The COVID-19 pandemic looks to be coming to a close, renewing optimism on markets around airline stocks. Over the last year, the US Global Jets ETF ($JETS) rose 76%, with 17% of that coming in just the last three months. The rise in the fund’s price is indicative of broad market optimism around an airline recovery, offering an opportunity for battered airlines to raise money in secondary offerings.
The $JETS ETF counts Southwest, American, Delta, United and a dozen other carriers as holdings. And they may be adding a few more before the week is out. Denver-based budget carrier Frontier Airlines will be the second airline to come to market during the COVID-19 pandemic. According to the company’s S-1 filing, which includes all the juicy details about a company going public, Frontier is looking to offer 30 million shares in between $19 and $21 per share. At the midpoint, the company would be valued at over $700 million. It would also help the company raise hundreds of millions in fresh capital.
The S-1 has some other useful information that might help investors decide whether or not they’ll be aboard $FRNT’s flight to markets. Here’s what you need to know:
1. Before COVID, they were making money
Frontier makes almost all of their operating revenues on tickets sold to passengers. In 2019, passenger flights represented over $2 billion in revenues. The company also booked $63 million in “other” assorted revenues.
That same year, the company booked a net profit of $251 million. In other words, the company made out with a 10% margin on all revenue after paying for aircraft fuel, salaries and other costs.
When COVID hit, the company took a $225 million loss in 2020. That wasn’t a very big problem for Frontier for one big reason -- they don’t have a whole lot of debt.
2. The business is healthy, and they’re spending a lot on expansion
According to their S-1 filing, Frontier has $378 million of cash and cash equivalents, a $161 million income tax receivable (refund) on the way and options to borrow up to $424 million from the Treasury Loan facility that was made to help ailing airlines. Given the health of their business, it’s no surprise that Frontier is taking advantage to expand. In fact, almost all of their debt right now is being expended on purchase commitments for new airliners. These purchase commitments are called pre-delivery payments (PDPs).
The company has ordered 156 aircrafts (mostly fuel-efficient Airbus planes) to be delivered between 2021 and 2028. The 156 aircrafts will cost $9 billion in total, which will be paid in rising amounts each year. In 2021, PDPs will cost the airline $683 million. In 2022, that cost will rise to $754 million. It will rise to over a billion dollars between 2023 and 2025. In the term thereafter, the company will make up the remaining nearly $4 billion.
The company is spending a lot to expand. Frontier already serves 110 airports and has 104 aircraft. The new fleet will certainly come with new destinations and millions of new passengers each year.
3. Frontier’s debt and leverage is above average for an airline
Since the airline industry is financially demanding, airlines operate with leverage. This means that an airline is traditionally borrowing more debt against their equity. For this reason, many airlines were poorly positioned when the COVID-19 pandemic hit. With less revenues coming in, expenditures remaining the same, and interest payments needing to be made, some airlines were feared to be in risk of default.
Frontier’s debt and leverage is pretty acceptable. Their Debt-to-Equity ratio, one means of assessing how many dollars of debt the company has for every dollar of shareholder equity, is 1.123 as of 2020. The average for the airline industry as of Q4 2019 was 1.156. Given that they have managed their debt and leverage exceptionally well, the company’s health actually rivals some of the bigger airlines.
4. Frontier is the second largest “ultra low-cost carrier”
According to Frontier, their domestic market share in 2019 was slightly over 3%. This is bigger than Allegiant Travel Company, which had over 2% of the market share and is valued at nearly $4 billion. However, it’s smaller than Spirit Airlines, which ate up nearly 5% of the market share and is valued at over $3 billion. The difference in valuations likely has a lot to do with debt, expansion plans and market inefficiencies.
That said, Frontier and the low-cost carriers are much smaller than mid-sized carriers such as Alaska and JetBlue, which both had 5% of the market. Even the mid-sized carriers are dwarfed by the size of America’s “big four” carriers: Southwest (24%), Delta (21%), American (19%) and United (14%).
Ultimately, this means that Frontier has a lot of upward mobility if it can offer good rates and lots of destinations.