Frontier Group Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Frontier is a Denver-based ultra-low-cost airline serving about 110 airports. The quarter was materially affected by COVID-19 and reduced travel demand. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Operating revenue | $271 | $544 | Down 50% |
| Operating income (loss) | $(92) | $(106) | Loss narrowed, with $136 of CARES Act credits recognized in 2021 |
| Net income (loss) | $(91) | $(64) | Loss widened; 2021 included $20 of warrant mark-to-market interest expense |
| Basic and diluted loss per share | $(0.46) | $(0.32) | |
| Operating cash flow | $30 | $(180) | 2021 benefited substantially from working-capital inflows |
| Cash and cash equivalents at quarter end | $429 | $612 | Cash increased $51 during Q1 2021 |
- Passenger revenue was $262, down 50%; other revenue was $9, down 44%. Domestic revenue was $259 and Latin America revenue was $12.
- Aircraft fuel expense fell 59% to $84, reflecting lower capacity, lower fuel prices and the prior-year fuel-hedge charge. Aircraft rent rose 34% to $138, partly due to deferred lease payments, early A319 return costs and a larger fleet.
- Operating expenses included a $136 CARES Act credit: $125 of PSP2 grant recognition and $11 of employee retention credits. The filing reports adjusted net loss of $173 in Q1 2021 versus $25 in Q1 2020 after excluding specified credits, charges and related tax effects.
- At March 31, current assets were $720 and current liabilities $1,223. Stockholders’ equity was $219, down from $310 at year-end 2020.
- Debt was $361 before $9 of acquisition costs and other discounts; reported current and long-term debt, net, totaled $352. Operating lease liabilities totaled $2,304. Debt-to-capital was 62%, or 92% including operating lease obligations.
- Management reported $853 of available liquidity at March 31: $429 cash plus $424 available under the Treasury Loan facility. The $424 borrowing availability was through May 28, 2021.
Material changes versus the prior-year quarter
- Capacity, measured by available seat miles (ASMs), decreased 36%; passengers fell 35% to 3.252 million. Load factor declined 4.5 percentage points to 69.9%, and revenue per available seat mile (RASM) fell 22% to 5.91 cents.
- Reported cost per available seat mile (CASM) fell 13% to 7.89 cents, but this included CARES Act credits. Adjusted CASM excluding fuel increased 46% to 8.96 cents, reflecting removal of the credits and specified lease-return costs.
- Q1 2021 operating cash flow turned positive, but included a $95 increase in air traffic liability and a $71 increase in other liabilities. Q1 2020 cash flow included the $111 pilot phantom-equity payment.
- Debt increased modestly to $361 from $357 at year-end 2020, including the $12 PSP2 promissory note received in the quarter. Warrant liability rose to $39 from $18, with a $20 fair-value charge recorded in interest expense.
Outlook, management commentary and risks
- Management said passenger volumes were 14% higher in Q1 2021 than in Q4 2020 and bookings also improved, but demand remained below pre-pandemic levels. It anticipated improved travel confidence as vaccines became more widely available, while emphasizing that recovery timing and demand were uncertain. The filing provides no specific forward financial guidance.
- Management reported average daily cash burn of $1 million in Q1 2021, compared with $2 million per day during 2020, using the company’s non-GAAP definition that excludes specified government aid and other items. It said March 2021 was cash-positive under that definition and cautioned that the trend might not continue.
- After quarter-end, Frontier received $21 of additional PSP2 funding and entered into a PSP3 agreement for approximately $150, comprising a $135 grant and a $15 loan. The IPO also closed in April: Frontier received $265 net of underwriting discounts and estimated offering expenses; the $271 figure cited elsewhere is after underwriting discounts but before estimated offering expenses. These events are not reflected in the March 31 financial statements.
- The company had firm commitments for 153 Airbus A320neo-family aircraft and 22 engines. Estimated flight-equipment purchase obligations totaled $8,854, including $522 for the remainder of 2021. Financing for most future aircraft remained to be arranged.
- COVID-19, fuel-price volatility, intense fare competition, fixed lease and aircraft commitments, and the ability to finance fleet growth are significant risks. One credit-card processor representing less than 10% of revenue granted covenant relief through Q2 2021; additional waivers or amendments may be needed. Frontier disclosed compliance with other covenants at the reporting date.
- The DOT requested information about Frontier’s consumer refund and credit practices for pandemic-related flight cancellations or significant changes. Frontier said it was cooperating. The filing does not quantify a potential loss.
- Government assistance carries restrictions, including limits on dividends and share repurchases, employee-related restrictions and minimum service requirements. The company also disclosed a $6 early-termination charge related to A319 leases; four A319s were scheduled for early return in Q2 and Q3 2021.
Important facts for investors to verify
- Whether travel demand, load factor and unit revenue recover sufficiently to offset higher adjusted unit costs once temporary government credits decline.
- Whether reported positive operating cash flow and March cash-positive performance are sustainable apart from working-capital movements and government support.
- Liquidity after the April IPO and PSP funding, including timing and collection of the $161 income-tax receivable, and any repayment of the Treasury Loan.
- Compliance with lender and credit-card processor covenants, including whether further waivers are required.
- Funding plans and financing terms for the $8.854 billion of aircraft and engine purchase obligations, alongside lease and debt commitments.
- Outcome of the DOT consumer-refund inquiry and any related regulatory or litigation exposure.