Frontier Group Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Frontier is a Denver-based ultra-low-cost airline serving approximately 120 airports in the United States and select international destinations. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Operating revenue | $605 | $271 |
| Operating income (loss) | $(153) | $(92) |
| Net income (loss) | $(121) | $(91) |
| Diluted loss per share | $(0.56) | $(0.46) |
| Cash from (used in) operating activities | $(87) | $30 |
| Cash from (used in) investing activities | $(33) | $7 |
| Cash from (used in) financing activities | $(71) | $14 |
- Revenue increased 123% year over year. Operating margin was approximately (25.3%) and net margin approximately (20.0%), calculated from reported GAAP results.
- Cash and cash equivalents were $727 at March 31, down from $918 at year-end 2021; the quarter’s net cash decrease was $191.
- Total debt principal was $355; debt net of acquisition costs and discounts was approximately $352, including $145 of current maturities. Total liabilities also include substantial operating leases: $2,410 of future lease obligations disclosed in the filing.
- Current assets were $876 and current liabilities $1,448. The company reported debt-to-capital of 46%, or 87% including operating lease obligations.
- Operating costs rose 109% to $758. Fuel expense rose 156% to $215; fuel averaged $2.99 per gallon, up 59%. GAAP CASM was 10.19 cents, versus 7.89 cents; RASM was 8.13 cents, versus 5.91 cents.
Material changes versus the prior comparable period
- Capacity, measured by available seat miles, increased 62%; passengers rose 67%, load factor improved to 74.2% from 69.9%, and RASM increased 38%.
- Despite the recovery in travel demand, GAAP net loss widened to $121 from $91. Q1 2021 included $136 of CARES Act credits, while Q1 2022 had none. The prior-year comparison also included a $20 warrant mark-to-market expense; Q1 2022 included $11 of merger-related costs and a $7 noncash debt-extinguishment charge.
- Management’s non-GAAP adjusted net loss was $109 in Q1 2022 versus $173 in Q1 2021; adjusted CASM excluding fuel was 7.15 cents versus 8.96 cents. These company-defined measures exclude specified items and are not GAAP measures.
- Operating cash flow shifted from a $30 inflow to an $87 outflow. Higher advance bookings contributed $90 to the increase in air traffic liability, supporting cash flow but representing travel obligations to customers.
Outlook, commentary, risks and unusual items
- Management expected available cash and operating cash flows to meet cash requirements for the next 12 months. It said longer-term needs, including the proposed Spirit transaction, would be funded from operating and financing activities, potentially including additional borrowing or debt or equity issuance. No quantified earnings or revenue guidance was provided.
- Frontier expected the Spirit merger to close in the second half of 2022, subject to shareholder and regulatory approvals and other closing conditions. Spirit shareholders were to receive 1.9126 Frontier shares and $2.13 cash per share; Frontier estimated an aggregate cash requirement of approximately $231 at closing. The filing reported $11 of Q1 merger expenses. Spirit’s board announced on May 2, 2022 that it would not pursue JetBlue’s proposal.
- Frontier repaid its $150 Treasury Loan in February 2022, using cash and incurring $1 of interest and fees plus a $7 noncash write-off of deferred financing costs. Repayment released the co-branded card program and related brand assets from that loan’s collateral.
- Aircraft fuel is a major exposure: no fuel hedges were outstanding at quarter-end. Management estimated that a hypothetical 10% rise in fuel prices would add approximately $71 to annual fuel expense, based on prior-12-month consumption. A 100-basis-point rise in variable interest rates was estimated to add $3 to annual interest expense.
- Significant commitments include $13.665 billion of aircraft and engine purchase obligations and $2.917 billion of operating lease obligations. The firm order book included 232 A320neo-family aircraft through 2029; financing for aircraft not already covered by lease commitments was still being evaluated.
- COVID-19 continued to affect the business, although management reported significant demand recovery. It cited uncertainty from future variants, inflation, fuel prices, labor availability, competition, operational disruptions and aircraft financing needs. A credit-card processor representing less than 10% of revenue had granted covenant relief through Q2 2022; further waivers or amendments might be required. The company said it was otherwise in covenant compliance.
- The DOT’s ongoing review of Frontier’s refund and credit practices for company-initiated cancellations or significant schedule changes remained unresolved. Approximately 88% of employees were union-represented; negotiations were ongoing for two amendable agreements. Management stated that legal outcomes could be uncertain, while it did not expect pending matters to materially affect the company.
Important facts for investors to verify
- Whether demand recovery, fares and ancillary revenue can offset fuel, labor and other cost inflation, and whether operating cash flow improves.
- Merger progress, required regulatory approvals, closing timing, cash needs, potential dilution, integration costs and realization of anticipated benefits.
- Aircraft-order financing and liquidity capacity given the large aircraft, lease and debt commitments.
- Renewal of the credit-card processor covenant waiver and any impact of future covenant requirements or cash holdbacks.
- Outcome of the DOT consumer-refund review and developments in labor negotiations or other contingencies.
- Whether management’s non-GAAP measures reconcile consistently with GAAP results and how they exclude unusual items, particularly the prior-year CARES Act support.