To understand the use of leverage and debt financing for Frontier Airlines (ULCC), various ratios were calculated to assess the company's financial risk. All data in the graphs are compromised from the company's Balance Sheet and Income Statement from the S&P Capital IQ. For analysis purposes, data includes the past four fiscal years 2018, 2019, 2020, and 2021. For comparison purposes, values were included for ULCC's main competitors to assess their position in the sector. The competitors are Copa Holdings and Spirit Airlines.

Debt-To-Assets:

The second ratio calculated was debt-to-assets which measures the proportion of a company’s assets that are financed by debt. Lower ratios are preferred as shareholders have contributed a large portion of the funds to the business, and creditors are more likely to be paid. These ratios are desired for debt-to-assets as it is less risky and more appealing to investors when companies have less of their assets funded by debt. Over the past four fiscal years, Frontier Airlines has maintained a stable debt-to-assets ratio of about 0.54 on average, which means that for every $1.00 of assets Frontier has, $0.54 is funded by debt. This ratio is relatively low and indicates that the company has about 54% of assets they own and would be able to use as capital and collateral in the case of default.

Compared to its competitors, Frontier Airlines’ debt-to-assets ratio was below its competitors in FY2018; however, for the rest of the fiscal years, Frontier had a solid debt-to-assets ratio for comparative purposes. The graph indicates the company is in good financial health and performing decently in line with market and sector expectations. Spirit Airlines and Copa Holdings are riskier than Frontier, as most of their assets are financed by debt.

Debt-To-Capital

The final leverage ratio calculated was the debt-to-capital ratio which measures a company’s total liabilities compared to total capital. This ratio focuses more on interest-bearing debt used to fund equity than the total debt. This ratio was calculated by dividing interest-bearing debt accounts by interest-bearing debt + total shareholder’s equity. Over the past four fiscal years, Frontier Airlines’ debt-to-capital ratio was 0.75, which means that for every $1.00 of equity, interest-bearing debt accounts fund 0.75. This ratio could be better because it indicates the company only has around a quarter of its capital to use in the case of default.

Compared to its major competitors, Frontier Airlines’ debt-to-capital is seen in the figure above. Frontier Airlines is in poorer financial standing compared to what is expected in the market. Compared to Spirit Airlines and Copa Holding, Frontier Airlines is riskier since it has a higher debt-to-capital ratio, meaning its capital is more financed by interest-bearing debt. As a result, Frontier, compared to its competitors, is more affected in the case of default. Out of the main competitors, Copa Holdings has a significantly lower debt-to-capital ratio which shows the company is less risky, but this could be attested to the different acquisitions and leverage within the firm.

Based on the above ratios, Frontier Airlines is in poor financial standing with high financial risk. Over the past four fiscal years, Frontier Airlines’ assets and capital comprise about 70% of both interest and non-interest-bearing debt. Based on this ratio, the company is in poor financial standings as most of its assets are tied up in debt obligations, and in the circumstance of default, they don’t have many funds remaining. Frontier Airlines should work to improve its ratios so it can perform and become a more attractive airline to consumers and stand out against the big competitors such as Jet Blue or Southwest, not small airlines like Spirit.

Compared with Copa Holdings and Spirit Airlines, Frontier surprisingly had worse ratios and higher risk. This shows that the company is in poorer financial standing than the Airline Industry.

Altman Z-Score:

Over the past four fiscal years, Frontier Airlines has had an average Altman Z Score of 0.85. The Altman Z Score is a combination of several financial ratios that predicts a company’s risk for bankruptcy and provides investors with an overall picture of the company’s financial standing. Based on the ranking, Frontier Airlines Z score indicates the company has a high risk of bankruptcy and default. The media Altman Z Score, for example, during the financial crisis in 2007-2008, was 1.81. In addition, the only year the company had a positive Altman Z Score was 2018; in 2020, they saw a negative Altman Z Score. These patterns from FY 2019 to FY 2021 show that Frontier Airlines has numerous red flags and should cause investors to do more diligence.

ULCC (Debt)

Average Cost of Debt: 5.08%

The average cost of Debt for Frontier Airlines in the classification on the balance sheet is 5.08%. The average cost of debt is the operating leases at a weighted-average discount rate. This is illustrated in the figure below.

Average Maturity of Debt: 7 Years

Took seven years’ average maturity of debt from the 2021 10-K Report. This data shows that it takes Frontier Airlines almost seven years to pay off most-long term debts, such as their plane leases.

Based on the ratios calculated above and this data, Frontier Airlines is in a position of financial risk because the airline sector is facing uncertainty and has money spread thin throughout. Also, being beaten in multiple ratios by companies like Spirit and Copa Holdings is concerning since that comparison is unmatched next to Southwest or Jetblue. Frontier Airlines needs to focus less on the fleets’ age and ensure customer satisfaction is at an all-time high and planes are departing airports with seats full so they can pay off their debt faster and accrue some capital.