Frontier Group Holdings, Inc. Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the 2024 Third Quarter Frontier Group Holdings Earnings Call. At this time, all participants are in 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 will now hand the conference over to your first speaker today, David Erdman, Senior Director of Investor Relations. Please go ahead.

Yes. Thank you, and good morning, everyone. Welcome to our third quarter 2024 earnings call. On the call with me this morning are Barry Biffle, Chief Executive Officer; Jimmy Dempsey, President; Mark Mitchell, Chief Financial Officer; and Bobby Schroeter, Chief Commercial Officer. Each will deliver brief prepared remarks, but before they do, I’ll recite 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, along with reports we file with the Securities and Exchange Commission. We will also discuss non-GAAP financial measures – actual results of which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement. So I’ll give the floor to Barry to begin his prepared remarks. Barry?

Thanks, David, and good morning, everyone. Our revenue and network initiatives helped to overcome headwinds from excess domestic capacity, and we saw green shoots midway through the quarter as we optimized our capacity and other carriers made needed cuts of their own. Domestic capacity growth has now slowed to its lowest rate post-pandemic and in fact for the first time in 10 years, it’s trailing gross domestic product, excluding COVID years. September RASM inflected higher by approximately 5%, excluding Hurricane Helene's impact. And while lower capacity was a factor, we’re seeing continued progress with our sales platform, the New Frontier, and loyalty program enhancements. Bobby will expand on these items in just a moment. Our third quarter adjusted pre-tax margin loss of 1.1% was at the midpoint of our guidance, despite a challenging conclusion to the quarter as Hurricane Helene struck the Southeast United States. Excluding the impact from the hurricane and the Microsoft CrowdStrike outage, our operation delivered year-over-year improvements across nearly every operational metric. This is a strong validation of our network simplification strategy, which also contributed to our 4% reduction in adjusted CASM ex-fuel on a stage adjusted basis during the quarter. Improvements in our operations are helping to drive the lowest complaint rate we’ve had in three years. We expect the RASM inflection to strengthen in the fourth quarter, including any headwinds from Hurricane Milton, supported by the maturity of our network and revenue initiatives and moderating capacity growth. In addition, the schedule overlap with our closest competitors is expected to significantly lower in the fourth quarter and into 2025 across nearly all Frontier crew bases. Hurricane Milton forced the cancellation of nearly 20% of our scheduled flights over a four-day period and caused demand softness in impacted travel areas on top of the lingering effects from Helene. I’d like to extend our thoughts to those affected by recent hurricanes, including many of our own employees who endured the brunt of them, as well as express my gratitude to the valued team members at Frontier for safely navigating these challenges and working diligently to quickly and safely recover operations. I’ll now turn the call over to Jimmy for a commercial overview. Jimmy?

Thanks, Barry, and good morning, everyone. Briefly recapping the quarter, total operating revenue increased 6% versus the prior year to $935 million on capacity growth of 4%, our slowest quarterly post-pandemic rate, resulting in RASM of $9.28. Departures increased 17% on a 14% shorter average stage. Total revenue per passenger was $106, down 8% versus the 2023 quarter, largely driven by oversupply of domestic seats prior to broad industry capacity reductions, which began to take effect midway through the quarter. As Barry mentioned, we saw a year-over-year inflection in stage length adjusted RASM as we progressed through August and into September as a direct result of our own capacity adjustments and the constructive capacity adjustments across the industry. We removed 37% of off-peak flying, shaping the week on the higher demand days while adding new routes, which increased our revenue pool by 17%. This strategy is proving to be a successful adjustment to our deployed capacity, whereby in addition to leisure traffic flows, we are enhancing our attractiveness to VFR and small business traffic. Seat capacity in the fourth quarter will continue to grow with deployed seats increasing by 6.5%, albeit on a shorter stage of 875 miles, resulting in ASM production reducing by 2% to 3% year-over-year. We opened three new stations during the third quarter: Bridgetown, Barbados; Port of Spain, Trinidad; and San Jose, California, and launched 17 new markets. We continue to expand our network in the fourth quarter, including the addition of 33 new markets launched from Palm Springs, Vail/Eagle, Burlington, Vermont, and Washington Dulles. Although Hurricane Helene and Milton dented our end of Q3 and early Q4 performance, we have seen a strong bounce back in bookings that is now in line with the trajectory we were experiencing in late August and September. Off-peak traffic flows remain challenging, and it is our expectation that we continue to moderate flying on Tuesdays, Wednesdays, Saturdays, and red-eye flying throughout 2025, with a focus on improving our RASM performance as significant network shifts from overcapacity underperforming markets at the end of 2023 and early 2024 results in maturing redeployed capacity across our 13 base footprint. We expect capacity growth in 2025 to be in the mid-single digits on an average stage length of approximately 900 miles. Our simplified out and back network enters its second year of operation as we progress through Q2 2025 with our new 2024 bases of Cleveland, Cincinnati, Tampa, Chicago, and San Juan, Puerto Rico maturing from a commercial and operational perspective. Throughout 2024, we’ve been working diligently to improve our merchandising to the customer and launch a new Frontier, together with some enhancements to our day of travel experience with our customers. I’ll hand it over to Bobby to go through some of these together with an update on our performance in our newly launched Premium products and enhanced loyalty program.

Thanks, Jimmy, and good morning, everyone. Our customer experience and revenue initiatives are showing significant momentum, and I’m excited to highlight some of the key advancements we’ve made recently. We continue to prioritize improving the customer experience through technology. This quarter we introduced self-service international travel document verification in the Frontier mobile app, allowing travelers to easily verify their documents before arriving at the airport. Over 80% of our customers now use the app on the day of travel for fast and easy check-in, bag drop, and boarding, which has greatly enhanced the overall airport experience. To that end, we will be delivering a new mobile app toward the end of this year, which will provide a significantly better customer experience from today. Additionally, on the airport front, we opened new ground loading gates in Denver, expanding our capacity at our home base and improving efficiency during peak travel periods. Turning to revenue. The New Frontier bundles Economy, Premium, and Business have been a significant driver of growth since their launch. Due to the success on flyfrontier.com, we added these bundles to the mobile app in mid-September, allowing customers to choose their preferred bundle not only at the time of booking but also before travel and at check-in. This multi-stage offering has increased attachment rates for these bundles, and we’re on track to extend this functionality to NDC-enabled third-party platforms early next year. The simplicity and transparency of bundle pricing has resonated well with customers, who appreciate the clear options and the ability to easily understand the total cost of their trip. This success positions us well to continue attracting new customers and to retain existing ones. Our Premium products UpFront Plus and BizFare have also continued to perform very well. The paid load factor for UpFront Plus, which is still in its maturity phase, is approaching 70%, generating 30% more ancillary revenue per passenger compared to the previous stretch seating. Similarly, BizFare has also been a strong performer with the utilization rate over 250 basis points higher in the third quarter compared to the second and a revenue premium nearly 50% higher than basic fares. As we expand BizFare into search engines like Google Flights and KAYAK in Q4 and further into corporate booking tools next year, we expect these products to continue driving incremental revenue. Our co-branded credit card partnership is yielding strong results as well. The introduction of two free check bags in August and Instant Elite Gold Status in May for cardholders has helped to drive co-brand revenue up 15% year-over-year for the third quarter, with applications up 39% and spending increasing by 9%, the highest on record. These enhancements have made our card more competitive and appealing, particularly for customers in key markets and crew bases, and we believe there is a large untapped revenue opportunity for us that we will be pursuing even more heavily in the future. That concludes my remarks, and I’ll turn it over to Mark for the financial update.

Thanks, Bobby, and good morning, everyone. Briefly recapping the quarter, total revenue was $935 million, 6% higher than the 2023 quarter. Fuel expense was $261 million, 10% lower than the 2023 quarter at an average cost of $2.67 per gallon. The decrease in fuel expense was driven by 13% lower fuel prices, partially offset by 4% higher consumption resulting from higher flown ASMs. Adjusted non-fuel operating expenses were $693 million within guidance, excluding most of the benefit from the $40 million legal settlement reached in September related to litigation brought against a former aircraft lessor. Approximately $2 million of this settlement is related to legal fees we incurred and thus were not adjusted for our non-GAAP earnings presentation. Proceeds from this settlement were received in early October. Adjusted CASM ex-fuel was $6.89 or $6.37 on a stage adjusted basis, 4% lower than the 2023 quarter driven by our cost savings program, which has delivered greater than $100 million of annual run rate savings since inception in the third quarter last year and the cost benefit from two additional aircraft sale-leaseback transactions in the quarter. Partially offsetting these items were higher costs tied to an increase in departures related to our decision to reduce average stage and higher costs due to fleet growth and reduced capacity on off-peak days to better align with demand trends. Third quarter pre-tax income was $27 million while adjusted pre-tax loss was $10 million yielding a 1.1% loss margin, the difference primarily related to the non-recurring legal settlement I just mentioned. Net income was $26 million while adjusted net loss was $11 million. Our adjusted net loss is greater than our adjusted pre-tax loss due largely to the impact of non-deductible tax items and the resulting impact on our quarter-to-date tax rate, particularly as our year-to-date adjusted pre-tax loss is close to breakeven. We ended the quarter with $781 million of total liquidity comprised of unrestricted cash and cash equivalents of $576 million and $205 million of availability under our new revolving line of credit that closed in September and was undrawn at quarter end. As previously disclosed, our new revolver is secured by our loyalty and brand-related assets; it features expansion capabilities, which, subject to certain terms, conditions, and additional lending commitments, may be increased to $500 million. We’re also able to enter into additional indebtedness secured by our loyalty and brand-related assets, which may provide for significant incremental liquidity as desired to the extent such indebtedness is pari-passu to that of the revolving credit facility. As part of establishing a new revolver, we also updated our existing PDP financing facility and secured two additional PDP facilities in September, which in the aggregate expands our PDP financing capacity by $113 million and covers aircraft deliveries through 2027 and certain deliveries scheduled in 2028. We had 153 aircraft in our fleet at quarter end after taking delivery of five A321neo aircraft during the quarter, all financed with sale-leaseback transactions. We expect to take delivery of two spare aircraft engines and six A321neos in the fourth quarter, all of which are planned to be financed with sale-leaseback transactions and exit the year with 159 aircraft. Our fleet plan for 2025 remains consistent with the amended delivery schedule we disclosed last quarter with the pace of deliveries in 2025 weighted towards the back half of the year. We expect to take delivery of 21 sale-leaseback financed aircraft next year, eight in the first half, all of which are A321neos, and 13 in the second half, of which five are A321neos and eight are A320neos, with the second half deliveries heavily weighted towards the fourth quarter. The aircraft leasing market today is strong, and we've secured sale-leaseback financing commitments for expected deliveries through 2025 along with approximately one-third of 2026 expected deliveries. Our fourth quarter guidance was published in the earnings announcement we issued this morning. Recapping key highlights. Fourth quarter non-fuel operating expenses are expected to be $725 million to $745 million, including an estimate of approximately $10 million related to cost inefficiencies from hurricane-related impacts and temporary excess crew-related costs tied to capacity reductions. Also bear in mind, the prior year quarter included a $36 million lease return benefit as we extended leases on four aircraft. On a full-year basis, we expect stage-adjusted CASM ex-fuel for 2024 to be down approximately 1% versus the prior year at the low end of prior guidance despite the significant reduction in off-peak day-of-week capacity in the last four months of the year that wasn't initially contemplated in our guide. The average fuel price per gallon for the fourth quarter is expected to be in the range of $2.40 to $2.50 based on the fuel curve as of October 24; adjusted pre-tax margin is expected to be in the range of breakeven to 2%, which includes an estimated 2 percentage point impact related to weather, resulting in an expected full-year adjusted pre-tax margin of breakeven to just modestly above. With that, I'll turn the call back to Barry for closing remarks.

Thanks, Mark. I'm proud of the progress the Frontier team has made in executing our revenue and cost initiatives while also improving our operational performance and customer experience. We expect the continued progress and maturation of these initiatives in the fourth quarter and into 2025 to drive further inflection in RASM on a stage-adjusted basis, which combined with our significant cost advantage is expected to support our objective of getting back to double-digit margins by the summer of 2025. Thanks again for joining us this morning. Before we begin Q&A, I want to flag that we will not be commenting on any potential M&A in our industry. Operator, we're ready to begin the Q&A.

Thank you. At this time, we’ll conduct the question-and-answer session. Our first question comes from the line of Ravi Shanker of Morgan Stanley. Your line is now open.

Great, thanks. Good morning, everyone. So maybe to kick off just on the ASM guidance for next year, what do you think that RASM trajectory looks like for 2025 given that you think it can now grow only mid-single digits? Given some of the new initiatives, do you think that there can be a little bit of a revenue offset there?

Yes, look, we view the path to back to double-digit margins as being driven at this point by the revenue initiatives, whether it's the maturing of the New Frontier and all the premium products that we've got, the continued maturation of the loyalty programs, plus the industry backdrop just in general, I think, is very accretive to this. So I think you can pretty much draw out a line from here and you can see why we're really bullish about getting back there. Especially if you consider that we wouldn't have had Hurricane Milton in the fourth quarter; we'd have made several points in margin this quarter.

Got it. Just to follow-up, just to that point, I think your guidance of getting to double-digit margin by summer of 2025. I think the Street is below half that number, right? So what's the Street not getting? Is it just the potential for converting that RASM or where do you think we need to close the gap versus expectations?

Well, I think the biggest bucket is probably just the maturation of all the new network initiatives that we introduced this year. I mean, you have to go back and look that we grew our revenue pool by over a third year-over-year, and now you're looking at growth sub-10%. So that represents a much bigger revenue pool. But yet that flying was very immature. When you lap year-over-year growth of 20% to 30% in maturation multiplied by 20% of your capacity, this is one of the simplest things for the Street to grasp. We're in the 4% to 5% range of RASM. Then you've got what we've got in the beginnings of the New Frontier; we’re just now getting to a 70% paid load factor with UpFront Plus. We’re seeing real attraction in our premium products, and we’re seeing real success in the New Frontier merchandising that’s working. It’s mature, and that’s worth a couple of bucks. Also, we have a new app coming out, as well as NDC, which we have seen across the industry being very accretive as well. So we have a lot of things in the tank and I think probably more than anyone else from a tailwind perspective for RASM. And that’s before you get to the overall industry backdrop of capacity, which I think what we're seeing now is that carriers are cutting and they are going to continue cutting until they hit their target margins. So I think that’s probably the best backdrop that we've had in the past seven to ten years.

Very helpful, thank you.

Thank you. Our next question comes from the line of Brandon Oglenski with Barclays. Your line is now open.

Hi, this is John Dorsett on for Brandon. Thank you for taking my question. With capacity at mid-single digits next year, how are you able to control costs? And can you also just talk a little bit about your rent line? With all the sale-leasebacks expected to come, how should this affect rent over the next year?

Yes, sure. Go ahead.

Yes, yes. So, specific to next year, as I mentioned, we are expecting 21 deliveries next year, with eight of those being A320neos and the balance A321neos. And so we have those sale-leaseback financed. Similar to what we've highlighted before, you would expect a similar amount of gains tied to that. As we turn the page to 2025, we’re on target as we stand now to achieve the $150 million annual run rate benefit from our cost savings program by the end of this year. Looking to next year with moderated capacity, those capacity adjustments are investments that, from a commercial perspective, are expected to help drive incremental RASM and better overall margin outcomes.

I just think I would add too; if you look at the latest costs, even including the fact that we reduced capacity, we're becoming the premier ULCC. In order to do that, you got to have the lowest cost in the space. It’s in our DNA. We're managing everything about it. Everything that Mark just mentioned on the simplification of the network, but what we're seeing is the cost convergence is true across most of the industry, but not in the case of Frontier. And I think that’s kind of misunderstood and not really highlighted. We are over 40% better in Q3, and it looks like based on the guidance that we will continue to maintain that over 40% cost advantage even as we roll into 2025.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Savi Syth of Raymond James. Your line is now open.

Hey, good morning. Just to follow-up on that last question. For unit cost pressure next year, could you help us kind of think through that? Are we seeing mid-single-digit increases again next year, or should it be better? Or at least help us think about the moving parts on a year-over-year basis?

Yes. Savi, at this point, we're not guiding for next year. What we're focused on right now is getting to that $150 million annual run rate target as part of our cost savings program. But we're still working through the guide for next year, so we're not guiding at this point.

Got it. And maybe Barry, you alluded to this, but I wonder if you could give a little more color on the capacity changes you've made; you did a lot of redeployment from last year and saw new markets mature. Could you talk about what the ASMs under maturity were as you progressed through this year and what that looks like next year?

Yes, sure. It's a great question. We did a significant redeployment from last year, mainly out of Florida; a little bit from Las Vegas. We moved that across several of our new bases. I think in large part, we’re hitting normal historical averages. Call it, two-thirds of those routes worked. The only disappointing area was actually New Orleans. We just didn't see universally anything work out of New Orleans. We think there are some local issues there, but by and large, we're seeing really good early results, and we expect that maturity curve to come through. You’re going to hit the historical averages. That’s why I mentioned in the first question, what's most misunderstood. I don't think people are understanding that 20% of our capacity was outsized redeployment, and you're going to have a 20% to 30% bump on maturity as we wrap into 2025. So I don't think there's anyone out there that has the tailwinds that we have on the revenue side.

So starting 2025, do you get back to your normal mix of new versus mature markets?

Yes, I think it's going to come down. You’re still going to have a little bit of new. We’ve got a few lingering opportunities that we're really interested in. But yes, I think by spring and summer, you'll get back to a normal mix of new markets largely as part of our growth. And over time, probably by July, you’ll start seeing growth tied to new markets.

Thank you.

Thank you. Our next question comes from the line of Michael Linenberg of Deutsche Bank. Your line is now open.

Hi, Barry. This is Shannon Doherty on for Mike. Thanks for taking my question. Can you provide us with more detail on the drivers of this year's $150 million cost savings program?

Yes. From a cost savings program standpoint, the high-level network simplification that we've talked about getting to over 80% in and out and the crew base footprint that we’ve put in place. In addition, we are implementing aggressive cost management from a headcount per aircraft standpoint, as well as a number of automation initiatives across the business that collectively are getting us to that $150 million annual run rate target.

Got it, thanks. And Barry, on the revenue side, you have a lot of revenue initiatives going on, and I know we’ve talked about them extensively, but which one are you most bullish on? Or said differently, which initiative is going to be the largest contributor to hitting your 10% to 14% pre-tax margin guide?

Well, I think the largest contributor is the network maturity. If it took a single bucket and it’s just math, right? It's going to happen. I think the one we’re probably the most excited about is actually what we’ve been doing from a premium perspective and from a loyalty perspective. We’re seeing huge uptake in our credit card, as an example. We’re in a situation with relatively low growth right now in the fall. But yet we’re seeing the highest credit card applications in our history, and they’ve jumped massively year-over-year because of all the initiatives that we’ve done this year. The maturity over the next several years is massive in terms of loyalty. If you take the loyalty revenue that the industry gets compared to us, we are several dollars a passenger below where we should be. I think you don’t get there through little small steps; you get there through some big changes, but it takes a while for that to mature. We think we made a lot of those changes and we have more to come, but I think the one area that we’re most excited about is probably loyalty because again, if you look at the industry, this is something they get up in the teens and $20 plus per passenger, and we’re in a couple of bucks a passenger. So this is a huge opportunity.

Thank you. One moment for our next question. Our next question comes from the line of Andrew Didora of Bank of America. Your line is now open.

Hey, good morning, everyone. Barry, just to clarify, on the double-digit margins by summer of next year, is that a comment just on margins over the summer? Or is that a true run rate figure that we can kind of build off of going forward?

No, run rate.

Got it. In terms of the credit facility moves that you made over the quarter, why was now the right time to raise additional liquidity? Was there something in the credit markets or your business trends that made you think differently about it at this point in time? Thank you.

Yes. Overall, we have a very attractive base of loyalty assets, and we’re always going to look at ways to optimize our balance sheet. For us, establishing a revolver with that as collateral gave us a very cost-efficient way to increase our liquidity. It just made a lot of sense. From a PDP financing perspective, given the growth in our fleet looking forward, it was the right opportunity to expand that facility, had significant interest, leading to a successful outcome, as we highlighted in the prepared remarks.

Thank you, Mark.

Thank you. One moment for our next question. Our next question comes from the line of Scott Group of Wolfe. Your line is now open.

Hey, thanks. Good morning. So Barry, any color on how to think about first half 2025 capacity? And I know you don’t want to talk about Spirit, and I’m sure you love hypothetical questions. But just hypothetically, if you have a deal with someone and you’re waiting on approval for that deal, how does that change your mid-single digit standalone capacity? Do you think it’s more likely to be higher or lower than that if you have a deal with someone?

Nice try, Scott. We’re not commenting on M&A. But look, we’re targeting mid-single digits for capacity growth, and we’re not putting that out by quarter, but that’s the plan for the year. I’ll let you ask another question since I’m not going to answer it.

To give you a little bit of color, Scott, we adjusted the network as you progress through the second half of this year, which has to lap into next year. The first half of the year will obviously see slower growth. Stage length normalizes around 900 miles, give or take, as you progress through next year. So you’re going to see some ASM growth come into the business in the back half of next year, but lower actual seat growth in the business. That’s how the year will shape for us next year as you see the effect of taking down capacity on Tuesdays and Wednesdays predominantly flow through the first six months of next year.

Okay. When we look at your cost guidance for Q4, I think it’s something order of magnitude of $0.075 of CASM ex. What – I get there’s some hurricane impacts in there, but what is sustainable there like what goes lower from there? Or does CASM ex grow from that level?

Right. When you step back and look at the year-over-year, you have to keep in mind that last year had a $36 million benefit from some lease extensions we did. And as you look at the number for this year, first of all, you’ve got fleet growth up 17% because of lower stage. You’ve got departure growth as well. Those combined with just some maintenance tied to a larger fleet, along with just some of the station mix we’re in and some rates tied to that, drive the year-over-year increase. Looking from an overall year perspective, we’ve been consistent from the beginning of the year that our stage-adjusted CASM ex would be down. It still is what we’re projecting to be down 1% for the full year. As Barry mentioned earlier, our cost advantage remains over 40% on a per-passenger basis versus the rest of the industry.

I think, optically, Scott, you need to look at the stage. If you look at it on a stage adjusted basis, you won’t see that large of an increase.

No, I get the year-over-year increase. I’m just trying to figure out the absolute CASM of $0.075. Is that sort of the right run rate to be thinking about going forward?

That’s assuming you’re not stage adjusting it, Scott.

On a stage adjusted basis for the fourth quarter, you’re closer to $0.07. Within that number, there are items tied to the lower capacity on off-peak days and other items I mentioned, but still get you to the full year, down 1%.

Okay. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Jamie Baker of JP Morgan Securities. Your line is now open.

Hey, good morning, everybody. Let me try a couple of questions, admittedly inspired by my competitors earlier on the call. On 2025 ex-fuel CASM, it feels like sale leaseback gains could turn from a tailwind this year to a headwind next year. I know you don’t want to give a full-year fully loaded CASM guide, but have you worked up just how much the sale-leaseback strategy could contribute next year, and is it indeed a headwind year-over-year?

Yes, isolating on the sale-leaseback gains given the mix and the number of aircraft, certainly that would drive lower sale-leaseback gains. But as you look at next year, I believe we’ve got more than enough tailwinds to mitigate that. You’re going to have next year the full-year benefit of the network simplification, and there’s a number of other items that we’re looking to aggressively manage our costs.

Okay. Barry, this is not asking you to comment on future M&A. My question is wholly backward-looking. So let me try that strategy. It’s been – I don’t know, 36, 37 months. What percentage of the original Spirit-Frontier rationale might still apply given everything that’s happened at the industry level? Just looking in the rearview mirror, not asking you to comment on the future.

Jamie, I love you, but I can’t comment on that. Look, we’re really excited about being the premier ULCC. I think we have proven that we have the lowest costs. We’ve proven that we can expand our cost advantage. We’ve deployed on the revenue side and executed better for network all these initiatives, loyalty, premiumization, and so forth. We’re going to buck the kind of excess capacity, and I think that everything’s coming together. So we’re excited about our future right now. We’ll see what happens.

Could I squeeze another one in just?

I’ll let you have one as long as it’s not the same variety.

Notwithstanding the comments you’ve made already on the call, I don’t want you to just repeat yourself. If I compare the fourth quarter guidance to the second quarter outcome, your margins were flat in the second quarter. You’re guiding something in that ballpark for the fourth quarter. I totally understand seasonality in the airline business, but domestic capacity is so much tighter today. Fuel is $0.40 lower. What headwinds would you identify to help explain why your margin guide isn’t better than the second quarter? Or is it just completely seasonality?

Well, I think it’s seasonality, but don’t underestimate the Florida impact. We don’t know how good it would have been. We just know that our sales kept climbing, climbing, climbing, and then we had two back-to-back hurricanes. Having a base in Tampa was not very helpful. This year was great. It’s great on the cost that Mark wants to brag about, but it’s not good on the revenue side due to the hurricanes and the impacts on Central Florida as well with Orlando based flying. Look, we are disappointed that we didn’t get to single digits, but I think we would have gotten much closer had we not had it. Another issue is just the maturation; we have a lot of brand new markets right now and we’re kind of taking a healthy drag from that. There were a lot of cheap seats, Jamie. If you wanted to go in July, it has never been that cheap. Choosing to travel during peak times was very affordable. So that bomb went off on the capacity world and we’re still kind of reeling from that. As we move into the winter season, we’re optimistic that this will change. For the first time, we’re going to have capacity growth lower than GDP in a long time. Don’t underestimate what that’s going to do for industry margins.

All right. Speaking to the bald spot, thank you, Barry. I appreciate it.

Thanks, Jamie.

Thank you. One moment for our next question. Our next question comes from the line of Steve Trent of Citi. Your line is now open.

Thank you very much, gentlemen, and I appreciate you taking the time. Most of my questions have been answered. If I could ask one about your expectations around future growth, do you have any high-level view on how much of that is going to come from organic growth versus attrition from other carriers versus your alliance with Mexico's Volaris? Thank you.

Good, great questions. Look, I think I could start it and Bobby can talk about some network. But at the end of the day, we're going to focus on organic growth. To the extent that someone with higher costs leaves a market and it opens an opportunity, we'll likely be the most nimble in the business and we will jump on that opportunity faster than anybody.

Yes, I think that speaks to the history here. We modified the network and we're nimble in that regard. Some of the things we've set up months ago will continue into next year and will build, allowing us to naturally grow from the maturation of the network itself. Of course, we discuss premiumization and various other things. We have the lowest costs, and we provide a product at a lower cost than anyone else. That our customers have wanted but haven’t necessarily had access to. So there's a lot of opportunity as we move into the future.

I appreciate your time. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Duane Pfennigwerth of Evercore ISI. Your line is now open.

Hey, thanks. Can you talk a little bit about the recent schedule changes to December? Was that due to aircraft deliveries getting pushed, or was it something else?

Yes, Duane, we've been adjusting our network over the last number of months, obviously to manage our Tuesday, Wednesday, and Saturday flying that we've been taking down. The recent change is just for the first half of the month, adjusting for some movement in aircraft deliveries. There’s nothing really significant in that other than us finalizing our network.

Got it, and for my follow-up, contractually not saying you're interested in doing this, but would your contracts allow you to sell future delivery positions in your book? Understand your plan sounds baked for 2025 on the sale leaseback front, but if you're going to grow 5%, let’s say if that were the plan in 2026, do you need to take 21 aircraft to hit that 5%, or could you monetize some of the value in your book through outright sale?

We can't get into commercial terms of confidential deals, but I think right now, we've spent a lot of time recently on our fleet, and we're very comfortable with the profile and feel good about the delivery schedule as it exists. Airbus deferred a number of it, and it got lumpy. We had the opportunity to work with them this summer to smooth that out. We took all their deferrals from the various challenges they had in their supply chains and we were able to fix the problems created from those deferrals, which allowed for a smoother schedule. So we feel very good about that profile.

Okay, appreciate the thoughts.

Thank you. One moment for our next question. Our next question comes from the line of Christopher Stathoulopoulos of SIG. Your line is now open.

Good morning, everyone. Thanks for taking my question. Barry, I want to better understand how to think about the network for 2025. Earlier in the call, it was mentioned that there is a mix of maturity versus longer-standing or new versus mature capacity if you could provide that mix there? Additionally, remind us of the criteria that you consider when evaluating new markets. Is it profitability by origination? Is it cash profit by flight segment? And also, looking at your selling schedule for next year still taking shape, how should we think about breadth or placement of capacity in terms of regions or crew versus non-crew base routes? Thank you.

There's a couple parts in there. We had oversize redeployment; we redeployed a significant amount out of Florida, and we had some others in Las Vegas. By and large, we saw two-thirds of our routes work well. The only disappointing market was in New Orleans, which just didn't materialize for a number of reasons. By and large, we see strong early results and expect that maturity curve to come through. So, you’re going to hit the historical averages. I mentioned earlier that 20% of our capacity was outsized redeployment. It’s projected that there will be a bump of 20% to 30% in maturity as we enter 2025. No one else has the revenue tailwinds that we have.

Great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Conor Cunningham of Melius Research. Your line is now open.

Hi everyone. Thank you. Following up on that question, Barry, you talked about being the premier ULCC. Could you just comment on the segment as a whole? Do you think the ULCC segment has made enough structural changes at this point, or is there further capacity rationalization that needs to come? And then within that, do you, within your double-digit margin comment, do you expect further supply to come out? Thank you.

The ULCC model is fantastic. If we look at domestic revenues and flying, I can parse that out from carriers that have a huge subsidy on half their business flying international. We think we're among the top tier margins, and we believe that we've validated our model. The domestic US market has seen too much capacity and particularly too much narrowbody capacity, and these tend to operate similar routes. We're currently seeing market forces push capacity out, and I think you’re going to continue to see that happen. The industry will pull capacity until people reach their target margins, and I would argue that we’re a long way away from that.

Okay, that's helpful. Could you also discuss why scale matters a lot to Frontier at this point from a sustained earnings perspective and cash flows over the long term? Thank you.

The biggest benefit to scale is on the revenue side. If we could get from the low single digits to upper single digits in loyalty, we can effectively do the math; $5 a passenger on 40 million passengers—that's $200 million a year is benefited from scale. The more scale you have, the more top-of-mind your card and loyalty currency becomes, and the more usability they have. That is one of the biggest benefits to scale.

Okay, appreciate it. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Tom Fitzgerald, TD Cowen. Your line is now open.

Thanks so much for the time. Just sticking with that comment about other revenue per passenger going from a couple bucks to five dollars, what is the timeline? Is that something you're expecting next year or just over the next handful of years? That’s your North Star you’re working towards?

Yes. I think it'll take a couple of years. We haven’t laid out a precise target yet, but we believe it’s very realistic to reach the $5 to $7 range over the coming years.

Okay, that's really helpful. And then just a housekeeping one, it looked like fuel efficiency just in ASMs per gallon has been pretty muted year-over-year this quarter and last quarter, even though you're still taking a lot of neos. Is there anything I'm missing there or any comments on that? Thanks again for the time.

Yes, that’s influenced by the stage length. When we pulled down the stage, the taxi and climb times stayed the same. You get efficiency at cruise speed, but it’s still industry-leading, especially at that stage.

Thank you. I'm showing no further questions at this time. I'll now turn it back to Barry Biffle for closing remarks.

I want to thank everybody for joining today. We look forward to talking to you in 2025. We believe we are the premier ULCC and are really excited about the tailwinds that we have going into next year. We'll talk to you in 2025.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.