Frontier Group Holdings, Inc. Q3 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the Frontier Group Holdings, Inc. Third Quarter 2023 Earnings Conference 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, Investor Relations. Please go ahead.

Thank you. Good morning everyone and welcome to our third quarter 2023 earnings call. On October 19th, we announced changes to our management team and so I'm pleased to introduce today's speakers and their new roles. With me are Barry Biffle, Chief Executive Officer; Jimmy Dempsey, President; and Mark Mitchell, Chief Financial Officer. Each will deliver brief prepared remarks, and then we'll get to your questions. But first, 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 released earlier this morning, along with reports we filed with the Securities and Exchange Commission. 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 prepared remarks. Barry?

Thank you, David and good afternoon everyone. I first want to recap the recent changes to our senior leadership including the promotion of Jimmy Dempsey to President and Mark Mitchell, the CFO. Jimmy will now oversee commercial, customer care, and operations research design and planning functions and Mark will assume Jimmy's former role. Jimmy and Mark have been invaluable members of Frontier's senior leadership team over the years and I'm excited about their contributions going forward. We also welcome Rajat Khanna to Frontier as our Chief Information Officer and Matt Saks as our new Treasurer. Rajat has extensive experience, including IT leadership roles at Lowe's Companies and at United Airlines, and Matt comes to us with significant cross functional experience at Airbus. Please join me in welcoming Rajat and Matt to Frontier and congratulating Jimmy and Mark on their promotions. Frontier has a deep bench of executive talent and we're well positioned to help guide the growth of our airline into the future. Our third quarter results reflect a pre-tax loss of 5%, with non-fuel operating expenses at the low end of our guidance as we continued our rigorous focus on cost management. The quarter was impacted by elevated fuel prices, uneven demand recovery, and uneven industry domestic capacity deployment as well as increased flight cancellations from weather and other operating challenges. Additionally, we observed softer than expected demand in the off peak periods in the quarter. Looking to the fourth quarter, stage adjusted non-fuel unit costs are expected to sequentially improve. We've also seen booking volume stabilize, driven by low fare stimulation, albeit at higher fuel prices. In 2024, we believe demand patterns will normalize and industry capacity growth will moderate and rebalance across geographies. We believe unit cost leadership will be fundamental to long-term success and we expect Frontier will be the lowest cost provider of a seat in the United States for years to come. Further, operating a high utilization, highly reliable airline will be important to our success and long-term growth as well as delivering a low cost and rewarding customer experience. I'll turn the call over to Jimmy to elaborate on our plan to dramatically simplify our operating model to align with the ULCC best practices and to fuel the next stage of Frontier's scalable growth. Jimmy?

Thanks Barry and good morning everyone. I will start by recapping the quarter. Total operating revenue for the third quarter was $883 million, reflecting RASM of $0.091, down 19% from a strong prior year comparison due to a 21% capacity growth and a 2% increase in stage. Fare revenue was $39 per passenger, lower than the $58 in the 2022 quarter, mainly due to the impact of increased industry capacity concentrated in our key markets, weakness during off-peak periods, and heightened flight cancellations resulting from weather conditions and ongoing operational challenges. In contrast, ancillary revenue was $76 per passenger, only down 3% from the previous year, indicating the resilience of our ancillary products and services. Although we have achieved the highest utilization in the industry this year, it has been difficult to reach even higher utilization due to the post-COVID operating environment, including air traffic control staffing challenges and reliability issues. In my new role, a key objective is to plan and allocate resources to improve reliability, which will allow us to operate at high utilization and decrease costs. Moving towards a more simplified operating model will lead to industry-leading low costs, enhanced reliability, and the best value proposition available. After thorough analysis, we concluded that simplifying our business similarly to European ULCCs will enhance reliability and facilitate our return to pre-COVID utilization levels, even with the operational issues faced over the past decade. This essentially means returning aircraft to their base nightly. As we anticipate that consumers will seek greater value in travel, we recently introduced Get It All For Less. As an initial step, we have improved the Frontier Miles program to be revenue-based, rewarding customers for both fare and ancillary purchases. We have also expanded our elite status levels to include new features such as waived change and cancellation fees, free bags, and seat assignments, among various other benefits. Furthermore, elite status is now easier to achieve, including reaching gold status after spending just $3,000 on the Frontier Barclay's Mastercard. In the upcoming months, we plan to expand our Get It All For Less initiative to further strengthen our customer value proposition. I will now pass it over to Mark for a financial update.

Thank you, Jimmy, and good morning, everyone. Third quarter pre-tax loss margin was 5.1%, reflecting a challenging environment as Barry covered earlier. Total revenue was $883 million, down 3% compared to the 2022 quarter and fuel expense was in line with guidance at an average cost per gallon of $3.08. Adjusted non-fuel operating expenses were $646 million or $6.66 on a unit basis, 3% lower than the 2022 quarter in an inflationary environment, and at the low end of our guidance, reflecting our continued focus on costs. We have the lowest total unit costs in the industry and we are focused on continuing to maintain our cost leadership through high utilization, improved reliability, and simplification of the operation. To that end, we've identified more than $200 million of annual run rate cost savings related to fundamentally changing the way we operate as presented earlier, which we expect to be fully implemented by the end of 2024. We will provide more details as we progress through next year. We exited the quarter with $640 million of unrestricted cash and cash equivalents. As a reminder, we also have access to substantial liquidity through our unencumbered loyalty and brand-related assets. We had 134 aircraft in our fleet at September 30th, after taking delivery of eight A321neo aircraft during the quarter, five of which were financed with direct leases. Two aircraft scheduled to be returned in September were delayed into early October and with another four deliveries expected in the fourth quarter, all financed through sale leaseback transactions, our forecast to exit the year with 136 aircraft is unchanged. Turning to fourth quarter guidance. Capacity growth is anticipated to be in the range of 12% to 14% over the 2022 quarter, on stage length, which is expected to average 950 miles, 8% lower than the 2022 quarter, which reflects network optimization in response to today's heightened fuel prices and demand environment. Accordingly, we estimate fuel to remain elevated at $3.20 to $3.30 per gallon based on the blended fuel curve on October 24th. Adjusted non-fuel operating expenses are expected to be between $655 million to $665 million, which on a stage-adjusted CASM basis is in line with the prior year and lower than the prior quarter. Taken together, our adjusted pre-tax loss margin in the fourth quarter is expected to range from 6% to 9%, which at the midpoint is slightly wider than the third quarter, mainly due to higher fuel expense. With that, I'll turn the call back to Barry for closing remarks.

Thanks Mark. I want to thank Team Frontier for staying focused on providing low fares done right in a challenging commercial and operating environment. We're disappointed in our results for the quarter and the outlook for the fourth quarter, and we're taking methodical steps to ensure we deliver a reliable and rewarding experience to our customers to remain the lowest cost provider of a seat in the United States for the long term. We believe these steps will position the airline to return to profitability. Thanks again for joining us this morning. We're ready to begin the Q&A portion of the call.

Thank you. And our first question is going to come from the line of Savi Syth with Raymond James. Your line is open, please go ahead.

Thanks. Good morning. I was kind of curious if you could provide a little bit more color on demand, maybe particularly the peak versus off peak. If I look at your unit revenue, it's similar on a year over year basis to what you're seeing in 3Q. But you do have slower capacity growth and your stage length is kind of getting shorter. So, I would have thought that that would have been the unit revenue tailwind.

Well, the peak periods continue to be more resilient than the off peak. But what we're dealing with is an overall slowdown in demand, which has been cited multiple times now since we kind of brought it up over a month ago. We've seen that and that is more acute in the off peak periods. And then we're also seeing kind of an uneven deployment of capacity in the United States. So there's a lot more capacity versus 2019 in Las Vegas and a lot less in Minneapolis, as an example. So, that unevenness is impacting Frontier the most as we study that. We're probably more impacted by the unevenness than anybody else in the space. But to answer your question about the peaks, they continue to remain very resilient.

And if I might just as you kind of look at capacity and your plans here, especially as you kind of restructure the approach, how should we think about 2024, is it still kind of similar to kind of 4Q level of year-over-year growth or should we see that moderating?

So, we did moderate our growth somewhat in the fourth quarter versus even just a few months ago expectations. And as we look to Q1, which is going to be back to where we see the biggest challenges in the demand environment is in Q1, as I mentioned, off peak is not as resilient as the peak. We are targeting mid-single-digit growth for Q1, but we are maintaining our mid-teens growth for the year. And I think more specifically, we will be targeting growth away from places that have been saturated in the more underserved markets as we move into 2024.

Very helpful. Thanks Barry.

Thank you. Our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is open, please go ahead.

Hey, thanks. Appreciate the time. If we could just sort of play back, 3Q revenue outcomes and maybe the variance relative to your initial expectations, could you maybe bucket what you feel like are contributing factors, and maybe one bucket being holding out for higher yields while basically your competitors really went for load and maybe weren't doing that to the same degree? Two, the ops challenges, which you highlighted and maybe you have a sense for how acute kind of the revenue outcomes were in the markets that had seen those the most? And then three, maybe just some suboptimal network bets that didn't play out the way you anticipated. Maybe there are other buckets, but I would appreciate if you could walk through some of that.

Thank you for your questions, Duane. First, I want to highlight that during and after the pandemic, we were surprised by how much stronger the decline was than we had anticipated. It felt more unusual than what we've experienced in terms of the peaks compared to the past. Additionally, having one or two carriers significantly lagging in load factor didn't help the situation, especially when their promotional efforts reduced demand just when we expected to secure some bookings. Fortunately, that has normalized now. Those are two significant factors to consider. Regarding our execution, we continuously pursue what we believe will yield the highest margins. The challenge lies in the fact that, similar to previous downturns, when capacity contracts sharply and subsequently rebounds, the reallocation isn't seamless as we can't coordinate with other airlines. For instance, Las Vegas is currently oversaturated; its capacity compared to 2019 has increased significantly, yet midweek occupancy rates are actually declining. In contrast, Minneapolis has not achieved a full recovery. Therefore, when we analyze airline performance in the U.S., the key insights emerge from looking at the competitive capacity that carriers are managing in their respective markets, with Frontier being the most affected. Historically, we tend to see corrections in this dynamic within six to 18 months, and we are eager to observe that rebalancing occur.

Thank you for your insights. Regarding operations, we've been hearing about the modular network approach for some time. There were periods when your operations seemed quite effective. I'm curious about what went wrong this quarter, considering the modular design. Could you clarify what is different about the new simplified approach compared to the modular network approach you previously discussed?

I think the challenge that we've had, Duane is we had great success with the modularity. And coming out of the pandemic, it was great. And we'd gotten to 50% modularity out and back. The problem is, is that the ATC staffing and the delay minutes as an example, we saw a significant increase. I mean, it was something like 10x the number of ground delay program minutes that we were dealing with in the system this summer. And so even though we'd gone modular, we didn't do enough. When we look at where we are very challenged reliability-wise, it is dramatically impacted in the multi-day trips. And so where we are at now, we are simply going to deepen the modularity and go straight to a kind of a best-in-class ULCC model of Europe. We're finally at a size and scale that makes sense for us; they have to be a little bigger. If much about Ryanair or Wizz, I mean, they can make a base with just a few aircraft. That doesn't really work with our reserve coverages in the United States, but we're at the point that we can do that. We will be in a situation where we don't have anywhere near the multi-day trips and we're targeting in the 90% plus range, by the time we get to spring, which will help us mitigate this. I'll just give you an example, even with the 50% out and back, we had a situation where we planned for today for tomorrow night where aircraft would be because of the disruption with ATC, we saw consistently over a third of our aircraft not end up where they were supposed to be on the fallout side. That has massive disruption to your maintenance plan. It causes you to need excess mechanics. It causes you to need more parts. It's a big step towards the recoverability. We feel like it not only unlocks the reliability of the airline, but it unlocks our ability to increase utilization because when we look at Europe, they've dealt with Euro Control in a tougher operating environment for decades. That is why we have to adopt that model. It's the only model we believe that is going to work at high utilization in this country.

Okay. Thank you for the thoughts.

Thank you. And our next question is going to come from the line of Brandon Oglenski with Barclays. Your line is open, please go ahead.

Yes, good morning, and thanks for taking the question. Barry, I guess if you can step back, what do you tell investors that have been with you since the IPO? Because it's been a pretty tough run here. If we look at your order book, over 200 aircraft on order yet 130 today, that's a lot of growth the next 10 years. And I know you're pulling it back in the first quarter, but some of it seems like uneven demand off-peak weakness fuel pressure APTC delays. They seem to be continuing. So, what structurally changes in the next year or two that gets you back to that pre-tax double-digit margin range?

I think it's pretty simple. One, I think you're going to see, as I mentioned, I think you're going to see the rebalancing of the capacity in the US. You're not going to have these wild swings, about 20% in one city versus down 15% in others. I think that's going to rebalance and that's going to be significantly beneficial to Frontier in absolute and on a relative basis. I think you're also going to see a shift in normalization and demand. I mean, international is in vogue, but that isn't going to last. And so that's going to rebalance as well. History shows you that. So, that's worth three to four points each. Then we ourselves are going to take our own self-help, and we're going to grow away from the saturations worth several more points. As we outlined, we're going to actually reduce our costs significantly, which is going to drive a couple more points of margin. That's also going to drive greater reliability, which also increases your revenue. When you're canceling 2%, 3% of your flights, the costs stay the same, but the revenue goes down. Obviously, we've got, as Jimmy mentioned, our Get It All For Less promise that we rolled out this week, which we think is going to pay massive dividends with the loyalty approach, which happens to be with Barclaycard. We're going to control the things we can control, and that's going to deliver profitability. We believe that low cost will win.

I appreciate that, Barry. I mean, are you going through a wholesale change on the network next year? Is that what we should think, like, getting out of markets like Vegas and Florida incrementally?

No. We're not getting it. So, let me be clear. We are not getting out and we're not leaving anywhere. But we will concentrate the growth that we plan. So in the mid-teens, it will be away from places that are saturated. It's going to be in places that are underserved.

Okay. And sorry, I should have rephrased, like, not getting out, but incrementally moving away from those markets with relative new capacity. Is that right?

No. No. We are the lowest cost provider in Las Vegas. We're not going anywhere. We do believe that the industry will probably slow its growth and probably contract there, but we will not be contracting. We will just the growth that we add to the company will be in underserved markets and we will not add more capacity to markets that we believe are oversaturated.

Okay. Appreciate it. Thank you.

Thank you. And our next question is going to come from the line of Michael Linenberg with Deutsche Bank. Your line is open. Please go ahead.

Hey, good morning everyone. Hey Barry, just back to your view on next year. You talked about mid-single growth in the March quarter and then aiming for mid-teens for the full year. So you would obviously have to ramp up as we move through the year. Are there any sort of whether it's margin targets or return metrics that you'll have to achieve in order to then sort of green light that type of growth, know, maybe it's by the June quarter where you start to ramp up because I'm sure there's metrics you probably want to hit before you want to accelerate that? Your thinking around that. Thank you.

Yes. Thanks, Mike. We're not guiding for 2024 margins at this point.

Okay. Okay, too early. And then just a question to Mark, and congratulations on your promotion. I want to go back just on the guidance. You had mentioned that the pretax margin guide for the fourth quarter versus the third, you said a lot of that had to do with a higher fuel price assumption. Are you assuming sort of similar demand that what we saw in September quarter continues into December? Is that a fair assumption?

Yes. I mean, I think, as was highlighted in the initial remarks, book trends here have stabilized. What you see in that guide range is primarily the impact of the higher fuel costs.

Okay, great. Thank you.

Thank you. And our next question is going to come from the line of Stephen Trent with Citi. Your line is open. Please go ahead.

Yes. Good morning everybody. Can you hear me okay?

Yes. We can.

Okay. Sorry about that. I have a little trouble with my phone. And congrats. I share Mike's comments, congrats to Jimmy and Mark on those new moves. That's great stuff. Just one or two for me here. Could you tell me with your 2024 plan what are your basic assumptions about the Air Traffic Control situation and sort of infrastructure investment in US airports? Any change there or you're assuming everything states as it is now?

Yes, thanks, David. Actually, we're assuming it gets worse. That is why we had always planned by 2025, 2026 to get to above 80% to 90% kind of out and back simplified network. However, we have to accelerate that. We have studied this extensively for now six to eight months. We have studied how they manage this in Europe, in very similar situations. We believe that their traffic control gets more strained over the coming years. We're planning around that by ensuring that we no longer have the kinds of dependencies and the risk of running multi-day trips that are vulnerable with three to four to five hour GDP programs.

All right. Really appreciate that, Barry. Just one other quick question. Could you refresh my memory regarding what percentage of your fuel exposure is West Coast refined?

Steve, it's Jimmy here. I mean, it's less than 20% of our exposure covers the West Coast, and we also have an exposure of about 10% or 15% in Denver as well, which is incorporated into that kind of more higher kind of crack spread and higher jet fuel cost. But over half of our exposure to fuel is around the U.S. Gulf Coast.

Okay, perfect. Thanks very much, Jimmy. Let me leave it there.

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Helane Becker with TD Cowen. Your line is open. Please go ahead.

Thanks very much, operator. Hi, everybody, and thanks for the time here. Is there a way for you to quantify what the Barclays card spend is and whether it's up, down, or the same as it was six months or a year ago?

We don't actually disclose that, but I can tell you we're very pleased with the performance of credit card partnerships with Barclays. We are investing significantly in the loyalty. As we announced earlier this week, our Get It All for Less promise includes changes to how people earn on the program, our elite status levels, but also the fact that you can earn gold status by just spending $3,000 on the credit card, which unlocks free bags, free seats, no change fees, no cancel fees, so just a lot of value. We believe that no one in the space rewards passengers traveling a few times a year and spending at least $10,000 on a credit card as much as we do in terms of free travel.

Okay. That's hugely helpful, actually. The relevance is very helpful. But the question I have about the comment you made on underserved markets and kind of thinking about growing in those markets. I understand why you would want to do that and it makes perfect sense, but do you need to have smaller aircraft to do that because those markets may not be as robust or as demand driven as some of the other markets that you are serving already? I feel like Americans only go to places, right?

Well, it's a good question, Helene, but no. Look, when you've got the 321neo in our configuration, it provides the lowest seat cost in the industry and enables you to fly more places, whether it's just a couple of times a week for small markets or several times a day. We have an amazing ability to stimulate demand. But what you should look at is just take the cities in the U.S., take all the airports, and just go in and look at the fourth-quarter capacity by city, look at how many seats in each city, and compare that to the same quarter in 2019. You'll see a dramatic difference. You're talking probably 30 to 40 points swing between the top and the bottom. So if demand is similar, and you have a 30% swing in capacity, that can be a 20 to 30 point jump in RASM or it can be a 20 to 30 point drag on a relative basis. That's what we're talking about when we say uneven capacity deployment in the U.S. I think you'll find something very interesting if you do that analysis. You'll find that there's a large correlation between the airlines that are doing well and those that are struggling margin-wise when you compare where their concentrations are. That's why we say, and history shows that these things will normalize over the next 6 to 12 months.

Right. That makes sense. Yes. Okay. That's really helpful, Barry. Thanks for all of that.

Thanks, Helane.

Thank you. And one moment for our next question. Our next question comes from the line of Jamie Baker with JPMorgan Securities. Your line is open. Please go ahead.

Hey, good morning everybody and congrats to Jimmy and Matt, Rajat, and I'm sorry, Jimmy and Mark, Rajat and Matt as well. It's already been a long morning. Can you update us on CapEx for the next couple of years? Obviously, everybody hoping for a better year next year, but just in the event that 2024 ends up resembling 2023, particularly after you reach a pilot deal, that 2024 ends up resembling 2023, particularly after you reach a pilot deal. I just want to make sure I understand your ability to raise incremental capital. I know you cited the credit card program and IP, so I'm just guessing that liquidity is on your mind as well.

Yes, Jamie, it's Jimmy here. Look, it's not a secret that we've spent a lot of time over the years fostering relationships across the leasing community to fund the growth in the business. We have about 22, 23 aircraft delivering next year. We have a really good pipeline on selling leasebacks on those aircraft all the way through to the end of next year, but most of our aircraft committed really in the first seven or eight months of next year. So we feel really good about the material capital spend on aircraft assets. The other capital spend that we have in the business is clearly engine shop visits and then just funding the growth in the business; they tend to be much lesser in terms of CapEx spend than the aircraft themselves, albeit the LEAP aircraft is coming in the next few years into its window where you'll see more engine shop visits develop for those aircraft. We're also watching quite closely the potential impact of the GTF. Frontier delivered its first GTF engine in September 2022. We're outside of the initial window where inspections on those engines are occurring at the moment, but we do anticipate we'll have to do some inspections towards the back end of 2024 and into 2025 and beyond. We think it will be a minimal impact on Frontier in relation to how we understand it at the moment, but it's obviously a fluid situation. We're watching it closely. That will determine our spares ratio and various different things, engine capacity in the airline.

Okay. So no definitive CapEx guide, but we should be thinking about sale-leaseback activity as we model for that. That's the summary?

Yes, I mean, that market has been really good to Frontier and it continues to be so. So, obviously, interest rates are higher and higher for everybody and we operate within that world, but the pipeline of operating leases that we have coming are pretty good. So we're quite comfortable with it.

Okay, good. And then Barry, you talk about lower ex-fuel CASM next year. What's your confidence on getting there if you mark your pilots to market, and let's just assume you did that on January 1st for illustrative purposes? I'm not asking you to negotiate in public. I'm just asking you to speak to your confidence in achieving lower X fuel CASM after a pilot hit of what's sort of best-case scenario, I'm guessing, $50 million of annual incremental expense. I'm not guessing, I'm analyzing, but probably a figure potentially north of that.

We plan on, as we outlined earlier, we plan on saving over $200 million on 2023 size with the simplification of the operation. So we believe we have adequate capacity to more than cover any pilot labor cost increase.

Okay, perfect. Thank you very much.

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Andrew Didora with Bank of America. Your line is open. Please go ahead.

Hi, good morning everyone. Barry or Mark, maybe two-parter for you. What are the buckets of the cost opportunities within that $200 million that you cited in your prepared remarks? And then, Barry, the road back to profitability or stopping the margin degradation, can it really just be accomplished on the cost side and utilization side, particularly with pilots coming? Or is it really just a revenue issue whereby you just kind of have to rethink your longer-term capacity plans in the high teens? Just trying to dissect those two parts. Thanks.

Yes, so this is Mark. The $200 million we highlighted, in broad strokes, as we simplify the schedule and the operational design, you'll have as a benefit of that lower crew travel, better ability to utilize reserves, and just better predictability of people and parts that are going to drive cost benefits through the organization. With that, you're also going to position the organization to drive higher utilization. That's really the foundation of the $200 million.

Yes, as far as the growth rate, I don't see a challenge with that. If you look under the hood, we feel confident with the cost savings that we're going to have, even net of the pilot cost. As I said, you're going to see the uneven deployment of capacity and the market saturations start to normalize. That's a huge benefit to us. You're going to see the rebalance. You're going to see people come back and travel more domestically than they did on a relative basis to Europe. That's just going to happen. Coupling that with the better reliability and what we're doing with our loyalty on the revenue side, we believe we will get back to profitability and get back to great margins; therefore, we don't have a challenge with the broker.

Got it. And then Barry, I'm just curious if you have any updated thoughts. I know there have been continued articles out there in the press just with regards to the government and kind of the excise tax on ancillary revenues. How do you think that plays out? At what point would trigger a change in terms of how you account for that? Thank you.

I didn't see that. I apologize for not seeing the article that he referenced. But what specifically would you see?

Just the excise tax on ancillary revenues, the potential of putting tax on that stream of revenue.

Oh that's, yes, so that actually has been out there for a long time. I think there's really good precedent on this that goes back to the 1950s, actually. So, look, if it's optional and it's not part of the core service, I think the statute was very clear.

Thank you, and one moment for our next question. Our next question is going to come from the line of Conor Cunningham with Melius Research. Your line is open. Please go ahead.

Hi everyone. Thank you. A couple questions on revenue. There's been a lot of discounting happening right now in the U.S. domestic market. As you run fare sales, I'm just curious if the uptake rate has been any different than it has been in the past. Just trying to understand the difference between load factor and so on as you kind of go forward. Thank you.

I'm going to let James Finner, our Vice President of Revenue Management speak to that.

Yes. As we look at the results, certainly we saw a bit of a slowdown in the second half of August and the September, but we've been pleased with the results as we've continued to run promotional activity through the last six, eight weeks and are optimistic as we see a trend, particularly for the peak period, as Barry mentioned, are more resilient here in the fourth quarter. We believe low fare stimulation is fundamental to run the ULCC and remain focused on that.

Okay. And then on these new markets that are underserved, when I think about that, I kind of think that they're underserved for a reason. So as you guys look into those markets, is your expectation that the spooling period is going to be a lot quicker than it probably has been in the past? Just trying to understand if there's going to be a drag on RASM as we start to add these new markets and so on, because new market development tends to be at the margin to live, just trying to understand that.

I believe there are some misunderstandings in the market regarding growth and its effects on revenue per available seat mile (RASM). When an airline is continually growing, there will always be a portion of the fleet that is not fully mature, which leads to a consistent decrease in RASM. Some airlines that have halted their growth have seen an increase in RASM, but this improvement is usually temporary. As they resume growth, the RASM decline returns. In our situation, while new growth in already saturated markets, like Las Vegas, is not meeting our usual performance standards, our mature markets are also experiencing significant RASM declines. The real issue is not our growth itself but rather the uneven allocation of capacity in our key markets, such as Las Vegas and parts of Florida, which is driving the decline.

Okay. Thank you.

Thank you, and one moment for our next question. Our last question comes from the line of Christopher Stathoulopoulos with Susquehanna Financial Group. Your line is open. Please go ahead.

Hi, good morning. Thanks for taking my question. So, Barry, your prepared remarks. You spoke about your belief that industry capacity is going to rationalize next year. There are fewer carriers today in the US than there were 10, 15 years ago, so perhaps less of an opportunity here for some irrational behavior. But the marginal cost per seat is such where well-capitalized carriers can continue to add inventory into the market here. So just help us, or if you could kind of explain your view there, particularly when we look at Southwest this morning, looks like their order book is growing, and of course, you have a full order book. So just kind of want to better understand the comments around it. I appreciate the history and analogy, I think, to Europe, but here in the US, perhaps there's a little bit of a different dynamic. Thanks.

We're less convinced of the overall capacity, and we'll let those bigger airlines decide what they think is the right amount of deployment. What we're seeing week after week in the schedule change adjustments and some of the most recent commentary is an expectation for their capacity deployment to come down. For example, we've seen attrition in pilot rates slowing down as a result because they're slowing down their hiring of pilots. So, evidence that the big airlines are actually slowing down their capacity. What I was really more referencing was not the total capacity, however. I was talking about the unevenness of the capacity deployment. Ultimately, if everyone showed their cards, you would find that some of the oversaturated Las Vegas and Florida markets, regardless of airline, the route P&Ls on those routes, are probably a little bit under pressure. We see that capacity being redeployed at a minimum, and possibly in some cases just eliminated. At best, they may retire the aircraft, but at worst, it's just getting redeployed. That unevenness will get itself sorted out, and that's really what I was referencing, not total capacity.

Okay, thank you. And then the comments for next year, and thinking about capacity allocation, to be clear, you're not arguing around a wholesale change here to some of your core markets, and you're looking at some of these underserved markets, which to the earlier question comes with its own set of challenges. But if we take a step back and think about your net route growth next year, so with no wholesale change to markets like Vegas and alike, and these new underserved markets, just if there's a number of, or kind of directionally how we should think about your net routes for 2024? Thank you.

I don't think that the overall routes is going to change that much. When you look at the percentage of our capacity that's in immature markets, it's hovering around 10%, and it could go a little closer to 12% with some of the new markets. But when they're in underserved markets, we think that that’s going to do really, really well. But it probably wants to be a little more when we look at kind of the underserved places.

Okay, thank you.

Thank you. And this concludes our question-and-answer session for today's conference. I would like to hand the conference back over to Barry Biffle for any closing remarks.

Yes, well, thank you everybody for joining and we look forward to updating you at the next quarterly call. Thanks everyone.

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