ULCC Profitability

Gross Profit Margin - Frontier Airlines' profit margin increased over the first two years; however, during the pandemic, they experienced a negative gross profit margin. The gross profit for the Fiscal Years 2020 and 2021 was impacted because of the COVID-19 pandemic and the cost and availability of aircraft fuel.

Operating Profit Margin - Operating Profit Margin remained stable during 2018 and 2019; however, the business suffered tremendously due to the airline industry's significantly affected by the pandemic. However, their future initiative is maintaining high utilization levels as the United States recovers from the pandemic. According to the 2021 10-K, Frontier plans on utilizing new generating, fuel-efficient aircraft that deliver lower operating costs than the prior generation aircraft. They also look to increase the average size and seat capacity of the aircraft in our fleet through the A320neo aircraft.

Net Profit Margin - Over the past four fiscal years, Net Profit Margin stayed relatively low in 2018 and grew at a reasonable rate for 2019, but then faced the negative impacts of the pandemic as expected. As of the Fiscal Year 2021, Frontier Airlines is currently in a negative profit margin territory. However, the company is considering market-specific and entity-specific factors, including the company's internal costs of providing services, the volume of marketing efforts, and overall advertisement strategy. These initiatives and an uptick in consumer travel demand should provide an optimistic outlook for Frontier Airlines and investors.

Return on Assets (ROA) - The dramatic changes in ROA can be explained by the changes in Net Profit Margin as they follow the same pattern as Total Asset Turnover. These decreases are attributed to the pandemic because less revenue was generated since consumers were not flying and operations were grounded due to the spread of COVID-19. However, from Fiscal Year 2020 to 2021, Frontier is building a more robust business model and getting back on track to compete with competitors and bring back customers with new programs such as a fleet of airbuses and a new reward program for consumers.

Return on Equity (ROE) - ROE for Frontier Airlines was similar to Net Profit Margin and ROA. It started stable in Fiscal Years 2018 and 2019 but witnessed a drastic decrease in fiscal years 2020 and 2021. ROE measures the profit made for each dollar of shareholder's equity. Frontier was not using capital efficiently and ultimately faced an unexpected pandemic, so they had to use as much cash on hand as possible. The company also faced the challenge of higher interest rate risk through aircraft lease contracts. The company for the Fiscal Year 2020 paid four million in upfront premiums for options to enter into and exercise cash-settled swaps with a forward starting effective date. However, as of December 2021, the company had no interest rate hedges outstanding.

Return on Net Operating Assets (RNOA) - RNOA follows similar trends with ROE in which the pandemic towards Frontier spirals. As of 2022, Frontier is in a better place financially than in 2021; however, they still have much consumer and investor confidence to regain because the entire company is still in hostile territories. The company is leasing more planes and building for the future, which is another area why we are seeing more capital put to work, reflecting in negative RNOA.

DuPont Analysis

Changes in Return on Total Equity (ROE) for the past four fiscal years can be explained by the DuPont Analysis calculations above in Figure 1.3. This analysis breaks ROE into three categories: Net Profit Margin, Total Asset Turnover, and Equity Multiplier. The model shows an overall decline in Total Asset Turnover, which shows the company has not remained steady in using assets to generate sales. As stated above, this was due to the Pandemic and lack of travel for two years. The Equity Multiplier has increased as expected because Frontier Airlines has a higher level of debt since the fleet of airbuses is through leases, and borrowing of money increased during the Pandemic to keep the company afloat. The one area of concern for investors is the ROE increasing for Fiscal Years 2018 and 2019; however, declining over 100% because of the Pandemic and uncertainty in the airline industry. Profit Margin decreases as well with ROE, so investors should remain cautious but have optimism because of the initiatives in place by the company and the Pandemic coming to an end.

Frontier Airlines vs Competitors

Compared to Competitors, Copa Holdings, Frontier Airlines outperforms in some areas and underperforms in others. In terms of Gross Profit Margin, Frontier Airlines had a decline in Fiscal Years 2020 and 2021, unlike Copa's slight but still positive decline. This demonstrates that they could stay afloat in a positive direction during the pandemic. Net Profit wise, Frontier Airlines has produced steadier net profit margins, and during the Fiscal Year 2020, Copa Holdings saw a significant decline in Net Profit Margin by a difference of (57.79%). As expected, from a Return on Assets standpoint, Frontier Airlines is more efficient in generating revenue against their competitors, as seen above. As a result, the Return on Equity for Frontier Airlines surpasses Copa Holdings from Fiscal Year 2018 to 2019; however, Copa Holdings has a lesser ROE for the Fiscal Year 2020 through 2021. Nonetheless, the negative ROE is not bad for Frontier Airlines because they were restructuring during the pandemic, as was Copa Holdings.