Q4 2023 Frontier Group Holdings Inc Earnings Call

Participants

David Erdman; Senior Director of IR; Frontier Group Holdings, Inc.

Barry Biffle; CEO, Director; Frontier Group Holdings, Inc.

Jimmy Dempsey; President; Frontier Group Holdings, Inc.

Mark Mitchell; Senior VP, CFO; Frontier Group Holdings, Inc.

Duane Pfennigwerth; Analyst; Evercore ISI Institutional Equities

Savanthi Prelis-Syth; Analyst; Raymond James & Associates, Inc.

Brandon Oglenski; Analyst; Barclays Bank PLC

Michael Linenberg; Analyst; Deutsche Bank AG

Scott Group; Analyst; Wolfe

Stephen Trent; Analyst; Citigroup Inc.

Conor Cunningham; Analyst; Melius Research LLC

Andrew Didora; Analyst; Bank of America

James Kirby; Analyst; JPMorgan Securities

Christopher Stathoulopoulos; Analyst; Susquehanna Financial Group

Presentation

Operator

Good day, and thank you for standing by, and welcome to the Frontier Group Holdings, Inc. fourth quarter 2023 earnings conference call. (Operator Instructions) Again. Please be advised that today's conference is being recorded I would now like to hand the conference over to your speaker today, David Erdman, Senior Director, Investor Relations. Please go ahead.

David Erdman

Thank you. Good morning, everyone. Welcome to our fourth quarter 2023 earnings call. Today's speakers will be Barry Biffle, Chief Executive Officer; Jimmy Dempsey, President; and Mark Mitchell, Chief Financial Officer.
It will deliver brief prepared remarks and then we'll get to your questions on today's call, we will be presenting supplemental materials, which can be viewed on the webcast platform with a PC or a smartphone. If you're not accessing the call from either or technical issues arise. You can follow along by downloading the presentation from our website at dot FLY, frontier.com/events and presentations before yielding Let me quickly review the customary Safe Harbor provisions, which are included on Slides 2 and 3. During this call, we will be making forward-looking statements which are subject to risks and uncertainties.
Actual results may differ materially from those predicted in these forward-looking statements. And additional information concerning risk factors which could cause such differences are outlined in the announcement we published earlier along with reports we file with the SEC.
We will also discuss non-GAAP financial measures, which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement presentation supplementing this call. I'll now yield the floor to be to Barry to begin his comments Barry?.

Barry Biffle

Thank you, David, and good morning, everyone. Before beginning the brief slide presentation, I'd quickly recap I'd like to quickly recap the fourth-quarter results. We generated a pretax margin of nearly 1% for both the fourth quarter and the full year.
Our fourth quarter results significantly outperformed guidance on strong operational performance and cost execution with our chasm. Excluding fuel 8% lower than the prior year quarter, we achieved a 99.5% completion factor on industry leading average system utilization of 11.3 hours during the quarter and the highest on-time arrivals and departures for the month of December. Since 2015, excluding pandemic year 2020.
Our operational performance during the December to January holiday season was also notable with 15% more departures than the prior year holiday season, making it our busiest in airline history in addition, our completion rate and on-time arrivals and departures during the holiday period all ranked as our best post-pandemic performance.
I want to take a moment to thank all of Team frontier for producing such great results and taking care of our customers. While I'm pleased with the operational performance and that we generated a positive pretax margin for the fourth quarter and full year. I'm disappointed in the absolute result. We are, therefore focused on taking meaningful steps to address the challenges that impacted our results during 2023 and on returning to double-digit margins.
Turning to slide 5. One of the largest challenges, many low-cost and ultra-low-cost carriers faced in 2023 was the industry's oversupply of capacity in leisure markets with Las Vegas and Orlando being two significant examples.
Both markets have experienced rapid and disproportionate growth compared to 2019 when demand and capacity were far more balanced as total US domestic capacity increased just over 4% since 2019. Total industry capacity in Las Vegas and Orlando grew by a combined 20% and are expected to continue to grow in 2024 based on current published schedules. This has resulted in a relative resin and margin headwind to many LCCs and ULCCs and Frontier is no exception.
On slide 6, no one's more aggressive and engaging in self-help to address overcapacity in leisure markets and Frontier. By summer, we plan to reduce Las Vegas and Orlando combined capacity by 11 points of our system share year over year, reducing the share of these markets by one-third.
To be clear, we're not retreating from our network footprint and either market. We are merely cutting what we believe is marginal unprofitable flying to return both freight bases to a rational operating optimal position for our cost structure and remain the low-cost leader in both markets.
Turning to slide 7, our network growth in 2024 is focused on exporting higher fare, visiting friends and relative markets. The market mix of routes by the summer will increase industry average fares in those markets by 5% year over year.
Not only are we chasing higher fare markets. The total revenue pool of industry revenue in our network this summer will be up over 50% despite only growing capacity 12% to 15%, meaning we need a much smaller share of industry revenue, extremely constructive for increasing resin. Additionally, the historical data suggest VFR routes tend to ramp quicker and reach maturity sooner than leisure routes.
Turning to slide 8. Another significant challenge we faced last year was the extended ATC ground delay programs, which negatively impacted our completion factor and utilization, particularly during the summer peak.
To address this, we are executing on the network simplification strategy that we discussed on our last earnings call with a focus on increasing the percentage of aircraft that returned to base nightly to greater than 80% by peak summer this year.
We expect this strategy to enable expanding our industry-leading utilization and improve reliability a key element of our plan is leveraging our 13 crew bases, including our recently announced crew bases in Cleveland, Cincinnati, Chicago and San Juan, Puerto Rico.
Single day trips flown from our crew bases, support, operational reliability, recoverability and higher fair. Our relative cost advantage to the industry outlined on slide 9 is a key factor in our ability to stimulate demand with low fares and it increased to over 40% in 2023.
We believe unit cost leadership is fundamental to our long-term profitability and expect Frontier will remain the lowest unit cost provider in the United States, particularly as significant cost savings materialize from our network simplification strategy. We expect that our network simplification strategy will underpin the $200 million of associated annual run rate cost savings, which should be implemented by the end of 2024.
As we highlighted on our third quarter earnings call. Further, our order book is heavily weighted to the high gauge A3 21 neo, which will contribute meaningfully to our ability to control costs as we continue to increase gauge Accordingly, we expect 2024 for adjusted chasm ex-fuel to be down 1% to 3% on a stage adjusted basis, just 1,000 miles.
As highlighted on Slide 10, we plan to leverage our network product brand and distribution to diversify our revenue and drive sequential revenue improvement.
I've spoken extensively about network enhancements, so let's briefly review the latter initiatives. Last week, we launched our an innovative Betfair's product to cater to cost-sensitive small business travelers while providing a premium experience for one low price. We've rebranded our stretch product to promote our premium economy seating starting at $19, consistent with our recent launch of our get it all for less campaign.
As we showcased last quarter, our relaunched Frontier Miles program features enhanced elite status tiers that can be earned faster and offers the highest credit card spend based travel reward earn rate in the industry for each dollar of spending with the Frontier, Barclays MasterCard, a new website and new mobile app as well as NDC are expected to launch by late 2024 and should provide significant distribution, merchandising and conversion benefits as well as improved brand positioning. Further, we've seen competitive overlap proceed in recent months.
To the extent carriers further engage and capacity rationalization, this would drive additional unit revenue benefit to Frontier, which will be accretive to our guide. However, we've only included the published reductions in our base case on slide 11, network cost and revenue initiatives are expected to drive profit and growth in the business. We expect our pre-tax margin for the full year 2024 to be in the range of 3% to 6%, with capacity growth of 12% to 15% and adjusted CASM down 1% to 3% on a stage adjusted basis to 1,000 Mile. First Quarter 2024 guidance is reflective of seasonality and off-peak dynamics expected during the quarter. Our guidance is based on fuel pricing as of February.
Turning to the final slide, with full year benefit of our network cost and revenue initiatives, we expect 2025 to be between 10% and 14% pre-tax margins. This includes the expectations of new labor agreements with pilots and flight attendants as both recently became amendable.
That concludes the slide presentation, and I'll now hand the call over to Jimmy for a commercial update.

Jimmy Dempsey

Thank you, Barry, and good morning. Everyone. fourth quarter revenue was $891 million, reflecting ROS of $8.9 down 15% on 15% capacity growth on an 8% decrease in average stage length. This represents a 4 point year-over-year sequential improvement from the third quarter, driven by stabilizing demand trends as we enter '20 into 2024, we are now seeing improving revenue trends better than our earlier expectations and see positive momentum as we transition to our new network and deliver on multiple revenue initiatives.
We expect the revenue trends to continue to show positive year over year sequential improvement. We carried a record 8.1 million passengers during the quarter with a 99.5% completion factor as well. On-time arrivals and departures in December were our highest since 2015, excluding the pandemic year of 2020. During the quarter.
As Barry mentioned, we made steady progress toward our objective to increase the percentage of F. and back flying, including the announcement of four new crew bases, a Cleveland, Cincinnati Chicago and San Juan Puerto Rico Cleveland basis expect to open in March, I would employ 110 pilots and 255 flight attendants in its 1st year.
The Cincinnati basis is scheduled to open in May and will employ 80 pilots and 160 flight attendants. The Chicago-based will serve both O'Hare and Midway and employ 110 pilots, along with 200 flight attendants already based there. And finally, San Juan will be our 13th crew base and will employ 90 pilots and 200 flight attendants and in its 1st year, we've been the fastest-growing airline in Puerto Rico, more than doubling seat capacity since 2019 and offering 14 nonstop routes from San Juan alone, Puerto Rico is playing a key role in our Caribbean and Latin America growth strategy. Not only because it's a popular tourist destinations, but large populations of Puerto Ricans reside in the US mainland and they frequently travel to the island to visit friends and family or to work remotely.
Frontier is well situated to capture a disproportionate share of this volume as we now serve more routes to Puerto Rico from the U.S. than any other carrier. Moreover, we recently announced a significant expansion of our network as part of our strategy to grow in higher fare routes. During the second quarter, we launched nonstop service from 38 airports with our largest concentration of routes and visiting friends and relatives markets from Dallas Fort Worth, Charlotte, Raleigh-Durham, Los Angeles, New York, Minneapolis, St. Paul and San Juan.
Finally, early last month, we officially launched our reimagined Frontier miles loyalty program, and we're seeing positive trends, memberships and engagement, particularly at elite levels of increase. We have also observed observe improved spending on the Cobra brand credit card. In fact, December spend was over 10%. Europe was up over 10% year over year and was the highest level on record. While it's still early, we expect to see continued improvement in spend throughout 2024.
That concludes my remarks. So I'll yield the call to Mark.

Mark Mitchell

Thank you, Jimmy. We generated a pre-tax margin of 0.7% on a GAAP basis and 0.8% on an adjusted basis in the fourth quarter, well above our guidance range on solid operational performance that Barry touched on earlier and cost related factors.
As a result of our fourth quarter performance, we also generated a pre-tax margin of 0.9%. For the full year, total revenue was $891 million, down 2% compared to the 2022 quarter. Fuel expense was roughly in line with the prior year quarter as the 12% benefit from lower fuel prices and 3% improvement in our industry-leading fuel efficiency to 105 ASMs per gallon was offset by the increase in consumption from capacity growth of 15%. Fuel expense for the quarter reflects an average cost per gallon of $3.18 which was slightly below the low end of our guidance range.
Adjusted nonfuel operating expenses in the fourth quarter totaled $590 million, or $0.59 per ASM 8% lower than the prior year quarter. Improvement in adjusted chasm, excluding fuel, was driven by a $36 million lease return cost benefit during the quarter from the execution in December of an extension of 4A320 ceo aircraft leases that were otherwise scheduled to return in 2024.
Moving forward, we will continue to be opportunistic with our fleet management, including attractive aircraft lease extension opportunities.
Our adjusted non-fuel operating expenses also benefited during the quarter from efficiencies realized across the business, given the strong operational performance and our continued focus on costs. While our fourth quarter pretax income was $6 million, we generated a net loss of $37 million, driven by the recognition of a $37 million non-cash valuation allowance against our US federal and state net operating loss deferred tax assets, which wasn't contemplated in our effective tax rate.
Our adjusted net income of $1 million for the quarter excludes this adjustment as it's a significant special non-cash item. It's important to note that these NOLs generally don't expire and can therefore continue to be used against future taxable income. Given our full year adjusted pretax guidance of 3% to 6%, we presently expect to utilize a substantial portion of NOLs this year.
Any corresponding reversal to this adjustment as we generate taxable income would also be excluded for non-GAAP purposes. We ended the year with $609 million of unrestricted cash and cash equivalents and $139 million net of total debt. In addition, we have unencumbered loyalty and brand-related assets, which we believe could generate significant additional liquidity. If desired, we had 100, 36 aircraft in our fleet at year end after taking delivery of four A. three 21 neo aircraft and returning to a three 20 ceo aircraft during the quarter, we expect to take delivery of six a. three 21 neos in the first quarter of 2024 and a total of 23 A. three 21 neo aircraft in 2024, all of which are anticipated to be financed through sale leaseback transactions.
With that, I'll turn the call back to Barry for closing remarks.

David Erdman

Thanks, Mark. Our objective for 2024 for clear, every member of team is focused on executing our network cost and revenue initiatives, improving our operational reliability, and delivering an enhanced experience for our customers with a network growth focus on high fare VFR markets alongside our commitment to remain the lowest cost provider in the United States. I'm confident these measures will drive higher margins in the business.
Thanks, everyone.
For joining the call today, and we will now open up for question.

Question and Answer Session

Operator

(Operator Instructions) Duane Pfennigwerth, Evercore ISI.

Duane Pfennigwerth

Hey, good morning. Tom, just on the unit cost guidance, can you give us some thoughts on how we should think about stage length this year or is there a way to maybe convert that guide to kind of a nominal unit cost guidance? And just broad strokes, what would the underlying kind of tailwinds and headwinds be from it from a unit cost perspective?

Barry Biffle

Well, so Duane, I think what's important, though, is our stages going down. So I think to be intellectually honest, that's why we're pinning it to 1,000 miles and we expect to be down 1% to 3% on a stage adjusted basis, but we expect it to be closer to 900 for the year.

Duane Pfennigwerth

Okay.

Jimmy Dempsey

I've got one.

Duane Pfennigwerth

Yes, just maybe broad strokes, the underlying kind of tailwinds and headwinds year over year.

Jimmy Dempsey

So when you look at that guidance for the full year. I mean that is underpinned by the network simplification that we've touched on and getting our own back flying to over 80% of that is going to drive the $200 million of annual run rate cost savings that we expect to have fully implemented by the by the end of the year.
Additionally, as we go through the year on the 23 aircraft that we're taking, delivery of those are three 21 neos. So you'll continue to get the gauge benefit there. And so I think those are the main drivers of the 1% to 3% down comp and in the chasm stage length adjusted.

Duane Pfennigwerth

Okay. Appreciate those thoughts.
And then I'm sure you get the question a lot as a team and maybe it's Barry, maybe it's Jimmy. But yes, to the extent that spirit becomes available again, can you just gauge your interest or to the extent you be tempted to reengage there. Is there any price on the equity where it would make sense from your perspective? Thanks for your thoughts.

Barry Biffle

Thanks, Duane. Is the first time I've been asked that question. We are 100% focused on our business and delivering profits for our shareholders. I'm so sorry, but we don't have anything in entertaining to talk.

Duane Pfennigwerth

Very clear. Thank you.

Operator

(Operator Instructions) Savanthi Syth of Raymond James.

Savanthi Prelis-Syth

Hey, good morning. I'm just kind of curious what your thoughts are as you kind of roll forward this network changes and where utilization would go?
And along those lines, I think how the pilot trends are looking at in terms of being able to complete those utilization targets?

Barry Biffle

Well, I'll talk about the pilots, and I'll let Mark talk about utilization. But Tom, on the pilot side, we've seen a dramatic change in the marketplace. I think I mean, you've seen the regionals looking at this and I think when you see the regionals being able to be staffed, I think that tells you everything you know about the about the shortage of pilots. So we don't see any challenges there.

Mark Mitchell

I'll start. And then yes. And then relative to the utilization. So in the fourth quarter, we delivered 11.3 hours on a total system basis because we progress with the network simplification, we expect the utilization to increase as we go through the year, and we'll continue to push to drive that drive that higher.

Savanthi Prelis-Syth

Appreciate that. And then if I might just a clarification question on doing color or for them. Is labor costs in any kind of labor cost increases in the 2024 that I know you mentioned in London later in the 2025 outlook.

Barry Biffle

Now these just opened a lot of people that have been opened for multiple years are starting to include it on. We didn't include it in 24, but we have included for 25.

Savanthi Prelis-Syth

Thank you.

Operator

(Operator Instructions) Ravi Shanker, Morgan Stanley.

Good morning, everyone. This is Katherine on for Ravi. Thank you for taking my question about six months ago at our live video conference. You kind of talked about structural pressures from ATC and plain restrictions, which it sounds like you are expecting deliveries.
But I was just curious what the lay of the land is today know, have those pressures eased? Are you trying to work around them? Is there an opportunity for a bigger reset and operating model to kind of deal with the current environment?

Barry Biffle

Yes. No, thanks for the question. I mean, we don't expect the situation to change. I think the weather's been a little more time to the industry, but we do continue to see kind of hints of these extended ground delay programs.
So the I think the next test is kind of Presidents' Day weekend and you've got all the all the weekends through the spring break season and Easter particularly you have to watch Florida and what that does to ground delay programs on.
But we are not waiting for the situation to change to improve our trajectory. We are taking control of the situation and we are designing our schedule around these issues and expect them to continue through the spring and summer.
And when we look at last year, we had 7% of our of our flights that were canceled in the summer and the majority of those like 90% were related to multi-day trips. And so we have to change the network to ensure that we combat these challenges and overcome the reliability issue. So but we feel really good about it because if we make everything look like the open back that we had, we expect to continue to improve our reliability as we've seen in recent months.

Got it. Thank you. And just as a quick follow-up, I was curious how close-in bookings are trending? I know there was kind of a slight drop-off last Labor Day.
So any color on what you think normal behavior might look like? Thanks for the questions.

Barry Biffle

Yes, Jimmy, kind of alluded this. We'll let him answer that question, sir.

Jimmy Dempsey

And look like what we've seen over the last kind of four or five months is a bottoming of booking trajectory in the early part of Q4 by the end of Q2 or Q3. And then we've seen as I mentioned in the prepared remarks, we've seen a transition to an improving revenue market as we progress through Q1.
And so we're actually quite encouraged by what we see. But we're obviously working very hard internally in terms of so restructuring the network that's providing a significant improvement as you progress through March, April, May, and June. And also you're seeing very strong demand in the short term, improving close-in pricing. So built into our guide is a sequential improvement over the last few quarters on our on our unit revenues.

Thank you.

Operator

(Operator Instructions) Brandon Oglenski, Barclays.

Brandon Oglenski

Hey, good morning, everyone. Thanks for taking the question. Jimmy, maybe if we can follow up there so I would assume that you have some acceleration built into your 2Q revenue outlook.
Was that what you're seeing in the bookings?
And can you compare and contrast that with Easter holiday timing not to be too near term here, but I guess it must be the network changes you're making that you're seeing the positive improvements. Is that correct?

Jimmy Dempsey

Yes, yes, I mean, we've if you look at the announcement we made recently, you see a big network shift happening March, April, May, June, and that network shift as drug is driving significant improvement in our revenue and a revenue turn like one of the things that we're focused on is entering a bigger revenue pool, but also actually in markets that have higher fares and so that is giving us a better revenue outcome that we're seeing across the business. It's early and you know, we have the big network shift happens during March, April, May, and June, as I said.
And so we'll see that progress. But the early signs are very, very good. And obviously, Easter comes back, as you mentioned, into this quarter, and we've got to deal with that. Overall, that's positive for this quarter. Obviously, it's out of April and but we think some of the changes we're making actually will drive longer-term support for growth in the business, particularly around utilization of peak periods where we're entering more VFR markets.

Brandon Oglenski

I guess anticipated in that improvement into 2Q and 3Q, just more, you are in the first quarter is more of it commercial revenue base or is that also the expectations that your cost can come down in maybe a more controllable operating environment this summer well?

Jimmy Dempsey

Yeah. I mean, look, with part of the guide today is clearly our costs are on a very good trajectory there on a different trajectory to the entire industry where our unit costs are actually coming down. Obviously, we stage it was just the 2000 miles, just to give you a fair comparison.
That's a really good thing. We're working very hard on the business and on extracting significant amount of cost out. That's a lot of that is driven by the network shift that we're doing. That helps the business. But what we're doing is in trying to improve sequential revenue as you progress through this year.
Clearly year over year, as you get into the second half of this year, you have an easier comp from a from a unit perspective. But what we're seeing at the moment gives us a lot of hope on our optimism around the improving revenue environment as we progress through this year.

Brandon Oglenski

Okay. Thank you.

Operator

(Operator Instructions) Michael Linenberg, Deutsche Bank.

Michael Linenberg

But we hear you and good morning, everyone. Hey, on I think on the last call, Jimmy, you talked about on some of the potential issues that you could have later in the year with the GTF on and I know you had indicated that it was somewhat fluid and you're in conversations with Pratt. Do you have a better sense about any potential groundings that we see later this year? If at all, it's a 2024 event.

Barry Biffle

Yes, Mike, this is very. We expect the financial impact, we expect no financial impact from the GTF.

Michael Linenberg

Okay. And then on Barry, since I have you my second on when I look at your network and I look at some of the routes that you do fly to, I know on you've talked of VFR but there are some markets that you're in where you actually have a decent presence in what I would characterize as business markets. I know in the past you did cater to some price sensitive on the business side, maybe it was 5%, maybe it was 10% on, but I'm only bringing this up because I when I look at one of your recent offerings, some of your product offerings there is a bit of a code of business type or sort of product type that you are rolling out maybe to take advantage of some of the network changes.
Can you talk about that and maybe there's some opportunity with your presence in these big markets, you know, Chicago and LA and Atlanta on et cetera. Any thoughts on that would be great.
Thanks for taking my questions.

Barry Biffle

Sure. So look, I mean, we're not making a major strategy shift to go after business. I mean, historically, we've been in the mid-single digits for business travel and the majority of those we believe are small business. But yes, we've heard from our customers, they would like to see on a kind of a bundled fare available through third party channels.
That's something we haven't had in the past. And so we have launched that the biz fare, which includes a bag carry-on bag and includes it actually premium economy, seating of it's available as well as flexibility. No change cancel fees.
So it's a great product for small businesses, save them money obviously, we don't have the frequency. That's the big airlines do. But I think for some people that want to save money and it's a great product, but which didn't have anything if they did have a managed travel, a partnership with a travel agency, we just didn't have a solution for them. And now we do. And so I look at you can kind of do the math. If you just get a few points of this at 30% to 50% higher fare, it is a great way to diversify our revenues and improve our overall routes.

Michael Linenberg

Very good. Thank you.

Operator

(Operator Instructions) Scott Group of Wolf.

Scott Group

Hey, thanks. Good morning. So I wanted to just go back to Q4 for a second, just on the cost side. So if you look at just cost ex-fuel, third quarter was $645 million, fourth quarter dropped to $590 million. And then the Q1 guide, it goes right back to [$650 million]. So any help on what happened in Q4?

Jimmy Dempsey

Yes.
So yes, Scott, to give you the broad strokes on Q4, right, to that $590 million as I highlighted in the prepared remarks, includes the $36 million benefit from the four A. three, 20 ceo lease extensions that will be executed. If you adjust for that rate, you're at [$626 million]. And from there looking at that number to what we're what we're guiding in the in the first quarter that takes into consideration the seasonality that comes to play in Q1.
Right.
So payroll tax related on seasonality, de-icing, I mean, you've got a growing fleet as well, right? And so those additional costs. So at the end of the day, I think that's the walk from Q4 to Q1.

Scott Group

Okay. That's helpful. And then can you just talk about I know you said you're assuming improving resin throughout the year just but maybe what your overall sort of resin growth expectation is? And just how to think about, right, the cadence of margins from down 4% to 7% in Q1 to down to up to 36% for the for the year I just want to understand, like where do you think you're ending the year on a margin run rate?

Barry Biffle

We don't actually guide resin, but look, I think you can look at the initiatives that we've talked about and kind of play those out, they continue to roll out as we move through the year. So you would obviously expect the cadence of that is that you will continue to see more accretive at rather some improvement as you move through the year as the initiatives mature and go out, I mean, you take the Betfair for example, that we just talked about a moment ago, we just launched it last week.
I mean, it's we're starting to discuss with certain corporations, getting it on their shelf and getting there. But there's just a lot of different paths to revenue diversification that we're focused on, but they all have slightly different timings as we move through the year.

Scott Group

And then I guess ultimately, what I'm trying to get to is where are we going? Where are we going from a margin perspective, the rest of this year? Because I'm trying to get to 10% to 14% next year with labor. So just anything you could do just like to sort of help on the bridge.

Mark Mitchell

Well, we've given you the first quarter and we've given you our year. So you can kind of while we didn't breakout quarters two through four, you can kind of do the algebra to figure out what that takes to hit that number. And I think if you if you take that into the second half of the year, you will see that the run rate of that delivers well against 2025.

Jimmy Dempsey

And then keep in mind, as you look at 24 and as we deliver on the network simplification plan and the revenue initiatives and cost initiatives that are there and you move into 25, you're getting the full year benefit, right of all of those items that are being put in place in 2024. I think that's important to note as you consider 25 versus 24.

Scott Group

Okay. Thank you.

Operator

(Operator Instructions) Stephen Trent, Citi.

Stephen Trent

Good morning, gentlemen, and thanks for taking my time to be taking the time to answer my questions. I was wondering just on a from a clarification perspective, um, could you refresh my memory and maybe your question for Mark, if you guys will be including any sale leaseback gains and OpEx. Thank you.

Jimmy Dempsey

Yes, I mean, we have consistently and consistent practice in the past and as we go forward, sale leaseback gains are a credit to operating expenses.

Stephen Trent

And any sort of a high level, would you sort of ballpark on where that could end up for this year for example?

Mark Mitchell

we don't call that out. But I think I think the best thing to think about, Stephen, is that the reason why it's there is because had we debt financed. It's the most fair way to compare it. So they get the benefit on the debt financing side, we did it through the sale leaseback, but on, but we don't actually call that specifically out, but it wouldn't have nowhere to people to have that. I mean the P&L impact will be similar to those.
We definitely, yes, no, it makes sense.

Stephen Trent

Makes sense or not, and I appreciate that. And just one last question. I know there on the sort of cross border view, you have one of your competitors having its codeshare with a Mexican carrier potentially getting not renewed by the Department of Transportation, how are you guys thinking about your relationship with Volaris in that regard? Thank you.

Barry Biffle

We're really excited about our partnership with Volaris. It's been disappointing, obviously that given the challenges over the last few years and their category that we haven't been able to exploit that partnership. But we're excited to get that turned on this year and we expect to do great things with it. We're larger now we have a greater brand presence. We have more distribution power coming on, but we're seeing them growing as well and their position. But we never had a TI. with Polaris. It's just a true partnership where we have a codeshare and overall marketing partnerships. So we're excited to get it turned on.
And I guess, you know, if you think about it, I guess we'll have a little bit more of a level playing field if what they're saying come through.

Stephen Trent

Okay. Appreciated. Very, thank you.

Operator

(Operator Instructions) Conor Cunningham, Melius Research.

Conor Cunningham

And thank you on just back to the underserved markets and the economic changes that you're making there, it seems like you're indicating that and a lot of this stuff is new unit revenue accretive, which I think is a bit surprising to some of us is the brand and the fares just being that well, received, but historically you would think of a spooling period being like over a year, two years. So just any thoughts around on what's being on why the success so far?

Mark Mitchell

I think if you in normal course I think those assumptions are correct. But having been a part of, processes like this over the last 30 years, I think you have to consider that where we're pulling this capacity from is a negative opportunity cost. So when you're not doing well financially on those, the redeployment in many cases is almost immediately accretive when you move to better market opportunities. I mean, I'll give an example,
If you find something four times a day and the fourth frequency didn't add any more revenue, but you had all those costs moving that frequency somewhere else that gain to the to the network is 100% incremental.

Conor Cunningham

Okay. That's helpful. Makes sense. And then on all these new products that you're talking about, biz fare premium economy and the global loyalty changes. I was just wondering if you could probably if you could give some context to just the contribution, you're talking about a seven point improvement in pretax margin. So what portion of these new products is what's occurring in 2025?
Thank you.

Mark Mitchell

Yes. Appreciate the question. But we haven't actually broken that out in detail, but I can tell you the majority of the benefit of both this year and next year is going to come from the network and the shift to the VFR flying and away from the oversupplied leisure markets. And then each one of the others are smaller contribution. And we have an expected huge things from the business, for example, we think that takes a while to mature.
Obviously, the frequent flyer things take time to mature, but early signs are fantastic, right. I mean, as Jimmy mentioned, earlier, you think the credit card spend alone, I mean, within a month of launching it at the spins up over 10% year over year, so which is just huge. So but sorry, we're not giving a breakdown of that one of those components at Target.

Operator

(Operator Instructions) Andrew Didora, Bank of America.

Andrew Didora

Hi, good morning, everyone. I'm Barry. Yes, look, I know your back half margins are going to look slightly better than what you're what's coming through in 1Q but maybe going back to Scott's point, provide a little bit more color on sort of the bridge on how you get from back half margins to your 2025 goal. I guess what kind of a some what kind of headwinds are you assuming from a labor? How are we thinking about kind of incremental revenues or any color you can provide on kind of bridging back half 24 to 25 margins I think would be very helpful for folks.

Barry Biffle

Sure. Look, as I said a while ago, we've given the first quarter within the year. So you can you can do the simple algebra and soft ForEx to figure out what that has to be. Obviously, as we've discussed, the diversification of the revenue has multiple components that actually unfold through the year. And so obviously that will have better greater benefit in six months from now than it will two months from now.
And so I think when you play that out that actually and then you annualize that in the back end into 2025, you can easily cover what we expect to be somewhere in around a quarter of a penny for the headwind of our labor deals. But some we believe that we can solidly get back to the 10% to 14% range for 2025 as a result.

Andrew Didora

Okay, got it. And Mark, just the $36 million benefit you had in 4Q from the lease extensions go away how long are these leases extended for? Does that $36 million kind of come back in 25 at all? How should we how should we think about that?

Mark Mitchell

Yes. Yes. So these are eight year leases that we extended out 12 years. And so that $36 million is out far into the future. So that's not a 25.

Andrew Didora

Okay, got it. Thank you.

Operator

(Operator Instructions) James Kirby of JPMorgan Securities.

James Kirby

Hey, good morning, guys. Just filed with Savvis question earlier with the pilot pipeline, there are media reports earlier last month on just slowing down the training and pushing some out home. Is that a function of less flying? Or is that just a function of less turnover? And any color you could share there?

Barry Biffle

Yes, we've seen thanks for the question. We've actually seen against what our earlier expectations were kind of a slowdown in attrition. And so we've seen that coupled with no other kind of canaries in the coal mine around the industry. So you've just seen a big change in that. And so to give you an idea, we've needed in round numbers around 30 pilots a month, right? And to get those with attrition for the last several years, we generally hire 60.
Right. And so what happens is that fit that if you if your attrition dries up, you could because of the timing it takes, call it six to eight months to get to the full kind of training of a new first officer, then you have a training of a captain and kind of to create a crew.
So if you see a material change in the attrition, you could actually very quickly be to 300 pilots for way too many. In addition to that, we're seeing efficiencies in the Outback schedule, which is going to actually change kind of our needs of pilots per airplane.
But then I would just also add that we have actually we invested significantly in our in our in our programs to bring in pilots. So we have a cadet program. We have a rotary transition program for military. We have our college programs.
And so we have a really robust our pipeline, and we're seeing a lot more stickiness with the people. So like people we've hired in the last like 1.5, two years have a much lower attrition rate than people that we hired more than more than 1.5 0.5 years. And the other thing is we have over 700 cadets in our pipeline, right now. So if you just do the math and cadets alone, we have over two years' worth of supply. So some I think that I think the marketplace has changed dramatically in the last one to two years.

James Kirby

Got it. That's great color. I appreciate that, Barry. And second question, I if I recall correctly, your prepared remarks, you mentioned competitive pressures rescinding in certain markets. And just wonder if you can elaborate on what type of markets those are? I believe you mentioned it's not embedded in guidance, but is that is that trend you see continuing as the year goes on in terms of rationalizing the rationalization of capacity?

Barry Biffle

Yes. Look, so we I mean, so let me be clear. So we've seen some capacity receipt against this approach. The biggest examples we saw Spirit leave out of out of out of Denver. We've seen capacity against us in Puerto Rico and other places start to recede and look, we can look at deal just like everybody else can and understand that the fares that but some of these carriers, we're seeing our some of the lowest quartile of the revenue and the best way to stop losing money and stopped doing things that lose money.
So I think people are making rational decisions around the system. We expect people to continue to do that. But we have only captured in our guide the changes that we've seen thus far, but we would expect to see a continued kind of rationalization of oversupply especially in a lot of these leisure markets.

James Kirby

Got it. It's just I appreciate the question.

Barry Biffle

Sure.

Operator

(Operator Instructions) Christopher Stathoulopoulos, Susquehanna Financial Group.

Christopher Stathoulopoulos

Thank you, everyone, and good morning. So I guess, Barry, I'm going to trying to get to the margin question in a different way on. And it's important here given the change here in your network, deemphasizing LASMCO. But if we take out the benefit of product, which is going to take some time to mature, but we think about the cadence of resin for this year and for next.
Ultimately, again, outside of if we just hold product constant a piece of that or a big piece of that arguably is going to be about where you're flying and how we can argue for or against any sort of you know, seasonal outperformance, et cetera, with respect to yields.
So my question is, if you could just put a finer point on, you know, where you're growing and to your point, we can all look at the deal schedules today, but want to better understand that. And then ultimately, as we think about the moving pieces for next year, is that a sort of a similar composition and Part B or C, do you need to make any changes with this shift with respect to the aircraft type or anything?
And so far is nuanced around crew scheduling and alike? Thank you.

Barry Biffle

So, no, we don't expect any change to our aircraft or I think our scheduling is becoming simpler because of what we talked about with the simplification of the network as far as the markets that we're chasing, I mean, it's very clear. I mean, we mentioned this earlier, but just the average fare across the system. So you take all of the markets that we will be flying in the summer and you look at those markets compared to the same markets last year and average fare is up 5% on the total.
So that just tells you that with the new flying, we are chasing significantly higher. I think the fares more in the 15 to 20 Buck range, higher on the things that we're actually going into. So these are significantly higher priced markets than we're into today.
Second thing is I'll point you back to another thing that we said in the slides is that the revenue pool itself. So the total revenue pool in all of the industry that we're flying year over year will be up over 50%. And so when you're only growing 12% to 15% and the revenue pool is going to 50%, you need a smaller share of a much bigger pie.
So it just kind of really derisks the business in a big way. And I think it kind of lowers competitive friction if you think about it, but specifically for the routes, I mean, obviously, we have talked about in our 13 bases, and we're going to grow significantly, especially from the ones that we've announced recently. We just announced a bunch of new routes out of out of San Juan, we announced a bunch of new routes out of out of Dallas Fort Worth, which is a base that we just opened last year and we've got some more announcements in the weeks to come.
We've got to some this week, some actually next week and then probably a few more announcements later this month. But I think you'll find in general. And all of these are markets with considerably higher fares than the marketplace we were in last summer, which we think will be significantly improving our resume trajectory.

Christopher Stathoulopoulos

Understood. Thank you. For that color. And my second question, the 80% or more than 80% excuse me out and back, if you could bridge that for March's anticipated two thirds, you know, what needs to be done to realize that and more importantly is how do you sustain that? Thank you.

Barry Biffle

So actually, we just went through this yesterday. And in fact, if you look at our March schedule, we're actually already there. And the 80% range to Outback were not scheduled with our crew there. And that's because, for example, we the Cincinnati base doesn't open until May, but we actually have the flying already kind of set up as if it was out and back. But there will be a lot of people still in hotels. So what happens as we flow through the next several months is the schedule doesn't change materially from an Outback perspective of the metal.
But what happens as we opened the bases and we have the crew members based in those cities, they become an Outback crew pairing. So you've actually already kind of done the majority of the simplification. It just gets easier every month as you flow through and we get there by June with the final opening of San Juan, which we expect. So Cleveland is in March, we've got to Chicago and Cincinnati in May. And then we have San Juan Puerto Rico in June.

Christopher Stathoulopoulos

Great. Thank you.

Operator

Thank you. At this time, I'd like to turn it back to you, Barry.

David Erdman

Before for closing remarks, and I want to thank everybody for joining us today. We're really excited about the results that we're putting forth in our guide and as well as our expectations as we move through the year and into next year, a lot of great things going on with the Company. So we appreciate everybody joining us today and we look forward to updating you on our progress and our success next quarter.

Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.