Frontier Group Holdings, Inc. Q2 FY2021 Earnings Call

Hello, and welcome to the Frontier Group Holdings Second Quarter 2021 Conference Call. My name is Brian and I will be moderating today's call. This call is being recorded and a replay will be available on flyfrontier.com in the Investor Relations section. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. It is now my pleasure to turn the conference over to Susan Donofrio, Head of Investor Relations. Susan you may begin.

Thank you, operator, and welcome, everyone to Frontier's second quarter earnings call. This call is being recorded and simultaneously webcast. A replay of this call can be found on our website. On the call with me today are Barry Biffle, Frontier's President and CEO; Jimmy Dempsey, EVP and CFO; and Daniel Shurz, Senior VP, Commercial; as well as other members of the management team. Following our prepared remarks, there will be a question-and-answer session for the sell-side analysts. We also wanted to remind everyone on the call that today's discussion contains forward-looking statements that are based on the company's current expectations and are not a guarantee of future performance. There could be significant risks and uncertainties that cause actual results to differ materially from those reflected by the forward-looking statements, including the risk factors discussed in our reports on file with the SEC. We undertake no duty to update any forward-looking statements. And in comparing results today, we will be adjusting all periods to exclude special items. Please refer to our second quarter 2021 earnings release, which is available on our website for the reconciliation of our non-GAAP measures. With that, I will turn it over to Barry for his opening remarks. Barry?

Thank you, Susan, and thank you, everyone for taking the time to attend our earnings call. Although this is only our second quarter as a public company, we recently celebrated our 27th year as an airline, and I couldn't be more proud of how we have evolved as a company and the strength and resiliency of our ultra-low-cost business model underpinned by our Low Fares Done Right strategy. In a moment, I'll be turning the call over to Daniel and Jimmy to bring you through the details of the second quarter and our expectations going forward. But I wanted to first provide you with some high-level thoughts. To start, we're very pleased that our expectation of pent-up demand as a result of widespread vaccinations proved to be true. Based upon this expectation, we had planned for and successfully completed the return of all our aircraft and employees into service across our stations during the quarter and consequently operated at capacity levels that were higher than the same comparable quarter in 2019. Utilization of our aircraft and load factors achieved during the quarter were significantly higher than last year and further improvement to the pre-COVID levels is expected as we enter 2022. I want to personally thank our team Frontier members for their hard work, dedication, and professionalism through the pandemic and for bearing our return to full operations, along with our commitment to our mission of Low Fares Done Right with the safety of our team members and customers continuing to be our top priority. Our success in navigating the pandemic and returning to full operations is the direct result of all our team's efforts. Looking forward, we're closely monitoring the impact of the Delta Variant. We expect any impact to be short-term in nature given the availability of vaccines and the likely increase in vaccination rates in response to the Delta Variant. We therefore expect a resumption of the pace of recovery as the Delta Variant cases fall, similar to what was experienced elsewhere in the world. As we returned the airline back to full operations, we have remained financially disciplined. The resulting strength of our balance sheet and liquidity coupled with our low-cost structure positions us well to address any delays in the timing and pace of the recovery resulting from the Delta Variant and to facilitate our planned growth as the recovery continues to unfold. Our growth since last quarter has continued in both domestic and international networks. Domestically, this includes new service from Atlanta, Dallas, Denver, Las Vegas, Orlando, and Salt Lake City and the announcement of even more leisure destinations from Philadelphia and Burbank. We're pleased to have the governor of Colorado in our first flight to Grand Junction as well. Internationally, our Caribbean and Latin America presence continues to grow, including expansion into Antigua, Aruba, Belize, Costa Rica, St. Martin, and Turks and Caicos. To keep up with this growth, we've opened a new crew base in Tampa during the quarter and plan to add Atlanta in due course. We remain committed to being America's greenest airline as well. This is not only through the use of more fuel-efficient aircraft, which generated over 100 ASMs per gallon during the quarter but also through other initiatives, including the campaign we launched this quarter highlighting Florida animal conservation. We partnered with Visit Orlando, representing four Orlando wildlife parks and preserves. Customers were invited to choose from among resident animals from the Central Florida Zoo and Botanical Gardens, Gatorland, SEA LIFE Orlando Aquarium, and Wild Florida to determine which animal would be on the tail of new Frontier Airlines aircraft. Ted the turtle was our winner from this highly successful contest and will appear on a frontier aircraft in 2022. Our efforts are resonating with customers as well. With a number of new Discount Den members surging in June to the highest monthly level since the program was initiated. In June, we also reached the highest level of new Barclays Frontier credit card member sign-ups in our company's history. This performance helped us achieve $60 per passenger non-ticket for the first time. Overall, I'm encouraged by the pace of recovery we experienced during the quarter and our timing of the capacity deployment to meet that recovery. There may be delays in the recovery resulting from the Delta Variant, but I expect those delays to be temporary given the existing availability of vaccines and observation of the movement in case levels experienced in other impacted areas of the world. Further, as the confusion subsides and Americans understand how powerful vaccinations are in preventing severe outcomes, we expect confidence to build and the pent-up demand will surge again. I'll now turn it over to Daniel, who will provide more details on our performance for the quarter.

Thank you, Barry. And I want to join you in thanking all of our team Frontier members for continuing to take such good care of each other and, of course, all of our customers. As the airline returns to full operation, we continue to be very focused on strengthening our loyalty and membership programs and have seen further success and momentum from our efforts. During the quarter, we enhanced our website to better highlight the benefits of our Discount Den program. As Barry mentioned, we should have seen a resulting surge in Discount Den memberships in June. The month we saw our highest level of acquisition since the program started. In addition, we mentioned last quarter that working with our launch partner Barclays, we will focus on attracting more card members to our Frontier Airlines Mastercard program. I just like to highlight, June set a new record sign-ups for the card and we've just exceeded that record in July. Our capacity during the quarter exceeded the levels of the comparable pre-COVID quarter in 2019. We've taken a balanced approach to our capacity growth with existing and new flight service and our overall goal is to stay in markets for three to four times a week flight service, which we think is ideal for our business model. Our Caribbean and Latin America footprint has grown to account for over 13% of our capacity this summer and we've recently announced new destinations to add to our existing capacity, including Antigua, Belize, and Turks and Caicos. Our goal by the end of 2023 is for flying in this region to account for 20% of our overall capacity. Domestically, we announced plans to further grow our footprint in the fall and winter with new routes out of Atlanta, Dallas, Las Vegas, Miami, and Orlando. These new domestic routes are almost exclusively taking advantage of our existing broad airport portfolio. We saw an increase in the recovery of demand as the quarter progressed. Operating revenues for the second quarter increased 184% year-over-year to $550 million as the recovery from the pandemic strengthened for leisure travel. We had over 80% more average aircraft in service during the second quarter of 2021 compared to the prior year, with average daily utilization recovering to over 10 hours per day and the fleet operating on an 80% load factor. Further recovery in our utilization and load factor is expected to the levels achieved in the comparable pre-COVID period as the recovery from the pandemic continues as Barry highlighted. On a per passenger basis, we generated total revenue per passenger of approximately $98, including $60 per passenger of non-fare and other revenue, which was 6% higher than the comparable quarter in 2019. Our capacity levels are expected to continue to trend at or above 2019 levels, as we progress through the coming months. Our forward bookings were strengthening before the recent uptick in Delta Variant cases. The impact of the Delta Variant on bookings and the length of that impact are difficult to predict. We do expect that as cases decline, we will see a positive impact on forward bookings. With that I will turn it over to Jimmy to provide more details on our financials.

Thanks, Daniel. I first want to thank all of the team Frontier members for their hard work and dedication as we restore the airline to full operation during the quarter while staying financially disciplined, generating approximately $70 million in cash during the quarter and ending with $936 million of unrestricted cash and cash equivalents, the highest balance in the company's history. The cash at the end of the quarter reflects the $266 million of net proceeds received from the successful closure of our IPO at the beginning of the quarter and $171 million of additional payroll support program funding under payroll support two and three. The strength of our liquidity position enabled us to allow the treasury loan facility drawdown date of May 28, 2021, to expire without drawing any remaining funds under the facility. We expect to receive our $161 million of income tax receivable later this year and are focused on repaying the $150 million outstanding under the treasury loan at the appropriate time. This will enable us to unencumber our co-brand credit card program and related brand assets that are currently collateralizing the treasury loan, providing standby access to substantial liquidity if needed. Our GAAP net income for the quarter was $19 million. Our adjusted net loss of $50 million or $0.24 per share excludes several special items. These include $87 million of Cares Act credits, a $2 million mark to market-related to the warrants held by US Treasury through our IPO closing date of April 6, 2021, and $6 million of costs associated with the early lease termination of our remaining 319 aircraft. We ended the June quarter with 119 aircraft, or 109 aircraft in our fleet after the addition of five new Airbus A320 new aircraft that were financed through sale-leaseback transactions, partly offset by three lease returns during the quarter. The lease returns during the quarter include two A319 aircraft associated with our early lease termination to complete our strategic objective of replacing all A319 aircraft with larger and more fuel-efficient A320 and A321 aircraft. To this end during July 2021, we signed a letter of intent with two of our leasing partners to add an incremental A321 aircraft through direct leases, with deliveries expected to begin in the second half of 2022 and completed in the first half of 2023. The incremental A321 aircraft will enable the company to boost its ASM growth rate as the recovery from the COVID pandemic continues. We anticipate taking delivery of an additional five A320neos during the third quarter of 2021, with no deliveries expected in the fourth quarter. Looking forward to the third quarter, we continue our focus on getting the airline back to full utilization as we enter 2022 while remaining flexible to address any impact from the Delta variant on our bookings. Within the last week, we have noted softening in the level of bookings over seasonal norms that we believe is directly related to the increased COVID-19 case numbers associated with the Delta variant. The impact of the Delta variant on bookings and the duration of that impact are difficult to predict. As a result, the top end of our guidance range for net income is being adjusted to breakeven, providing us with a third quarter net income loss margin range of 0% to minus 5%. We are confident that as cases decline we will see a positive impact on forward bookings. More details on our forward guidance can be found in our second quarter earnings release and our website. With that, I will hand it back over to Barry for some closing remarks.

Thank you, Jimmy. It's been a year of enormous change for our company and we continue to thank all our team Frontier members for going above and beyond as we navigate through the pandemic and the successful return of all of our aircraft and employees into service across all of our stations during the quarter, enabling us to take advantage of the strengthening recovery in leisure travel. While the timing of the recovery may be temporarily delayed due to the Delta variant, we're in a very strong liquidity position for the proven and very resilient business model that positions us well for continued shareholder value creation as we grow the business. With that, operator, please open up the call for questions.

Our first question comes from the line of Mike Linenberg of Deutsche Bank. Please go ahead.

Hey, good afternoon everyone. This is to Barry and maybe to Daniel as well. First off, just kudos to the fact that you guys have this promotion out there, this friends with vaccines fly free. So, definitely creative and my hats off to you on that one, which is sort of a lead into my question, thoughts on the Biden administration talking about all arrivals, overseas arrivals into the US actually having to be vaccinated. How does that change in your thinking about new international destinations? I think you've indicated in the past that you're probably going to see more international in 2021, 2022. Is it less focus on VFR and more on pure leisure destinations like Caribbean, Turks, and Caicos? How does that change? And also, sort of as a follow-up question, where are you with respect to your customer base? Do you have a sense of how many of them are vaccinated? I’m bringing this up because two other carriers in prior conference calls this quarter indicated that they gave some statistics. One said the majority of their customers were vaccinated, another one said their most frequent customers are something on the order of 84% of them were vaccinated. Any thoughts on that since it will have some impact on people choosing where and when they can fly? Thank you.

Thanks, Mike. I'll try to work backwards and try to remember all the questions you threw in there. But look, if we look at who's traveling now and compare that to a year ago, I mean you've got massive numbers of travelers and people didn't travel a year ago not because fares were too expensive or anything else, they were scared to fly. The vaccinations made them feel safe and that's what got people back out traveling. We’ve been quietly surveying over the last few days to actually get the exact latest number, but we believe it is the vast majority of everyone who is traveling today is vaccinated. I don't see a challenge to your international question. I don't see a challenge there either. In fact, I was with the Miami airport recently in the first month that they offered vaccinations in the airport in Miami. They had over 50,000 people come there. People are coming off planes from everywhere to get it. The people that are going to travel in the United States, I think you're going to see that they're vaccinated as well. Look, we're in the safety business, and we would support and continue to support any measures or incentives that it takes to get everybody vaccinated. The facts are clear. There's a lot of confusion over the last week or two talking about breakthrough cases, but there are three numbers that every American should know: 97, 99, and 100. 97% of those in the hospital with COVID are unvaccinated. 99% or more of everyone dying of COVID is unvaccinated. It's time for 100% of everyone who is eligible to get vaccinated.

Great. And just one quick follow-up. The withdrawal from LAX, I was surprised. Presumably it has to do with cost or maybe it's moving to a new terminal which is less convenient. Thoughts on that because it would seem like that would be a good market for you for the long haul.

Mike, thank you. It's Daniel. We always prioritize maintaining low costs. Southern California offers a variety of airports. LAX was already an expensive airport, and we experienced another significant cost increase due to new construction there. We have shifted our services to airports where we save a substantial amount per passenger. This allows us to utilize our low fares to draw in customers, which ultimately benefits our business. It's not that we're abandoning LA; we're still serving the Southern California region through airports in Ontario, Burbank, and Orange County, which are all significantly lower-cost options for us.

Thank you. Our next question comes from Ravi Shanker of Morgan Stanley. Your line is open.

Thank you. Good afternoon everyone. Maybe as a follow-up on some of the previous commentary on the previous question. Just your commentary on the Delta Variant kind of showing up in your booking activity. That seems a little bit different than some of the other airlines, probably all the other airlines so far. They've said that they're not seeing any impact so far. Is this just because you're reporting later on them? And so you have kind of more up-to-date information here, or do you think there's something different about the way where you fly to your type of customers that you're maybe seeing a slightly different delta impact than some of the other airlines?

Look, if we would have reported two weeks ago, we wouldn't have had the Massachusetts study, we wouldn't have had the new CDC guidance, and you wouldn't have had all this new information about the Delta Variant. I hate to be the bearer of news that this resurgence is an impact on economic activity, but it is. If you want to look at the KAYAK search data, it's public. It's out there. You can look at it. It's been trending down for the last two weeks. This is very clear. If you compare what was going on in June compared to now, there's been a little slowing in the recovery. Nothing like we saw obviously a year ago. The most recent ARC data shows us that we're seeing a little bit of a setback as well. We've factored that into our numbers that we're presenting today. I understand you're comparing it to carriers that haven't factored any of this in, but we were in a position where it's very clear with our data. We've seen some softness in future sales. We're still seeing great demand close in but as we look beyond the summer peak, we have seen some softness and that is reflected in the public data as well. And so that's why we reflected in our guidance.

Very good. Crystal clear on that makes a lot of sense. And just kind of shifting gears a little bit from my follow-up, there was an executive order from the Biden administration a few weeks ago targeting a number of industries, including the airline industry, particularly focused on increased fare disclosure as well as potentially looking at kind of slots in certain airports. I would love to get your take on what you think of that and kind of how much of that is actually actionable? Thank you.

Yes. This is Howard Diamond. There's nothing in those executive orders that we are concerned about. We feel like we're already compliant. These have been in the works for quite a bit of time. So we're fully prepared to comply. We absolutely believe in transparency and providing the best customer experience.

Thank you. Our next question comes from Hunter Keay of Wolfe Research. Your line is open.

Hey. How are you guys doing?

Hi.

Okay, Barry. So is business travel coming back whenever it does? Does this travel come back good because it creates a pricing umbrella and alleviates some competitive capacity pressure, or is it bad because it gives network airlines a revenue stream they can use to subsidize low fares to compete against you in a way that you probably consider to be short-term irrational?

It's good. It's very good. Look, if your cost structure requires really high fares to make money, they do irrational things when that's not available to them. So it's good for the entire industry as business travel comes back. I think what's exciting is that we've seen, prior to the Delta Variant in the last week or so, you’ve seen business travel coming back a lot faster than any of us ever expected. I can't tell you how many business dinners and events and things I've been to in the last six to eight weeks. I think it's good. While we may take a little bit of temporary delay, the recovery is not canceled. I just think they may push back some of the office openings. But that just means that there's probably going to be more people traveling in October than there was in September.

Okay. And then a couple of questions on capacity for you. The third quarter was a little bit lower than I expected it would be. Did you dial that back because of the Delta Variant? And then second, how did the new planes you just acquired in July impact the outlook for growth next year? Thanks a lot.

Yeah. I'll just deal with the second part of the question. Next year's growth rates are going to head towards about 30% given the year-over-year change from having lower utilization this year. It doesn't materially change our growth rate in 2022. What it does is it infills some growth for 2023 that we talked about while we were doing the IPO; our growth rate at that time was around 10% to 11% ASM growth. We think that will rise to maybe high teens in 2023 because it gives us some confidence now given what we're seeing in our cost base and the efficiency that's coming through in a more modular network on the back of what we've learned through COVID, plus also the incremental A321s coming into the fleet that we think our CASM ex-fuel actually will be modestly below $0.06 in 2023, which is a real positive move for the business from a unit cost perspective and it gives us better confidence in terms of getting the airline back to pre-COVID margins as we progress through 2023.

Right. The high teens, that's a year-over-year.

Sorry. Yes, high teens year-over-year.

Just clarify Jimmy.

Yes okay. That's right.

Sorry. Dan, go ahead. Were you going to say something?

Our capacity growth in Q3 has been slightly lowered. We expect a minor decrease in capacity in response to current conditions, but it's just a small change of about a point. We still anticipate significant growth in fourth quarter ASMs, currently expecting an increase in the 12% to 14% range.

Okay. Got it. Very helpful. Thank you.

You’re welcome.

Thank you. Our next question comes from Duane Pfennigwerth of Evercore. Please go ahead.

On lease payment deferrals you noted you're caught up on those. I wonder if you could give us the cash flow impact and the OpEx impact from the catch-up in Q2; in other words, the amounts that will not be recurring?

Yes. The significant lease repayment we made in the first quarter was approximately $22 million, if I recall correctly. In the second quarter, it was around $10 million. We have mostly paid it back. The same applies to cash, net income, and operating costs. There is a small remaining amount of a couple of million dollars that needs to be paid out over the rest of the year, but it is largely settled at this point. Additionally, we are normalizing our working capital concerning accounts payable. A major change we are experiencing in the business is that as we approach full utilization in 2022, we are investing a notable amount in training and in underutilized aircraft. This means we are effectively incurring rent expenses throughout this year as we prepare the business for next year. This presents a significant cost challenge, but one that we believe we can manage as we move into next year.

That's helpful. And then my follow-up is on operations. As you take a look at what's going on across the industry, what is your take on where the pain points are really emanating from? You've talked about the concept, at least for your own network, of a more modular network. Is there anything different about the way you have spooled up either your network or your planning that helps to insulate you from some of these issues we're seeing?

Yes. So I'll start it and let Daniel talk. But look, we're not immune to the workforce challenges that are happening all across America in just about every sector in services. You've seen shortages of trucking; you've seen shortages of all types of things; supply chain and shortages of people that want to work. But I'll tell you we've been heavily focused on this since January. It got more acute as everyone tried to get back to full operations this summer. It was almost like we were all stealing from each other’s employee pool. But I'll tell you there's silver lining. I mean, when we talk to a lot of the recruiters and the feedback we're getting from the job fairs, you're finally starting to see those people get off the couch and look like they're getting ready to go back to work as their unemployment benefits are going to stop. I think this is temporary in nature. As I tell people, these are good problems to have. I think we're all blessed to have the demand recovery so we would even have these challenges. It's a lot better to have that conversation today versus what we're talking about a year ago. And as far as operational resiliency, we've always been focused on that in our operational design. But I think we've gotten even better at that over the last year.

Yes, I believe that transitioning to a more modular approach has definitely helped us. We've encountered some of the same challenges, but within the network, we are now better equipped to manage disruptions, especially those caused by weather. This improvement has enabled us to mitigate issues more effectively in various parts of the network. We're also continuing to expand our crew bases; we recently opened one in Atlanta and are set to launch another in Phoenix in 2022. This modular structure enhances our commercial performance, provides us with greater flexibility in network design, and improves day-to-day operations and recovery efforts. Consequently, these changes lead to reduced costs. As we grow in these cities with crew bases, it positively impacts our high-profit ancillary services as well. We had a productive quarter concerning ancillary performance, achieving $60, and expanding these cities benefits both our Discount Den and credit card acquisition efforts. Overall, it brings numerous advantages.

Okay, appreciate your thoughts.

Our next question comes from Savi Syth of Raymond James. Your line is open.

Hey, good afternoon. Just given how international is going to be playing a bigger role in the network as you get to 2023, just curious what you're seeing today? And if there's going to be any kind of change in the type of international market mix that you're seeing, or how much of your growth is going to be dedicated towards international?

I'm going to start off and then let Daniel discuss some specifics about the region. You mentioned the $60 in non-ticket revenue, and we're now aiming for $63 by the end of 2023. This will allow us to reach a breakeven fare of about $30. We believe our growth potential is significantly enhanced with such a low breakeven fare. We plan to focus on international markets where we expect much higher yields compared to domestic ones. We think this will provide us with a substantial boost in RASM over the next few years. Now, Daniel, could you elaborate on some of the specifics?

In the short term, we've observed a significantly better performance in near international leisure compared to VFR, a trend that some competitors have also noted. We have directed our summer growth and recently announced winter plans towards leisure destinations. As vaccination rates increase and travel fully resumes in the region, we expect to expand our VFR portfolio as well, leading to a balanced mix. Currently, our focus is primarily on our two Florida bases, but we anticipate growth in our international Frontier network. We expect that by the end of 2023, 20% of our capacity will be allocated to the international and Caribbean markets.

That's helpful. Thank you. And just as a quick follow-up on the Delta variant comments. Have you seen a difference in impact in kind of where that demand softening is, or is it just kind of broad based?

So, it's Daniel, again. We're seeing it reasonably broad-based for the moment. I think it's causing concern. It's causing concerns people look to book further out. That's a relatively general concern across the market.

I would just add, I mean, look, there's a lot of confusion out there right now. The last week, probably the worst time in terms of people's understanding. Again, I mentioned it earlier, as people that are vaccinated are getting a little freaked out over the last week, as they understand the facts, they're going to settle down. They're going to realize that as long as the data holds up again: 97% of everybody in the hospital is unvaccinated, and over 99% of everybody dying is unvaccinated. I think everybody just got scared a little bit. They heard about these breakthrough cases, but they are extremely, extremely rare. As people start to understand that, we expect that people will get back to their normal life.

Thank you. All right. Great. Thank you.

Thank you. Your next question comes from Stephen Trent of Citi. Your question please.

Good afternoon, everybody and thanks for taking my question. I just wanted to touch base a little bit on what you guys are seeing from weather events. I mean, we've seen kind of extreme drought in parts of the Desert Southwest and forest fires and what have you. I'm just wondering if any of these occurrences have created any operational disruption versus what you would have previously anticipated?

Yes. Look, I can kick it off and some of the other shares we even talk to. Yes, we have seen some unprecedented weather events. Yes, setting records in the West, setting records in the East, thunderstorms lasting longer, we’re seeing day after day of ground stops in airports, these seasonally happen, but yes, the intensity and some of the records are very difficult. I can tell you, again, we're blessed to have the modularity in our network, and it hasn't rippled through other parts of the business as a result of that design feature, but it is challenging. I mean, what it does in a world where we're largely staffed very well. I think on a relative basis, maybe better than others, but weather stretches those folks. You stretch duty periods on the crew. You stretch the day for those who work on the ground, if they have to sit there for hours on end and wait for the weather to clear to finish unloading an airplane. Unfortunately, our customers oftentimes get in that situation. Thankfully, though, seasonally, we should be moving into better weather over the next couple of months. Hopefully, all the supply chain issues that are here in the US and all the other things normalize as well as the unemployment benefits run out. By the time we can get back to winter, everyone will have plenty of staff to deal with these issues.

Great. Very helpful, Barry. And then just my one very quick follow-up, I heard you mention the detail about some of the southbound routes into LatAm. Given the FAA's downgrade of Mexico to category 2, has that created kind of any incremental opportunities for Frontier, or is it way too short of a timeframe to have any meaningful benefit from that?

No. It doesn't change the calculus for us. As we look at the different opportunities in Latin America, especially Mexico, we've continued to add routes there, but I assume that's going to be short-lived. I understand the Mexican authorities are working on this, and they're going to work through that. I don't think it creates any long-term strategic opportunity for anyone on the US side.

Okay. Very helpful. Appreciate the color. Thank you. Your next question comes from Jamie Baker of JPMorgan. Please, go ahead.

Hey. This is Ian Snyder, JPMorgan, with two quick questions on behalf of Jamie. I'll jump right in with it. On the last call, you mentioned that work-from-home flexibility could theoretically lead to people taking more trips each year. Obviously, it's too early to know if that's happening, but are there any interesting trends you're seeing when tracking repeat customers?

This is Daniel. It seems to be a bit early to determine that. We were actually anticipating this to occur towards the end of this year as we await the main return to office, which will give us insight into the level of additional flexibility. It's during the period when offices return to whatever the new normal is that we will truly understand the impact on travel patterns. Clearly, we're not there yet.

There's no indication yet.

But we still do believe that it's going to happen. I mean, there's a lot of permanent remote working that's going to take place; it's going to cause conferences and meetings and training travel that's going to be necessary, but it also just gives them a lot of flexibility. So I haven't seen any indications that we're not going to move to more flexibility. I think the theory still holds.

Great. Thanks for that. And then just one more quick follow-up. On the leasing side, I know we've gotten just a little bit with the lease payment deferrals, but we have had a lot of discussion with appraisers on this. Could you give some color on the sort of 320neo offers you're getting, perhaps on a percent basis of how current offers compared to your average lease rate for aircraft already in service? Are they 10% lower, or 30% lower? Just some order of magnitude would be helpful for us.

Yes. The leasing market faced challenges in 2020 due to a liquidity squeeze that affected airlines and leasing companies. Pricing initially expanded but is now returning to or even going below pre-COVID levels, which is advantageous. While I won't disclose exact lease rate figures, we are recognized as a strong option within the leasing sector, attracting companies looking to place or finance aircraft. We are well-positioned as we move into next year from a leasing and financing standpoint. It's positive to see a return to nearly pre-COVID levels, although there are instances of below those levels, and aggressive pricing has emerged, which is quite encouraging.

Great to hear and appreciate the color there. That’s it for me.

Thanks.

Thank you. Our next question comes from Chris Stathoulopoulos of Susquehanna. Your line is open.

Good afternoon. Thanks for taking my question. So I appreciate the color on the impact you're seeing from the Delta variant; it looks to be more to the system as a whole versus any specific areas. But I'm wondering if you could comment prior to the acceleration in the Delta cases over the last two weeks, what your guidance might have looked like for adjusted net income margin?

Hi, Chris. It's Jimmy here. So, look, we expected to deliver to you a guidance range maybe 2, 3 points higher on the top end on what we gave you today from a net income perspective. We probably were 2%, 3% positive on that about a week and a half ago. As we saw things progress over the weekend, we made a revision to our guidance. If you want to look at that in dollar terms, it's probably somewhere in the region of $20 million to $30 million in terms of revenue, that it hurt or it's going to hurt the business in the next couple of months. We feel pretty good about the progress that we're achieving on recovery. If you look at the business, we had a negative EBITDAR through last year, into the first quarter this year. We have a positive EBITDAR of 13% in the second quarter. Our anticipation as to the EBITDAR levels will head back above 20%. Not sure how much above 20%, but a really positive trajectory for the business as it recovers and heads into 2022. That’s probably stalled a little bit. We'll probably end up slightly below 20% from an EBITDAR perspective in the third quarter. Then we'll see how things develop from the Delta Variant and have behavior changes in the next couple of months as we assess the rest of the year.

Okay. Thank you for that color. If we do start to see these vaccination requirements for inbound travel or renewed measures reinstated domestically, could you walk us through some of the ways that you could perhaps get agile with the network, whether that's reallocating flights or aircraft? But just what have you learned over the last 18 months of having to constantly adjust the network? And if you do have to make these changes, how perhaps you can be more efficient now into the fall versus where we were last spring? Thanks.

Yes, we're not here to speculate about the future. It's important not to get distracted by the Delta variant, as this is a temporary issue. We always anticipated challenges like this could arise. It typically takes six to eight weeks to resolve, as seen in the UK and Southwest Missouri. If new measures, such as vaccine requirements, are implemented, it's crucial to recognize that vaccinated individuals often feel more comfortable traveling. They feel more at ease knowing that others are vaccinated as well. We believe this situation could actually drive demand higher. Therefore, we don't think it's wise to make any long-term strategic decisions based on this short-term issue.

Thank you.

Thank you. Your next question comes from Myles Walton of UBS. Please go ahead.

Thanks. Good afternoon. Could you comment a bit on through the quarter trends, particularly as it relates to load factors, maybe comparing June to April or May and what July is looking like?

Hi, Myles, it's Daniel. We saw traffic recover sharply during the quarter as capacity continued to increase. We saw load factors continue to grow during the quarter; we've seen that trend continue into July, obviously, the peak month for summer travel.

So are you anticipating the 3Q loads to be similar to 2019 3Q loads?

We are not yet recovered to 2019 load factors. While we are seeing recovery, we're not yet recovered to 2019 levels.

Okay. And then maybe Jimmy, the size of the sale-leaseback gains in the quarter was it $25 million on the five deliveries? Is that a similar number that's baked into the 3Q guidance as well?

I think it was a little bit less than that. But yes, it's consistent. We have actually five aircraft in Q2, five aircraft in Q3. We actually have no aircraft in Q4, just to point out to all of you. You won't see any leaseback gains in Q4 related to aircraft. But yes, it's effectively five aircraft in the last two quarters.

Okay. All right. I’ll leave here to. Thanks.

Your next question comes from Eric Morgan of Barclays. Your line is open.

Hey, good afternoon. Thanks for taking my question. I just wanted to ask one a little bit longer-term on your growth plans in the context of what your fleet is going to look like in a few years. So, you'll have the larger mix of the 321s as we get to 2023 and beyond, and you had the letter of intent announced today as well. Just wondering if you could speak to how this change in mix of aircraft size impacts your growth strategy, if at all, just in terms of markets you can enter and any limitations or otherwise on your ability to stimulate demand? Thanks.

Okay. So, what we're expecting in terms of growth rate in the next couple of years, as I said earlier, as Hunter asked the question, in 2023 will be just under 20%, somewhere around high teens in terms of percentage. The delivery profile works in the next four or five years beyond that; it starts to slow down in 2025, 2026, 2027 as you deliver aircraft. We have some optionality on incremental aircraft that we could bring from leasing companies that we've talked about before, and we've displayed today that we have 10 aircraft; but also the potential to extend the series of aircraft that we have that are on eight-year leases in the 2026-2027 period, and that gives us an ability to tip some of those growth rates up a little bit. In relation to the size of the aircraft, yes, our average seats per departure, from today's announcement for example, out of 10 aircraft, our average seats for margin 23 will go to just over 200 seats. I mean that's really positive from a unit cost perspective in the business. It actually opens up opportunities for us in destinations around the United States that we think are interesting. Maybe Daniel you want to talk about where we place our growing aircraft?

Absolutely. We've deployed our current rate of 321 across most of our network and tested it in various markets. They perform well in both large and small markets, reducing unit costs significantly. The marginal cost associated with the fleet, including module costs and additional seats, is quite low. We believe we can effectively introduce more 321s in nearly every airport in our system, although there are a few where we need to use the 320 for operational reasons. Overall, the 321 is suitable for almost every location in our network, and as our fleet composition shifts more towards the 321, you'll see us deploying it across the system.

Thank you. We have a follow-up from Hunter Keay of Wolfe Research. Your line is open.

Hi. Thanks. Just a couple of quick clarification questions. On the 30% growth in 2022, that was a year-over-year growth rate or year over two years? I realize it's almost the same thing, but just to get this.

It's year-over-year.

Okay. Thanks, Jimmy. And then I'm sure I know you answered this question too, but I just want to clarify the sub $0.06 CASM in 2023, that's obviously CASM ex-fuel not CASM ex-fuel and interest expense, correct?

Yes. Look, we anticipate CASM ex-fuel in 2022 will be slightly above $0.06 and in 2023, it will be slightly below $0.06, largely on the back of adding these aircraft into the business and also some of the things that we've learned as we emerge from COVID with the modular network.

Great. Okay. That’s it. Thank you.

Thank you. We have a follow-up from Chris Stathoulopoulos of Susquehanna. Your line is open.

Thanks for taking my follow-up. If you could comment on the fare dynamic that you're seeing and if there's anything notable perhaps at the system level or specific areas of your network? Thanks.

In summary, we have observed an improvement in the fare environment as demand increased, which is expected with the arrival of summer demand. Each year, the industry typically experiences a decline as we transition from the summer peak into the fall shoulder. Recently, particularly over the last week, we have noticed some promotional activity that Barry mentioned, indicating that those offers are becoming more aggressive. We believe this is also linked to the weakening demand attributed to the Delta variant.

Thank you. I show no further questions in queue at this time. Are there any closing remarks?

No, I just want to thank everyone for joining the call today. We're really pleased with our results in the second quarter. We remain very encouraged about the business going forward, especially as we look to 2023 when we expect to be sub-6 CASM heading to $63 in non-ticket revenue to our breakeven fare we're targeting at $30, which we think is really powerful for our business. I just want to thank all of our employees and partners at team Frontier for helping us produce great operations and continue to get things back to normal as we get into 2022 and have full utilization again. Thanks everybody for joining the call. We'll talk to you soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.