Frontier Group Holdings, Inc.

Good day. Thank you for standing by. Welcome to the Frontier Group Holdings, Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, David Erdman, Senior Director of Investillations. Please go ahead.

Thank you. Good morning, everyone, and welcome to our second quarter 2024 earnings call. On the call with me this morning are Barry Biffle, Chief Executive Officer, Jimmy Dempsey, President, Mark Mitchell, Chief Financial Officer, and Bobby Schroeder, Chief Commercial Officer. Before yielding, I'd like to recite the customary Safe Harbor provisions. During this call, we will be making forward-looking statements which are subject to risks and uncertainties. Actual results may differ materially from those predicted in these forward-looking statements. Additional information concerning risk factors which could cause such differences are outlined in the announcement we released earlier, along with reports we file with the Securities and Exchange Commission. We will also discuss non-GAAP financial measures which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement. So I'll give the floor to Barry to begin his prepared remarks. Barry?

Thanks, David, and good morning, everyone. Despite industry oversupply across the United States, we effectively navigated the quarter due in part to our network and revenue diversification combined with our unique and improved cost advantage. While consumer travel demand has remained resilient, post-pandemic travel patterns have compelled us to concentrate our flying on peak days. Coupled with the maturity of the new revenue initiatives and our unique cost advantage, we believe we will drive margin improvement and be the clear low-cost winner in 2025 and beyond. Our cost advantage is bolstered by the program we launched late last year, which has generated more than $100 million in annual run rate savings tied to the network simplification, and I'm confident there's more to come. To mitigate excess industry capacity headwinds, we quickly responded by adjusting our post-summer capacity to focus on peak days of the week, which we believe will drive RASM improvement and ultimately margin growth in our business. In addition, we're also adjusting our fleet plan to accommodate for moderating growth over the next several years. This morning, we announced a revised delivery schedule with Airbus, which defers 54 aircraft out of 2025 through 2028, reducing our planned growth to approximately 10% per year from the previously expected high team growth. Moreover, we continue to optimize our suite of products and services to better align with customer demand. During the quarter, we launched the new Frontier, which provides clear upfront pricing and options, along with additional benefits. We'll also soon launch a new app in NDC, A new website early next year and all of this will improve the customer experience and ultimately drive higher revenue per passenger. Before yielding the call, I want to extend my gratitude to every member of Team Frontier for their resilience and determination in the face of this challenging landscape and for remaining focused on our top priority of delivering a safe and reliable experience for our customers following our mission of low fares done right. I'll now turn the call over to Jimmy for a commercial overview.

Jimmy? Thanks, Barry, and good morning, everyone. Briefly recapping the quarter, total operating revenue increased by 1% to $973 million on capacity growth of 13%, both compared to the 2023 quarter, resulting in RASM of $0.921. Departures increased 26% on a 13% shorter average stage. Total revenue per passenger was $109, down 14% versus the 2023 quarter, largely driven by the impact of domestic seat growth, which has outpaced seasonal demand trends during a period in which we were transitioning our network and implementing several key product merchandising and distribution enhancements, including the new Frontier. Our network simplification strategy has been to focus on high fare, underserved markets. This year, we have launched our four new crew bases and five new maintenance bases to support the network transition to over 80% out-and-back flying. During the quarter, we opened Cincinnati, Chicago, and San Juan. in addition to Cleveland in March, optimizing the total base footprint to 13. As part of the structural shift in the network, we launched 114 new routes from our 13 bases. Consistent with historical averages, we have seen encouraging results on two-thirds of these markets, and we have made adjustments to the markets that did not stimulate. As a result of our focus on peak-day flying, capacity is expected to grow by 4% to 6% in the third quarter and 5% to 7% for the full year versus 2023. While consumer travel demand has remained resilient on peak days of the week, post-pandemic travel patterns compelled us to concentrate our flying on peak days to capture a relatively higher RASM. Accordingly, beginning in mid-August through the end of the year, we trimmed capacity on off-peak days of the week. To size the adjustments, less than 30% of September seats for sale today are scheduled on off-peak days compared to approximately 40% in September 2023. In addition to our own capacity adjustments, the post-summer capacity cuts from other carriers should start to restore a balance in the domestic market. In fact, in the past month, we've observed fare increases and the elimination of the lowest promotional fares, augmenting our own self-help measures. In June, we reached targeted levels of out-and-back flying and it helped drive an improvement across key operational metrics, including on-time arrivals and departures and controllable completion factor. Our swift recovery from last month's IT-related disruptions further validates its working. while certain other impacted carriers struggle to reset their operations in a timely manner. Furthermore, it helped drive our cost performance in the quarter as we realized significant savings as a result of our network simplification. Bobby Schroeder, our new Chief Commercial Officer, will walk you through several key product merchandising and distribution enhancements, including the new Frontier.

Thanks, Jimmy, and good morning, everyone. Making sure our customers have the best possible value with a great experience is what drives us at Frontier Airlines. As part of this goal, this quarter, we launched the New Frontier. This initiative marks a major step in our commitment to delivering unparalleled value and a superior travel experience. With the New Frontier, customers now see clear and straightforward pricing of fare and bundle options immediately after their search, making it easier to understand the total cost of their trip from the start. The New Frontier has been very successful. Initially launched on flyfrontier.com only, it is now outperforming other channels. This success has led us to roll it out or is leading us to roll it out to our mobile app shortly and to third parties over time. Additionally, our Upfront Plus and BizFair products continue to perform exceptionally well. Upfront Plus offers our customers a seating experience with a block middle seat at the front of the aircraft that far surpasses other premium economy seating options in the marketplace at a great price. The positive reception of this premium product has far exceeded our expectations. BizFair, our bundled product upsell and third-party channels, has also been successful. We initially focused our launch in online travel agency channels, which are primarily leisure customers. We are now leaning more heavily into travel management companies and corporate online booking tools with BizFair, which are more focused on business travel and a distribution channel that we have been more limited in historically. Looking ahead, we are thrilled to announce the upcoming launch of a new mobile app shortly and a new website early next year. These platforms are being designed with the user experience at the forefront, offering enhanced functionality and better looking, better booking processes. The new app and website will also allow us to bring new products and services to market more quickly and enable us to merchandise in more effective ways, significantly improving our customers' digital interactions with us. Moreover, we are in the final stages of integrating NDC or new distribution capability connectivity. This advancement will enable us to offer a richer, more dynamic shopping experience across various sales channels. With NDC, customers will benefit from greater choice and tailored offers, ensuring they receive the best value service. Together, these developments underscore our ongoing dedication to innovation and excellence in every aspect of our business. We are confident that these initiatives will strengthen our market position, enhance the overall travel experience for our customers, and drive overall loyalty. That concludes my remarks, so I'll now yield the time to Mark to provide a financial update.

Thanks, Bobby, and good morning, everyone. Total revenue was $973 million, slightly higher than the comparable 23 quarter. Fuel expense was $288 million, 18% higher than the 23 quarter, at an average cost per gallon of $2.84. The year-over-year increase in fuel expense was the result of 6% higher fuel prices and 13% higher consumption resulting from higher ASMs marginally offset by increased fuel efficiency compared to the second quarter. Adjusted non-fuel operating expenses were $660 million, $45 million below the low end of our guidance, due primarily to better-than-expected cost performance supported by our network simplification efforts and the cost benefit from the aircraft lease extensions we executed during the quarter. Adjusted CASM ex-fuel was 6.24 cents, 10% lower than the 23 quarter, or 5.92 cents on a stage-adjusted basis, 16% lower compared to the 23 quarter, due to the cost benefit from having five additional aircraft sale-leaseback transactions in the quarter and the cost benefit of the aircraft lease extensions, along with the aggressive cost management across the organization that helped mitigate year-over-year inflationary impacts supported by network simplification. Second quarter adjusted pre-tax margin was 3.3%, reflecting the impact of the excess domestic industry capacity as previously highlighted. We ended the quarter with $658 million of unrestricted cash and cash equivalents and $206 million of cash net of total debt, an increase of $50 million versus the prior quarter. We had 148 aircraft in our fleet at quarter end, after taking delivery of six A321neo aircraft during the quarter, all financed with sale-leaseback transactions. We expect to take delivery of 11 A321neos in the second half of 2024, and we have financing arranged for our aircraft deliveries into early 2026. As Barry mentioned, we recently updated our delivery profile with Airbus, which deferred 54 aircraft deliveries in 2025 through 2028, as compared to our delivery profile as of the end of Q1. The delivery profile for our remaining 187 aircraft for 2025 and onward is extended from 2029 to 2031. The deferrals further support our efforts to moderate growth. They also reduce our financing needs and lower pre-delivery payments in the coming years. Our third quarter and full year 2024 guidance was published in the earnings announcement we issued this morning, Recapping key highlights, full-year adjusted CASMX fuel, stage-adjusted, is expected to be down 1% to 2% versus the prior year, despite the significant capacity reduction since our last guidance update in May. Our adjusted pre-tax margin in the third quarter is expected to range from a loss of 3% to 6%, which includes an estimated 4 percentage point impact from the Microsoft CrowdStrike outage in July and weather-related impacts, including Hurricane Debbie. Full-year adjusted pre-tax margin is expected to be in the range of minus 1.5% to positive 1.5%. With that, I'll turn the call back to Barry for closing remarks.

Thanks, Mark. While we're disappointed in the industry capacity imbalance relative to demand and its effect on our revenue and margins, we're encouraged by our cost and revenue tailwinds which coupled with our expectation of additional industry self-help measures in the months to come, ensures we will be the clear low-cost winner in 2025 and beyond. Thanks again for joining us this morning. We're ready to begin the Q&A portion of the call.

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Brandon Oglinsky with Barclays. Your line is open.

Hi, this is John Dorset on for Brandon. Thanks for taking my question. In the release, you commented that RASM is supposed to inflect into the fourth quarter. How many bookings do you currently have today that will give you confidence that RASM will inflect positives?

Well, I think what we've got right now is that, and we said it just a moment ago, is that the September fair has actually inflected positive already year over year. And I think that is really before we see a lot of the balance of a lot of the cuts that have happened, and we expect to continue to happen in the fourth quarter. So we expect the RASM inflection to take place in September and beyond, just again, just based off the current trends.

Okay, thank you. And just one follow-up. Earlier in the year, you talked to new markets being RASM accretive. How have they been performing this summer? And is it taking a little longer than previously expected to mature in the new markets?

Yeah, John, it's Jimmy here. Look, you know, anytime you launch new markets, and we've been in the business of doing this for quite some time, you have a maturity profile on the markets. You know, we've launched quite a considerable amount of new routes in the in Q2, and we've seen those mature positively across the summer months and moving into the fall and winter season. What we've done is we've cut the ones that we don't see that are operating well, and what we said earlier is that we usually see about a two-thirds success rate in new routes, and it's consistent among the new route launches during the second quarter that two-thirds of them are working and operating quite positively.

Great. Thank you. Appreciate the time.

Thank you. Now, next question coming from the lineup. Michael Lindenberg with Deutsche Bank. Your line is open.

Oh, yeah. Hey, good morning. I want to take a closer look just on the cost side. I mean, you did come in a lot better. I don't know, $50 million plus. When I go through the line items, a lot of them were actually up in line with capacity. Like, if you had to look at, like, the two or three drivers of of that better cost, what were they? Which sort of line items drove that? Thanks. And then I have a follow-up.

Yeah, no worries. This is Mark. So when you look at the outperformance versus the guidance that we put forward, so we had stronger than expected cost savings from the cost savings plan that we put forward where we highlighted in the release that we've gotten over $100 million of annual run rate savings. So that certainly was a contributor. In addition, during the quarter, we extended some leases. There was a lease return benefit tied to that. That was another component. So those, I would say, were the two primary drivers.

But the big driver and the one that's sustainable is we are delivering on what we laid out last year. to simplify the network, simplify the schedule and the operation, and we're seeing, you know, huge dividends from that, and that's going to continue to accelerate because it was a little bit sooner than we had planned, but we'll definitely see the benefits of that as we round out the balance of the year.

Barry, can I maybe push back on that? I mean, in the quarter, I mean, you definitely had a better completion factor from a year ago. The whole industry did pretty well in the June quarter, but you – You came in last versus the competition on canceled flights, and I just assumed that that was the ramping up of the out and back, opening up some of these new stations. You do see your station operations numbers up. The expense line is up a lot more than your capacity growth. So I actually thought that maybe you were struggling during the quarter, but it sounds like maybe it's just the industry did better on a completion factor basis, and you just happened to come in at the tail end. I don't know.

Well, a couple things. One, Yeah, so we did have some teething challenges with opening the new bases. Those have been, you know, those are behind us. But what really caused it is we had a preponderance of weather that just really hit us in Texas, hit us in Colorado, hit us in Florida. And I think, you know, we just kind of had the bad end of being indexed, I guess, to weather. But I think when you look to July, you can see the bases are mature. The weather was even across the U.S., And if you look at that, you know, we moved up in the mid-pack, and we've got significant jumps now in on-time year over year. And, in fact, I think our completion for July was relatively flat even with that huge technology outage. So, yeah, I think from a reliability perspective, we're really seeing it, and that's benefiting our customers. But on the cost side, we're really seeing a huge, huge benefit there. from the simplification.

Yeah, and just one other thing to add. On the stations front, I mean, you've got to take into consideration stage. So you were looking at the capacity movement, but departures are up, you know, a lot more. And so certainly that is going to, you know, drive stations to move more than you would otherwise expect, you know, just looking at capacity by itself.

And just one other thing I'd add, Michael. One other thing I'd add, Michael, and you and I have talked about this offline, but I think if you look and technology outage shows it again, especially with the out and back, we're the only major airline the only one that has actually not had a multi-day event caused by a weather or some kind of outage, we bounce back every time. And that resilience is because of the schedule and what we've done to construct the business and make it much more reliable. And we expect that we'll continue to get dividends as those bases mature over the next couple of months.

Yeah, no, no, you saw that in the data on like July 20th where everybody was canceling a lot. I know you canceled the night before. I think you only canceled five flights. So you could definitely see it in that data. Thanks for taking my questions.

Thank you. Thanks, Mike.

Our next question coming from the line of Ravi Shankar with Morgan Stanley.

Hi, this is Catherine on for Ravi. Thanks for taking my question. I just wanted to ask about the bundled fares, just kind of what your rationale was there, what are the benefits that you might be seeing, and maybe, you know, what has changed with the market that's now kind of the right time to do this?

Yeah, so this is Bobby Catherine. You know, we launched the new frontier in May, and a big part in that was actually trying to bring forward and make sure that our customers were able to make decisions up front with the the fare itself and the bundles right there in front of them. It's been very successful, so we launched out of the gate with a higher ancillary attachment rate than other channels. That has persisted. Through time, we've done a lot of price optimization that has helped from a revenue perspective there as well, and we see a lot of opportunity in the future as we look at more price optimization and merchandising opportunities as well. Look, this is something that when you're in this environment, the value that we're creating and bringing forward is for our customers and people shopping to be able to see that total price up front. And that's something that was further down the path when they were doing a search. And so we're losing eyeballs in terms of people being able to see that, and we've gained that quite a bit. So it's been very successful. We see that as a creative, and frankly, as we get into Patrick O' On future months and as the environment is changing. We see this as a big benefit for us going forward.

Thank you. And if I could just sneak in one more just curious if there's a risk of the industry growing too much capacity on peak days. Patrick O' And whether or not you're confident that current travel patterns are kind of stabilizes like the new normal with peak first off, etc.

Well, I think, so in our case, you know, we looked at where we make money and where we've been losing money here recently with the oversupply. And the midweek has been losing money on balance, on average. And so for us, that makes sense to reduce that. that oversupply. We've made those changes, and that'll be a run rate going forward. I can't speak for the industry overall. I think there's probably not just midweek. I think there's probably routes and overall capacity that needs to come out. We see several hundred routes for the high-cost carriers that are up at least 50% or more capacity versus 2019. And I think there's over 150 of them that the capacity's more than doubled just of the high-cost carrier capacity. So, you know, we look forward. There's a lot more capacity to come out. That's why they stopped losing money and stopped doing things that lose money, and I suspect that the industry is going to respond to that.

Thank you. Thank you. Our next question coming from the line of Scott Groove with MOVE Research. The line is open.

Hey, thanks, guys. So I think the guidance now implies that fourth quarter capacity flat to maybe even down a little bit year over year. How should we think about capacity in 25? And in a world where you guys are now deferring some aircraft, any color on how to think about the LV SPAC gains going forward?

Yeah, look, so as far as 25, we haven't finalized 25 yet, but we expect that to be single digits, maybe upper single digits, but mid to upper single digits on capacity. But as far as CERA leaseback gains, you know, what we announced today was already kind of in the works. I mean, this has been kind of what we've been operating under, if you will, for over a year now, effectively. What happened was when Airbus had all these delays over the last couple of years, they kept deferring aircraft. And unfortunately, it made, in future years, the capacity stream got very lumpy. And so this enabled us to smooth that out and also control the capacity to be at that 10% or, in next year's case, slightly lower. But we don't see a major impact from our expectations to sell leaseback gains. I mean, we'll have roughly the same amount of aircraft next year as we have this year, as an example.

Okay. I want to just, you're talking a lot more about more peak and less off-peak. You know, your model's been so much about utilization, and that was, you know, for over the last year or so, we need to get our utilization back to where it was. Like, how much of a headwind to utilization is this new approach?

Yeah, in rough math, we're looking at about an hour. And, you know, you can do the math. You can go look at our rent line. And what that does to the cost, it's somewhere in $60 million range of aircraft rent. But we think that that headwind is more than overcome. And so a slight impact to CASM, but several points in RASM, and that goes straight to the bottom line. So we think this is worth several points in margin, which is where you look at kind of our implied RASM and guide for the balance of the year. We see this is very accretive. And, again, I'll reiterate what we said a while ago. We're now seeing fares up for September year over year, and we expect that trend to continue.

And if I can just ask one more. So, you know, you and others now sort of leaning into premium. Is there any data you have that says, hey, here are new customers to Frontier that have, like, people that were reluctant to fly you in the past that are now flying with you for the first time in a premium part of the plane? I don't know if you understand what I'm trying to ask. Any data you have around that?

Yeah, I understand what you're saying. Look, I think it's very new, and these products are very new. It's been accretive to us, and we've been really pleased, whether it be the Biz Fair that we've launched, whether it be our Upfront Plus and all of the premium stuff that we've put out there. We're really pleased with it. But it's been mainly upsells to our existing customers on our website. Although the Biz Fair is enabling us to kind of reach into those third-party channels and introducing new people to the Frontier brand. And it's been a pretty good success. So we're just now getting those things dialed in, and there'll be a lot of maturity over the next 12 to 36 months on all these products. So I think over time, people will find us out when their corporation has them book on us because the travel management companies that we've been making ourselves available in those channels. But it's slow to mature.

Yeah, and I would just add on the seat side, you know, one thing that we have on that, the pre-verse post, so we made a transformation with upfront plus, premium, and preferred, and the take rate of the sort of time period after has increased along with the yield, so it tells you that people are engaging with that product at a much higher rate on the premium seating products that they did before, and that's just in its maturity phase, so we anticipate actually being able to yield up on that even more in the future with some of the merchandising and pricing tools that we're going to be using.

Thank you, guys.

Thank you. Our next question coming from the lineup. We sit with Raymond James. Your line is open.

Hey, good morning.

If I might just follow up on Mike's question earlier on the non-fuel optics. Is the step up from 2Q to 3Q, even though capacity is not necessarily stepping up, a function of you just don't have that lease extension benefit? Or I was kind of curious what's happening there. And then as you slow your growth next year, I know it's still early days, but any kind of color on how we should think about unit cost trajectory?

Yes, I mean, specific, Savi, to Q2 to Q3. So when you think about that move, certainly a portion of it is the lease benefit that we had in Q2 tied to the lease extensions. There's also a little bit of maintenance timing. And as you're going through the adjustment in capacity, there is a little bit of stickiness in some costs as you go through that transition. But at the end of the day, I think those are the main drivers when you look at the guide versus the 660.

That's helpful.

Any color on how we should think about as you slow your growth to, I think, again, high teens to now maybe 10%, I think, on the longer term, but maybe even kind of high single digits next year?

Yeah, I mean, so, you know, as Barry mentioned, right, so the utilization, you know, component, so, I mean, if you put it in terms of, you know, the cost-saving plan, right, that we had put forward where we're targeting, you know, $200 million, you know, a portion of that plan, you know, tied to the utilization that's being traded for, you know, the RASM benefit. The remainder of that is on track, you know, the $150 million to hit that annual run rate by the end of the year. And then keep in mind as well, Sabi, when you look at where we sit at Q2, our cost advantage has widened to 45%. And as we look into next year, on the back of the cost savings plan and other initiatives that we have, we expect to be able to sustain and leverage that cost advantage.

Makes sense. And can I clarify on the four-point impact from weather and CrowdStrike? How much was CrowdStrike?

So we haven't finalized everything. To be clear, we got hit by the Microsoft outage, which was the day before. A cruel coincidence, unfortunately. But the afternoon before Microsoft actually had an Azure outage, which impacted our sales and operations from pretty much 4 PM onward. And so we had several hundred cancellations from that. We had just recovered. from that around midnight or so Denver time, and that is when the CrowdStrike hit took place. So we're still sorting out which parts went to CrowdStrike, which part goes to Microsoft, but it's in the 20 million plus range and roughly two points in margin degradation.

All very helpful. Thank you. Thank you. Our next question coming from the line of Glenn Penningford with Evercar ISI. Your line is open.

Hey, thanks. Maybe just to pick it up right there. So that $20 million, is that something you're going to look to recover?

We don't discuss those types of things yet, but you would expect we will look to recover every penny.

And then I guess just given all the changes you're making on how you price your product, how are you thinking about the evolution of base fares versus ancillary? Is there a new target for ancillary? And I guess what is the risk that we're now selling bundled total fares at the same base fare level you were previously selling unbundled fares?

Look, I think we're moving to a total revenue per passenger and looking to get to a RASM that gets us back to double-digit margins. That's our target, right? And so whether it comes from fair or comes from ancillary, we think we went too far with the fair side, and we think this dials us back in. It is obviously a risk, right, that we give up too much, and that's what dialing it in is all about. But I can tell you that we believe with the trends we've seen, we've seen significant improvements in the last six weeks. We've got some more technology updates to make to give us more merchandise and control over the next several weeks. But we see that this is going to be accretive, especially as we move kind of out of this more low fare environment. You know, we mentioned that the fare is going up. We've seen a fare increase recently and we've seen, you know, structurally, you know, a lot of the promotional fares across the industry are kind of being removed out of the marketplace. So as that kind of you know, environment improves, I think people look at the value of Frontier. And I think when you couple that with the overall new Frontier, and I think you compare it to, you know, a carrier that just announced a big change in seat assignment, as an example, this is exciting because this is really leveling the playing field. This is going to make it very simple for you to compare our product versus them. And the only difference will be bags. And you can quickly go compare the difference. And in fact, you get a lot more with Frontier because you can go to the New Frontier and see the four options that we offer, and there's far superior seating options that you can get on other carriers in kind of our price point.

Thanks for that, Barry. And then maybe just lastly, can you speak to the market for sale leasebacks in the way that you structure them? Is that marketplace stable, getting looser, getting tighter? Any thoughts? And I guess did that relate at all to the decision to defer?

Yeah, so Duane, this is Mark. So as we mentioned on the prepared remarks, I mean, we have financing arranged into 26. And when you step back, and we're not going to get into the details of those terms, but I mean, the market continues to remain to be healthy for us as we look forward. So we don't see any issues on that front.

And I would just add, too, Duane, this was not, didn't have anything to do with financing. It had to do with Airbus' challenges and their, you know, kind of their delays, and they kind of created kind of lumpy, and when they started delaying aircraft, they piled them up in certain spots, and this enabled us to smooth those out. But I would just say about the leasing community, and, you know, I've gone around the world this year and met with a lot of leasing companies and personally been talking to a lot of them, And I got to tell you, there's a lot of interest in Frontier. I mean, I know investors and these people look very short term, but if you lease us an airplane, you are committing to eight, 12 years with us. And what they see and what they're excited about is there was this whole story last year, and it's continued to be repeated, about cost convergence. And what we have actually shown is that we are not converging in cost. Our cost advantage is widening. it's getting bigger and if you look at the structural things we've done to schedule we've got more to come in that regard so we see that cost advantage being being real there's an oversupply in the United States but what leasing companies do is they understand what the long term is and they know that that oversupply will be addressed and that low cost will win and low cost will again matter and that's why they're betting on frontier we haven't seen one change at all if anything I'd say there's more people interested in in us than there was before because they see us as kind of last man standing in the U S marketplace as we move forward.

Okay. Appreciate the thoughts.

Thank you. Now, our next question coming from the lineup, Stephen Trent with city.

Yes. Good afternoon, gentlemen. And thanks very much for taking my question. Um, I was intrigued by what you said about new route launches. I think you said 114 new routes from the 13 crew bases, but then you end up pulling some of them back when they don't perform, you know, any high level view on what sort of time tolerance you have for these routes to start performing before you decide to pull them and how that might possibly differ from what you see from your competitors. Thank you.

Yeah, Stephen, look, we see there's two time periods that you see with new route launches. Obviously, the booking is coming into the launch of the actual flight, and you can see performance into that. And then beyond that into the period after, we've seen on two-thirds of the routes, like we did launch over 113 routes, I think it was, in the last couple of months. We've seen some of them not perform and what we do is we address them pretty promptly, particularly as you move out of the seasonal peak part of the year into seasonal off-peak periods. Some of those roots may come back next year, but we see those being removed going into the fall and winter months. And then we obviously work the ones that we're keeping and we see two-thirds of those roots performing and continuing to mature. And it will take up to about 12 months for those to mature back to system-level performance. And so we're investing in those routes and ensuring that they get to system-level performance over the next 12 months.

Appreciate that, Jimmy. Thank you. And as my follow-up, I know there's been noise out there about the Department of Transportation wanting the industry to be more transparent about X, Y, and Z and have all these disclosures on fees and what have you. You know, what's the latest on what you guys are seeing and, you know, to the extent that some of these DOJ decrees are concerning?

Yeah, look, you know, I can't speak to all the, everything going on with the government and what they're digging into. But, you know, we believe with the new frontier, you're able to see what you want up front and you can make a decision very clearly. We are worried, however, that there are third parties that we partner with that don't have the capabilities to make sure that everything is communicated up front. So I think the way that some of these rules have been constructed, I think they're not easily complied with. But we believe that we are more than complying with the spirit of it. of what they're looking for with the new frontier. And we think this is, you know, there's not much there. I think, honestly, I do hope that the DOT follows up on what they've said, though, that they want to look at competition. We continue to see challenges with common-use gates in this country. We continue to see challenges with, you know, kind of fortress carriers working with their relevant local airports to create environments that are not conducive to growth airlines operating safely and reliably, nor do they allow us to grow in a good way. So we look forward to seeing the DOT following through with its commitment to digging into this and getting a thorough investigation into the practices that are taking place because we feel it's beyond anti-competitive.

Okay. I appreciate that, Barry. Thanks for the time.

Thank you. Our next question, coming from the lineup, Connor Canningham with Millie's Research. Your line is open.

Hi, everyone. Thank you. Just on the load factor decline in the second quarter, you know, seven points, you know, fares came down quite a bit. I would have thought that lower fares would have stimulated demand a little bit. I understand that there's oversupply, but is it really just a function of where off-peak is relative to peak today? Thank you.

Yeah, look, I mean, we've gotten to the point where I think we have truly found all the demand there is. I mean, we have consistently sold fares in a penny to a dollar plus taxes and fees on a Tuesday, Wednesday, and not gotten full, which tells you that there's just not that much demand. And, you know, we called this out, and I think we got a lot of grief for it a year and a half ago that we called this travel pattern out. And there was, I think, some hope that, you know, last Labor Day, that there was a lot of return to office was going to help mitigate this and change it. But we're now several years into this. And so the travel patterns have become clear to us, and we're going to stop pushing on a string with this. Because it is clear to us that with the flexible work or, you know, kind of work from home on a couple days a week, the two most common days that they're in the office is on Tuesday, Wednesday. And it has caused an environment where there's just not the demand. And it's not just us. You can go look at your TSA numbers. You can go stroll through your favorite airport, and you'll just see it. I mean, there's just not the traffic in the airport. And this is a function of the travel patterns for the leisure people, but also the fact that business is still down 20% to 25%. And so we see this to be a semi-permanent change, and so we're going to stop organizing our business around it. We recognize we have too many pilots, we have too many flight attendants and everything in the near term, and we're carrying those costs in the third and a little bit of the fourth quarter until we can kind of grow into it until this reset takes place. But the reality is we think that this is kind of the new norm. The problem is if they don't have those days off, it's hard for them to travel even if the fare is near free.

Okay, that's helpful.

And then in February, you laid out a plan to get to, I think it was 10 to 14% pre-tax margins in 2025. Obviously, a lot has changed since then. One, are you continuing to expect that target, just given the fact that all the product changes you're making the cost savings? I'm just curious on how you're thinking about that target that you laid out not too long ago. Thank you.

I think if anything, we're getting more confidence in that target. I think it's moved a little bit to the right. because of the oversupply. But, you know, this is temporary. This is a one- to two-quarter thing. And I think the most encouraging thing that I've seen is that, you know, pretty much universally the industry is responding to this capacity imbalance with demand. And history shows you that once people start cutting, they're not going to stop until they get to their target margins. So we see a lot of – we still see a lot of excess capacity. with several carriers out there, and we think that there's going to be a lot more coming. So yeah, it may take us a quarter or two further than we had, but no, we feel better about the target than ever. And it's become clear, too, I mean, we said this back in February at the time, and we've debunked this cost convergence thing several times, but it has now become clear that our cost advantage is real, it's durable, it's sustainable. And when we look into 2025, we see that continuing to expand. And so that's why we think that we will more than get there with all the industry capacity cuts that we expect over the fall and through the winter.

Appreciate it. Thank you.

Thank you. Our next question coming from the lineup. Tom Fitzgerald with TD County. Line is open.

Hi, everyone. Thanks very much for the time. I'm just kind of curious your view on with the stage length going down, how large the premium opportunity could really be. It seems like the shorter the stage length, the less appetite there is to pay up the cabin, but I could be thinking about that the wrong way.

Well, hey, first, thanks. Congratulations on the new role there. So good to have you. Yeah, look, so... At the end of the day, whether you're sitting on a plane for an hour or four hours, people like a slightly better seat. Whether you're in that plane for an hour or four hours, some people like the window and some people want an aisle because they want to be near the bathroom. It doesn't change that. So while there's a propensity for them to value it more, it doesn't mean they don't value it. And so from our perspective, what we've just seen with the oversupply You know, it's been more acute in some of the longer halls. But yeah, we're seeing good take rate. I mean, I don't know that we're going to actually ever know what it could have been on the longer stage because we may not have that stage ever again. But we're seeing good take rates on it.

Okay, thanks. That's really helpful. And then I guess just... If you know whether it's the macro or other issues, but if things if the downside scenario starts to play out, do you have any further flexibility with with airbus either deferring orders or cancel because sometimes it just seems like the best solution is less points and more. Thanks again for the time everyone.

Yeah, look, I mean, where we're at, we believe, you know, that we can be profitable on the peak days. So it's not a shell count issue. It's more of a day-a-week issue and probably more season issue. So I think the flexibility that we might need in that scenario, we've already demonstrated we have. We can adjust that capacity. But I think that from a shell count, we don't see a need for that in our business. And I would also remind everyone, we're the lowest cost provider, and that cost advantage is widening. And in any kind of recessionary environment, we're going to revert back to the mean. And that is Walmart, Costco, and the low-cost carriers win in recessions.

Thank you. Our next question coming from the lineup. Andrew Dior with Bank of America. Your line is open. Thank you.

Hey, good afternoon, everyone. Hi, Barry. On the load factor point, if you feel like you've tapped kind of all the demand there, why is 10% growth the next few years the right level, and why not keep maybe pushing out deliveries and cut capacity over the next few years?

Well, the issue is that it was primarily the off-peak days. So it's not an overall – situation. It's more off-peak. We were also hit in the fourth quarter. We still had a lot of the oversupply stuff. We were in the middle of launching the new routes. You had a lot of new routes, and you also had still many of the oversupplied routes. As we continue to grow the demand pool, we're up 50%. By the time we get to the fourth quarter, our total revenue pool is up 50% year over year. is when you look at the overall, all the O&Ds we're in. So we just don't see that being a challenge. We're already seeing the load factors recover, and we're seeing the fares recover, as I mentioned a while ago. The September fare is up, and we see it going up from there on moving forward.

Okay, understood. And then two quick modeling questions. Mark, maybe – One, what stage length are you using or are you factoring in this year just so we can get to an actual chasm number from the stage length adjusted chasm guide that you gave? And then just in terms of the order book change, when we think about the 21 planes coming in next year, just from a sell, leaseback, gain perspective, anything change there or should we continue to model in the recent rate of, say, $12 to $13 million per plane or will that come down? Thank you.

Yeah, so two things. So from a stage perspective, roughly 850 would be the stage to target. And then when you look at the 21 aircraft next year, the only nuance when you look this year to next year is that we do have about roughly a third of those deliveries next year were going to be 320s versus this year they were all 321s.

So a lower rate per plane?

Yeah, the 320 is coming in at a bit of a lower rate than the 321. So you just have that mixed nuance. Outside of that, I think that's the only thing to factor in.

Got it. Thank you.

Thank you. Our next question coming from the lineup. Jamie Baker with JPMorgan Securities. Your line is open.

Hey, thanks for the questions. This is James on for Jamie. Most of the questions have been asked. Just thinking about the capacity that's been taken out of the system in the second half of the year, you talked about peak versus off-peak. Is there any geographic way you can break that down? There's been Latin America pressures in prior quarters. Is that the driver of that or are there other markets out there or types of markets that you're pulling from?

Look, I think the only market or city that we, I think, were really disappointed in was actually New Orleans. You know, when we look at the rest of the network, things kind of hit the averages, but I think New Orleans did drag it down. You know, we don't completely understand what happened there, but it just universally did not stimulate.

Okay, that's fair. And then... The new rules that mandate a refund for a three-hour plus domestic delay, just high-level thoughts. Are you seeing passengers that take that, that are seeking that compensation, or do you think they stick around for a rebooking?

We haven't seen a big change on that. I mean, the reality is that it's more troublesome. I mean, a three-hour delay is uncomfortable and disappointing, but... you know, oftentimes when we have that delay, everyone else has the same delay. Right. Because they're generally weather related. It's not even measurable. I'm looking around the room. We haven't noticed anything measurable on that.

Got it. I appreciate the questions.

Thank you. And with that, I will turn the call back over to Barry Biffle for any closing comments.

Hey, I want to thank everybody for joining us today. Again, I wanted to reiterate we're disappointed in the environment, but the good news is we're seeing green shoots with that, and it looks like the bottom is in. I think you're going to see further capacity rationalization as we move through the coming months and into the winter, and we're really excited about the kind of self-help that we've taken and all of the tailwinds that we've got on the revenue side as well as the cost side. So we look forward to talking to you next quarter and updating you on the success with that. Thanks for joining.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation.

You may now disconnect. Bye. music music Thank you. Thank you.

Good day. Thank you for standing by. Welcome to the Frontier Group Holdings, Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, David Erdman, Senior Director of Investillations. Please go ahead.

Thank you. Good morning, everyone, and welcome to our second quarter 2024 earnings call. On the call with me this morning are Barry Biffle, Chief Executive Officer, Jimmy Dempsey, President, Mark Mitchell, Chief Financial Officer, and Bobby Schroeder, Chief Commercial Officer. Before yielding, I'd like to recite the customary Safe Harbor provisions. During this call, we will be making forward-looking statements which are subject to risks and uncertainties. Actual results may differ materially from those predicted in these forward-looking statements. Additional information concerning risk factors which could cause such differences are outlined in the announcement we released earlier, along with reports we file with the Securities and Exchange Commission. We will also discuss non-GAAP financial measures which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement. So I'll give the floor to Barry to begin his prepared remarks. Barry?

Thanks, David, and good morning, everyone. Despite industry oversupply across the United States, we effectively navigated the quarter due in part to our network and revenue diversification combined with our unique and improved cost advantage. While consumer travel demand has remained resilient, post-pandemic travel patterns have compelled us to concentrate our flying on peak days. Coupled with the maturity of the new revenue initiatives and our unique cost advantage, we believe we will drive margin improvement and be the clear low-cost winner in 2025 and beyond. Our cost advantage is bolstered by the program we launched late last year, which has generated more than $100 million in annual run rate savings tied to the network simplification, and I'm confident there's more to come. To mitigate excess industry capacity headwinds, we quickly responded by adjusting our post-summer capacity to focus on peak days of the week, which we believe will drive RASM improvement and ultimately margin growth in our business. In addition, we're also adjusting our fleet plan to accommodate for moderating growth over the next several years. This morning, we announced a revised delivery schedule with Airbus, which defers 54 aircraft out of 2025 through 2028, reducing our planned growth to approximately 10% per year from the previously expected high team growth. Moreover, we continue to optimize our suite of products and services to better align with customer demand. During the quarter, we launched the new Frontier, which provides clear upfront pricing and options, along with additional benefits. We'll also soon launch a new app and NDC, A new website early next year, and all of this will improve the customer experience and ultimately drive higher revenue per passenger. Before yielding the call, I want to extend my gratitude to every member of Team Frontier for their resilience and determination in the face of this challenging landscape and for remaining focused on our top priority of delivering a safe and reliable experience for our customers following our mission of low fares done right. I'll now turn the call over to Jimmy for a commercial overview.

Jimmy? Thanks, Barry, and good morning, everyone. Briefly recapping the quarter, total operating revenue increased by 1% to $973 million on capacity growth of 13%, both compared to the 2023 quarter, resulting in RASM of $0.921. Departures increased 26% on a 13% shorter average stage. Total revenue per passenger was $109, down 14% versus the 2023 quarter, largely driven by the impact of domestic seat growth which has outpaced seasonal demand trends during a period in which we were transitioning our network and implementing several key product merchandising and distribution enhancements, including the new Frontier. Our network simplification strategy has been to focus on high fare, underserved markets. This year, we have launched our four new crew bases and five new maintenance bases to support the network transition to over 80% out-and-back flying. During the quarter, we opened Cincinnati, Chicago, and San Juan. in addition to Cleveland in March, optimizing the total base footprint to 13. As part of the structural shift in the network, we launched 114 new routes from our 13 bases. Consistent with historical averages, we have seen encouraging results on two-thirds of these markets, and we have made adjustments to the markets that did not stimulate. As a result of our focus on peak-day flying, capacity is expected to grow by 4% to 6% in the third quarter and 5% to 7% for the full year versus 2023. While consumer travel demand has remained resilient on peak days of the week, post-pandemic travel patterns compelled us to concentrate our flying on peak days to capture a relatively higher RASM. Accordingly, beginning in mid-August through the end of the year, we trimmed capacity on off-peak days of the week. To size the adjustments, less than 30% of September seats for sale today are scheduled on off-peak days compared to approximately 40% in September 2023. In addition to our own capacity adjustments, the post-summer capacity cuts from other carriers should start to restore a balance in the domestic market. In fact, in the past month, we've observed fare increases and the elimination of the lowest promotional fares, augmenting our own self-help measures. In June, we reached targeted levels of out-and-back flying and it helped drive an improvement across key operational metrics, including on-time arrivals and departures and controllable completion factor. Our swift recovery from last month's IT-related disruptions further validates its working. while certain other impacted carriers struggle to reset their operations in a timely manner. Furthermore, it helped drive our cost performance in the quarter as we realized significant savings as a result of our network simplification. Bobby Schroeder, our new Chief Commercial Officer, will walk you through several key product merchandising and distribution enhancements, including the new Frontier.

Thanks, Jimmy, and good morning, everyone. Making sure our customers have the best possible value with a great experience is what drives us at Frontier Airlines. As part of this goal, this quarter, we launched the New Frontier. This initiative marks a major step in our commitment to delivering unparalleled value and a superior travel experience. With the New Frontier, customers now see clear and straightforward pricing of fare and bundle options immediately after their search, making it easier to understand the total cost of their trip from the start. The New Frontier has been very successful. Initially launched on flyfrontier.com only, it is now outperforming other channels. This success has led us to roll it out or is leading us to roll it out to our mobile app shortly and to third parties over time. Additionally, our Upfront Plus and BizFair products continue to perform exceptionally well. Upfront Plus offers our customers a seating experience with a block middle seat at the front of the aircraft that far surpasses other premium economy seating options in the marketplace at a great price. The positive reception of this premium product has far exceeded our expectations. BizFair, our bundled product upsell and third-party channels, has also been successful. We initially focused our launch in online travel agency channels, which are primarily leisure customers. We are now leaning more heavily into travel management companies and corporate online booking tools with BizFair, which are more focused on business travel and a distribution channel that we have been more limited in historically. Looking ahead, we are thrilled to announce the upcoming launch of a new mobile app shortly and a new website early next year, These platforms are being designed with the user experience at the forefront, offering enhanced functionality and better looking, better booking processes. The new app and website will also allow us to bring new products and services to market more quickly and enable us to merchandise in more effective ways, significantly improving our customers' digital interactions with us. Moreover, we are in the final stages of integrating NDC or new distribution capability connectivity. This advancement will enable us to offer a richer, more dynamic shopping experience across various sales channels. With NDC, customers will benefit from greater choice and tailored offers, ensuring they receive the best value service. Together, these developments underscore our ongoing dedication to innovation and excellence in every aspect of our business. We are confident that these initiatives will strengthen our market position, enhance the overall travel experience for our customers, and drive overall loyalty. That concludes my remarks, so I'll now yield the time to Mark to provide a financial update.

Thanks, Bobby, and good morning, everyone. Total revenue was $973 million, slightly higher than the comparable 23 quarter. Fuel expense was $288 million, 18% higher than the 23 quarter, at an average cost per gallon of $2.84. The year-over-year increase in fuel expense was the result of 6% higher fuel prices and 13% higher consumption resulting from higher ASMs marginally offset by increased fuel efficiency compared to the second quarter. Adjusted non-fuel operating expenses were $660 million, $45 million below the low end of our guidance, due primarily to better-than-expected cost performance supported by our network simplification efforts and the cost benefit from the aircraft lease extensions we executed during the quarter. Adjusted CASM ex-fuel was 6.24 cents, 10% lower than the 23 quarter, or 5.92 cents on a stage-adjusted basis, 16% lower compared to the 23 quarter due to the cost benefit from having five additional aircraft sale-leaseback transactions in the quarter and the cost benefit of the aircraft lease extensions, along with the aggressive cost management across the organization that helped mitigate year-over-year inflationary impacts supported by network simplification. Second quarter adjusted pre-tax margin was 3.3%, reflecting the impact of the excess domestic industry capacity as previously highlighted. We ended the quarter with $658 million of unrestricted cash and cash equivalents and $206 million of cash net of total debt, an increase of $50 million versus the prior quarter. We had 148 aircraft in our fleet at quarter end, after taking delivery of six A321neo aircraft during the quarter, all financed with sale-leaseback transactions. We expect to take delivery of 11 A321neos in the second half of 2024, and we have financing arranged for our aircraft deliveries into early 2026. As Barry mentioned, we recently updated our delivery profile with Airbus, which deferred 54 aircraft deliveries in 2025 through 2028, as compared to our delivery profile as of the end of Q1. The delivery profile for our remaining 187 aircraft for 2025 and onward is extended from 2029 to 2031. The deferrals further support our efforts to moderate growth. They also reduce our financing needs and lower pre-delivery payments in the coming years. Our third quarter and full year 2024 guidance was published in the earnings announcement we issued this morning Recapping key highlights, full-year adjusted CASMX fuel, stage-adjusted, is expected to be down 1% to 2% versus the prior year, despite the significant capacity reduction since our last guidance update in May. Our adjusted pre-tax margin in the third quarter is expected to range from a loss of 3% to 6%, which includes an estimated 4 percentage point impact from the Microsoft CrowdStrike outage in July and weather-related impacts, including Hurricane Debbie. Full-year adjusted pre-tax margin is expected to be in the range of minus 1.5% to positive 1.5%. With that, I'll turn the call back to Barry for closing remarks.

Thanks, Mark. While we're disappointed in the industry capacity imbalance relative to demand and its effect on our revenue and margins, we're encouraged by our cost and revenue tailwinds which coupled with our expectation of additional industry self-help measures in the months to come, ensures we will be the clear low-cost winner in 2025 and beyond. Thanks again for joining us this morning. We're ready to begin the Q&A portion of the call.

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Brandon Oglinsky with Barclays. Your line is open.

Hi, this is John Dorsett on for Brandon. Thanks for taking my question. In the release, you commented that RASM is supposed to inflect into the fourth quarter. How many bookings do you currently have today that will give you confidence that RASM will inflect positive?

Well, I think what we've got right now is that, and we said it just a moment ago, is that the September fair has actually inflected positive already year over year. And I think that is really before we see a lot of the balance of a lot of the cuts that have happened, and we expect to continue to happen in the fourth quarter. So we expect the RASM inflection to take place in September and beyond, just again, just based off the current trends.

Okay, thank you. And just one follow-up. Earlier in the year, you talked to new markets being RASM accretive. How have they been performing this summer? And is it taking a little longer than previously expected to mature in the new markets?

Yeah, John, it's Jimmy here. Look, you know, anytime you launch new markets, and we've been in the business of doing this for quite some time, you have a maturity profile on the markets. You know, we've launched quite a considerable amount of new routes in recent in Q2, and we've seen those mature positively across the summer months and moving into the fall and winter season. What we've done is we've cut the ones that we don't see that are operating well, and what we said earlier is that we usually see about a two-thirds success rate in new routes, and it's consistent among the new route launches during the second quarter that two-thirds of them are working and operating quite positively.

Great. Thank you. Appreciate the time.

Thank you. Now, next question coming from the lineup. Michael Lindenberg with Deutsche Bank. Your line is open.

Oh, yeah. Hey, good morning. I want to take a closer look just on the cost side. I mean, you did come in a lot better. I don't know, $50 million plus. When I go through the line items, a lot of them were actually up in line with capacity. Like, if you had to look at, like, the two or three drivers of of that better cost, what were they? Which sort of line items drove that? Thanks. And then I have a follow-up.

Yeah, no worries. This is Mark. So when you look at the outperformance versus the guidance that we put forward, so we had stronger than expected cost savings from the cost savings plan that we put forward where we highlighted in the release that we've gotten over $100 million of annual run rate savings. So that certainly was a contributor. In addition, during the quarter, we extended some leases. There was a lease return benefit tied to that. That was another component. So those, I would say, were the two primary drivers.

But the big driver and the one that's sustainable is we are delivering on what we laid out last year to simplify the network, simplify the schedule and the operation. And we're seeing, you know, huge dividends from that, and that's going to continue to accelerate because it was a little bit sooner than we had planned, but we'll definitely see the benefits of that as we round out the balance of the year.

Barry, can I maybe push back on that? I mean, in the quarter, I mean, you definitely had a better completion factor from a year ago. The whole industry did pretty well in the June quarter, but you – You came in last versus the competition on canceled flights, and I just assumed that that was the ramping up of the out and back, opening up some of these new stations. You do see your station operations numbers up. The expense line is up a lot more than your capacity growth. So I actually thought that maybe you were struggling during the quarter, but it sounds like maybe it just... The industry did better on a completion factor basis, and you just happened to come in at the tail end. I don't... Well, a couple things.

One... Yeah, so we did have some teething challenges with opening the new bases. Those have been, you know, those are behind us. But what really caused it is we had a preponderance of weather that just really hit us in Texas, hit us in Colorado, hit us in Florida. And I think, you know, we just kind of had the bad end of being indexed, I guess, to weather. But I think when you look to July, you can see the bases are mature. The weather was even across the U.S., And if you look at that, we moved up in the mid-pack, and we've got significant jumps now in on-time year over year. And in fact, I think our completion for July was relatively flat even with that huge technology outage. So yeah, I think from a reliability perspective, we're really seeing it, and that's benefiting our customers. But on the cost side, we're really seeing a huge, huge benefit from the simplification.

Yeah, and just one other thing to add. On the stations front, I mean, you've got to take into consideration stage. So you were looking at the capacity movement, but departures are up, you know, a lot more. And so certainly that is going to, you know, drive stations to move more than you would otherwise expect, you know, just looking at capacity by itself.

And just one other thing I'd add, Michael. One other thing I'd add, Michael, and you and I have talked about this offline, but I think if you look and technology outage shows it again, especially with the out and back, we're the only major airline the only one that has actually not had a multi-day event caused by a weather or some kind of outage, we bounce back every time. And that resilience is because of the schedule and what we've done to construct the business and make it much more reliable. And we expect that we'll continue to get dividends as those bases mature over the next couple of months.

Yeah, no, no, you saw that in the data on like July 20th where everybody was canceling a lot. I know you canceled the night before. I think you only canceled five flights. So you could definitely see it in that data. Thanks for taking my questions.

Thank you. Thanks, Mike.

Our next question coming from the line of Ravi Shankar with Morgan Stanley.

Hi, this is Catherine on for Ravi. Thanks for taking my question. I just wanted to ask about the bundled fares, just kind of what your rationale was there, what are the benefits that you might be seeing, and maybe, you know, what has changed with the market that's now kind of the right time to do this?

Yeah, so this is Bobby Kaplan. You know, we launched the new frontier in May, and a big part in that was actually trying to bring forward and make sure that our customers were able to make decisions up front with the the fare itself and the bundles right there in front of them. It's been very successful, so we launched out of the gate with a higher ancillary attachment rate than other channels. That has persisted. Through time, we've done a lot of price optimization that has helped from a revenue perspective there as well, and we see a lot of opportunity in the future as we look at more price optimization and merchandising opportunities as well. Look, this is something that when you're in this environment, the value that we're creating and bringing forward is for our customers and people shopping to be able to see that total price up front. And that's something that was further down the path when they were doing a search. And so we're losing eyeballs in terms of people being able to see that, and we've gained that quite a bit. So it's been very successful. We see that as a creative and frankly, as we get into future months. And as the environment is changing, we see this as a big benefit for us going forward.

Thank you. And if I could just sneak in one more. Just curious if there's a risk of the industry growing too much capacity on peak days and whether or not you're confident that current travel patterns are kind of stabilized as like the new normal with peak first trough, etc.? ?

Well, I think, so in our case, you know, we looked at where we make money and where we've been losing money here recently with the oversupply. And the midweek has been losing money on balance, on average. And so for us, that makes sense to reduce that. that oversupply. We've made those changes, and that'll be a run rate going forward. I can't speak for the industry overall. I think there's probably not just midweek. I think there's probably routes and overall capacity that needs to come out. We see several hundred routes for the high-cost carriers that are up at least 50% or more capacity versus 2019. And I think there's over 150 of them that the capacity's more than doubled just of the high-cost carrier capacity So, you know, we look forward. There's a lot more capacity to come out. That's why they stopped losing money and stopped doing things that lose money, and I suspect that the industry is going to respond to that.

Thank you. Thank you. Our next question coming from the line of Scott Groove with MOVE Research. The line is open.

Hey, thanks, guys. So I think the guidance now implies that Fourth quarter capacity flat to maybe even down a little bit year over year. How should we think about capacity in 25? And in a world where you guys are now deferring some aircraft, any color on how to think about the LV SPAC gains going forward?

Yeah, look, so as far as 25, we haven't finalized 25 yet. But we expect that to be single digits, maybe upper single digits, but mid to upper single digits on capacity. But as far as CERL leaseback gains, what we announced today was already kind of in the works. I mean, this has been kind of what we've been operating under, if you will, for over a year now, effectively. What happened was when Airbus had all these delays over the last couple of years, they kept deferring aircraft. And unfortunately, it made, in future years, the capacity stream got very lumpy. And so this enabled us to smooth that out and also control the capacity to be at that 10%, or in next year's case, slightly lower. But we don't see a major impact from our expectations to sell leaseback gains. We'll have roughly the same amount of aircraft next year as we have this year, as an example.

Okay. I want to just, you're talking a lot more about more peak and less off-peak. You know, your model's been so much about utilization, and that was, you know, for over the last year, we need to get our utilization back to where it was. Like, how much of a headwind to utilization is this new approach?

Yeah, in rough math, we're looking at about an hour. And, you know, you can do the math. You can go look at our rent line. And what that does to the cost, it's somewhere in $60 million range of aircraft rent. But we think that that headwind is more than overcome. And so a slight impact to CASM, but several points in RASM, and that goes straight to the bottom line. So we think this is worth several points in margin, which is where you look at kind of our implied RASM and guide for the balance of the year. We see this is very accretive. And, again, I'll reiterate what we said a while ago. We're now seeing fares up for September year over year, and we expect that trend to continue.

And if I can just ask one more. So you and others now sort of leaning into premium, is there any data you have that says, hey, here are new customers to Frontier that have, like, people that were reluctant to fly you in the past that are now flying with you for the first time? in a premium part of the plane? I don't know if you understand what I'm trying to ask.

Any data you have around that? Yeah, I understand what you're saying. Look, I think it's very new, and these products are very new. It's been accretive to us, and we've been really pleased, whether it be the BizFair that we've launched, whether it be our Upfront Plus and all of the premium stuff that we've put out there. We're really pleased with it. But it's been mainly upsells to our existing customers on our website. Although the Biz Fair is enabling us to kind of reach into those third-party channels and introducing new people to the Frontier brand. And it's been a pretty good success. So we're just now getting those things dialed in, and there'll be a lot of maturity over the next 12 to 36 months on all these products. So I think over time, people will find us out when their corporation has them book on us because the travel management companies that we've been making ourselves available in those channels. But it's slow to mature.

Yeah, and I would just add on the seat side, you know, one thing that we have on that, the pre-verse post, so we made a transformation with upfront plus, premium, and preferred, and the take rate of the sort of time period after has increased along with the yield, so it tells you that people are engaging with that product at a much higher rate on the premium seating products that they did before, and that's just in its maturity phase, so we anticipate actually being able to yield up on that even more in the future with some of the merchandising and pricing tools that we're going to be using.

Thank you, guys.

Thank you. Our next question coming from the lineup. We sit with Raymond James. The line is open.

Hey, good morning.

If I might just follow up on Mike's question earlier on the non-fuel optics. Is the step up from 2Q to 3Q, even though capacity is not necessarily stepping up, a function of you just don't have that lease extension benefit? Or I was kind of curious what's happening there. And then as you slow your growth next year, I know it's still early days, but any kind of color on how we should think about unit cost trajectory?

Yes, I mean, specific, Savi, to Q2 to Q3. So when you think about that move, certainly a portion of it is the lease benefit that we had in Q2 tied to the lease extensions. There's also a little bit of maintenance timing. And as you're going through the adjustment in capacity, there is a little bit of stickiness in some costs as you go through that transition. But at the end of the day, I think those are the main drivers when you look at the guide versus the 660.

That's helpful.

Any color on how we should think about as you slow your growth to, I think, again, high teens to now maybe 10%, I think, on a longer term, but maybe even kind of high single digits next year?

Yeah, I mean, so, you know, as Barry mentioned, right, so the utilization, you know, component, so, I mean, if you put it in terms of, you know, the cost-saving plan, right, that we had put forward where we're targeting, you know, $200 million, you know, a portion of that plan, you know, tied to the utilization that's being traded for, you know, the RASM benefit. The remainder of that is on track, you know, the $150 million to hit that annual run rate by the end of the year. And then keep in mind as well, Sabi, when you look at where we sit at Q2, you know, our cost advantage has widened to, you know, 45%. And as we look into, you know, next year, you know, on the back of the cost savings plan and, you know, other initiatives that we have, I mean, we expect to be able to sustain and leverage, you know, that cost advantage.

Makes sense. And can I clarify on the four-point impact from weather and CrowdStrike? How much was CrowdStrike?

So we haven't finalized everything. To be clear, we got hit by the Microsoft outage, which was the day before. A cruel coincidence, unfortunately. But the afternoon before Microsoft actually had an Azure outage, which impacted our sales and operations from pretty much 4 PM onward. And so we had several hundred cancellations from that. We had just recovered. from that around midnight or so Denver time, and that is when the CrowdStrike hit took place. So we're still sorting out which parts went to CrowdStrike, which part goes to Microsoft, but it's in the 20 million plus range and roughly two points in margin degradation.

All very helpful, thank you. Thank you. Our next question coming from the line of Dwayne Pennyford with Evercar ISI. Your line is open.

Hey, thanks. Maybe just to pick it up right there. So that $20 million, is that something you're going to look to recover?

We don't discuss those types of things yet, but you would expect we will look to recover every penny.

And then I guess just given all the changes you're making on how you price your product, how are you thinking about the evolution of base fares versus ancillary? Is there a new target for ancillary? And I guess what is the risk that we're now selling bundled total fares at the same base fare level you were previously selling unbundled fares?

Look, I think we're moving to a total revenue per passenger and looking to get to a RASM that gets us back to double-digit margins. That's our target, right? And so whether it comes from fair or comes from ancillary, we think we went too far with the fair side, and we think this dials us back in. It is obviously a risk, right, that we give up too much, and that's what dialing it in is all about. But I can tell you that we believe with the trends we've seen, we've seen significant improvements in the last six weeks. We've got some more technology updates to make to give us more merchandise and control over the next several weeks, but we see that this is going to be accretive, especially as we move kind of out of this more low fare environment. You know, we mentioned that the fare's going up. We've seen a fare increase recently, and we've seen, you know, structurally, you know, a lot of the promotional fares across the industry are kind of being removed out of the marketplace. So as that kind of you know, environment improves, I think people look at the value of Frontier. And I think when you couple that with the overall new Frontier, and I think you compare it to, you know, a carrier that just announced a big change in seat assignment, as an example, this is exciting because this is really leveling the playing field. This is going to make it very simple for you to compare our product versus them. And the only difference will be bags. And you can quickly go compare the difference. And in fact, you get a lot more with Frontier because you can go to the New Frontier and see the four options that we offer, and there's far superior seating options that you can get on other carriers in kind of our price point.

Thanks for that, Barry. And then maybe just lastly, can you speak to the market, you or Jimmy, the market for sale leasebacks in the way that you structure them? Is that marketplace stable, getting looser, getting tighter? Any thoughts? And I guess did that relate at all to the decision to defer?

Yeah, so, Dwayne, this is Mark. So as we mentioned on the prepared remarks, I mean, we have financing arranged into 26, and when you step back, and we're not going to get into the details of those terms, but, I mean, the market continues to remain to be healthy for us as we look forward. So, you know, we don't see any issues on that front.

And I would just add, too, Duane, this was not, didn't have anything to do with financing. It had to do with Airbus' challenges and their, you know, kind of their delays, and they kind of created kind of lumpy, and when they started delaying aircraft, they piled them up in certain spots, and this enabled us to smooth those out. But I would just say about the leasing community, and, you know, I've gone around the world this year and met with a lot of leasing companies and personally been talking to a lot of them, And I've got to tell you, there's a lot of interest in Frontier. I mean, I know investors and these people look very short-term, but if you lease us an airplane, you are committing to eight, 12 years with us. And what they see and what they're excited about is there was this whole story last year, and it's continued to be repeated, about cost convergence. And what we have actually shown is that we are not converging in cost. Our cost advantage is widening. It's getting bigger. And if you look at the structural things we've done with the schedule, we've got more to come in that regard. So we see that cost advantage being real. There's an oversupply in the United States. But what leasing companies do is they understand what the long term is. And they know that that oversupply will be addressed and that low cost will win and low cost will again matter. And that's why they're betting on Frontier. And we haven't seen one change at all. If anything, I'd say there's more people interested in us than there was before because They see us as kind of last man standing in the U.S. marketplace as we move forward.

Okay. Appreciate the thoughts.

Thank you. Now our next question coming from the line of Stephen Trent with Citi. He'll end us off.

Yes. Good afternoon, gentlemen, and thanks very much for taking my question. I was intrigued by what you said about new route launches. I think you said 114 new routes from the 13 crew bases, but then you end up pulling some of them back when they don't perform. Any high-level view on what sort of time tolerance you have for these routes to start performing before you decide to pull them and how that might possibly differ from what you see from your competitors. Thank you.

Yeah, Stephen, look, we see there's two time periods that you see with new route launches. Obviously, the booking is coming into the launch of the actual flight, and you can see performance into that. And then beyond that into the period after, we've seen on two-thirds of the routes, like we did launch over 113 routes, I think it was, in the last couple of months. We've seen some of them not perform and what we do is we address them pretty promptly, particularly as you move out of the seasonal peak part of the year into seasonal off-peak periods. Some of those roots may come back next year, but we see those being removed going into the fall and winter months. And then we obviously work the ones that we're keeping and we see two-thirds of those roots performing and continuing to mature. And it will take up to about 12 months for those to mature back to system-level performance. And so we're investing in those routes and ensuring that they get to system-level performance over the next 12 months.

Appreciate that, Jimmy. Thank you. And as my follow-up, I know there's been noise out there about the Department of Transportation wanting the industry to be more transparent about X, Y, and Z and have all these disclosures on fees and what have you You know, what's the latest on what you guys are seeing and, you know, to the extent that some of these DOJ decrees are concerning?

Yeah, look, you know, I can't speak to all the everything going on with the government and what they're digging into. But, you know, we believe with the new frontier, you're able to see what you want up front and you can make a decision very clearly. We are worried, however, that there are third parties that we partner with that don't have the capabilities to make sure that everything is communicated up front. So I think the way that some of these rules have been constructed, I think they're not easily complied with. But we believe that we are more than complying with the spirit of it. of what they're looking for with the new frontier. And we think this is, you know, there's not much there. I think, honestly, I do hope that the DOT follows up on what they've said, though, that they want to look at competition. We continue to see challenges with common-use gates in this country. We continue to see challenges with, you know, kind of fortress carriers working with their relevant local airports to create environments that are not conducive to growth airlines operating safely and reliably, nor do they allow us to grow in a good way. So we look forward to seeing the DOT following through with its commitment to digging into this and getting a thorough investigation into the practices that are taking place because we feel it's beyond anti-competitive.

Okay. I appreciate that, Barry. Thanks for the time.

Thank you. Our next question, coming from the lineup, Connor Cunningham with Mellis Research. Your line is open.

Hi, everyone. Thank you. Just on the load factor decline in the second quarter, you know, seven points, you know, fares came down quite a bit. I would have thought that lower fares would have stimulated demand a little bit. I understand that there's oversupply, but is it really just a function of where off-peak is relative to peak today? Thank you.

Yeah, look, I mean, we've gotten to the point where I think we have truly found all the demand there is. I mean, we have consistently sold fares at a penny to a dollar plus taxes and fees on a Tuesday, Wednesday, and not gotten full, which tells you that there's just not that much demand. And, you know, we called this out, and I think we got a lot of grief for it a year and a half ago that we called this travel pattern out. And there was, I think, some hope that, you know, last Labor Day, that there was a lot of return to office was going to help mitigate this and change it. But we're now several years into this. And so the travel patterns have become clear to us, and we're going to stop pushing on a string with this. Because it is clear to us that with the flexible work or, you know, kind of work from home on a couple days a week, the two most common days that they're in the office is on Tuesday, Wednesday, and And it has caused an environment where there's just not the demand. And it's not just us. You can go look at your TSA numbers. You can go stroll through your favorite airport, and you'll just see it. I mean, there's just not the traffic in the airport. And this is a function of the travel patterns for the leisure people, but also the fact that business is still down 20% to 25%. And so we see this to be a semi-permanent change, and so we're going to stop organizing our business around it. We recognize we have too many pilots, we have too many flight attendants and everything in the near term, and we're carrying those costs in the third and a little bit of the fourth quarter until we can kind of grow into it until this reset takes place. But the reality is we think that this is kind of the new norm. The problem is if they don't have those days off, it's hard for them to travel even if the fare is near free.

Okay, that's helpful.

And then in February, you laid out a plan to get to, I think it was 10 to 14% pre-tax margins in 2025. Obviously, a lot has changed since then. One, are you continuing to expect that target, just given the fact that all the product changes you're making, the cost savings? I'm just curious on how you're thinking about that target that you laid out not too long ago. Thank you.

Oh, I think if anything, we're getting more confidence in that target. I think it's moved a little bit to the right, because of the oversupply. But, you know, this is temporary. This is a one- to two-quarter thing. And I think the most encouraging thing that I've seen is that, you know, pretty much universally the industry is responding to this capacity imbalance with demand. And history shows you that once people start cutting, they're not going to stop until they get to their target margins. So we see a lot of – with several carriers out there, and we think that there's going to be a lot more coming. So yeah, it may take us a quarter or two further than we had, but no, we feel better about the target than ever. And it's become clear, too, I mean, we said this back in February at the time, and we've debunked this cost convergence thing several times, but it has now become clear that that our cost advantage is real, it's durable, it's sustainable. And when we look into 2025, we see that continuing to expand. And so that's why we think that we will more than get there with all the industry capacity cuts that we expect over the fall and through the winter.

Appreciate it. Thank you.

Thank you. Our next question coming from the lineup. Tom Fitzgerald with TD County. Line is open.

Hi, everyone. Thanks very much for the time. I'm just kind of curious your view on with the stage length going down, how large the premium opportunity could really be. It seems like the shorter the stage length, the less appetite there is to pay up the cabin, but I could be thinking about that the wrong way.

Well, hey, first, thanks. Congratulations on the new role there. So good to have you. Yeah, look, so... At the end of the day, whether you're sitting on a plane for an hour or four hours, people like a slightly better seat. Whether you're in that plane for an hour or four hours, some people like the window and some people want an aisle because they want to be near the bathroom. It doesn't change that. So while there's a propensity for them to value it more, it doesn't mean they don't value it. And so from our perspective, what we've just seen with the oversupply you know, it's been more acute in some of the longer halls. But, yeah, we're seeing good take rate. I mean, I don't know that we're going to actually ever know what it could have been on the longer stage because we may not have that stage ever again. But we're seeing good take rates on it.

Okay, thanks. That's really helpful. And then I guess just... If you know whether it's the macro or other issues, but if things if the downside scenario starts to play out, do you have any further flexibility with with airbus. Either deferring orders or cancel because sometimes it just seems like the best solution is less points and more basically thanks again for the time everyone.

Yeah, look, I mean, where we're at, we believe, you know, that we can be profitable on the peak days. So it's not a shell count issue. It's more of a day-a-week issue and probably more season issue. So I think the flexibility that we might need in that scenario, we've already demonstrated we have. We can adjust that capacity. But I think that from a shell count, we don't see a need for that in our business. And I would also remind everyone, we're the lowest cost provider, and that cost advantage is widening. And in any kind of recessionary environment, we're going to revert back to the mean. And that is Walmart, Costco, and the low-cost carriers win in recessions.

Thank you. Our next question coming from the lineup, Andrew Dior with Bank of America. Your line is open. Thank you.

Hey, good afternoon, everyone. Hi, it's Barry. On the load factor point, if you feel like you've tapped kind of all the demand there, why is 10% growth the next few years the right level, and why not, you know, keep maybe pushing out deliveries and cut capacity over the next few years?

Well, the issue is that it was primarily the off-peak days. So it's not an overall trend. It's more off-peak. We were also hit in the fourth quarter. We still had a lot of the kind of oversupply stuff. We were in the middle of launching the new routes. So you had a lot of new routes, and you also had still kind of many of the oversupplied routes. So as we continue to grow the demand pool, we're up 50%. By the time we get to the fourth quarter, our total revenue pool is up 50% year over year. is when you look at the overall, all the O&Ds we're in. So we just don't see that being a challenge. We're already seeing the load factors recover, and we're seeing the fares recover, as I mentioned a while ago. The September fare is up, and we see it going up from there on moving forward.

Okay, understood. And then two quick modeling questions. Mark, maybe... One, what stage length are you using? Are you factoring in this year just so we can get to an actual chasm number from the stage length adjusted chasm guide that you gave? And then just in terms of the order book change, when we think about the 21 planes coming in next year, just from a sell-leaseback-gain perspective, anything change there? Should we continue to model in the recent rate of, say, $12 million to $13 million per plane, or will that come down? Thank you.

Yeah, so two things. So from a stage perspective, roughly 850 would be the stage to target. And then when you look at the 21 aircraft next year, the only nuance when you look this year to next year is that we do have about roughly a third of those deliveries next year were going to be 320s versus this year they were all 321s.

So a lower rate per plane?

Yeah, the 320 is coming in at a bit of a lower rate than the 321. So you just have that mixed nuance. Outside of that, I think that's the only thing to factor in.

Got it. Thank you.

Thank you. Our next question coming from the lineup. Jamie Baker with JPMorgan Securities. Your line is open.

Hey, thanks for the questions. This is James on for Jamie. Most of the questions have been asked. Just thinking about the capacity that's been taken out of the system in the second half of the year, you talked about peak versus off-peak. Is there any geographic way you can break that down? There's been Latin America pressures in prior quarters. Is that the driver of that, or are there other markets out there or types of markets that you're pulling from?

Look, I think the only market or city that we, I think, were really disappointed in was actually New Orleans. You know, when we look at the rest of the network, things kind of hit the averages, but I think New Orleans did drag it down. You know, we don't completely understand what happened there, but it just universally did not stimulate.

Okay, that's fair. And then The new rules that mandate a refund for a three-hour plus domestic delay, just high-level thoughts. Are you seeing passengers that take that, that are seeking that compensation, or do you think they stick around for a rebooking?

We haven't seen a big change on that. I mean, the reality is that it's more troublesome. I mean, a three-hour delay is uncomfortable and disappointing, but... you know, oftentimes when we have that delay, everyone else has the same delay. Right. Because they're generally weather-related. It's not even measurable. I'm looking around the room. We haven't noticed anything measurable on that.

Got it. I appreciate the questions.

Thank you. And with that, I will turn the call back over to Barry Biffle for any closing comments.

Hey, I want to thank everybody for joining us today. Again, I wanted to reiterate we're disappointed in the environment, but the good news is we're seeing green shoots with that, and it looks like the bottom is in. I think you're going to see further capacity rationalization as we move through the coming months and into the winter, and we're really excited about the kind of self-help that we've taken and all of the tailwinds that we've got on the revenue side as well as the cost side. So we look forward to talking to you next quarter and updating you on the success with that. Thanks for joining.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.