Frontier Group Holdings, Inc. annual report, FY2021

Frontier Group Holdings, Inc. — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021; this is an annual report, not a standalone fourth-quarter report. Frontier is a Denver-based ultra-low-cost airline serving about 120 U.S. and near-international airports. Its 110-aircraft fleet was entirely Airbus and operated under leases.

Financial performance and position

Metric	FY2021	FY2020	FY2019
Operating revenue	$2.060 billion	$1.250 billion	$2.508 billion
Operating income (loss)	$(117) million	$(365) million	$309 million
Net income (loss)	$(102) million	$(225) million	$251 million
Operating cash flow	$216 million	$(557) million	$171 million
Cash and cash equivalents at year-end	$918 million	$378 million	Not stated here

Revenue rose 65% year over year as capacity increased 58%, passengers increased 84%, and load factor improved to 75.9% from 67.5%. Revenue remained 18% below 2019; load factor was 86.1% in 2019.
FY2021 fare revenue was $806 million and non-fare passenger revenue was $1.194 billion. Total revenue per passenger declined to $99.49 from $111.23 in 2020 and $109.91 in 2019; fare revenue per passenger was $38.94 and non-fare passenger revenue per passenger was $57.65.
Reported operating expenses were $2.177 billion, including $295 million of CARES Act credits that reduced expenses and $11 million of early lease termination costs. Fuel expense was $575 million, or 26% of operating costs. Fuel cost averaged $2.17 per gallon, with no fuel hedges outstanding at year-end.
Reported operating margin was approximately negative 5.7% and net margin approximately negative 5.0%. The company reported adjusted net loss of $299 million for 2021 versus $301 million in 2020; this non-GAAP measure excludes specified credits, charges and related tax effects.
Cash from operations was $216 million; investing used $67 million and financing provided $391 million. Financing included $266 million in net IPO proceeds.
Year-end debt was $423 million before $9 million of debt costs and discounts; reported net debt was $414 million. Debt-to-capital was 44%, or 84% including operating lease obligations. Operating lease liabilities totaled $2.435 billion.
Assets were $4.235 billion, liabilities $3.705 billion and stockholders’ equity $530 million. Current assets totaled $1.037 billion and current liabilities $1.326 billion.

Changes versus comparable periods

Compared with 2020, the operating loss narrowed by $248 million and net loss narrowed by $123 million, alongside the recovery in travel demand and capacity. CARES Act credits increased to $295 million from $193 million.
Fuel expense increased 70% from 2020, principally because fuel consumption rose 64% with higher capacity and fuel rates increased 4%. Non-fuel expenses increased 25% as operations expanded.
Adjusted CASM excluding fuel improved to 7.02 cents from 8.63 cents in 2020, but was 29% above 2019’s 5.44 cents. The company attributed the year-over-year improvement mainly to capacity growth spreading fixed costs.
Compared with 2019, 2021 revenue was 18% lower, while operating expenses were 1% lower. Adjusted net loss contrasts with 2019 net income of $251 million.

Outlook, notable events and risks

Management reported significant demand recovery during 2021, but recovery slowed in the second half of the third quarter and into the fourth quarter amid Delta and Omicron. It planned to adjust capacity and costs as conditions warranted. The filing provides no quantified financial guidance.
On February 2, 2022, Frontier repaid its $150 million Treasury loan plus $1 million accrued interest, releasing the co-branded card program and related assets from the loan collateral. Restrictions on dividends and share repurchases continue until February 2, 2023; executive compensation limits extend until April 1, 2023.
On February 5, 2022, Frontier agreed to acquire Spirit Airlines. Spirit shareholders are to receive 1.9126 Frontier shares and $2.13 cash per share, subject to closing conditions, including regulatory approvals and Spirit shareholder approval. Frontier expected closing in the second half of 2022; completion and timing were not assured. Frontier estimated its cash consideration at approximately $231 million. A $94.2 million termination fee may apply in specified circumstances.
Frontier had firm commitments for 234 Airbus A320neo-family aircraft and 21 spare engines through 2029. Estimated flight-equipment purchase obligations totaled $13.766 billion; timing and delivery estimates may change. All 110 year-end aircraft were leased.
Principal risks include continuing pandemic and demand uncertainty, fuel-price volatility, competitive fare pressure, inflation and labor availability, union negotiations, aircraft maintenance and lease-return costs, substantial lease and aircraft commitments, and reliance on third-party providers and technology systems.
The Department of Transportation was reviewing Frontier’s COVID-related refund and credit practices following a 2021 information request. Frontier said it was cooperating; the review remained in process. The filing also describes possible exposure to consumer-protection rules and environmental requirements.
The merger presents regulatory, integration, technology, labor, cost and execution risks; anticipated synergies may be delayed, reduced or not achieved. Frontier’s 88% union-represented workforce and Spirit workforce integration are relevant considerations.
Auditor Ernst & Young issued an unqualified opinion on the financial statements. Critical audit matters included leased-aircraft return-cost estimates and deferred-tax-asset realizability. The filing states disclosure controls were effective; management’s internal-control assessment and auditor attestation were omitted under the newly public company transition rules.

Most important facts for investors to verify

Whether demand recovery, load factor and unit revenue can improve without relying on temporary government support; assess the $295 million FY2021 CARES Act credit benefit.
Cash generation and liquidity after repayment of the Treasury loan, including debt covenants, credit-card processor waiver status and the effect of aircraft pre-delivery payments.
Funding and financing plans for the $13.766 billion aircraft purchase commitments and $2.435 billion operating lease liability.
Current status, regulatory conditions, cash needs, integration expenses and expected benefits of the proposed Spirit merger.
Outcome of the DOT refund-practices review, and developments in labor negotiations, fuel costs and aircraft maintenance or return-cost estimates.