Citi has issued an update on Frontier Group Holdings Inc (NASDAQ: ULCC), adjusting the airline's price target downward to $3.50 from the previous $5.35. Despite this change, the firm has decided to maintain a Neutral rating on the company's shares.
The adjustment comes amid concerns about the challenges facing the discount airline sector in the United States. Frontier, in particular, is grappling with immediate issues stemming from an oversupply of domestic mainline industry capacity. This situation is putting pressure on the airline in the short term.
In addition to these current difficulties, Frontier is also dealing with longer-term risks. The airline's high financial leverage is a point of concern, as is the potential return on investment from the collective discount airline industry's efforts to enhance premium cabin offerings.
Citi's stance on Frontier Group Holdings reflects these complexities, with the firm emphasizing the high-risk nature of the investment. The Neutral/High Risk rating indicates a cautious outlook on the airline's stock amidst the current industry environment.
Frontier Group reported a 1% rise in total revenue to $973 million in its second-quarter 2024 earnings conference call. The airline's strategic adjustments, which include network and revenue diversification, cost-saving initiatives, and capacity optimization, have led to expectations of emerging as the clear low-cost leader by 2025. Frontier's new routes have also shown promise, with two-thirds performing well, and the company is enhancing customer experience through new digital platforms and bundled fares.
The company's adjusted non-fuel operating expenses were below guidance at $650 million and adjusted CASM ex-fuel was 10% lower than the previous year. Frontier ended the quarter with $658 million in cash and 148 aircraft in its fleet. The airline revised its Airbus delivery schedule, deferring 54 aircraft from 2025 to 2028, and extending lease deferrals to 2031.
Despite industry challenges such as oversupply and changing travel patterns, Frontier has achieved over $100 million in annual savings from a program launched last year. However, some new routes have not performed as expected and will be removed. The company experienced cancellations and margin degradation due to a Microsoft (NASDAQ:MSFT) outage and a CrowdStrike (NASDAQ:CRWD) hit.
InvestingPro Insights
In light of Citi's recent update on Frontier Group Holdings Inc (NASDAQ: ULCC), an examination of real-time data and InvestingPro Tips can provide additional context for investors. The airline's market capitalization currently stands at $637.53 million, and it is trading near its 52-week low, with a price 34.09% of the high. This underscores the market's valuation of the company in relation to its past year's performance. Frontier's price-to-earnings (P/E) ratio is at -10.18, reflecting challenges in profitability, particularly over the last twelve months where the company was not profitable.
InvestingPro Tips suggest that Frontier operates with a significant debt burden (Tip 0) and may have trouble making interest payments on its debt (Tip 1), aligning with Citi's concerns about the airline's high financial leverage. Despite these challenges, net income is expected to grow this year (Tip 2), providing a potential upside amid the current difficulties. However, the stock's volatility (Tip 8) and the fact that six analysts have revised their earnings downwards for the upcoming period (Tip 5) could indicate more turbulence ahead for investors.
For those looking for more detailed analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/ULCC, which can help investors navigate the complexities surrounding Frontier Group Holdings' stock.
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