Frontier Group - Q1 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Frontier Group Holdings First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there are a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Erdman, Senior Director of Investor Relations. Please go ahead.

David Erdman (Senior Director of Investor Relations)

Good afternoon, everyone, and welcome to our first quarter 2023 earnings call. Today's speakers will be Barry Biffle, President and CEO, Jimmy Dempsey, EVP and CFO, and Daniel Shurz, Senior Vice President of Commercial. Each will deliver brief prepared remarks, and then we'll get to your questions. First, let me quickly review 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 published earlier, along with reports we file with the SEC. We will also discuss non-GAAP financial measures which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement. I'll give the floor to Barry to begin his remarks. Barry.

Barry Biffle (President and CEO)

Thanks, David. Good afternoon, everyone. Our results for the first quarter reflect an adjusted pre-tax loss margin of 1.9%, slightly outperforming expectations on a strong spring break period. While demand during January and the first half of February was seasonally weak, particularly in off-peak days, demand strengthened as we progressed from President's Day through the spring break period. In fact, we operated an average utilization of 11.8 hours per day in March. The progression in demand throughout the quarter helped drive revenue of $848 million, a record for any first quarter in the company's history. We expect the strength in demand for leisure travel to continue to extend into the busy summer travel season. The leisure demand is supported by consumer, which today has a greater propensity and ability to travel compared to pre-pandemic periods.

More notably, they have far more flexibility to travel and to do so more often with work from home arrangements and flexible work schedules. We believe this is largely the basis for the surge in total leisure travel demand that began in earnest last year. It's showing resiliency. We've positioned ourselves to capture a disproportionate share of it through our Low Fares Done Right strategy and innovative product offerings. Our GoWild! Pass, which launched last fall, is a prominent example. It's a leisure-focused product we're best suited to offer. Before the pandemic, this kind of product would have had limited appeal. Today, however, sales have been strong with customers across many consumer segments, creating the ability for inexpensive, frequent travel. The pass gives them the freedom and peace of mind to unlock unlimited and spontaneous travel to all destinations we serve.

Of the pass sales thus far, over half do not have prior travel history with Frontier. With this previously untapped customer base, we also have the opportunity to expand brand awareness and preference, along with driving incremental revenues as these customers engage with our loyalty platforms such as Discount Den and the Frontier World Mastercard. It's a key part of our strategy to increase the contribution from loyalty and subscription-related products, supporting our goal of achieving ancillary revenue of $85 per passenger by the fourth quarter and $100 per passenger by 2026. The strength we're experiencing in leisure travel demand favors peak days and peak periods where we see an outsized contribution. This outsized contribution is a trend that has developed over the last year as we emerge from the pandemic.

Having analyzed this new customer behavior and until peak and off-peak demand relationship normalizes, we're reshaping our capacity beginning in the second quarter to exploit this dynamic and expect the changes to be fully deployed in the second half of 2023. We are excited about this shift and our ability to lower our execution risk while maximizing revenue and profits. While we expect the update to our network strategy to enhance our operational performance and pre-tax margins, the resulting adjustments to capacity and utilization will increase our unit costs. With that said, we still expect our total cost advantage, which widened from over $60 per passenger pre-pandemic to over $70 per passenger in 2022, to further expand in 2023.

We anticipate our cost advantage to benefit from the ongoing gauge and fuel efficiency benefits from the increasing mix of A321neo aircraft, the operational benefits from our enhanced network strategy, and the significantly lower debt service exposure we have compared to the rest of the industry. Overall, as a result of the planned network changes I've highlighted, we're adjusting our full year capacity guidance to reflect expected growth of 19%-22%. The entire organization is aligned and focused on the return to double-digit pre-tax margins. Our second quarter guidance of adjusted pre-tax margins in the range of 7%-10% is a significant step to getting double-digit pre-tax adjusted margins in the second half of the year and will represent the highest post-pandemic margins achieved by the company. With that, I'll hand the call over to Daniel for a commercial update.

Daniel Shurz (Senior VP of Commercial)

Thank you, Barry, and good afternoon, everyone. Total operating revenue for the first quarter of 2023 totaled $848 million, a record for any first quarter in company history, driven by RASM growth of 19% on an 18% increase in capacity, both compared to the 2022 quarter. The RASM increase was driven by a 9 percentage point increase in load factor to 83% and an 11% increase in revenue per passenger to $124, both compared to the 2022 quarter. Ancillary revenue performance continued to be strong even in the seasonally weaker first quarter, with $80 per passenger generated during the quarter, $11 per passenger higher than the 2022 quarter.

Last month, we opened access to our GoWild! passholders to begin booking travel three weeks earlier than we had originally announced. Feedback thus far has been overwhelmingly positive, with customers taking to social media to proclaim its benefits. In response to consumer demand, just yesterday, we announced another GoWild! promotion for the summer of 2023 pass of $499 during the month of May. The GoWild! program is an important addition to our loyalty ecosystem. When supplemented with Elite spending levels via our Frontier World Mastercard, customers now have the opportunity to travel on unlimited amount without incurring ancillary fees for seats and bags. Further, as customers invest in the GoWild! Pass and the Frontier World Mastercard, the value of the Discount Den becomes an obvious complementary product. Spending briefly on the shape by utilization changes to our network.

We conducted a full review of profitability over the past several quarters and observed a clear change in consumer demand patterns. While overall leisure travel is increasing, the bracket is disproportionately landing on peak days and in peak travel periods. Prior to the pandemic, the RASM premium on peak days versus Tuesday to Wednesday was 19%. This premium has expanded to over 25% today. By maximizing flying on peak days and peak periods and reducing underperforming flying in low demand periods, we believe we can generate better profitability with less flying, thus de-risking our operations. Given our modular network approach, which has proven to be more resilient from a reliability perspective over the past two years, specifically reducing midweek flying on longer stage routes is more operationally complex, as it would cause significant crew inefficiencies.

For this reason, we have eliminated a select number of longer-haul routes as part of this network optimization, which will reduce our average stage length from 1,070 miles closer to 1,000 miles. That concludes my remarks, and I'll now yield the call to Jimmy.

Jimmy Dempsey (EVP and CFO)

Thank you, Daniel. Our first quarter results reflect a pre-tax loss margin of 2% on a GAAP basis, or minus 1.9% on an adjusted basis. The results are reflective of the seasonality of the business, with the seasonally weak first half of the quarter substantially offset by a strong spring break period. RASM increased 19% during the quarter on an 18% increase in capacity. Fuel expenses slightly lower than anticipated, driven by an average cost per gallon of $3.45. Adjusted non-fuel operating expenses were in line with expectations of $580 million, or $0.0661, 8% lower than the 2022 quarter. We ended the quarter in a strong financial position of $790 million of unrestricted cash and cash equivalents, or $363 million net of total debt.

We had 125 aircraft in our fleet at March 31 after taking delivery of six A321neo aircraft during the quarter, three of which were direct leases. As noted in our earnings release, Airbus notified us of its intent to shift its remaining aircraft deliveries expected in 2023 by approximately one month. This will cause two incremental A321neo aircraft to shift into 2024 from 2023, in addition to the previous delays from earlier this year. Additionally, the 2023 delays cascading into 2024 are expected to result in no net change to the expected deliveries in 2024, as a similar number of delays are expected in 2024.

Based on the revised schedule from Airbus, we expect to take delivery of four A321neos in the second quarter, three of which are direct leases, seven in the third quarter, four of which are direct leases, and four in the fourth quarter. Additionally, we recently executed an agreement to extend the current leases on two A320ceo aircraft by four years, which otherwise were scheduled to return in the fourth quarter. Accordingly, we expect to end the year with 136 aircraft in our fleet, unchanged from our prior estimate.

Turning to guidance, second quarter capacity growth is anticipated to be in the range of 22%-24% over the 2022 quarter, while full year 2023 capacity is expected to reflect growth of between 19%-22% over the prior year to align with the utilization changes presented earlier and the impact of the Airbus delays. Fuel costs are expected to be between $2.65 per gallon and $2.75 per gallon in the second quarter and $2.80-$2.90 per gallon for the full year 2023, based on the blended curve on April 24th. Adjusted non-fuel operating expenses in the second quarter are expected to be between $645 million to $665 million and $2.5 billion-$2.55 billion for the full year.

Our second quarter cost guide includes the deferral of an aircraft delivery into the third quarter and excess crew staffing resulting from the Airbus delays earlier this year. Full year costs reflect the deferral of two incremental aircraft deliveries into 2024, as well as the previously noted network changes detailed by Barry and Daniel, which deliver a similar level of departures on a shorter average stage length than previously planned. We are proud of our relative cost advantage of over $70 per passenger over the industry and are confident that with longer stage and maintaining higher utilization, we would have beaten our sub $0.06 CASM ex objective. However, we believe our network changes deliver a better profitability outcome for the business.

Second quarter adjusted pre-tax margin is expected to be in the range of 7%-10%, which will be our highest post-pandemic margin, while average adjusted pre-tax margin in the second half of the year is expected to be in the range of 10%-13%. With that, I'll turn the call back to Barry for closing remarks.

Barry Biffle (President and CEO)

Thanks, Jimmy. I'm extremely proud of Team Frontier and want to personally thank all of our employees for our performance during the quarter, including the achievement of high utilization during the peak March period. We're focused on achieving double-digit margins and expect that the strength of our ancillary product offerings and widening cost advantage position us well to achieve this target. In addition, we believe that the network updates we're making to capitalize on the post-pandemic demand changes have created a unique opportunity for us to optimize our capacity and our high utilization capabilities in a manner that enable us to lower our execution risks and maximize profits, putting us on track to return to pre-pandemic margins over the next year. Thanks everyone for joining the call. I'll now turn it over to the operator for questions.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Duane Pfennigwerth with Evercore ISI. Your line is open.

Duane Pfennigwerth (Senior Managing Director of Equity Research)

Hey, thanks. Appreciate the time. With your, with your new or maybe increased emphasis on seasonality, could you just put that in context for us, maybe compare a, you know, peak relative to a trough a month within a quarter? I assume it's sort of, you know, within the week, as well as kind of month to month. Maybe, you know, just pick a September, for example. How would you be thinking about a September now relative to a July versus, you know, before you made this change?

Daniel Shurz (Senior VP of Commercial)

Duane, thank you. It's Daniel. It's much more a day of week issue than it is a, than it is a month to month issue. Our peak day utilization is gonna look very similar, we think month to month through the, through the rest of the year. We're seeing peaks be strong even in, even in off-peak periods. What you're gonna see, I think, relative to where we would have been is what you're gonna see is in the most significant periods, we're probably gonna be about 20% smaller on Tuesday and Wednesday than we would have been prior to this.

The overall difference is about 15% in the second half between our off-peak days and our peak days, and in the most significant periods it's about 25%. You would have seen a small difference in the past. I'll call it about 20% in a month like September.

Duane Pfennigwerth (Senior Managing Director of Equity Research)

Okay. Maybe just for my follow-up. Longer term in nature, is load factor something that you're driving to from a target perspective? You know, what would be the goal on load factor over time? You know, how do you expect this shift to aid that goal?

Barry Biffle (President and CEO)

Well, load factor is, we only look at it as a function of total revenue and RASM. It is helpful when you're in a high ancillary business of the leader in the world to actually run a high load factor. For that reason, we have been targeting it. You'll actually see that we've been improving in this area, and we expect to continue to improve, and we would like to get to a flown load factor that starts with a nine.

Duane Pfennigwerth (Senior Managing Director of Equity Research)

Maybe just one last little follow-up there. The GoWild!, you know, to the extent you get to a nine, the GoWild!, how many points would you anticipate that would contribute?

Barry Biffle (President and CEO)

In the one to three point range once it's mature.

Duane Pfennigwerth (Senior Managing Director of Equity Research)

Thank you.

Operator (participant)

Thank you. One moment for our next question. We have a question from Jamie Baker with JPMorgan Securities. Your line is open.

Jamie Baker (Managing Director and Senior Equity Analyst of US Airlines and Aircraft Leasing)

Hey, good afternoon, everybody. Barry at Investor Day, you leaned pretty heavy into, you know, work-life attributes that were helping you navigate the pilot shortage better than some of your competitors. You know, several months have elapsed since then. Several new contracts have been reached. You know, Spirit admits that its raise isn't, you know, particularly helping things. I'm just wondering if your pilot staffing confidence is unfazed by anything you've seen since Investor Day?

Barry Biffle (President and CEO)

It's unfazed. We remain in a surplus position, and we're really proud of what we offer, and nothing's changed in that area. In fact, we were just reviewing it earlier today and the attrition is right on target. You know, I think you just have to remember, we have competitive compensation. If you look over the first 10+ years of their careers. We've also got a better work-life balance, as you mentioned, with more days off than practically anybody else in the industry. I mean, I think we're averaging in the it starts in the 12 range days per month for average bid line holders.

No, we have a robust recruiting, and we don't have the attrition that you're seeing at some of these other carriers.

Jamie Baker (Managing Director and Senior Equity Analyst of US Airlines and Aircraft Leasing)

Perfect. Just as a follow-up, you know, historically, most U.S. airlines did not accrue for higher wages, you know, new contracts. It caught me by surprise as that convention appeared to change in the last year or so. Obviously it doesn't make sense before you reach your amendable date, but have you given any thought as to whether you might guide 2024 CASM reflective of a new contract, or will you just wait until it's ratified, which was the, you know, the old school way of doing things?

Jimmy Dempsey (EVP and CFO)

Jamie, it's Jimmy Dempsey here.

Jamie Baker (Managing Director and Senior Equity Analyst of US Airlines and Aircraft Leasing)

Hi, Jimmy.

Jimmy Dempsey (EVP and CFO)

I mean, how's it going? We haven't. We need to open the contract. You know, the contract expires at the end of the year, the early opener for the pilots is in July. I mean, we'll address next year's guidance when we get closer to next, to next year. you know, clearly we're aware of what's happening in the pilot world. We are staffing the airline very effectively, managing our contract and our relationship with the pilots in a very effective manner. you know, some of those other contracts were open for quite some period of time and also had deals on the table that showed substantial increases in pay. We are some ways away from doing that you know, easy.

Jamie Baker (Managing Director and Senior Equity Analyst of US Airlines and Aircraft Leasing)

Got it. Thanks for the feedback. I appreciate it, gentlemen. Take care.

Operator (participant)

Thank you. We have a question from Conor Cunningham from Melius Research. Your line is open.

Conor Cunningham (Senior Equity Research Analyst)

Everyone, thank you for the time. Just in terms of the changes to the reshaping of your network. I'm just trying to understand why you're doing this now. I would have thought that some of these changes would have already been implemented, but just are you seeing off-peak a lot weaker than you've anticipated, and then peaks just being that much better? Just curious if you're seeing anything on the margin from a demand standpoint that's really changing how you're thinking about your network overall?

Barry Biffle (President and CEO)

Well, look, it has changed versus pre-pandemic. As Daniel laid out, you know, it was a 19% difference, you know, off peak versus peak, you know, prior to the pandemic, and we're seeing levels over 25% now. So in some cases, even more extreme in some cases, even more extreme in the off-peak months for off-peak days. So yes, the reason why we haven't changed is quite candidly, we are a high utilization business and we've actually run a lot higher utilization than most people on balance from a midweek perspective in the past. You know, we are now at the point, we've seen several quarters, and we just, the data is staring us in the face.

I think when you look at the first quarter in particular, I think, you know, what I think is most interesting is we believe we could have made money from a profitability perspective when we looked at first quarter, had we made these changes. One of the best ways to stop losing money is stop doing things that lose money. We are on a go-forward basis. We're reacting to this. If the dynamics change going forward, we'll look at it again. We think this is the right path to get back to pre-pandemic margins.

Conor Cunningham (Senior Equity Research Analyst)

Okay, that's helpful. Then as you start to think about your 2024 plans and growth overall, I mean, there's been a lot of talk about, you know, capacity constraints. you've talked a fair bit about Airbus delays. Just why shouldn't we expect whatever we had in terms of our capacity growth plan for 2024, that it should be lower going forward? It just seems like a lot of these issues that we're talking about right now just won't necessarily dissipate going forward. Just curious on how you're thinking about that as we go into 2024. Thanks.

Barry Biffle (President and CEO)

There will be delays in 2024. I think the biggest thing that you have to understand, though, is that the majority of the pain has already been felt. You're lapping. When they first came in with this big delay, you moved a whole bunch of airplanes to the right. What's gonna happen is, yes, we'll move aircraft out of 24 into 25 at some point, but the 23s that got moved into 24 will actually deliver. You know, I think you have to remember, we have enough aircraft on delivery that we expect to continue to have sizable growth.

I think what's more important when you think about Frontier versus the overall industry is that, you know, if you ask an airline today, would you take an airplane from the manufacturer that's maybe delayed a few months, versus not have one, they'll take the airplane delayed. We have a very good order book, and it's a real asset to the business. I think, yes, it will impact 2024, but from a year-over-year perspective, I think you're not gonna see the changes that you've seen in the past.

Conor Cunningham (Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our question comes from Helane Becker with Cowen. Your line is open.

Helane Becker (Managing Director and Senior Research Analyst)

Thanks very much, operator. Hi, everybody. Thank you for the time this afternoon. Can you maybe, Jimmy, talk about the non-fuel cost pressures that you're seeing, like which airport cost maybe is included in that? I know salaries are up, but the other costs that you're experiencing.

Jimmy Dempsey (EVP and CFO)

There's a couple of things. You know, we're not immune to inflation like the entire economy. You know, we are seeing some inflation in the business being offset by the growth in capacity and the average seats per departure increasing considerably. That is effectively managed inflation. What you're seeing at the moment in the cost base is overstaffing from a crew perspective, both in the pilot and flight attendant world. Then you have some noise around the delivery delays that are happening in the airline, that, you know, move from one quarter to another, some of the financing benefits that we get from sale and leasebacks.

You have some noise that's going on around that, where, you know, the typical Airbus delivery delay is now four to five months, as opposed to three to five months previously. Outside of that, the business is, from a cost perspective, is operating very effectively. You know, our cost differential to the competition is still over $70 a passenger. Pre-COVID, it was $60 a passenger. Our cost advantage against the rest of the industry has widened, and we expect that to continue.

Helane Becker (Managing Director and Senior Research Analyst)

That's very helpful. Thank you. Just as a follow-up question, I noticed in the last, I don't know, random survey, you guys were last in, I guess, consumer satisfaction, if that's a word. I'm wondering how you're thinking about retaining customers as opposed to churning customers. Do I have that wrong and you're not really churning, you just had some bad luck?

Barry Biffle (President and CEO)

Well, I think, you know, when we look at the data, we have one of the highest repeat businesses, in the industry. We have over 90% repeat business. you know, look, I saw one of these recent surveys. I think I would be very careful about. The sources of some of these and how they, how they base that off of. The other thing is when you look at the weightings of some of these, I guess, studies or analysis, they really don't weight price like they should. What you see is that consumers, when they buy air travel, the number one thing they look for, especially for leisure customers, is price.

You know, if you weight price as it should be weighted, I think we're a clear winner when you look at the overall value for consumers, and that's why we continue to have such high repeat business.

Helane Becker (Managing Director and Senior Research Analyst)

Thank you. Very helpful. Thanks, guys.

Operator (participant)

Thank you. Our next question comes from Andrew Didora with Bank of America. Your line is open.

Andrew Didora (Director and Senior Equity Research Analyst)

Hey, good afternoon, everybody. Just in terms of the network changes, right, I know, Barry, you speak about it lowering your execution risk. I would think that, you know, more peak flying maybe kind of, you know, might increase operational risk a bit here. Am I right to think about it that way? Maybe what are you doing to potentially mitigate some of this, you know, operational risk at peak times?

Daniel Shurz (Senior VP of Commercial)

Andrew, it's Daniel. We're broadly speaking, flying the same utilization on peak days. What I was saying is actually, we're just gonna keep the peak utilization up. Well, maybe apply slightly higher peak utilization in and off-peak month because we found the peak days and those off-peak months transform a bit better. We're not pushing, we're not pushing our peak utilization higher than it was before. The lower execution risk is simply you've got with lower off-peak flying, you've got more recovery time during the middle of the week. You've got more recovery time on Saturday, which helps you, and we've seen that. We've seen evidence of this, helps us run a better operation than on both those days and on the peak days that follow.

Barry Biffle (President and CEO)

The other thing I would point out, too, is that if you look at the, you know, March and, especially April, we're the highest utilization airline in total, not just peak days, in total. Yet we've been mid-pack or higher. I think we're fourth place in completion in April as an example. If you can trust anyone to run high utilization effectively and reliably, it's Frontier.

Andrew Didora (Director and Senior Equity Research Analyst)

Got it. Then sort of a follow-up to an earlier question regarding your costs. You know, I guess 2023 capacity did come down a decent chunk, but the midpoint of your OpEx guidance went higher. You know, can you maybe provide a bridge on what is driving that? You know, Jimmy maybe providing some of the bigger cost buckets, that's driving OpEx higher even while capacity is coming down.

Jimmy Dempsey (EVP and CFO)

Yeah, I mean, I mentioned it earlier to Helane's question. You know, the movement of aircraft out of the period, is one of the big drivers of increasing the higher range, the higher end of the range. The other thing that's happening in the business is you have a similar number of departures, but lower ASM production because the stage length is shortening. You have this very similar overall cost base, albeit on slower ASM produced capacity, but a similar level of departures. You end up with a similar cash cost effectively. You do save some money, on fuel, but your airport charges, your station costs in general, and the ground handling costs typically stay similar, you know. That's all you're seeing at the moment.

Andrew Didora (Director and Senior Equity Research Analyst)

Got it. If I could maybe sneak one more, yeah, one more in there. Just in terms of kind of pretax margins for the year. Obviously, fuel came down a bit. Costs are moving higher. Anything changed from your perspective in the way you're thinking about the revenue cadence throughout the year?

Daniel Shurz (Senior VP of Commercial)

Not really. We're expecting the revenue for the rest of the year. We're expecting domestic to look much more like normal years. We're expecting peaks to be good. We're expecting the summer, therefore, Q3 to be strong. We're expecting the usual holiday strength in Q4. We're expecting the cadence through the year to be much more like a normal domestic year.

Andrew Didora (Director and Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. Our next question is coming from Brandon Oglenski from Barclays. Your line is open.

Brandon Oglenski (Managing Director and Senior Analyst)

Hey, good afternoon, and thanks for taking the question. I guess this one's for Barry or Daniel. You know, with the off-peak changes, does this change in any way, like, your new market, strategy, especially in the back half of the year as you get into, you know, the more trough, periods, you know, after the summer?

Barry Biffle (President and CEO)

No, this wouldn't change our new market strategy in particular, although longer hauls are more complicated because if you do wanna reduce midweek flying, it causes inefficient crew pairings, you know, it causes deadheads, as an example. I would say, you know, if you just look at a specific city where this has been most pronounced, it's Las Vegas. I mean, we have seen that, you know, the midweek is just nowhere near what it was prior to the pandemic. You can see it in the pricing of hotels in Las Vegas. You can see it, everything, you know, you can see the strip is packed on a Friday night, but on a Tuesday, it's just little. You can get a reservation anywhere you want.

That is reflecting in our loads as well, as well as fares. That impacts Las Vegas, and it especially impacts long hauls from Vegas, as an example. But overall, we haven't seen anywhere else be that challenged like we've seen in Las Vegas.

Brandon Oglenski (Managing Director and Senior Analyst)

I mean, I guess, Barry, some of the concern in the market is you do definitely have the absolute cost advantage, but is that just not resulting in the stimulation that you guys were seeing maybe pre-pandemic?

Daniel Shurz (Senior VP of Commercial)

No, that, well, no, Brandon, I'll take this one. We're seeing demand strength. We're seeing the ability to stimulate demand in new markets. We are still aggressively expanding the airline. We are aggressively adding new markets, and we're absolutely seeing that strength come through. What we're saying here simply is in off-peak periods, off-peak days a week have been, are further underperforming relative to what we saw pre-pandemic. Again, that's not to say we're not gonna find expansion, we're not gonna find stimulation.

I can point to markets where, which were new last September compared to pre-pandemic, where on the peak days a week, we saw very strong performance. We saw great demand and we continue to see in the future, lots more markets where we can, we're going to see exactly the same thing.

Brandon Oglenski (Managing Director and Senior Analyst)

Okay. Appreciate that. Then maybe just one last one on utilization. If you are taking down off peak, how do you plan to match utilization or do you take a slight penalty there too?

Barry Biffle (President and CEO)

In addition to what? We're not, I mean, look, utilization will be slightly lower, but overall our cost advantage we expect to widen. Let's be clear that our cost advantage is widening even with these changes. This is less than a 10% move. This is not that dramatic of a change. We expect that this is accretive you know, couple points in margin from a profitability perspective. This isn't a major change in our business. It's just a tweak that we're just seeing that travel patterns, people are willing to pay a lot more to travel Thursday, Sunday than they did even before, and there's more of them.

The work from home and I would actually argue it's less the work from home, but more the work flexibility, where people are working two and three days a week in the office. The most common two days in the office are Tuesdays and Wednesdays. It's no coincidence. It's this is not some, you know, just mysterious black box of information. That's why travel for leisure is the hardest on Tuesdays and Wednesdays. That, to be blunt, we've got to utilize the airline and we're better at it than anybody on the other days of the week, but Tuesday, Wednesday is just not as pronounced as it was before. It's not gonna kill our business.

Brandon Oglenski (Managing Director and Senior Analyst)

Thank you, Barry.

Barry Biffle (President and CEO)

It's actually gonna make it stronger.

Brandon Oglenski (Managing Director and Senior Analyst)

Thank you.

Barry Biffle (President and CEO)

Yeah, thanks.

Operator (participant)

Thank you. Our next question comes from Michael Linenberg from Deutsche Bank. Your line is open.

Shannon Doherty (Equity Research Analyst)

Hi, good afternoon. This is actually Shannon Doherty on for Mike. Barry, I appreciate the details that you gave in the script about the GoWild! Pass and saw that you recently put the summer pass on sale, I think, for $499. You know, I just wonder whether that was demand driven or if you're just trying to sell even more and, you know, like, do you hit a limit in the number of passes that you can sell maybe on like a credit card, just thinking about, you know, fleet growth and capacity?

Barry Biffle (President and CEO)

Well, there are actually, I mean, ultimately, there's a limit. We want to, we want GoWild! to be, you know, the highest NPS product that's out there. We want to sell it at favorable prices, but ultimately, there is a limit just like there's a limit on how many seats you can sell. Even, I think credit cards would actually eventually have a limit to people because they only have so much capacity. No, we're really excited about it. It's probably been, you know, the best received product that we've ever launched.

I think, if I recall, I think you were personally interested in it yourself, so, hopefully you've taken advantage of the, of the great deals and, we're really excited about it. Yes, there is ultimately going to be a limit. You know, we've said this before publicly, and that's why I said, you know, it could be a couple points in load factor is look, we had six million seats that were going to potentially go empty. We've said if we could just fill a third of those, that's two million seats. This isn't tough math, right? That's several points in load factor. You can kind of back into there.

Yes, there will be a limit, based on how many times they fly, and how much the usage is how many we could actually sell. We don't believe we've hit that yet.

Shannon Doherty (Equity Research Analyst)

Great. Thanks. Just my second question. I noticed that you guys filed a schedule through spring 2024, but about a week ago, you know, fully cut it beyond November. What was that about? Was that more just, you know, unsure about the demand beyond the summer? Or does it have to do with this peak, off-peak month and day changes that you guys are making? Anything you have there would help.

Daniel Shurz (Senior VP of Commercial)

It's Daniel. No, that was actually an error by the industry schedules provider. They mistakenly took our full schedule and just extended it forward into the winter. We have a schedule on sale to customers through November 15th. That's the current furthest out extension we have for this year, and we've never had a date on sale to customers beyond that time.

Shannon Doherty (Equity Research Analyst)

Got it. Makes sense. All right. Thank you guys.

Barry Biffle (President and CEO)

No, thank you.

Operator (participant)

Our next question comes from Christopher Stathoulopoulos from Susquehanna International Group.

Christopher Stathoulopoulos (Senior Equity Research Analyst)

Good afternoon, everyone. Thanks for taking my question. Barry, I think this is the second cut to the 2023 capacity guide from around, I think 42 billion ASMs you outlined in November. February was on Airbus. Today is network changes, and it sounds like some additional delays, but of smaller size. At this point, if there are additional delays in deliveries, can you offset that with utilization or something else? You know, just how do we get comfortable with the current guide in light of what looks to be like elevated risks with the OEMs at least through year-end? Thank you.

Barry Biffle (President and CEO)

Well, I think, look, we have been disappointed in their delivery stream, but I think as we get closer and closer and we're watching them, you know, like a hawk, to be honest, I think we're growing in confidence that, yes, it's firming up. I think they've gotten their bad news out. I think it's pretty firm. Again, I'm not gonna speak for Airbus. They could have another challenge, but it looks pretty good. On a utilization basis, look, I mean, if fuel prices change, if demand changes somewhat, we have the ability to add more capacity.

I think at this point, you know, given that they're four months in and they've pushed another two aircraft, I think that kinda shows the magnitude of the change, which is not a big material piece from here on out. Again, like the capacity changes we're making right now, this is elective. We could put these ASMs back in. We just think that we can make more money without flying them. Quite honestly, we'll make more money and we continue to have the lowest cost in the business, and we'll have an even widening cost advantage. It's really an unnecessary utilization.

Christopher Stathoulopoulos (Senior Equity Research Analyst)

Okay. As a follow-up, as we look at the network plans that you outlined in November, which included this focus on building a more modular network, does this change in capacity impact the plans? Is it sort of, you know, unchanged and just there's a different path now to get there, or is it gonna take longer? Just if you could put a little finer point on how we should think about the plans you outlined at your investor day versus this new dynamic. Yeah, plans you have. Thanks.

Daniel Shurz (Senior VP of Commercial)

Absolutely. This is Daniel. From a modularity perspective, when we were talking in November, we implemented that. We implemented that increasingly high modularity network in November. We have continued, we continue to work in that with that design approach to the network. That will continue. That will continue even with this off-peak capacity cut. We've made the network increasingly designed around one-day crew trips. One-day crew trips obviously work perfectly with day of week variance because if you have the trip in the schedule on Monday and you don't have it on Tuesday, that's fine.

To the extent we are a mix of one and two-day crew trips, primarily, two-day crew trips, we'll make sure they're in markets that actually want to fly seven days a week. There's not a problem with that either. I don't expect any change to the modularity. I don't expect any change to the crew efficiency from moving in this direction.

Christopher Stathoulopoulos (Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question, press star one one on your telephone. Again, that's star one one to ask a question. Our next question comes from Filipe Nielsen from Citi. Your line is open.

Filipe Nielsen (Equity Research Analyst)

Hi, guys. It's Felipe speaking from Stephen Trent's team at Citi. Thanks for taking my question. Well, we're curious about to hear from you about to what extent do you see upside from code sharing with Mexican carrier Volaris, in case Mexico regains its category one status on safety rating? I have a follow-up question after that.

Barry Biffle (President and CEO)

Yeah. Dan, Daniel can answer it.

Daniel Shurz (Senior VP of Commercial)

Yeah, we obviously have a codeshare with Volaris. We're suspended under the downgrade of Mexico. We are not allowed to codeshare on Volaris. Volaris continues to operate a codeshare on Frontier flights. Assuming Mexico is re-upgraded, when Mexico is re-upgraded to category one, we will resume putting our code on Volaris-operated flights.

Filipe Nielsen (Equity Research Analyst)

Okay, great. Great color, guys. Just a second follow-up on my side. How do you feel about your current pipeline of mechanics? Curious to hear about.

Barry Biffle (President and CEO)

That's a great question, Felipe. You know, people talk a lot about the pilots, but actually the mechanic shortage is also real. It's not, you know, kind of the numbers that we've seen for the pilots, but it is a challenge. The industry overall has had some difficulty, I think, you know, attracting the younger generations to go and choose that vocational path and get into training. We have actually seen, you know, I think pockets of issues. So it's a little different than the pilots because the pilots, you know, you can move them around the system, if you will. It seems to be much more a local market issue, where we have challenges in some places.

We've seen strength in kind of the Sun Belt, you know, in the pockets of where we're growing the network. You also see in some cities there are shortages. It changes the incentives you have to in order to hire them, and they vary by city. We've been doing a lot of things to actually, you know, just like we've done, we haven't been talking about it, but just like we've been doing with our cadet program. Our head of HR, he has been going out and putting together a recruiting team, and we're working with a lot of the schools that are producing mechanics.

We feel good about the pipeline that we've put together. Yes, it is an issue. A lot of people don't wanna talk about it or haven't recognized it, but it is an issue and we're, we've been managing it now for well over a year. The truth is that, you know, Frontier remains an attractive place to work for our pilots as well as mechanics. We have a pretty good pipeline of folks coming in.

Filipe Nielsen (Equity Research Analyst)

Great. Super clear. Thanks for the call, guys.

Barry Biffle (President and CEO)

Yeah. Thanks, Filipe.

Operator (participant)

Thank you. I'm showing no further questions in the queue. I'd like to turn the call back over to Barry Biffle for closing remarks.

Barry Biffle (President and CEO)

Hey, I wanna thank everybody for joining today, and especially those of you that asked questions. Appreciate those thoughtful questions, and we look forward to talking to you again in the next quarter. Thanks, everyone.

Operator (participant)

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