Frontier Group Holdings, Inc. quarterly report, Q2 FY2021

Frontier Group Holdings, Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Frontier is a Denver-based ultra-low-cost airline serving about 120 airports. Results remained affected by the COVID-19 recovery. Dollar amounts below are in millions unless otherwise noted.

Financial and operating results

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Operating revenue	$550	$194	$821	$738
Operating income (loss)	$18	$6	($74)	($100)
Net income (loss)	$19	$17	($72)	($47)
Operating cash flow	Not stated for quarter	Not stated for quarter	$242	($193)

• Q2 revenue increased 184% year over year as capacity rose 348%, passengers increased 545%, and load factor improved to 80.0% from 54.3%. Six-month revenue increased 11%, while capacity rose 33% and load factor improved to 76.0% from 70.9%.
• Reported Q2 net income included $87 million of CARES Act credits, offset partly by $6 million of early aircraft lease termination costs; reported six-month results included $223 million of credits and $10 million of those costs. Management’s adjusted net loss was $50 million for Q2 versus $37 million a year earlier, and $223 million for the six months versus $62 million.
• RASM declined 37% in Q2 to 7.92¢ and 16% for the six months to 7.12¢. Management attributed lower revenue per passenger in part to fewer expired customer travel credits recognized than in the prior-year periods.
• Q2 CASM excluding fuel was 5.67¢, down 49%; adjusted CASM excluding fuel was 6.84¢, down 60%. For the six months, those measures were 5.83¢, down 18%, and 7.68¢, down 5%, respectively. These are non-GAAP measures.
• Fuel expense was $139 million in Q2 versus $15 million, reflecting 391% greater consumption and a 92% higher average fuel rate. Six-month fuel expense was $223 million versus $219 million; 33% higher consumption was offset by a 24% lower average cost per gallon, including the prior-year impact of hedge losses.

Balance sheet, liquidity, and cash flow

• Cash and cash equivalents were $936 million at June 30, 2021, compared with $378 million at year-end 2020. The company also reported a $161 million current income tax receivable, primarily related to 2020 net operating losses, which it expected to receive later in 2021.
• Six-month operating cash flow was $242 million, largely reflecting a $199 million increase in air traffic liability and a $164 million increase in other liabilities. Investing activities provided $10 million; financing activities provided $306 million, including $266 million of net IPO proceeds.
• Total debt principal was $373 million: $88 million current and $275 million long term on the balance sheet, net of applicable discounts. Debt-to-capital was 40%, or 83% including operating lease obligations. Operating lease liabilities totaled $2.410 billion.
• Working capital was negative: current assets were $1.226 billion and current liabilities were $1.391 billion. Management cited $936 million of cash as total available liquidity and said the company could navigate short-term demand declines.

Material changes and notable items

• The April 2021 IPO raised $266 million net for the company from issuance of 15 million shares at $19 per share. Selling stockholders sold additional shares, but Frontier received no proceeds from their sales. Common shares outstanding were 215.4 million at June 30.
• Payroll support included $143 million of PSP2 grants and $135 million of PSP3 grants, alongside $33 million of PSP2/PSP3 loans. Of the PSP3 grant, $72 million remained deferred in other current liabilities at quarter-end. Grant support and employee retention credits materially affected reported expenses and earnings.
• Frontier had 109 aircraft, all under operating leases, and firm orders for 148 A320neo-family aircraft through 2028. Purchase commitments for aircraft and engines were approximately $8.612 billion; total contractual obligations shown, including leases and debt, were $11.964 billion.
• Management reported that all aircraft and employees had returned to service across stations during Q2. Average aircraft utilization rose to 10.1 hours per day from 4.1 hours a year earlier.

Outlook, risks, and contingencies

• The filing provides no numerical revenue, earnings, or capacity guidance. Management expected recovery to continue but said demand, capacity requirements, and the duration and effects of COVID-19—including the Delta variant—were uncertain. It described the Delta variant’s effect on bookings as negative but expected it to be short term; that assessment was expressly uncertain.
• Management said it would adjust capacity and costs as needed to preserve liquidity. It reported stronger bookings and a 72% increase in passenger volumes in Q2 compared with Q1.
• Frontier had no fuel derivative contracts outstanding at June 30. Management estimated a hypothetical 10% increase in average fuel prices would raise annual fuel expense by about $34 million. A 100-basis-point increase in variable borrowing rates would increase annual interest expense by about $3 million.
• The company was in compliance with its covenants except for a credit-card processor covenant for which it had obtained a waiver through Q4 2021; the processor represented less than 10% of revenue. Management said further waivers or amendments might be needed. The Treasury loan’s remaining borrowing availability lapsed in May 2021; Frontier said it was focused on repaying the $150 million outstanding when liquidity and conditions permitted.
• CARES Act and related support terms restrict dividends and share repurchases, require service levels through March 31, 2022, and impose employment and executive-compensation limits, among other conditions. Dividend and repurchase restrictions extend until the later of September 30, 2022 or one year after repayment of the Treasury loan.
• The Department of Transportation was reviewing Frontier’s consumer refund and credit practices for flight cancellations or significant changes during the pandemic. Frontier said it was cooperating; the review remained ongoing, and the filing did not quantify any potential loss.
• Other significant risks include volatile fuel prices, intense fare competition, fixed lease and aircraft purchase commitments, labor costs, operational disruption, and dependence on Airbus and a small number of engine suppliers. The filing also notes that approximately 87% of employees were union-represented and Indigo controlled about 83% of outstanding common stock.

Investor verification priorities

• Assess underlying profitability apart from payroll-support grants, tax credits, lease termination charges, and warrant remeasurement; reconcile reported results with management’s non-GAAP adjusted measures.
• Track cash generation excluding IPO proceeds, government support, and working-capital inflows, particularly increases in air traffic and other liabilities.
• Confirm receipt and timing of the $161 million tax receivable and monitor the company’s stated intention to repay the Treasury loan.
• Review liquidity needs against aircraft purchase commitments, lease obligations, maintenance deposits, and planned fleet growth.
• Monitor COVID-19 and Delta-related bookings, fuel prices without hedges, the credit-card processor covenant waiver, and the status and potential outcome of the DOT review.