Frontier Group Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2023

General

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8. “Financial Statements and Supplementary Data” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on February 22, 2023 (the “2022 Annual Report”). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the “Risk Factors” section of our 2022 Annual Report and other factors set forth in other parts of this Quarterly Report on Form 10-Q and our other reports and documents filed with the SEC.

Overview

Frontier Airlines, Inc. (“Frontier”) is an ultra low-cost carrier whose business strategy is focused on Low Fares Done Right. We are headquartered in Denver, Colorado and offer flights throughout the United States and to select near international destinations in the Americas. Our unique strategy is underpinned by our low-cost structure and superior low-fare brand.

The following table provides select financial and operational information for the three and six months ended June 30, 2023 and 2022, respectively:

(in millions)

(in millions)

Total operating revenues for the three and six months ended June 30, 2023 totaled $967 million and $1,815 million, respectively, an increase of 6% and 20% compared to the three and six months ended June 30, 2022, respectively. This was primarily due to an increase in capacity, as measured by ASMs, as compared to the corresponding periods in 2022, along with an increase in ancillary revenue per passenger, partially offset by a decrease in fare revenue per passenger.

Total operating expenses during the three and six months ended June 30, 2023 totaled $888 million and $1,761 million, respectively, resulting in a cost per available seat mile (“CASM”) of 9.51¢ and 9.72¢, compared to 11.87¢ and 11.04¢ for the three and six months ended June 30, 2022, respectively. Fuel expense was 27% lower and 3% lower during the three and six months ended June 30, 2023, respectively, as compared to the three and six months ended June 30, 2022. The $91 million and $14 million decrease in fuel expense for the three and six months ended June 30, 2023, respectively, compared to the corresponding periods in 2022, are primarily driven by a 39% and 18% decrease in fuel rates, partially offset by the 19% and 18% increase in fuel gallons consumed during the three and six months ended June 30, 2023, respectively, as a result of the 23% and 20% increase in capacity, respectively. Our non-fuel expenses increased by 14% and 10% during the three and six months ended June 30, 2023, respectively, as compared to the corresponding prior year periods, driven primarily by higher capacity and a larger fleet size and the resulting increase in operations during these same periods. CASM (excluding fuel), a non-GAAP measure, decreased 8% for the three months ended June 30, 2023 to 6.90¢, as compared to the corresponding period in 2022, as a result of the increase to capacity and was also favorably impacted by station costs due mainly to lower passenger reaccomodation costs, the fixed nature of aircraft rent expense, insignificant transaction and merger-related costs and lower sales and marketing costs, which was partially offset by higher maintenance, material and repair costs. CASM (excluding fuel), a non-GAAP measure, decreased 8% for the six months ended June 30, 2023 to 6.77¢, as compared to the corresponding period in 2022, as a result of the increase to capacity and was also favorably impacted by lower aircraft rent including the reversal of $18 million of previously accrued lease return costs, higher sale-leaseback gains, lower transaction and merger-related expenses and the semi-fixed nature of certain airport costs, partially offset by higher maintenance, material and repair costs. Adjusted (non-GAAP) CASM (excluding fuel) decreased from 7.24¢ for the three months ended June 30, 2022 to 6.90¢ for the three months ended June 30, 2023. For the three months ended June 30, 2022, this excludes the impact of $9 million in transaction and merger-related costs, $7 million in asset impairment charges and $1 million in collective bargaining contract ratification costs. There were no adjustments for the three months ended June 30, 2023. Adjusted (non-GAAP) CASM (excluding fuel) decreased from 7.19¢ for the six months ended June 30, 2022 to 6.76¢ for the six months ended June 30, 2023. For the six months ended June 30, 2022, this excludes the impact of $20 million in transaction and merger-related costs, $7 million in asset impairment charges and $1 million in collective bargaining contract ratification costs. For the six months ended June 30, 2023, this excludes the impact of $1 million in transaction and merger-related costs. For the reconciliation to corresponding generally accepted accounting principles in the United States (“GAAP”) measures, see “Results of Operations—Reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest.”

We generated net income of $71 million and $58 million during the three and six months ended June 30, 2023, respectively, compared to net income of $13 million and a net loss of $108 million for the three and six months ended June 30, 2022, respectively. Considering these aforementioned non-GAAP adjustments and the related tax impacts, our adjusted (non-GAAP) net income was $71 million and $59 million for the three and six months ended June 30, 2023, respectively, as compared to an adjusted (non-GAAP) net income of $20 million and a net loss of $89 million for the three and six months ended June 30, 2022, respectively. For the reconciliation to corresponding GAAP measures, see “Results of Operations—Reconciliation of Pre-Tax Income (Loss) to Adjusted Pre-Tax Income (Loss), Net Income (Loss) to Adjusted Net Income (Loss) and to EBITDA, EBITDAR, Adjusted EBITDA, and Adjusted EBITDAR.”

As of June 30, 2023, our total available liquidity was $780 million, made up of cash and cash equivalents. On February 2, 2022, we repaid the $150 million outstanding under our term loan facility (the “Treasury Loan”) with the U.S. Department of the Treasury (the “Treasury”). The repayment of this loan unencumbered our co-branded credit card program and related brand assets that secured the Treasury Loan obligation.

Results of Operations

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Operating Revenues

Total operating revenue increased $58 million, or 6%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, as we experienced increased demand for leisure travel. Revenue was favorably impacted by a 23% capacity growth, as measured by ASMs, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. This was driven by a 12% increase in average aircraft in service during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, as well as a 6% increase in average daily aircraft utilization to 11.5 hours per day for the three months ended June 30, 2023, as compared to 10.9 hours per day for the corresponding prior year period. Revenue was unfavorably impacted by the 14% decline in RASM due to the 9% decline in revenue per passenger mainly caused by moderation of fare revenue per passenger and the 8% increase in average stage length, partially offset by a 6% increase in total ancillary revenue per passenger and increased load factors during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022.

Operating Expenses

N/M = Not meaningful

(a) Cost per ASM figures may not recalculate due to rounding.

(b) These metrics are not calculated in accordance with GAAP. See the reconciliation to corresponding GAAP measures provided below.

Reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest

($ in millions)

($ in millions)

(a) Cost per ASM figures may not recalculate due to rounding.

(b) CASM (excluding fuel) and Adjusted CASM (excluding fuel) are included as supplemental disclosures because we believe that excluding aircraft fuel is useful to investors as it provides an additional measure of management’s performance excluding the effects of a significant cost item over which management has limited influence. The price of fuel, over which we have limited control, impacts the comparability of period-to-period financial performance, and excluding the price of fuel allows management an additional tool to understand and analyze our non-fuel costs and core operating performance, and increases comparability with other airlines that also provide a similar metric. CASM (excluding fuel) and Adjusted CASM (excluding fuel) are not determined in accordance with GAAP and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

(c) Represents $5 million in employee retention costs and $4 million in transaction costs, including banking, legal and accounting fees, incurred in connection with the terminated Merger with Spirit, for the three months ended June 30, 2022.

(d) Represents a write-off of $7 million in capitalized software development costs as a result of a termination of a vendor arrangement.

(e) Represents $1 million of costs related to the collective bargaining contract ratification costs earned through May 2023 and committed to by us as part of an agreement with the union representing our aircraft technicians that was ratified and became effective in May 2022.

(f) Adjusted CASM is included as supplemental disclosure because we believe it is a useful metric to properly compare our cost management and performance to other peers, as derivations of Adjusted CASM are well-recognized performance measurements in the airline industry that are frequently used by our management, as well as by investors, securities analysts and other interested parties in comparing the operating performance of companies in the airline industry. Additionally, we believe this metric is useful because it removes certain items that may not be indicative of base operating performance or future results. Adjusted CASM is not determined in accordance with GAAP, may not be comparable across all carriers and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

(g) Adjusted CASM including net interest and CASM including net interest are included as supplemental disclosures because we believe they are useful metrics to properly compare our cost management and performance to other peers that may have different capital structures and financing strategies, particularly as it relates to financing primary operating assets such as aircraft and engines. Additionally, we believe these metrics are useful because they remove certain items that may not be indicative of base operating performance or future results. Adjusted CASM including net interest and CASM including net interest are not determined in accordance with GAAP, may not be comparable across all carriers and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Aircraft Fuel. Aircraft fuel expense decreased by $91 million, or 27%, during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. The decrease was primarily due to a 39% decrease in fuel rates partially offset by a 19% increase in fuel gallons consumed due to increased capacity.

Salaries, Wages and Benefits. Salaries, wages and benefits expense increased by $37 million, or 21%, during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. The increase was primarily due to higher crew costs, primarily from pilots, driven by elevated credit hours and other benefit costs, as well as increased headcount of salaried support staff.

Aircraft Rent. Aircraft rent expense increased by $15 million, or 11%, during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, primarily due to a larger fleet and higher costs associated with anticipated lease returns.

Station Operations. Station operations expense increased by $4 million, or 3%, during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, primarily due to a 17% and 11% increase in passengers and departures, respectively, as well as higher station agent commission costs partially offset by lower passenger reaccommodation expenses.

Sales and Marketing. Sales and marketing expense decreased by $2 million, or 4%, during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, primarily due to a reduction in media advertising expense and lower booking fees, partially offset by higher credit card fees resulting from the 6% increase in revenue. The following table presents our distribution channel mix:

Maintenance, Materials and Repairs. Maintenance, materials and repair expense increased by $21 million, or 68%, during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. This was primarily due to more average aircraft in service and higher average daily utilization per aircraft, which resulted in higher maintenance costs, including higher aircraft materials and airframe check expenses, as well as associated contract labor costs.

Depreciation and Amortization. Depreciation and amortization expense decreased by $3 million, or 20%, during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, primarily due to a loss on asset disposal during the comparable period, partially offset by an increase in capital maintenance.

Transaction and Merger-Related Costs. Transaction and merger-related costs decreased by $9 million during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, as the Merger Agreement was terminated on July 27, 2022.

Other Operating Expenses. Other operating expenses increased by $14 million, or 36%, during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. The increase was primarily driven by increased administrative costs, including IT and professional services as well as higher travel expenses relating to crew accommodations, driven by an increase in capacity. These increases were partially offset by lower gains on sale-leaseback transactions compared to the corresponding prior period.

Other Income (Expense). Other income increased by $8 million during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. Higher interest rates and increased balances in our interest-bearing cash accounts contributed to an increase in interest income. Additionally, higher interest rates contributed to greater capitalized interest which was partially offset by interest expense as a result of rate increases on our variable rate debt.

Income Taxes. Our effective tax rate for the three months ended June 30, 2023 was an expense of 19.3%, compared to a benefit of 62.5% for the three months ended June 30, 2022. The effective tax rate for the three months ended June 30, 2023 was lower than the statutory rate primarily due to excess tax benefits associated with our stock-based compensation arrangements. The increase in the estimated annual tax rate for the six months ended June 30, 2022, as compared to the estimated annual effective rate for the first quarter of 2022, resulted in an income tax benefit for the three months ended June 30, 2022.

Results of Operations

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Operating Revenues

Total operating revenue increased $301 million, or 20%, during the six months ended June 30, 2023 compared to the six months ended June 30, 2022, as we experienced increased demand for leisure travel. Revenue was favorably impacted by 20% capacity growth, as measured by ASMs, during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. This was driven by an 11% increase in average aircraft in service during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, as well as a 6% increase in average daily aircraft utilization to 11.4 hours per day for the six months ended June 30, 2023, as compared to 10.8 hours per day for the corresponding prior year period. RASM remained consistent for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, as load factor increased 4.9 pts. and ancillary revenue per passenger increased 10%, partially offset by a 7% increase in average stage length and a 1% decrease in total revenue per passenger.

Operating Expenses

N/M = Not meaningful

(a) Cost per ASM figures may not recalculate due to rounding.

(b) These metrics are not calculated in accordance with GAAP. See the reconciliation to corresponding GAAP measures provided below.

Reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest

($ in millions)

($ in millions)

(a) Cost per ASM figures may not recalculate due to rounding.

(b) CASM (excluding fuel) and Adjusted CASM (excluding fuel) are included as supplemental disclosures because we believe that excluding aircraft fuel is useful to investors as it provides an additional measure of management’s performance excluding the effects of a significant cost item over which management has limited influence. The price of fuel, over which we have limited control, impacts the comparability of period-to-period financial performance, and excluding the price of fuel allows management an additional tool to understand and analyze our non-fuel costs and core operating performance, and increases comparability with other airlines that also provide a similar metric. CASM (excluding fuel) and Adjusted CASM (excluding fuel) are not determined in accordance with GAAP and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

(c) Represents $1 million in employee retention costs incurred in connection with the terminated Merger with Spirit for the six months ended June 30, 2023. Represents $12 million in transaction costs, including banking, legal and accounting fees, and $8 million in employee retention costs incurred in connection with the terminated Merger with Spirit for the six months ended June 30, 2022.

(d) Represents a write-off of $7 million in capitalized software development costs as a result of a termination of a vendor arrangement.

(e) Represents $1 million of costs related to a one-time contract ratification incentive, plus payroll-related taxes earned through May 2023 and committed to by us as part of an agreement with the union representing our aircraft technicians that was ratified and became effective in May 2022.

(f) Adjusted CASM is included as supplemental disclosure because we believe it is a useful metric to properly compare our cost management and performance to other peers, as derivations of Adjusted CASM are well-recognized performance measurements in the airline industry that are frequently used by our management, as well as by investors, securities analysts and other interested parties in comparing the operating performance of companies in the airline industry. Additionally, we believe this metric is useful because it removes certain items that may not be indicative of base operating performance or future results. Adjusted CASM is not determined in accordance with GAAP, may not be comparable across all carriers and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

(g) On February 2, 2022, we repaid the Treasury Loan, which resulted in a one-time write-off of the remaining $7 million in unamortized deferred financing costs related to the Treasury Loan. This amount is a component of interest expense.

(h) Adjusted CASM including net interest and CASM including net interest are included as supplemental disclosures because we believe they are useful metrics to properly compare our cost management and performance to other peers that may have different capital structures and financing strategies, particularly as it relates to financing primary operating assets such as aircraft and engines. Additionally, we believe these metrics are useful because they remove certain items that may not be indicative of base operating performance or future results. Adjusted CASM including net interest and CASM including net interest are not determined in accordance with GAAP, may not be comparable across all carriers and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Aircraft Fuel. Aircraft fuel expense decreased by $14 million, or 3%, during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. The decrease was primarily due to an 18% decrease in fuel rates, partially offset by the 18% increase in gallons consumed, driven by our higher capacity.

Salaries, Wages and Benefits. Salaries, wages and benefits expense increased by $68 million, or 20%, during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. The increase was primarily due to higher crew costs, primarily from pilots, driven by elevated credit hours and other benefit costs, and an increased headcount of salaried support staff for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

Aircraft Rent. Aircraft rent expense increased by $18 million, or 7%, during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, primarily due to a larger fleet, partially offset by the reversal of $18 million of previously accrued lease return costs due to a four-year lease extension of two of our aircraft.

Station Operations. Station operations expense increased by $23 million, or 10%, during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, primarily due to a 21% and 11% increase in passengers and departures, respectively, as well as higher station agent commissions costs partially offset by lower passenger reaccommodation expenses.

Sales and Marketing. Sales and marketing expense increased by $6 million, or 8%, during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, primarily due to higher credit card fees resulting from the 20% increase in revenue, partially offset by a reduction in media advertising. The following table presents our distribution channel mix:

Maintenance, Materials and Repairs. Maintenance, materials and repair expense increased by $32 million, or 49%, during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. This was primarily due to more average aircraft in service and higher average daily utilization per aircraft, which resulted in higher maintenance costs, including higher aircraft materials and airframe check expenses, as well as associated contract labor costs.

Depreciation and Amortization. Depreciation and amortization expense decreased by $5 million, or 18%, during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, primarily due to a loss on asset disposal during the six months ended June 30, 2023, partially offset by an increase in capital maintenance.

Transaction and Merger-Related Costs. Transaction and merger-related costs decreased by $19 million, or 95%, during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, as the Merger Agreement was terminated on July 27, 2022.

Other Operating Expenses. Other operating expenses decreased by $8 million, or 9%, during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. The decrease was primarily driven by $29 million in additional sale-leaseback gains, partially offset by increases to supplies and general and administrative costs, including IT and professional services, as well as increases to travel expenses relating to crew accommodations, driven by an increase in capacity.

Other Income (Expense). Other income increased by $24 million during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. Higher interest rates and increased balances in our interest-bearing cash accounts contributed to an increase in interest income. Additionally, higher interest rates contributed to greater capitalized interest which was partially offset by interest expense as a result of rate increases on our variable rate debt, and during the six months ended June 30, 2022, there was a $7 million loss from the extinguishment of debt related to the write-off of unamortized deferred financing costs associated with the Treasury Loan.

Income Taxes. Our effective tax rate for the six months ended June 30, 2023 was an expense of 18.3%, compared to a benefit of 29.4% for six months ended June 30, 2022. The effective tax rate for the six months ended June 30, 2023 was lower than the statutory rate primarily due to excess tax benefits associated with our stock-based compensation arrangements. The effective tax rate for the six months ended June 30, 2022 is higher than the statutory rate due to the non-deductibility of certain executive compensation costs and other employee benefits.

Reconciliation of Pre-Tax Income (Loss) to Adjusted Pre-Tax Income (Loss), Net Income (Loss) to Adjusted Net Income (Loss) and to EBITDA, EBITDAR, Adjusted EBITDA, and Adjusted EBITDAR

(in millions)

(in millions)

(a) Adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of pre-tax income, net income and EBITDA are well-recognized performance measurements in the airline industry that are frequently used by our management, as well as by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry.

Adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA have limitations as analytical tools. Some of the limitations applicable to these measures include: adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; EBITDA and adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; EBITDA, and adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness or possible cash requirements related to our warrants; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and adjusted EBITDA do not reflect any cash requirements for such replacements; and other companies in our industry may calculate adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA differently than we do, limiting their usefulness as comparative measures. Because of these limitations, adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA should not be considered in isolation from or as a substitute for performance measures calculated in accordance with GAAP. In addition, because derivations of adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, derivations of pre-tax income (loss), net income (loss) and EBITDA, including adjusted pre-tax income (loss), adjusted net income (loss) and adjusted EBITDA, as presented may not be directly comparable to similarly titled measures presented by other companies.

For the foregoing reasons, each of adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.

(b) EBITDAR and adjusted EBITDAR are included as a supplemental disclosure because we believe them to be useful solely as valuation metrics for airlines as their calculations isolate the effects of financing in general, the accounting effects of capital spending and acquisitions (primarily aircraft, which may be acquired directly, directly subject to acquisition debt, by capital lease or by operating lease, each of which is presented differently for accounting purposes), and income taxes, which may vary significantly between periods and for different airlines for reasons unrelated to the underlying value of a particular airline. However, EBITDAR and adjusted EBITDAR are not determined in accordance with GAAP, are susceptible to varying calculations and not all companies calculate the measure in the same manner. As a result, EBITDAR and adjusted EBITDAR, as presented, may not be directly comparable to similarly titled measures presented by other companies. In addition, EBITDAR and adjusted EBITDAR should not be viewed as a measure of overall performance since they exclude aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. Accordingly, you are cautioned not to place undue reliance on this information.

(in millions)

(in millions)

(a) See “Reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest” above for discussion on adjusting items.

Comparative Operating Statistics

The following table sets forth our operating statistics for the three and six months ended June 30, 2023 and 2022. These operating statistics are provided because they are commonly used in the airline industry and, as such, allow readers to compare our performance against our results for the corresponding prior year period, as well as against the performance of our peers.

(a) See “Glossary of Airline Terms” for definitions of terms used in this table.

(b) These metrics are not calculated in accordance with GAAP. For the reconciliation to corresponding GAAP measures, see “Results of Operations—Reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest.”

Liquidity, Capital Resources and Financial Position

Overview

As of June 30, 2023, we had $780 million in total available liquidity, made up of cash and cash equivalents. We had $430 million of total debt, net, of which $237 million is short-term. Our total debt, net is comprised of our $270 million pre-delivery payment (“PDP”) facility (“PDP Financing Facility”), $80 million pre-purchased miles facility with Barclays Bank Delaware (“Barclays”), $66 million in 10-year, low-interest loans from the Treasury (the “PSP Promissory Notes”) and $17 million in secured indebtedness for our headquarters building, partially offset by $3 million in deferred debt acquisition costs and other discounts.

On February 2, 2022, we repaid the Treasury Loan, which included the $150 million principal balance along with accrued interest and associated fees of $1 million. As a result, we recognized a $7 million non-cash charge from the write-off of unamortized deferred financing costs associated with the Treasury Loan for the six months ended June 30, 2022.

In connection with the PSP Promissory Notes and Treasury Loan, we issued to the Treasury warrants to purchase 3,117,940 shares of our common stock at a weighted-average price of $6.95 per share. We have the intent and ability to settle the warrants issued to the Treasury in common shares and we have classified the warrant liability to additional paid-in-capital on our condensed consolidated balance sheet. The Treasury has not exercised any warrants as of June 30, 2023.

We continue to monitor our covenant compliance with various parties, including, but not limited to, our lenders and credit card processors. As of the date of this report, we are in compliance with all of our covenants.

The following table presents the major indicators of our financial condition and liquidity:

($ in millions)

Use of Cash and Future Obligations

We expect to meet our cash requirements for the next twelve months through use of our available cash and cash equivalents, our PDP Financing Facility and cash flows from operating activities. We expect to meet our long-term cash requirements with cash flows from operating and financing activities, including, but not limited to, potential future borrowings on our PDP Financing Facility and/or potential issuances of debt or equity. Our primary uses of cash are for working capital, aircraft PDPs, debt repayments and capital expenditures.

Our single largest capital commitment relates to the acquisition of aircraft. As of June 30, 2023, we operated all of our 126 aircraft under operating leases. PDPs relating to future deliveries under our agreement with Airbus are required at various times prior to each aircraft’s delivery date. As of June 30, 2023, we had $380 million of PDPs held by Airbus which have been partially financed by our PDP Financing Facility. As of June 30, 2023, our PDP Financing Facility, which allows us to draw up to an aggregate of $270 million, had $270 million outstanding. As of June 30, 2023, we had a firm obligation to purchase 217 A320neo family aircraft and 17 additional spare engines to be delivered by 2029. Of our aircraft commitments, four had committed operating leases for 2023 deliveries, and we are evaluating financing options for the remaining aircraft. As of June 30, 2023, we had signed lease agreements with two of our leasing partners to add ten additional A321neo aircraft through direct leases. Five deliveries occurred in the six months ended June 30, 2023, with the remaining five deliveries continuing into the third quarter of 2023, based on the latest delivery schedule. These direct lease aircraft are not included in the 217 aircraft subject to the purchase agreements with Airbus discussed above.

Additionally, we are required by some of our aircraft lease agreements to pay maintenance reserves to our respective aircraft lessors in advance of the performance of major maintenance activities; these payments act as collateral for the lessors to ensure aircraft are returned in the agreed upon condition at the end of the lease period. Qualifying payments that are expected to be recovered from lessors are recorded as aircraft maintenance deposits on our condensed consolidated balance sheets. During the six months ended June 30, 2023 and 2022, we made $9 million and $10 million, respectively, in maintenance deposit payments to our lessors. As of June 30, 2023, we had $109 million in recoverable aircraft maintenance deposits on our condensed consolidated balance sheet, of which $24 million was included in accounts receivable because the eligible maintenance had been performed and the remaining $85 million was included within aircraft maintenance deposits.

The following table summarizes current and long-term material cash requirements as of June 30, 2023, which we expect to fund primarily with operating and financing cash flows (in millions):

(a) Includes principal commitments only associated with our PDP Financing Facility pertaining to deliveries through 2025, our floating rate building note through December 2023, our affinity card unsecured debt due through 2029 and the PSP Promissory Notes due through 2031. See “Notes to Condensed Consolidated Financial Statements — 6. Debt”.

(b) Represents interest on debt obligations.

(c) Represents gross cash payments related to our operating lease obligations that are not subject to discount as compared to the obligations measured on our condensed consolidated balance sheets. See “Notes to Condensed Consolidated Financial Statements — 7. Operating Leases”.

(d) Represents purchase commitments for aircraft and engines. See “Notes to Condensed Consolidated Financial Statements — 9. Commitments and Contingencies”.

(e) Represents fixed maintenance reserve payments for aircraft including estimated amounts for contractual price escalations. See “Notes to Condensed Consolidated Financial Statements — 7. Operating Leases”.

Cash Flows

The following table presents information regarding our cash flows in the six months ended June 30, 2023 and 2022:

(in millions)

Operating Activities

During the six months ended June 30, 2023, net cash used in operating activities totaled $34 million, which was driven by $79 million of outflows from changes in operating assets and liabilities and non-cash adjustments totaling $13 million, partially offset by $58 million of net income.

The $79 million of outflows from changes in operating assets and liabilities include:

• $93 million increase in other long-term assets driven by increases in capitalized maintenance, prepaid maintenance, prepaid bonuses and capitalized interest;
• $60 million decrease in other liabilities driven primarily by leased aircraft return payments and decreased return costs, and other related accruals; and
• $9 million increase in aircraft maintenance deposits; partially offset by
• $40 million increase in our air traffic liability;
• $28 million decrease in accounts receivable due to station and credit card receivables;
• $9 million decrease in supplies and other current assets; and
• $6 million increase in accounts payable.

Our net income of $58 million was also adjusted by the following non-cash items to arrive at cash used in operating activities:

• $57 million gain recognized on sale-leaseback transactions; partially offset by
• $23 million depreciation and amortization;
• $13 million deferred tax expense;
• $7 million stock-based compensation expense; and
• $1 million in amortization of swaption cash flow hedges, net of tax.

During the six months ended June 30, 2022, net cash used in operating activities totaled $67 million, which was driven by a $108 million net loss and non-cash adjustments totaling $30 million, partially offset by inflows from changes in operating assets and liabilities of $71 million.

The $71 million of inflows from changes in operating assets and liabilities include:

• $99 million increase in our air traffic liability as a result of increased bookings;
• $56 million increase in other liabilities driven by growth in the business, reflected primarily through increases in our accrued fuel of $30 million, leased aircraft return costs of $30 million and passenger tax accounts of $26 million, partially offset by a $26 million payment to FAPAInvest LLC for their phantom equity units; and
• $8 million increase in accounts payable; partially offset by
• $42 million increase in other long-term assets driven by increases in deferred taxes and prepaid maintenance;
• $34 million increase in supplies and other current assets driven by growth in the business, including increased fuel balances;
• $10 million increase in aircraft maintenance deposits; and
• $6 million increase in accounts receivable driven by increases in bookings.

Our net loss of $108 million was also adjusted by the following non-cash items to arrive at cash used in operating activities:

• $45 million deferred tax benefits; and
• $28 million gain recognized on sale-leaseback transactions; partially offset by
• $28 million depreciation and amortization;
• $7 million losses from the extinguishment of debt;
• $7 million stock-based compensation expense; and
• $1 million in amortization of swaption cash flow hedges, net of tax.

As of June 30, 2023, we did not have any other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our results of operations, financial condition or cash flows.

Investing Activities

During the six months ended June 30, 2023, net cash used in investing activities totaled $33 million, driven by:

• $23 million cash outflows for capital expenditures;
• $9 million net outflows for PDP activity; and
• $1 million cash proceeds relating to other investing activity.

During the six months ended June 30, 2022, net cash used in investing activities totaled $57 million, driven by:

• $41 million net payments for pre-delivery deposit activity;
• $14 million cash outflows for capital expenditures; and
• $2 million cash outflows relating to other investing activity.

Financing Activities

During the six months ended June 30, 2023, net cash provided by financing activities was $86 million, primarily driven by:

• $89 million cash inflows from sale-leaseback transactions related to A320neo family aircraft and spare engines delivered during the six months ended June 30, 2023; and
• $52 million cash proceeds from debt issuances, consisting of $44 million draws on our PDP Financing Facility and $9 million draws on our Barclays facility, net of issuance costs; partially offset by
• $51 million cash outflows from principal repayments on our PDP Financing Facility; and
• $5 million cash outflows for payments related to minimum tax withholdings of share-based awards.

During the six months ended June 30, 2022, net cash used in financing activities was $28 million, primarily driven by:

• $189 million cash outflows from principal repayments on long-term debt; which includes the paydown of the $150 million Treasury Loan and $39 million in PDP Financing Facility payments; and
• $3 million cash outflows for payments related to minimum tax withholdings of share-based awards; partially offset by
• $141 million cash proceeds from debt issuances, made up of a $56 million draw on our Barclays facility and $85 million in draws on our PDP Financing Facility, net of issuance costs; and
• $23 million in cash inflows from sale-leaseback transactions related to A320neo family aircraft and spare engine delivered during the six months ended June 30, 2022.

Critical Accounting Policies and Estimates

For information regarding all other critical accounting policies and estimates, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” contained in our 2022 Annual Report.

Recently Adopted Accounting Pronouncements

See “Notes to Consolidated Financial Statements —1. Summary of Significant Accounting Policies” included in Part II, Item 8 of our 2022 Annual Report for a discussion of recent accounting pronouncements.

GLOSSARY OF AIRLINE TERMS

Set forth below is a glossary of industry terms:

“A320 family” means, collectively, the Airbus series of single-aisle aircraft, including the A320ceo, A320neo, A321ceo and A321neo aircraft.

“A320neo family” means, collectively, the Airbus series of single-aisle aircraft that feature the new engine option, including the A320neo and A321neo aircraft.

“Adjusted CASM” is a non-GAAP measure and means operating expenses, excluding special items, divided by ASMs. For a discussion of such special items and a reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest, and CASM including net interest, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Adjusted CASM including net interest” or “Adjusted CASM + net interest” is a non-GAAP measure and means the sum of Adjusted CASM and net interest expense (income) excluding special items divided by ASMs. For a discussion of such special items and a reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest, and CASM including net interest, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Adjusted CASM (excluding fuel)” is a non-GAAP measure and means operating expenses less aircraft fuel expense, excluding special items, divided by ASMs. For a discussion of such special items and a reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest, and CASM including net interest, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Air traffic liability” means the value of tickets, unearned membership fees and other related fees sold in advance of travel.

“Ancillary revenue” means the sum of non-fare passenger revenue and other revenue.

“Available seat miles” or “ASMs” means the number of seats available for passengers multiplied by the number of miles the seats are flown.

“Average aircraft in service” means the average number of aircraft used in flight operations, as calculated on a daily basis.

“Average daily aircraft utilization” means block hours divided by number of days in the period divided by average aircraft.

“Average stage length” means the average number of miles flown per flight segment.

“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.

“CASM” or “unit costs” means operating expenses divided by ASMs.

“CASM (excluding fuel)” is a non-GAAP measure and means operating expenses less aircraft fuel expense, divided by ASMs.

“CASM including net interest” or “CASM + net interest” is a non-GAAP measure and means the sum of CASM and net interest expense (income) divided by ASMs.

“DOT” means the United States Department of Transportation.

“Fare revenue” consists of base fares for air travel, including mileage credits redeemed under our frequent flyer program, unused and expired passenger credits, other redeemed or expired travel credits and revenue derived from charter flights.

“Fare revenue per passenger” means fare revenue divided by passengers.

“FTE” means full-time equivalent employee.

“Load factor” means the percentage of aircraft seat miles actually occupied on a flight (RPMs divided by ASMs).

“Net interest expenses (income)” means interest expense, capitalized interest, interest income and other.

“Non-fare passenger revenue” consists of fees related to certain ancillary items such as baggage, service fees, seat selection, and other passenger-related revenue that is not included as part of base fares for travel.

“Non-fare passenger revenue per passenger” means non-fare passenger revenue divided by passengers.

“Other revenue” consists primarily of services not directly related to providing transportation, such as the advertising, marketing and brand elements of the Frontier Miles affinity credit card program and commissions revenue from the sale of items such as rental cars and hotels.

“Other revenue per passenger” means other revenue divided by passengers.

“Passengers” means the total number of passengers flown on all flight segments.

“Passenger revenue” consists of fare revenue and non-fare passenger revenue.

“PDP” means pre-delivery deposit payments, which are payments required by aircraft manufacturers in advance of delivery of the aircraft.

“RASM” or “unit revenue” means total revenue divided by ASMs.

“Revenue passenger miles” or “RPMs” means the number of miles flown by passengers.

“Total ancillary revenue per passenger” means ancillary revenue divided by passengers.

“Total revenue per passenger” means the sum of fare revenue, non-fare passenger revenue, and other revenue (collectively, “Total Revenue”) divided by passengers.

“Treasury” means the U.S. Department of the Treasury.

We are subject to market risks in the ordinary course of our business. These risks include commodity price risk, with respect to aircraft fuel, as well as interest rate risk, specifically with respect to our floating rate obligations and interest rate swaps. The adverse effects of changes in these markets could pose a potential loss as discussed below. The sensitivity analysis provided does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.

Aircraft Fuel. Our results of operations can vary materially due to changes in the price and availability of aircraft fuel and are also impacted by the number of aircraft in use and the number of flights we operate. Aircraft fuel represented approximately 27%, 30%, 37% and 33% of total operating expenses for the three and six months ended June 30, 2023 and 2022, respectively. Unexpected changes in the pricing of aircraft fuel or a shortage or disruption in the supply could have a material adverse effect on our business, results of operations and financial condition. Based on our fuel consumption for the 12 months ended June 30, 2023, a hypothetical 10% increase in the average price per gallon of aircraft fuel would have increased aircraft fuel expense by approximately $115 million.

Interest Rates. We are subject to market risk associated with changing interest rates, due to Secured Overnight Financing Rate (“SOFR”) based interest rates on our PDP Financing Facility and our floating rate building note and Effective Federal Funds Rate ("EFFR") based interest rates on our affinity card advance purchase of mileage credits. During the six months ended June 30, 2023, as applied to our average debt balances, a hypothetical increase of 100 basis points in average annual interest rates on our variable-rate debt would have increased our annual interest expense by $4 million.

We are exposed to interest rate risk through aircraft lease contracts for the time period between agreement of terms and commencement of the lease, where portions of the rental payments are adjusted and become fixed based on swap rates. As part of our risk management program, we enter into contracts in order to limit the exposure to fluctuations in interest rates. During the three and six months ended June 30, 2023, we did not enter into any swaps and, therefore, paid no upfront premiums for options. During the three and six months ended June 30, 2022, we paid upfront premiums of $9 million for the option to enter into and exercise cash-settled swaps with a forward starting effective date for seven of our future aircraft deliveries. As of June 30, 2023, we had hedged $295 million in aircraft rent payments for seven aircraft and two engines to be delivered by the end of 2023.

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the three months ended June 30, 2023, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors disclosed in Part I, Item 1A. "Risk Factors" contained in our 2022 Annual Report. Investors are urged to review such risk factors carefully.