Frontier Group Holdings, Inc. Common Stock 2026 Q3 Earnings Call

Hello, everyone. Thank you for joining us, and welcome to Frontier Group Holdings' Q3 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to David Erdman, Senior Director of Investor Relations. David, please go ahead. Thank you, and good morning.

Welcome to our Frontier Group Holdings third quarter 2026 earnings call. Joining me today in speaking order are Jimmy Dempsey, President and Chief Executive Officer, Bobby Schroeter, Chief Commercial Officer, and Mark Mitchell, Chief Financial Officer. Each will deliver brief prepared remarks, and then we'll open the call for questions. However, before we begin, I'll remind you that today's discussion will include forward-looking statements subject to risks and uncertainties, and we will be referring to certain non-GAAP financial measures during the call. Reconciliations can be found in the earnings release issued earlier today and on our investor relations website. We'll also be referencing stage-adjusted unit metrics, which are based on a conversion to 1,000 miles. I'll give the call over to Jimmy to begin his prepared remarks. Jimmy? Thanks, David, and good morning, everyone.

Our third quarter results represent another meaningful step forward in Frontier's transformation. The team delivered record revenue, exceptional unit revenue performance, and adjusted profitability in a high fuel price environment. This performance demonstrates that the changes we are making across the business are positioning the business for sustained profitability. I want to begin by thanking Team Frontier for all their efforts in helping us to make progress and execute on our transformation plan. Their focus on safety, operational execution, and customer experience is fundamental to our success. We are moving with urgency, but we are doing so with the discipline required to build a stronger and more durable airline. Third quarter revenue of $1.4 billion was a company record, up 53% year-over-year, with RASM growth of 30% on an 18% increase in capacity.

Adjusted diluted earnings per share was $0.18, above the high end of our guidance range, as our revenue performance more than absorbed the incremental fuel headwind. Adjusted pre-tax margin improved nearly 12 percentage points year-over-year to 3%, despite absorbing a 56% increase in fuel price. Our fleet rightsizing work is now substantially complete. During the quarter, we finalized agreements to early return 13 A320neo aircraft and replace that capacity with direct leases for 10 newer, larger and more cost-efficient A321neo aircraft. Our fleet rightsizing transactions ensure measured growth, considerably lower future maintenance obligations, lower financial leverage, and better gauge dynamics for the business. On cost discipline, we remained on track to deliver $200 million of annual run rate cost savings by 2027, including the benefits from a more productive fleet.

To this end, our adjusted unit costs, excluding fuel and sale and leaseback gains, are down approximately 2.5% year-over-year. Operationally, we are making meaningful progress to build a more reliable airline through improved maintenance planning, stronger station capabilities, and more consistent execution. Following volatile weather in most of July and August, our completion factor in September and through October to date ranked third among domestic carriers. While this demonstrates significant progress, we are focused on improving the level of consistency in the delivery of the operation. The results we announced today also demonstrate the continued progress we are making with revenue management and customer loyalty, including the strong response to our premium offerings. First Class seat installation begins this quarter, with Starlink Wi-Fi installation beginning in the first quarter, diversifying the revenue base and enhancing our value proposition. Looking ahead, we expect the commercial momentum to continue.

RASM for the fourth quarter is expected to be up over 20% on capacity growth of 5%-6%, which will be our fourth consecutive quarter of double-digit unit revenue growth, helping us mitigate the elevated fuel costs expected during the fourth quarter. Our performance reflects the successful progression of the company's strategic initiatives set out earlier this year, and it gives us confidence in our ability to translate our momentum into sustained profitability. With that, I will turn the call over to Bobby.

Thanks, Jimmy. Third quarter RASM increased 30% year-over-year to $0.1187 on capacity growth of 18%. Total revenue per passenger also rose 30% to approximately $138, while load factor declined modestly by two percentage points, highlighting our focus on proactively adjusting our strategy to maximize results in the current environment. Importantly, the strength in RASM extended across the week as we reintroduced off-peak capacity. The positioning of our network has enabled us to take advantage of a more favorable supply-demand dynamic in our markets, and in conjunction with our continued revenue management discipline, is leading to an outsized revenue improvement. Importantly, we are delivering these results ahead of the First Class and Starlink rollouts Jimmy mentioned. Those investments will build on the progress we are already making, giving customers more choice and broadening our appeal to leisure and small business travelers.

We see further opportunities to increase revenue per passenger and build loyalty while maintaining the cost discipline that supports our low fares. Contributing to our revenue performance is a 37% year-over-year improvement in loyalty-related revenue, supported by growth in our co-brand card and membership programs, along with higher engagement and spending. These programs give customers more reason to choose Frontier and return more often, and they provide recurring revenue streams that diversify our revenue mix and support more resilient earnings.

Looking ahead, we expect our commercial momentum to continue into the fourth quarter with RASM increasing more than 20% year-over-year on capacity growth of 5%-6%. With that, I'll turn it over to Mark.

Thanks, Bobby. Adjusted net income was $40 million during the third quarter or $0.18 per diluted share, meaningfully above our previously issued guidance. Fuel expense was $425 million at an average cost of $3.96 per gallon. The average cost per gallon reflects an increase of 56% versus the corresponding 2025 quarter, or approximately $150 million of incremental expense on current quarter fuel consumption. Adjusted operating expenses excluding fuel were $896 million, 7.4 cents stage adjusted, 3% higher year-over-year. However, as Jimmy mentioned, excluding sale leaseback gains, adjusted CASM ex fuel declined approximately 2.5% on a stage adjusted basis, driven by efficiencies from our fleet rightsizing and other cost savings initiatives. We ended the quarter in a strong liquidity position with $1.18 billion, up slightly from the end of the second quarter.

Due in large part to our fleet rightsizing and other strategic initiatives, our leverage ratio declined meaningfully from 7 times adjusted EBITDAR at the end of 2025 to just over 4 times on a trailing 12-month basis at the end of September. We ended the quarter with 164 Airbus aircraft following the delivery of one A320neo and three A321neo aircraft, two fewer than expected. We also returned all 13 A320neo aircraft under the most recent early return agreement, with five returns in the third quarter of 2026 and the remainder in October. In the fourth quarter, we expect to take delivery of two A321neo aircraft from our order book and five of the 10 A321neo aircraft under direct lease transactions with AerCap. The remaining five direct lease aircraft are expected in the first quarter of 2027.

Separately, we expect to take delivery in the fourth quarter of three of the 11 aircraft being sold to Avolon, with the remaining eight expected to be received and sold to Avolon in the first half of 2027. The gains from the sale of the 11 aircraft to Avolon will be excluded from our non-GAAP results. The fleet actions associated with the latest early return agreement resulted in non-recurring charges of $134 million in the third quarter, including lease return costs, accelerated depreciation related to capitalized maintenance due to shortened useful lives, and the write-off of non-recoverable capitalized prepaid maintenance balances. These non-recurring charges were excluded from our non-GAAP results. Turning to guidance. We expect fourth quarter adjusted diluted earnings per share to range from a loss of $0.15 to a profit of $0.05 based on an expected average fuel cost of $4.75 per gallon, up $1.25, or over $100 million from our prior guidance on capacity growth of 5-6 percentage points year-over-year.

RASM is expected to be up over 20% versus the prior year quarter, which would be our fourth consecutive quarter of double-digit growth. Operator, we are ready to open the line for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Savi Syth with Raymond James. Your line is open. Please go ahead.