Revenue Recognition

Revenue Components

Frontier Airlines' revenue reflects disproportionate changes due to the impact of the COVID-19 pandemic. Total operating income increased by $810 million during the year ending on December 31, 2020. Frontier Airlines has experienced increased demand for leisure travel as COVID-19 vaccines were available and widely used compared to December 31, 2020. Frontier Airlines' total revenue was lower during the year ending December 31, 2021, due to the decrease in expected and actual expiration of customer rights to book future travel recognized in 2021, according to Frontier's 2021 10-K. Total Operating Revenue decreased by $448 million or 18% during the year ended December 31, 2021, due to a lower revenue per passenger and the decrease in load factor from 86.1% during the year. According to Frontiers Airlines, 10-K Frontier had 18 percent more average aircraft in service during the fourth quarter of 2021 compared to the fourth quarter of 2019. Frontier's average daily aircraft utilization continued to recover, improving from 10.6 hours per day in the third quarter of 2021 to 10.9 hours per day in the fourth quarter of 2021. The fleet operated at a 74.2 percent load factor during the quarter, which was impacted by the Delta and Omicron variants. Further improvement is expected in the utilization and load factor levels achieved in the fourth quarter of 2019 as the recovery from the COVID-19 pandemic continues.

Figure 1.4: Chart of ULCC Operating Revenues. Source: ULCC 10-k Report 2021

Revenue Recognition

According to Frontier Airlines 2022 10-k Report, the company focuses on three different components of passenger revenues. The first focus is on fare revenues which is tickets solid in advance of the flight date are initially recorded as an air traffic liability on the Companies consolidated balance sheet. Fare revenues are recognized in passenger revenues within the consolidated statements of operations at the time of departure when transportation is provided. The second focus is non-fare passenger revenues. This includes items such as service fees, baggage and seat selection deemed part of providing passenger transportation are recognized to non-fare passenger revenues in passenger revenues within the consolidated statements of operations. Service fees include items such as convenience fees, charges for non refundable ticket expiration, cancellation charges and service charges. The third part that makes up Frontier Airlines Cost of Goods Sold is their depreciation and amortization of their airplanes. Even though the ticket expense went down for Frontier Airlines, their COGS did not because of the money being spent on plane leases and maintenance. Change fees are recognized at the time of departure. The company during the pandemic waived cancellation and change fees for customers in the entirety of 2020 and first quarter of 2021. The third focus is on passenger taxes and fees which Frontier is required to collect certain taxes and fees from customers on behalf of government agencies and remit these back to the governmental entity or airport on a periodic basis. These fees include U.S. Federal Transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure taxes. These taxes and fees according to the 10-k are collected at the time customers purchase their tickets but are not included in passenger revenues at the time. Frontier records a liability upon collection from the customer and reduces the liability when payment are remitted to the governmental agency or airport.

Figure 1.5: Chart of ULCC Total Operating Revenues. Source: ULCC 10-k Report 2021

Vertical Analysis

The figure below shows the results of a vertical analysis conducted for Frontier Airlines for the past four fiscal periods. Data for these calculations comes from the company's income state, downloaded from S&P Capital IQ. Generally, Frontier Airlines has a more considerable income than expenses as a percent of sales which means they are in good financial standing. COGS makes up the majority of Frontier Airlines and remains around an average of 97.56%; however, this number is heavily impacted by the Fiscal Years 2020 and 2021. Typically ULCC has a COGS of 77%. The company has a higher COGS because they are also heavily invested in fleets of planes and research and development growth projects. Frontier Airlines had a stable Gross Profit in the first two fiscal years; however, the pandemic impacted the company significantly. Similar to Gross Profit, Frontier Airlines had a lower net income in the Fiscal Year 2018, which increased considerably in FY2019 but faced the challenges of the pandemic and shaped themselves for the industry's future. As mentioned above, Frontier Airlines COGS remained constant unlike their ticket sales because ammortization and depreication is factored into COGS as well as the planes and R&D growth of the company.

Figure 1.6: ULCC Vertical Analysis for Past 5 Fiscal Years. Source of Data: S&P Capital IQ

Quality of Earnings

Frontier Airlines has a poor level of earnings. Based on calculations from the vertical analysis, Frontier Airlines has maintained lower profit levels. In Fiscal Years 2018 and 2019, Frontier increased its overall net income; however, the impact of COVID affected FY 2020 and 2021 dramatically. The company is still stable with its new initiatives and a new line of fleets coming in FY 2022; however, there is a sense of uncertainty. With a focus and high investment directly on COGS, the company is more sensitive to outside factors and could witness a dramatic decrease in profits if there is an economic or environmental event that would cause people to fly less or lose trust in ULCC. Nevertheless, optimism can stay since Fornier has an average of 43 percent fuel savings compared to other U.S. airlines. In addition, their mission of providing affordable travel across America is substantially more significant than any other airline.

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