On Tuesday, Susquehanna adjusted its outlook on shares of Frontier Group Holdings Inc (NASDAQ: ULCC), reducing the price target to $4.50 from $6.00 while retaining a Neutral rating on the stock. The revision reflects concerns over a challenging operating environment anticipated for the company and its ultra-low-cost airline peers in the second half of 2024 and into the 2025 fiscal year.
The analyst from Susquehanna cited several factors contributing to the headwinds facing Frontier Group. Among these is an expected increase in U.S. domestic capacity, with available seat miles (ASMs) projected to rise by 4% year-over-year in the second half of 2024.
Moreover, there is an anticipation of plateauing leisure demand, influenced by a weakening macroeconomic backdrop, and an observed shift in consumer preferences towards premium travel products. For instance, bookings for premium economy seats on U.S. domestic flights have surged to more than double the levels seen in fiscal year 2019.
The report also highlighted upcoming labor negotiations as a potential risk for Frontier Group. The union contracts for its pilots, represented by the Air Line Pilots Association (ALPA), and flight attendants, represented by the Association of Flight Attendants-CWA (AFA-CWA), are due for amendment in 2024.
Given that similar labor deals in the industry have resulted in rate increases of over 25% compared to pre-pandemic levels, there is a significant risk of increased costs affecting the company's cost per available seat mile excluding fuel (CASM-ex) and profit margins going into 2025.
Furthermore, the ultra-low-cost carrier model is facing challenges in growth prospects. The analyst pointed to aircraft delivery delays, supply chain issues, such as the Pratt & Whitney GTF engine recall, and labor shortages, including air traffic control (ATC), as obstacles. These factors are particularly impactful at critical points in Frontier's network, which is heavily oriented towards leisure destinations, notably in Florida.
In other recent news, Frontier Group Holdings has reported a better-than-expected adjusted pretax loss margin of 2.8% for the first quarter of 2024. The airline is on track to achieve significant cost savings through network optimization and revenue initiatives. Frontier maintains its full-year guidance, expecting to generate a 3-6% adjusted pretax margin in the second quarter and a 10-14% margin by 2025.
In addition, Frontier Group has announced the appointment of Nancy L. Lipson to its Board of Directors. Ms. Lipson brings a wealth of legal expertise and corporate governance experience, anticipated to support the company's growth and governance in the competitive airline industry.
Furthermore, the U.S. Treasury Department has garnered $556.7 million from the sale of warrants in 11 major U.S. airlines, including Frontier Group. These warrants were originally issued as part of the government's COVID-19 relief efforts for the airline industry. These recent developments underline the ongoing recovery and restructuring efforts in the airline industry.
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