Frontier Group Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Frontier operates as a single-segment ultra-low-cost airline serving approximately 120 airports. Results remain affected by the COVID-19 recovery and seasonal volatility.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $630 million | $245 million | $1,451 million | $983 million |
| Operating income (loss) | $43 million | ($81 million) | ($31 million) | ($181 million) |
| Net income (loss) | $23 million | ($51 million) | ($49 million) | ($98 million) |
| Operating cash flow | — | — | $96 million | ($366 million) |
Q3 operating margin was approximately 6.8% and net margin approximately 3.7%; nine-month operating and net margins were approximately (2.1%) and (3.4%), respectively. Q3 diluted EPS was $0.10; nine-month diluted loss per share was $0.23.
- Revenue and operations: Q3 revenue rose 157% year over year as available seat miles (ASMs) increased 88%, passengers increased 136%, and load factor rose to 77.4% from 62.5%. Nine-month revenue increased 48%, with ASMs up 50% and load factor at 76.5%, versus 68.2%.
- Costs and margins: Q3 fuel expense increased 168% to $166 million, reflecting 102% higher fuel consumption and a 33% increase in cost per gallon to $2.19. Adjusted CASM excluding fuel, a non-GAAP measure, was 6.55¢ versus 9.06¢. For nine months, adjusted CASM excluding fuel was 7.24¢ versus 8.40¢.
- Cash and liquidity: Cash and cash equivalents were $802 million at September 30, versus $378 million at year-end 2020. The company also reported a $161 million current income-tax receivable. Nine-month operating cash flow improved from a $366 million use to $96 million provided, substantially reflecting a $117 million increase in air traffic liability and other working-capital inflows.
- Debt and leases: Debt principal was $375 million; reported current and long-term debt, net of discounts and costs, totaled $365 million. Balance-sheet operating lease liabilities were approximately $2.503 billion. Debt-to-capital was 39%, or 83% including operating lease obligations.
Changes versus prior period and notable items
- Q3 returned to GAAP profitability from a year-earlier loss, alongside substantial capacity and passenger growth. Nine-month net loss narrowed to $49 million from $98 million.
- Government payroll-support credits materially affected reported expenses: $72 million was recognized in Q3 2021 and $295 million in the first nine months of 2021, versus $97 million and $188 million in the comparable 2020 periods. These credits are not recurring operating revenue. Management reported adjusted net losses of $24 million in Q3 2021 versus $106 million in Q3 2020, and $247 million for nine months 2021 versus $168 million for nine months 2020; these are non-GAAP measures.
- The company completed its April 2021 IPO, receiving $266 million net for newly issued shares. Selling-stockholder proceeds did not go to the company. IPO-related warrant reclassification also ended recurring mark-to-market accounting; nine-month 2021 results included $22 million of warrant mark-to-market expense.
- Operating cash flow benefited from advance bookings and other liability movements; it should not be read as equivalent to recurring earnings. Sale-leaseback gains were $55 million for the first nine months.
Outlook, risks and contingencies
- No quantified financial or capacity guidance is provided in the filing. Management said demand recovery slowed in the second half of Q3 amid the Delta variant, while describing the impact as difficult to predict and expecting it may be short-term. The company said it would adjust capacity and costs as needed and anticipated further improvement in utilization and load factor as recovery continued.
- Fuel-price exposure is significant: management estimated a hypothetical 10% increase in average fuel prices would add about $45 million to annual fuel expense. No fuel or interest-rate hedges were outstanding at quarter-end.
- COVID-relief funding carries restrictions, including required service levels through March 31, 2022, limits on dividends and repurchases until one year after Treasury Loan repayment, and executive-compensation limitations. The company had a waiver through Q4 2021 for a covenant at one credit-card processor representing less than 10% of revenue; further waivers or amendments may be needed.
- Aircraft commitments are substantial: 143 A320neo-family aircraft and 22 engines were on order. Estimated flight-equipment purchase obligations totaled $8.384 billion; total disclosed contractual obligations were $11.865 billion. Financing for the aircraft not yet placed under committed operating leases remained to be evaluated.
- The DOT was reviewing the company’s refund and credit practices for Frontier-initiated cancellations or significant schedule changes during COVID-19. Frontier said it was cooperating; the review’s outcome and potential financial effect were not specified.
- Other key risks include uncertain pandemic demand, fuel and labor costs, intense fare competition, operational disruption, and lease and aircraft financing obligations. Indigo-controlled funds beneficially owned approximately 82.8% of outstanding common stock, creating concentrated voting control.
Investor verification points
- How much of reported profitability and liquidity depends on government support, advance ticket bookings, working-capital timing, and sale-leaseback gains?
- Can revenue and unit-cost performance hold as payroll-support credits diminish and fuel prices, capacity, and demand change?
- How will Frontier finance its aircraft commitments and meet debt, lease, maintenance, and other fixed obligations?
- What is the outcome of the DOT refund-practices review, and will the credit-card processor covenant waiver need extension?
- What are the company’s latest demand, capacity, and liquidity trends following the Delta-related slowdown?