Frontier Group Hit With a Downgrade at Raymond James, Stock Drops 5%

Frontier Group Holdings (NASDAQ:ULCC) stock plunged more than 5% intra-day today after Raymond James analysts downgraded the company to Underperform from Market Perform, adjusting earnings forecasts due to a lower completion factor in Q2/24 and a revised industry revenue outlook.

Despite multiple initiatives to restore earnings and return margins to historical levels, the analysts noted that these efforts initially had a negative impact before potentially yielding positive results. Start-up costs for new bases, the need to mature new markets, and delays in adopting new offerings are contributing factors.

Some initiatives, like network reallocation, face challenges from a shifting competitive landscape that may erode expected benefits. Frontier’s completion factor continues to lag behind most U.S. peers, both absolutely and year-over-year. While Frontier has made significant adjustments to August schedules, focusing on off-peak days, the analysts view this as a temporary fix for longer-term concerns about Frontier’s planned growth with 240-seat A321s.

The analysts suggest that pushing out deliveries and changing the mix to include lower-gauge aircraft could improve investor sentiment. However, there is a disincentive for Frontier to delay deliveries due to the loss of sale/lease-back (SLB) gains. The airline industry is incentivized to grow to capture the difference between aircraft purchase prices and market rates, and the analysts do not fault Frontier management’s accounting of SLB gains, attributing it to changes in U.S. GAAP in 2019.

The analysts concluded that if Frontier’s earnings do not improve, lessors may demand more concessions, reducing the benefits from SLB gains.