On Monday, Republic Airways Holdings Inc. (NASDAQ:RJET) subsidiary Frontier Airlines reported its operating statistics for the month of June and the second quarter. Frontier reported a load factor of 94% in June; that number represents the percentage of seats filled by paying passengers (adjusting for the length of each flight). For the full quarter, that figure was 91%.
By airline industry standards, both numbers are stunningly high. This indicates that customers have embraced Frontier’s new “ultra-low-cost carrier”, or ULCC, operating model so far. By filling more seats on each plane, Frontier can make money with lower ticket prices than competitors that have more seats flying empty. For example, Southwest Airlines Co. (NYSE:LUV) — one of Frontier’s main competitors at its hub in Denver — reported a load factor of just 85% for June.
While Frontier’s industry-leading load factor is something to be proud of, the company still has work to do in order to approach the profitability of its ultra-low-cost-carrier rivals — Allegiant Travel Company (NASDAQ:ALGT) and Spirit Airlines Incorporated (NASDAQ:SAVE). In April, Republic Airways Holdings Inc. (NASDAQ:RJET)’s management forecast that Frontier would achieve an operating margin of 2%-4% in Q2. By contrast, Spirit’s Q2 2012 adjusted operating margin was 16.3%, while Allegiant’s Q2 2012 operating margin was a whopping 18.1%. This shows how far Frontier is behind the other ULCCs, but it also highlights the promise of the ULCC operating model.
Fill ‘em up
One of the hallmarks of ultra-low-cost carriers is that they push down base airfare prices in order to stimulate demand and fill more seats. Still, even Frontier’s ULCC competitors cannot manage to produce comparable load factors. Allegiant, which typically has some of the highest load factors in the industry, trailed Frontier by more than three percentage points with a load factor of 90.6% in June. (Spirit has not yet reported June traffic.)
Moreover, Frontier’s outperformance has been fairly consistent recently. Frontier achieved load factors of 87% in April and 91% in May. By contrast, Spirit’s load factors in April and May were 81.6% and 86.9% respectively, while Allegiant’s load factors for scheduled service were 88.7% and 89.1% in April and May.
Secrets to success
Typically, it is very difficult for airlines to achieve load factors above 90%. Inevitably, some flights are scheduled for off-peak days and times when demand is lower. Additionally, airlines usually try to have some seats available for last-minute travelers who are willing to pay higher fares. How has Frontier managed to boost its load factor to stratospheric levels in spite of those impediments?