Good day, and thank you for standing by. Welcome to the Frontier Group Holdings' First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is recorded. I would now like to hand the conference over to your speaker today, David Erdman, Senior Director of Investor Relations. Please go ahead.

Good afternoon, everyone and welcome to our first quarter 2023 earnings call. Today's speakers will be Barry Biffle, President and CEO; Jimmy Dempsey, EVP and CFO; and Daniel Shurz, Senior Vice President, Commercial. Each will deliver brief prepared remarks, and then we'll get to your questions. But first though, let me quickly review 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 will also discuss non-GAAP financial measures, which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement. So I will give the floor to Barry to begin his remarks. Barry?

Thanks, David, and good afternoon, everyone. Our results for the first quarter reflected an adjusted pretax loss margin of 1.9%, slightly outperforming expectations during a strong spring break period. While demand during January and the first half of February was seasonally weak, particularly on off-peak days, demand strengthened as we progressed from President's Day through the spring break period. In fact, we operated at an average utilization of 11.8 hours per day in March. This progression in demand throughout the quarter helped drive revenue of $848 million, a record for any first quarter in the company's history. We expect strong demand for leisure travel to continue into the busy summer travel season. The leisure demand is supported by consumers, who now have a greater propensity and ability to travel compared to pre-pandemic periods. They have far more flexibility to travel and do so more often with work-from-home arrangements and flexible work schedules. We believe this is largely the basis for the surge in total leisure travel demand that began in earnest last year. It's showing resiliency, and we have positioned ourselves to capture a disproportionate share of it through our low fare done right strategy and innovative product offerings. Our GoWild Pass, which launched last fall, is a prominent example. It's a leisure-focused product that we are best suited to offer. Before the pandemic, this kind of product would have had limited appeal. Today, however, sales have been strong with customers across many consumer segments, creating a foundation for inexpensive frequent travel. The Pass gives them the freedom and peace of mind to unlock unlimited and spontaneous travel to all destinations we serve. Of the Pass sales thus far, over half do not have prior travel history with Frontier, allowing us to expand brand awareness and preference while driving incremental revenues as these customers engage with our loyalty platforms such as Discount Den and the Frontier World Mastercard. It's a key part of our strategy to increase the contribution from loyalty and subscription-related products, supporting our goal of achieving ancillary revenue of $85 per passenger by the fourth quarter and $100 per passenger by 2026. The strength we're experiencing in leisure travel demand favors peak days and peak periods where we see an outsized contribution. This outsized contribution is a trend that has developed over the last year as we emerged from the pandemic. Having analyzed this new customer behavior, until the peak and off-peak demand relationship normalizes, we are reshaping our capacity beginning in the second quarter to exploit this dynamic and expect the changes to be fully deployed in the second half of 2023. We are excited about this shift and our ability to lower execution risk while maximizing revenue and profits. While we expect the update to our network strategy to enhance our operational performance and pretax margins, the resulting adjustments to capacity and utilization will increase our unit cost. With that said, we still expect our total cost advantage, which widened from over $60 per passenger pre-pandemic to over $70 per passenger in 2022, to further expand in 2023. We anticipate our cost advantage to benefit from the ongoing gauge and fuel efficiency improvements from the increasing mix of A321neo aircraft, the operational benefits from our enhanced network strategy, and the significantly lower debt exposure we have compared to the rest of the industry. Overall, as a result of the planned network changes I highlighted, we're adjusting our full-year capacity guidance to reflect expected growth of 19% to 22%. The entire organization is aligned and focused on returning to double-digit pretax margins. Our second quarter guidance of adjusted pretax margins in the range of 7% to 10% is a significant step towards achieving double-digit pretax adjusted margins in the second half of the year and will represent the highest post-pandemic margins achieved by the company. With that, I'll hand the call over to Daniel for a commercial update.

Thank you, Barry, and good afternoon, everyone. Total operating revenue for the first quarter of 2023 totaled $848 million, a record for any first quarter in company history, driven by RASM growth of 19% on an 18% increase in capacity, both compared to the 2022 quarter. The RASM increase was driven by a nine percentage point increase in load factor to 83%, and an 11% increase in revenue per passenger to $124, both compared to the 2022 quarter. Ancillary revenue performance continued to be strong even in the seasonally weaker first quarter, with $80 per passenger generated during the quarter, $11 per passenger higher than the 2022 quarter. Last month, we opened access to our GoWild Pass holders to begin booking travel three weeks earlier than we had originally announced. Feedback thus far has been overwhelmingly positive, with customers taking to social media to share their experiences. In response to consumer demand, just yesterday we announced another GoWild promotion for the summer of 2023 pass, priced at $499 during May. The GoWild program is an important addition to our loyalty ecosystem. When supplemented with elite spending levels via our Frontier World Mastercard, customers now have the opportunity to travel an unlimited amount without incurring ancillary fees for seats and bags. Furthermore, as customers invest in the GoWild Pass on the Frontier World Mastercard, the value of the discount then becomes an obvious complementary product. Here’s a brief explanation of the changes to our network utilization. We conducted a full review of profitability over the past several quarters and observed a clear change in consumer demand patterns. While overall leisure travel is increasing, the benefit is disproportionately landing on peak days and during peak travel periods. Prior to the pandemic, the RASM premium on peak days versus Tuesday to Wednesday was 19%. This premium has now expanded to over 25%. By maximizing flying on peak days and in peak periods, and reducing underperforming flying in low-demand periods, we believe we can generate better profitability with less flying, thus derisking our operations. Given our modular network approach, which has proven to be more resilient from a reliability perspective over the past few years, specifically reducing midweek flying on longer stage routes has become more operationally complex as it would cause significant crew inefficiencies. For this reason, we have eliminated a select number of longer haul routes as part of this network optimization, which will reduce our average stage length from 1070 miles closer to 1000 miles. That concludes my remarks and I'll now hand the call to Jimmy.

Thank you, Daniel. Our first quarter results reflected a pretax loss margin of 2% on a GAAP basis or minus 1.9% on an adjusted basis. The results are reflective of the seasonality of the business, marked by a seasonally weak first half of the quarter, substantially offset by a strong spring break period. RASM increased 19% during the quarter on an 18% increase in capacity. Fuel expense was slightly lower than anticipated, driven by an average cost per gallon of $3.45. Adjusted non-fuel operating expenses were in line with expectations of $580 million or $6.61, 8% lower than the 2022 quarter. We ended the quarter in a strong financial position with $790 million of unrestricted cash and cash equivalents, or $363 million net of total debt. We had 125 aircraft in our fleet as of March 31 after taking delivery of six A321neo aircraft during the quarter, three of which were direct leases. As noted in our earnings release, Airbus notified us of its intent to shift its remaining aircraft deliveries expected in 2023 by approximately one month. This will cause two incremental A321neo aircraft to shift from 2023 into 2024, in addition to the previous delays from earlier this year. Furthermore, the 2023 delays cascading into 2024 are expected to result in no net change to the expected deliveries in 2024 as a similar number of delays are expected in 2024. Based on the revised schedule from Airbus, we expect to take delivery of four A321neos in the second quarter, three of which are direct leases; seven in the third quarter, four of which are direct leases; and four in the fourth quarter. Additionally, we recently executed an agreement to extend the current leases on two A320ceo aircraft by four years, which were otherwise scheduled to return in the fourth quarter. Accordingly, we expect to end the year with 136 aircraft in our fleet, unchanged from our prior estimate. Turning to guidance, second quarter capacity growth is anticipated to be in the range of 22% to 24% compared to the 2022 quarter. While our full year 2023 capacity is expected to reflect growth of between 19% to 22% over the previous year to align with the utilization changes presented earlier and the impact of the Airbus delays. Fuel costs are expected to be between $2.65 and $2.75 per gallon in the second quarter and $2.80 to $2.90 per gallon for the full year 2023, based on the blended curve on April 24th. Adjusted non-fuel operating expenses in the second quarter are expected to be between $645 million to $665 million and $2.5 billion to $2.55 billion for the full year. Our second quarter cost guidance includes the deferral of an aircraft delivery into the third quarter and excess crew staffing resulting from the Airbus delays earlier this year. Full year costs reflect the deferral of two incremental aircraft deliveries into 2024, as well as the previously noted network changes detailed by Barry and Daniel, which will deliver a similar level of departures on a shorter average stage length than previously planned. We are proud of our relative cost advantage of over $70 per passenger over the industry, and are confident that with longer stage lengths and maintaining higher utilization, we would have beaten our sub-$0.06 CASM objective. However, we believe our network changes will deliver a better profitability outcome for the business. The second quarter adjusted pretax margin is expected to be in the range of 7% to 10%, which will be our highest post-pandemic margin. While the average adjusted pretax margin in the second half of the year is expected to be in the range of 10% to 13%. With that, I'll turn the call back to Barry for closing remarks.

Thanks, Jimmy. I'm extremely proud of our team at Frontier and want to personally thank all of our employees for their performance during the quarter, including the achievement of high utilization during the peak March period. We are focused on achieving double-digit margins and expect that the strength of our ancillary product offerings and widening cost advantage position us well to achieve this target. In addition, we believe that the network updates we're making to capitalize on the post-pandemic demand changes have created a unique opportunity for us to optimize our capacity and our high utilization capabilities in a manner that enables us to lower our execution risk and maximize profits, putting us on track to return to pre-pandemic margins over the next year. Thanks, everyone, for joining the call. I'll now turn it over to the operator for questions.

Thank you. Our first question comes from Duane Pfennigwerth with Evercore ISI. Your line is open.

Hey, thanks. Appreciate the time. With your new or maybe increased emphasis on seasonality, could you just put that in context for us? Maybe compare a peak relative to a trough month within a quarter? I assume it's sort of within the week, as well as kind of month to month, so maybe just pick a September, for example. How would you be thinking about a September now relative to a July versus before you made this change?

Duane, thank you. It's Daniel. It's much more a day of week issue than it is a month-to-month issue. Our peak day utilization is going to look very similar. We think month-to-month through the rest of the year, we’re seeing peaks remain strong even in off-peak periods. The difference, relative to where we would have been prior, is in the most significant periods, we're probably going to be about 20% smaller on Tuesday and Wednesday than we would have been prior to this. The overall difference is about 15% in the second half between our peak days and off-peak days, and in the most significant periods is about 25%. You would have seen a smaller difference in the past, so I'll call it about 20% in a month like September.

Okay. And then maybe just for my follow-up, longer term in nature, is load factor something that you're driving towards from a target perspective? What would be the goal on load factor over time? And how do you expect this shift to aid that goal?

Well, load factor is something we only look at as a function of total revenue and RASM. It is helpful when you're in a high ancillary business like we are to actually run a high load factor. For that reason, we have been targeting it. You'll actually see that we've been improving in this area, and we expect to continue to improve. We would like to get to a flown load factor that starts with a nine.

Maybe just one last little follow-up there. The GoWild, to the extent you get to a nine, how many points would you anticipate that would contribute?

In the one to three point range once it's mature.

Thank you. One moment for our next question. We have a question from Jamie Baker with JP Morgan Securities. Your line is open.

Hey, good afternoon, everybody. So, Barry, at Investor Day, you leaned pretty heavily into the work-life attributes that were helping you navigate the pilot shortage better than some of your competitors. Several months have elapsed since then, several new contracts have been reached. Spirit admits that its raise isn’t particularly helping things. I'm just wondering if your pilot staffing confidence is unfazed by anything you've seen since Investor Day?

It's unfazed. We remain in a surplus position. We're really proud of what we offer and nothing has changed in that area. In fact, we were just reviewing it earlier today and the attrition is right on target. You have to remember, we have competitive compensation if you look over the first 10 or so years of their careers. We've also got a better work-life balance, as you mentioned, with more days off than practically anybody else in the industry. I think we're averaging in the 12-day range per month for average bid line holders. So, we have a robust recruiting process and we don't have the attrition that you're seeing at some of these other carriers.

Perfect. And just as a follow-up, historically, most U.S. airlines did not accrue for higher wages in new contracts. It surprised me, as that convention appeared to change in the last year or so. Obviously, it makes no sense before you reach your amendable date, but have you given any thought as to whether you might guide 2024 CASM reflective of a new contract, or will you just wait until it's ratified, which was the old school way of doing things?

Jamie, it's Jimmy Dempsey here. We need to open the contract, which expires at the end of the year, and the early opener for the pilots is in July. We will address next year's guidance as we get closer to it. We are aware of the situation in the pilot world and are staffing the airline effectively while managing our contract and our relationship with the pilots. Some other contracts have been open for a long time and had proposals for significant pay increases. We are still some distance from that, so...

Got it. Thanks for the feedback. I appreciate it, gentlemen. Take care.

Thank you. We have a question from Conor Cunningham from Melius Research. Your line is open.

Hey, everyone. Thank you for the time. Just in terms of the changes to the reshaping of your network, I'm just trying to understand why you're doing this now. I would have thought that some of these changes would have already been implemented. Are you seeing off-peak considerably weaker than anticipated, and then peaks just being that much better? I'm curious if you're seeing anything on the margin from a demand standpoint that’s really changing how you're thinking about your network overall.

Well, it has changed versus pre-pandemic. As Daniel laid out, it was a 19% difference between off-peak versus peak prior to the pandemic. We're seeing levels over 25% now, and in some cases, even more extreme on off-peak days. The reason why we haven't changed before this is quite candidly that we are a high utilization business, and we've actually ran a lot higher utilization than most people on balance from a midweek perspective in the past. We have now reached the point where we have seen several quarters of data. What I think is most interesting is we believe we could have been profitable during the first quarter had we made these changes earlier. One of the best ways to stop losing money is to stop doing things that lose money. So, we are on a go-forward basis reacting to this. If the dynamics change, we will adjust, but we think this is the right path to get back to pre-pandemic margins.

Okay. That's helpful. And then as you start to think about your 2024 plans and overall growth, I mean, there's been a lot of talk about capacity constraints. You've talked a fair bit about Airbus delays. Just why shouldn't we expect whatever we had in terms of our capacity growth plan for 2024 to be lower going forward? It just seems like a lot of these issues that we're talking about right now just won't necessarily dissipate. Just curious how you're thinking about that as we move into 2024. Thanks.

Well, there will be delays in 2024. I think the biggest thing you have to understand is that we have already felt the majority of the pain. When they first came in with this big delay, we moved a whole bunch of airplanes to the right. What’s going to happen is yes, we will move aircraft out of 2024 into 2025 at some point, but the 2023 aircraft that got pushed into 2024 will be delivered. Ultimately, we have enough aircraft on delivery that we expect to continue to achieve sizable growth. So, when you think about Frontier versus the industry as a whole, if you ask an airline today, would you take an airplane from the manufacturer that's maybe delayed a few months versus not have one, they would take the delayed aircraft. We have a very good order book, and it’s a real asset to the business. So, yes, it will impact 2024, but from a year-over-year perspective, I think you're not going to see the changes that you've seen in the past.

Okay. Thank you.

Thank you. One moment for our next question. Our question comes from Helane Becker with Cowen. Your line is open.

Thanks very much, operator. Hi, everybody. Thank you for the time this afternoon. So, can you maybe, Jimmy, talk about the non-fuel cost pressures that you're seeing, like which airport costs maybe are included in that? I know salaries are up, but what other costs are you experiencing?

There are a couple of things. We're not immune to inflation like the whole economy. We are seeing some inflation in the business being offset by the growth in capacity, and the average seats per departure are increasing considerably. This effectively manages inflation. Currently, you’re seeing overstaffing in terms of crew perspective, both in the pilot and flight attendant realm. Moreover, you have some noise around the delivery delays that are occurring in the airline that move from one quarter to another regarding some of the financing benefits we receive from the sale of these assets. The typical Airbus delivery delays are now four to five months as opposed to three to five months previously. Outside of that, from a cost perspective, the business is operating very effectively. Our cost differential to the competition is still over $70 a passenger. Pre-COVID, it was $60 a passenger. Our cost advantage against the rest of the industry has widened, and we expect that to continue.

That's very helpful. Thank you. As a follow-up question, I noticed in a recent survey, you guys were ranked last in consumer satisfaction. I'm wondering how you're thinking about retaining customers as opposed to churning customers, or do I have that wrong? And you're not really churning; you just had some bad luck?

Well, I think when we look at the data, we have one of the highest repeat businesses in the industry. We have over 90% repeat business. Look, I saw one of these recent surveys, and I think it’s important to be cautious about some of these sources and how they base that off. The waitings of some of these studies don't weight price as they should. Consumers, when they buy air travel, look primarily for price. If you weigh price correctly, I think we’re a clear winner in terms of overall value for consumers. That’s why we continue to have such high repeat business.

Thank you. Very helpful. Thanks, guys.

Thank you. Our next question comes from Andrew DiDora with Bank of America. Your line is open.

Hey, good afternoon, everybody. Just in terms of the network changes, right? I know, Barry, you speak about it lowering your execution risk, but I would think that more peak flying might kind of increase operational risk a bit here. Am I right to think about it that way? And what are you doing to potentially mitigate some operational risk at peak times?

So, Andrew, it's Daniel. We're broadly speaking flying the same utilization on peak days. What I was saying is we're just going to keep the peak utilization up. We're not pushing our peak utilization higher than it was before. The lower execution risk is simply because you have more recovery time during the middle of the week. We’ve seen that this helps us run a better operation on both those days and on the peak days following up.

The other thing I would point out too is that if you look at March and especially April, we’re the highest utilization airline in total, not just on peak days, in total. Yet we've been mid-pack or higher, I think we're fourth place in completion in April as an example. So, if you can trust anyone to run high utilization effectively and reliably, it's Frontier.

Got it. And then, sort of a follow-up to an earlier question regarding your costs. I guess 2023 capacity did come down a decent chunk, but the midpoint of your OpEx guidance went higher. Can you provide a bridge on what is driving that, Jimmy? Maybe some bigger cost buckets that are driving OpEx higher even while capacity is coming down?

Yeah. I mentioned to Helene earlier that the movement of aircraft out of the period is one of the significant drivers affecting the higher end of the range. Another factor is you have a similar number of departures but lower ASM production because the stage length is shortening. You have a very similar overall cost base, albeit slower ASM produced capacity, but similar departures. You, therefore, see similar cash costs. You do save some money on fuel, but your airport charges, station costs, and ground handling costs typically remain similar. That's all you're seeing at the moment.

Got it. And if I could maybe squeeze one more in there. Just in terms of pretax margins for the year, obviously fuel came down a bit, your costs started moving higher. Anything change from your perspective in the way you're thinking about the revenue cadence throughout the year?

Not really. We're expecting the revenue for the rest of the year to look much more like normal years. We're expecting peaks to be good, the summer—therefore Q3 should be strong—and we are anticipating the usual holiday strength in Q4. So, the cadence through the year is expected to be much more like a normal domestic year.

Thank you. Our next question comes from Brandon Oglenski from Barclays. Your line is open.

Hey, good afternoon and thanks for taking the question. I guess this one’s for Barry or Daniel. With the off-peak changes, does this change in any way your new market strategy, especially in the back half of the year as you get into the more trough period after summer?

No. This wouldn't change our new market strategy in particular. Although, longer hauls are more complicated because if you do want to reduce midweek flying, you cause inefficient crew pairings and deadheads, for example. If you look at a specific city where this has been most pronounced, it is Las Vegas. We’ve seen that midweek is just nowhere near what it was prior to the pandemic—and you can see that in the pricing of hotels in Las Vegas. The strip is packed on a Friday night, but on a Tuesday it's nearly empty. That is reflected in our loads and fares. So, this situation impacts Las Vegas, and it especially affects long hauls from there. But overall, we haven't seen any other market experience challenges like that.

I mean, I guess, Barry, some concerns in the market are you do have the absolute cost advantage, but is that just not resulting in the stimulation that you guys may have seen pre-pandemic?

No. Brandon, I'll take this one. We're seeing demand strength. We're seeing the ability to stimulate demand in new markets. We are still aggressively expanding the airline and are adding new markets. We’re absolutely seeing that strength come through. What we're saying is simply off-peak periods, off-peak days are underperforming relative to what we saw pre-pandemic. That said, I can point to new markets that were launched last September compared to pre-pandemic and, on peak days, we saw very strong performance.

Okay. Appreciate that. And maybe just one last one on utilization. If you are pulling back on off-peak, how do you plan to match utilization? Or do you take a slight penalty there too?

I wouldn't consider it a slight penalty. Utilization will be slightly lower, but overall our cost advantage is expected to widen. Let’s be clear that our cost advantage is widening even with these changes. So, this is less than a 10% move. It’s not that dramatic a change. We expect this is accretive to margins from a profitability perspective. This is not a major change in our business. It’s a tweak we've seen as customer travel patterns have changed, with consumers willing to pay a lot more to travel Thursday to Sunday than they did previously. Work-from-home contributes, but more so does work flexibility. Most commonly, the two days in the office are Tuesdays and Wednesdays. This is why leisure travel is hardest on those days.

Thank you, Barry.

Thank you. And our next question comes from Michael Linenberg from Deutsche Bank. Your line is open.

Hi, good afternoon. This is actually Shannon Doherty on for Mike. Barry, I appreciate the details that you gave about the GoWild Pass and I saw that you recently put the Summer Pass on sale, I think for $499. I wonder whether that was demand driven or if you're just trying to sell even more? Do you hit a limit in the number of passes that you can sell, maybe unlike a credit card, just thinking about fleet growth and capacity?

Ultimately, there's a limit. We want GoWild to be the highest NPS product available. We want to sell it at favorable prices, but there will be a limit, just like there's a limit on how many seats you can sell—a credit card too has limits based on capacity. We’re really excited about it; it’s possibly the best-received product we've launched. I think you were personally interested in it, so hopefully, you've taken advantage of the great deals. We're really excited about it, but yes, there will eventually be a limit. We’ve said this before publicly, and that’s why I mentioned it could be a couple points in load factor. If we had 6 million seats potentially going empty and could just fill a third, that’s 2 million seats, several points in load factor. So you can back into those numbers; yes, there will be a limit on usage, but we don’t believe we’ve hit that yet.

Great. Thanks. And just my second question: I noticed that you filed a schedule through spring 2024, but about a week ago, you fully cut it beyond November. What was that about? Was that more just unsure about the demand beyond the summer, or does it relate to the peak-off-peak month and day changes that you guys are making?

It's Daniel. No, that was actually an error by the industry schedules provider. They mistakenly took our full schedule and extended it into the winter. We put our schedule on sale to customers through November 15th. That’s the furthest out extension we have for this year. We’ve never offered a schedule to customers beyond that time.

Got it. Makes sense. All right. Thank you guys.

Thank you for joining today, especially those of you that asked questions. We appreciate those thoughtful inquiries, and we look forward to talking to you again in the next quarter. Thanks everyone.

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