# Frontier Group Holdings, Inc. (ULCC) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Frontier Group Holdings, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1670076/000167007624000021/fron-20231231.htm
Accession: 0001670076-24-000021
Filing date: 2024-02-20
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ULCC/
All MD&A years: /company/ULCC/mda/
Previous year: /company/ULCC/mda/fy2022/ (FY 2022)
Next year: /company/ULCC/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Our discussion and analysis of fiscal year 2023 compared to fiscal year 2022 is included herein. For discussion of results for the fiscal year 2021 and analysis of year-to-year comparisons between 2022 and 2021, please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on February 22, 2023.

Overview

Frontier Airlines, Inc. (“Frontier”) is an ultra low-cost carrier whose business strategy is focused on Low Fares Done Right. We are headquartered in Denver, Colorado and offer flights throughout the United States and to select near international destinations in the Americas. Our unique strategy is underpinned by our low-cost structure and superior low-fare brand.

The following table provides select financial and operational information for the years ended December 31, 2023 and 2022 (in millions):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022"],["Total operating revenues","$","3,589","","","$","3,326","","","8","%"],["Total operating expenses","$","3,592","","","$","3,371","","","7","%"],["Income (loss) before income taxes","$","32","","","$","(45)","","","N/M"],["Available seat miles (\u201cASMs\u201d)","37,822","","","31,746","","","19","%"]]
[[/GREPCENT_TABLE]]

Total operating revenues for the year ended December 31, 2023 totaled $3,589 million, an increase of 8% compared to the year ended December 31, 2022. This was primarily due to a 19% increase in capacity, as measured by ASMs, partially offset by the 9% decrease in revenue per available seat mile (“RASM”). This RASM movement was driven by a decrease in total revenue per passenger driven by lower fares, partially offset by the favorable increase in load factor, as compared to the corresponding period in 2022.

Total operating expenses during the year ended December 31, 2023 totaled $3,592 million, resulting in a cost per available seat mile (“CASM”) of 9.50¢, compared to 10.62¢ for the year ended December 31, 2022. Fuel expense was 3% lower during the year ended December 31, 2023, as compared to the year ended December 31, 2022. The $30 million decrease in fuel expense for the year ended December 31, 2023, compared to the corresponding period in 2022, was primarily driven by a 17% decrease in fuel prices, largely offset by the 17% increase in fuel gallons consumed during the year ended December 31, 2023, as a result of our 19% increase in capacity. Our non-fuel expenses increased by 11% during the year ended December 31, 2023, as compared to the corresponding prior year period, driven primarily by higher capacity and a larger fleet size and the resulting increase in operations during the same period, partly offset by increased sale-leaseback gains. While non-fuel expenses increased, CASM (excluding fuel), a measure that is not prepared using generally accepted accounting principles in the United States (“GAAP”), decreased 6% for the year ended December 31, 2023 to 6.51¢ on 19% capacity growth. The improvement was largely due to increased utilization, the decrease in aircraft rent resulting from lease extensions and an increase in sale-leaseback gains, partly offset by an increase in airport costs.

Adjusted (non-GAAP) CASM (excluding fuel), decreased from 6.90¢ for the year ended December 31, 2022 to 6.50¢ for the year ended December 31, 2023. For the year ended December 31, 2023, Adjusted (non-GAAP) CASM (excluding fuel) excludes the impact of $1 million in net transaction and merger-related costs incurred in connection with our terminated merger with Spirit Airlines, Inc. (“Spirit”) and $1 million in other operating costs associated

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with legal fees incurred due to the U.S. Department of Justice’s substantial requests for information and deposition testimony from us related to the contemplated merger of Spirit and JetBlue Airways. For the year ended December 31, 2022, Adjusted (non-GAAP) CASM (excluding fuel) excludes the impact of the $10 million in net transaction and merger-related costs, $7 million in asset impairment charges, and $2 million in collective bargaining contract ratification costs. For the reconciliation to corresponding GAAP measures, see “Results of Operations—Reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest.”

We generated a net loss of $11 million and $37 million during the years ended December 31, 2023 and 2022, respectively. Considering the aforementioned non-GAAP operating adjustments along with the $37 million valuation allowance, primarily against our U.S. federal and state net operating loss deferred tax assets, recorded during the year ended December 31, 2023, our adjusted (non-GAAP) net income was $28 million for the year ended December 31, 2023. Considering the aforementioned non-GAAP operating adjustments along with the $7 million non-operating write-off of deferred financing costs during the year ended December 31, 2022, due to the repayment of the CARES Act loan and the related tax impacts of these adjustments, our adjusted (non-GAAP) net loss was $17 million for the year ended December 31, 2022. For the reconciliation to corresponding GAAP measures, see “Results of Operations—Reconciliation of Net Income (Loss) to Adjusted Net Income (Loss), Pre-Tax Income (Loss) to Adjusted Pre-Tax Income (Loss) and Net Income to EBITDA, EBITDAR, Adjusted EBITDA, and Adjusted EBITDAR.”

As of December 31, 2023, our total available liquidity was $609 million, made up of cash and cash equivalents. On February 2, 2022, we repaid the $150 million outstanding under our term loan facility (the “Treasury Loan”) with the U.S. Department of the Treasury (the “Treasury”). The repayment of this loan unencumbered our co-branded credit card program and related brand assets that secured the Treasury Loan obligation.

Trends and Uncertainties Affecting Our Business

We believe our operating and business performance is driven by various factors that typically affect airlines and their markets, including trends which affect the broader travel industry, as well as trends which affect the specific markets and customer base that we target. The following key factors may affect our future performance:

Competition. The airline industry is highly competitive. The principal competitive factors in the airline industry are the fare and total price, flight schedules, number of routes served from a city, frequent flyer programs, product and passenger amenities, customer service, fleet type and reputation. The airline industry is particularly susceptible to price discounting as once a flight is scheduled, airlines incur only nominal incremental costs to provide service to passengers occupying otherwise unsold seats. Price competition occurs on a route-by-route basis through price discounts, changes in pricing structures, fare matching, target promotions and frequent flyer initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to maximize RASM. The prevalence of discount fares can be particularly acute when a competitor has excess capacity that it is under financial pressure to sell. A key element of our competitive strategy is to maintain very low unit costs in order to permit us to compete successfully in price-sensitive markets. In addition, some of the legacy network carriers match LCC and ULCC pricing on portions of their network, including through the selective deployment of so-called “basic economy” fares. We believe that fare discounts, along with unbundled product offerings, have and will continue to stimulate demand for Frontier due to our Low Fares Done Right strategy.

Our Low Fares Done Right strategy is underpinned by our low-cost structure, and has significantly reduced our cost base by increasing aircraft utilization, transitioning to larger and more fuel-efficient aircraft, maximizing seat density, renegotiating the majority of our distribution agreements, realigning our network, migrating to a self-service customer service model, enhancing our website and mobile app, boosting employee productivity and contracting with leading specialists to provide us with select operating and other services.

Our cost structure has generally allowed us to achieve strong results from operations relative to the rest of the industry during periods of competitive pricing and price discounts. We believe that we are well positioned to

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maintain our low unit operating costs relative to our competitors through on-going strategic initiatives, including continuing our cost optimization efforts and further realizing economies of scale. To the extent that we are unable to maintain our low-cost structure, our ability to compete effectively may be impaired. In addition, if our competitors engage in fare wars or similar behavior, our financial performance could be adversely impacted.

Aircraft Fuel. Fuel expense represents one of the single largest operating expense for most airlines, including ours. Aircraft fuel prices and availability are subject to market fluctuations, refining capacity, periods of market surplus and shortage and demand for heating oil, gasoline and other petroleum products, as well as meteorological, economic and political factors and events occurring throughout the world, which we can neither control nor accurately predict. The future cost and availability of aircraft fuel cannot be predicted with any degree of certainty.

Volatility. The air transportation business is volatile and highly affected by economic cycles and trends. Global pandemics and related health scares, consumer confidence and discretionary spending, fear of terrorism or war, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, changes in governmental regulations on taxes and fees, weather and other factors have resulted in significant fluctuations in revenue and results of operations in the past.

Seasonality. Our results of operations for any interim period are not necessarily indicative of those for the entire year because the air transportation business and our route network are subject to seasonal fluctuations. We generally expect demand to be greater in the second and third quarters compared to the rest of the year. While we have, over recent years, reduced our concentration in Denver to decrease the impact of seasonality in our business, 24% of our flights during the year ended December 31, 2023 had Denver International Airport as either their origin or destination, as compared to 26% of our flights during the year ended December 31, 2022.

Labor. The airline industry is currently experiencing certain shortages of qualified personnel. The airline industry is also heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements (“CBAs”). Relations between air carriers and labor unions in the United States are governed by the United States Railway Labor Act (“RLA”). Under the RLA, CBAs generally contain “amendable dates” rather than expiration dates and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (“NMB”). This process continues until either the parties have reached an agreement on a new CBA or the parties have been released to “self-help” by the NMB. In most circumstances, the RLA prohibits strikes. However, after release by the NMB, carriers and unions are free to engage in self-help measures such as lockouts and strikes.

We have seven union-represented employee groups comprising approximately 86% of our employees as of December 31, 2023. Our pilots are represented by the Air Line Pilots Association (“ALPA”); our flight attendants are represented by the Association of Flight Attendants (“AFA-CWA”); our aircraft technicians, aircraft appearance agents, material specialists and maintenance controllers are all represented by the International Brotherhood of Teamsters (“IBT”); and our dispatchers are represented by the Transport Workers Union (“TWU”).

Maintenance, Materials and Repairs and Maintenance Reserve Obligations. The amount of total maintenance costs and related depreciation of heavy maintenance expense is subject to variables such as estimated usage, government regulations, the size, age and makeup of the fleet in future periods, and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify future maintenance-related expenses for any significant period of time.

As of December 31, 2023, the average age of our aircraft was approximately four years and all of the aircraft in our fleet were financed with operating leases, the last of which is scheduled to expire by the end of 2035. Please refer to “Notes to Consolidated Financial Statements—9. Operating Leases” for further discussion. We expect that these new aircraft will require less maintenance when they are first placed in service (sometimes called a “maintenance holiday”) because the aircraft will benefit from manufacturer warranties and also will be able to operate for a significant period of time, generally measured in years, before the most expensive scheduled maintenance obligations, known as heavy maintenance, are required. Once these maintenance holidays expire, these

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aircraft will require more maintenance as they age and our maintenance and repair expenses for each of our aircraft will be incurred at approximately the same intervals. When these more significant maintenance activities occur, this will result in out-of-service periods during which our aircraft are dedicated to maintenance activities and unavailable to generate revenue.

We account for heavy maintenance events under the deferral method. Accordingly, heavy maintenance is depreciated over the shorter of either the remaining lease term or the period until the next estimated heavy maintenance event. As a result, maintenance events occurring closer to the end of the lease term will generally have shorter depreciation periods than those occurring earlier in the lease term. This will create higher depreciation expense specific to any aircraft related to heavy maintenance during the final years of the lease as compared to earlier periods.

Results of Operations

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Operating Revenues

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022"],["Operating revenues ($ in millions):"],["Passenger","$","3,509","","$","3,248","","$","261","","","8","%"],["Other","80","","78","","2","","","3","%"],["Total operating revenues","$","3,589","","$","3,326","","$","263","","","8","%"],["Operating statistics:"],["ASMs (millions)","37,822","","31,746","","6,076","","19","%"],["Revenue passenger miles (RPMs) (millions)","30,798","","25,669","","5,129","","20","%"],["Average stage length (miles)","1,007","","991","","16","","2","%"],["Load factor","81.4","%","","80.9","%","","0.5","pts","","N/A"],["RASM (\u00a2)","9.49","","10.48","","(0.99)","","(9)","%"],["Total ancillary revenue per passenger ($)","76.51","","76.28","","0.23","","\u2014","%"],["Total revenue per passenger ($)","118.77","","130.50","","(11.73)","","(9)","%"],["Passengers (thousands)","30,218","","25,486","","4,732","","19","%"]]
[[/GREPCENT_TABLE]]

Total operating revenue increased $263 million, or 8%, during the year ended December 31, 2023, as compared to the year ended December 31, 2022, as we experienced continued demand related to leisure travel through most of the year, which was moderated by lower fares. Revenue was favorably impacted by 19% capacity growth, as measured by ASMs, during the year ended December 31, 2023, as compared to the year ended December 31, 2022. This increase was driven by a 13% increase in average aircraft in service during the year ended December 31, 2023, as compared to the year ended December 31, 2022, as well as a 2% increase in average daily aircraft utilization to 11.3 hours per day for the year ended December 31, 2023, as compared to the 11.1 hours per day for the corresponding prior year period. RASM decreased 9% during the year ended December 31, 2023 as compared to the year ended December 31, 2022, driven by a 9% decrease in total revenue per passenger due to fare, as well as the 2% increase in stage length, partially offset by the 0.5 point increase in load factor.

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Operating Expenses

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change","","Cost per ASM","","Change"],["","2023","","2022","","","2023","","2022"],["Operating expenses ($ in millions):(a)"],["Aircraft fuel","$","1,130","","","$","1,160","","","$","(30)","","(3)","%","","2.99","\u00a2","","3.66","\u00a2","","(18)","%"],["Salaries, wages and benefits","858","","","715","","","143","","20","%","","2.27","","","2.25","","","1","%"],["Aircraft rent","554","","","556","","","(2)","","\u2014","%","","1.47","","","1.75","","","(16)","%"],["Station operations","516","","","422","","","94","","22","%","","1.36","","","1.33","","","2","%"],["Maintenance, materials and repairs","179","","","146","","","33","","23","%","","0.47","","","0.46","","","2","%"],["Sales and marketing","164","","","164","","","\u2014","","\u2014","%","","0.43","","","0.52","","","(17)","%"],["Depreciation and amortization","50","","","45","","","5","","11","%","","0.13","","","0.14","","","(7)","%"],["Transaction and merger-related costs, net","1","","","10","","","(9)","","(90)","%","","\u2014","","","0.03","","","N/M"],["Other operating expenses","140","","","153","","","(13)","","(8)","%","","0.38","","","0.48","","","(21)","%"],["Total operating expenses","$","3,592","","","$","3,371","","","$","221","","7","%","","9.50","\u00a2","","10.62","\u00a2","","(11)","%"],["Operating statistics:"],["ASMs (millions)","37,822","","","31,746","","","6,076","","19","%"],["Average stage length (miles)","1,007","","","991","","","16","","2","%"],["Passengers (thousands)","30,218","","","25,486","","","4,732","","19","%"],["Departures","188,841","","","165,447","","","23,394","","14","%"],["CASM (excluding fuel) (\u00a2) (b)","6.51","","","6.96","","","(0.45)","","(6)","%"],["Adjusted CASM (excluding fuel) (\u00a2) (b)","6.50","","","6.90","","","(0.40)","","(6)","%"],["Fuel cost per gallon ($)","3.10","","","3.72","","","(0.62)","","(17)","%"],["Fuel gallons consumed (thousands)","364,606","","","312,115","","","52,491","","17","%"]]
[[/GREPCENT_TABLE]]
________________

N/M = Not meaningful

(a)Cost per ASM figures may not recalculate due to rounding.

(b)These metrics are not calculated in accordance with GAAP. See the reconciliation to corresponding GAAP measures provided below.

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Reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","($ in millions)","","Per ASM (\u00a2)","","($ in millions)","","Per ASM (\u00a2)"],["Non-GAAP financial data:(a)"],["CASM","","","9.50","","","","","10.62"],["Aircraft fuel","(1,130)","","","(2.99)","","","(1,160)","","","(3.66)"],["CASM (excluding fuel)(b)","","","6.51","","","","","6.96"],["Transaction and merger-related costs, net(c)","(1)","","","(0.01)","","","(10)","","","(0.03)"],["Other operating costs - legal fees (d)","(1)","","","\u2014","","","\u2014","","","\u2014"],["Asset impairment(e)","\u2014","","","\u2014","","","(7)","","","(0.02)"],["Collective bargaining contract ratification(f)","\u2014","","","\u2014","","","(2)","","","(0.01)"],["Adjusted CASM (excluding fuel)(b)","","","6.50","","","","","6.90"],["Aircraft fuel","1,130","","","2.99","","","1,160","","","3.66"],["Adjusted CASM(g)","","","9.49","","","","","10.56"],["Net interest expense (income)","(35)","","","(0.09)","","","\u2014","","","\u2014"],["CARES Act - write-off of deferred financing costs due to paydown of loan(h)","\u2014","","","\u2014","","","(7)","","","(0.02)"],["Adjusted CASM + net interest(i)","","","9.40","","","","","10.54"],["CASM","","","9.50","","","","","10.62"],["Net interest expense (income)","(35)","","","(0.10)","","","\u2014","","","\u2014"],["CASM + net interest(i)","","","9.40","","","","","10.62"]]
[[/GREPCENT_TABLE]]
__________________

(a)Cost per ASM figures may not recalculate due to rounding.

(b)CASM (excluding fuel) and Adjusted CASM (excluding fuel) are included as supplemental disclosures because we believe that excluding aircraft fuel is useful to investors as it provides an additional measure of management’s performance excluding the effects of a significant cost item over which management has limited influence. The price of fuel, over which we have limited control, impacts the comparability of period-to-period financial performance, and excluding the price of fuel allows management an additional tool to understand and analyze our non-fuel costs and core operating performance, and increases comparability with other airlines that also provide a similar metric. CASM (excluding fuel) and Adjusted CASM (excluding fuel) are not determined in accordance with GAAP and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

(c)Represents $1 million in employee retention costs incurred in connection with the terminated merger with Spirit for the year ended December 31, 2023. Represents $19 million in employee retention costs and $16 million in transaction costs, including banking, legal and accounting fees, incurred in connection with the terminated merger with Spirit, partially offset by $25 million received from Spirit for the reimbursement of incurred merger-related expenses for the year ended December 31, 2022.

(d)Represents $1 million of legal fees incurred due to the U.S. Department of Justice’s substantial requests for information and deposition testimony from us related to the contemplated merger of Spirit and JetBlue Airways.

(e)Represents a write-off of $7 million in capitalized software development costs as a result of a termination of a vendor arrangement.

(f)Represents $2 million of costs related to a one-time incentive bonus and related payroll adjustments resulting from the May 2022 contract ratification with the union representing our aircraft technicians.

(g)Adjusted CASM is included as supplemental disclosure because we believe it is a useful metric to properly compare our cost management and performance to other peers, as derivations of Adjusted CASM are well-recognized performance measurements in the airline industry that are frequently used by our management, as well as by investors, securities analysts and other interested parties in comparing the operating performance of companies in the airline industry. Additionally, we believe this metric is useful because it removes certain items that may not be indicative of base operating performance or future results. Adjusted CASM is not determined in accordance with GAAP, may not be comparable across all carriers and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

(h)On February 2, 2022, we repaid the Treasury Loan, which resulted in a one-time write-off of the remaining $7 million in unamortized deferred financing costs related to the Treasury Loan. This amount is a component of interest expense.

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(i)Adjusted CASM including net interest and CASM including net interest are included as supplemental disclosures because we believe they are useful metrics to properly compare our cost management and performance to other peers that may have different capital structures and financing strategies, particularly as it relates to financing primary operating assets such as aircraft and engines. Additionally, we believe these metrics are useful because they remove certain items that may not be indicative of base operating performance or future results. Adjusted CASM including net interest and CASM including net interest are not determined in accordance with GAAP, may not be comparable across all carriers and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Aircraft Fuel. Aircraft fuel expense decreased by $30 million, or 3%, during the year ended December 31, 2023, as compared to the year ended December 31, 2022. The decrease was primarily due to a 17% decrease in fuel cost per gallon, substantially offset by the 17% increase in gallons consumed, driven by higher capacity.

Salaries, Wages and Benefits. Salaries, wages and benefits expense increased by $143 million, or 20%, during the year ended December 31, 2023, as compared to the year ended December 31, 2022. The increase was primarily due to growth in our fleet, higher crew costs, driven by elevated credit hours on higher capacity and other benefit costs, and an increased headcount of salaried support staff.

Aircraft Rent. Aircraft rent expense decreased slightly by $2 million, during the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily due to the reversal of $53 million of previously accrued lease return costs due to lease extensions of six of our aircraft and five engines, partially offset by a larger fleet.

Station Operations. Station operations expense increased by $94 million, or 22%, during the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily due to a 14% increase in departures and a 19% increase in passengers, partially offset by lower passenger reaccommodation expenses.

Maintenance, Materials and Repairs. Maintenance, materials and repair expense increased by $33 million, or 23%, during the year ended December 31, 2023, as compared to the year ended December 31, 2022. This was primarily due to more average aircraft in service and higher average daily utilization per aircraft, which resulted in higher maintenance costs, including higher airframe check and materials expenses, as well as associated contract labor costs.

Sales and Marketing. Sales and marketing expense remained consistent during the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily due to higher credit card fees, resulting from an 8% increase in revenue, offset by a decrease in customer reservation system fees, as well as a reduction in media advertising. The following table presents our distribution channel mix:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["Distribution Channel","2023","","2022"],["Our website, mobile app and other direct channels","72","%","","70","%","","2","pts"],["Third-party channels","28","%","","30","%","","(2)","pts"]]
[[/GREPCENT_TABLE]]

Depreciation and Amortization. Depreciation and amortization expense increased by $5 million, or 11%, during the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily due to an increase in capitalized maintenance, partially offset by a $7 million asset impairment recorded during the year ended December 31, 2022.

Transaction and Merger-Related Costs, Net. During the year ended December 31, 2023, we incurred $1 million in merger-related costs, as compared to $10 million in net costs during the year ended December 31, 2022, which included $19 million in employee retention costs and $16 million in transaction costs, primarily related to legal and other professional fees, partially offset by the $25 million received from Spirit for the reimbursement of incurred merger-related expenses.

Other Operating Expenses. Other operating expenses decreased by $13 million, or 8%, during the year ended December 31, 2023, as compared to the year ended December 31, 2022. The decrease was primarily driven by the

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increases in gains from sale-leaseback transactions compared to the corresponding prior period, partially offset by increases to travel expenses relating to crew accommodations, driven by an increase in capacity, as well as increases to IT, supplies and general and administrative costs.

Other Income (Expense). Other income (expense) was $35 million during the year ended December 31, 2023, as compared to no other income (expense) for the year ended December 31, 2022. Higher interest rates and increased balances in our interest-bearing cash accounts contributed to an increase in interest income. Additionally, higher interest rates and the increase in PDP balances contributed to greater capitalized interest. Interest expense increased for the year ended December 31, 2023 as compared to the year ended December 31, 2022 due to increased rates and balances as compared to the prior period and interest expense for the year ended December 31, 2022 was unfavorably impacted by a $7 million non-cash charge from the write-off of unamortized deferred financing costs associated with the repayment of the Treasury Loan.

Income Taxes. Our income tax expense was $43 million for the year ended December 31, 2023, as compared to an $8 million benefit for the year ended December 31, 2022. Our effective tax rate for the year ended December 31, 2023 was 134.4%, primarily due to a $37 million valuation allowance recorded in December 2023 against our U.S. federal and state net operating loss deferred tax assets, which expire from one year to having no expiration, as a result of being in a three-year cumulative pre-tax loss position and limitations on compensation provided to certain executives pursuant to Internal Revenue Code section 162(m), partially offset by benefits recognized on the exercise of expiring stock options. Please refer to “Notes to Consolidated Financial Statements—15. Income Taxes” for additional information.

Reconciliation of Net Income (Loss) to Adjusted Net Income (Loss), Pre-Tax Income (Loss) to Adjusted Pre-Tax Income (Loss) and Net Income to EBITDA, EBITDAR, Adjusted EBITDA, and Adjusted EBITDAR

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","(in millions)"],["Non-GAAP financial data (unaudited):"],["Adjusted pre-tax income (loss)(a)","$","34","","","$","(19)"],["Adjusted net income (loss)(a)","$","28","","","$","(17)"],["EBITDA(a)","$","47","","","$","\u2014"],["EBITDAR(b)","$","601","","","$","556"],["Adjusted EBITDA(a)","$","49","","","$","12"],["Adjusted EBITDAR(b)","$","603","","","$","568"]]
[[/GREPCENT_TABLE]]
__________________

(a)Adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of pre-tax income (loss), net income and EBITDA are well-recognized performance measurements in the airline industry that are frequently used by our management, as well as by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry.

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Adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA have limitations as analytical tools. Some of the limitations applicable to these measures include: adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; EBITDA and adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; EBITDA, and adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness or possible cash requirements related to our warrants; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and adjusted EBITDA do not reflect any cash requirements for such replacements; and other companies in our industry may calculate adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA differently than we do, limiting their usefulness as comparative measures. Because of these limitations, adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA should not be considered in isolation from or as a substitute for performance measures calculated in accordance with GAAP. In addition, because derivations of adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, derivations of pre-tax income (loss), net income (loss) and EBITDA, including adjusted pre-tax income (loss), adjusted net income (loss) and adjusted EBITDA, as presented may not be directly comparable to similarly titled measures presented by other companies.

For the foregoing reasons, each of adjusted pre-tax income (loss), adjusted net income (loss), EBITDA and adjusted EBITDA has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.

(b)EBITDAR and adjusted EBITDAR are included as a supplemental disclosure because we believe them to be useful solely as valuation metrics for airlines as their calculations isolate the effects of financing in general, the accounting effects of capital spending and acquisitions (primarily aircraft, which may be acquired directly, directly subject to acquisition debt, by capital lease or by operating lease, each of which is presented differently for accounting purposes), and income taxes, which may vary significantly between periods and for different airlines for reasons unrelated to the underlying value of a particular airline. However, EBITDAR and adjusted EBITDAR are not determined in accordance with GAAP, are susceptible to varying calculations and not all companies calculate the measure in the same manner. As a result, EBITDAR and adjusted EBITDAR, as presented, may not be directly comparable to similarly titled measures presented by other companies. In addition, EBITDAR and adjusted EBITDAR should not be viewed as a measure of overall performance since they exclude aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. Accordingly, you are cautioned not to place undue reliance on this information.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","(in millions)"],["Adjusted net income (loss) reconciliation (unaudited):"],["Net income (loss)","$","(11)","","","$","(37)"],["Non-GAAP Adjustments(a):"],["Transaction and merger-related costs, net","1","","","10"],["Other operating costs - legal fees","1","","","\u2014"],["Asset impairment","\u2014","","","7"],["Collective bargaining contract ratification","\u2014","","","2"],["CARES Act - write-off of deferred financing costs due to paydown of loan","\u2014","","","7"],["Pre-tax impact","2","","","26"],["Tax benefit (expense) related to non-GAAP adjustments","\u2014","","","(6)"],["Valuation allowance(b)","37","","","\u2014"],["Net income (loss) impact","$","39","","","$","20"],["Adjusted net income (loss)","$","28","","","$","(17)"],["Adjusted pre-tax income (loss) reconciliation (unaudited):"],["Income (loss) before income taxes","$","32","","","$","(45)"],["Pre-tax impact","2","","","26"],["Adjusted pre-tax income (loss)","$","34","","","$","(19)"]]
[[/GREPCENT_TABLE]]

67

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","(in millions)"],["EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR reconciliation (unaudited):"],["Net income (loss)","$","(11)","","","$","(37)"],["Plus (minus):"],["Interest expense","29","","","21"],["Capitalized interest","(28)","","","(11)"],["Interest income and other","(36)","","","(10)"],["Income tax expense (benefit)","43","","","(8)"],["Depreciation and amortization","50","","","45"],["EBITDA","47","","","\u2014"],["Plus: Aircraft rent","554","","","556"],["EBITDAR","$","601","","","$","556"],["EBITDA","$","47","","","$","\u2014"],["Plus (minus)(a):"],["Transaction and merger-related costs, net","1","","","10"],["Other operating costs - legal fees","1","","","\u2014"],["Collective bargaining contract ratification","\u2014","","","2"],["Adjusted EBITDA","49","","","12"],["Plus: Aircraft rent","554","","","556"],["Adjusted EBITDAR","$","603","","","$","568"]]
[[/GREPCENT_TABLE]]

(a)See “Reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest” above for discussion on adjusting items.

(b)In December 2023, we recorded a $37 million non-cash valuation allowance against our U.S. federal and state net operating loss deferred tax assets, which largely don't expire, mainly as a result of being in a three-year cumulative pre-tax loss position, which has no impact on cash taxes and is not reflective of our effective tax rate for deductible net operating losses generated or actual cash tax obligations created.

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Comparative Operating Statistics

The following table sets forth our operating statistics for the years ended December 31, 2023 and 2022. These operating statistics are provided because they are commonly used in the airline industry and, as such, allow readers to compare our performance against our results for the corresponding prior year period, as well as against the performance of our peers.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","Change"],["Operating statistics (unaudited)(a)"],["ASMs (millions)","37,822","","31,746","","19","%"],["Departures","188,841","","165,447","","14","%"],["Average stage length (miles)","1,007","","991","","2","%"],["Block hours","523,440","","451,156","","16","%"],["Average aircraft in service","126","","112","","13","%"],["Aircraft \u2013 end of period","136","","120","","13","%"],["Average daily aircraft utilization (hours)","11.3","","11.1","","2","%"],["Passengers (thousands)","30,218","","25,486","","19","%"],["Average seats per departure","199","","193","","3","%"],["RPMs (millions)","30,798","","25,669","","20","%"],["Load Factor","81.4","%","","80.9","%","","0.5","pts"],["Fare revenue per passenger ($)","42.26","","54.22","","(22)","%"],["Non-fare passenger revenue per passenger ($)","73.85","","73.21","","1","%"],["Other revenue per passenger ($)","2.66","","3.07","","(13)","%"],["Total ancillary revenue passenger ($)","76.51","","76.28","","\u2014","%"],["Total revenue per passenger ($)","118.77","","130.50","","(9)","%"],["RASM (\u00a2)","9.49","","10.48","","(9)","%"],["CASM (\u00a2)","9.50","","10.62","","(11)","%"],["CASM (excluding fuel) (\u00a2) (b)","6.51","","6.96","","(6)","%"],["CASM + net interest (\u00a2) (b)","9.40","","10.62","","(11)","%"],["Adjusted CASM (\u00a2) (b)","9.49","","10.56","","(10)","%"],["Adjusted CASM (excluding fuel) (\u00a2) (b)","6.50","","6.90","","(6)","%"],["Adjusted CASM (excluding fuel), SLA 1,000 (\u00a2)(b)(c)","6.52","","6.87","","(5)","%"],["Adjusted CASM + net interest (\u00a2) (b)","9.40","","10.54","","(11)","%"],["Fuel cost per gallon ($)","3.10","","3.72","","(17)","%"],["Fuel gallons consumed (thousands)","364,606","","312,115","","17","%"],["Full-time equivalent employees","7,214","","6,450","","12","%"]]
[[/GREPCENT_TABLE]]
_________________

(a)Figures may not recalculate due to rounding. See “Glossary of Airline Terms” for definitions of terms used in this table.

(b)These metrics are not calculated in accordance with GAAP. For the reconciliation to corresponding GAAP measures, see “Results of Operations—Reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest.”

(c)Stage Length Adjusted (SLA) to 1,000 miles: Adjusted CASM (excluding fuel) * Square root (stage length / 1,000).

69

Liquidity, Capital Resources and Financial Position

Overview

As of December 31, 2023, we had $609 million in total available liquidity, made up of cash and cash equivalents. We had $470 million of total debt, net, of which $251 million was short-term and consisted of amounts outstanding under our pre-delivery deposit payment facility (“PDP Financing Facility”) and secured indebtedness related to our headquarters building. Our total debt, net was comprised of $312 million outstanding under our PDP Financing Facility, $80 million outstanding under our pre-purchased miles facility with Barclays Bank Delaware (“Barclays”), $66 million in 10-year, low-interest loans from the Treasury (collectively, the “PSP Promissory Notes”) and $16 million in secured indebtedness for our headquarters building, partially offset by $4 million in deferred debt acquisition costs.

On February 2, 2022, we repaid the Treasury Loan, which included the $150 million principal balance along with accrued interest and associated fees of $1 million. As a result, we recognized a $7 million non-cash charge from the write-off of unamortized deferred financing costs associated with the Treasury Loan for the year ended December 31, 2022. By repaying the amounts outstanding under the Treasury Loan, our co-branded credit card program and related brand assets that collateralized the Treasury Loan are now unencumbered.

In connection with the PSP Promissory Notes and Treasury Loan, we issued to the Treasury warrants to purchase 3,117,940 shares of FGHI common stock at a weighted-average price of $6.95 per share. We have the intent and ability to settle the warrants issued to the Treasury in common shares and we have classified the warrant liability to additional paid-in capital on our consolidated balance sheet. The Treasury has not exercised any warrants as of December 31, 2023.

We continue to monitor our covenant compliance with various parties, including, but not limited to, our lenders and credit card processors. As of the date of this report, we are in compliance with all of our covenants.

The following table presents the major indicators of our financial condition and liquidity:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["","($ in millions)"],["Cash and cash equivalents","$","609","","","$","761"],["Total current assets, excluding cash and cash equivalents","$","262","","","$","259"],["Total current liabilities, excluding current maturities of long-term debt and operating leases","$","858","","","$","933"],["Current maturities of long-term debt, net","$","251","","","$","157"],["Long-term debt, net","$","219","","","$","272"],["Stockholders\u2019 equity","$","507","","","$","509"],["Debt to capital ratio","48","%","","46","%"],["Debt to capital ratio, including operating lease obligations","87","%","","85","%"]]
[[/GREPCENT_TABLE]]

Use of Cash and Future Obligations

We expect to meet our cash requirements for the next twelve months through use of our available cash and cash equivalents, our PDP Financing Facility and cash flows from operating activities. We expect to meet our long-term cash requirements with cash flows from operating and financing activities, including, but not limited to, potential future borrowings on our credit facility and/or potential issuances of debt or equity. We also have unencumbered

70

loyalty and brand-related assets which we believe could generate significant additional liquidity, if desired. Our primary uses of cash are for working capital, aircraft PDPs, debt repayments and capital expenditures.

Our single largest capital commitment relates to the acquisition of aircraft. As of December 31, 2023, we operated all of our 136 aircraft under operating leases. PDPs relating to future deliveries under our agreement with Airbus are required at various times prior to each aircraft’s delivery date. As of December 31, 2023, we had $407 million of PDPs held by Airbus which have been partially financed by our PDP Financing Facility. As of December 31, 2023 our PDP Financing Facility, which allows us to draw up to an aggregate of $365 million, had $312 million outstanding. As of December 31, 2023, we had a firm obligation to purchase 210 A320neo family aircraft and 15 additional spare engines to be delivered by 2029. Of our aircraft commitments, four had committed operating leases for 2024 deliveries, and 12 were subject to non-binding letters of intent to provide operating lease financing for 2024 deliveries. We intend to evaluate financing options for the remaining aircraft.

Additionally, we are required by some of our aircraft lease agreements to pay maintenance reserves to our respective aircraft lessors in advance of the performance of major maintenance activities; these payments act as collateral for the lessors to ensure aircraft are returned in the agreed upon condition at the end of the lease period. Qualifying payments that are expected to be recovered from lessors are recorded as aircraft maintenance deposits on our consolidated balance sheets. A portion of our cash is, therefore, unavailable until after we have completed the scheduled maintenance in accordance with the terms of the operating leases. During the years ended December 31, 2023 and 2022, we made $16 million and $18 million, respectively, in maintenance deposit payments, net to our lessors. As of December 31, 2023, we had $96 million in recoverable aircraft maintenance deposits on our consolidated balance sheets, of which $12 million was included in accounts receivable because the eligible maintenance had been performed and the remaining $84 million was included within net aircraft maintenance deposits.

The following table summarizes current and long-term material cash requirements as of December 31, 2023, which we expect to fund primarily with operating and financing cash flows (in millions):

[[GREPCENT_TABLE]]
[["","Material Cash Requirements"],["","2024","","2025","","2026","","2027","","2028","","Thereafter","","Total"],["Debt obligations(a)","$","252","","","$","76","","","$","\u2014","","","$","\u2014","","","$","66","","","$","80","","","$","474"],["Interest commitments(b)","22","","","8","","","7","","","7","","","5","","","3","","","52"],["Operating lease obligations(c)","566","","","563","","","500","","","434","","","352","","","1,417","","","3,832"],["Flight equipment purchase obligations(d)","1,391","","","2,500","","","2,358","","","2,448","","","2,403","","","1,356","","","12,456"],["Maintenance deposit obligations(e)","3","","","3","","","3","","","4","","","4","","","1","","","18"],["Total","$","2,234","","","$","3,150","","","$","2,868","","","$","2,893","","","$","2,830","","","$","2,857","","","$","16,832"]]
[[/GREPCENT_TABLE]]
__________________

(a)Includes principal commitments only associated with our PDP Financing Facility with borrowings as of December 31, 2023 pertaining to aircraft with deliveries through 2025, our floating rate building note through June 2024, our affinity card unsecured debt due through 2029 and the PSP Promissory Notes through 2031. See “Notes to Consolidated Financial Statements — 8. Debt”.

(b)Represents interest on debt obligations.

(c)Represents gross cash payments related to our operating lease obligations that are not subject to discount as compared to the obligations measured on our consolidated balance sheets. See “Notes to Consolidated Financial Statements — 9. Operating Leases”.

(d)Represents purchase commitments for aircraft and engines. See “Notes to Consolidated Financial Statements — 12. Commitments and Contingencies”.

(e)Represents fixed maintenance reserve payments for aircraft including estimated amounts for contractual price escalations. See “Notes to Consolidated Financial Statements — 9. Operating Leases”.

71

Cash Flows

The following table presents information regarding our cash flows in the years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","(in millions)"],["Net cash used in operating activities","$","(261)","","","$","(78)"],["Net cash used in investing activities","(90)","","","(154)"],["Net cash provided by financing activities","199","","","75"],["Net decrease in cash, cash equivalents and restricted cash","(152)","","","(157)"],["Cash, cash equivalents and restricted cash at beginning of period","761","","","918"],["Cash, cash equivalents and restricted cash at end of period","$","609","","","$","761"]]
[[/GREPCENT_TABLE]]

Operating Activities

During the year ended December 31, 2023, net cash used in operating activities totaled $261 million, which was driven by an $11 million net loss, $211 million of outflows from changes in operating assets and liabilities and non-cash adjustments totaling $39 million.

The $211 million of outflows from changes in operating assets and liabilities includes:

•$163 million in increases in other long-term assets driven by increases in capitalized maintenance, prepaid maintenance, capitalized interest and forgivable loans, partially offset by a decreased deferred tax asset;

•$60 million in decreases in our air traffic liability;

•$45 million in decreases in other liabilities driven by leased aircraft return payments, partially offset by an increase in other operational related accruals;

•$16 million in increases in aircraft maintenance deposits; and

•$7 million in increases in supplies and other current assets; partially offset by

•$47 million in increases in accounts payable; and

•$33 million in decreases in accounts receivable.

Our net loss of $11 million was also adjusted by the following non-cash items to arrive at cash used in operating activities:

•$147 million in gains recognized on sale-leaseback transactions; partially offset by

•$50 million in depreciation and amortization;

•$43 million in deferred tax expense primarily due to the recognition of a valuation allowance;

•$14 million in stock-based compensation expense; and

•$1 million in amortization of cash flow hedges, net of tax.

During the year ended December 31, 2022, net cash used in operating activities totaled $78 million, which was driven by a $37 million net loss, $14 million of outflows from changes in operating assets and liabilities and non-cash adjustments totaling $27 million.

72

The $14 million of outflows from changes in operating assets and liabilities includes:

•$94 million in increases in other long-term assets driven by increases in prepaid maintenance and capitalized maintenance;

•$40 million in increases in supplies from increased consumable and fuel inventory balances as well as increases to other current assets driven by swaption derivative premiums;

•$28 million in increases in accounts receivable;

•$18 million in increases in aircraft maintenance deposits; and

•$4 million in decreases in accounts payable; partially offset by

•$130 million in increases in other liabilities driven by growth in the business primarily through increased leased aircraft return costs, aircraft maintenance costs, and other related accruals; and

•$40 million in increases in our air traffic liability as a result of increased bookings.

Our net loss of $37 million was also adjusted by the following non-cash items to arrive at cash used in operating activities:

•$87 million in gains recognized on sale-leaseback transactions;

•$8 million in deferred tax benefits; partially offset by

•$45 million in depreciation and amortization;

•$15 million in stock-based compensation expense;

•$7 million in losses on extinguishment of debt; and

•$1 million in amortization of cash flow hedges, net of tax.

As of December 31, 2023, we did not have any other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our results of operations, financial condition or cash flows.

Investing Activities

During the year ended December 31, 2023, net cash used in investing activities totaled $90 million, driven by:

•$51 million in cash outflows for capital expenditures;

•$36 million in net outflows for PDP activity; and

•$3 million in cash outflows relating to other investing activity.

During the year ended December 31, 2022, net cash used in investing activities totaled $154 million, driven by:

•$111 million in net payments for pre-delivery deposit activity;

•$41 million in cash outflows for capital expenditures; and

•$2 million in cash outflows relating to other investing activity.

Financing Activities

During the year ended December 31, 2023, net cash provided by financing activities was $199 million, primarily driven by:

•$163 million in net proceeds received from sale-leaseback transactions;

•$171 million in cash proceeds from debt issuances, consisting of $162 million in draws on our PDP Financing Facility, net of issuance costs, and a $9 million draw on our Barclays facility; and

•$1 million in proceeds from the exercise of stock options; partially offset by

•$131 million in cash outflows from principal repayments on debt, which include $130 million in PDP Financing Facility payments and $1 million in payments pursuant to our floating rate building note; and

•$5 million cash outflows for payments related to tax withholdings of share-based awards.

73

During the year ended December 31, 2022, net cash provided by financing activities was $75 million, primarily driven by:

•$273 million in cash proceeds from debt issuances, consisting of $217 million in draws on our PDP Financing Facility, net of issuance costs, and $56 million draw on our Barclays facility;

•$71 million in net proceeds received from sale-leaseback transactions; and

•$1 million in proceeds from the exercise of stock options; partially offset by

•$266 million in cash outflows from principal repayments on debt, which include the paydown of the $150 million Treasury Loan, $115 million in PDP Financing Facility payments and $1 million in payments pursuant to our floating rate building note; and

•$4 million of payments for tax withholdings related to vesting of share-based awards.

Commitments and Contractual Obligations

Our contractual purchase commitments as of December 31, 2023 include future aircraft and spare engine acquisitions. Except to the extent set forth in the applicable notes to our consolidated financial statements, the table below does not include commitments that are contingent on events or other factors that are uncertain or unknown at this time.

[[GREPCENT_TABLE]]
[["","","A320neo","","A321neo","","TotalAircraft(a)","","Engines"],["Year Ending"],["2024","","\u2014","","","23","","","23","","","2"],["2025","","17","","","25","","","42","","","4"],["2026","","19","","","22","","","41","","","4"],["2027","","21","","","21","","","42","","","3"],["2028","","10","","","30","","","40","","","2"],["Thereafter","","\u2014","","","22","","","22","","","\u2014"],["Total","","67","","","143","","","210","","","15"]]
[[/GREPCENT_TABLE]]

__________________

(a)    While the commitments presented above reflect the agreed-upon delivery dates as of December 31, 2023, we have recently experienced delays in the deliveries of Airbus aircraft which may persist in future periods.

During October 2019, we entered into an amendment with Airbus that allows us the option to convert 18 A320neo aircraft to A321XLR aircraft. This conversion right is not reflected in the table above as this option has not been exercised.

As of December 31, 2023, all 136 aircraft in our fleet were subject to operating leases. These leases expire between 2025 and the end of 2035. Leases for 42 of our aircraft could generally be renewed at rates based on fair market value at the end of a lease term for extensions ranging from two years to four years.

Separately, we have various leases with respect to real property as well as various agreements among airlines relating to fuel consortia or fuel farms at airports. Under some of these contracts, we are party to joint and several liability regarding damages. Under others, where we are a member of an LLC or other entity that contracts directly with the airport operator, liabilities are borne through the fuel consortia structure. Our aircraft, services, equipment lease and sale and financing agreements typically contain provisions requiring us, as the lessee, obligor or recipient of services, to indemnify the other parties to those agreements, including certain of those parties’ related persons, against virtually any liabilities that might arise from the use or operation of the aircraft or such other equipment. We believe that our insurance would cover most of our exposure to liabilities and related indemnities associated with the commercial real estate leases and aircraft, services, equipment lease and sale and financing agreements described above.

74

Certain of our aircraft and other financing transactions include provisions that require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in law or regulations. In certain of these financing transactions and other agreements, we also bear the risk of certain changes in tax laws that would subject payments to non-U.S. entities to withholding taxes.

Certain of these indemnities survive the length of the related financing or lease. We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict when and under what circumstances these provisions may be triggered and the amount that would be payable if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with GAAP. In doing so, we make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition and results of operations could be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss below. For a detailed discussion of our significant accounting policies, please refer to “Notes to Consolidated Financial Statements — 1. Summary of Significant Accounting Policies.”

Frequent Flyer Program

Our FRONTIER Miles program provides frequent flyer travel awards to program members based on accumulated miles. Miles are accumulated as a result of travel, purchases using the co-branded credit card and purchases from other participating partners. As of each of December 31, 2023 and 2022, our total frequent flyer liability was $45 million.

The contract to sell miles under the co-branded credit card partnership has multiple performance obligations. The agreement provides for joint marketing, and we account for this agreement consistently with the accounting method that allocates the consideration received to the individual products and services delivered based on relative stand-alone selling prices. We determined the best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) equivalent ticket value (“ETV”) for the award travel obligation, (3) licensing of brand and access to member lists and (4) advertising and marketing efforts. Any changes in the assumptions outlined above related to our co-branded credit card partnership at agreement inception would impact the allocation of consideration received and the resulting timing of when revenues from the each of the specific performance obligation would be recognized.

We estimate breakage (miles that are expected to expire unutilized) based on statistical models derived from historical redemption patterns. Breakage assumptions, including the period over which miles are expected to be redeemed, the actual redemption activity for miles, or the estimated fair value of miles expected to be redeemed, could have an impact on revenues in the year in which the change occurs and in future years. Additionally, we estimate ETV, which is used to determine the value per mile, based on the historical prices of the flights redeemed using miles and changes to these assumptions could impact the initial allocation of consideration in our co-branded credit card partnership or the amount of revenue recognized or deferred for miles accumulated as a result of travel.

For the year ended December 31, 2023, holding other factors constant, a 10% change in our estimated frequent flyer breakage rate would have resulted in a change to passenger revenues of approximately $3 million, or less than 1%.

75

Leased Aircraft Return Costs

Our aircraft operating lease agreements generally require us to return aircraft airframes and engines to the lessor in a certain condition or pay an amount to the lessor based on the airframe and engine’s actual return condition.These return provisions are evaluated at inception of the lease and throughout the lease terms and are accounted for as either fixed or variable lease payments (depending on the nature of the lease return condition). When such costs become both probable and estimable, they are accrued as a component of supplemental rent through the remaining lease term. Changes to the assumptions utilized in the estimation of these lease return costs are accounted for on a cumulative catch-up basis. As of December 31, 2023 and 2022, our total leased aircraft return cost liability was $26 million and $102 million, respectively.

In 2023, we extended the term for certain aircraft and spare engine operating leases that were slated to return in 2023 and 2024. As a result of the six aircraft and five engine extension events, for the year ended December 31, 2023, we recorded a benefit of $53 million to aircraft rent in our consolidated statement of operations related to previously accrued lease return costs that were variable in nature and associated with the anticipated utilization and condition of the airframes and engines at the original return date. Given the extension of these aircraft operating leases, such variable return costs are no longer probable of occurring.

In assessing the future potential lease return costs we consider the future anticipated costs and scope of maintenance events (largely driven by projected number of flight hours and cycles estimated to be utilized on the aircraft and engines prior to return), estimated timing of such events including the timing since the last expected major maintenance event, the date the aircraft is due to be returned to the lessor, contractual terms of the lease and maintenance provider agreements, current condition of each aircraft, age of the aircraft at lease expiration, type of engine, projected number of hours and cycles run on the engines at the time of return and the number of projected cycles run on the airframe at the time of return, among other estimates.

If actual estimates vary materially from those utilized in the estimation of lease return costs we could incur more or less supplemental rent expense depending on the direction of the adjustments necessary. There can be no assurance that the projections utilized will not materially change in the future given the inherent difficulty in forecasting future utilization of aircraft over their lease terms; however, the estimates utilized are the best available at the time the financial statements were issued.

Income Tax Valuation Allowance

As of December 31, 2023, our total deferred tax assets, net of a $48 million valuation allowance, were $757 million, which included $75 million of deferred tax assets related to net operating loss (“NOL”) carry forwards. These deferred tax assets are comprised of $53 million, $11 million and $11 million related to NOLs available to reduce future federal, state and foreign taxable income, respectively. We assess whether it is more likely than not that sufficient taxable income will be generated to realize deferred tax assets, and a valuation allowance is established if it is not likely that deferred income tax assets will be realized. We consider sources of taxable income from prior period carryback periods, future reversals of existing taxable temporary differences, tax planning strategies and future taxable income when assessing the future utilization of deferred tax assets.

As part of our assessment of whether a valuation allowance is warranted, we consider all available positive and negative evidence in conjunction with evaluating the source and availability of taxable income to utilize such deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2023. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

As a result of our assessment, we concluded that as of December 31, 2023, it is more likely than not that the benefit from a portion of our federal and state deferred tax assets will not be realized. Accordingly, we recorded a valuation allowance of $37 million against our federal and state NOL related deferred tax assets, which reflects the impact of expected income generated as a result of future reversals of existing taxable temporary differences. Furthermore, we have a valuation allowance related to our $11 million of foreign deferred tax assets. The amount of

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the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

Long-Term Maintenance Agreements

We have entered into maintenance agreements with both of our engine providers, CFM International and Pratt & Whitney, to cover the primary maintenance services of the engines for a majority of our fleet. The arrangements stipulate that we pay a baseline per-flight-hour rate based on monthly engine utilization over the life of the arrangement. Given that the accounting for the arrangement will follow our heavy maintenance accounting and is dependent on many projected factors such as flight hours, shop visit timing and scope, and the stand-alone value of certain maintenance services, there are significant estimates that impact the accounting of our per-flight-hour maintenance agreements including amounts capitalized, expensed and treated as capitalized maintenance as well as the timing of each.

As of December 31, 2023, we had capitalized $141 million of rate per hour payments which are probable to be recovered via future shop visits.

Recently Adopted Accounting Pronouncements

See “Notes to Consolidated Financial Statements — 1. Summary of Significant Accounting Policies” included in Part II, Item 8 of this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.

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GLOSSARY OF AIRLINE TERMS

Set forth below is a glossary of industry terms:

“A320 family” means, collectively, the Airbus series of single-aisle aircraft, including the A320ceo, A320neo, A321ceo and A321neo aircraft.

“A320neo family” means, collectively, the Airbus series of single-aisle aircraft that feature the new engine option, including the A320neo and A321neo aircraft.

“Adjusted CASM” is a non-GAAP measure and means operating expenses, excluding special items, divided by ASMs. For a discussion of such special items and a reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Adjusted CASM including net interest” or “Adjusted CASM + net interest” is a non-GAAP measure and means the sum of Adjusted CASM and net interest expense (income) excluding special items divided by ASMs. For a discussion of such special items and a reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Adjusted CASM (excluding fuel)” is a non-GAAP measure and means operating expenses less aircraft fuel expense, excluding special items, divided by ASMs. For a discussion of such special items and a reconciliation of CASM to CASM (excluding fuel), Adjusted CASM (excluding fuel), Adjusted CASM, Adjusted CASM including net interest and CASM including net interest, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

“Air traffic liability” means the value of tickets, unearned membership fees and other related fees sold in advance of travel.

“Ancillary revenue” means the sum of non-fare passenger revenue and other revenue.

“Available seat miles” or “ASMs” means the number of seats available for passengers multiplied by the number of miles the seats are flown.

“Average aircraft in service” means the average number of aircraft used in flight operations, as calculated on a daily basis.

“Average daily aircraft utilization” means block hours divided by number of days in the period divided by average aircraft in service.

“Average stage length” means the average number of miles flown per flight segment.

“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.

“CASM” or “unit costs” means operating expenses divided by ASMs.

“CASM (excluding fuel)” is a non-GAAP measure and means operating expenses less aircraft fuel expense, divided by ASMs.

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“CASM including net interest” or “CASM + net interest” is a non-GAAP measure and means the sum of CASM and net interest expense (income) divided by ASMs.

“CBA” means a collective bargaining agreement.

“CBP” means the United States Customs and Border Protection.

“DOT” means the United States Department of Transportation.

“EPA” means the United States Environmental Protection Agency.

“FAA” means the United States Federal Aviation Administration.

“Fare revenue” consists of base fares for air travel, including miles redeemed under our frequent flyer program, unused and expired passenger credits, other redeemed or expired travel credits and revenue derived from charter flights.

“Fare revenue per passenger” means fare revenue divided by passengers.

“GDSs” means Global Distribution Systems such as Amadeus, Sabre and Travelport, used by travel agencies and corporations to purchase tickets on participating airlines.

“LCC” means low-cost carrier.

“Load factor” means the percentage of aircraft seat miles actually occupied on a flight (RPMs divided by ASMs).

“Net interest expenses (income)” means interest expense, capitalized interest, interest income and other.

“NMB” means the National Mediation Board.

“Non-fare passenger revenue” consists of fees related to certain ancillary items such as baggage, service fees, seat selection, and other passenger-related revenue that is not included as part of base fares for travel.

“Non-fare passenger revenue per passenger” means non-fare passenger revenue divided by passengers.

“OTA” means Online Travel Agent.

“Other revenue” consists primarily of services not directly related to providing transportation, such as the advertising, marketing and brand elements of the FRONTIER Miles affinity credit card program and commissions revenue from the sale of items such as rental cars and hotels.

“Other revenue per passenger” means other revenue divided by passengers.

“Passengers” means the total number of passengers flown on all flight segments.

“Passenger revenue” consists of fare revenue and non-fare passenger revenue.

“PDP” means pre-delivery deposit payments, which are payments required by aircraft manufacturers in advance of delivery of the aircraft.

“RASM” or “unit revenue” means total revenue divided by ASMs.

“Revenue passenger miles” or “RPMs” means the number of miles flown by passengers.

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“RLA” means the United States Railway Labor Act.

“Total ancillary revenue per passenger” means ancillary revenue divided by passengers.

“Total revenue per passenger” means the sum of fare revenue, non-fare passenger revenue, and other revenue (collectively, “Total Revenue”) divided by passengers.

“Treasury” means the U.S. Department of the Treasury.

“TSA” means the United States Transportation Security Administration.

“ULCC” means ultra low-cost carrier.

“VFR” means visiting friends and relatives.