Mounting Regulations And Declining US Leisure Demand Will Erode Profitability

Key Takeaways

• Persistent cost pressures and demographic shifts threaten Frontier's ultra-low-cost model, impacting profitability and constraining long-term revenue growth.
  
• Brand erosion, customer dissatisfaction, and liquidity risks undermine earnings stability and elevate long-term solvency concerns.
  
• Enhanced revenue streams, operating efficiency, and market position are expected due to industry consolidation, diversification efforts, low-cost operations, digital transformation, and financial resilience.

Catalysts

Provides low-fare passenger airline services to leisure travelers in the United States and Latin America.

• Frontier remains extremely vulnerable to structurally higher operating costs as mounting environmental regulations, carbon taxes, and fuel price volatility threaten to erode its ultra-low-cost model over the coming years, leading to persistent net margin compression and structurally weaker profitability.
  
• Demographic shifts, including the aging U.S. population and slowing population growth, are likely to reduce the long-term demand pool for leisure air travel; with Frontier's heavy reliance on price-sensitive leisure travelers, this will constrain sustainable revenue growth and ultimately pressure long-term earnings potential.
  
• The increase in remote work and virtual conferencing adoption is expected to permanently shrink the business and personal travel market, directly reducing Frontier's achievable load factors and keeping top-line revenue and RASM below historical growth rates for the foreseeable future.
  
• Ongoing customer dissatisfaction issues-rooted in the ultra-low-cost carrier model-are anticipated to persist, risking continued brand erosion and further loss of market share, with long-term negative implications for both unit revenues and earnings stability.
  
• Frontier's limited liquidity, significant upcoming aircraft deliveries, and reliance on sale-leaseback financing heighten balance sheet risk; in a scenario of continued revenue weakness or additional economic shocks, elevated interest costs and cash burn could deteriorate net margins and threaten long-term solvency.

Frontier Group Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Frontier Group Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Frontier Group Holdings's revenue will grow by 9.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.9% today to 4.0% in 3 years time.
• The bearish analysts expect earnings to reach $196.8 million (and earnings per share of $0.85) by about September 2028, up from $-34.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.1x on those 2028 earnings, up from -37.4x today. This future PE is lower than the current PE for the US Airlines industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 1.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Frontier Group Holdings Future Earnings Per Share Growth

Risks

• Reduction in industry and competitive capacity, especially in Frontier markets, is expected to support higher yields and improved load factors, which could boost revenue and net margins as excess supply exits the market.
  
• Significant growth in ancillary and loyalty revenues, including a 40% year-over-year increase in co-brand loyalty revenue per passenger and the rollout of new premium product offerings, is projected to enhance diversification of revenue streams and lift top-line growth as well as average revenue per passenger.
  
• Frontier's low-cost structure, young, fuel-efficient fleet, and disciplined capacity management position it to capitalize on any shakeout among less efficient competitors, potentially leading to market share gains and long-term earnings upside.
  
• Ongoing digital transformation through new mobile apps, website upgrades, and real-time distribution partnerships is expected to lower distribution costs and improve the customer experience, directly supporting improved operating efficiency and higher net margins.
  
• Committed sale-leaseback financing for aircraft deliveries and a strong balance sheet with $766 million in liquidity mitigate financing risk and provide resilience, supporting continued fleet optimization and margin improvement despite industry volatility.

Valuation

• The assumed bearish price target for Frontier Group Holdings is $3.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Frontier Group Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.0, and the most bearish reporting a price target of just $3.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.9 billion, earnings will come to $196.8 million, and it would be trading on a PE ratio of 5.1x, assuming you use a discount rate of 12.3%.
• Given the current share price of $5.58, the bearish analyst price target of $3.0 is 86.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.