Frontier Group Holdings, Inc.

Hello and welcome to the Frontier Group Holdings first quarter 2021 conference call. My name is Cherry and I will be moderating today's call. This call is being recorded and your play will be available on flyfrontier.com in the investor relations section. After today's prepared remarks, there will be an opportunity to ask questions. To ask a question during the session, you will need to press star one on your telephone. It is now my pleasure to turn the conference over to Susan Donofrio, Head of Investor Relations. You may begin.

Thank you, Operator, and welcome everyone to Frontier's first earnings call as a publicly traded company. This call is being recorded and simultaneously webcast. A replay of this call can be found on our website. On the call with me today are Barry Biffle, Frontier's President and CEO, Jimmy Dempsey, EVP and Chief Financial Officer, and Daniel Choze, Senior VP Commercial, as well as other members of the management team. Following our prepared remarks, there will be a question and answer session for the sell side analysts. We also wanted to remind everyone on the call that today's discussion contains forward-looking statements that are based on the company's current expectations and are not a guarantee of future performance. There could be significant risks and uncertainties that cause actual results to differ materially than those reflected by the forward-looking statements, including the risk factors discussed in our reports on file with the SEC. We undertake no duty to update any forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items. Please refer to our first quarter 2021 earnings release, which is available on our website for the reconciliation of our non-GAAP measures. With that, I will turn it over to Barry for his opening remarks.

Thank you, Susan. And thanks everyone for taking the time to attend our first earnings call as a public company. In a moment, Daniel and Jimmy will bring you through the details of the first quarter and their expectations going forward. First and foremost, we're pleased with what we're seeing in the demand for travel. The vaccine is truly unlocking the pent up demand everyone anticipated and bookings are getting stronger every week. We believe our focus on leisure travel coupled with our low fares done right strategy positions us as an industry leader in this recovery. Well, this has been a challenging year across the industry. We're very thankful to all our Team Frontier members for their commitment and diligence to ensuring our successful navigation through the pandemic, and they have helped us ensure we are well positioned to succeed in the recovery. I also want to thank our union leadership as they have partnered with us on a range of solutions to help keep our employees and customers safe over the past year. One thing is certain, Team Frontier is stronger than ever as we emerge from this crisis. As we position the business to maximize the rebound opportunity, we're adding roots to both new and existing cities in our domestic network and growing our near international network footprint as well. As an example, we added leisure destinations for the summers that include Nassau, San Jose, Costa Rica, and St. Martin. These additions come on the heels of new service already introduced to Guatemala City, San Salvador, as well in Central America. We've also added new nonstop routes from Atlanta, Dallas, Denver, Las Vegas, and Salt Lake City. Further, our commitment to being America's greenest airline was enhanced by the addition of three new A320neo aircraft added to the fleet during the first quarter of 2021. In addition to the fuel efficient engines, they were the first aircraft in our fleet to feature our new Recaro lightweight seats, which are 30% lighter than our existing seats and considerably more comfortable. We achieved significant milestones during the quarter, including executing an IPO to enhance our liquidity, becoming cash positive in March of 2021, and getting our departures back to 2019 levels in March of 2021. We're now focused on moving the business back to profitability in the second half of 2021 and operating at full utilization next year in 2022. Overall, there's positive energy across Team Frontier as we move beyond COVID. Our momentum aligned well. with the growth trajectory of the fleet position Frontier to maximize shareholder value and their recovery ahead. I'll now turn it over to Daniel, who will provide more details on our performance for the quarter.

Thank you, Barry, and I want to join you in thanking all of Team Frontier for continuing to take such good care of each other and our customers. I also want to reiterate how pleased we are that our low-fares-done-right travel model has resonated so well with our customers. We firmly believe you shouldn't have to pay a high price to get a high-quality, family-friendly travel experience. Our low-cost model has allowed us to roll out reasonably priced unbundled and bundled options, and we continue to listen to our customers and fine-tune these offerings. Discount and subscriptions, providing members with exclusive access to Frontier's lowest available fares, continue to grow. Working with our loyalty partner, Barclays, we just launched some new offers to attract even more card members. The benefits offered by the Frontier Airlines World MasterCard have already been recognized by Money.com as the best airline card of 2021. And we were among the first to initiate a variety of heightened health and safety initiatives early on in the pandemic, and we will continue to make our customers our foremost priority with respect to comfort, safety, and operational performance. As Barry mentioned, we continue to increase our Caribbean and Latin America footprint, and this summer the region is expected to account for over 13% of our capacity. We're also targeting additional near international growth over the next few years. We're also excited to be adding five new domestic cities to our summer 2021 schedule, including the return of Frontier Service to Alaska. Now on to the trends we are seeing within our quarterly results. Similar to other airlines, our January and February performance reflected the third COVID wave across the United States and the impact of new travel restrictions. After President's Day, we saw demand for air travel improve as we moved into the spring break and Easter booking window, with a significant step up in March demand. Operating revenues for the March quarter declined due to the impact of COVID causing a 36% decline in capacity year over year, which led to a 50% year over year decline in operating revenues. On a per-passenger basis, we saw ticket revenue decline 30% in the quarter, while non-fare and other revenue declined 19%. We saw the non-fare and other revenue remain strong overall at $52.55 per passenger, and our total revenue per passenger for the quarter was $83.38. Our capacity levels are trending at or above 2019 levels as we progress through the coming months. We're seeing a recovery in load factors as the appetite for travel continues and demand returns moving into the summer months. With that, I will turn it over to Jimmy to provide more detail on our financials.

Thank you, Daniel. I shared Barry and Daniel's optimism on the demand recovery we are seeing. I want to thank all of the Team Frontier members who rolled up their sleeves in challenging times during the pandemic and put Frontier at the forefront of the recovery in air travel. Our growing confidence in the recovery enabled us to begin hiring pilots and flight attendants in February and restart projects that were paused as we managed through COVID. In addition, our IPO strengthens our balance sheet and puts Frontier in a strong liquidity position, enabling us to emerge from COVID with limited incremental debt. Now turning to the quarter, our GAF net loss was $91 million. Our adjusted net loss of $173 million, or 86 cents per share, excludes a number of special items. These include $136 million of CARES Act credits, a $20 million mark-to-market related to the warrants held by the U.S. Treasury, and a $4 million cost associated with the early lease termination of our remaining A319 aircraft. With respect to our revenues and liquidity position, we timed our capacity deployment as the quarter progressed to take advantage of our expectation of a recovery in air travel leading up to spring break. This enabled our revenues and cash receipts to finish the quarter on a strong note. As of March 31st, 2021, we had $853 million of total available liquidity, inclusive of the $424 million of undrawn amounts under the Treasury Loan Facility. The liquidity as of March 31st, 2021 excludes the net IPO proceeds of $265 million, given its April 6th closing. Our liquidity was enhanced in April by the receipt of $96 million in payroll support funding from PSP 2 and 3. We expect to receive the final payment of $75 million relating to PSP 3 in the second quarter. This puts Frontier in a very strong liquidity position. As such, we are unlikely to draw further funds under the treasury loan facility. We have a current tax receivable of $161 million that provides us with an opportunity, when received, to assess the repayment of the $150 million currently outstanding under our treasury loan without utilizing other existing liquidity. The repayment of our treasury loan will unencumber our co-brand credit card program and related brand assets that are currently collateralizing the facility. We believe that our loyalty program, encompassing our co-brand credit card and discount-dense subscription program, together with the Frontier brand could generate substantial liquidity should the need arise. We ended the March quarter with 107 aircraft in our fleet after the addition of three new Airbus A320neo aircraft that were financed through sale and leaseback transactions. In addition, in early May, we executed a contract with one of our lessors to accelerate the return of four remaining A319 aircraft from the company's fleet. Three of the A319 aircraft will exit Frontier's fleet during the second quarter of 2021 and the fourth aircraft will exit the fleet in the third quarter of 2021. This is the completion of an early objective of the transformation of Frontier into an ultra-low cost carrier by replacing all 319 aircraft with larger and more fuel-efficient A320 and 321 aircraft. We anticipate delivering 10 A320neos and two spare engines during the remainder of the year, with five aircraft delivering during the second quarter and five aircraft in the third quarter. As we look forward into the second quarter and reflect on the improvement in demand, we expect our net income margin to range between minus 10% and minus 15%, reflecting total adjusted operating expenses, excluding fuel, ranging between $480 and $490 million, an average fuel cost per gallon of $2, and an effective tax rate of 22%. Our expectations for Q2 exclude any adverse operational impacts or fuel price spikes caused by the cyber attack on the colonial pipeline. To close, our financial discipline and low-fares-done-right strategy has positioned us well as a recovery strengthens in demand for travel returns. 2021 is the year that we continue to invest in the recovery of the business and position ourselves for successful growth in the coming years with the immediate focus on getting our airline back to full utilization as we enter 2022. With that, I will hand it back to Barry for some closing remarks.

Thanks, Jimmy. It's been a year of enormous change for our company, and we continue to thank all of our Team Frontier members for going above and beyond what was expected of them. We've got the right team in place to navigate what's ahead along with the right cost structure and the right low fare product. With that, operator, please open up the call for questions.

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ravi Shankar from Morgan Stanley. Your line is now open.

Thanks. Good evening, everyone. A couple of questions on the current environment as you see it. When you look at the incremental traffic that they're coming on right now, do you have any data on whether you are expanding the pie and the travelers you're seeing right now are, like, new to air travel, if you will, or are you just taking share from other airlines in the LCCs and legacies?

Daniel, why don't you take this one?

Thanks, Ravi. I think what we're seeing right now is a pent-up return of travel in the U.S. I think we're seeing lots of customers come back to travel. And I think, as always, our low costs are allowing us to offer extremely low fares and continue to stimulate demand. And that's a combination of new customers and also key to the ULCC model, key to our model, is customers flying more frequently because they can afford to do so because we deliver lower fares in the marketplace.

Gordon, just to follow up to that, do you feel like there's an environment where the ULCCs can meaningfully grow their market share and kind of close the gap to maybe the kind of share that ULCCs have in Europe, or do you think it takes a little while longer for the market to go in that direction?

Well, look, I think if you look at our share in the United States, I mean, we're just getting started, right? We're at 10% all the ULCCs compared to, you know, approaching half over in Europe. So, yeah, there's a lot more room ahead. Great. Thank you.

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

Yeah, hey, Mike. Good job on the first quarter here, gentlemen. I guess a couple here, you know, Barry, when you were on the road, you know, on the deal, you know, what, you know, five, six weeks ago, I mean, you were, you had a pretty encouraging, I mean, a positive outlook. I mean, trends look like that they were moving in the right direction and, you know, things seem good. And yet here we are. five or six weeks later, and yet, you know, you have a much higher fuel price, and I would argue, you know, a more favorable margin guide than I think what we saw as recently as five or six weeks ago. Is the right interpretation that things have maybe gotten even better than sort of what you were seeing, you know, five, six weeks ago when you were on the road? Because, you know, the guidance would suggest that it does seem like that maybe we're seeing some acceleration here. Is that the right interpretation?

I think that's right, Mike. I mean, look, I mean, you know, I feel better today than I have probably since, I guess, last January when I first heard of coronavirus, right? And I feel better than I did yesterday, and I feel better than I did last week. Look, it's real, right? You're seeing it every day. The vaccine is slowing the cases, it's slowing the hospitalizations, and people are feeling free. I mean, you know, this last question, we were talking about stimulation, but I think I think what's happening is the demand is just being let loose from the vaccination. So it just keeps getting better. And so, yes, we're feeling really good about the world and couldn't be more excited about the recovery.

Great. And then just my second question to Daniel. You know, look, I get the whole story about, you know, getting away from the A319. You'll have higher gauge. It's going to help your unit costs on one hand. But then on the other hand, I guess there's an argument that maybe it precludes your ability to fly into some of the smaller markets. And you do fly into a lot of smaller cities right now. You look at some of your competitors, and they have stayed with whether it's the A319s or even the 737-7 MAXs in the case of Southwest. Do you think that getting out of that smaller gauge and as your gauge moves up that there's just going to be a whole slew of city pairs that either don't work or maybe it's a less than daily strategy? How do you think about that, just your response to that? Thank you.

Thanks, Mike. You're absolutely right. As we go to a higher gauge, we get lower costs, and we already have a strategy of applying the right frequency to the right markets. We fly low-frequency markets. We fly our smaller markets in general today on the A320neo, which is the bulk of our fleet today, the majority of our fleet today, and we found that works. We fly some small markets at low frequency on the A321 and find that works. We have the lowest costs. We are going to be a low-cost leader, and that enables us to fly as many markets as we can, and I think that's the right strategy to maximize our opportunity.

Very good. Thanks, everyone.

Thank you. Our next question comes from the line of Jamie Baker from J.P. Morgan. Your line is now open.

Hey, good afternoon, everybody. Question on aircraft leases. You know, I know you've engaged in sale leasebacks with various lessors, but for future deliveries, for the pipeline, do aircraft have to be sourced from the Indigo pool? I mean, the order, you know, Or if somebody like, I don't know, pick a name, AirCap came to you with a more attractive lease rate, could you take it?

Yeah, Jamie, this is Jimmy Dempsey here. Yeah. No, like in 2017, we were part of a joint purchasing initiative that delivered, you know, 430 aircraft into airlines in the Indigo portfolio. We contracted for our aircraft, like all the other airlines in the portfolio, separately. And so Frontier contracted for 134 aircraft. We're committed to those aircraft, and they deliver over the next kind of seven years or so. We could look at aircraft that pop up beyond that order book, like any other airline can. And if there are opportunities, we'll certainly look at it. We are looking at potentially adding 321s, incremental 321s to our fleet. And they could come either directly off the manufacturer or through a leasing company. And so, yeah, we have absolute flexibility to do that.

Okay. All right. That helps. And also, second question, do you have any ability to track how much basic economy competitors are putting in your markets against you? You know, given the strength in summer demand, I would think that they'd be allocating less than usual, and United said as much on its call. I'm just wondering if you have a way to actually measure it and if you have any idea as to how those trends might look.

Yeah, look, I mean, I think if you look at basic economy, I think there's a lot of confusion out there. So basic economy is a product, and there's price points, right? So it doesn't matter how much basic economy is out there. What matters is the prices that you're charging. But I will tell you, both the product is less than it was. There's less of it out there. And the price points, as, I mean, many of you report on, I mean, they're slowly moving up. I mean, the demand is coming back. ATLs are filling up. Load factor is going up. It's just how revenue management works, right? The fares are going up. And so I think everybody's looking at this and realizes, you know, in the next few months, your demand is going to outstrip supply.

And if I could just sneak in a third, you know, we're in the middle of May now. Between now and the end of June – How much inventory hasn't been sold, and how much higher would fares have to be on that remaining inventory for you to break even in the quarter? I mean, are we talking $5, $50? I'm just trying to get a feel for how close you might actually get, but if you don't have that at your fingertips, I get it.

Well, it's algebra, and I'm sure we could calculate it real fast. I'm not sure we would disclose it. Okay. Fair enough. But, look, I will tell you, you know, we said it in the opening remarks, we feel very confident with the trends that we will be profitable in the second half of the year and feel pretty good about it.

Okay. Thanks, everybody. Congrats.

Thank you. Our next question comes from the line of Hunter Key from Wolf Research. Your line is now open.

Hey, everybody. Congrats on the IPO. Thanks for having me on. Barry, what would you say your top one or two financial targets as you think about the next couple of years or just running the business for the long term? Is it just raw dollar profits? Would you trade a little bit of margin to drive more EPS? I mean, obviously it's a balance, but what are the top one or two that you really are going to prioritize over the next couple of years?

Well, profitability and costs.

Just like absolute raw profit dollars.

Well, I mean, I would actually expand it, and I would say there's one and two. So profitability one and cost number two, but within profit there's a 1A, which is margins themselves and those levels, and 1B is aggregate profit, which drives EPS.

Okay. Okay. Cool. And then, um, a couple of quick ones here. When you, when you talk about full utilization, you said in your script in 2022, are you talking about your, your, at one point you're going to hit 12.2 hours per day, or are you actually going to average that over the course of the year?

We expect by the end of the year to be in a position to begin and operate all of 22 at full utilization.

Okay. So you'll be exiting 22 at full utilization is what you're saying basically.

No, no, no, no, no 21. We're investing today in hiring and ramping everything up so that we can be ramped up to full utilization by the end of the year such that 2022 will be a full operating year.

I got you. Okay, thank you. And then just a quick one here. What are your thoughts on the potential PSP4 program? Is that something you would support?

I doubt it's going to be necessary.

Okay. Thank you, everybody.

Thank you. Our next question comes from the line of Duane Finningworth from Evercore ISI. Your line is now open.

Hey, thanks. Could you characterize, I'd love to hear your answer on what inning you think we're in from a leisure recovery perspective, domestic leisure recovery perspective, Some have suggested bookings are kind of all the way back to 2019. It feels like there's more recovery still on the table here, even in the U.S., certainly in places here like New York. And, of course, part of that view is going to depend upon how folks are revenue managing. So maybe just to follow on relatedly to Jamie's question, how are you – managing inventory now versus, say, this time in 2019? And how do you think the industry is? In other words, is the industry opening up more future inventory now at low price points?

Yeah, so look, I don't know what you mean. You're somewhere between, I guess, the second and third inning. And what I would mean by that, Duane, is we've started – it was sort of trickling bookings up in February and they continue to accelerate through March. They're accelerated through April. We're now seeing them just, you know, continue to build. Um, but there were, there's, there's another factor, right? So as the demand recovers, then capacity recovers, right? Everybody talks about pent up demand, but there's also pent up capacity. Um, the good news is now you're starting to reach pretty close to, um, 2019 levels this summer. And so, you know, you're now going to probably, if the demand continues to go, you're going to see demand outstrip supply. And so that'll move us to, I don't know, inning four or five. And that's what's going to cause fares to go up and yields to go up. And that's revenue management. And so I think you probably don't get to inning number seven until you get towards the end of the year. And you're probably going to have pretty aggressive Thanksgiving and Christmas just because so many people missed it last year. So you're going to have way more demand than you're going to have seats. As it compares to last year at this time, well, there was zero inventory management.

Sorry, 2019. The basic point being, exactly, like how are you managing your inventory in May of 2021 versus what you might have been doing in May of 2019? Exactly.

Yeah, I think we're still behind because not everyone has reflated their booking curve completely. And I think there's also still certain segments that aren't quite there. Florida may be great, but certain cities aren't quite there. But I think if you look at even today, I mean, just this recent announcement of you can have your mask off in the last few hours from the CDC, If you're indoors, well, that's big news. There's also now another leg of demand. You've now got 12 to 16-year-olds eligible today for the vaccine. So I think there's more to come, but I think we're still a little bit soft versus where we were because the fares aren't back to where they were in 2019. But, again, I think in the next few innings, if you will, call it the next six to 12 weeks, you should start seeing that.

That's great. Makes a lot of sense. And then just for my follow-up, I'm sure you got asked this question a lot when you were on the road. I didn't get to hear your answer to it, so I'm curious if you could share it now. Can you provide your views on industry consolidation, how likely that is specifically in the low-cost sector?

Okay. Well, look, we're focused on profitability and starting to hit that in the second half and focused on shareholder value. And for that reason, obviously, You know, we're leaders in the industry, and we'll look at any opportunity that presents itself, but right now we're focused on returning to profitability.

Okay, thank you.

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

Hey, good afternoon, everyone, and congrats on your first public quarter here. So, Barry, I guess, you know, following up from that question and, you know, the target to be at full utilization, I think, by the end of this year, right? You know, are you managing towards reaching, I mean, you do have a goal of profitability in the second half of the year, but are you managing towards a certain profit target right now or is it just that we can be in the black? Then 2022 is where we readjust and focus on getting margins up. Is that the right way to think about it?

Well, I mean, yeah, you've got to cross over the line and move to the black first, and then you start focusing on increasing that and getting back to, you know, previously, you know, expected levels, if you will, from profitability. But, yeah, like right now, we're just really excited to cross that mark, and we feel like we're on the eve of it, as I just kind of answered in that last question. We feel like we're on the eve of it, given the way that demand is recovering and starting to shape up. And... I think that will drive it in the second half. And, look, 22 is still a ways away, but there's a lot of positive things to happen before then. But, yeah, we'll be focused on maximizing margins in 22.

Okay. And, Jimmy, do you mind helping us with the fleet changes that you announced? So I think you're going to take delivery of 10 additional aircraft this year. So are you going to end the year with a fleet of, like, 115? Is that about right?

No, there's no real change in the total fleet count for the year. We're just laying out that there's five in this quarter and five in the following quarter. So 10 for the rest of the year. We land a year with about 110 aircraft. And just to recap on what Barry said, one of the things that you've got to be focused on for our business is at the end of 19, we had 98 aircraft. At the end of 2022, we'll have 120 aircraft. So the business is significantly bigger between pre-COVID and post-COVID size. So I just want to point that out. But no, there's no change to our fleet plan right now. What we did with the 319s was effectively accelerate them from redeliveries at the end of the year towards the early part of next year to remove them from the fleet now. Clearly, we're removing fleet from storage and bringing them back into service. And our view at this stage was it didn't make a whole lot of sense to return those aircraft to full service across the summer months. suffer some of the maintenance costs associated with them. So it made sense to actually remove them from fleet early. And that's something that we did and took advantage of something that cropped up very quickly.

Okay, appreciate that. And then I guess the last one from me, you know, you guys did announce a couple of new international destinations. Is that looking more lucrative in the future here or is domestic and international kind of an equal opportunity at this point?

Yeah, look, I mean, if you if you look at international versus domestic over the last several years, let's go prior to the pandemic. And, and we had seen that yields were considerably higher. And we had begun investing and you know, going back in the 1819 period in the international. So as we recover, we are looking back again at making that happen. And we think the dynamics will actually be even better than pre-COVID just because of the competitive landscape and our relative cost advantage in the near international. But also just the fact that the international is being delayed, if you will, from a recovery compared to the domestic. And so when it does come back from a demand perspective, we think it's going to come back with a vengeance. So we're positioning ourselves so that we can exploit this in 22 and 23. And we think that that really does a lot to position our revenue backdrop to be a lot stronger than even what it was before.

Thanks, Barry.

Thank you. Our next question comes from the line of Helen Baker from Cowan. Your line is now open.

Thanks very much, operator. Hi, everybody, and thank you very much for the time. Let's see, when you talked about cash burn being positive in March, did you say that that continued at that same rate in April and May? Or is it continuing at that same rate, or is it accelerating?

Thanks, Elaine. It's Jimmy here. Yeah, look, we turned cash positive just as we turned into March. Really, booking started to improve, you know, a big change post-President's Day. The airline performed reasonably well through March and the ATL started to fill out for forward bookings. That's continued. Our anticipation is that we're cash positive through the quarter and really moving on from a liquidity discussion and back into really getting the airline back up to full utilization.

Perfect. My next question is, is there a choice or is there a time when you would when it would make sense for you to switch from a fully leased fleet to a partially leased fleet and a partially owned fleet. Would you consider that?

Yeah, we would. We talked about this a lot when we were doing the IPO. It's something that we can look at as we develop. Like this year, we've chosen to use operating leases all the way across this year. We've actually one aircraft left to finance at the end of Q3. we can look at it in terms of how we shape going forward. It's really a commercial decision around tax, whether you have to put any equity into the aircraft and what the cash position is at the point of delivery of the aircraft. And for us, commercially, we haven't found anything that makes commercial sense on an NPV basis like a sale and leaseback transaction for us. And so we'll continue to do it and benchmark against other forms of financing. But at the moment, operating leases make a lot of sense, particularly when you're growing the business quite dramatically like we are and not burdening the cash flow in the business with funding that growth. We have been funding a big portion of the business in our PDPs into delivering these aircraft. And so that's the focus of some of our cash flow that's over the last five or six years has been to manage our pre-delivery payments to Airbus as opposed to managing the actual delivery itself. And so it's been quite successful for us.

Right, right. I'm not sure it ever makes sense to own an aircraft, but that question does come up. The other, my last question is, are your aircraft ETOPS certified and is Hawaii a realistic option for you at some point in your future?

So, Helena, it's Daniel. Yeah. Oh. No, our current aircraft are not capable of flying to Hawaii with a full passenger load, and we're not ETOPS certified as a result. There's no need to be, and it would add cost to business. We do have A321XLRs on order, and when they join the fleet in a few years, we will look at Hawaii amongst other opportunities for deployment of that aircraft. And it may become part of the network at that time, but it's not a short-term possibility for the airlines.

Gotcha. Okay. Well, thanks, gentlemen. Thanks for the answers.

Thanks, Clay.

Thank you. Our next question comes from the line of Andrew DeDora from Bank of America. Your line is now open.

Hey, good afternoon, everyone, and congrats on the IPO. First question, Barry, where do you think your pre-tax margins can go over your growth period? Is this a I think 2019 pre-tax was like 14% or so. You know, is this a mid to high teens business or are you at some level below that? What are your thoughts there?

Well, look, I mean, you know, when we get back to 2019 levels, we will then focus if we can make it bigger. But I think our focus right now is to just get back to 2019. And we feel good about our costs. relative advantage and where that's headed. And we think that expands over the next year to two years. And so we feel good about getting it. And once we get to 19, then we can probably talk about if we can exceed it.

Okay. Fair enough. And then, look, I guess when you think about the leisure recovery, clearly you see kind of this pent-up demand environment extending into the holiday period. But when you think about kind of beyond that. Do you think, you know, leisure reverts to the growth rates we were seeing, say, pre-pandemic? Or is there something that you're seeing or, you know, you believe in that you think there's some maybe more positive structural change going forward here from the leisure passenger? We'd love to get your thoughts on that. And thank you for the questions.

Yeah, thanks. So, look, listen, we talk about this all the time, and all we have are a bunch of anecdotes at this point, but people are starting to form judgments and views. And, you know, look, I mentioned I think Thanksgiving is going to be the best Thanksgiving we've ever had in the industry, same thing for Christmas, and same thing for New Year's, and I think you're going to see the same thing for President's Day and even Spring Break. By the time we get to Spring Break next year, there will have been some people that didn't go on Spring Break. Basically, they missed two in a row. It's almost three years. I think you're going to see the surge continue for at least 12 to 18 months until people get caught up on vacation, people get caught up seeing family and friends. And so I feel very good about it. And then when you think about getting past kind of the pent-up demand component that I think will last 12 to 18 months, then you get to this new phenomenon of all this work from home that's going on, which really translates to work from anywhere. And, you know, we're seeing more and more people traveling midweek, you know, changing cities and working off their parents' couch in North Carolina this week and then, you know, next week they're in California. And so that's just a whole new travel segment that we didn't have. Plus, with the additional flexibility, people can travel more. And, you know, Jimmy and I, we've debated this, you know, in the past. And when we look at carriers in Europe like Ryanair and EasyJet and Wiz and all those, you know, when you look at the vacations, that the average European has, how many days off they have per year. And you compare that to the average American, how much we have. They literally have more than double the vacation days. And so I look at what that does for us in terms of all this additional flexibility that people are going to have. That's just going to create much more leisure travel. So I think this could last for several years.

Great. Thank you for the thoughts.

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

Hey, good afternoon, everybody, and congrats on the IPO. The first question for me is actually a math question. Are you implying, you know, the revenue for 2Q is down about maybe around 16% on a year-over-two-year basis, if I'm doing that math correctly?

We'll have to come back to you on the exact math on that. We gave you a range of outcomes of a net income of minus 10 to 15 and gave you the operational costs associated with that. We're not guiding the exact revenue numbers at this stage.

Okay, understood. And then just on the comment about getting back to utilization by the end of this year, that's faster than I had anticipated. what does that mean from your ability to kind of get back to maybe pre-crisis trend on unit costs and how should we think about that unit cost trend?

Yeah, look, our view hasn't changed since we talked about the, or during the IPO when we talked about unit costs. You know, there is some inflation across the industry that we had to deal with. We're very focused on our total costs and so our Our CASM plus net interest, we continue to invest very heavily in the fleet, and we're very different to other airlines in terms of how we finance the airline through 100% operating leases, and so therefore our CASM ex-fuel gets slightly inflated by the fact that we pay rent as opposed to having some of the ownership costs down in the interest line. And then we get a huge benefit from the fuel efficiency that the NEO aircraft is delivering into the fleet, and by the time you get to mid-year next year, we start delivering 321s again. And so a change in the business that has happened in the last two years or three years or so is the fact that 321s have become less than 20% of our fleet. They will actually start moving back up in terms of a percentage of the fleet as you progress beyond 2022 and into 2023 and 2024. And we get to about half the fleet operated as 321s by the time you get to about 2025 or 2026. Our anticipation is that our unit costs are similar to where we talked about them a few weeks ago. There's no real change in our utilization that went into our thoughts during the IPO process. So we think we'll be on track for that.

I appreciate that. And if I might ask one last question, I know business demand is not a big component, but you do carry some business and it tends to be SME where I think the recovery is faster. I'm curious what you're seeing on that front and if you're seeing any improvements along with the improvement you're seeing with leisure here near term.

I'll take it.

I'll take that. Go ahead, Donna. Yes, it's a very small portion of our traffic. We've seen from the data we've got, we've seen a little bit of an improvement in that in the last couple of months. Yes, It definitely seems to be recovering a bit. We obviously don't have a lot of data on the rest of the trends in the industry, so I don't know if our recovery is any better than anyone else's. But it is a small portion of what we take, and obviously the much bigger story is how much the leisure demand is recovering.

All right, thank you.

I would just add one other thing, too, just on this business discussion. I look at my calendar, and I'm traveling almost every week for the next six weeks. And I'm starting to hear more and more of this. And as offices reopen, I've joked about this a lot. But, you know, do you really think people are going to be sitting in a cube or do you think they'll go back to the Marriott? And I think you will see business travel return. But in our case, it's going to be small business. It's not corporate managed. Makes sense.

All right. Thank you. Thank you. Our next question comes from the line of Miles Walton from UBS. Your line is now open.

Thanks, Evie. I was wondering if you could maybe touch on the ATL performance in the quarter, and when you talk about the recovery to a normal working curve, should we expect that to expand towards sort of where you were in 2019 from an ATL perspective, maybe adjusted upward given the larger fleet towards $300 million by the end of the year?

Yeah, Miles, Jimmy here. Look, our ATL has been recovering. At the end of December, it hit its lowest point, given the seasonality, but also the effect of COVID. And it's been slowly and gradually improving. It certainly accelerated in March and the run into spring break. And you'd expect it to recover across the year. Really predicting where our ATL is at the end of the year is difficult to do at this stage. But you would expect it to somewhat normalize as the year progresses. And there's still a ways to go on that. Okay. Okay.

And then Barry, I guess in the, I don't know who asked the question around innings, but I think seventh inning was when you put the, the line towards pricing as, as normalized to 2019. Is that, is that sometime towards the end of the year where, where yields have, have fully baked in and recovered?

Yeah. I mean, I think in the United States domestically for sure. The international will obviously, I think, lag that. I think it's going to take you until probably mid-22 or even to 23 for certain regions, just depending upon how they're able to control the coronavirus. But no, I think domestically, I think you should be by the end of the year. And I'll even go back to your earlier question about ATL. In the back of my mind, I'm looking towards the next few holidays and peak periods. And I think there's a risk for the consumer that they're going to get shut out of where they want to go or, you know, they may have to fly a day or two earlier or later for Thanksgiving. And that's going to cause them to book further out when they get burnt. And so, look, when they're not able to – it's one thing to say fares are likely to rise. It's another thing to say, well, they may not even get a fare because there's going to be more demand than there is supply. So if you're thinking about traveling, you're going to want to do it sooner rather than later. And I think when that happens this summer – they're going to start booking the holidays. And then when they get burned at the holidays, they're going to start booking the next summer and spring break. So I think you could see ATLs across the industry go up just from that phenomena. But as far as pricing firming up, look, you've got to be full before you can focus on price. And I think that takes to – for the industry, I think that takes to the latter part of the year for all the industry.

Got it. Thanks, guys. Okay. Thank you.

Thank you. Our next question comes from the line of Steven Trent from Citigroup. Your line is now open.

Good afternoon, everybody, and thanks for taking my question. Just two quick ones from me. I know you guys don't have a massive exposure to the southeast, but given the disruption we saw with the gasoline supply in parts of the country, Did you guys feel any of that in any of your operations, or was it not really an issue for you?

Yeah, so we had some challenges. We did some tankering, but we didn't have to do any tech stops, and we think it's largely – it looks like it's going to be largely resolved now.

Okay, great news. And just very quickly, during the IPO, a number of investors were intrigued by how high your ancillary revenues are. And when we go forward, you mentioned the Barclays co-branded card and what have you. Do you see additional opportunities to push the envelope even further than you have?

This is Daniel. We do see continued opportunity, and we're focused on ancillary on the highest profit margin within our ancillary offerings. And as the airline gets bigger, the relevance of both our credit card program with Barclaycard and our discount then continue to get better. More customers, more routes, more opportunity to take advantage of the benefits. We're focused on continuing to work with Barclays, as we said in the opening remarks, on improving offers. And on the discount, then, we're looking to continue making enhancements to the program to increase the value it offers, to increase the number of customers who sign up for it. It's a paid loyalty program, and it's a very good program as a result, and there's a lot of opportunity to continue to build it.

Okay, that's very helpful. I'll leave it at that. Thanks, guys, and congrats.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Barry Stifel for closing remarks.

I just want to thank everybody for joining us today, and we look forward to updating you on our next quarter. Thanks, everyone.

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