.

Business Overview

Frontier Airlines is an ultra-low-cost carrier that offers flights throughout the United States and to select international destinations in the Americas. The company's business strategy is focused on "Low Fares Done Right," which is underpinned by its low-cost structure and superior low-fare brand. Frontier operates a fleet of 142 aircraft, primarily Airbus A320neo family aircraft, as of the end of the first quarter of 2024.

The company has recently made several strategic moves to optimize its network and improve its cost structure. Frontier has been transitioning its network to an "out-and-back" model, with the goal of achieving 80% out-and-back flying by the end of the second quarter of 2024. This transition is expected to drive $200 million in annual run-rate cost savings by the end of the year. Additionally, Frontier has been opening new crew bases, including in Cleveland, Cincinnati, Chicago, and San Juan, Puerto Rico, to support its network optimization efforts.

Financials

In the first quarter of 2024, Frontier reported total operating revenues of $865 million, a 2% increase compared to the same period in 2023. This was driven by an 8% increase in capacity, as measured by available seat miles (ASMs), partially offset by a 5% decrease in revenue per available seat mile (RASM). The company's total operating expenses during the quarter were $896 million, resulting in a cost per available seat mile (CASM) of 9.49 cents, compared to 9.95 cents in the prior-year period.

Frontier's non-fuel expenses increased by 9% during the first quarter of 2024, driven primarily by higher capacity and a larger fleet size, partially offset by increased sale-leaseback gains. The company's fuel expense decreased by 10% during the quarter, primarily due to a 15% reduction in fuel prices, partially offset by a 6% increase in fuel gallons consumed.

The company generated a net loss of $26 million during the first quarter of 2024, compared to a net loss of $13 million in the same period of 2023. As of March 31, 2024, Frontier had $622 million in total available liquidity, made up of cash and cash equivalents.

Outlook

For the second quarter of 2024, Frontier expects capacity growth to be in the range of 12% to 14% over the same period in 2023, with an average stage length of approximately 900 miles. The company expects fuel costs to remain elevated at $2.80 to $2.90 per gallon, and adjusted non-fuel operating expenses to be between $705 million and $720 million.

Despite the impact of higher fuel prices and the company's network transition, Frontier expects to generate an adjusted pretax margin in the range of 3% to 6% in the second quarter of 2024. The company has also reaffirmed its full-year 2024 adjusted pretax margin guidance of 3% to 6%, as well as its guidance for CASM (excluding fuel) during 2024 on a stage-adjusted basis to 1,000 miles to be lower by 1% to 3% versus the prior year.

Looking ahead to 2025, Frontier is confident in its ability to achieve an adjusted pretax margin of 10% to 14%, driven by its cost tailwinds, expected network maturity, and revenue diversification initiatives.

Revenue Diversification and Cost Discipline

Frontier has been focused on diversifying its revenue streams and enhancing its cost discipline to drive long-term profitability. The company recently introduced its UpFront Plus seating option, which provides customers with an upgraded seating experience in the first two rows of the aircraft. This, combined with the company's existing premium seating options, expands Frontier's ability to offer choice and cater to a wider range of customer preferences.

Additionally, Frontier has been making investments in its loyalty program, FRONTIER Miles, and plans to introduce new distribution and merchandising capabilities, including a new website and mobile app, later this year. These initiatives are expected to increase the company's revenue per passenger and load factors over the next several years.

On the cost side, Frontier's aggressive focus on cost discipline has enabled it to widen its cost advantage over the industry. The company's relative cost advantage, as measured by CASM (excluding fuel) on a stage-adjusted basis to 1,000 miles, has expanded to 42% on a trailing 12-month basis. Frontier's $200 million annual run-rate cost savings target, driven by its network optimization efforts, is expected to further strengthen the company's competitive position.

Geographic and Segment Performance

Frontier's operations are primarily focused on domestic destinations within the United States, which accounted for 93% of its total operating revenues in the first quarter of 2024. The company's Latin America segment, which includes flights to destinations in the Americas outside of the United States, contributed the remaining 7% of total operating revenues.

In terms of revenue breakdown, passenger revenues, which include fare and non-fare passenger revenues, accounted for 98% of Frontier's total operating revenues in the first quarter of 2024. The remaining 2% of revenues were derived from other sources, such as advertising, marketing, and brand elements of the FRONTIER Miles affinity credit card program.

Risks and Challenges

While Frontier has demonstrated its ability to navigate the challenging industry environment, the company faces several risks and challenges that investors should be aware of. These include potential delays in aircraft deliveries, labor negotiations with its unionized workforce, and the ongoing impact of the COVID-19 pandemic on travel demand.

Additionally, Frontier operates in a highly competitive industry, and the company's ability to maintain its cost advantage and execute on its revenue diversification initiatives will be critical to its long-term success. The company's reliance on sale-leaseback transactions to finance its aircraft acquisitions is another factor that investors should closely monitor.

Conclusion

Frontier Group Holdings, Inc. (ULCC) has continued to demonstrate its commitment to cost discipline and revenue diversification, positioning the company for long-term success in the ultra-low-cost carrier market. The company's strategic initiatives, including its network optimization efforts and investments in new products and services, are expected to drive improved financial performance in the coming years. While the company faces several risks and challenges, Frontier's focus on maintaining a strong cost advantage and diversifying its revenue streams should help it navigate the evolving industry landscape.