Frontier Group Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Frontier is a Denver-based ultra-low-cost airline serving about 110 airports, primarily in the United States and select destinations in the Americas.
Key financial and operating metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $906 million | $630 million | $2,420 million | $1,451 million |
| Operating income (loss) | $56 million | $43 million | $(90) million | $(31) million |
| Net income (loss) | $31 million | $23 million | $(77) million | $(49) million |
| Diluted earnings (loss) per share | $0.13 | $0.10 | $(0.36) | $(0.23) |
| Operating cash flow | Not separately provided for the quarter | $(172) million | $96 million | |
| Cash and cash equivalents at period end | $674 million at September 30, 2022 | $918 million at December 31, 2021 |
- Q3 passenger revenue was $883 million, including $497 million of non-fare passenger revenue; other revenue was $23 million.
- Q3 load factor was 82.5%, up 5.1 percentage points year over year. Capacity (ASMs) grew 7%, while revenue per available seat mile (RASM) rose 34% to 11.27 cents.
- Q3 operating expenses rose 45% to $850 million. Fuel expense increased 84% to $306 million; fuel cost per gallon rose 76% to $3.85.
- Q3 CASM was 10.57 cents, versus 7.83 cents. Adjusted CASM excluding fuel, a non-GAAP measure, was 6.90 cents versus 6.55 cents.
- At September 30, cash was $674 million; debt principal was $423 million ($421 million net carrying value), including $193 million of current maturities. Operating lease liabilities were $2,424 million on the balance sheet.
Changes versus comparable periods
- Revenue increased 44% in Q3 and 67% for the first nine months, as leisure demand, pricing, passenger volumes and capacity recovered. Q3 passengers rose 13%; nine-month passengers rose 26%.
- Q3 net income increased to $31 million from $23 million. For the first nine months, the net loss widened to $77 million from $49 million, despite substantially higher revenue.
- Higher fuel prices and operating activity drove cost pressure. Q3 fuel expense rose 84%; nine-month fuel expense rose 120%. Adjusted CASM excluding fuel increased 5% in Q3 but declined 2% for the nine-month period.
- Prior-year results included CARES Act grant and employee retention credit benefits of $72 million in Q3 and $295 million for the first nine months. No CARES Act credits were recognized in 2022.
- Cash fell by $244 million during the first nine months of 2022. Operating activities used $172 million, investing used $117 million, and financing provided $45 million; the prior-year period generated $96 million from operations and included $266 million of IPO proceeds.
Outlook, management commentary, risks and unusual items
- Management said it expected to meet cash needs for the next 12 months using available cash and operating cash flows; longer-term needs were expected to be met with operating and financing cash flows, including potential borrowing or securities issuance. The filing provides no specific earnings or revenue guidance.
- Management attributed improved demand to recovery in leisure travel and strong pricing, while noting continued uncertainty from COVID-19 and the need to adjust capacity and costs if demand changes.
- The proposed Spirit Airlines merger was mutually terminated July 27, 2022. Frontier received $25 million of expense reimbursement; if Spirit completes or agrees to another acquisition within the specified 12-month period and it closes, Frontier may be owed an additional $69 million. Net merger-related costs were an $8 million expense for the first nine months, but a $12 million credit in Q3.
- Frontier repaid its $150 million Treasury Loan in February 2022 and recorded a $7 million non-cash debt-extinguishment charge. The repayment released the co-branded card program and related brand assets from that loan’s collateral.
- One credit card processor, representing less than 10% of revenue, granted covenant relief through Q3 2022; the company reported compliance with other covenants. Failure to maintain liquidity covenants could allow processors to withhold remittances.
- Aircraft-related commitments are significant: $13.372 billion of flight-equipment purchase obligations and $2.964 billion of undiscounted operating lease obligations were disclosed as of September 30, 2022. Frontier had 226 aircraft on firm purchase order through 2029 and said it was evaluating financing for aircraft without committed leases.
- Key risks include fuel-price volatility (no fuel hedges were outstanding), inflation and rising interest rates, labor availability and costs, operational disruption, aircraft delivery and engine reliability, and financing needs. A 10% fuel-price increase was estimated to add about $104 million to fuel expense over the prior 12 months.
- The DOT’s review of Frontier’s refund and credit practices for company-initiated cancellations or significant schedule changes remained ongoing. The filing states that the ultimate outcome of legal and regulatory matters is uncertain.
Important facts for investors to verify
- Whether cash burn and liquidity remain manageable alongside aircraft purchases, lease payments and scheduled debt maturities.
- Whether revenue recovery and pricing can offset fuel, labor, maintenance and other operating-cost inflation.
- The funding and lease plans for the large aircraft order book, and any changes to delivery timing or aircraft commitments.
- The status and potential consequences of the DOT refund-practices review and the credit-card-processor covenant waiver.
- Whether the conditions for the additional $69 million Spirit-related payment are met.
- How management’s non-GAAP adjusted measures reconcile to GAAP results; the filing cautions that these measures are not substitutes for GAAP and may not be comparable across airlines.