Frontier Group Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Frontier is a Denver-based ultra-low-cost airline serving approximately 120 airports. Unaudited consolidated results are for one reportable segment.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $909 million | $550 million | $1,514 million | $821 million |
| Operating income (loss) | $7 million | $18 million | $(146) million | $(74) million |
| Net income (loss) | $13 million | $19 million | $(108) million | $(72) million |
| Operating margin (approx.) | 0.8% | 3.3% | (9.6)% | (9.0)% |
| Operating cash flow | Not separately stated | Not separately stated | $(67) million | $242 million |
Q2 passenger revenue was $890 million, including $420 million of fare revenue and $470 million of non-fare passenger revenue; other revenue was $19 million. Q2 capacity (ASMs) rose 10%, load factor increased to 84.1% from 80.0%, and revenue per available seat mile (RASM) increased 51% to 11.97 cents. Total revenue per passenger rose 42% to $139.40.
Q2 operating expenses rose 70% to $902 million. Fuel expense increased 141% to $335 million as fuel cost per gallon rose 117% and fuel consumption increased 11%. CASM was 11.87 cents versus 7.68 cents; adjusted CASM excluding fuel was 7.24 cents versus 6.84 cents. For the first half, adjusted CASM excluding fuel decreased to 7.19 cents from 7.68 cents, while reported CASM increased to 11.04 cents from 7.76 cents.
Liquidity, debt and cash flows
At June 30, 2022, cash and cash equivalents were $766 million, down from $918 million at December 31, 2021. Current assets totaled $954 million and current liabilities $1.550 billion. Debt was $376 million before $3 million of debt costs and discounts (reported current and long-term debt, net, totaled $373 million). Debt to capital was 47%; including operating lease obligations, it was 87%. Operating lease liabilities on the balance sheet totaled approximately $2.404 billion.
First-half cash decreased $152 million: operating activities used $67 million, investing activities used $57 million, and financing activities used $28 million. Operating cash flow benefited from a $99 million increase in air traffic liability as bookings rose, but the prior-year period included $242 million of operating cash generation. Frontier repaid its $150 million Treasury Loan in February; it also drew $56 million under its Barclays mileage-credit facility and $85 million under its aircraft pre-delivery facility during the first half.
Major cash requirements disclosed for June 30 included $13.541 billion of aircraft and engine purchase commitments, $2.923 billion of operating lease obligations, and $376 million of debt principal payments, on the filing’s stated schedule.
Changes, outlook and material matters
- Revenue growth reflected recovering leisure demand, higher fares and ancillary revenue, increased load factor, and 10% higher Q2 capacity. For the first half, revenue increased 84%, with capacity up 30% and RASM up 41%.
- The prior-year comparisons included substantial CARES Act payroll support credits: $87 million in Q2 2021 and $223 million in the first half of 2021. Those credits ceased in 2021. First-half 2022 results also included $20 million of Spirit merger-related costs, $7 million of software impairment, and a $7 million noncash debt-extinguishment charge.
- On July 27, 2022, after quarter-end, Frontier and Spirit mutually terminated their proposed merger. Frontier expected approximately $9 million of additional employee retention costs in Q3, a $2 million write-off of deferred equity issuance costs, and other termination-related expenses. Spirit is obligated to reimburse $25 million of incurred merger expenses; a further $69 million may be payable if Spirit completes a qualifying transaction with another acquirer within 12 months.
- Management said available cash and expected operating cash flows should meet cash requirements for the next 12 months; longer-term needs are expected to be met through operating and financing cash flows, including potential borrowing or capital-market issuance. No specific earnings or revenue guidance was provided.
- Risks include fuel-price volatility (Frontier had no fuel hedges outstanding), inflation, competition and discretionary leisure demand, COVID-19 uncertainty, labor and staffing constraints, operational disruption, and significant aircraft, lease and maintenance commitments. A credit-card processor representing less than 10% of revenue had granted a covenant waiver through Q3 2022; future waivers or amendments may be needed. The company reported covenant compliance otherwise.
- Frontier had hedged interest-rate exposure on $245 million of rent payments for seven aircraft due by the end of 2023. It had 229 A320neo-family aircraft on firm order through 2029. Approximately 87% of employees were union-represented; negotiations with dispatcher and material-specialist groups were ongoing.
Investor facts to verify
- Whether operating cash flow and liquidity improve, especially as air traffic liabilities and working-capital needs change.
- Whether fuel costs can be passed through to fares and whether unit costs remain controlled as capacity expands.
- Actual Q3 merger-termination costs and receipt of the $25 million reimbursement; whether the contingent $69 million becomes payable.
- Progress on aircraft financing and funding the large delivery commitments, lease obligations, and maintenance requirements.
- Resolution of the processor covenant waiver and the status or outcome of the DOT review of refund practices.