Frontier announced its Q3 earnings last week, and while it wasn’t nearly as bad as Spirit, Frontier did not do well. The airline had a -5.1 pre-tax margin on plunging revenue numbers. And while there are several things being blamed, CEO Barry Biffle issued a challenge for people to look at just how much capacity had poured into its biggest markets. Challenge accepted.
The airline’s unit revenue dropped from 11.27 cents per available seat mile last year to an anemic 9.10 cents this year. That nearly 20 percent decrease wasn’t quite the end of the world since ancillary revenue held up, but the average revenue per passenger still dropped 15 percent to $115.
What’s to blame? It sounds like the biggest issue in Frontier’s eyes is overcapacity in the big leisure markets. Here’s what Barry had to say in response to a question from TD Cowen’s Helane Becker.
But I think what you should look at is just take the cities in the U.S., take all the airports and just go in and look at the fourth quarter capacity by city, look how many seats in each city and compare that to the same quarter in 2019, and you’ll see a dramatic, dramatic difference. You’re talking probably 30 to 40 points swing between the top and the bottom. So if demand is similar and you have a 30% swing in capacity, that can be a 20 to 30 point jump in RASM or it can be a 20 to 30 point drag on a relative basis. So that’s what we’re talking about when we say uneven capacity deployment in the U.S.A and I think you’ll find something very interesting if you do that analysis.
Ok, let’s do that. I limited this to looking at domestic travel within the lower 48 states since the rest is not really relevant for Frontier. Here is what it looks like.
Q3 2023 vs Q3 2019 Seats by Origin on Routes Within the Continental US
To the surprise of nobody, he’s right. On a percentage basis, we see capacity pouring into Denver, Las Vegas, Orlando, and Miami when looking at the largest markets in the US. And what are Frontier’s biggest stations in Q3? That’d be Denver, Orlando, Atlanta, and Las Vegas. Atlanta is certainly more of an outlier, but that’s after Frontier slashed Las Vegas flying anyway. Even after some cuts, Denver, Orlando, and Las Vegas account for 29 percent of the airline’s total seats. That’s a lot.
Barry says that the plan now is to redirect growth to more underserved markets. He was emphatic in saying that this will not see the big leisure markets get reduced. It’s just that future growth will redirect to other places where fares are better.
In six to 18 months, Barry says that capacity distribution will likely normalize based on past precedent. So we’ll see the leisure markets settle back down and fares will rise while the Chicagos and LA’s of the world will grow back up again.
Do you buy it? I don’t know. Barry is bullish even on Las Vegas. He says Frontier is the lowest cost provider, so it won’t be going anywhere. Frontier will win on costs. (It has other plans to help improve that side of the equation, by the way.) But I just don’t know who would be pulling back in Vegas.
On the one hand, I suppose this is like Mexico during the pandemic. Or even Hawai’i. Airlines didn’t know what to do with their airplanes, so — in Hawai’i at least once the testing rules were in place — they put the widebodies in there and add frequency. That has now evened out.
But this summer, the big boom was in long-haul international. Europe was absolutely hot hot hot. You would think that with Europe being so hot, the bigger hubs would have seen more capacity added to feed those Europe flights. But it’s the big hubs that performed worse. And the airplanes flying in Florida and Vegas can’t be sent to Europe.
So will capacity really be redirected? It has to be, because these big leisure markets are not doing well. And there may very well be too much capacity out there, so the question is… where can they put it?
Since Frontier thinks there are underserved markets out there, that’s where it will put its growth. We don’t know exactly what markets those will be, but Barry did mention Minneapolis/St Paul as an example of an underserved market on the earnings call. So keep an eye out for cities like that.
Meanwhile, Frontier is also revamping its frequent flier program and fixing its operation to be more of an out-and-back model (stay tuned for a future post on that) to try to improve profitability. But without capacity coming out of the airline’s biggest markets, it’s not clear that profitability will be possible.