Fuel costs, hurricanes key to Frontier losses

Joyzelle Davis, Rocky Mountain News

Published January 27, 2006 at midnight

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Frontier Airlines' loss for the third quarter exceeded analysts' expectations, squeezed by soaring fuel costs and disruptions in service to Mexico after Hurricane Wilma.

Denver-based Frontier had a net loss of $10.3 million, or 28 cents a share, in the quarter ended Dec. 31. That compares with a loss of $11.1 million, or 31 cents per share, in the year-earlier quarter. Analysts had expected a loss of 19 cents a share, according to the I/B/E/S research service.

In spite of the loss, Frontier reported promising signs, including improved cost cutting, higher ticket prices for the fourth consecutive quarter and a 19 percent increase in passenger revenue.

That revenue boost was "overshadowed by three significant aberrations to our fiscal performance" - a 35 percent increase in fuel cost since last year, disruption in service to Cozumel and Cancún, and the end of flights to New Orleans, said CEO Jeff Potter.

Frontier lost $4.8 million in revenue after it temporarily stopped flights to the Mexican resort cities after Hurricane Wilma. The loss of service to New Orleans after Hurricane Katrina cost another $1.2 million.

Revenue, which includes sales from regional airline partners and cargo operations, grew 19 percent to $247 million. Passenger revenue rose 19 percent to $217.8 million as Frontier carried 14 percent more passengers.

That revenue jump wasn't enough to offset soaring fuel prices, which averaged $2.17 per gallon during the quarter compared with $1.55 a year earlier.

Excluding fuel costs, Frontier cut expenses - or costs per available seat mile - by 4 percent to 6.17 cents during the quarter. With fuel factored in, that measure increased 5.9 percent from the year-earlier period to 9.32 cents.

"I've got a list of 50 individual projects to reduce costs," said Paul Tate, chief financial officer.

The company is trying to reduce fuel burn on aircraft, he said. It also has reduced liability insurance rates, changed the bidding system for flight attendant shifts and loaded 10 fewer meals to reduce waste.

The current quarter is the first in which Frontier faces competition at its hometown Denver International Airport from Southwest Airlines, which started 13 daily flights on Jan. 3 and will boost that to 20 flights in March.

Frontier's future earnings will likely be pinched "not only by Southwest's entry, but also by United's competitive response," said James Parker, an analyst with Raymond James, in a research note released ahead of earnings.

Although Potter acknowledges that the entry of Southwest will "generate new pressures," he said the company is confident that its "product is second to none" and will continue to manage its costs.

Potter expects fourth-quarter results to be "approximately break even" and improve over the year-earlier, when Frontier reported a loss of $3.72 million. That assumes that fuel remains at its current level of around $2 a gallon.

Frontier Airlines

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davisj@RockyMountainNews.com or 303-892-2514

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