Frontier Group Holdings, Inc. — Q2 2023 Form 10-Q
Business context and reporting period: Frontier is a Denver-based ultra-low-cost airline serving about 90 airports in the United States and the Americas. This unaudited quarterly report covers the three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. The company reports one operating segment.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $967 million | $909 million | $1.815 billion | $1.514 billion |
| Operating income (loss) | $79 million | $7 million | $54 million | $(146) million |
| Net income (loss) | $71 million | $13 million | $58 million | $(108) million |
| Diluted EPS | $0.31 | $0.06 | $0.26 | $(0.49) |
| Operating expenses | $888 million | $902 million | $1.761 billion | $1.660 billion |
| Operating cash flow | Not stated separately for Q2 | $(34) million | $(67) million |
- Q2 revenue rose 6%; capacity (available seat miles, or ASMs) increased 23%. Passenger revenue grew 6%, while total revenue per passenger fell 9% to $127.23 and revenue per ASM (RASM) fell 14% to 10.35 cents. Ancillary revenue per passenger increased 6% to $79.64.
- For the first half, revenue rose 20% and ASMs rose 20%. Load factor increased to 84.1% from 79.2%; RASM was approximately flat at 10.02 cents.
- Q2 operating expenses declined 2% despite higher capacity; cost per ASM (CASM) fell 20% to 9.51 cents. First-half expenses increased 6%, while CASM fell 12% to 9.72 cents. Excluding fuel, CASM declined 8% in both periods; these are non-GAAP measures.
- Fuel expense fell 27% in Q2 and 3% in the first half, mainly because fuel rates declined 39% and 18%, respectively. Higher capacity increased fuel consumption. Salaries and benefits, maintenance, and aircraft rent increased with fleet size and operations.
- Cash and cash equivalents were $780 million at June 30, versus $761 million at December 31, 2022. Current assets were $1.009 billion and current liabilities $1.645 billion.
- Debt was $433 million gross, or $430 million net of debt issuance costs and discounts; $237 million was current. Total debt-to-capital was 43%, or 84% including operating lease obligations. The company reported covenant compliance.
Material changes, cash flows, and commitments
- First-half operating cash use improved to $34 million from $67 million. Investing cash use was $33 million, compared with $57 million. Financing provided $86 million, chiefly from $89 million of sale-leaseback proceeds and $52 million of net debt issuance proceeds, partly offset by $51 million of principal repayments. Cash increased $19 million.
- First-half results included $57 million of sale-leaseback gains and an $18 million aircraft-rent benefit from reversing previously accrued lease-return costs after lease extensions. The company recognized $17 million of sale-leaseback gains in Q2.
- At June 30, the company had 126 aircraft, all under operating leases, and commitments to purchase 217 aircraft and 17 spare engines. Aircraft and engine purchase obligations totaled $12.863 billion; total disclosed material cash requirements, including debt, interest, leases and maintenance deposits, were $16.702 billion.
- Operating lease obligations required gross future cash payments of $3.334 billion. Frontier expects to fund near-term requirements with cash, operating cash flows and its pre-delivery payment facility; it is evaluating financing for aircraft deliveries.
Outlook, commentary, and risks
- The filing provides no quantitative earnings or operating guidance. Management said it expects to meet cash needs for the next 12 months using available cash, the pre-delivery payment facility and operating cash flows. Results are seasonal and may be affected by economic conditions.
- Management attributed revenue growth to leisure demand and increased capacity, while noting moderated fares. Airbus delivery delays had occurred and could persist.
- Fuel-price and interest-rate exposure remain material. A hypothetical 10% rise in fuel prices would have increased annual fuel expense by approximately $115 million; a 100-basis-point increase in variable borrowing rates would add about $4 million to annual interest expense. The company had hedged $295 million of rent exposure for seven aircraft and two engines due by year-end.
- Approximately 86% of employees were union-represented. Negotiations with dispatcher and material-specialist groups were ongoing; several other agreements had approaching amendable dates.
- The proposed Spirit Airlines merger was terminated in July 2022. The filing describes a possible additional $69 million payment to Frontier if Spirit completed, or entered into a definitive agreement for, another acquisition within 12 months after termination. The filing does not state whether the condition was met.
- Frontier said litigation and regulatory matters were not expected to have a material adverse effect, while acknowledging that actual losses could exceed accrued amounts. It reported no material changes to the risk factors in its 2022 annual report.
Important facts for investors to verify
- Whether operating cash generation improves, given first-half cash use despite reported net income, and whether working-capital movements reverse.
- Whether fare trends, RASM and revenue per passenger stabilize as capacity expands and ancillary revenue grows.
- Funding plans and expected returns for the substantial aircraft purchase and lease commitments, including the effect of any delivery delays.
- Future fuel and floating-rate borrowing costs, hedge coverage, and the company’s ability to maintain liquidity and covenant compliance.
- Outcome of labor negotiations and whether the disclosed Spirit-related $69 million payment condition was satisfied.