Frontier Group Holdings Inc (ULCC) 2022 Q3 法說會逐字稿

Hello. Thank you for standing by, and welcome to the Frontier Group Holdings, Inc. Third Quarter Earnings Call. (Operator Instructions). I would now like to hand the conference over to your speaker today, David Erdman, Senior Director, Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to our third-quarter 2022 earnings call. Today's speakers will be Barry Biffle, President and CEO; Jimmy Dempsey, EVP and CFO; and Daniel Shurz, Senior Vice President, Commercial. Each will deliver brief prepared remarks, and then we'll get to your questions. But first, let me quickly review the customary safe harbor provisions. During this call, we will be making forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those predicted in these forward-looking statements. Additional information concerning risk factors which could cause such differences are outlined in the announcement we published earlier, along with the reports we file with the SEC. We will also discuss non-GAAP financial measures, which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement. In addition, comments about relative operating statistics exclude pandemic-affected quarters during 2020. Lastly, if you didn't already noticed the announcement in the earnings release, we will be hosting an Investor Day the morning of November 15 in New York. The event will be live-streamed and archived on our website preregistrations required for all participants, whether in personal or virtual. However, in-person participants must register at least 24 hours in advance. Registration link is provided on our Investor Relations web page at ir.flyfronter.com. So I'll give the floor to Barry to begin his comments. Barry?

Thanks, David, and good afternoon, everyone. First, I want to thank all of team Frontier employees for serving our customers in the quarter and doing a great job producing these great results. With the supportive demand environment for affordable travel, record ancillary revenue performance and improving unit costs, we posted back-to-back quarterly profits and expanded our adjusted pretax margin to 5.2%, nearly double the second quarter margin. Total operating revenue was 35% higher over the 2019 quarter, while capacity increased by 8% over the same period, contributing to a 26% increase in revenue per available seat mile. In fact, over the first 9 months of the year, we've grown capacity about 12% while increasing total operating revenues by 31% compared to the same period in 2019, demonstrating the strength of our leisure-focused ultra low-cost business model.

The strong revenue performance was underpinned by the achievement of a record $78 of ancillary revenue per passenger during the quarter, which eclipsed the record set last quarter by $3. Since the third quarter of 2019, we've grown ancillary revenue per passenger a remarkable 38%, and we're confident in achieving our targeted run rate of $80-$5 per passenger by the end of 2023. We'll talk more about how we plan to continue to innovate and optimize our ancillary product offerings at our Investor Day on November 15. Leisure travel demand remains strong and has undergone a fundamental increase versus customer propensity to travel prior to the pandemic. To gain more insight into emerging trends, we recently pulled our customers to understand how they're thinking about future travel plans and their ability to travel. The results of the survey reveals an inclination to fly more frequently than they did pre-pandemic with over half of the survey respondents indicating that they now have more money and more flexibility to do so. The results of this poll demonstrate resiliency in the lesion segment.

We expect the benefits from this resilient demand to be amplified by industry capacity, which continues to lag GDP growth. As we look to capitalize on this consumer sentiment, we expect to benefit from our ability to offer ultra-low fares. These fares are underpinned by our industry-leading position in both ancillary revenue per passenger and unit cost. We operated with the lowest adjusted CASM plus net interest of all U.S.-based carriers in the first half of 2022, and our unit costs improved from the second quarter. We are focused on expanding our cost advantage versus the rest of the industry, supported by increased utilization, relentless cost management and the significant gauge benefit from the A321neo aircraft.

Our first A321neo arrived about a month ago. It's an incredible aircraft with a livery reflecting the new Pratt & Whitney Geared Turbofan technology, which is helping to deliver a stunning 120 ASMs per gallon, along with significantly lower carbon emissions and engine noise. All are fundamental elements to furthering our standing as America's Greenest airline. This is the first of 168 A321neos scheduled to be delivered through 2029, including direct leases, 36 of which are expected by the end of 2023. With 240 seats, this aircraft will provide a transformational shift in our business. We'll be able to fly more passengers more sustainably and with lower CASM. We launched our cadet program in the third quarter and have over 1,300 applications to date. We also announced our rotary transition program last week. Coupled with our university Aviation programs, these 3 recruiting platforms will provide the backbone for our pilot recruiting in 2023 and beyond, and we expect the majority of our new pilots will come from these programs within a year. Overall, we are positioned to capitalize on a strong leisure market given we have the lowest breakeven fare driven by the highest ancillary revenue per passenger and the lowest cost.

With that, I'll now hand the call over to Daniel for a commercial update.

Thank you, Barry, and good afternoon, everyone. Our third-quarter revenue performance was once again exceptional, [by] 35% over the same quarter in 2019. This is the third consecutive quarter we posted double-digit revenue growth over the respect to 2019 quarters and is a testament to the strong travel recovery that we believe is sustainable, as Barry covered earlier. Our third-quarter capacity was up 8% over the 2019 quarter, while RASM increased 26% over the same period from $8.96 to $11.27 despite a high concentration of capacity deployed during off-peak periods in September. Revenue per passenger increased 24% to $135 with ancillary revenue contributing $78 of that amount. Both RASM and revenue per passenger set an all-time third-quarter record and ancillary revenue per passenger clips the previous record.

And total performance continues to benefit from recent product expansion and enhancements, strong attachment rates, and increased revenue integrity. As the third quarter progressed, utilization increased over 11 hours per day. Our schedule for the fourth quarter sees a further improvement to over 11.5 hours per day as we continue normalizing stage lengths. We continue to grow our international footprint. Beginning next February, we will launch service from Denver, Chicago Midway and St. Louis to Montego Bay. We also began 5 new Caribbean routes from Atlanta next week. With the opening of our new crew base in Phoenix next month, we announced 12 routes from the city to destinations across the country. With these new routes, we will offer a total of 23 destinations from Phoenix, a rapidly growing market, which has been underserved by ULCCs. That concludes my prepared remarks, and I'll now hand it over to Jimmy.

Thank you, Daniel, and welcome, everyone. We generated a pretax margin of 6.4% on a GAAP basis and 5.2% on an adjusted basis during the third quarter, above the top end of our guidance range. Adjusted pretax margin primarily includes $12 million in net transaction and merger-related credits associated with the company's terminated combination with Spirit Airlines and reflects a nearly 250 basis point improvement over the prior quarter. The margin improvement is driven by the record ancillary revenue per passenger performance that drove a 35% increase in total operating revenue and a 26% increase in RASM versus 2019, coupled with an 8% reduction in our adjusted CASM plus net interest over the second quarter. The unit cost improvement is related to both a 13% reduction in the average fuel cost per gallon to $3.85 per gallon as well as a 5% reduction in our adjusted CASM ex-fuel to $6.9 due to improving utilization and cost management efforts across the business.

We expect the fourth quarter to deliver further improvement in our unit costs, driven by improvements in utilization and continued cost management efforts. Our cost strategy is focused on expanding the cost advantage we have over the industry. The pillars of this strategy are: one, growing our industry-leading fuel efficiency; two, having the lowest debt service cost; and three, achieving the lowest CASM ex-fuel capability in our business with a 2023 CASM ex-fuel target of below to $0.06. We intend to maintain the lowest unit cost in the industry, including fuel, nonfuel cost and interest.

As Barry mentioned, during the first 6 months of 2022, Frontier operated with the lowest adjusted CASM plus net interest of all U.S.-based carriers. With the improvement in our unit cost during the third quarter and the execution of our cost strategy, we expect our total unit cost advantage versus the industry to expand. We ended the third quarter in a strong financial position with $674 million of unrestricted cash and cash equivalents and $251 million net of total debt. In addition, we -- as previously highlighted, we have the ability, if needed, to access substantial liquidity through our loyalty program and brand-related assets. We had 115 aircraft in our fleet in September 30th after taking delivery of 2 A320neo aircraft and our first A321neo aircraft during the quarter and returning 3 A320CEO aircraft. In the fourth quarter, we expect to take delivery of another 7 A320neo family aircraft, including 5 A321neo aircraft.

Looking forward to the fourth quarter, we expect a continuation of the favorable demand environment Capacity is anticipated to grow by between 15% and 17% over the comparable 2019 quarter. Fuel costs are anticipated to be between $3.7 and $3.75 per gallon based upon the blended jet fuel curve on October 21. Adjusted non-fuel operating expenses are expected to be between $565 million and $585 million in the third quarter, reflecting further unit cost improvements on the planned capacity growth. Our cost and capacity guidance alongside the favorable demand environment is expected to deliver an adjusted pretax margin in the range of 3% to 7%.

With that, I'll turn the call back to Barry to deliver closing remarks before the Q&A.

Thanks, Jimmy. Demand for affordable travel is greater than ever with a customer base that has more flexibility and plans to travel more often than they did pre-pandemic. We are better positioned than anyone to exploit this opportunity as our ultra-low-cost fares are the most attractive for leisure customers. As our results demonstrate, our focus is to build shareholder value through our low fares downright business model. We look forward to expanding on our results and commentary for the quarter and other elements of our business at the upcoming Investor Day, November 15. We hope to see you there.

We'll now move to Q&A.

(Operator Instructions). Our first question comes from Stephen Trent with Citi.

I'm just going to start off with one for now I was wondering if you have any high-level thoughts about the ultra low-cost business model in the event that we get downturn. So if you look back at the credit crunch, any high-level view of the extent to which carriers like Frontier [Thrive] because you had consumers may be leaving the legacies and looking for cheaper fares while oil rolled off. I would just look to get your little thoughts on that.

Sure. So Steve, we -- I think everyone knows, if you look at history, the lowest cost model going back to the '80s is generally the winner in any recessionary environment. We've seen that with Southwest back in the '80s and '90s. We saw it with Ryanair. We saw it with Spirit back in the great recession. So typically, you would find an ultra-low-cost carrier, and especially ourselves, which is the lowest cost to fare most likely the best in a recessionary environment. And part of that is just simply because we'll have the lowest cost, so it's easier to cover our costs. There is generally trade down that you see in those type of recessions. But we also have higher ancillary, we see a lot more stickiness in that versus the fair revenue, and it doesn't seem to fluctuate as much.

So I think we're probably better positioned than most. I do think, though, that from what we know today, and it depends upon how deep a recession could be. But if you look at the increase in propensity to travel and the fact that people are traveling more times per year on at least in their – in what they've been doing right now and what they plan to do. I think a recessionary impact could only maybe just bring that back to what you had pre-pandemic. So I think you couple that with the constrained industry capacity and I'm not going to say there won't be any turbulence in our space, but I think we could see a very mild recession, if anything, impacts us at all.

Our next question comes from Jamie Baker with JPMorgan.

So other airlines, you're citing consumer -- shifting consumer travel patterns. Is it driving any changes in how you schedule and fly the airline? Or is it just as simple as sitting back and letting the revenue roll in?

Jamie, it's Daniel Schurz. So look, as we see demand -- we see demand spread out a little bit across the week and we move away from the very peak Friday, Sunday pattern. What is already starting to allow us to do is increase utilization on the shoulder days of the week and even just on to some too on the off-peak day the week because we're seeing demand plans past week. It's actually beneficial to the business because we're getting better demand across the week. And we're also expecting, and we're seeing some evidence that it's starting to deseasonalize the business to some extent. I'm not going to say that off-peak periods are suddenly going to become peak. That's not it. But we're not going to -- we're not -- we're seeing a little bit less in the way of seasonality as well. So I think it's -- I think it will lead us to pushing utilization up a little bit because we've got more ability to generate cash. We've got more ability to have cash-positive flying on periods when previously we might have lefted a few airplanes sitting on the ground.

Does it disrupt maintenance schedules in any sort of measurable way?

No. In many ways actually flattening things out and making things more consistent across the week actually tends to help operationally in all sorts of ways. It helps because you've got consistent access patterns for maintenance, it helps on consistent patterns of the airport for the staffing purposes. It helps because you get more efficiency from crews when you have consistent across the week. So it actually helps a little bit and potentially there's a little bit of a benefit from a cost perspective as well.

Interesting. Second question, in the release, you cite that aircraft leases are expiring between, what, this year and 2034. Is that front-end loaded, back-end loaded, fairly consistent? I'm just trying to think through how the reality of rising interest rates and rising lease rates are going to flow through the P&L going forward?

Yes. Jamie, our redelivery program is pretty consistent from about 24 through into the next decade, given that we typically do either 8- or 12-year leases on delivery of the aircraft. So it lags the delivery in the first place, 8 to 12 years, so pretty consistent. From a current market perspective, we are in a really good position in terms of financing the airline. We have the next 12 months covered in terms of our aircraft deliveries. In fact, we have 35 of the next 37 aircraft deliveries financed. And we've done it in a way that has capped the interest rate exposure on a lot of these leases. So in the recent run-up that you've seen in interest rates, certainly for the next 12 months, we're in really good shape to manage that. And then we have, obviously, aircraft deliveries beyond that. But that puts us in a very strong position from a financing perspective for next year.

Our next question comes from Duane Pfennigwerth with Evercore.

Very, very pleasant question so far, unlike publicly questioning your business model on other conference calls. But anyway, on fleet, how would you rate your confidence in ending 2023 with the 36 A321s? And did -- are we right, did some aircraft actually shift out of this year that you expected?

Yes. We've had a couple of aircraft shift from the end of this year into next year. They were due to deliver right at the end of the year. So it doesn't really have a meaningful impact on ASM production this year. We have visibility on our aircraft deliveries probably largely into the middle of next year, and you've certainly seen some delays in aircraft deliveries. But it's nothing like you're seeing with Boeing. We're lucky that we're delivering aircraft through Airbus who have some supply chain issues, but not to the extent that you're seeing in other manufacturers. And so any delivery delays are generally modest of the 2-month to 3-month variety. So the aircraft are coming. It's just whether they come in October, November, or December next year. Look, there may be a case where a couple of aircraft like this year roll from the end of next year into 2024. But we'll deal with that if that happens.

Can you walk us through the building blocks of capacity next year? It just feels like gauge is going to be up quite meaningfully. Can you -- how big a contributor would that be to the 30% you're targeting?

Well, like about half the capacity that we're bringing next year is already delivered to the aircraft or to the airline. We've been underutilizing the gas that's all across this year. We moved to just over 11.5 hours in utilization in the fourth quarter of this year. But if you look at the previous 3 quarters, you've been at 11 or below 11 hours in utilization. So some of that growth comes through using the assets that are in place today. And the rest of it comes with 321neo that we took the first delivery of a month ago. And that move to delivering aircraft at 240 seats. It changes the ASM production in the airline quite materially for the block hours that are required to produce that production. And so if we are growing the business by towards 30% in ASM production, our block hour needs are in the low 20s. And so you're getting a significant efficiency gain in the business. And so your requirement for pilots or flight attendants, mechanics to support the fleet is not as fast as 30% if we push ASMs towards 30% market.

Go ahead. Sorry.

So I was going to ask Daniel to answer the question on how it builds throughout the year.

So if you look at the year and you look at the shape of our current plans for next year, Duane, we're sitting with similar growth in Q1 next year to Q4 of this year. And then it picks up to above 30%, not much above the above 30% but about 30% for the rest of the year. That's driven by the fact that we return to peak utilization or traditional pre-pandemic utilization later in the first quarter. And then we retain that utilization expectation for the rest of the year. So as Jimmy said, that's roughly half of the growth next year is half of the growth is how much the utilization growth and delivery pace continues to pick up during the year in terms of number of aircraft.

Okay. I have one more for you, but I'm going to get back in the queue. So will talk to you in a bit.

Our next question comes from Michael Linenberg with Deutsche Bank.

Just a couple here. I want to go back just on utilization. I know, Daniel, you had mentioned, I think you're roughly 11.1%, you're going to go to 11.5% in the fourth quarter. Next year, where can we get on utilization, and I'm talking about hours per day. Is that -- what's the aspirational number? How should we think about how that helps fund CASM? Like if we go from, say, 11 hours to 12 hours, is that like $0.5 of CASM unit cost improvement Jimmy? How should we think about that?

Well, so I'll answer the first part. Yes, we're looking to get utilization next year to over 12. We're looking to get slightly above 12% on the fleet is the plan for the full year. As to the CASM impact, I'll let Jimmy.

Yes. You can see this in your model. Like an hour and utilization is probably about 0.2 to 0.3 in CASM ex-fuel. The fixed overhead that your occurring just drives that number.

Yes. Okay. So that's significant. And then just second question, and this is probably to Daniel. You guys have pretty meaningful overlap with Florida and even the Caribbean now. And yet you didn't call out in your release any impact from Ian or Fiona, the 2 hurricanes, either last quarter or this quarter. Anything on impact on revenue or costs that we should be aware of early (inaudible)?

So look, do we have an impact? Yes, we estimate about a 1-point margin impact in the third quarter, and we're looking at the fourth quarter and some of the demand impacts we're guessing probably about a 1-point impact in the fourth quarter. I will say, and we could see it post-hurricane, we were able to recover our operation more quickly than some of the other airlines who have significant operations in Florida. So we did -- again, some of the benefits we've talked about the modular network and the modular way we design the operation, we're once again visible recovering our operations post-hurricane. But look, yes, the one airline that's really called it out, our presence in Florida is almost exactly the same as theirs.

Our next question comes from Brandon Oglenski with Barclays.

It's good to be live on you guys again. Barry, can you talk to the sustainability of your ability to grow in the market? I know you guys didn't necessarily have a pilot availability issue in the summer, but it was compounding factors external to your company, I think that maybe you pull back your schedule a little bit. So do you think you now have the pieces in place and the externalities solved that you can sustain that growth outlook into 2023?

Yes. Look, we had the challenges that a lot of airlines faced. It was probably back to the overlap in Florida. I think those with high concentrations in Florida were more impacted than others, and we were in that category. And Jacksonville Center was the big culprit that hit us back in March and April. I know that they're working on their staffing issues. What we did as a knee-jerk reaction as we cut a lot of flying into Florida and then cross the Jacksonville Center, and that hurt our utilization in the summer. We have rejiggered the schedule now. And so we're in a situation where we are more -- even more extreme modularity as Daniel described so that we don't get impacted. We've also looked at the pairings.

We talked about this before, where we don't have 3 or 4 times that accrue crosses Jacksonville Center, a maximum 2 per duty period. So we've lessened our risk now. And so look, we'll see what happens. I mean we're eager to watch the holiday periods with air traffic control and what happens during the spring break period. But what we've done is we've lessened our risk there. And so we think our ability to grow is cleared for takeoff.

And Barry, you feel you have the available pipeline of pilot hiring and training as well, no bottlenecks there?

Yes. So we have surplus as a result of pulling back this summer. We're slowly [peering] them back in. We hope to have them fully utilized by the end of the quarter and then growing in. But as I said in my opening remarks, our cadet program has been wildly popular. We've had over 1,300 applications so far. Roughly half of those that have gone through financing with ATP have already gotten financed. So that's great to see. We announced our rotary transition program last week. There's a lot of pilots to come from there, and we've had our university program, which we haven't talked about a lot, but we've had it in place for several years, and that's really starting to just finally come to fruition producing pilots. So between those 3 programs, we expect within 1 year, the majority of our pilots will come from that, and we continue to see good numbers. So we feel pretty good about our pilot hiring at this point.

All right. And last one for me. Jimmy, do you think it's still right to be targeting a sub-6x CASM? There's been a lot of inflation across the board. You still think that's an attainable number though?

Yes. Look, there's been inflation and Frontier has experienced some inflation across its business, particularly around the airport world. What we have been doing in the last 6 months or so is really focusing on the elements of the cost base that we can control, and we've started to look at changing the way we do business. which is driving real cost savings into the business. If you look at our unit costs in Q3 and our unit cost going into Q4, we're seeing real step changes in our path towards $0.6. Obviously, the 321neo gives you a significant boost in terms of seat density on the aircraft and average seats per departure, which really helps bring efficiency into the airline. But in the context of changing the way we do business, we really don't want to disclose a huge amount right now on that. We have our Investor Day on November 15.

And our entire management team will be there where we will actually give you some insights into the things that we've been doing to change the way we look at our business from a frontier perspective, and that is driving real savings. Part of the improvement in unit costs in the last quarter over Q2 and what we're seeing going into Q4, on top of improving utilization and lengthening the stage really in the airline, is this project that we've been embarking on, which is showing real promise and real savings. So more to come in November.

Our next question comes from Ravi Shanker with Morgan Stanley.

So not to stable any magic at from the Analyst Day, but I think there's been a lot of potentially structural change in consumer behavior coming out of the pandemic. So I just wanted to ask on ancillary. Do you feel like there's any real structural change in the way consumers are shopping for add-on stuff in addition to the base ticket? And also what do you think some of these new proposed regulations on price transparency does to that?

Thanks, Ravi. It's Daniel. I'll talk about the 2 issues separately. Look, we're finding with our ongoing work on optimization. We're obviously driving better and better non-ticket revenue. You've seen that – you saw a new record in the third quarter. And that's driven by -- we offer the lowest power and the better we can drive our ancillary or we can drive the lowest fare in the market. And we give customers a choice of lots of different options. And the more products we add them, the more potential items customers can buy and customers find options they find appealing. And I think this is an improvement. Are we seeing any huge structural shift in what people are buying? No, we're not. We're seeing better performance across the board on all of our ancillary products.

The proposed DOT regulations, I'll just say this for right now. Airlines already displayed transparently all the products we sell and the pricing for all those products. No one buys a frontier ticket on our website without knowing the price for any of the ancillary products they might want to buy, they're all extremely visible in the purchase process for those that purchased them. Anything you might buy later is extremely clear and extremely obvious. We don't have a problem with price transparency. Our consumers don't get any [gotches] in the process. They get to see everything that they need. And we will make that point clearly when we respond to any proposals.

Our next question comes from Savanthi Sythwith Raymond James.

If I may ask Barry, it feels like you talked about pilot hiring, and that's been a big topic lately. It seems like there is a shift here. As you point out, versus relying on regional airlines for hiring, you are going directly in hiring pilots and not relying on others. It seems like that's a shift and maybe might strengthen your pilot offering. Does it lower cost in the long term? How does it change the -- your positioning in the industry? Or is it just net neutral because you've just shifted where you're getting your pilot?

Well, look, first and foremost, we're a safety-oriented business. And so I think with what we're doing right now, it's actually pretty exciting from a training perspective. I think we could end up with a more uniform training program that delivers much safer pilots. But the big component here is the fact that we're controlling our destiny and we will control the sourcing of our pilots. And so we just put to bed this continuous drumbeat of the sky is falling. And so we're just taking control of it. We don't know what's going to happen with regionals and everyone else, but we're just putting in programs that ensure that we have a solid supply for years to come. It.

And then if I might follow up on the CASM commentary on sub-6 to me, is that given the timing of the capacity and the utilization rates, is that something you'd be able to reach by the second quarter of next year? Is that a realistic expectation?

Savi, we're not guiding quarters next year at this stage. But look, we'll progress through Q1 is always a quarter that's slightly higher cost than the rest of the year. And so your trajectory towards $0.06 for the year. You should see it in Q1, but it will obviously show up more closer to the second half of the year as you drive utilization and the assets come into the business, part of getting to sub-6 is delivering on the 321neos that commence the fleet during next year. It's not the sole component, but it's a significant portion of the improvement from where you expect to be in the fourth quarter, for example, and then that rolling through next year.

Our next question comes from Conor Cunningham with Melius Research.

Just on the RASM or the implied RASM. I'm pretty surprised at the lack of decline given you have higher capacity, there's a ton of noise just in holiday timing. Can you just talk about where you're seeing the strength in your markets relative to some of the others? Like a lot of the guidance that you're hearing out of other carriers has some deceleration implied in it and you really aren't seeing that right now. I imagine some of its ancillary, but if there's any other color that you could provide on that, that would be helpful.

Look, you've got the biggest point. We are seeing continued progress, and we expect to see continued progress in the fourth quarter. On non-ticket as we work our way towards the goal of $85 by the end of 2023. So that provides -- that provides some of it. We've also -- look, we've also as part of our work on the November schedule where we've worked on stream modularity and some of the cost change. We've also -- we also look at the performance of the network. And we've also made changes there that are going to help drive volume in the business because we're focusing on where things are doing well. And look, our brand is the most positive one in the ultra-low-cost space. And I think we're getting consumers are recognizing that, and they're seeing the value we offer them. They're seeing -- you can look at numbers out from the industry, including today on how really we've got the best value proposition out there and customers understand that.

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Okay. And then, Barry, I think you made some comments about potential transatlantic in Deep South America flying with the XLR. And like I understand why that may be appealing, but it's 3x year stage length and all that stuff. So I'm just trying to -- there's been some struggles with the ultra low-cost long-haul model over the years. So I'm just curious on why that may be appealing to you now. And just any thoughts there, that would be great.

Sure. Well, look, we have options on 18 XLRs that could come as early as 2026. And to be clear, what I said -- what I was describing is what the aircraft can do. They are asking where could it fly. And obviously, yes, it could go to South America, it could go to Hawaii, Europe. And so there's a lot of places that the airplane can fly. It obviously gives you the ability to fly several times our -- yes, maybe several times our average stage that's if you used it to its full potential. But the reality is, it enables us to fly longer sectors, and we've got a lot of options with the U.S. license to do that. And with 18 aircraft by the time that comes in, this will be a small percentage of the fleet, but I think it will enable us to fly some exciting destinations that will make our frequent flyer program and our discount dent and all of our subscription products just that much more powerful from a brand perspective. So will it materially change the economics and the financials of the companies? No. But indirectly, it will because it will help propel the brand further.

Our next question comes from Andrew Didora with Bank of America.

I had a bunch of questions on utilization, but you've addressed all of those by now. But maybe I'll ask Barry, strategically, when you spoke in your prepared remarks about the structural changes that you're seeing in travel, does that change the way you think about your network construction over the next few years as you grow? I guess how do you think about the -- do you think there is more room for growth within new markets? Or is a lot of this is just adding depth and breadth to the current network? Just curious on how the structural changes, how you view these structural changes in terms of network construction?

I can start, and Daniel can add to it. I think one thing that helps is it actually really helps a carrier like us that often less than daily because if they've got more flexibility, they can move to different days, a lot easier. But I think what it's going to cause us to do is just make sure that we have more and more of the right portfolio of places that they want to go and a lot more options because the truth is if you look at the data, they're telling you they're going to travel more often. And so that means they're going to explore and experiment with more destinations. So having a really good footprint and breadth of service that I think is going to become more and more important. I don't know, Daniel, if you want to...

I think Barry is right. I think it definitely encourage it definitely encourages frequency. We're already seeing – as we're already seeing we fly. We have a very large airport footprint. And so already our growth going forward is going to be more of a mix of frequency than purely that is heavily new market-focused as it was in the past. Look, we will also watch and I think this bid is too early to do, we're seeing this broadly. And [we’re seeing] these trends towards flattening of demand platform broadly. So because if it happens broadly across the network, it doesn't inherently drive one particular type of network growth. And look, as we continue to add basis, Phoenix is a great example. We're adding those 12 routes in Phoenix, they're all to existing cities in the front-end network. As we continue to grow as we continue to have crew bases, we will find more opportunity to add markets that connect the dots within the existing network.

Our next question comes from [Thomas Gerald] with Cowen.

A lot of mine have already been answered, but I guess just quickly, if you could provide maybe a little more color on the opportunity in the Phoenix market that you see (technical difficulty) and what you're excited about there. That would be great.

Well, look, it's reasonably simple. Phoenix is a top 10 metro area, relatively fast-growing market one of the top 3 or 4 fastest-growing metro areas in the country. And it's a great mix of a good destination market, a good inbound tourist market, and a strong outbound market. Some of the best markets in the country from a ULCC perspective have those characteristics. And Phoenix Sky Harbor Airport is incredibly well located to the metro area, and it's underserved by ULCC capacity today. And so we're excited there. And look, we are a Western brand. But we're a national brand, but we have a brand that's rooted in the West, rooted here in our hometown, obviously, of Denver, but that plays well across the Western United States. I think you look at the city of that scale. You look at the metro area of well over $4.5 million now, and you look at how few ULCC departures there are from the airport, it's a natural opportunity. So much leisure demand.

(Operator Instructions). Our next question comes from Duane Pfennigwerth with Evercore.

And maybe you answered it with Phoenix. But Barry and Daniel, as you observed the domestic industry rebuild with regional carrier constraints and general pilot constraints and every carrier having a focus on scheduling that supports reliability, are there any new surprises or new thinking regarding the types of markets you want to target? We got to think there's more white space in midsized markets given the industry's constraints, but maybe there isn't a good way to target those with less than daily service and focus on reliability at the same time. So would love some thoughts on that topic, and then I have one more for you.

Well, I'll start and I'll let Barry add. So yes, when we look at a capacity build back, and I would say, your point actually this lack of capacity build back would be a better way to describe it in some cases. Lower regional capacity has an advantage, maybe not always directly for us in the markets where there wasn't the capacity. Some of those regional markets are obviously quite small. But we look at examples of some of the longer-haul markets we recently added from Las Vegas and what's notable with the lack of regional capacity is how many fewer connect options exist, for example, and how often that creates market options because there's simply pure options for customers, even in some relatively bigger markets.

And I think, look, our expectation is that there will be some changes in the way the network carriers build – 3 network carriers build their networks as they have less regional capacity to supply. It's going to create opportunity for us. We've got the lowest total cost. We're focused on maintaining those lower total costs, increasing our cost advantage. And as we do that, that we will find -- we will continue to find more markets, we can end up. But Barry, I don't know if there's more you want to...

Yes. Look, Duane, I think you're right. It's just math and its economics. As you shrink the regional footprints and what's left is increasing its cost dramatically, they're starting to knock on pilot rates of our size of our levels with 1/3 of the seats. So when you start thinking about the economics of these flights, the costs are going up. So there's going to be fewer seats and much more expensive in small to midsize markets, which is going to create an opportunity for carrier like us. So it's just economics 101.

And I'll add one more thing. As we add -- as we continue to add more pilot basis, there's more and more opportunity to have modular operations. There's more markets we can find ways to enter that we can operate reliably. And that's going to be a growing opportunity over the years to come. But with this growth, there's more [provision] to come.

And then just real quick. I can't see it in your results and maybe you said it, but just given the overlaps on some of those Florida markets, how much did Hurricane EN impact you in 3Q and in 4Q here?

Yes. It’s all right Duane, was asked earlier and we did answer but I'll give it again. We think about a 1-point impact on our margin in Q3. And we think from the demand destruction effect in Q4, probably about a 1-point impact in Q4.

Our next question comes from Anthony Berni with Susquehanna.

Just a quick question on next year's CapEx. I'm assuming with all these deliveries, CapEx will probably step up. But if you could just give us any rough ballpark of that, that would be helpful.

Yes. We've financed the vast majority of the fleet that delivers next year and there through operating leases. So obviously, we're delivering a significant portion of aircraft over 30 aircraft next year. And so that will be reflected in the CapEx number. However, because we finance them on operating leases, they will not be coming out of the books as a typical asset like other airlines where they finance their aircraft on balance sheet through some debt structure.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Barry Biffle for any further remarks.

I want to thank everybody for joining us, and we look forward to seeing you on November 5 at the NASDAQ in New York at our Investor Day.

Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.