Frontier's Real Business is Airplane Deals
It's making big money from sale-and-leaseback transactions, not from flying passengers. Should we be concerned?
Dear readers,
I don't think JP Morgan analyst Jamie Baker subscribes to this newsletter, but maybe someone shared my recent American Airlines story with him — the one in which I criticized analysts for asking meek questions — because he came out swinging at Frontier CEO Barry Biffle on Thursday’s earnings call. I found it delightful.
Frontier had a decent first quarter, losing only $26 million on total revenues of $865 million, and reported a pre-tax margin of -2.8 percent. Not bad for winter. "We had a pretty good beat," Biffle crowed, mentioning Frontier had performed better than analyst expectations. The potential problem is how Frontier nearly broke even: it was not from flying passengers.
More than any other U.S. airline, Frontier benefits from sale-and-leaseback gains. You know how it works: After Frontier takes delivery of new Airbus aircraft, it sells them to lessors and rents them back, booking a gain on the sale. In the first quarter, Frontier reported $71 million in sale-leaseback proceeds, Baker noted, allowing it to offset its CASM.1
"It feels like the business model is becoming increasingly dependent on aircraft financing decisions as opposed to the RM and CASM stuff that we're all kind of accustomed to,” Baker said. "When sale-leaseback proceeds begin to fade, have you given any thoughts on how you might manage the business differently?" Zing!
How did Biffle respond? Well, long-time readers know that Biffle can be more animated (some might say angry) than most CEOs when someone asks him a question he does not like.2