Airline Leader Interview - Frontier, President Jimmy Dempsey

Transcript

Michael Bell:Recent promotion as President of the company, and tell us a little bit about your scope of responsibility in that role, Jimmy.

Jimmy Dempsey:Yeah, I mean, I've been in Frontier— actually, I'm in Frontier 10 years next week, which is quite remarkable that time moves so quickly. You know, I became President last October. I've initially taken over the commercial department, A lot of resource planning, network planning around the airline, and a lot of the customer care stuff that we do. So I did that, took that role responsibility in October, and we're in a process now where we're changing a lot of the airline's network in order to manage through the environment that we're in at the moment.

Michael Bell:Yeah, we're going to chat a little bit about that. For those of you Not aware, Frontier is one of the leading ultra-low fare carriers in the United States. As Jimmy mentioned, it was— it had been in existence in multiple shapes and forms, but never really as a ULCC. And in partnership with Indigo, the leadership team there, Barry Biffle, Jimmy, and others have transformed it into that publicly listed company on the NASDAQ. About 135 plus or minus narrow-body Airbus airplanes with a pretty big substantial aircraft order coming in too. Like, how many airplanes do you have coming?

Jimmy Dempsey:We did like 2 or 3 aircraft orders over the last 6 or 7 years where we bought the A320neo. We had 80 of those when we arrived in Frontier 10 years ago and we've delivered all of those. And then we did a substantial order in 2017 where we purchased about 134 aircraft actually at the time. And then we added to that And where we purchased another 90 aircraft in—

Michael Bell:That's massive.

Jimmy Dempsey:In 2020.

Michael Bell:And so we're going to want to talk about where you see the deployment of that going forward. But if you fast forward the film, it is today a substantial ULCC and it's going to be even more so going forward. So let's get into the substance of the airline's strategy and business model. So what is the business model? What is the strategy of Frontier? How would you encapsulate it?

Jimmy Dempsey:We're very focused on unit costs. You know, we transformed the airline back in 2014 when we had about 50 aircraft in the fleet. 2/3 of those aircraft were A319s. We transformed that fleet into an all-A320 family aircraft, removed over like 5 or 6 years all the A319s and introduced the A320.

Michael Bell:Just to get seat-mile costs down?

Jimmy Dempsey:Well, to get— yeah, we introduced the A320neo in order to reduce the costs in the business. And also bring scale. And so the airline now has 140 aircraft operating with about 200 aircraft on order. We're now over 50% or over 80% A320neo family aircraft with the A321neo becoming the predominant aircraft in the fleet. We have about 50/50 A321 aircraft in our fleet and it will move to about 70% A321neo over the next kind of 4 or 5 years.

Michael Bell:You want the A321 because of cost? Because of capacity or what's the—

Jimmy Dempsey:Yeah, I mean, we operate the A321neo with a 240-seat configuration, so it's a big aircraft. And so it has absolutely huge efficiency benefits to the airline by operating with such a large aircraft. And so that's been very, very successful for us in the last few years. The other thing that we've been doing is ensuring that we are the most fuel-efficient airline in the United States. Our fuel efficiency far surpasses everybody else in the US. We do 105 ASMs per gallon. We produce 105 ASMs per gallon compared to everybody else. The Big 4 airlines, like in the previous panel, there's a lot of talk about the Big 4 airlines. They produce about 65 or 70 ASMs per gallon. So our efficiency is quite dramatically different to them.

Michael Bell:Is that because new airplanes and heavy density on the schedule?

Jimmy Dempsey:Yeah, we've got 80% of the fleet are A321neos or A320neo family aircraft, and then the high-density aircraft produces more ASMs, obviously.

Michael Bell:Terrific. But strategy-wise, if you were to draw the competitive landscape in the United States, you have the majors, you also see some startups. We heard from Tom Doxey at Breeze today. Where do you situate Frontier? Where do you guys want to be in that landscape?

Jimmy Dempsey:We're still a relatively small airline with 140 aircraft. Like, the big guys all have Close to 1,000 aircraft. So we're like 10% of their size. But they're about 3% of the US market. So we're tiny in terms of the context of scale. What we've done with the airline is build a network footprint across the United States where we have 13 bases now. We started out in Denver 10 years ago and expanded the business beyond Denver. In the last 8 or 9 months, we've moved the airline From having 8 bases to now having 13 bases and really are starting to follow the European ULCC model where you have a high volume of bases where crew and aircraft returns to base every night. That creates a lot of efficiency to the business. And so they're all spread across the United States. So we're based obviously Denver, we have Dallas, Atlanta, and we have Vegas, Phoenix, Philadelphia, and then we've just launched— These are all operating? These are existing operating bases. And then we've launched Puerto Rico recently. We're launching Cleveland, Cincinnati. Over the last month we've launched Cincinnati and Cleveland as new bases into the airline. And that creates this ability for us to go out and back from those bases, which we've struggled with in the US compared to Europe because of the difficulty in scale, getting scale into it because of our pilot contract, our crew contract.

Michael Bell:Right. And what are the advantages of this multi-base model? Clearly Wizz Air does it, Ryanair, easyJet, I think they all follow that model, but what's the real advantage and have they seen something that the US carriers didn't for the longest time and maybe are following suit?

Jimmy Dempsey:Yeah, well, it creates, like, there's 2 or 3 things that it gives us, right? It creates a lot of efficiency, it simplifies the business quite dramatically from an operational perspective.

Michael Bell:Yes, you have multiple little airlines effectively.

Jimmy Dempsey:Effectively, each base is its own little ecosystem for an airline. It creates a lot of efficiency. So particularly for the crew, it changes their lifestyle. Up until now, we had about half our crews on multi-day trips. We now will have about 80% of our crews on single-day trips. So they'll return back to their base every day. And so they get the benefit of going home every night. That's a huge change from where we were as a business. We've been trying to move to this over the last 7 or 8 years slowly, and we got to about 40 to 45% of our business with an out-and-back network. And in the last 7 or 8 months, we've pushed that to 80%. So we've changed the network in order to do that. So it gives us huge efficiency. The other thing it gives us is actually a better presence in those markets.

Michael Bell:So you become almost like a hometown airline for those people.

Jimmy Dempsey:Right. And if you look at the US industry, loyalty has become a huge portion of the benefit that the big guys get in comparison to the small airlines. And part of that is to do with our size and also our relevance in each of the markets that we're in. And so we are now moving and concentrating more aircraft in bases where we're flying a high preponderance of city destinations, leisure-type routes, which we're predominantly a leisure airline, but also visiting friends and relatives type routes around the United States to create relevance, to improve, you know, the performance in our loyalty program.

Michael Bell:Is the idea that You would have a fairly stable network out of those bases versus a high degree of seasonality. And I'll tell you where I'm going with this. I wanted you to contrast it to, for example, what Sun Country does, which is a highly dynamic schedule. It looks completely different one season to the next, and they may be picking up spill traffic versus trying to keep that year-long presence somewhere. So what's the model you guys are following?

Jimmy Dempsey:We're similar. We would be quite dynamic. We would look at the seasonal benefits of certain routes and it changes obviously from summer into winter. What we will get out of this with the new VFR traffic is more year-round type routes. You know, when we transformed Frontier, what we were doing, which is, I mean, relevant to a lot of people here in Calgary, we were flying a lot of people from cold places in the United States to warm places in the United States. And so as the business grew in the last 10 years, we started to base aircraft in Florida, and other parts of the U.S. We're now effectively reversing those aircraft into the northern parts of the U.S. and flying them down to—

Michael Bell:And complementing the sun traffic with the VFR traffic.

Jimmy Dempsey:Right, and so that is a preponderance of very seasonal traffic flows, and then we're complementing that with VFR traffic flows into some of the major cities around the U.S.

Michael Bell:How much of that has to do with overcapacity in some of those sun markets, Jimmy? Is that a contributor to this shift that you're pulling off?

Jimmy Dempsey:Yeah, I mean, you've seen the airlines developed post-COVID and the pace of recovery of the business traveler was quite slow. And so you saw a huge amount of capacity go into markets like Florida or Vegas in the last few years. It got to a tipping point last— at the end of last summer where you effectively had an oversupplied market in Florida. And so we sat down and looked at it. We're very focused on obviously performance in the business. But we're not afraid of change, and so we've changed quite dramatically our exposure to some of those oversupplied markets. And so today, as you move through this year, you're seeing a lot of change happening in the network in order to move from the oversupplied markets, but move them into underserved and overpriced markets. And so that's really what we've done.

Michael Bell:You're a finance guy, so look back here on the numbers, and I want you to Talk a little bit of your view of what is happening to your sector. I'll call it the ULCC sector. And what are the benefits of expansion? I look back, 2013, so a full decade ago, about $1.35 billion in revenues and a net profit of $11 million. This last year completed $3.6 billion, so almost triple the revenues and a net loss of $11 million. So, Is it really worth it to expend all this effort to— and you have 200 more airplanes coming— to kind of eke out a loss comparable to that modest profit?

Jimmy Dempsey:I mean, it's been a bumpy recovery from COVID Tell us what this is saying, if you will. Look, Frontier was— if you look, you jump 10 years effectively. If you look through the middle period, we're one of the most profitable airlines in the world by margin and very, very successful in doing that. You know, we've grown quite aggressively through COVID. We kept delivering aircraft into the system. The airline actually was making in Q2 last year 9% operating earnings before tax margins, which was a real recovery story. And then you had this oversupply dynamic that developed in the US. Our changes that we've made in the last 6 or 8 months Should get us back to the type of profitability we had pre-COVID.

Michael Bell:And what I would like you to comment on, Jimmy, and you're right, I just took 2 snapshots there. The numbers in between are actually very robust. $150, $200 million, $160, $251 million pre-COVID. But you guys were cranking it out. What's happened to this subsector though? You look at Spirit, JetBlue, Frontier, even the new entrants are having a hard time. Has the bloom come off relative to the ULCC Have the majors sort of figured this out? And why is that sector not as robust as it used to be?

Jimmy Dempsey:I think it's still quite robust. The difference between pre-COVID and post-COVID, the legacy airlines are benefiting enormously from their loyalty programs. If you look at the cash flows that are going into the legacy airlines, the 4 big guys in the United States, it's more than their profitability. And so, They are being heavily subsidized in terms of their overall profitability. In our case, we're so small that our loyalty program, it is very cash generative for us, but not to the same extent that they have. Yeah, I think Delta's doing like $6 or $7 billion a year. That's a huge benefit to them versus us. Our view is that costs matter. Costs have always mattered in this industry. We're the lowest cost provider of a seat in the United States. And we'll continue to be so. And we've done a huge amount of work around this efficiency drive in our business. We'll take out about $200 million of run rate costs as you progress through this year, and that's a huge step in the right direction in terms of getting the airline back to double-digit margins.

Michael Bell:And at the end of the day, as IndiGo has shown year over year, cost wins, right?

Jimmy Dempsey:I think if you look across the industry all across the world, unit costs matter in this industry. And they matter over the long term, not necessarily over the short term.

Michael Bell:You mentioned in our prep for this that you've also kept your balance sheet in pretty good shape. So talk about that and how that might help you going forward as well too.

Jimmy Dempsey:Yeah, we've always been very good stewards of the balance sheet in Frontier. Like one of the things that we did in COVID was emerge from COVID without really any debt, any incremental debt on our balance sheet. And that's put us in a very, very strong position as you manage through Today's environment. We don't have— we haven't leveraged our loyalty program. It is a very valuable asset to the business. The only debt that we've put in the business is linked to what we call productive debt, but linked to aircraft. And so that puts us in a very, very strong position. So every asset that comes into our organization, we tend to move it quite aggressively into a high utilization business model and generate cash flow off it for So you've kept cost discipline, you've kept your balance sheet in good shape. Yes.

Michael Bell:You have new airplanes coming, which will continue to drive unit costs down. So as long as you can find suitable markets to deploy those airplanes, it should be a healthy business.

Jimmy Dempsey:Oh, look, you know, our focus is very much on keeping our unit costs and our cost differential to the rest of the competition very, very high. Our cost differential against everybody else has grown pre-COVID to post-COVID. And so that's the platform with which we'll grow the airline quite aggressively in the next 5 years.

Michael Bell:And if I look back to low fares done right, which is your kind of moniker, if you will, and the key attributes, the first one is low unit costs. So you obviously adhere to that very well. But talk about the network and commercial side of this. So a lot of people here are interested in network growth agendas. You've mentioned these bases. Pivoting to that model today, but with 200-something airplanes coming, the picture is going to look like more than 10 or 12 or 15 bases, presumably. So what's that look like? I mean, is it 20, 30 bases? And where are those going to be?

Jimmy Dempsey:Well, I'm not going to tell you where they're going to be, but we'll probably open—

Michael Bell:Come on, just a little bit.

Jimmy Dempsey:We'll probably open 2 or 3 a year, each year for the next 5 or 6 years. So yeah, you will get into over 20 bases over time. I mean, the growth in the airline is real. The frontier will be somewhere between 270 to 320 aircraft over the next 10 years. So that's a dramatic change in size in the business. We've more than tripled the size of the airline in the last 10 years, and in the next 10 years we'll probably at least double the size of the airline from where it is today. So it's quite dramatic growth. There's no shortage of pilots or crews in order to to fly those aircraft. So we feel quite confident in rolling out the business. One of the challenges that the airline faces is obviously, you know, the major airports around the United States, either the slot-controlled ones or other airports, you have a paucity of gate availability. And that's a challenge as the airline grows. But we have yet to face a problem with growing the airline over the last 7 or 8 years, even though that challenge still existed 7 or 8 years ago.

Michael Bell:Tom Doxey was talking about their success in going to some of these secondary markets. Do they lend an opportunity to establish bases and maybe stay away from some of the more heavily subscribed markets that way?

Jimmy Dempsey:Yeah, we'll do both. We'll do both. Like, look, we're the lowest cost provider of a seat in the market, puts us as effectively the lowest fare provider, so we stimulate hugely into either Big markets or small markets, and we have a mixture of both across the network. We tended to match big markets with small markets, so picking up traffic flows that identifies that. And that comes from where we're based in Denver. Similar to Calgary, you have a lot of— we have about 80, 90 destinations out of Denver. And so we don't necessarily do high-frequency traffic flows. We tend to size the market to the size of the stimulation that we think we can achieve.

Michael Bell:Okay.

Jimmy Dempsey:In terms of growing the airline, and that's been quite successful for us over the years.

Michael Bell:And I recall back when Indigo took over Spirit and did that ULCC transformation, obviously a very successful one, and then sold off, went to Frontier, did the same thing. The word was, well, one day, you know, that Bill Franke was going to go and put these airlines together. And of course, lo and behold, that day came, and he made an attempt to do so. JetBlue got in the way. A year and a half later or plus, theirs gets denied and now Spirit's sitting on its own. So what do we take from all that? Is there benefits to industry consolidation in the space? Do you see that happening? Will this be an attractive target for you guys again?

Jimmy Dempsey:Look, we're focused, we're very much focused on growing our business. Like, we have a huge aircraft order and so growing the airline organically is where our focus is. There's no doubt that in the United States, the 4 big players have a very powerful position in terms of their scale in all the airports that they're in, but also across the US if you look at it as a whole. You could see consolidation helping someone generate scale so that they can compete with the big guys, but the administration has been—

Michael Bell:Not friendly.

Jimmy Dempsey:Not friendly to consolidation. to that process. And so our focus is in returning the airline to healthy profitability post-COVID, and that's where our focus is. We obviously engaged with Spirit, had a deal. JetBlue came in and outbid us on the deal and agreed a deal with Spirit, and they went through their process. Since that happened, we've been solely focused on organic growth in the airline.

Michael Bell:So talk about yourselves that way, and I'm going to I'm going to ask you a question, but then come to the one here on Slido, which is the brand. You know, I think the low fares done right was sort of an insinuation that, you know, maybe that sort of— excuse my language— hard-ass ULCC approach that Ryanair and Spirit had taken, you know, had sort of worn thin. You can do this, you can be low fare, you can be kind to your customers and socially responsible, etc. What does the brand stand for and how do you see We're very much a family brand.

Jimmy Dempsey:If you look at the traffic flows into our website and our booking program and the people who travel with us, it's typically families traveling on vacation or small, medium-sized enterprises where their people are traveling because they're getting the benefit of our low fares. And so our brand with the animals on the tail is very attractive to to families. And what we're doing as a business at the moment is trying to take the friction out of some of the traffic or travel issues that happen in the US. Like if you looked at the last kind of 2 summers in the United States, you've had real weather impacting air traffic control in the United States, which is causing significant cancellations across the US. Our move to this out-and-back network is going to put us in a situation where Our completion factor and on-time performance has improved dramatically because we're simplifying the network. That strategy and move to the out-and-back network that we're doing was really as a result of difficult traffic flows in and out of Florida last summer. And so we're hopeful that that actually— or optimistic that that improves this summer.

Michael Bell:And with that comes sort of a more reliability.

Jimmy Dempsey:And as a result, that reduces some of the friction that exists.

Michael Bell:So, I'm going to ask you one of the questions here, which I don't really understand, but maybe you can understand it.

Jimmy Dempsey:Which one?

Michael Bell:When and where can we expect to see the Frontera name used? I think it may be an insinuation to an extension into Latin America.

Jimmy Dempsey:So, we've— I mean, I'm sure— I think I know where this is coming from. So, what we've done is we've launched a base in Puerto Rico. And we're going to be launching a base in Mexico. There you go. In San Juan. And so we think that that's a huge gateway opportunity for us. And we've been flying to Puerto Rico for some time, but we're now linking Puerto Rico much more aggressively to the mainland United States, and then also linking Puerto Rico and creating traffic flows in San Juan across the Caribbean. This has been a big objective of ours in the last few years, and we've moved quite aggressively To actually roll out our position in Puerto Rico, so we're quite excited about that.

Michael Bell:That'll be Frontier, right?

Jimmy Dempsey:That could be Frontier, yeah.

Michael Bell:And related to that, what's your outlook on returning to Canada? I don't mean you, but the airline.

Jimmy Dempsey:Well, I actually quite like Calgary. It's really like Denver, actually.

Michael Bell:So you have returned?

Jimmy Dempsey:It's very nice. So I have returned. Look, we— I mean, you heard it on the previous panel. When we look at Canada, it's It's a relatively expensive market for us to fly traffic flows out of Canada into the United States or down to the Caribbean. So that's one of the issues. What we have been doing is flying, like if you take Buffalo as an example, we actually have quite a significant number of Canadians who drive down to Buffalo and fly on us. And so that's one of the things that we've been looking at as a business.

Michael Bell:And that's been going on for years.

Jimmy Dempsey:That's years.

Michael Bell:Vancouver and Montreal and other markets like that.

Jimmy Dempsey:But we've yet to figure out the higher cost base of the— at our business model and stimulating traffic flows, it's very important for us to have a low cost base, low unit cost base, in order to encourage people to get off the couch and travel. And so that's challenging cross-border into Canada.

Michael Bell:Related to that, a question which you said you're the cost leader and have widened that gap. What are the major sources of your cost advantage relative to your LCC competitors? Other than the fact you don't take a salary, but you can tell us about that.

Jimmy Dempsey:Look, the larger aircraft is a big benefit to the airline. The fact that we have 80% of our airline operating on A320neo fleet gives us huge fuel efficiency versus everybody else. But 240 seats on a 321neo is quite powerful in terms of keeping your unit costs down, and that's a big benefit. The other thing that we do, which a lot of ULCCs do, is we operate high utilization. So we're looking at the number of sectors we fly, or number of flights we fly per aircraft per day, and the distance that they fly. And so the airline has actually been reducing the distance that we fly as we open these bases. And actually producing more departures and more seats as a result of that, taking our cost per passenger down quite dramatically.

Michael Bell:But the more departures would drive down the utilization, would it not? Or is it kind of—

Jimmy Dempsey:Well, you got to work hard, right? So this business is very, very challenging. You're moving heavy machinery, and so you've got to work hard in terms of ensuring that you can manage the utilization while flying shorter stages. And we've done that very successfully. We've got an excellent team in Frontier. That is capable of actually managing our utilization through the seasons, which keeps our cost base very, very competitive.

Michael Bell:We have sub-5 minutes and we know you need to run to catch a flight. So what questions do we have for Jimmy in the audience today? None. Do we see one? Right there, thank you.

Jimmy Dempsey:Hi, Christine Boynton with Aviation Week. Early days for the upfront seating product, but what has the reception to that been like so far, and how is Frontier looking at potential further expansions into premium-type options? Thank you for the question. So yeah, we launched, we've launched actually 2 products in the last 4 or 5 months. We launched what's called a BizFair. Which was a kind of bundle-type option for business— focused on business traffic travelers who get priority boarding and get a carry-on bag all part of the one fare. And then we've also launched BizFare— or sorry, Upfront Plus. Now Upfront Plus is effectively very similar to European, intra-European business class traffic. So we block the middle seats. The performance on it is way better than our expectations, which is really, really good. It's early days, it launched a month ago, but we think it's a very, very attractive option for people where they can block, effectively buy a seat without the middle seat blocked. We're testing it out in the early stages on the first 2 rows of the aircraft, so effectively taking out 4 seats. And so we like it. We like it. We've seen a really strong response from our customers on it. It's good.

Michael Bell:Which talks to this sort of direction that the market's taking towards premium.

Jimmy Dempsey:And so, look, part of what we're doing is we reworked our loyalty program and we've launched some premium products. We also have, we've always had stretch seats on the aircraft and we've got some other premium seating options on the aircraft. We're trying to diversify our revenue base. And part of that is enhancing the loyalty program. And so we've actually moved our loyalty program to effectively for every dollar spent you get 10 times the points. And so that's driven a lot more card spend on our card over the last few months where we're bringing the card further up in the wallet. And that's a big push by the airline in order to diversify our revenue base. We have a long way to go on it, but it's Jimmy, why are we stuck in old nomenclature?

Michael Bell:It's really a pet peeve of mine. We still talk about LCCs and ULCCs. I see the majors going down to grab your traffic, and I see you guys and others going upmarket. Don't we see convergence here? And at the end of the day, I don't think the consumer really cares what your costs are. They care about your fares, right?

Jimmy Dempsey:Right. And so, you know, we're very competitive, and so we chase every customer. Typically, we have been focused on the leisure passenger. We're moving into more business traffic and visiting friends and relatives type traffic. We're a very competitive airline, and so yeah, we just want a customer. We don't care if they're a business, leisure, or VFR type traffic flows. Doesn't matter to us.

Michael Bell:You're going to make money on them.

Jimmy Dempsey:Yeah.

Michael Bell:If there aren't any in the audience, we'll ask one off the screen. Is there any others in the audience? No? Okay. So how do you avoid introducing complexity to your organization when rapidly growing the fleet and the airline? We've seen this time and time again. Airlines overexpand, add cost, add complexity, multiple fleet types. Next thing you know, they're like in bankruptcy and back to basics. So how are you guys gonna avoid that?

Jimmy Dempsey:I mean, one of the things that we're very, very good at is is scaling the airline. And we have had a growth machine in place for over 10 years now. And we've kept the administration of that airline in a very simple fashion. And we still run the airline like a small company. All of the senior executives are very heavily involved in managing the day-to-day.

Michael Bell:Very hands-on.

Jimmy Dempsey:Very hands-on management of day-to-day in the business. And it is much bigger today than it was 10 years ago, and it will get a lot bigger over time. And so having the ability to manage that growth and scale is very important. And so, for example, a lot of airlines in the last few years have been struggling with the pilot shortage in the United States. We have had a pilot training machine in place for a long time because we've grown quite dramatically. And so even though we faced higher attrition, We had the organization in place in order to handle that and actually grow quite materially. So we haven't had a pilot shortage. Obviously now the environment has changed a little bit. You have some airlines announcing furloughs and new pilot hiring is reduced quite a bit. So that's changed. But that's part of our makeup is actually growing the business and having a growth machine behind the airline to support the While keeping the leadership and management pretty simple and lean.

Michael Bell:Yeah, and I can attest, I mean, relative to a lot of companies, if you email a senior executive at Frontier, you're going to get a response, and it'll come from the executive themselves, right? Which is really refreshing.

Jimmy Dempsey:So you don't get that at other airlines?

Michael Bell:Not all of them. Well, we are at time. What Jimmy didn't share with you is their real secret to keeping their costs down is their recruitment fees, which they beat us up on all the time. Very, very clever. Good at supplier management. Fascinating. You guys have an exciting agenda ahead. You have a robust business model, cost base, balance sheet, and obviously great leadership. So kudos to you. And please join me in thanking Jimmy for his time today. Thank you.

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