A321 Frontier in flight
Frontier Group Holdings, Inc., the parent company of Frontier Airlines, reported its financial results for the first quarter of 2022 on April 28 and issued guidance for the second quarter and full-year 2022. Frontier reported a 1Q22 loss but guides to record 2Q22 revenue and a profit.
Total operating revenue for the first quarter of 2022 was $605m, 11 percent higher than the corresponding pre-COVID quarter in 2019. Ancillary revenue performance during the quarter was robust, with $69.28 of ancillary revenue per passenger, 21 percent higher than the corresponding pre-COVID quarter in 2019. Offsetting the strong revenue performance was the impact of high fuel prices, which averaged $2.99 per gallon, among other factors. Net loss for the quarter was $121 million, with an adjusted (non-GAAP) net loss of $109 million.
Looking forward to the second quarter, and reflecting the current demand environment, the company expects record revenue with RASM growth of over 20 percent compared to the second quarter of 2019. This revenue performance is expected to more than overcome elevated fuel prices, delivering an anticipated pre-tax margin between one and five percent in the second quarter (before transaction and merger-related costs and other special items).
“We expect over 20 percent RASM improvement versus the second quarter of 2019, underpinned by the phenomenal performance of our ancillary product offerings and an expectation of $70 in ancillary revenue per passenger in the second quarter,” said Barry Biffle, Frontier’s president, and CEO. “Our anticipated record revenues plus our industry-leading fuel efficiency validate the ultra-low-cost model, even in a high-cost fuel environment, providing confidence in our return to profitability. We are so proud of Team Frontier, which has successfully navigated the airline through the pandemic.”
Balancing capacity
Frontier is focused on balancing capacity in light of today’s demand and operational environment to enable the airline to return to profitability in the second quarter and full-year 2022. Utilization in the first quarter was impacted by severe weather patterns during March across parts of Florida where a high concentration of flights was operated. The weather issues and resulting downline impacts were exacerbated by staffing shortages at the Jacksonville Air Traffic Control Center, which controls the airspace over the northern two-thirds of Florida and the key markets of Orlando and Tampa.
Second-quarter capacity is anticipated to grow 10 to 12 percent versus the corresponding pre-COVID quarter in 2019 with full-year capacity expected to grow 12 to 15 percent versus 2019. The Company expects utilization to improve as overall passenger volumes increase through year-end.
The dynamic of lower average stage length, lower utilization, and surplus staffing deliver a temporarily elevated unit cost that is expected to moderate by year-end as demand fully recovers. In addition, the introduction of the A321neo aircraft in the second half of 2022 is expected to further advance Frontier’s structural fuel advantage and accelerate the trend to higher average seats per departure, enabling additional cost-efficiency versus other industry carriers.
Fleet
As of March 31, Frontier had a fleet of 112 Airbus single-aisle aircraft, consisting of 75 A320neos, 16 A320ceos, and 21 A321ceos. All aircraft in the fleet are financed with operating leases that expire between 2022 and 2034. Frontier’s fleet is the most fuel-efficient of all major U.S. carriers when measured by ASMs per fuel gallon consumed, generating 103 ASMs per gallon during the first quarter of 2022, a slight improvement compared to the corresponding prior-year quarter and six percent higher than the corresponding pre-COVID quarter in 2019.
Frontier took delivery of two A320neo aircraft during the quarter and has four planned aircraft deliveries during the second quarter of 2022. As of March 31, 2022, the Company had commitments to purchase an additional 232 aircraft to be delivered through 2029, including 74 A320neo aircraft and 158 A321neo aircraft, enabling the Company to significantly increase in size in the future. Additionally, the introduction of the A321neo aircraft in the second half of 2022 is expected to advance Frontier’s structural fuel advantage and further the trend to higher average seats per departure, leading to improved cost efficiency versus industry carriers.
Frontier does not feel pilot shorage pressure. The Company has attractive bases and pilots can make Captain faster at Frontier than at other airlines. Opening a Phoenix base is a reflection of this. Frontier appears to have a stable pilot pipeline. Frontier gets 14-15 applications per day. The plan is to add about 250 pilots per year.
Frontier-Spirit Proposed Combination
On February 7, Frontier announced a merger agreement with Spirit Airlines. That signed agreement remains in place:
“We continue to be excited about completing the merger and delivering the significant benefits that will come with it. This combination offers tremendous value for shareholders. The structure of the transaction will enable both Spirit and Frontier shareholders to benefit from the substantial upside potential of the combined company. Our regulatory process is already well underway and many months ahead of any alternative. For consumers, this merger will super-charge the ULCC model. Together, Frontier and Spirit will offer even more ultra-low fares to more places and deliver $1 billion in annual savings for consumers. For employees, we expect this combination to create 10,000 new direct jobs and thousands more at our business partners. For the competition, the dominant ‘Big Four’ airlines and other high-cost airlines like JetBlue will be faced with a true nationwide ultra-low fare competitor,” said Biffle.
Looking Ahead
Cowen & Co. reports: “Management expects capacity growth of 10% to 12% compared to 2Q19. Adjusted operating expenses are forecast to be $545 to $555 MM. Fuel cost per gallon is forecast to be in a range of $3.40 to $3.50 / gallon, an increase of 15.4% from the March quarter level. Unit revenue is forecast to be up >20% v 2Q19. Management is forecasting record 2Q revenue and an adjusted pretax margin of 1% to 5%.”
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