Frontier Group Holdings, Inc.: Form 10-Q for the period ended Sep 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 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 nine months ended September 30, 2023 and 2022, respectively (in millions):

Total operating revenues for the three months ended September 30, 2023 totaled $883 million, a decrease of 3% compared to the three months ended September 30, 2022. This was primarily due to a 19% decline in RASM driven by a decrease in fare revenue per passenger and a decrease in load factor, as compared to the corresponding periods in 2022, partially offset by an increase in capacity, as measured by ASMs.

Total operating revenues for the nine months ended September 30, 2023 totaled $2,698 million, an increase of 11% compared to the nine months ended September 30, 2022. This was primarily due to an increase in capacity, as measured by ASMs, which was partially offset by an 8% decline in RASM due mainly to a 6% decline in total revenue per passenger.

Total operating expenses during the three months ended September 30, 2023 totaled $937 million, resulting in a cost per available seat mile (“CASM”) of 9.66¢, compared to 10.57¢ for the three months ended September 30, 2022. Fuel expense was 5% lower during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. The $15 million decrease in fuel expense for the three months ended September 30, 2023, compared to the corresponding periods in 2022, was primarily driven by a 20% decrease in fuel prices, partially offset by the 19% increase in fuel gallons consumed during the three months ended September 30, 2023. Our non-fuel expenses increased by 19% during the three months ended September 30, 2023, as compared to the corresponding prior year period, driven primarily by higher capacity and a larger fleet size and the resulting increase in operations during these same periods, partially offset by increased sale-leaseback gains. Additionally, a $12 million net credit related to the transaction and merger-related costs was recognized during the three months ended

September 30, 2022. While non-fuel expenses increased, CASM (excluding fuel), a non-GAAP measure, decreased 1% for the three months ended September 30, 2023 to 6.66¢ on 21% capacity growth largely due to increased sale-leaseback gains and the fixed nature of aircraft rent as well as lower sales and marketing costs which were partly offset by increases in airport costs. Also, the 2022 period benefited from the $12 million net credit related to transaction and merger-related costs.

Total operating expenses during the nine months ended September 30, 2023 totaled $2,698 million, resulting in a CASM of 9.70¢, compared to 10.88¢ for the nine months ended September 30, 2022. Fuel expense was 3% lower during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. The $29 million decrease in fuel expense for the nine months ended September 30, 2023, compared to the corresponding periods in 2022, is primarily driven by an 18% decrease in fuel prices, partially offset by the 18% increase in fuel gallons consumed during the nine months ended September 30, 2023, as a result of our 21% increase in capacity. Our non-fuel expenses increased by 13% during the nine months ended September 30, 2023, as compared to the corresponding prior year period, driven primarily by a larger fleet size and the increase to capacity during these same periods, partially offset by an increase in sale-leaseback gains in the current period, lower lease return costs and lower transaction and merger-related costs. CASM (excluding fuel), a non-GAAP measure, decreased 6% for the nine months ended September 30, 2023 to 6.73¢, as compared to the corresponding period in 2022, as a result of the fixed nature of aircraft rent expense in connection with the aforementioned growth in capacity and other factors mentioned above.

Adjusted (non-GAAP) CASM (excluding fuel) decreased from 6.90¢ for the three months ended September 30, 2022 to 6.66¢ for the three months ended September 30, 2023. For the three months ended September 30, 2022, this excludes the impact of the $12 million credit from net transaction and merger-related costs and $1 million in collective bargaining contract ratification costs. There were no adjustments for the three months ended September 30, 2023. 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.”

Adjusted (non-GAAP) CASM (excluding fuel) decreased from 7.09¢ for the nine months ended September 30, 2022 to 6.72¢ for the nine months ended September 30, 2023. For the nine months ended September 30, 2023, this excludes the impact of $1 million in net transaction and merger-related costs, and for the nine months ended September 30, 2022, this excludes the impact of $8 million in net transaction and merger-related costs, $7 million in asset impairment charges, and $2 million in collective bargaining contract ratification costs. 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.”

We generated a net loss of $32 million during the three months ended September 30, 2023, compared to net income of $31 million for the three months ended September 30, 2022. Considering these aforementioned non-GAAP adjustments and the related tax impacts, our adjusted (non-GAAP) net loss was $32 million for the three months ended September 30, 2023, as compared to an adjusted (non-GAAP) net income of $33 million for the three months ended September 30, 2022. 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.”

We generated net income of $26 million during the nine months ended September 30, 2023, compared to a net loss of $77 million for the nine months ended September 30, 2022. Considering the aforementioned non-GAAP operating adjustments along with the $7 million non-operating write-off of deferred financing costs during the nine months ended September 30, 2022 due to the repayment of the CARES Act loan and the related tax impacts of these adjustments, our adjusted (non-GAAP) net income was $27 million for the nine months ended September 30, 2023, as compared to an adjusted (non-GAAP) net loss of $56 million for the nine months ended September 30, 2022. 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 September 30, 2023, our total available liquidity was $640 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 September 30, 2023 Compared to Three Months Ended September 30, 2022

Operating Revenues

Total operating revenue decreased $23 million, or 3%, during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, as we experienced lower domestic fares, partially offset by increased capacity. Revenue was unfavorably impacted by the 19% decline in RASM due to the 15% decline in total revenue per passenger, which was mainly caused by a reduction in fare revenue per passenger and a decrease in load factor during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. Revenue was favorably impacted by a 21% capacity growth, as measured by ASMs, during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, driven by a 14% increase in average aircraft in service during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, as well as a 2% increase in average daily aircraft utilization to 11.3 hours per day for the three months ended September 30, 2023, as compared to the 11.1 hours per day for the corresponding prior year period.

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 $25 million received from Spirit for the reimbursement of incurred Merger-related expenses, partially offset by $9 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.

(d) 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.

(e) 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.

(f) 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 $15 million, or 5%, during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. The decrease was primarily due to a 20% decrease in fuel prices 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 $39 million, or 21%, during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. The increase was primarily due to higher crew costs, driven by elevated credit hours on higher capacity and other benefit costs, as well as increased headcount of salaried support staff.

Aircraft Rent. Aircraft rent expense increased by $10 million, or 7%, during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, primarily due a larger fleet, partially offset by lower costs associated with lease returns.

Station Operations. Station operations expense increased by $32 million, or 32%, during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, primarily due to a 15% and 14% increase in passengers and departures, respectively.

Sales and Marketing. Sales and marketing expense decreased by $1 million, or 2%, during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, primarily due to lower credit card fees resulting from the 3% decrease in revenue. The following table presents our distribution channel mix:

Maintenance, Materials and Repairs. Maintenance, materials and repair expense increased by $6 million, or 14%, during the three months ended September 30, 2023, as compared to the three months ended September 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.

Depreciation and Amortization. Depreciation and amortization expense increased by $5 million, or 63%, during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, primarily due to an increase in capitalized maintenance.

Transaction and Merger-Related Costs, Net. During the three months ended September 30, 2022, we generated a net $12 million benefit, driven by $25 million received from Spirit for the reimbursement of incurred merger-related expenses, partially offset by incurred expenses of $9 million in employee retention costs and $4 million in transaction costs, primarily related to legal and other professional fees.

Other Operating Expenses. Other operating expenses decreased by $1 million, or 2%, during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. The decrease was primarily driven by the increase in gain on sale-leaseback transactions compared to the corresponding prior period, partially offset by the increase in travel expenses relating to crew accommodations, due to the increase in capacity and higher general and administrative costs, including IT and professional services.

Other Income (Expense). Other income increased by $7 million during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. Higher interest rates and increased average 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 September 30, 2023 was a benefit of 28.9%, compared to an expense of 46.6% for the three months ended September 30, 2022. The effective tax rate for the three months ended September 30, 2023 was higher than the statutory rate primarily due to the loss before taxes for the quarter coupled with the tax benefits associated with our stock-based compensation arrangements. The increase in the estimated annual tax rate for the three months ended September 30, 2022 was a result of the generation of significant pre-tax losses in the first quarter of 2022 as compared to the generation of pre-tax income in the second and third quarters of 2022 and the resulting impact on the tax expense recognized for the three months ended September 30, 2022 in conjunction with utilizing an estimated annual effective rate.

Results of Operations

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Operating Revenues

Total operating revenue increased $278 million, or 11%, during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, as we experienced continued demand related to leisure travel through most of the year, partially offset by lower domestic fares. Revenue was favorably impacted by 21% capacity growth, as measured by ASMs, during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. This was driven by a 12% increase in average aircraft in service during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, as well as a 5% increase in average daily aircraft utilization to 11.4 hours per day for the nine months ended September 30, 2023, as compared to 10.9 hours per day for the corresponding prior year period. RASM decreased 8% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to the 6% decline in revenue per passenger mainly caused by a reduction in fare revenue per passenger, as well as the 5% increase in stage length, partially offset by the 2.2 point increase in load factor and 5% increase in ancillary 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 nine months ended September 30, 2023. Represents $16 million in transaction costs, including banking, legal and accounting fees, and $17 million in employee retention costs incurred in connection with the terminated Merger with Spirit, partially offset by $25 million received from Spirit for the reimbursement of incurred Merger-related expenses for the nine months ended September 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 $2 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 $29 million, or 3%, during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. The decrease was primarily due to an 18% decrease in fuel prices, partially offset by the 18% increase in gallons consumed, driven by higher capacity.

Salaries, Wages and Benefits. Salaries, wages and benefits expense increased by $107 million, or 20%, during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. The increase was primarily due to higher crew costs, driven by elevated credit hours on higher capacity and other benefit costs, and an increased headcount of salaried support staff.

Aircraft Rent. Aircraft rent expense increased by $28 million, or 7%, during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to a larger fleet, partially offset by the reversal of $22 million of previously accrued lease return costs due to lease extensions of two of our aircraft and two of our spare engines.

Station Operations. Station operations expense increased by $55 million, or 17%, during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to a 19% and 12% increase in passengers and departures, respectively, partially offset by lower passenger reaccommodation expenses.

Sales and Marketing. Sales and marketing expense increased by $5 million, or 4%, during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to higher credit card fees resulting from the 11% 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 $38 million, or 36%, during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. This was primarily due to more average aircraft in service and higher average daily utilization per aircraft, which resulted in higher contract labor and maintenance costs.

Depreciation and Amortization. Depreciation and amortization expense was unchanged for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to a loss on asset disposal recorded for the nine months ended September 30, 2022, offset by an increase in capitalized maintenance.

Transaction and Merger-Related Costs, Net. During the nine months ended September 30, 2023, we incurred $1 million in merger-related costs, as compared to $8 million in net costs during the nine months ended September 30, 2022, which included $17 million in employee retention costs and $16 million in transaction costs, primarily related to legal and other professional fees, partially offset by the $25 million received from Spirit for the reimbursement of incurred merger-related expenses.

Other Operating Expenses. Other operating expenses decreased by $9 million, or 7%, during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. The decrease was primarily driven by the increase in gains from sale-leaseback transactions compared to the corresponding prior period, partially offset by increases to travel expenses relating to crew accommodations, driven by an increase in capacity, as well as increases to IT and supplies and general and administrative costs.

Other Income (Expense). Other income increased by $31 million during the nine months ended September 30, 2023, as compared to the nine months ended September 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 nine months ended September 30, 2022, we recorded a $7 million non-cash charge from the extinguishment of debt related to the write-off of unamortized deferred financing costs associated with the repayment of the Treasury Loan.

Income Taxes. Our effective tax rate for the nine months ended September 30, 2023 was an expense of 0%, compared to a benefit of 18.9% for nine months ended September 30, 2022. The effective tax rate for the nine months ended September 30, 2023 was lower than the statutory rate primarily due to tax benefits associated with our stock-based compensation arrangements. The effective tax rate for the nine months ended September 30, 2022 was lower 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 (loss), 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.

(b) For purposes of determining the tax rate applicable to Adjusted (i.e., non-GAAP) net income (loss) with respect to the three and nine months ended September 30, 2022, we established our adjusted effective tax rate by using September 30, 2022 actual results. In contrast, for all other interim periods, we determined our effective tax rate on a non-GAAP basis by using full year actual and projected results to determine the effective tax rate to calculate Adjusted net income (loss). Management believed the use of September 30, 2022 actuals to calculate an adjusted tax rate for the three and nine month interim periods then ended provided a more meaningful relationship between income tax expense and Adjusted pre-tax income (loss) than would be produced using the full year and projected results method due to the shift from an adjusted pre-tax loss in early 2022 to actual and forecasted profitability in the third and fourth quarters of 2022 combined with an expectation of annual adjusted pre-tax results being near break-even and the resulting impact of non-deductible items. GAAP permits the use of the actual results method under such circumstances. However, the foregoing methodology was applied solely to the non-GAAP presentation in the prior year periods. Income tax expense was calculated on a GAAP basis for all periods presented and on a non-GAAP basis for the current year using the estimated annual effective tax rate method which uses an expectation of full year pre-tax income (loss) in the determination of interim effective tax rates as this method does not produce significant variations in the customary relationship between income tax expense and pre-tax accounting income.

Comparative Operating Statistics

The following table sets forth our operating statistics for the three and nine months ended September 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) Figures may not recalculate due to rounding. 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 September 30, 2023, we had $640 million in total available liquidity, made up of cash and cash equivalents. We had $486 million of total debt, net, of which $266 million is short-term and consists of amounts outstanding under our pre-delivery deposit payment facility (“PDP Financing Facility”) and secured indebtedness related to our headquarters building. Our total debt, net is comprised of $328 million outstanding under our PDP Financing Facility, $80 million outstanding under our 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 $16 million in secured indebtedness for our headquarters building, partially offset by $4 million in deferred debt acquisition costs.

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 nine months ended September 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 September 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 September 30, 2023, we operated all of our 134 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 September 30, 2023, we had $423 million of PDPs held by Airbus which have been partially financed by our PDP Financing Facility. As of

September 30, 2023, our PDP Financing Facility, which allows us to draw up to an aggregate of $365 million, had $328 million outstanding. As of September 30, 2023, we had a firm obligation to purchase 214 A320neo family aircraft and 16 additional spare engines to be delivered by 2029. Of our aircraft commitments, four had committed operating leases for 2023 deliveries, and 19 were subject to non-binding letters of intent to provide operating lease financing for 2024 deliveries. We intend to evaluate financing options for the remaining aircraft.

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 nine months ended September 30, 2023 and 2022, we made $13 million and $14 million, respectively, in maintenance deposit payments to our lessors. As of September 30, 2023, we had $109 million in recoverable aircraft maintenance deposits on our condensed consolidated balance sheet, of which $22 million was included in accounts receivable because the eligible maintenance had been performed and the remaining $87 million was included within aircraft maintenance deposits.

The following table summarizes current and long-term material cash requirements as of September 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 with borrowings as of September 30, 2023 pertaining to aircraft with 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 nine months ended September 30, 2023 and 2022 (in millions):

Operating Activities

During the nine months ended September 30, 2023, net cash used in operating activities totaled $207 million, which was driven by $183 million of outflows from changes in operating assets and liabilities and non-cash adjustments totaling $50 million, partially offset by $26 million of net income.

The $183 million of outflows from changes in operating assets and liabilities include:

• $132 million increase in other long-term assets driven by increases in capitalized maintenance, prepaid maintenance, prepaid bonuses and capitalized interest;
• $50 million decrease in other liabilities driven primarily by leased aircraft return payments;
• $18 million increase in supplies and other current assets;
• $13 million increase in aircraft maintenance deposits; and
• $6 million decrease in our air traffic liability; partially offset by
• $24 million increase in accounts payable; and
• $12 million decrease in accounts receivable due to the collection of station receivables.

Our net income of $26 million was also adjusted by the following non-cash items to arrive at cash used in operating activities:

• $97 million gain recognized on sale-leaseback transactions; partially offset by
• $36 million depreciation and amortization;
• $10 million stock-based compensation expense; and
• $1 million in amortization of swaption cash flow hedges, net of tax.

During the nine months ended September 30, 2022, net cash used in operating activities totaled $172 million, which was driven by a $77 million net loss, outflows from changes in operating assets and liabilities of $83 million and non-cash adjustments totaling $12 million.

The $83 million of outflows from changes in operating assets and liabilities include:

• $68 million increase in other long-term assets driven by increases in deferred taxes and prepaid maintenance;
• $35 million increase in supplies from increased fuel inventory and consumable balances and other current assets driven by supplier incentives and prepaid expenses;
• $14 million increase in aircraft maintenance deposits;
• $13 million decrease in accounts payable; and
• $6 million increase in accounts receivable driven by increases in bookings; partially offset by
• $30 million increase in other liabilities driven by growth in the business, reflected primarily through increases in leased aircraft return costs of $26 million, aircraft maintenance costs of $24 million, other current liabilities of $10 million, passenger tax accounts of $7 million and accrued fuel of $5 million, partially offset by a $26 million payment to FAPAInvest, LLC for their phantom equity units and a reduction to station obligations of $16 million; and
• $23 million increase in our air traffic liability as a result of increased bookings.

Our net loss of $77 million was also adjusted by the following non-cash items to arrive at cash used in operating activities:

• $49 million gain recognized on sale-leaseback transactions; and
• $18 million deferred tax benefits; partially offset by
• $36 million depreciation and amortization;
• $11 million stock-based compensation expense;
• $7 million loss from the extinguishment of debt; and
• $1 million in amortization of swaption cash flow hedges, net of tax.

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

Investing Activities

During the nine months ended September 30, 2023, net cash used in investing activities totaled $91 million, driven by:

• $52 million net outflows for PDP activity;
• $37 million cash outflows for capital expenditures; and
• $2 million cash outflows relating to other investing activity.

During the nine months ended September 30, 2022, net cash used in investing activities totaled $117 million, driven by:

• $86 million net payments for pre-delivery deposit activity; and
• $31 million cash outflows for capital expenditures.

Financing Activities

During the nine months ended September 30, 2023, net cash provided by financing activities was $177 million, primarily driven by:

• $124 million cash inflows from sale-leaseback transactions related to A320neo family aircraft and spare engines delivered during the nine months ended September 30, 2023; and
• $141 million cash proceeds from debt issuances, consisting of $132 million drawn on our PDP Financing Facility, net of issuance costs and $9 million in draws on our Barclays facility; partially offset by
• $84 million cash outflows from principal repayments on our PDP Financing Facility and our headquarters building; and
• $5 million cash outflows for payments related to tax withholdings of share-based awards.

During the nine months ended September 30, 2022, net cash provided by financing activities was $45 million, driven by:

• $214 million cash proceeds from debt issuances, consisting of a $56 million draw on our Barclays facility and $158 million in draws on our PDP Financing Facility, net of issuance costs; and
• $49 million in cash inflows from sale-leaseback transactions related to A320neo family aircraft and spare engines delivered during the nine months ended September 30, 2022; partially offset by
• $215 million cash outflows from principal repayments on debt, which includes the paydown of the $150 million Treasury Loan and $65 million in PDP Financing Facility payments; and
• $3 million cash outflows for payments related to tax withholdings of share-based awards.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies and estimates during the nine months ended September 30, 2023. For information regarding our 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 31%, 31%, 36% and 34% of total operating expenses for the three and nine months ended September 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 September 30, 2023, a hypothetical 10% increase in the average price per gallon of aircraft fuel would have increased aircraft fuel expense by approximately $113 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 nine months ended September 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 nine months ended September 30, 2023, as well as the three months ended September 30, 2022, we did not enter into any swaps and, therefore, paid no upfront premiums for options. During the nine months ended September 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 September 30, 2023, we had hedged $130 million in aircraft rent payments for three aircraft and one 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 September 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 September 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 September 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 Item 1A “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on February 22, 2023, except for the change to the following risk factor. Investors are urged to review all such risk factors carefully.

We depend on a sole-source supplier for our aircraft and two suppliers for our engines.

A critical cost-saving element of our business strategy is to operate a single-family aircraft fleet; however, our dependence on the Airbus A320 family aircraft for all of our aircraft and on CFM International and Pratt & Whitney for our engines makes us vulnerable to any delivery delays, design defects, mechanical problems or other technical or regulatory issues associated with this aircraft type or these engines. In the event of any actual or suspected design defects or mechanical problems with the Airbus A320 family aircraft or CFM International or Pratt & Whitney engines, whether involving our aircraft or that of another airline, we may choose, or be required, to suspend or restrict the use of our aircraft. Our business could also be materially adversely affected if the public avoids flying on our aircraft due to an adverse perception of the Airbus A320 family aircraft or CFM International or Pratt & Whitney engines, whether because of safety concerns or other problems, real or perceived, or in the event of an accident involving such aircraft or engines. Separately, if any of Airbus, CFM International or Pratt & Whitney becomes unable to perform its contractual obligations, including a failure to deliver aircraft or engines on schedule, and we must lease or purchase aircraft or engines from another supplier, we would incur substantial transition costs, including expenses related to acquiring new aircraft, engines, spare parts, maintenance facilities and training activities, and we would lose the cost benefits from our current single-fleet composition, any of which could have a material adverse effect on our business, results of operations and financial condition. We have recently experienced delays in the deliveries of Airbus aircraft, which have exceeded several months, and our business could be additionally impacted if delays persist in future periods. These risks may be exacerbated by the long-term nature of our fleet and order book which commits us to Airbus aircraft and the engines available for such aircraft for a substantial period of time into the future.

Since 2022, we have begun to induct aircraft into our fleet that use the Pratt & Whitney PW1100 GTF engine, and we have elected this engine for most of our planned future deliveries. In the third quarter of 2023, Pratt & Whitney announced an expansion of an inspection program related to PW 1100 GTF engines which, for the first time, includes engines in our fleet. This inspection program is expected to begin in the second half of 2024. The impact to our operations is unknown at this time but may result in lengthy turnaround time to perform these inspections and any resulting repairs or other modifications that may be identified. This program may have an adverse impact on our operations, increase costs related to our existing fleet and potentially affect the timing of future deliveries of aircraft for which Pratt & Whitney engines have been elected, potentially materially.