Thank you for joining us. Welcome to the Frontier Group Holdings Q2 2022 Earnings Call. I will now hand the call over to your host, David Erdman. Please proceed.

Thank you and good afternoon, everyone. Welcome to our second quarter 2022 earnings call. Today's speakers will be Barry Biffle, President and CEO; Jimmy Dempsey, EVP and CFO; and Daniel Schurz, Senior Vice President, Commercial. Each will deliver brief prepared remarks and then we'll get to your questions. But first, let me quickly cover the customary Safe Harbor provisions. During this call, we will be making forward-looking statements which are subject to risks and uncertainties. Actual results may differ materially from those predicted in these forward-looking statements. Additional information concerning risk factors which could cause such differences are outlined in the announcement we published earlier, along with reports we filed with the SEC. We may also discuss non-GAAP financial measures which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement. And then lastly, we will be participating in several investor conferences in August and September, and we certainly hope to see you at one of those events. And so, I'll give the floor to Barry to begin his comments. Barry?

Thanks, David, and good afternoon, everyone. Needless to say, it's been an interesting few months since our last earnings call. While public attention was largely centered on the merger, behind the scenes, we realized the highest quarterly revenue in history at $909 million, 43% above the comparable 2019 quarter, and a record ancillary revenue of $75 per passenger. The strong revenue performance in the second quarter enabled us to overcome elevated fuel prices and generate an adjusted pretax margin of 3%. We were able to lessen the impact of the weather and air traffic control limitations through proactive measures which led to an improvement in our completion factor as the quarter progressed, with a completion factor of 99% during June and over 99% during the busy 4th of July week. In addition, unlike many other carriers, we are not experiencing disruptions due to shortages related to pilot and flight attendant staffing levels. In fact, we have surplus staffing today and the capacity to train 80 additional pilots a month. Contrary to common paradigms and misconceptions about the ULCC segment, we are a highly attractive landing spot for pilots, given our career growth and resulting pay opportunities as compared to the legacy carriers along with a desirable footprint of bases, including the opening of the Phoenix crew base later this year. To further strengthen our pilot recruitment capabilities, we are working with a major flight school to develop a cadet program which will provide an opportunity to train 250 zero-time flight applicants per year who might otherwise have chosen a different career path due to employment uncertainty. Upon completion of training, we will assist in placing them into flying assignments to continue to build experience and we'll be able to hire them once they reach requisite flying times. As we look forward to the third quarter, we expect the demand environment to remain strong, with RASM growth anticipated to be over 20% versus the comparable 2019 quarter, supported by continued strength in our ancillary revenue per passenger. We will continue to focus on generating profitable growth in the business as we increase utilization and successfully overcome the challenges with the pandemic. Accordingly, we expect to turn a second consecutive quarterly profit in the third quarter, with an adjusted pretax margin in the range of 1% to 5%. I'd like to thank Team Frontier for their continued dedication, professionalism, and commitment to providing safe and reliable service to our customers. They are at the core of our Low Fares Done Right model. With that, I'll now hand the call over to Daniel.

Thanks, Barry, and good afternoon, everyone. Second quarter revenue performance was exceptional on many levels. Revenue growth of 43% over the comparable 2019 quarter was driven by a 29% increase in RASM, from $0.0927 to $0.1197, along with a 10% increase in capacity over the 2019 quarter. Revenue per passenger was an impressive 24% to $139, with ancillary revenue contributing nearly $75 of that amount, a record for the business and above our expectations. And third, performance was driven by recent product expansion and enhancement along with strong attachment rates. We will continue to expand and enhance our ancillary offerings to allow our customers to personalize their travel experience and to allow us to continue to offer ultra-low fares. Given our strong performance and future plans, we're now targeting ancillary per passenger to reach $85 by the end of 2023. We achieved an 84% load factor during the second quarter, an improvement of 10 percentage points over the prior quarter. Utilization was an average of 10.9 hours per day, roughly in line with the prior quarter, and we expect a gradual trend toward the 12-plus hours we realized in 2019, consistent with our recovery plan. In response to high fuel prices, we designed our second and third quarter average stage length to be between 960 and 980 miles, which is considerably below historical levels. We expect to return the airline to pre-pandemic average stages starting in the fourth quarter. As we build that capacity, our ASM growth relative to 2019 is expected to accelerate during the current quarter, with capacity up 5% in July, 8% to 9% in August, and 14% to 16% in September, resulting in a higher proportion of our seats being deployed in an off-peak month and creating an approximate 3% drag on RASM in the quarter. Touching on commercial highlights, we recently announced expanded service from Las Vegas. Beginning August 9, we'll launch service from Harry Reid International Airport to Baltimore, Buffalo, Hartford, and Kansas City. With these new routes, Frontier will serve 57 destinations from our Las Vegas base, making us the fastest-growing airline and one of the top leisure destinations in North America. In response to strong demand since we launched service in Houston Hobby in May, we're adding a daily nonstop route to Denver beginning in September. Just last month, we expanded our international and Caribbean service from our Tampa base, launching nonstop flights to Montego Bay and San Juan along with expanded service to Cancun. And lastly, on August 8, we'll formally break ground for our innovative new terminal at Denver International Airport, where we're planning construction of 14 ground loading gates, which will facilitate expedited planning and deplaning through the front and rear aircraft doors, leading to shorter turn times. This and other streamlining initiatives across our network are designed to improve operational performance and enhance customer experience. And with that, I'll hand it over to Jimmy Dempsey.

Thank you, Daniel, and welcome, everybody. Second quarter results were in line with our guidance. The strong demand environment drove record-setting revenue growth compared to the same quarter in 2019; and, along with the exceptional ancillary performance, enabled us to turn our first adjusted profit in over two years. We've employed rigorous financial discipline throughout this difficult period to ensure Frontier has a strong platform to deliver profitable growth. Results in the second quarter were impacted by elevated fuel prices, resulting in $335 million of fuel expenses at an average fuel cost of $4.41 per gallon. Total operating expense was approximately $900 million, including $9 million of transaction- and merger-related costs and $7 million related to an asset impairment, while adjusted nonfuel operating expense was $550 million. This resulted in the CASM ex-fuel of $0.724, which was impacted by lower utilization, lower average stage, higher station-related costs, and the short-term cost of surplus crew. Though our CASM ex-fuel is currently elevated, we're still targeting a return to sub-$0.06 during 2023 as our utilization of stage length normalizes and seats per departure increases with the planned introduction of the A321neo to help mitigate inflationary pressures on the business. We ended the second quarter in a strong financial position, with $766 million of unrestricted cash and cash equivalents. Frontier is in the enviable position of having access to a substantial liquidity source by leveraging our co-brand credit card program and related brand assets should the need arise. As planned, we have enhanced our pre-delivery payment facility to align with the short-term obligations under the Airbus order book, whereby the facility was increased from $200 million to $280 million. We ended the second quarter with 114 aircraft in our fleet after taking delivery of three A320neo aircraft during the quarter. We expect to take delivery of another four aircraft in the third quarter and eight in the fourth quarter, including the first of 36 A321neos by the end of 2023. Looking forward to the third quarter, we expect a continuation of the favorable demand environment we saw in the second quarter. Capacity is anticipated to grow by 8% to 10% over the comparable 2019 quarter. RASM is expected to improve by over 20% in the third quarter versus the comparable 2019 quarter, bolstered by continued strength in ancillary revenue per passenger. Fuel costs are anticipated to be between $3.75 and $3.80 per gallon based upon the blended jet fuel curve on July 22. Adjusted nonfuel operating expenses are expected to be between $565 million to $585 million in the third quarter, the increase from the prior quarter due largely to capacity growth. Adjusted pretax margin is expected to be in the range of 1% to 5%, constrained by the 3% RASM drag Daniel mentioned earlier. With that, I'll turn the call back to Barry to deliver closing remarks before we move to Q&A.

Thanks, Jimmy. Before closing, I'd like to offer my thoughts on the termination of our merger agreement with Spirit. Obviously, we're disappointed in this outcome and that Spirit shareholders will miss an opportunity to meaningfully participate in the rebound of leisure travel, of which we're in the early stages. Our Board took a disciplined approach throughout the course of our negotiations. Rather than overpay for Spirit, the Board prioritized the interest of Frontier, our employees, and our shareholders. As a standalone entity and potentially America's ultra-low-cost carrier, Frontier has a fantastic platform for profitable growth, underpinned by a strong balance sheet, an unmatched A321neo order book, a clear path to CASM-ex below $0.06, and exceptional ancillary performance with plenty of room to run. Collectively, these elements are key contributors to the resiliency of our business model. I could not be more confident in our future, especially given the growing demand for affordable air travel. Our proven and resilient ultra-low-cost model continues to provide the foundation for our strategy and long-term value creation. Even with rising fuel prices, we continue to keep costs and fares low while generating record revenues and providing reliable service. We have one of the highest completion rates in the industry, and our recent performance further validates our business model and strengthens our confidence. We appreciate everyone's time this afternoon. We will not be commenting any further on the termination of the merger agreement, nor a potential tie-up between Spirit and JetBlue. I am, however, happy to take questions about how we will grow our business and add shareholder value as America's ultra-low-cost carrier.

Our first question comes from Jamie Baker with J.P. Morgan.

So Airbus cut its production forecast today, also delayed the planned ramp in 320 production rates. Just wondering how you expect that to impact planned capacity over, I don't know, the next 24 months or so and whether there's any flexibility within the Indigo portfolio to shift around deliveries so that you don't slip?

Yes. Look, Jamie, we've been a little focused on our own things right now, so we haven't focused on that. But look, I mean, we have a large order book with Airbus and obviously, we buy a lot of planes. I know a lot of people have maybe moved some orders around. I'm not sure what this has to do with us. Yes, we do have the ability, as been disclosed before, to move aircraft among the Indigo portfolio carriers that participated in the Dubai order a few years ago. But we're unaware of any material differences versus our order book as we stand today.

And second, there's no shortage of data at this point proving that lower-end consumers are certainly trying to find ways to economize. Your third-quarter guide looks fine to us. Just curious if you're seeing any change in trip duration. Obviously, lobbing off a day of holiday is one way to save on the aggregate expense. Or any changes in the booking curve? Or maybe your data just implies complete immunity to slowing economic trends. Any thoughts there?

Well, I'll start and I'll let Barry add on, Jamie. It's Daniel. No, we're not really seeing any difference. We've seen no change in trip duration. We're not seeing any slowdown in demand and so we don't see this at the moment. So we're not being affected at the moment and we're confident that we're offering the right value to customers to keep getting them to come and choose Frontier.

Yes. We have seen two things that are interesting. One is kind of the work-from-home phenomena. We have seen an extension of some people's itinerary. So I think, in the composite, there may be some people, Jamie, that actually are cutting off a day. I've read articles, just like you have, about some hotels, maybe they cut a day or two off their vacation but they still go and save money. At the same time, you've got people moving around that are working from home but really working from somewhere else. And so they are actually expanding. So the averages, I think, may be clouding that. The one piece of data we do have that is pretty empirical is that we have seen an increase in incomes of our travelers and so a significant increase in the $100,000 household income and a significant increase in the $200,000-plus household income which suggests that you are seeing the buy-down effect to Frontier.

Our next question comes from Duane Pfennigwerth with Evercore ISI.

I wanted to ask you about new markets. I understand you've been busy and focused on other things. But as you think through the implications of staffing shortages for the industry, staffing shortages for regional carriers, more white space in small markets, are there any obvious targets or markets that you feel are really constrained, or overly constrained, from a capacity perspective? And I certainly appreciate your comments about not wanting to go there but you have spent a fair amount of time studying potential overlap. What would you might see as the opportunities that could develop if they do pursue a relationship?

I'm going to let Daniel talk about the more recent kind of phenomena with shortages of regional capacity and he's probably got some examples, because I know he's been exploiting them.

Yes. Look, we always, Duane, watch what's going on in the industry. What we've seen, actually, it's less, I think, regional service in the traditional sense. They tend to serve quite small markets, fundamentally, probably. We do have markets that, even for us, are a little bit too small. But what we've also seen is as airlines have consolidated capacity again this year, we've seen a pullback in certain markets. You can see, notably, we've looked from our Vegas base. One of the reasons we went into the markets we went into is you can see meaningfully reduced capacity in some of those markets as other airlines have sort of consolidated the way they're flying. So, for example, Las Vegas-Buffalo, Las Vegas-Hartford, substantial markets, much less competitive service than what is seen pre-pandemic. There are other examples in our key leisure bases of where we're seeing similar phenomenon and those are the ones we're going to take advantage of.

In response to your second question, I mentioned that we are looking forward to our exciting future as America's ultra-low-cost carrier. To address your inquiry, if new competitors do enter the market, consider an airline that closely resembles us but operates with 40% higher costs, which gives us considerable advantage moving forward.

Our next question comes from Michael Linenberg with Deutsche Bank.

Congrats on getting back to profitability. My first question, just on looking at the differentials, the year-over-year, year-over-2-year, in sort of your base fare versus your ancillary. And it is interesting. You were obviously successful in pushing both up which is a good thing in a highly inflationary environment. But that ancillary increase was roughly double. And I'm curious about, either Barry or Daniel, just they're different products, different price elasticities, presumably one is more sticky than the other but it was a big increase. We're talking about $20, $25 or so, plus or minus a few dollars. What were the big components? Or is there just an inflationary piece in there where just bag fees are now $3 to $5 higher and seat fees and insurance fees are all $3 to $5? Is that really what's flowing through here? Because it does look like a step function change, if you could add color.

Right. So look, we took advantage of the pandemic to continue developing new products. So it's a mix. It's a mix of everything. It's an inflationary effect. It's new products we've introduced. It's the continued work we've done and I think where we lead the industry in how we optimize our pricing of our ancillary products, reflecting what customers want. And it's just the continued work to improve this. And that's why we now have confidence. Given what we've seen, we now have confidence just to increase our target to $85 by the end of 2023.

And I would just add, Michael, we learned in the pandemic. We used to think that 50-50 was a good split. And you said it just a moment ago. We used this word. Literally, you'll hear this around our office multiple times a day. We talk about the stickiness of non-ticket. And the truth is, fares and fuel are largely out of our control, but non-ticket is not. And so what we like about non-ticket is that we can get closer and closer. I mean, I can't guarantee profits, but we can get closer and closer to protecting our profits going forward. So that's why we've laid out today that we plan to get to $85 by the end of next year. And that is to not only get us back to solid profitability in 2023 but to make sure that we can maintain it for decades to come.

And then just my second, Barry, because you brought this up and it seems like you guys are sort of on the leading edge here with respect to zero-hour pilots and helping them get through training and getting them to that 250 hours. And the question that hasn't been well-answered is, okay, they're at 250. At what point do you get them to 1,500? And I know there's Part 135 opportunities but there's only so many that are out there. It sounds like you've studied this. What is it, a 2-year, 3-year? What's the timeframe from getting from 250 to 1,500? It seems like everybody talks about it and it seems like you get them through the program and they're ready to fly but it sounds like it's a few years. Can you just give us at least a little bit more sort of your thoughts on that?

Yes. I'll start it off. And we thought there might be some questions, so we are fortunate today to have Brad Lambert, our Vice President of Flight Operations. But there's a couple of phases. You've got to get your private at roughly 40 hours. You've got to get to commercial 250, CFI, II. And then, yes, you can get ATP at 1,000 if you have 60 college hours of aviation. You can get it at 1,250 if you have 30 college hours, and you can get it at 1,500 if you don't have any college hours of aviation. The cadet program that we're rolling out will target using some of the college hours to limit that. But Brad, we're really excited about it and Brad can tell you more about the kind of opportunities that we're going to work with them to do here and abroad to build their hours from 250 up.

(Indiscernible), this is Brad Lambert. So we've definitely got opportunities, obviously, with the 135 carriers. You're right, there's limited capacity there. But the nice thing about our agreement with ATP is they are the biggest, call it, manufacturer of pilots out there in the country. And there's lots of opportunities there for them to instruct and build time very quickly. So we look at the program 24 months or so. But again, we want to control our destiny, and we think we've got enough opportunity for them to build the flight time up to the (indiscernible). The 24 months, that's what we're looking for. That's actually very helpful. And we're also looking for international opportunities, as well. There's a lot of other countries out there that accept USA licenses and we can fly them at 250 hours, building time up to that ATP minimums.

The main thing I would just say, Michael, is we're just going to no longer entertain these speculations that we're going to run out of pilots. We're going to source our pilots and have control of it.

Our next question comes from Scott Group with Wolfe Research.

So as you think about the standalone growth potential, I guess what I'm trying to understand is what do you think your capacity growth looks like over the next several years in an environment where Spirit is standalone and then where JetBlue acquires Spirit? I don't know if that's a violation of what you want to talk about. But I guess I'm trying to understand how your growth story is different now on a standalone basis and how do you navigate sort of that regulatory uncertainty potentially over the next year-plus? Do we have to wait for some of that accelerated growth?

This is Daniel. We already have an aggressive growth plan. Next year, as we return to normal utilization levels, we anticipate seeing a 30% growth in 2023 over 2022 as we fully get the airline back to normal utilization. And then, going forward after that, we already have a fleet plan that provides for 15% to 20% a year growth. What happens in the environment? What happens in potential combinations? We could always accelerate it and move it closer to 20%, if necessary, above 20%. We will watch for opportunities by controlling our costs as discussed. By driving our non-ticket revenue, we are controlling our destiny and we can make the choices about where we fly.

Did I hear that the plan is to grow 30% next year versus '22?

Yes, Scott, it's Jimmy Dempsey here. Yes, given that we have constrained capacity across this year or next year, as you move back to full utilization, you get to 30%, slightly above 30% growth.

And then maybe just last thing, just as I focus on the report and the guidance, can you just talk about the monthly TRASM trends? And I know you're talking about 20%-plus but if you feel like it should be closer to the upper $20s you did in Q2? Any color there?

We are seeing right now typical seasonality. We're not going to go into more detail on that. What we're seeing for Q3 is just typical seasonality patterns. But obviously, the issue, as we discussed, is because we have the higher amount of capacity growth at the end of the quarter because we're growing 5% in July and 14% to 16% in September. That is creating a drag on the overall RASM for the quarter of around three points because we pushed more capacity growth into an off-peak month.

Our next question comes from Savanthi Syth with Raymond James.

Just as a follow-up on Jamie's question earlier, it looks like maybe even this year, your kind of aircraft deliveries are getting a little bit delayed. So are you seeing that delay this year? And just as you kind of plan out your capacity, what's your confidence level? And how much of that 30% is dependent on fleet deliveries versus just getting utilization back up?

Roughly half of it is fleet deliveries and the other half comes from increased utilization.

Yes. And Savi, near-term, we've seen some delays. I mean, it's been relatively modest. We're obviously on the Airbus program. It's nothing compared to the Boeing program. You're seeing six week delays, four to six weeks, eight week delays in aircraft deliveries for some of the aircraft but all relatively near-term story.

Yes, the delays have generally been in days and weeks. And so we typically put in a 45-day, up to 45-day kind of cushion between a delivery and when we have it scheduled to fly.

And if I might, one thing you've shown last year and this year throughout is a nimbleness to react to the demand environment, or whatever the environment brings, with COVID or anything else. Just kind of curious what kind of environment you're assuming in that 30%. And if we do see a slowing down or kind of a recessionary environment, what you're comfortable maybe moderating that to? Or how should we think about that?

Well, look, I think we're always probably the fastest to react if things were to dramatically change but I think our confidence in the 30% is driven by a couple of things. One, we're headed to sub-$0.06 CASM. So if anybody can be successful with the airline business, it will be with low prices if demand were to fall off. And so we'll be one of the few that can afford to actually carry low prices. And it will be further subsidized, not just on the cost side but by the fact that we have the $85 target by the end of next year in non-ticket and we're already producing $75. So we're pretty confident in the growth. Obviously, we'll reevaluate that if there were a deeper recession than what we're seeing. But so far, the demand looks very good and we've seen some seasonal changes but nothing major. And I think what seems to be missed in the airline space is, even if there is a recession, the capacity cuts on the airline space is, even if there is a recession, the capacity cuts are already built in. And I think, if you track back what we should have had with normal GDP growth over the last three years, we are significantly lower than where you would normally see capacity. It would normally see capacity. And so, if you get a 10% to 20% cut from a recession, well, the cuts are already in. So that's why you're seeing a lot of the pricing power across the industry even as other industries are having a tough time right now.

Our next question comes from Helane Becker with Cowen.

I just have two questions. To follow up that comment, Barry, that you just made about capacity reduction already factored in, what do you think that the hiring will look like at the airline in an environment where things do slow? Would you pause the hiring? Or would you just continue to forge ahead?

No, I think we would be the last airline to stop hiring, or even slow hiring, because when you're the lowest-cost producer in the space, you're the first one that should be growing.

I have another question regarding the Pilots Union, specifically Alpha National. What responsibility do you think they have for training pilots? They seem to be asking for various assurances but appear unwilling to take on the responsibility of increasing the pilot ranks. Do they have any responsibility in this matter? Additionally, during your negotiations with the pilots, can you encourage them to accept some of this responsibility?

I guess I'm not understanding your question.

Well, think about it this way. If you want to become a pilot, the $250,000 cost is 100% on you. And part of the reason for that is the rules around which you can become a pilot. It's not that easy a career path, right, if you don't go military or something like that. So don't you think Alpha itself bears some responsibility for helping an 18-year-old or a 22-year-old get the necessary hours in order to build a career?

I don't know if it's Alpha's responsibility. I think maybe they have some. Maybe everyone has a responsibility across the entire aviation community. I mean, just to clarify, it's not $250,000. It's less than $100,000 to get your commercial. Yes, if you paid for all of your hours and you didn't get any type of job, yes, it would cost considerably more, maybe in the $250,000, $300,000 range. But the challenge with that, you're not going to be as good a pilot as someone that we can hand-hold through our cadet program, place at a great place where they get good training and they get real-life experiences flying from a commercial perspective. But look, I think we as an industry and overall need to take responsibility but I can just tell you what we're doing. Look, we see the shortages coming down the line. And while we haven't had challenges, we're just taking control of our destiny and we're going to have the sourcing that we need, no different than we source airplanes and no different when we source engines, parts, everything else. We're going to source training of pilots from zero hours. And to be quite honest, I mean, in the last few hours, it's been one of the most exciting times at Frontier. I mean, look, our Head of HR is right across (indiscernible) right now. I mean he's been inundated today. We have a bunch of flight attendants that already are like, 'Hey, I always want to be a pilot.' And so this is really exciting to have a program that kind of handholds them, get them through it, help them get set up with a really good training program and then gets them the right type of experience that they need to be safe pilots. And so, not only are we going to control the sourcing of our pilots but we're also going to control the quality and the training so that we can ensure that they'll be successful and safe pilots for us. And we hope that we can partner with Alpha when they come in, but they are generally not involved until once they become an active line holder, or actually a pilot at Frontier.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Barry Biffle for any closing remarks.

Well, thanks, everyone. We appreciate everyone joining us today. And again, as I said, we're excited to be America's ultra-low-cost carrier. Really excited to talk to you soon. Talk to you next quarter.

(Indiscernible) conclude today's presentation. You may now disconnect and have a wonderful day.