Good day, and thank you for standing by. Welcome to the Frontier Group Holdings, Inc. Fourth 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 being 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. Welcome to our fourth quarter 2023 earnings call. Today's speakers will be 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. On today's call, we will be presenting supplemental materials, which can be viewed on the webcast platform with a PC or a smartphone. If you're not accessing the call from either or if technical issues arise, you could follow along by downloading the presentation from our website at ir.flyfrontier.com/eventsandpresentations. Before yielding, let me quickly review the customary safe harbor provisions, which are included on Slides 2 and 3. 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 file 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 and in the presentation supplementing this call. I'll now yield the floor to Barry to begin his comments. Barry?

Thank you, David, and good morning, everyone. Before beginning the brief slide presentation, I'd quickly recap the fourth quarter results. We generated a pretax margin of nearly 1% for both the fourth quarter and the full year. Our fourth quarter results significantly outperformed guidance on strong operational performance and cost execution with our CASM excluding fuel 8% lower than the prior year quarter. We achieved a 99.5% completion factor on industry-leading average system utilization of 11.3 hours during the quarter and the highest on-time arrivals and departures for the month of December since 2015, excluding the pandemic year 2020. Our operational performance during the December to January holiday season was also notable. We had 15% more departures than the prior year holiday season, making it our busiest in airline history. In addition, our completion rate and on-time arrivals and departures during the holiday period all ranked as our best post-pandemic performance. I want to take a moment to thank all of Team Frontier for producing such great results and taking care of our customers. While I'm pleased with the operational performance and that we generated a positive pretax margin for the fourth quarter and full year, I'm disappointed in the absolute result. We are, therefore, focused on taking meaningful steps to address the challenges that impacted our results during 2023 and on returning to double-digit margins. Turning to slide five. One of the largest challenges many low-cost and ultra-low-cost carriers faced in 2023 was the industry's oversupply of capacity in leisure markets, with Las Vegas and Orlando being two significant examples. Both markets have experienced rapid and disproportionate growth compared to 2019 when demand and capacity were far more balanced. As total U.S. domestic capacity increased just over 4% since 2019, total industry capacity in Las Vegas and Orlando grew by a combined 20% and are expected to continue to grow in 2024 based on current published schedules. This has resulted in a relative RASM and margin headwind to many LCCs and ULCCs, and Frontier is no exception. On slide six. No one is more aggressive in engaging in self-help to address overcapacity in leisure markets than Frontier. By summer, we plan to reduce Las Vegas and Orlando combined capacity by 11 points of our system share year-over-year, reducing the share of these markets by one-third. To be clear, we're not retreating from our network footprint in either market, we are merely cutting what we believe is marginal unprofitable flying to return both markets to a rational optimal position for our cost structure and remain the low-cost leader in both markets. Turning to slide seven. Our network growth in 2024 is focused on exploring higher fare visiting friends and relatives markets. The market mix of routes by this summer will increase industry average fares in those markets by 5% year-over-year. Not only are we chasing higher fare markets, but the total revenue pool of industry revenue in our network this summer will be up over 50%, despite only growing capacity 12% to 15%, meaning we need a much smaller share of industry revenue, which is extremely constructive for increasing RASM. Additionally, historical data suggests VFR routes tend to ramp quicker and reach maturity sooner than leisure routes. Turning to slide eight. Another significant challenge we faced last year was the extended ATC ground delay programs, which negatively impacted our completion factor and utilization, particularly during the summer peak. To address this, we are executing on the network simplification strategy that we discussed on our last earnings call, with a focus on increasing the percentage of aircraft that return to base nightly to greater than 80% by peak summer this year. We expect this strategy to enable expanding our industry-leading utilization and improve reliability. A key element of our plan is leveraging our 13 crew bases, including our recently announced crew bases in Cleveland, Cincinnati, Chicago, and San Juan, Puerto Rico. Single day trips flowing from our crew bases support operational reliability, recoverability, and higher fares. Our relative cost advantage to the industry outlined on slide nine is a key factor in our ability to stimulate demand with low fares and an increase to over 40% in 2023. We believe unit cost leadership is fundamental to our long-term profitability and expect Frontier will remain the lowest unit cost provider in the United States, particularly as significant cost savings materialize from our network simplification strategy. We expect that our network simplification strategy will underpin the $200 million of associated annual run rate cost savings, which should be implemented by the end of 2024 as we highlighted on our third quarter earnings call. Further, our order book is heavily weighted to the high gauge A321neo, which will contribute meaningfully to our ability to control costs as we continue to increase gauge. Accordingly, we expect 2024 adjusted CASM ex-fuel to be down 1% to 3% on a stage-adjusted basis to 1,000 miles. As highlighted on slide 10, we plan to leverage our network, product, brand, and distribution to diversify our revenue and drive sequential RASM improvement. I've spoken extensively about network enhancements, so let's briefly review the latter initiatives. Last week, we launched our innovative biz fares product to cater to cost-sensitive small business travelers while providing a premium experience for one low price. We've rebranded our stretch product to promote our premium economy seating starting at $19, consistent with our recent launch of our 'Get it All for Less' campaign. As we showcased last quarter, our relaunched Frontier Miles program features enhanced elite status tiers that can be earned faster and offers the highest credit card spend-based travel reward earn rate in the industry for each dollar of spending with the Frontiers Barclays Mastercard. A new website and new mobile app as well as NDC are expected to launch by late 2024 and should provide significant distribution, merchandising, and conversion benefits as well as improved brand positioning. Further, we've seen competitive overlap recede in recent months. To the extent carriers further engage in capacity rationalization, this would drive additional unit revenue benefit to Frontier, which will be accretive to our guidance. However, we have only included the published reductions in our base case. On slide 11, network, cost, and revenue initiatives are expected to drive profit and growth in the business. We expect our pretax margin for the full year 2024 to be in the range of 3% to 6%, with capacity growth of 12% to 15% and adjusted CASM ex down 1% to 3% on a stage-adjusted basis to 1,000 miles. First quarter 2024 guidance reflects seasonality and off-peak dynamics expected during the quarter. Our guidance is based on fuel pricing as of February 2. Turning to the final slide. With the full-year benefit of our network cost and revenue initiatives, we expect 2025 to show pretax margins between 10% and 14%. This includes expectations of new labor agreements with pilots and flight attendants as both recently became amendable. That concludes the slide presentation, and I'll now hand the call over to Jimmy for a commercial update.

Thank you, Barry, and good morning, everyone. Fourth quarter revenue was $891 million, reflecting RASM of $0.089, down 15% on 15% capacity growth and an 8% decrease in average stage length. This represents a 4-point year-over-year sequential improvement from the third quarter, driven by stabilizing demand trends. As we enter into 2024, we are now seeing improving revenue trends better than our earlier expectations and see positive momentum as we transition to our new network and deliver on multiple revenue initiatives. We expect the revenue trends to continue to show positive year-over-year sequential improvement. We carried a record 8.1 million passengers during the quarter with a 99.5% completion factor. Our on-time arrivals and departures in December were our highest since 2015, excluding the pandemic year of 2020. During the quarter, as Barry mentioned, we made steady progress toward our objective to increase the percentage of out-and-back flying, including the announcement of four new crew bases at Cleveland, Cincinnati, Chicago, and San Juan, Puerto Rico. The Cleveland base is expected to open in March and will employ 110 pilots and 250 flight attendants in its first year. The Cincinnati base is scheduled to open in May and will employ 80 pilots and 160 flight attendants while the Chicago base will serve both O'Hare/Midway and employ 110 pilots along with 200 flight attendants already based there. Finally, San Juan will be our 13th crew base and will employ 90 pilots and 200 flight attendants in its first year. We've been the fastest-growing airline in Puerto Rico, more than doubling sea capacity since 2019 and offering 14 non-stop routes from San Juan alone. Puerto Rico is playing a key role in our Caribbean and Latin America growth strategy, not only because it's a popular tourist destination but because large populations of Puerto Ricans reside in the U.S. mainland, and they frequently travel to the island to visit friends and family or to work remotely. Frontier is well situated to capture a disproportionate share of this volume as we now serve more routes to Puerto Rico from the U.S. than any other carrier. Moreover, we recently announced a significant expansion of our network as part of our strategy to grow in higher fare routes. During the second quarter, we launched nonstop service from 38 airports with our largest concentration of routes in visiting friends and relatives markets from Dallas Fort Worth, Charlotte, Raleigh-Durham, Los Angeles, New York, Minneapolis-St. Paul, and San Juan. Finally, early last month, we officially launched our reimagined Frontier Miles loyalty program, and we're seeing positive trends. Memberships and engagement, particularly at elite levels have increased. We have also observed improved spend on the co-brand credit card. In fact, December spend was up over 10% year-over-year and was the highest level on record. While it's still early, we expect to see continued improvement in spend throughout 2024. That concludes my remarks, so I'll lead the call to Mark.

Thank you, Jimmy. We generated a pretax margin of 0.7% on a GAAP basis and 0.8% on an adjusted basis in the fourth quarter well above our guidance range on solid operational performance, as Barry touched on earlier and cost-related factors. As a result of our fourth quarter performance, we also generated a pretax margin of 0.9% for the full year. Total revenue was $891 million, down 2% compared to the 2022 quarter. Fuel expense was roughly in line with the prior year quarter as the 12% benefit from lower fuel prices and a 3% improvement in our industry-leading fuel efficiency to 105 ASMs per gallon was offset by the increase in consumption from capacity growth of 15%. Fuel expense for the quarter reflects an average cost per gallon of $3.18, which was slightly below the low end of our guidance range. Adjusted non-fuel operating expenses in the fourth quarter totaled $590 million or $0.059 per ASM, 8% lower than the prior year quarter. The improvement in adjusted CASM, excluding fuel, was driven by a $36 million lease return cost benefit during the quarter from the execution in December of an extension of four A320ceo aircraft leases that were otherwise scheduled to return in 2024. Moving forward, we will continue to be opportunistic with our fleet management, including attractive aircraft lease extension opportunities. Our adjusted non-fuel operating expenses also benefited during the quarter from efficiencies realized across the business, given the strong operational performance and our continued focus on costs. While our fourth quarter pretax income was $6 million, we generated a net loss of $37 million driven by the recognition of a $37 million non-cash valuation allowance against our U.S. federal and state net operating loss deferred tax assets, which wasn't contemplated in our effective tax rate guidance. Our adjusted net income of $1 million for the quarter excludes this adjustment as it's a significant special non-cash item. It's important to note that these net operating losses generally don't expire and can, therefore, continue to be used against future taxable income. Given our full-year adjusted pretax guidance of 3% to 6%, we presently expect to utilize a substantial portion of net operating losses this year. Any corresponding reversal to this adjustment as we generate taxable income would also be excluded for non-GAAP purposes. We ended the year with $609 million of unrestricted cash and cash equivalents and $139 million net of total debt. In addition, we have unencumbered loyalty and brand-related assets, which we believe could generate significant additional liquidity if desired. We had 136 aircraft in our fleet at year-end after taking delivery of four A321neo aircraft and returning two A320ceo aircraft during the quarter. We expect to take delivery of 6 A321neos in the first quarter of 2024 and a total of 23 A321neo aircraft in 2024, all of which are anticipated to be financed through sale-leaseback transactions. With that, I'll turn the call back to Barry for closing remarks.

Thanks, Mark. Our objectives for 2024 are clear. Every member of Team Frontier is focused on executing our network, cost, and revenue initiatives, improving our operational reliability, and delivering an enhanced experience for our customers with a network growth focus on high-fare VFR markets. Alongside our commitment to remain the lowest cost provider in the United States, I'm confident these measures will drive higher margins in the business. Thanks, everyone, for joining the call today, and we will now open up for questions.

Our first question comes from Duane Pfennigwerth of Evercore ISI.

Hey, good morning. Just on the unit cost guidance, can you give us some thoughts on how we should think about stage length this year? Or is there a way to maybe convert the guide to kind of a nominal unit cost guidance? And just broad strokes, what would the underlying kind of tailwinds and headwinds be from a unit cost perspective?

Well, so Duane, I think what's important to note is our stage is going down. So I think to be intellectually honest, that's why we're pinning it to 1,000 miles, and we expect to be down 1% to 3% on a stage-adjusted basis, but we expect it to be closer to 900 for the year.

Yes, just maybe broad strokes, the underlying kind of tailwinds and headwinds year-over-year?

Yes. So when you look at that guidance for the full year, I mean that is underpinned by the network simplification that we've touched on and getting our out-and-back flying to over 80%. And that is going to drive the $200 million of annual run rate cost savings that we expect to have fully implemented by the end of the year. Additionally, as we go through the year, the 23 aircraft that we're taking delivery of are A321neos. So you'll continue to get the gauge benefit there. And so I think those are the main drivers of the 1% to 3% down in the CASM stage length adjusted.

Okay. Appreciate those thoughts. And then I'm sure you get the question a lot. As a team, maybe it's Barry, maybe it's Jimmy. But to the extent that Spirit becomes available again, can you just gauge your interest or to the extent you'd be tempted to reengage there? Is there any price on the equity where it would make sense from your perspective?

Thanks, Duane. It's the first time we've been asked that question. We are 100% focused on our business and delivering profits for our shareholders. So sorry, but we don't have anything entertaining to talk about.

Very clear. Thank you.

Thank you. And our next question comes from Savi Syth of Raymond James.

Yes. Hi, good morning. I was kind of curious what your thoughts were as you kind of roll forward these network changes, where utilization would go and along those lines, I think how the pilot trends are looking in terms of being able to meet the utilization targets?

I'll discuss the pilots, and Mark will cover the utilization aspect. Regarding the pilot situation, we've noticed a significant shift in the market. The regional airlines are managing to staff their positions, which indicates the extent of the pilot shortage. Therefore, we don't anticipate any issues in that area.

Yes. And then relative to the utilization, so in the fourth quarter, we delivered 11.3 hours on a total system basis. As we progress with the network simplification, we expect the utilization to increase as we go through the year, and we'll continue to push to drive that higher.

I appreciate that. And if I might, just a clarification question on Duane's color. Any kind of labor cost increases in the 2024 guide? I know you mentioned it is contemplated in the 2025 outlook.

No. These just opened. I know a lot of people that have been open for multiple years are starting to include it. We didn't include it in '24, but we have included it for '25.

Okay. Thank you.

Thank you. And our next question comes from Ravi Shanker of Morgan Stanley.

Good morning, everyone. This is Katherine on for Ravi. Thank you for taking my question. About six months ago at Laguna Conference, you kind of talked about structural pressures from ATC and plane restrictions, which it sounds like you are expecting deliveries, but I was just curious what the lay of the land is today? Have those pressures eased? Are you trying to work around them? Is there an opportunity for a bigger reset in the operating model to kind of deal with the current environment?

Thank you for the question. We do not anticipate any changes in the situation. The weather has improved slightly for the industry, but we still notice signs of ongoing extended ground delays. Our next significant test will be during the President's Day weekend, followed by weekends leading up to spring break and Easter, particularly in Florida, where ground delays may be impacted. However, we are not just waiting for conditions to improve; we are actively managing the situation by adjusting our schedule to address these challenges, which we expect will persist into spring and summer. Last year, we saw a cancellation rate of several percent during the summer, with around 90% of those cancellations linked to multi-day trips. Therefore, we are modifying our network to tackle these issues and improve reliability. We are optimistic because if we can structure our operations similarly to our successful out-and-back model, we believe our reliability will continue to improve, as we have noticed in recent months.

Got it. Thank you. And just as a quick follow-up, I was curious how close in bookings are trending. I know there was kind of a slight drop-off last Labor Day. So any color on what you think normal behavior might look like? Thanks for the questions.

Yes. Jimmy kind of alluded to this; we'll let him answer that question.

Sure. Look, like what we've seen over the last kind of four or five months is a bottoming of booking trajectory in the early part of Q4, back end of Q3. And then we've seen it, as I mentioned in the prepared remarks, we've seen a transition to an improving revenue market as we progress through in Q1. And so we're actually quite encouraged by what we see. We're obviously working very hard internally in terms of restructuring the network, that's providing a significant improvement as you progress through March, April, May, and June. And also, you're seeing very strong demand in the short-term, improving close-in pricing. So built into our guide is a sequential improvement over the last few quarters on our unit revenues.

Thank you.

Thank you. Our next question comes from Brandon Oglenski of Barclays.

Hey, good morning everyone. Thanks for taking the question. Jimmy, maybe if we can follow up there. So I would assume that you have some acceleration built into your 2Q revenue outlook. Is that what you're seeing in the bookings? And can you compare and contrast that with Easter holiday timing, not to be too near-term here. But I guess it must be the network changes you're making that you're seeing the positive improvements. Is that correct?

We have made several announcements recently indicating a significant network shift occurring in March, April, May, and June. This shift is leading to a noticeable improvement in our revenue performance. We are concentrating on accessing a larger revenue pool and targeting markets with higher fares, which is resulting in better revenue outcomes across the business. While it’s still early, the initial signs are very encouraging. As you noted, Easter is returning this quarter, which is a positive factor for us, particularly in April. We believe that the adjustments we are implementing will also support long-term growth, especially during peak periods as we enter more VFR markets.

And I guess, anticipated in that improvement in 2Q and 3Q, just from where you are in the first quarter, is more of it commercial or revenue based? Or is it also the expectations that your costs can come down and maybe a more controllable operating environment this summer?

Well, yes. I mean, look, part of the guide today is clearly our costs are on a very good trajectory. They're on a different trajectory to the entire industry where our unit costs are actually coming down. Obviously, we stayed adjusted to 1,000 miles just to give you a fair comparison. That's a really good thing. We're working very hard in the business on extracting a significant amount of cost out. That's a lot of that is driven by the network shift that we're doing. That helps the business. But what we're doing is trying to improve sequential revenue as you progress through this year. Clearly, year-over-year, as you get into the second half of this year, you have an easier comp from a unit perspective. But what we're seeing at the moment gives us a lot of hope or optimism around the improving revenue environment as you progress through this year.

Okay, thank you.

Welcome.

And our next question comes from Michael Linenberg of Deutsche Bank.

Hey, good morning, everyone. Hey, I think on the last call, Jimmy, you talked about some of the potential issues that you could have later in the year with the GTF. And I know you had indicated that it was somewhat fluid and you were in conversations with Pratt. Do you have a better sense about any potential groundings that we see later this year, if at all, it's a 2024 event?

Yes, Mike, this is Barry. We expect no financial impact from the GTF.

Okay. Good. And then, Barry, since I have you my second, when I look at your network and I look at some of the routes that you do fly to, I know you've topped up VFR, but there are some markets that you're in where you actually have decent presence in what I would characterize as business markets. I know in the past, you did cater to some price-sensitive on the business side, maybe it was 5%, maybe it was 10%. But I'm only bringing this up because when I look at one of your recent offerings, some of your product offerings, there is a bit of a, call it, a business type fare or sort of product that you are rolling out, maybe that's to take advantage of some of the network changes. Can you talk about that? And maybe there's some opportunity with your presence in these big markets, Chicago and L.A. and Atlanta, etc. Any thoughts on that would be great. Thanks for taking my questions.

Sure. So look, I mean, we're not making a major strategy shift to go after business. I mean, historically, we've been in the mid-single digits for business travel. And the majority of those, we believe, are small business. But yes, we've heard from our customers they would like to see kind of a bundled fare available through third-party channels. That's something we haven't had in the past. And so we have launched the Biz fare, which includes a bag, carry-on bag. It includes actually premium economy seating if it's available as well as flexibility, no change-cancel fees. So it's a great product for small businesses. It saves them money. Obviously, we don't have the frequency that the big airlines do. But I think for some people that want to save money, it's a great product. But we just didn't have anything if they did have a managed travel partnership with a travel agency; we just didn't have a solution for them, and now we do. And so look, you can kind of do the math. If you just get a few points of this at a 30% to 50% higher fare, it's a great way to diversify our revenues and improve our overall RASM.

Very good. Thank you.

Thank you. And our next question comes from Scott Group of Wolfe.

Hey, thanks. Good morning. So I wanted to just go back to the fourth quarter for a second, just on the cost side. So if you look at just cost ex-fuel, third quarter was $645 million, fourth quarter dropped to $590 million, and then the Q1 guide that goes right back to $650 million. So any help on what happened in Q4?

Yes. So yes, Scott, to give you the broad strokes on Q4, right? So that $590 million as I highlighted in the prepared remarks includes the $36 million benefit from the four A320ceo lease extensions that we executed. If you adjust for that, right, you're at $626 million. And from there, looking at that number to what we're guiding in the first quarter, that takes into consideration the seasonality that comes to play in Q1, right? So payroll tax-related seasonality, de-icing. I mean you've got a growing fleet as well, right? And so those additional costs. So at the end of the day, I think that's the walk from Q4 and then Q1.

Okay. That's helpful. Can you discuss your expectations for RASM growth throughout the year and how to interpret the margin progression, moving from a decline of 4% to 7% in Q1 to a rise of 3% to 6% for the year? I want to understand your outlook for the margin run rate by the end of the year.

We don't provide guidance on RASM, but you can consider the initiatives we've discussed and how they will unfold throughout the year. You should anticipate continuous improvement in RASM as these initiatives develop. For example, we recently launched the Biz fare and are in talks with some corporations to make it available to them. We are exploring various avenues for revenue diversification, each with its own timeline as we progress through the year.

And then I guess, ultimately, what I'm trying to get at is where are we going from a margin perspective, the rest of this year? Because I'm trying to get to 10% to 14% next year with labor. So just anything you could do to sort of help on the bridge?

We have provided the first quarter results and our overall yearly projections, so while we haven't detailed the numbers for the second through fourth quarters, you can calculate what is needed to reach that target. I believe if you consider this for the second half of the year, you will find that the current pace positions us well for 2025.

And then keep in mind, as you look at '24 and as we deliver on the network simplification plan and the revenue initiatives and cost initiatives that are there and you move into '25, you're getting the full-year benefit, right, of all of those items that are being put in place in '24. So I mean I think that's important to note as you consider '25 versus '24.

Got it. Okay, thank you.

Thank you. And our next question comes from Stephen Trent of Citi.

Good morning, and thank you for taking the time to answer my questions. I would like some clarification. Could you remind me if you will be including any sale leaseback gains in OpEx? Thank you.

Yes. I mean we have consistent practice in the past. And as we go forward, sale-leaseback gains are a credit to operating expenses.

And any sort of high-level view sort of a ballpark on where that could end up for this year, for example?

We don't call that out. But I think the best thing to think about, Stephen, is that the reason why it's there is because had we debt financed, it's the most fair way to compare it. So they get the benefit on the debt financing side, we get it through the sale leaseback. but we don't actually call that specifically out, but it would be similar to people that have debt. I mean the P&L impact will be similar to those who debt finance.

Yes, that makes sense. I appreciate it. I have one last question. I understand that one of your competitors might not have its codeshare with the Mexican carrier renewed by the Department of Transportation. How are you approaching your relationship with Volaris in this context?

We're really excited about our partnership with Volaris. It's been disappointing, obviously, that given the challenges over the last few years in their category that we haven't been able to exploit that partnership, but we're excited to get that back turned on this year and we expect to do great things with it. We're larger now. We have a greater brand presence. We have more distribution power coming. But we're seeing them growing as well in their position. But we never had ATI with Volaris. It's just a true partnership where we have a co-share and overall marketing partnership. So we're excited to get it turned on. And I guess, if you think about it, I guess we'll have a little bit more of a level playing field if what they're saying comes through.

Okay. Appreciate it, Barry. Thank you.

Thank you. And our next question comes from Conor Cunningham of Melius Research.

Hi, everyone. Thank you. Just back to the underserved markets and all the changes that you're making there, it seems like you're indicating that a lot of the stuff is unit revenue accretive, which I think is a bit surprising to some of us. Is the brand and the fares just being that well received? But historically, you would think of a spooling period being like over a year or two years. So just any thoughts around why the success so far?

I believe those assumptions are generally accurate. However, having been involved in similar processes over the last 30 years, it’s important to recognize that the capacity we’re utilizing comes with a significant opportunity cost. When financial performance is lacking, reallocating resources to more promising market opportunities can be immediately beneficial. For instance, if you're operating a route four times a day and the last frequency doesn’t generate additional revenue but incurs costs, reallocating that service can provide a 100% incremental benefit to the overall network.

Okay. That's helpful. Makes sense. And then on all these new products that you're talking about Biz fare, premium economy, and all the loyalty changes, I was just wondering if you could provide some context to just the contribution? You're talking about a 7-point improvement in pretax margin. So what portion of these new products is what's occurring in 2025? Thank you.

I appreciate the question, but we haven't broken that out in detail. I can tell you that the majority of the benefit for both this year and next year is expected to come from the network and the shift to VFR flying, moving away from the oversupplied leisure markets. The contributions from other areas are smaller. We don’t expect significant gains from the Biz fare yet as it will take time to mature. Similarly, the frequent flyer initiatives also require time to develop, but early indicators are promising. For instance, as Jim mentioned earlier, just one month after launching the credit card, spending has increased over 10% year-over-year, which is substantial. However, we are not providing a breakdown of each component.

It's all good. Thank you.

Thank you. And our next question comes from Andrew Didora of Bank of America.

Hi, good morning everyone. Barry, I understand that your margins in the second half of the year will significantly improve compared to what we're seeing in the first quarter. However, referring back to Scott's question, could you elaborate on the transition from those improved margins to your 2025 target? Additionally, what labor-related challenges are you anticipating? How should we approach the potential for incremental revenues? Any insights you could share on connecting the margins from the second half of 2024 to those in 2025 would be very beneficial for everyone.

Sure. As I mentioned earlier, we've reported on the first quarter and the start of the year, so you can easily calculate what that means moving forward. As we've discussed, the diversification of our revenue has several components that will unfold throughout the year. This will have a greater positive impact in six months compared to two months from now. When you consider this and project it forward into 2025, you can account for what we expect to be around $0.25 in headwinds from our labor agreements. However, we believe we can return to the 10% to 14% range for 2025 as a result.

Okay. Got it. And Mark, just the $36 million benefit you had in 4Q from the lease extensions, does this just go away, how long were these leases extended for? Does that $36 million kind of come back in '25 at all? How should we think about that?

Yes. So these are eight-year leases that we extended out 12 years. And so that $36 million is out far into the future. So that's not a '25 item.

Okay, got it. Thank you.

Yes.

Thank you. Our next question comes from James Kirby of JPMorgan Securities.

Hey, good morning, guys. Just following up with Savi's question earlier with the pilot pipeline. There are mere reports earlier last month on just slowing down the training and pushing some out. Is that a function of less flying? Or is that just a function of less turnover? And any color you can share there?

We've noticed a slowdown in attrition, which is different from our earlier expectations. This, along with other indicators in the industry, has resulted in a significant change. Generally, we've needed around 30 pilots a month, and historically, we've hired about 60 to account for attrition. If attrition drops, it takes around six to eight months to fully train a new first officer, and then we also need to train a captain to form a crew. A noticeable drop in attrition could quickly lead to having 200 to 300 more pilots than needed. Additionally, we're observing efficiencies in our out-and-back schedule, which will affect our pilot requirements per airplane. Furthermore, we've made substantial investments in our pilot recruitment programs, including cadet programs, rotary transition programs for military personnel, and college programs. Our pipeline is quite strong, and we've experienced lower attrition rates among hires from the last one to two years compared to those hired over two years ago. Currently, we have over 700 cadets in our pipeline, equating to more than two years' worth of supply. Overall, the marketplace has changed significantly in the past one to two years.

Got it. That's great color. Appreciate it, Barry. And second question, if I recall correctly in your prepared remarks, you mentioned competitive pressures rescinding in certain markets. Just wondering if you can elaborate on what type of markets those are? I believe you mentioned it's not embedded in guidance, but is that a trend you see continuing as the year goes on in terms of rationalization of capacity?

Yes. Let me clarify. We have observed a decrease in capacity, particularly when Spirit exited Denver. This trend has also been noticeable in Puerto Rico and other locations. Analyzing the data, it’s clear that some carriers have been experiencing revenues in the lowest quartile, and the most effective way to stop incurring losses is to cease unprofitable operations. It appears that companies are making sensible decisions regarding their capacity. We anticipate this trend will persist, but our guidance only reflects the changes we've observed up to this point. We do expect a continued adjustment of oversupply, particularly in leisure markets.

Got it. I appreciate the questions.

Sure.

Thank you. And our next question comes from Christopher Stathoulopoulos, SIG.

Thank you, everyone. Good morning. So I guess, Barry, I'm going to try to get to the margin question in a different way. It's important here given the change here in your network, deemphasizing LAS and MCO. But if we take out the benefit of product, which is going to take some time to mature. And we think about the cadence of RASM for this year and for next, ultimately, again, outside of if we could just hold product constant, a piece of that or a big piece of that arguably is going to be about where you're flying and how we can argue for or against any sort of seasonal outperformance, etc. with respect to yield. So my question is, if you could just put a finer point on where you're growing. And to your point, we can all look at the DO schedules today, but want to better understand that. And then ultimately, as we think about the moving pieces for next year, is that sort of a similar composition and Part B or C, do you need to make any changes with this shift with respect to the aircraft type or anything and so far as nuanced around crew scheduling and the like? Thank you.

We don't anticipate any changes to our aircraft, and our scheduling is becoming simpler due to the network simplification we discussed. Regarding the markets we are targeting, it's clear that the average fare across the system is up 5% compared to last year for the same markets we will be operating this summer. This indicates that with the new routes, we are pursuing significantly higher fares, which are typically in the range of $15 to $20 more. Furthermore, the total revenue pool within the industry that we operate in will increase by over 50% year-over-year. So even if we grow by only 12% to 15%, we will still need a smaller share of a much larger market, which reduces the risks for the business and lowers competitive friction. Specifically, we've talked about our 13 bases and are set to grow significantly, particularly from those we've recently announced. We've introduced several new routes from San Juan and Dallas/Fort Worth, a base we established last year. More announcements are forthcoming in the weeks ahead, with some this week and more next week, plus additional ones later this month. All these new routes are in markets with much higher fares than those we were operating in last summer, which we believe will greatly enhance our revenue per available seat mile trajectory.

Understood. Thank you for that color. And my second question, the 80% or more than 80%, excuse me, out-and-back, if you could bridge that for March's anticipated two-thirds, what needs to be done to realize that? And more importantly is how do you sustain that? Thank you.

Thanks. Actually, we just went through this yesterday. If you look at our March schedule, we're already there at the 80% range to out-and-back. We're not scheduled with our crew there. For example, the Cincinnati base doesn't open until May, but we actually have the flyingalready kind of set up as if it was out-and-back. We expect to continue to improve our reliability as we've seen in recent months.

Great. Thank you.

Thank you. At this time, I'd like to turn it back to Barry Biffle for closing remarks.

Hey, I just want to thank everybody for joining us today. We're really excited about the results that we're putting forward in our guide and as well as our expectations as we move through the year and into next year. A lot of great things going on with the company. So we appreciate everybody joining us today, and we look forward to updating you on our progress and our success next quarter.

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