Frontier Group Holdings, Inc. (ULCC) Earnings

Management highlights

### Operational Performance Improvement - System-wide maintenance strategy improved liability and operational reliability: Frontier ranked 4th among U.S. domestic carriers for completion factor in H1, with a controllable completion factor of 99.3%. - Sequential unit cost improvement: Q2 adjusted operating expenses excluding fuel and early return agreements were 7.42 cents per ASM (stage adjusted), representing a 10% sequential decline driven by higher aircraft utilization. ### Strategic Partnerships & Product Updates - Extended and improved the co-branded credit card partnership with Barclays, with a new 10-year agreement and $375 million maximum pre-purchase mileage facility, of which only ~$120 million had been drawn as of quarter-end. - Announced a fleet-wide rollout of Starlink high-speed in-flight Wi-Fi, scheduled to launch in early 2027. - First-class seating will be rolled out starting in Q4 of the current year through the winter season, to be completed early next year. The existing Upfront Plus premium product has a paid load factor over 80%, in line with legacy carrier industry averages, demonstrating customer demand for premium offerings from Frontier. ### Fleet Transition & Capacity Strategy - Completed the planned return of all 24 A320neos under an early lease return agreement in Q2, ending the quarter with a total fleet of 165 Airbus aircraft (2 new A320neos and 4 new A321neos delivered in the quarter). - Management is in advanced discussions to early terminate leases for 13 additional A320neo aircraft and enter direct leases for up to 10 newer, more cost-efficient A321neo aircraft; if executed, total fleet size will be no more than 168 Airbus aircraft by the end of Q1 next year. - The company is prioritizing fleet stability over the next two years to mature operations after rapid growth from 95 aircraft at end-2019 to ~170 aircraft planned, improving operational reliability before resuming consistent growth. - Upping fleet gauge to A321neo provides a 29% capacity increase per aircraft with disproportionately lower cost per departure, improving unit economics. ### Financial Performance in Q2 - Total adjusted operating expenses were $1.3 billion (11.77 cents per ASM), including $436 million in fuel expense at an average price of $4.17 per gallon. - Q2 adjusted net loss was $22 million (10 cents per share), which was significantly better than the prior guidance range of a 45-60 cent per share loss, driven by stronger-than-expected revenue and disciplined cost management. - Ended Q2 with total liquidity of $1.16 billion, 27% of trailing twelve-month adjusted revenue, which was above guidance due to stronger sales, a higher-than-expected signing bonus from the Barclays amendment, and disciplined capital allocation.

Guidance

- **Profitability Timing**: Management expects to return Frontier to sustained profitability in the second half of the current year, with profitability targeted for 2027. - **Third Quarter Current Year**: Capacity is expected to grow 17-18% year-over-year (flat sequentially year-over-year, up 2-3% from Q2), with adjusted diluted EPS expected to range from a loss of $0.10 per share to a profit of $0.10 per share, at an average fuel cost of $3.70 per gallon. RASM is expected to increase just over 20% year-over-year, even with 18% ASM growth. - **Fourth Quarter Current Year**: Capacity growth is targeted at ~7% year-over-year, in line with long-term growth targets, with adjusted diluted EPS expected to range from break-even to a profit of $0.20 per share at an average fuel cost of $3.45 per gallon, marking the third consecutive quarter of improving earnings. - **Medium-Term Capacity Growth**: Annualized medium-term capacity growth is targeted at a range of 7-10%, with management preferring high single-digit growth to support stable operations and avoid operational stress. For next year, growth is expected to be in the 5-8% range, pending final planning. - **Medium-Term Unit Cost**: Excluding sale-leaseback gains, management targets a stage-adjusted CASM (excluding fuel) in the mid-7 cents per ASM range for 2027, down from ~8 cents per ASM in 2025 on a like-for-like basis. - **Medium-Term Aircraft Utilization**: The company targets average daily aircraft utilization of 11 to 11.5 hours over the medium term, up from just over 10 hours in Q3 of the current year, which will drive further unit cost improvement.

Segment performance

This earning call does not break out financial performance for distinct product segments; all operational and financial results are reported on a consolidated company-wide basis. Key consolidated Q2 metrics include: Revenue per Available Seat Mile (RASM) of 11.52 cents, up 28% year-over-year; total revenue per passenger of ~$131, up 20% year-over-year; flown load factor of 80.3%, up 1 percentage point year-over-year on capacity that was 8% higher year-over-year. Loyalty, a high-margin consolidated revenue stream, delivered a nearly 30% year-over-year increase in revenue contribution from the Barclays co-branded credit card, driven by record new card acquisition and double-digit growth in cardholder spend in H1.

Risks & headwinds

- Volatility in global jet fuel prices creates uncertainty for profitability, as consumer willingness to accept continued fuel price pass-through cannot be predicted with certainty. - The U.S. domestic airline industry remains extremely concentrated, with four major carriers holding over 80% of domestic capacity, leading to persistent competitive pressure that can impact pricing and market share. - Inflation across airport operations and other industry input costs could push unit costs higher than current medium-term targets. - Fleet transition activities create lumpiness in near-term capacity and create temporary transition-related cost headwinds, including higher maintenance activity during the transition period. - All proposed early lease termination and new lease agreements for the fleet are not yet finalized, creating uncertainty around the timing and size of the planned fleet adjustment.

Analyst Q&A

• Q: What is Frontier’s medium-term capacity growth strategy, and what is the rationale for upgauging to A321neo aircraft? How will unit costs progress over the next 6-12 months? /

  A: Frontier maintains its medium-term annual growth target of 7-10%, with near-term lumpiness driven by ongoing fleet transition. The company plans to reduce capacity growth to the 6-8% range in Q4 after 18% growth in Q3, as it completes the return of 13 older A320neos. Upgauging to A321neo delivers a 29% capacity increase per aircraft with disproportionately lower cost per departure, improving overall profitability. Sequential unit cost improvement is expected to continue through H2, with sale-leaseback gains creating temporary noise in full-year comparisons; core unit costs (excluding these gains) are already improving.

• Q: What is the competitive dynamic in Frontier’s markets following Spirit’s wind-down, and how does competitive capacity decline impact results? /

  A: The U.S. domestic market remains highly competitive, with four large carriers controlling 80% of capacity. Structural changes from Spirit’s capacity cuts starting in late 2022, combined with Frontier’s shift to more disciplined revenue management, drove higher RASM gains than the previously expected 3-5 percentage point improvement. These gains have allowed Frontier to largely offset elevated jet fuel prices, and the company is backfilling lost Spirit capacity in high-value market segments.

• Q: What is the expected permanence of recent RASM improvements, and what unique lessons have been learned about Frontier’s passenger demographic? /

  A: The improvement in RASM is driven by multiple factors, including better operational performance that improves customer loyalty, more disciplined revenue management including better pricing for bundled services through NDC and OTAs, and industry-wide structural capacity changes. The improvements are broad-based across Frontier’s customer base, with existing premium products like Upfront Plus already demonstrating strong demand for segmented offerings from the airline’s core price-sensitive demographic, supporting the case for continued premium product expansion.

• Q: What revenue and margin upside do management expect from the new first-class and Starlink Wi-Fi product launches? /

  A: First-class will begin rolling out in Q4 and finish early next year, while Starlink Wi-Fi will launch in early 2027, with full fleet completion expected by summer. Strong paid load factor for the existing Upfront Plus product (over 80%, in line with industry averages) gives management confidence that first-class will be accretive to revenue beyond existing premium offerings. These products will also allow Frontier to enter consideration for customer segments that previously did not consider the airline due to the lack of premium amenities, expanding the overall customer base.

• Q: What is the long-term strategic priority for Frontier, and when can investors expect return on invested capital to exceed cost of capital? /

  A: Management’s current focus is on strengthening core fundamentals: cost discipline, improved revenue management, optimal fleet size, and stronger liquidity, rather than setting long-term ROIC targets yet. The company sees significant untapped opportunity in its loyalty program, which is less mature than peers, and is investing in product improvements to drive customer loyalty and sustainable profitability. Management estimates it will take roughly one more year to complete operational and product changes to build a strong enough foundation for long-term profitable growth.