On Tuesday, UBS began coverage on Frontier Group Holdings Inc (NASDAQ: ULCC), issuing a Neutral rating and establishing a price target of $8.00. The firm's analysis suggests that while Frontier Group has the potential for significant profit and loss improvements in the near future as it adjusts its network towards more productive routes, there are still several risks that warrant a cautious stance.
Frontier Group Holdings, which faced challenges throughout 2023 due to revenue per available seat mile (RASM) compression on key domestic leisure routes, is expected to undergo strategic changes starting this spring and summer.
The airline plans to redirect its capacity from oversaturated leisure markets, such as Las Vegas (LV) and Orlando (MCO), to larger destination cities. According to UBS, this reallocation is projected to enhance Frontier's average fares and flight occupancy, leading to higher RASMs.
The airline's capacity adjustments are significant, with reductions ranging from 10% to 35% in April for LV and MCO, but an average increase of about 60% in several other metropolitan areas.
UBS forecasts that these changes will positively impact the company's financial performance, with pretax margin estimates increasing by 210 basis points to 3.0% for the fiscal year 2024, in line with the consensus but at the lower end of the company's guidance of 3-6%.
For the fiscal year 2025, the pretax margin estimate is raised by 270 basis points to 5.7%, slightly below the consensus of 5.8% and well under the company's ambitious guidance of 10-14%.
The firm indicates that for Frontier's stock to experience a significant rise, the airline will need to demonstrate tangible progress that surpasses these estimates. The reconfiguration of Frontier's route network is aimed at boosting profitability by focusing on routes with higher demand and less competition.
Still, the success of this strategy is contingent upon the airline's execution and its ability to manage potential competitive responses and ongoing negotiations with its pilots.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.