Frontier readies to cut capacity if fuel costs continue to rise

Washington DC
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Management at US low cost carrier Frontier Airlines remains encouraged by the industry's ability for the moment to pass on the costs of higher fuel through fare increases, but the airline remains committed to capacity cuts if oil continues its steady climb.

Excluding a $1.9 million gain on fuel hedging, Frontier, which is the branded operation of parent Republic Airways Holdings, saw its fuel costs per gallon rise about 20% year-over-year during the fourth quarter. As a result the airline faced a cost headwind of roughly $23 million.

However, during a 23 February earnings call Republic VP of revenue production Greg Aretakis said that since mid-October Frontier recorded six domestic system-wide fare increases, "the most recent of which just occurred last weekend".

Republic chief executive Bryan Bedford explains the fare increases that have stuck during the recent months should "increase our top line about 3%-4%, which would cover about a 10% increase in oil costs for us".

But when Republic finalised the business plan for Frontier in December of 2010, Bedford says the baseline fuel cost per gallon was $2.75 based on the forward jet fuel curve.

"Today that number looks more like $3.25 which is about a 20% increase," Bedford says. "So if oil prices remain where they are today, we'd need another three-to-four point increase on the top line to offset the impact of the current level of higher oil input costs."

If oil stays in the $100 per barrel range Bedford says there's no question that "airlines have to refocus, tighten their belts on capacity and show some discipline, and we would expect Frontier to be no exception".

For the moment Frontier is sticking to its full-year guidance of capacity growth of 4%-5%, which is heavily weighted toward the back end of the year.

Republic VP planning and strategy Daniel Shurz says if the company determines capacity adjustments are necessary, cuts could begin as early as the third quarter. "We're seeing very good demand levels in this phase of continuing upward fare trends, " says Shurz, adding that is a healthy indicator for the North American summer season. "So our greatest concern naturally arises post Labour Day", he states. But Shurz stresses if fuel costs continue to elevate, Republic will act sooner to mitigate the higher expense.