On Monday, Republic Airways (NASDAQOTH:RJETQ) 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 (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 (NASDAQ:ALGT) and Spirit Airlines (NASDAQ:SAVE). In April, Republic'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?
One important factor helping Frontier is that the carrier has been mercilessly cutting capacity. For Q2, Frontier cut its mainline capacity by 10%, while it virtually eliminated the regional flying that it had contracted out to Republic Airlines (another Republic Airways subsidiary). All in all, system capacity dropped 20% for the quarter.
In the course of these dramatic cuts, Frontier eliminated many underperforming routes, including all service at its former Colorado Springs focus city. Capacity cuts tend to boost load factor on the remaining flights, since travelers have fewer options.
Frontier's flexible approach to scheduling has also boosted load factors. The company has been mimicking Allegiant by flying many of its new routes less than once a day. For example, Frontier recently began service from Wilmington, Del., to five destinations; all five routes are operated with a single airplane. This is doable because each route has two to four round-trip flights per week. By tweaking the number of flights per week on each route, Frontier can more accurately match capacity to demand.
Foolish bottom line
Frontier has made a remarkable turnaround, considering that it filed for bankruptcy back in 2008 and a number of industry experts expected it to file for bankruptcy yet again in 2011. Recently, the company has consistently maintained one of the highest load factors in the country, which suggests that passengers are eagerly embracing Frontier's low fares.
That said, Frontier needs to continue reducing its cost structure in order to match the profitability of Allegiant and Spirit, its ULCC rivals. If it can do so, Frontier's earnings will skyrocket, benefiting Republic Airways shareholders or a potential acquirer. However, it will take several years to push through all of the necessary cost cuts to reach that point, so patience is a must for investors.
Adam Levine-Weinberg is long Aug 2013 $10 Calls on Republic Airways Holdings. The Motley Fool recommends Southwest Airlines. The Motley Fool owns shares of SPIRIT AIRLINES INC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.