Earnings Call Transcript - ULCC Q3 2022

Operator, Operator

Hello, thank you for standing by. Welcome to the Frontier Group Holdings Inc. Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. We'll be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, David Erdman, Senior Vice President, Investor Relations. Please go ahead.

David Erdman, Senior Vice President, Investor Relations

Thank you and good afternoon, everyone. Welcome to our third quarter 2022 earnings call. Today's speakers will be Barry Biffle, President and CEO; Jimmy Dempsey, EVP and CFO; and Daniel Schurz, Senior Vice President, Commercial. Each will deliver brief prepared remarks and then we'll get to your questions. But first, let me quickly review the customary Safe Harbor provisions. During this call, we will be making forward-looking statements which are subject to risks and uncertainties. Actual results may differ materially from those predicted in these forward-looking statements. Additional information concerning risk factors which could cause such differences are outlined in the announcement we published earlier, along with reports we filed with the SEC. We will also discuss non-GAAP financial measures which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement. In addition, comments about relative operating statistics exclude pandemic affected quarters during 2020. Lastly, if you didn't already notice the announcement in the earnings release, we will be hosting an Investor Day the morning of November 15th in New York. The event will be live-streamed and archived on our website. Pre-registration is required for all participants, whether in person or virtual. However, in person, participants must register at least 24 hours in advance. Registration link is provided on our Investor Relations webpage at ir.flyfrontier.com. So I'll give the floor to Barry to begin his comments. Barry?

Barry Biffle, President and CEO

Thanks, David and good afternoon, everyone. First, I want to thank all of Team Frontier employees for serving our customers in the quarter and doing a great job producing these great results. With a supportive demand environment for affordable travel, record ancillary revenue performance and improving unit costs, we posted back-to-back quarterly profits and expanded our adjusted pre-tax margin to 5.2%, nearly double the second quarter margin. Total operating revenue was 35% higher over the 2019 quarter, while capacity increased by 8% over the same period, contributing to a 26% increase in revenue per available seat mile. In fact, over the first nine months of the year, we've grown capacity about 12%, while increasing total operating revenues by 31% compared to the same period in 2019, demonstrating the strength of our leisure-focused ultra-low-cost business model. The strong revenue performance was underpinned by the achievement of a record $78 of ancillary revenue per passenger during the quarter, which eclipsed the record set last quarter by $3. Since the third quarter of 2019, we've grown ancillary revenue per passenger a remarkable 38%. And we're confident in achieving our targeted run rate of $85 per passenger by the end of 2023. We'll talk more about how we plan to continue to innovate and optimize our ancillary product offerings at our Investor Day on November 15th. Leisure travel demand remains strong and has undergone a fundamental increase versus customer propensity to travel prior to the pandemic. To gain more insight into emerging trends, we recently polled our customers to understand how they're thinking about future travel plans and their ability to travel. The results of the survey revealed an inclination to fly more frequently than they did pre-pandemic, with over half of the survey respondents indicating that they now have more money and more flexibility to do so. The results of this poll demonstrate resiliency in the Leisure segment. We expect the benefits from this resilient demand to be amplified by industry capacity, which continues to lag GDP growth. As we look to capitalize on this consumer sentiment, we expect to benefit from our ability to offer ultra-low fares. These fares are underpinned by our industry-leading position in both ancillary revenue per passenger and unit costs. We operated with the lowest adjusted CASM plus net interest of all U.S.-based carriers in the first half of 2022, and our unit costs improved from the second quarter. We are focused on expanding our cost advantage versus the rest of the industry, supported by increased utilization, relentless cost management, and a significant engagement benefit from our A321neo aircraft. Our first A321neo arrived about a month ago. It's an incredible aircraft with a livery reflecting the new Pratt & Whitney geared turbofan technology, which is helping to deliver a stunning 120 ASMs per gallon, along with significantly lower carbon emissions and engine noise. All are fundamental elements to furthering our standing as America's greenest airline. This is the first of 168 A321neos scheduled to be delivered through 2029, including direct leases, 36 of which are expected by the end of 2023. With 240 seats, this aircraft will provide a transformational shift in our business; we’ll be able to fly more passengers more sustainably and with lower CASM. We launched our cadet program in the third quarter and have over 1,300 applications today. We also announced our rotary transition program last week. Coupled with our university aviation programs, these three recruiting platforms will provide the backbone for our pilot recruiting in 2023 and beyond, and we expect the majority of our new pilots will come from these programs within a year. Overall, we are positioned to capitalize on a strong leisure market, given we have the lowest breakeven fare, driven by the highest ancillary revenue per passenger and the lowest cost. With that, I'll now hand the call over to Daniel for a commercial update.

Daniel Shurz, Senior Vice President, Commercial

Thank you, Barry, and good afternoon, everyone. Our third quarter revenue performance was once again exceptional, rising 35% over the same quarter in 2019. This is the third consecutive quarter we posted double-digit revenue growth over the respective 2019 quarters and it's a testament to the strong travel recovery that we believe is sustainable as Barry covered earlier. Our third quarter capacity was up over 8% over the 2019 quarter, while RASM increased 26% over the same period, from $0.896 to $0.1127, despite a high concentration of capacity deployed during off-peak periods in September. Revenue per passenger increased 24% to $135, with ancillary revenue computing $78 of that amount. Both RASM and revenue per passenger set an all-time third quarter record and ancillary revenue per passenger eclipsed the previous record. Ancillary performance continues to benefit from recent product expansion and enhancement, strong attachment rates, and increased revenue integrity. As the third quarter progressed, utilization increased to over 11 hours per day. Our schedule for the fourth quarter sees a further improvement to over 11.5 hours per day as we continue normalizing stage length. We continue to grow our international footprint. Beginning next February, we will launch service from Denver, Chicago Midway, and St. Louis to Montego Bay. We also will begin five new Caribbean routes from Atlanta next week. With the opening of our new crew base in Phoenix next month, we announced 12 routes from the city to destinations across the country. With these new routes, we will offer a total of 23 destinations from Phoenix, a rapidly growing market which has been underserved by ULCCs. That concludes my prepared remarks and so I'll now hand it over to Jimmy.

Jimmy Dempsey, EVP and CFO

Thank you, Daniel, and welcome everyone. We generated a pretax margin of 6.4% on a GAAP basis and 5.2% on an adjusted basis during the third quarter, above the top end of our guidance range. Adjusted pretax margin primarily includes $12 million of net transaction and merger related credits associated with the company's terminated combination with Spirit Airlines and reflects a nearly 250 basis point improvement over the prior quarter. The margin improvement is driven by the record ancillary revenue per passenger performance that drove a 35% increase in total operating revenue and a 26% increase in RASM versus 2019, coupled with an 8% reduction in our adjusted CASM plus net interest over the second quarter. Unit cost improvement is related to both a 13% reduction in the average fuel cost per gallon to $3.85 per gallon as well as a 5% reduction in our adjusted CASM ex-fuels to $0.609, due to improving utilization and cost management efforts across the business. We expect the fourth quarter to deliver further improvement in our unit cost, driven by improvements in utilization and continued cost management efforts. Our cost strategy is focused on expanding the cost advantage we have over the industry. The pillars of this strategy are: one, growing our industry-leading field efficiency; two, having the lowest debt service cost; and three, achieving the lowest CASM ex-fuel capable in our business with a 2023 CASM ex-fuel target of below $0.06. We intend to maintain the lowest unit costs in the industry, including fuel, non-fuel costs, and interest. As Barry mentioned, during the first six months of 2022, Frontier operated with the lowest adjusted CASM plus net interest of all U.S.-based carriers, with the improvement in our unit costs during the third quarter and the execution of our cost strategy, we expect our total unit cost advantage versus the industry to expand. We ended the third quarter in a strong financial position with $674 million of unrestricted cash and cash equivalents and $251 million net of total debt. In addition, as previously highlighted, we have the ability, if needed, to access substantial liquidity through our loyalty program and brand-related assets. We had 115 aircraft in our fleet on September 30, after taking delivery of two A320neo aircraft and our first A321neo aircraft during the quarter and returning two A320ceo aircraft. In the fourth quarter, we expect to take delivery of another seven A320neo family aircraft, including five A320neo aircraft. Looking forward to the fourth quarter, we expect a continuation of the favorable demand environment. Capacity is expected to grow by between 15% and 17% over the comparable 2019 quarter. Fuel costs are anticipated to be between $3.7 and $3.75 per gallon based on the blended jet fuel curve on October 21st. Adjusted non-fuel operating expenses are expected to be between $565 million and $585 million in the third quarter, reflecting further unit cost improvements on the planned capacity growth. Our cost and capacity guidance alongside the favorable demand environment is expected to deliver an adjusted pre-tax margin in the range of 3% to 7%. With that, I'll turn the call back to Barry to deliver closing remarks before the Q&A.

Barry Biffle, President and CEO

Thanks, Jimmy. Demand for affordable travel is greater than ever, with a customer base that has more flexibility and plans to travel more often than they did pre-pandemic. We are better positioned than anyone to exploit this opportunity as our ultra-low cost fares are the most attractive for leisure customers. As a result, our focus is to build shareholder value through our Low Fares Done Right business model. We look forward to expanding on our results and commentary for the quarter, and other elements of our business at the upcoming Investor Day on November 15. We hope to see you there. We'll now move to Q&A.

Operator, Operator

Our first question comes from Stephen Trent with Citi.

Stephen Trent, Analyst

I'm just going to start off with one for now. I was wondering if you have any high-level thoughts about the ultra-low-cost business model in the event that we get a downturn. So if you look back at the credit crunch, any sort of high-level view of the extent to which carriers like Frontier thrived because you had consumers maybe leaving the legacies and looking for cheaper fares while oil rolled off. I would just love to get your high-level thoughts on that.

Barry Biffle, President and CEO

So Steve, I think everyone knows if you look at history, the lowest cost model going back to the 80s is generally the winner. In any recessionary environment, we've seen that with Southwest back in the 80s and 90s. We saw it with Ryanair, we saw it with Spirit back in there in the Great Recession. So typically, you would find an ultra-low-cost carrier, especially ourselves, which is the lowest cost provider most likely the best in a recessionary environment. Part of that is just simply because we'll have the lowest cost, so it's easier to cover our costs. There is generally trade-off that you see in those types of recessions. But we also have higher ancillary revenue; we see a lot more stickiness in that versus the fare revenue and it doesn't seem to fluctuate as much. So I think we're probably better positioned than most. I do think, though, that from what we know today, it depends upon how deep a recession could be. But if you look at the increase in propensity to travel and the fact that people are traveling more times per year on what they've been doing right now and what they plan to do, I think a recessionary impact could only maybe just bring that back to what you had kind of pre-pandemic. So I think you couple that with the constrained industry capacity, and I'm not going to say there won't be any turbulence in our space, but I think we can see a very mild recession, if anything impacts us at all.

Operator, Operator

Our next question comes from Jamie Baker with JPMorgan.

Jamie Baker, Analyst

So like other airlines, you're citing shifting consumer travel patterns, is it driving any changes in how you schedule and fly the airline? Or is it just as simple as kind of sitting back and letting the revenue roll in?

Daniel Shurz, Senior Vice President, Commercial

Hey, Jamie, it's Daniel Shurz. So as we see demand spread out a little bit across the weekend, we move away from the very peak to Friday, Sunday pattern. What is already starting to allow us to do is increase utilization on the shoulder days of the week and even just on some now on the off-peak days of the week because we've seen demand flatten this past week. It's actually beneficial to the business because we're getting better demand across the week. And we're also expecting and we're seeing some evidence that it's starting to deseasonalize the business to some extent. I'm not going to say that our peak periods are suddenly going to become peaks; that's not it. But we're seeing a little bit less seasonality as well. So I think it's going to lead us to push utilization up a little bit because we've got more ability to generate cash. We've got more ability to have cash positive flying on periods, compared to previously when we might have left a few airplanes sitting on the ground.

Jamie Baker, Analyst

Does it disrupt maintenance schedules in any sort of measurable way?

Daniel Shurz, Senior Vice President, Commercial

No, in many ways actually flattening things out and making things more consistent across the week helps operationally in all sorts of ways. It helps because you've got consistent access patterns for maintenance, consistent patterns at the airport for staffing purposes, and you get more efficiency from crews when you have consistency across the week. So it actually helps a little bit and potentially has a little bit of a benefit from a cost perspective as well.

Jamie Baker, Analyst

Interesting. Second question, in the release you've said that aircraft leases are expiring between what, this year and 2034? Is that front-end loaded, back-end loaded, fairly consistent? I'm just trying to think through how the reality of rising interest rates and rising lease rates are going to flow through the P&L going forward.

Jimmy Dempsey, EVP and CFO

Yeah, Jamie, our redelivery program is pretty consistent from about 2024 through into the next decade, given that we typically do either 8 or 12 year leases on delivery of the aircraft. So it kind of lags the delivery in the first place 8 to 12 years. From a current market perspective, we're in a really good position in terms of financing the airline. We have the next 12 months in terms of our aircraft deliveries; in fact, we have 35 of the next 37 aircraft deliveries financed. We've done it in a way that has kept the interest rate exposure on a lot of these leases. So in the recent run-up that you've seen in interest rates, certainly for the next 12 months, we're in really good shape to manage that. And then we have obviously aircraft deliveries beyond that. But that puts us in a very strong position from a financing perspective for the next year.

Operator, Operator

Thank you. One moment for questions. Our next question comes from Duane Pfennigwerth with Evercore. You may proceed.

Duane Pfennigwerth, Analyst

Hey, thanks. Very, very pleasant questions so far, unlike publicly questioning your business model on other conference calls. But anyway, on fleet, how would you rate your confidence in ending 2023 with the 36 A321s? And are we right that, did some aircraft actually shift out of this year that you expected?

Barry Biffle, President and CEO

Yes. We have had a couple of aircraft shift from the end of this year into next year. I mean, they were due to deliver right at the end of the year, so it doesn't really have a meaningful impact on ASM production this year. We have visibility on our aircraft deliveries, probably largely into the middle of next year. You have certainly seen some delays in aircraft deliveries. But it's nothing like you are seeing with Boeing. We are lucky that we are delivering aircraft through Airbus, who have some supply chain issues, but not to the extent that you are seeing in other manufacturers. Any delivery delays are generally modest, two to three months. So the aircraft are coming; it's just whether they come in October, November, December next year.

Duane Pfennigwerth, Analyst

Okay.

Jimmy Dempsey, EVP and CFO

Look, there may be a case where a couple of aircraft like this year rolled from the end of next year into 2024. But we will deal with that if that happens.

Duane Pfennigwerth, Analyst

Can you explain the components of capacity for next year? It seems like the gauge is going to increase significantly. How much of a contribution would that be to the 30% target?

Jimmy Dempsey, EVP and CFO

About half the capacity that we are bringing next year is already delivered to the airline. We have been under-utilizing the asset all across this year. I mean, we moved to just over 11.5 hours in utilization in the fourth quarter of this year. But if you look at the previous three quarters, you have been at 11 or below 11 hours in utilization. Some of that growth comes through using the assets that are in place today, and the rest of it comes with A321neo that we took the first delivery of a month ago. That move to delivering aircraft at 240 seats changes the ASM production in the airline quite materially for the block hours required to produce that production. If we are growing the business towards 30% in ASM production, our block hour needs are in the low 20s. So you are getting a significant efficiency gain in the business. Your requirement for pilots or flight attendants and mechanics to support the fleet is not as fast as 30% if we push ASMs towards the 30% mark.

Duane Pfennigwerth, Analyst

Okay. That's helpful. Go ahead. Sorry.

Jimmy Dempsey, EVP and CFO

I was going to ask Daniel to answer the question on how it builds throughout the year.

Daniel Shurz, Senior Vice President, Commercial

If you examine the year-on-year comparisons and the shape of our current plans for next year, we expect similar growth in the first quarter next year as we have in the fourth quarter this year. After that, we anticipate growth exceeding 30%, although not significantly above that threshold, for the remainder of the year. This expectation is driven by our return to peak utilization, or the traditional utilization levels seen before the pandemic, which we expect to achieve late in the first quarter, and we aim to maintain that utilization for the rest of the year. As Jimmy mentioned, approximately half of the growth next year is a result of increased utilization, while the delivery pace of aircraft will also continue to accelerate throughout the year.

Operator, Operator

Our next question comes from Michael Linenberg with Deutsche Bank.

Michael Linenberg, Analyst

I have a couple of questions regarding utilization. Daniel, you mentioned that you're currently at 11 and expect to reach 115 in the fourth quarter. For next year, what can we expect in terms of utilization? Specifically, I mean hours per day. What is the target number, and how should we understand its impact on CASM? If we increase from 11 hours to 12 hours, would that equate to a half cent improvement in CASM unit cost? Jimmy, what are your thoughts on this?

Daniel Shurz, Senior Vice President, Commercial

Yes, we're looking to get utilization next year to over 12. We're looking to get slightly above 12 on the fleet is the plan for the full year. As per the CASM impact, I’ll let Jimmy.

Jimmy Dempsey, EVP and CFO

You can see this in your model; like an hour on utilization is probably about 0.2 to 0.3 in CASM ex-fuel. The fixed overhead that's recurring just drives that number.

Michael Linenberg, Analyst

And then just second question, and this is probably to Daniel, you guys have pretty meaningful overlap with Florida and even the Caribbean now and yet you didn't call out in your release any sort of impact from Ian or Fiona, the two hurricanes, either last quarter or this quarter? Anything on impact on revenue or costs that we should be aware of?

Daniel Shurz, Senior Vice President, Commercial

Look, do we have an impact? Yes. We estimate about a 0.1 margin impact in the third quarter. We're looking at the fourth quarter; we're guessing probably about a one point impact in the fourth quarter. I will say, post-hurricane we were able to recover our operation more quickly than some of the other airlines who have significant operations in Florida. So we did again experience some of the benefits we've discussed regarding the modular network and the modular way we design the operation. Well, once again visible recovering operations post-hurricane. But look, yes, our presence in Florida is almost exactly the same as theirs.

Operator, Operator

Our next question comes from Brandon Oglenski with Barclays.

Brandon Oglenski, Analyst

Barry, can you talk to the sustainability of your ability to grow in the market? I know you guys didn't necessarily have a pilot availability issue this summer, but it was compounding factors external to your company that I think made you pull back your schedule a little bit. So do you think you now have the pieces in place and the externalities solved that you can sustain that growth outlook in 2023?

Barry Biffle, President and CEO

We faced challenges similar to many airlines, particularly due to the situation in Florida. Those airlines with substantial operations in Florida were affected more than others, and we were among them. The Jacksonville center significantly impacted us in March and April, and although they are addressing staffing issues, we had to react quickly by reducing many flights into Florida and over the Jacksonville center, which negatively affected our utilization that summer. We have since restructured our schedule to be even more modular, as Daniel mentioned, to avoid such impacts in the future. Additionally, we've adjusted our crew pairings to minimize the number of times crews cross the Jacksonville center, limiting it to a maximum of twice per duty period, thereby reducing our risk. We are looking forward to observing air traffic control patterns during the holiday and spring break periods, but we believe we've mitigated our risks sufficiently and are now well-positioned for growth.

Brandon Oglenski, Analyst

And, Barry, if you have the available pipeline of pilot hiring and training as well, no bottlenecks there?

Barry Biffle, President and CEO

Yeah, so we have a surplus as a result of pulling back in the summer. We're slowly bringing them back in; we hope to have them fully utilized by the end of the quarter and then grow in. But as I said in my opening remarks, our cadet program has been wildly popular; we've had over 1,300 applications so far, roughly half of those that have gone through financing with ATP have already gotten financed. So that's great to see. We announced our rotary transition program last week. There's a lot of pilots to come from there. And we've had our university program, which we haven't talked about a lot, but we've had it in place for several years. That program is really starting to just finally come to fruition producing pilots. So between those three programs, we expect within one year, the majority of our pilots will come from that. We continue to see good numbers. So we feel pretty good about our pilot hiring at this point.

Brandon Oglenski, Analyst

Right. Thank you. And lesson for me, Jimmy, do you think it's still right to be targeting a sub-6X ASM? I mean, there's been a lot of inflation across the board. You still think that's an attainable number though?

Jimmy Dempsey, EVP and CFO

Yeah, look at there has been inflation, and Frontier has experienced some inflation across its business, particularly around the airport world. What we've been doing in the last six months or so is really focusing on the elements of the cost base that we can control. We've started to look at changing the way we do business, which is driving real cost savings into the business. If you look at our unit costs in Q3, and our unit costs going into Q4, we're seeing real step changes in our path towards success. Obviously, the A321neo gives you a significant boost in terms of seat density on the aircraft and average seats for departure, which really helps bring efficiency into the airline. But in the context of changing the way we do business, we really don't want to disclose a huge amount right now on that. We have our Investor Day on November 15th, and our entire management team will be there where we will actually give you some insight into the things that we've been doing to change the way we look at our business from a Frontier perspective, and that is driving real savings. Part of the improvement in unit costs in the last quarter over Q2 and what we're seeing going into Q4 is on top of improving utilization and lengthening the stage really in the airline is this project that we've been embarking on, which is showing real promise and real savings. So more to come in November.

Operator, Operator

Thank you. One moment for questions. Our next question comes from Ravi Shanker with Morgan Stanley. You may proceed.

Ravi Shanker, Analyst

Great. Thanks. So not to steal any magic away from the Analyst Day, but I think there has been a lot of potentially structural change in consumer behavior coming out of this pandemic, so just wanted to ask on ancillary. Do you feel like there is any kind of real structural change in the way consumers are shopping for add-on stuff in addition to the base ticket? And also, what do you think some of these new proposed regulations on price transparency do to that?

Daniel Shurz, Senior Vice President, Commercial

Thanks, Ravi. It's Daniel. I'll talk about the two issues separately. Look, we are finding with our ongoing work on optimization, we are obviously driving better and better non-ticket revenue. You've seen that you saw a new record in the third quarter, and that's driven by we offer the lowest fare, and the better we can drive our ancillary, the more we can drive the lowest fare in the market. We give customers the choice of lots of different options, and the more products we add, the more potential items customers can buy, and customers find options they find appealing, and I think this has been proven. Are we seeing a huge structural shift in what people are buying? No, we're not. We're seeing better performance brought across the board on all of our ancillary products. The proposed DOT regulations, I'll just say this for right now: Airlines already display transparently all the products we sell and the pricing for all those products. No one buys the Frontier ticket on our website without knowing the price for any of the ancillary products they might want to buy. They are all extremely visible in the purchase process for those who have purchased them. Anything you might buy later is extremely clear and extremely obvious. We don't have a problem with price transparency. Our consumers don't get any surprises in the process. They get to see everything that they need, and we will make that point clearly when we respond to timely proposals.

Operator, Operator

Thank you. One moment for questions. Our next question comes from Savi Syth with Raymond James. You may proceed.

Savi Syth, Analyst

Hey, good afternoon. If I may ask, Barry, it feels like you talked about pilot hiring, and that's been a big kind of topic lately. It seems like there is a shift here. As you point out versus relying on regional airlines for hiring, you are going directly in hiring pilots and not relying on others. It seems like that's a shift and maybe it might strengthen your pilot offering. Does it lower costs in the long-term? How does it change your positioning in the industry? Or is it just net neutral because you have just shifted your hiring?

Barry Biffle, President and CEO

Well, look, first and foremost, we are a safety-oriented business. With what we are doing right now, it’s exciting from a training perspective. I think we could end up with a more uniform training program that delivers much safer pilots. The big component here is the fact that we are controlling our destiny and we will control the sourcing of our pilots. So we are just taking charge of it. We don't know what's going to happen with regionals and everyone else, but we're instituting programs that ensure we have a solid supply for years to come.

Savi Syth, Analyst

And then in my follow-up on the kind of CASM commentary on sub-6. To me, is that given the timing of the capacity and the kind of utilization rates? Is that something you'd be able to reach by the second quarter of next year? Is that a realistic expectation?

Jimmy Dempsey, EVP and CFO

I mean, Savi, we're not guiding quarters next year at this stage. But look, we will progress through Q1. It's always a quarter that's slightly higher cost than the rest of the year, and so your trajectory towards $0.06 for the year you should see it in Q1, but it'll obviously show up closer to the second half of the year as you drive utilization and the assets come into the business. Part of getting to sub-six is delivering on the A321neos that come into the fleet during next year. It’s not the sole component, but it’s a significant portion of the improvement from where you expect to be in the fourth quarter, for example, and then rolling through next year.

Operator, Operator

Our next question comes from Connor Cunningham with Melius Research.

Connor Cunningham, Analyst

Just on the RASM or all the implied RASM. I'm pretty surprised at the lack of decline, given you have higher capacity. There's a ton of noise just in holiday timing. Can you just talk to where you're seeing the strength in your markets relative to some of the others? Like, a lot of the guidance you're hearing out of other carriers has some sort of deceleration implied in it. And then you really aren't seeing that right now; imagine some of it’s ancillary, but if there's any other color that you could provide on that, that would be helpful.

Daniel Shurz, Senior Vice President, Commercial

The biggest point is we're seeing continued progress, and we expect to see continued progress in the fourth quarter on non-ticket as we work our way towards the goal of $85 by the end of 2023. So that provides some of it. We've also – as part of our work on the November schedule, where we've worked on modularity and the cost change, we've made changes in the network that will drive volume in the business because we're focusing on whether or not things are performing well. Our brand is the most positive one in the ultra-low-cost space, and I think consumers are recognizing that and seeing the value we offer them. That's the thing; you can look at the numbers up in the industry, including today, on how we've got the best value proposition out there, and customers understand that.

Connor Cunningham, Analyst

And then Barry, I think you made some comments about potential Transatlantic and Deep South America flying with the XLR. And like, I understand why that may be appealing, but it's 3X's years stage length and all that stuff. So I'm just trying to understand. There's been some struggles with the ultra-low-cost long-haul model over the years. So I'm just curious on why that may be appealing to you now and just any thoughts? That would be great.

Daniel Shurz, Senior Vice President, Commercial

We have options on 18 XLRs that could come as early as 2026. And to be clear, what I was describing is what the aircraft can do. They are asking where could it fly? It could go to South America, Hawaii, Europe. There are a lot of places that this airplane can fly. It enables us to fly several times our average stage; yes, maybe several times our average stage, that's if you use it to its full potential. But the reality is it enables us to fly longer sectors, and we've got options with the U.S. license to do that. With 18 aircraft, by the time it comes in, this will be a small percentage of the fleet. But I think it'll enable us to fly some exciting destinations that will make our Frequent Flyer program, our Discount Den, and all of our subscription products just that much more powerful from a brand perspective. Will it materially change the economics and finance of the company? No. But indirectly, it will, because it will help propel the brand further.

Operator, Operator

Our next question comes from Andrew Didora with Bank of America.

Andrew Didora, Analyst

I had several questions about utilization, but you've answered most of them already. I’d like to ask Barry, when you mentioned in your prepared remarks the structural changes occurring in travel, does that influence your approach to network construction in the coming years as you expand? Do you believe there’s more potential for growth in new markets, or is it primarily about enhancing the existing network? I’m interested in how these structural changes affect your perspective on network construction. Thank you.

Barry Biffle, President and CEO

I can start, and Daniel can add to it. I think one thing it helps is it helps a carrier like us that often flies less than daily, because if customers have more flexibility, they can move to different days a lot easier. It’s going to cause us to make sure that we have more of the right portfolio of places that they want to go and a lot more options. Because the truth is, if you look at the data, they are telling you they’re going to travel more often. That means they’re going to explore and experiment with more destinations. So having a really good footprint and breadth of service I think is going to become more and more important.

Daniel Shurz, Senior Vice President, Commercial

I think Barry is right. It definitely encourages frequency. We're already seeing that; we have a very large airport footprint. Our growth going forward is going to be a mix of increasing frequency and strengthening key markets interestingly more than new market focus as it was in the past. We're watching and seeing this broadly across the network; the flexibility and trends towards flattening of demand patterns don’t just impact a single type of market growth. As we grow and continue to add bases, we’ll find more opportunity to connect the dots within our existing network.

Operator, Operator

Thank you. One moment for questions. Our next question comes from Thomas Fitzgerald with Cowen.

Thomas Fitzgerald, Analyst

Thanks so much for the time. A lot of mine have already been answered, but I guess just quickly if you could provide maybe a little more color on the opportunity in the Phoenix market that you see and what you are excited about there?

Daniel Shurz, Senior Vice President, Commercial

It's reasonably simple. Phoenix is a top ten metro area, relatively fast-growing market. One of the top three or four fastest-growing metro areas in the country, and it encompasses a great mix of a destination market, inbound tourism market, and strong outbound market; some of the best markets in the country from a ULCC perspective. Phoenix Sky Harbor Airport is incredibly well located for the metro area, and it's underserved by ULCC capacity today. So, we are excited there. We are a western brand with national reach, but we have a brand rooted in the West, in our hometown of Denver, which performs well across the Western United States. You look at the metro area with over 4.5 million now and how you could operate ULCC departures from the airport; it's a natural opportunity with very substantial leisure demand.

Operator, Operator

Thank you. Our next question comes from Duane Pfennigwerth with Evercore. You may proceed.

Duane Pfennigwerth, Analyst

Thanks for taking the follow-up, and maybe you answered it with Phoenix. But Barry and Daniel, as you observe the domestic industry rebuild with regional carrier constraints and general pilot constraints and every carrier having a focus on scheduling that supports reliability, are there any new surprises or new thinking regarding the types of markets you want to target? We've got to think there is more white space in midsize markets, given the industry's constraints, but maybe there isn't a good way to target those with less than daily service and focus on reliability at the same time. So would love some thoughts on that topic and then have one more for you.

Daniel Shurz, Senior Vice President, Commercial

When we look at capacity build-back, or the lack of capacity build-back, that would be a better way to describe it in some cases. Lower regional capacity has an advantage. Maybe not always directly for us in the markets where there isn't capacity; some of those regional markets are small. Looking at examples of some of the longer-haul markets we recently added from Las Vegas, what's notable with the lack of regional capacity is how many fewer connection options exist, for example, and how frequently that creates market opportunities since there are simply fewer options for customers even in relatively bigger markets. Our expectation is that there will be some changes in the way network carriers build their network; with less regional capacity today, it will create more opportunities for us. We have the lowest total cost and are committed to maintaining that total cost advantage, enabling us to identify more markets to serve.

Barry Biffle, President and CEO

You're right; it’s math and economics. As you shrink the regional footprints, what remains becomes more expensive. At the same time, they’re starting to raise pilot rates to the extent we do with much fewer seats. Fewer seats and more expensive rates in small to midsize markets are likely to create opportunities for a carrier like us as those economics shift.

Daniel Shurz, Senior Vice President, Commercial

As we have more pilot bases, there’s an opportunity to enjoy modular operations; that creates opportunities to enter more markets that operate reliably, which will be a growing opportunity moving forward.

Duane Pfennigwerth, Analyst

And then just real quick, I can't see it in your results and maybe you said it, but just given the overlaps on some of those Florida markets. How much did Hurricane Ian impact you in Q3 and Q4 here?

Daniel Shurz, Senior Vice President, Commercial

We estimate about a one point margin impact in Q3 and we expect around a one point impact in Q4 from the demand destruction.

Operator, Operator

Our next question comes from Anthony Berni with Susquehanna.

Anthony Berni, Analyst

Just a quick question on next year's CapEx. I'm assuming with all these deliveries, CapEx will probably step up, but if you could just give us any sort of rough ballpark of that? That would be helpful.

Jimmy Dempsey, EVP and CFO

We’ve financed the vast majority of the fleet that delivers next year, and they are through operating leases. As we’re delivering a significant portion of aircraft, over 30 aircraft next year; that will be reflected in the CapEx number. However, since we finance on operating leases, they will not be coming out of the books as a typical asset, unlike other airlines that finance their aircraft on the balance sheet through some sort of debt structure.

Operator, Operator

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

Barry Biffle, President and CEO

Thank you, everyone, for joining us, and we look forward to seeing you on November 15 at the NASDAQ in New York at our Investor Day. Thank you.

Operator, Operator

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