Frontier Group Holdings, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Frontier Group Holdings 3rd Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and if you would like to ask a question during that time, simply press star 1 on your telephone keypad. If anyone should require assistance during the conference, please press star 0. I would now like to turn the conference over to Suzanne D'Oprio, head of investor relations. Please go ahead.

Thank you, operator, and welcome everyone to Frontier's third quarter earnings call. 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 CFO, and Daniel Schurz, 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 cell site analysts. We also wanted to remind everyone on the call today that today's discussion does contain 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 from 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 third 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. Barry.

Thank you, Susan. And thank you everyone for taking the time to attend our third quarter earnings call. This quarter reflected another step in our path to recovery with the business remaining resilient and managing the dynamic nature of the pandemic. I'm very proud of the team and thank them for their continued delivery of safe and reliable service to our customers. During the quarter, we increased our capacity while also delivering a high level of operational reliability. We continue to view the Delta variant as transitory and remain focused on getting the airline back to full utilization in the second quarter of 2022, while being nimble to address any further impacts from COVID. We also achieved $63 in ancillary revenue per passenger, which is higher than the levels we were able to achieve pre-COVID. While the pandemic has lasted longer than any of us expected, the vaccine boosters, vaccines for children, and the new therapeutic treatment expected to be approved by year-end provide strong support for sustained demand recovery into 2022. More broadly, as the recovery progresses and demand returns, we plan to continue the expansion of our domestic and international network while continuing to build on our ancillary performance. In a moment, Daniel will take you through our third quarter revenue performance and the opportunities we see going forward. On the cost side, We're focused on expanding our relative cost advantage by driving efficiency in all aspects of the business and offsetting inflation by being relentless in eradicating waste in our efforts to drive lower costs. And to be clear, when we reference our relative cost advantage, we mean our total costs, including fuel and interest expense. I'll now turn it over to Daniel to provide a commercial update.

Thank you, Barry. I want to join you in thanking Team Frontier for all of their hard work in managing the COVID pandemic while delivering safe and reliable service to our customers. We generated $630 million of total operating revenues during the third quarter, with our total revenue per passenger of $106, increasing 8% from the second quarter and reflecting 97% of the comparable amount during the pre-COVID quarter in 2019, with a load factor of 77%. We had an 8% increase in average departures per day versus the comparable period in 2019 on a 7% shorter average stage length. We generated $63 ancillary revenue for passenger during the quarter, which is 12% higher than the comparable pre-COVID quarter in 2019. On the network front, we continued our domestic and international network expansion during the third quarter, opening stations in St. Martin, San Jose, Costa Rica, and Burbank, California. And we introduced our largest ever schedule in Las Vegas, Our expansion will continue into the balance of 2021, with new stations being added in Antigua, Belize, and Costa Rica. And last week, we introduced our largest ever schedule in Orlando, making it our largest station in terms of daily departures for the winter schedule. As we grow our network, we are focused on doing so in a financially disciplined way, ensuring, as Barry mentioned, that we are relentless in eradicating race and eliminating things we don't get paid for, such as excessive airport costs. To that end, we're taking action on the significant increase we're seeing in the cost for employment at certain airports. Following our decision to exit LAX in San Jose, California earlier this year, in the first quarter of 2022, we will be ending service to Washington, Dallas, and Newark. As with any airport, if the fare and cost relationship improves, we will revisit the decision. As we discussed on our last earnings call, the Delta variant has impacted demand. Encouragingly, over the last two months, As COVID case counts stabilized, we have seen the start of demand recovery with improvements in both volume and fare levels. And as we manage the post-COVID revenue environment, we see an opportunity associated with rising household incomes, which combined with our competitive fares gives us confidence in our growth potential. We've seen early indications of this in the overall strength of our ancillary performance. The recent strength and momentum of our loyalty program, including both a record number of Discount Den memberships in the quarter and adding a record number of new Frontier Barclays credit card accounts, underpins our confidence in the planned growth of our business and our ability to increase our 2023 ancillary revenue per passenger target to $65. With that, I'll turn it over to Jimmy to provide more details on our financials.

Thanks, Daniel. I also want to thank all of our Team Frontier members for their hard work and dedication as we managed the airline through the pandemic while staying financially disciplined. We were profitable in the third quarter on a gap basis, recognising $23 million of net income. Our adjusted net loss of $24 million, or 11 cents per share, excludes a number of special items. These include $72 million of CARES Act credits and $1 million of cost associated with the early lease termination of our remaining 319 aircraft. While the quarter was impacted by the Delta variant and rising fuel prices, we remained financially disciplined in managing the business. We ended the third quarter with 802 million of unrestricted cash and cash equivalents and have a 161 million current income tax receivable from our annual tax returns filed during the first quarter of 2021. We continue to be focused on repaying the $150 million of outstanding loan under the Treasury facility at the appropriate time. As previously highlighted, This will enable us to unencumber our co-branded credit card program and related brand assets that are currently collateralizing the Treasury loan and make that collateral available to access liquidity if needed. While the company has adequate liquidity on its balance sheet, with the strength of our loyalty programs as highlighted by Daniel, including our co-branded credit card program, discount and subscription program, and our related brand assets, we believe we have approximately $1 billion of potential untapped liquidity based on debt financing secured by other airlines. We ended the third quarter with 112 aircraft in our fleet after the addition of five new Airbus A320neo aircraft that were financed through sale and leaseback transactions, partly offset by two lease returns during the quarter, including retiring the last 319 aircraft. We have no planned deliveries in the fourth quarter. Our fleet is 10% larger than the prior year and continues to be the most fuel efficient of all major U.S. carriers when measured by ASMs per gallon, of fuel consumed, generating almost 100 ASMs per gallon during the quarter. 65% of our fleet is comprised of the fuel-efficient A320neo aircraft, and we will introduce the A321neo aircraft in the second half of 2022, adding another step change in efficiency to the business. We remain focused on getting the airline back to full utilization in the second quarter of 2022, while remaining flexible to address the unpredictability of COVID-19 on our bookings. As Daniel outlined, the Delta variant had a significant impact on the airline's bookings through August and September, creating a deficit in forward bookings as we entered the fourth quarter. During September, we experienced the normalization of volume levels, but at discounted fares. We are currently seeing an improvement in fare levels as the holiday season approaches. However, fuel prices have continued to increase, creating a short-term cost hurdle to overcome. Our forward guidance summarized in the earnings release takes the lingering effect from the Delta variant into consideration, along with higher expected fuel prices. These impacts are partly offset by the improvements in booking trends that began during the latter part of the third quarter as COVID-19 cases stabilized. As a result, our guidance range for our fourth quarter adjusted net income margin is a loss of between 10% and 15%. More details on our forward guidance can be found in our third quarter earnings release. With that, I will hand it back to Barry for some closing remarks.

Thank you, Jimmy. While COVID has lasted longer than any of us expected and the Delta variant has created a delay in the recovery, we're in a strong financial position and we're seeing improvement in demand. We have a proven and resilient business model that is poised to take advantage of the future growth opportunity of our business, and we couldn't be more excited about the future. With that, operator, please open up the call for questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star 1 on your telephone keypad. We have your first question from Ravi Shankar with Morgan Stanley. Your line is open.

Great afternoon, everyone. Barry, you said at a conference a few months ago that industry pricing discipline that we saw earlier this year was one of your biggest positive takeaways during the pandemic period. You mentioned in your release that there was some discounting of fares to get volumes back up in September. Can you just describe the competitive pricing environment right now and kind of how you see that evolving into 2022, both for base fares and a financial increase?

Sure. If I recall the conversation, it was talking about prior to the Delta variant starting, We had seen more pricing discipline across the industry than we had seen, honestly, since probably 2013. And so whether it be levels, rules, APs, restrictions. And so obviously that was kind of washed away when the Delta variant hit. I'm pleased to say now, though, we have seen... kind of the depths of the Delta variant from a demand perspective was in September. We've seen demand continue to recover. And as that volume has come through, our revenue management team has worked really hard to systematically continue to take advantage of that and methodically raise fares. And we continue to see strengthening to the point now where Yesterday we reached the highest sales level on a daily basis that we've seen since July, which gives us the confidence as we look forward that by spring break, if you just kind of roll through the booking curve what that would look like, we believe that from a demand and revenue environment we should be back to 19 levels by the time we get to spring.

Got it. That's great. And for my follow-up, the airport fees that you mentioned and kind of, you know, that's kind of changing our decision to fly to certain airports, kind of obviously that's understandable. It's something that's been flagged by all the airlines. What's the long-term sustainable solution to that? I mean, do you just kind of sit out those airports for a while and kind of go back to it when things come back to normal and kind of how long does that take? Or kind of any color on the forward outlook there would be helpful.

Thanks, Ravi. This is Daniel. I think it's going to be a combination of situations depending on the airport. We're going to see airports where absolutely I think they realize that their costs are driving service away and they'll try and figure out ways to make it more cost effective and we'll absolutely look at that and potentially come back to those airports. And we have so many growth opportunities as we've said multiple times this year. We have lots of places to put our aircraft and so we're finding more cost effective places in the short term. And look, A number of the airports we've made decisions on are in multi-airport cities, and there are much more cost-effective airports for us to fly from in those cities and those metro regions. And if that's ultimately what we have to do for the long term, we'll do it for the long term. So, yes, if costs come down, and I think some airports will see costs come down, we will be back. But if costs don't come down, we will stick with lower-cost airports. Very helpful. Thanks, guys.

We have your next question from Brandon Ogulonski with Barclays. Your line is open.

Hey, good afternoon, everyone, and thanks for taking my question. I guess, Barry, in your response to that one from Robbie, you talked about, you know, by spring break, hopefully getting back to normal, I think, on fare structure or just revenue and yields. Do you think you can be profitable by then, too? Or does gaining back full utilization really the key there?

We would expect to be profitable if we get back to 2019 revenue per passenger levels. And look, I think to be clear, I think what happens and there's confusion, especially during a pandemic, I think a lot of people have gotten an education about the difference between sales and revenue. And normally there's not this much volatility, you know, week to week, month to month, and definitely not quarter to quarter, but you see this. And so when we talk about sales today, we're talking about all future sales for all travel periods, which you need to look over the next three to six months. And so even if you're getting back to 2019 revenue per passenger levels, it takes a full flow through of the booking curve in order for those revenues to materialize from a flown perspective. So we're not immune to the dent that was put in all of our load factors and fares caused by the Delta variant, but what we're telling you is that we're moving out of that and we're climbing towards what we believe is spring, and we're seeing really good things from an overall fair perspective in total dollars, which leads us to believe that we will see revenues that should be back to 19 levels. And obviously to cover fuel, we'll need a little bit more than that. But we're pretty optimistic about the future, and yes, we will be profitable at the current trajectories.

Okay, appreciate that. And Jimmy or Daniel, you guys are talking about getting back to full utilization by QQ, I think. You will be taking deliveries in the front half of next year, right? So should we be thinking, you know, full utilization means capacity growth north of 30% versus where you were in 19?

Yeah, Brandon, we're still working through what we think Q1 should look like. We think it's probably up to about 10% lower capacity than what we had originally planned. We haven't finalized it yet. You know, the issue that's happening at the moment, we think there'll be a sustained recovery post or around spring break, but we think the off-peak periods still need work. And so it's focusing on the off-peak periods and the capacity deployed in those periods that we're doing at the moment. And so we think our capacity will be a little bit lower than what we previously thought, where it was up about 30% in ASMs year over year. We haven't set an exact... Go ahead. No, he was just saying we haven't set a final number.

All right, thank you. Thanks, Brandon. Thank you. We have your next question from Helene Becker with Cohen. Your line is open.

Thanks very much, Operator. Hi, everybody, and thank you very much for the time. I just have a couple of questions. The first one is on Costa Rica specifically. I know this is getting, like, weedy, but I've seen that demand in the market hasn't been that strong, and yet you guys are going and opening, I think, a second, I think you just said a second station there. So obviously you're seeing something that the peer group isn't seeing. Can you just talk about, like, that market opportunity? And I know it's kind of weedy, but I was just interested in that.

So, Helene, no, it's a good question. I think I'll talk about two things. One, we have much lower fares. What we're bringing into the Costa Rica market, we're adding Liberia to San Jose, which we opened in the summer. We're bringing much lower fares, and we're following the leisure demand that exists. There's incredibly strong leisure demand in these near-shore destinations, and that's what we've seen in our expansion internationally. And I would also point out, again, that we fly... We're looking at digital nomads. We know Costa Rica is interesting for people to go stay there for a few weeks and work. We're also differentiated from other islands. We fly a lower frequency level. We fly the right frequency level for the right market and that's a consistent part of our network deployment strategy and it's just the same in Costa Rica as it is across our network.

That's really helpful. Thanks, Daniel. And then my other question is this with respect to capacity growth in 2022. It seems like, and it's kind of subpart A and B. So subpart A is, Barry, earlier in the year on one of the earnings calls you talked about, demand would be strong for the holidays. And I think Jimmy just said that. You know, you expect strong demand for spring break next year with the off-peak still needing trouble. So, the demand that you thought you would see for Thanksgiving and Christmas, are you seeing that level of demand or is it better or worse? And then subpart B of the question is with respect to capacity. I know you have aircraft coming in and you've got bigger aircraft replacing smaller aircraft, which is a good thing. I'm assuming that means that you won't need to hire quite as many pilots. And is that a gating factor on capacity? Not even getting back to 2019 levels, I'm talking about the ability to grow beyond those levels. to kind of as GDP grows and as we kind of get out of this pandemic and get back to whatever our next normal is. So maybe a lot in there, but pick two questions. Sure.

Sure. Thanks, Elaine. Look, I mean, I remain as confident today as ever that the holidays are going to be big. I think what happened, though, for the last three months since we last spoke to you on the last call, what's happened is the Delta variant, you know, put a damper on demand, right? And so it hurt. Obviously, it hurts, you know, August, September, October, and even the front end of November. We're seeing everybody now, like Thanksgiving's really booking. The Christmas holidays are really booking. I think the biggest challenge, though, to the quarter, while I think I can say that we're going to have one of the best Thanksgiving and Christmas periods we've had in a long time or if ever, the periods around it are still soft. And I think that's driven by a couple things. One, The Delta variant caused the return to office to get delayed, and a lot of people have moved that to January. If they're not in the office, then they're largely not traveling, so I think that hurts business travel, which isn't direct to us, but it's indirect in that it hurts the whole travel ecosystem. And then the second thing is the wide bodies are just now being unleashed to go back to their proper homes in the international. So as we see that capacity go out, I suspect that you'll start to see things improve. The other reality is that you don't have the full vaccines, right? So the kids just now, children 5 to 11, just now got approved. They're just now getting their shots. They're not fully vaccinated yet. So I think that slowed us down. But, yes, the holiday periods look good. The shoulder period is still a little bit soft, but I think when you flow that through, you know, once everybody's back in the office, once you have the boosters in place, and I think probably most importantly, you know, we're underestimating the power of this therapeutic pill that eliminates death by like 90%. It will be available by the year end. But I think you'll start to see those off-peak periods start to fill in, and that's why we're confident by spring and beyond everything will be good.

Gotcha. Okay. Thank you.

We have your next question from Hunter Key. We will research your lines open.

Hey, everybody. Jimmy, what are you expecting for sale leaseback gains in 4Q?

Yeah, we have no aircraft deliveries in the fourth quarter, so we don't expect any sale leaseback gains related to aircraft deliveries this quarter.

Okay, got it. Thank you. And then on the 4Q CASM number, please, just to peel that back, which is the ultimate nature of the first question, what is driving that pressure? If you could just help me understand the specific line items in the P&L, how much of this is transient, how much of this is sticky, how much are maybe you spending a little bit to ensure good operational integrity? Just help me understand that CASM guide for 4Q, please. Thanks. Okay.

Yeah, we entered into, if you trace all the way back this year, our objective was to get the airline back to full utilization as you got towards the end of the fourth quarter. And so we've been hiring pilots and flight attendants in order to satisfy that. And since the Delta variant came about, we've been close in canceling flights. And if you look through September, October, we've taken anywhere between 7% and 9% of the plan capacity out of the business. So you're carrying a bit of cost in relation to crew through the quarter. The biggest differential is really the sale and leaseback gains that you referred to. And then also we're probably about 3% to 4% higher in capacity. And there's a little bit of inflation. We certainly are not immune to it like every other airline. We've seen some inflation occur through the summer, but it's less than about $5 million in terms of the quarter, so relatively small in the context of our overall cost base. But there is an element of inflation, particularly around, stations, airport costs. Like other airlines have mentioned on their calls, we're certainly seeing some disjointed airport costs coming in, largely linked to uneven capacity across the industry as the industry starts to move through the pandemic. And so that's really what's happening. Sequentially, it's a little bit higher than Q3 than we'd expected, but largely because of the items that I just laid out.

Thank you. We have your next question from Savvy Seed with Raymond James. Your line is open.

Hey, good afternoon, everyone. Maybe first just to follow up a little bit on Helene's question. I was wondering in terms of what your hiring plans are for 2022, mainly I'm kind of curious if you're confident about being able to meet those targets. It seems like from a training infrastructure standpoint, it seems like the industry as a whole is doing a lot of hiring and training, you know, just to get to summer capacity. And I know there's kind of fleet changes and things like that. So just curious what your views are on kind of supply and training capabilities across like pilots, you know, flight attendants and mechanics.

Well, let's just go by work groups. We'll start with pilots. We're extremely competent. We plan out the airline a long ways in advance is, As Hunter's question just a moment ago pointed out, however, when plans change like the Delta variant, we get stuck with the cost. But right now we have significant excess crew just simply because we overhired when we planned to fly a larger airline right now. But if you just flow this out and you go through the training from recruitment to hiring to training, to getting on the line and being a pilot in the first officer seat, that then frees up someone to move from the first officer seat to the captain's seat. And that whole process can take six to eight months. And so my confidence on the front half of next year and even into Q2 is like close to 100% because Almost all of these people are already on property that we need in order to satisfy that. Flight attendants can be managed a little bit closer in. There isn't the upgrade cycle with the captains and so forth. But when we look today at the people that we're getting through the door for training and continuing to fill classes, we feel really good. And in fact... We've seen now that once we got past the unemployment incentives and so forth back in September, we've seen in all parts of our business the places that we did have shortages, we've been able to satisfy that. So feel really good about the flight attendants? The airport staff probably is one of the most dramatic recoveries, probably the most hit by many of the unemployment incentives, but probably the quickest to snap back as well. So we feel very good about that. And I think the one area, and we've highlighted this before, that there is a shortage in the United States, and that's one of maintenance. And so there are qualified technicians are at a premium today, and we continue to work with our business partners to make sure that we have the right equipment number of folks out there. But I'll tell you, from an efficiency perspective, we've looked at it and you start saying, well, how many hours do I have of mechanics that are sitting around not working? And we're trying to figure out how can we be much more efficient and make sure that they've got a wrench in their hand and working on airplanes if we're going to be paying them. So we feel pretty good overall about the situation. And while we're not immune to the workforce challenges that people have had, I think we're managing it pretty well and feel good about the pipeline. And I think we have probably as good a better handle on the costs, and we have modeled those out. And I would say that, you know, unless something materially changes that further increases their trajectory, we incorporate that into our thinking for our 2023 guidance that we gave that we would be sub-6x fuel, including the inflation we know today. So I hope that answers your question.

No, that's extremely helpful. Thank you, Barry. And then if I might ask just on moving the ancillary revenue target up from, I think, 63 to 65 here for 2023, you've heard a lot of airlines talking about demand for premium products being strong. It was already kind of a secular trend that may be strengthening. Do you think driving some customer behavior, even on Frontier, to just buy more ancillary and kind of treat them to kind of a better overall experience? Or is your kind of bullishness really driven by, you know, just what you're seeing on the credit card and loyalty sign up standpoint?

Well, Savia, it's a great question. It's Daniel. I think, look, we've seen both. We've seen a really strong ancillary performance for the quarter. and our core products led notably by what we do think of as the sort of the buyout when you've got the money to pay for it products of seats and bundles. And absolutely, we're seeing strength there. That's our premium. That's our equivalent to the premium products that some of the other airlines have been talking about. But it's also tied, and I think it's the same thing, the strongest credit card applications, the strongest credit card approvals in the quarter. I think you're seeing... You're seeing all of these products working in lockstep in this stronger market. And we've got our own premium products. And yes, that's part of what's driving this target. We've got lots of ideas in the pipeline for other things we can sell to customers as well. And we think both Discount Den and the credit card product are going to continue to perform extremely well.

And I just add to this. Let me just add, too, I think, you know, we as an industry and I don't know, we probably spend 80, 90 percent of our time on it over the last couple of months on the negative bit. But people keep talking about inflation and the positive or silver lining in this is that incomes increase. You just look at the latest reports, they're up more than they've been in a long, long time. And we're seeing that extra money flow through to these extra products. You're seeing it in all types of other industries. And so while we're being relentless about eradicating waste and making sure that we manage down the cost side of inflation, the revenue opportunity is real. And so we're going to make sure that we get our fair share of that as we move forward. And more buying power translates to more pricing power for us. So we're really excited about it.

Makes sense. All right, thank you.

We have your next question from Duane Pennyworth with Evercore ISI. Your line is open.

Hey, thanks. So I guess drawing on a lot of the previous questions, as you think about the 4Q, you know, starting weak and finishing strong, can you just comment on the opportunity to improve RASM sequentially? it just feels like the peak is very strong. I mean, northeast of Florida, and maybe I'm just whining here a little bit, I don't know that I've ever seen it like this. So can you just say, like, again, you've got decent momentum on ancillary, and we're going to finish strong here. So is sequential improvement and RASM off the table?

No, absolutely not. We believe RASM. We believe we can see sequential improvement. The challenge, as Jimmy alluded to earlier, is that we went into the quarter with a lot of bookings driven in the bottom of the bad part of the delta spike, but we are seeing improvement. So overall, we expect to see the trajectory continue. It's going to probably be slight because of the impact of the delta variant, because of how that impacted impacted the beginning of the quarter, but yes, it's continuing to improve, and we expect, and as Barry said, a lot of that is for future sales, future travel, and so we expect that improvement as the quarter goes on, and we expect to have that improvement to continue into 2022, as Barry was highlighting.

Yep, that's helpful, and then on, again, given just the timing and the rhythm of how we started the quarter, maybe this is a little bit hard to measure, but You made a bit of a push on international. Can you talk high level how the unit revenue profile of the international new markets compares to domestic new markets?

Look, we're starting a lot of our new international markets for the fourth quarter right around now. So they're just starting. And as in any market, there is ramp. But what we are seeing is demand is building each week for these international markets. We're seeing strong leisure demand for the peaks. And what we saw as continued strength, obviously, in Cancun led us to announce more Cancun service for winter, which starts in December and January. And we're seeing good early trends on those new markets as well. We're very comfortable with how we've deployed our international capacity this winter.

Okay. And then... You know, certainly appreciate some of the inflationary commentary and airports, et cetera, which, you know, we can't call it a dead horse at this point across the industry, but we've certainly had a lot of questions around that. Just to come at it maybe a little bit differently, as you look across your groups and your vendors, are you seeing any relief on labor availability yet, any changes on that front to the better?

Yeah. Yeah, I think that we've definitely seen that. I'm actually going to ask Jake Filene to talk a little bit. He's responsible for our airports where we had the most acute challenges. But Jake, why don't you talk a little bit about what we're seeing now?

Yeah, we've seen material change in our retention, attrition rates, if you look at year-to-date through June and then year-to-date through September, October. We've seen across the network really improvement across the board in attrition rates coming down. A lot of that is due to, you know, we've done targeted wage increases at the city level, and those have been very effective. Okay. Thank you.

Thanks, Dwayne.

We have your next question from Jamie Baker with JP Morgan. Your line is open.

Hey, good afternoon, everybody. Most of my questions have been addressed, but try this one on. So in response to higher fuel, the levers one normally thinks about are tightening up capacity, trying to push up yield, just stating the obvious. I'm curious, though, as a smaller entity and specific to recapturing fuel, is it possible to think outside of the box? I mean, do you ever sit around and throw around – I don't know, different pricing ideas internally, maybe reducing the booking window, something like a fuel club or, you know, selling advanced tickets without fuel included and then, you know, rerunning the car down the road. I'm only asking because you're small, you're nimble, and it seems like most of the industry evolution has come from smaller airlines. A simple no will suffice if you think it's too goofy of a question.

Well, I couldn't answer no. That would be incorrect. We spend a lot of time on this. In fact, we're sitting here laughing because there's a whiteboard that has some notes from a week or two ago laying there talking about some of these various things in the room we're in. Okay. Look, here's the deal. First of all, we get 100 miles per gallon per seat. And if you just do the math on that, roughly 1,000 miles, you need about 12 gallons in your 80 percentile load factors. We need 12 gallons of fuel. So just do the math. At $2.50, $30 in fuel, we think about this all the time. But when you look at the broader industry, especially the big four, they need like 35%, 40% more, I think, on average. So you just do the math. They need about 20 gallons. So right out of the gate, right, we've got eight gallons times two and a half bucks. That is the differential and the cost advantage that we have versus them. The industry needs that full amount of money, and we only need a portion of it. So that gives us a unique position where we're kind of structurally hedged against them. But we're not immune to economic pressures. And I'll tell you, we have, like I said earlier, our revenue management team is acutely aware of the price of gas. They fill up their cars too. So we've been watching it, and I will start with we're at $63 on the non-ticket, moving to $65 by 2023. If you do the math on that and you look at the increase versus what we paid in 2019, that will largely cover the fuel. We're looking at other ways to make sure that the non-ticket plus other fare initiatives brings our total revenue per passenger and ultimately our RASM to ensure that at some point in the very near future if these fuel prices stay at these elevated levels that we can cover it.

Okay, very thorough. Thank you, Barry. And then second, and it's just because it feels like the call is winding down, but I understood in May, given the IPO timing, but is there any internal consideration to pulling the reporting date forward a little bit? I'm just thinking about the periods when investors are most focused on the airlines, and it just doesn't feel like the second week of November is that period. Small net.

Yeah, Jamie here. I hope you're doing well. Yeah, our anticipation is that we report at least a week earlier all the way through next year. There were some internal reasons why we were reporting this late. The previous quarter, I think we were around the 3rd of August, so we'd expect to report at least a week earlier than this going forward. Yeah, we just have an anomaly this quarter.

Got it. Understood. Thank you for the thorough answers. Appreciate it, guys. Take care.

Thanks, Jamie. Sorry if it messed up the travel schedule.

No, no, not at all. I'm thinking about the attention that I want Frontier to get, and it's just, you know, it can be tough to break through on people's calendars. A lot of outsiders are, you know, knee-deep in other sectors right now, and it's just, you know, sometimes... No, I was teasing you, Jamie.

We'll get it sorted out.

No worries. Take care.

We have your next question from Miles Walton with UBS. Your line's open.

Thanks. Good evening. Let's maybe pick up a little bit on the detail of the fuel efficiency that you've been talking about. The 100 gallons, excuse me, 100 essence per gallon, that's down about 4% year on year, largely because of stage length, I would guess. The 321 NEO comes in second half of next year. What should we be thinking about for fuel efficiency gains as you look into 22 versus 21, and is that a trend we can use going forward as well? you know, the fleet's more even leveled.

So I'm not looking at the actual, I think you may be comparing to when we had some of the 321s parked possibly last year. 320 COs. Yeah, maybe some of the COs. So I think, look, our run rate for our fleet, if we've got it fully operational, is right around 100 miles per gallon. So I think there could have been a mix when we were looking at some of the historical through the pandemic. In fact, for example, in the heart of the pandemic, we had all the 21s actually parked, which are very efficient in addition to the Neos.

So you go to next year, is it a couple of points?

Miles, just to add to what Barry's saying, like if you looked at Frontier pre-COVID, we were doing about 97 miles per gallon. We're close to 100 now. Obviously, it's hotter in the summer, so sequentially it's a little bit lower than what it was earlier in the year. You expect to see somewhere between 1% and 2%, 1% largely over the next three or four years in efficiency that comes into the building each year. And so that's really what you see. It's not going to be 2%, 3%, 4%. You've got two-thirds of the fleet now operated as A320 NEOs, you then see the introduction of the 321 Neo, which gives you an improved efficiency, but it's in the kind of just above 1% zone.

And to give you specifics, Miles, the 321 Neo, when we bring that in next year, With our configuration, it's going to have approximately 110 miles per gallon per seat. So it's a pretty good step function change. And as we flow those through the business, that's why Jimmy's talking about gaining 1% to 2% a year. It's just math because you're bringing in, again, the most efficient aircraft we've ever had.

Got it. And then the other thing that I maybe just poke on a little bit to ask the question, it sounds like you're pointing more to the corporate reopening as sort of the next leg of recovery. And I'm curious, have we completely separated from case counts, death counts, and, you know, vaccination levels and the magic pill coming through, and really the next leg is going back to the office, somehow spurring, you know, your network as well as everyone else's?

Well, it's not just that, right? It's when people are sitting around their house, when they're not in their office, they don't travel as much, and generally even further on their own dime. But I'm just saying, in general, you need... You know, for midweek travel, obviously you need business travel to take place. But I think it's a convergence of many issues. That's a structural one. When people are not back in their offices, these are a lot of the same people who travel. And so that is a drag on the industry. The international has been a drag. There is still some drags, and there's more and more positive announcements on this every day. But getting a PCR test to go to an international destination is is not only kind of a pain and time-consuming, it's expensive. And if you've got a family of four and you're spending a couple hundred bucks each to do that, that's a drag on international leisure travel. So you've got that. You've got the pills. You've got just several things, a whole litany of it, that points to you're going to have a lot better demand as we turn the clock and the calendar into next year. And that's on top of what we're already seeing, right? So that's additive. Got it. Thanks again.

We have your next question from Mike Linenberg with Deutsche Bank. Your line is open.

Oh, yeah. Hey, good afternoon, everyone. Hey, just a counterpoint on Jamie's comment. I actually appreciate the fact that you guys go this late in the quarter because it's like a mid-quarter update. And I think sort of last quarter, Barry, when you were out kind of giving us an update and how things had materially worsened, since everybody else had reported, so it was, you know, nice to kind of get that information in real time. So definitely the counterpoint there, but at the end of the day, I guess, you know, you've got to do what's right for you guys. Just jumping over to a question here. When I look about at how you've done operationally, you've definitely outperformed, you know, your peer group. despite the fact that you guys have been adding back a decent amount of capacity. And maybe some of it is that you got out in front of the whole vaccine mandate. I mean, I think that that's somewhat of an untold story. You guys were early with United and I believe Hawaiian. But as you think about growing the business, what's the right number? Like how many domiciles do you have now? How do you think about pilots, flight attendants, aircraft per domicile? What's the appropriate number that will allow you to continue to put up these good numbers?

So a lot in that. So operational design is a big thing that we do. In fact, our head of network. His title is not just network, but his title is the VP of Network and Operational Design. And we spend a lot of time looking through what drives reliability. I mean, our mission is low fare is done right. And so we look at things that cause challenges to reliability. We look at things that have caused controllable cancellations in the past. And we've looked at the maintenance that it takes to support that, the crew that it takes to support that, and then the actual schedule construction. And so the first thing that's probably, and it was almost a requirement to be nimble through COVID, we had been working for years to move to a more modular network. And what we mean by that is that we are largely out and back with the majority of our trips being less than two days from a crew perspective. Having three- and four-day trips, especially during thunderstorm seasons or snow seasons, it's nearly impossible for them to not run into some kind of weather and trip up a multi-day sequence so we have moved to preferring out and backs that has been necessitated the need to have eight operational crew bases across our system which is a little more than which is a little more than than many other carriers maybe our size would have but we've made that investment effectively in excess reserve costs because you have to have reserves in each a minimum amount of reserves in those bases but we believe that that resiliency pays off in strong reliability And then when you think about the maintenance, that footprint, we constantly debate this a lot. And we're looking through right now what is the best way to make that efficient as we continue to grow. We've looked at more mechanics and more parts in more places, or do you do the work in more concentrated places? And we'll see how that sorts out. But we're trying to make sure that we offer the safe, reliable operation at the lowest cost possible. And while we're not perfect, I think we've put together a pretty good recipe for And I think this year we were probably paranoid early on about the labor shortages. And I think we did a fantastic job if you go kind of March, April, May. And I think we were ahead of the curve. And then what we didn't realize is the entire rest of the country, not just airlines, but restaurants and everybody, was going to try to hire everybody in the month of June. And so kind of probably that last 10% to 15% of hiring was a challenge. And so now I think the vaccine mandate that you have today – that OSHA just put out the final one. So you've got some that are required to be vaccinated, and then you have large employers, 100 plus, that are vaccinate or test, which we fall in the second category because we are not a government contractor. And so we're working through that. There's 400 and some odd pages of rules. We're going to make sure that we're compliant with that. And that goes into effect, I think, January 4th. And we are working through the process right now to make sure that we are fully compliant. But we run a safe and reliable operation, and we'll do everything we can to do it in a smart and compliant way.

Great. And just if I could, that's super helpful, Barry. If I could just fit in a quick one here to Daniel, and maybe this is just sort of a little bit of a follow-up on Savi's question. I mean, again, I look at the stats, and your ancillary is up 11% on a year-over-two-year basis. Your stage length is down 7%. So when I usually think about stickiness of ancillary, usually the longer the haul, the more likely you're going to get people to buy up for the extra comforts. And I'm just curious if as you move into international, and I realize it's early, are you anticipating a higher take rate on ancillary as you move into some of these international markets? Any thoughts on that? And thanks for taking the questions.

Absolutely. I'll very quickly answer the first part. There's a lot less relationship overall between stage length and ancillary than there is between stage length and fair. There are different things that impact that. But if we look at international, we do have experience in international markets. Obviously, we have long experience in both Cancun and Punta Cana. And yes, we do see more of that sort of premium leisure trade-up behavior. That's exactly the behavior we're describing for the overall system this summer. We tend to see more of that premium trade-up. We do see our ancillary products performing better. It's a slightly different customer mix. It's a slightly different purpose of travel mix, and it does tend to work well.

Okay, very good. Thanks, Daniel. Thanks, Barry.

Thanks, everyone. We have your next question from Steven Trent with Citi. Your line is open.

Thank you, Operator, and good afternoon, gents, and thanks very much for taking my question. Most of my questions also answered, and Mr. Lindenberg beat me to it to ask about your crew stations. But just curious, when you think about, you know, Frontier's really had very little incremental debt addition during the pandemic versus, you know, most of your U.S. peers. When you think about coming out of the other side, as many of your competitors are paying down debt, you know, what do you see in terms of the opportunity to push the envelope in terms of being a green airline? You know, I think a lot of people... you know, love your otters and animal symbols on the planes and what have you. You know, are you guys thinking high level about sustainable aviation, fuel more aggressively or taking the next step, you know, in cutting the climate footprint with the wiggle room you guys will have versus others? Thank you.

A lot going on there. Maybe we'll follow up. I think you had a deck question there. Let me start with the green. Look, we're America's greenest airline. We've got 100 miles per gallon per seat, and we've got a really good lead. We've got the youngest fleet in America, highest concentration of new generation A320neo family aircraft. Really proud of our position. And I know there's a lot to talk about sustainable aviation fuels, and we are interested and intrigued by it. But, you know, a lot of people talk about 2050, and if you're really excited even about 2030, if you get really excited about a 30% to 50%, you know, reduction in CO2, then great news. You can fly Frontier today. You don't have to wait 10 to 20 years to get it from a lot of the greenwashing people across this industry around this globe. And so sustainable aviation fuel is an excuse to not reduce CO2. Remember, it's reduce, reuse, and recycle. And where we are today is we're in the unique position that we offer consumers the ability to save the planet and save money at the same time, which gives you kind of ESG without compromise. Now, as far as the debt, I'm not sure I understood what you were talking about the debt versus everybody else, but Jimmy is intrigued and staring at the phone.

Yes, Stephen, I hope you're keeping well. Look, we're very proud of the fact that we've managed through COVID without adding substantial debt to the business. We talked about this in the IPO and I've talked about it since. We added about a dollar a passenger of debt, whereas the rest of the industry added approximately $20 per passenger when you amortize their debt and then they have to service that over the next five years or so. Our objective at the moment is to actually clear out the government loan and pay it down. And that puts us in a very, very good and unique position across the industry. And then, you know, one of the things that we've learned through the COVID process is the value that's inherent in the loyalty program that we have in our brand assets. And that puts us in a really, really strong position from a balance sheet perspective in the airline. As you emerge from COVID, not having tapped that liquidity to bolster your balance sheet and operate through through the pandemic. And so our anticipation is you get to sustained recovery, get back to cash flow, strong cash flow generation as you progress through 2022. And that puts us in a really strong position to grow this business.

Super helpful. Really appreciate the cover, guys. Thank you. Sure.

We have your next question from Andrew DeDora with Bank of America. Your line is open.

Hey, good afternoon, everyone. Just two quick ones from me. I guess first, Barry, do you have a sense of what percentage of your passengers connected onto you from an international destination pre-pandemic? I'm just trying to get a sense of what the easing of these international restrictions could mean for you.

So international from other metal, another airline, or international on us?

From another airline, yes.

If this is Daniel, it's a tiny, tiny number of customers. On balance, is it marginally helpful? Is it marginally helpful? It's very marginally helpful, but it's not meaningful to us in any way.

Got it. Makes sense.

I would just add, though, on the international, the average consumer, I mean, we all follow it every day. But getting rid of these restrictions across the board is good for all international, whether it be near international, wide-body, long-haul. When people are confused, especially less sophisticated leisure travelers, they just stay away. So getting all these restrictions removed is good for all types of air travel.

I hear you. Barry, just a clarification. from your earlier commentary around revenues getting back to 2019 levels by the spring. Did you mean total company revenues back by the spring, or were you talking about unit revenue or revenue per passenger metric? Thanks.

I'm talking about RASM, unit revenue. RASM, okay.

Okay, thank you.

We have your next question from with Suskihanna. Your line is open.

Good evening. Thanks for taking my question. So two questions, both around RASM. The first, so the comment that you expect to be profitable by the spring, assuming the current trajectory of demand continues. I'm curious, what are you assuming with respect to U.S. domestic capacity for the industry? Because it sounds like, based on your prepared remarks and the COVID data, with the vaccination data and new therapeutics that this sort of next bucket of capacity, certainly with respect to long haul capacity going back to their natural markets, and it sounds like you're optimistic around business. Curious, you know, what gives you the confidence at this point, that fares will be strong enough to offset what will likely be a meaningful step up in domestic U.S. capacity into the first half?

I think we're basing that off what we've seen the last week, last two weeks, and what we've seen build up over the last couple of months, and then adding on to that further acceleration in overall volume. And if we're now touching 2019 fares and ancillary combined. So total revenue per passenger is starting to touch 2019 levels. So if that holds up, I think you can cover it. Then the difference becomes fuel, effectively. And so we think there's several more shoes to drop from a positive perspective when we look between now and spring break. And as I mentioned, getting the 5 to 11-year-olds vaccinated, they're just now starting to get there. They're not all fully vaccinated. The boosters are just now being rolled out. But the therapeutic pill is, again, additive. And then you throw on that that you've got the return to office in January. You've got the wide bodies leaving and going back to their natural international markets. And so all of these should be constructive for domestic demand and capacity balance.

Okay. And then the second question, also a rousing question, your decision to at least temporarily walk away from some of these higher cost airports. Obviously, that should help in terms of a per trip, and I'm guessing a network chasm, but is there any impact with respect to network RASM? And I'm going to guess no, because you're more of a point-to-point carrier, but Should we think about that being a positive or negative as we think about system RASM into 2022? Thank you.

So this is Daniel. We think about this on a margin basis. So the airports that we're pulling out of, the costs are so far above our system averages, we believe it's margin accretive to move the flight to other airports. That's how we're making these decisions. And that's our opportunity. We've moved to significantly lower cost airports. Even if there's a slight RASM penalty in the process, the margin benefit is there.

Okay. Thank you.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Barry Biffle, President and CEO, for any closing remarks.

Thanks, everyone, for joining the call today. If you have any further questions, please reach out to Susan and the team, and we look forward to talking with you again soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.