Frontier Group Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022. Amounts are in USD millions unless noted. Frontier is a single-segment ultra-low-cost airline serving approximately 100 airports.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $848 | $605 | +40% |
| Operating expenses | $873 | $758 | +15% |
| Operating loss | $(25) | $(153) | Improved |
| Net loss | $(13) | $(121) | Improved |
| Basic and diluted loss per share | $(0.06) | $(0.56) | Improved |
| Operating cash flow | $(25) | $(87) | Improved |
- Revenue growth reflected an 18% increase in capacity (available seat miles), a 19% increase in revenue per available seat mile (RASM), and stronger leisure demand. Load factor rose to 82.8% from 74.2%; passengers increased 26% to 6.826 million.
- Passenger revenue was $830 million, including $527 million of non-fare passenger revenue. Total ancillary revenue per passenger increased 15% to $79.95.
- Fuel expense rose 36% to $292 million, driven by 17% higher consumption and a 15% increase in fuel rates. Total operating expenses grew more slowly than revenue; CASM was 9.95 cents versus 10.19 cents. Non-GAAP adjusted CASM excluding fuel declined 8% to 6.61 cents.
- Q1 2023 results included $40 million of sale-leaseback gains and $1 million of merger-related costs. The prior-year quarter included $7 million of debt-extinguishment costs and $11 million of merger-related costs. Adjusted net loss, a non-GAAP measure, was $12 million versus $109 million.
Financial position, cash flow and obligations
- Cash and cash equivalents were $790 million at March 31, 2023, up from $761 million at year-end 2022; management described this as total available liquidity. Net cash used in operations was $25 million. Investing activities provided $10 million and financing activities provided $44 million, including $51 million of sale-leaseback proceeds.
- Total debt was $429 million before $2 million of debt costs and discounts; reported net debt was approximately $427 million. Of reported net debt, $215 million was current. Total operating lease liabilities were $2.639 billion; debt-to-capital was 47%, or 86% including operating lease obligations.
- Total assets were $4.670 billion, total liabilities $4.182 billion, and stockholders’ equity $488 million. Air traffic liability was $424 million current on the balance sheet; the note reports $430 million including amounts classified as long-term.
- Material stated cash requirements totaled $16.702 billion, including $12.895 billion of aircraft and engine purchase obligations and $3.305 billion of operating lease obligations. Frontier had firm purchase commitments for 218 A320neo-family aircraft and 18 spare engines, with deliveries scheduled through 2029.
Changes, outlook and risks
- Management attributed the improved results mainly to recovering travel demand, stronger fares and ancillary revenue, higher load factor, and increased capacity. Non-fuel CASM improvement was also helped by sale-leaseback gains and lower lease-return costs.
- Management expected to meet cash needs for the next 12 months using cash, operating cash flow and the pre-delivery payment facility; longer-term needs may require operating and financing cash flows, additional borrowing, or debt or equity issuance. The filing provides no specific earnings or full-year financial guidance.
- Airbus notified Frontier on May 3, 2023 of A321neo delivery delays: seven 2023 deliveries shifted by an average of one month, including two moving into 2024, and 11 deliveries moved from 2024 to 2025. Management cautioned that delays may continue.
- Fuel and interest-rate exposure are material: a hypothetical 10% increase in fuel prices would have increased annual fuel expense by approximately $124 million, based on the prior 12 months’ consumption; a 100-basis-point increase in variable rates was estimated to increase annual interest expense by $4 million. The filing also notes $97 million of LIBOR-based debt maturing after LIBOR’s June 2023 discontinuation and reports $451 million of rent exposure hedged for aircraft and engines scheduled for delivery by year-end.
- Approximately 87% of employees were represented by unions; negotiations with dispatcher and material-specialist groups were ongoing. Frontier reported compliance with its debt and other covenants. It said litigation was not expected to have a material adverse effect, while acknowledging that outcomes and losses can be uncertain.
- The proposed Spirit merger had been terminated in July 2022. Frontier could be owed an additional $69 million if Spirit entered into and ultimately completed a qualifying acquisition within 12 months of termination. The quarter included $1 million of related retention expense.
Important facts for investors to verify
- Whether demand, load factor, fare and ancillary-revenue strength persist as capacity expands, and whether the company can sustain its improved unit costs.
- Updated aircraft delivery schedules and financing plans for the substantial aircraft purchase commitments, including impacts on liquidity and operations.
- Cash generation relative to debt maturities, lease obligations and other commitments; confirm the distinction between debt principal, reported net debt and operating lease liabilities.
- Exposure to fuel prices and variable interest rates, the transition from LIBOR, and the effectiveness and accounting impact of interest-rate hedges.
- Whether the contingent $69 million Spirit-related payment became payable within the contractual 12-month period after termination.