Hello, thank you for standing by. Welcome to the Frontier Group Holdings Inc. Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] We'll be advised that today's conference maybe recorded. I would now like to hand the conference over to your speaker today, David Erdman, Senior Vice President, Investor Relations. Please go ahead.

Thank you and good afternoon, everyone. Welcome to our third quarter 2022 earnings call. Today's speakers will be Barry Biffle, President and CEO; Jimmy Dempsey, EVP and CFO; and Daniel Schurz, Senior Vice President, Commercial. Each will deliver brief prepared remarks and then we'll get to your questions. But first, let me quickly review the customary Safe Harbor provisions. 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. Additional information concerning risk factors which could cause such differences are outlined in the announcement we published earlier, along with reports we filed 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. In addition, comments about relative operating statistics exclude pandemic affected quarters during 2020. Lastly, if you didn't already notice the announcement in the earnings release, we will be hosting an Investor Day the morning of November 15th, in New York. The event will be live streamed and archived on our website. Pre-registration is required for all participants, whether in person or virtual. However, in person, participants must register at least 24 hours in advance. Registration link is provided on our Investor Relations web page at ir.flyfrontier.com. So I'll give the floor to Barry to begin his comments. Barry?

Thanks, David and good afternoon, everyone. First, I want to thank all of Team Frontier employees for serving our customers in the quarter and doing a great job producing these great results. With a supportive demand environment for affordable travel, record ancillary revenue performance and improving unit costs, we posted back to back quarterly profits and expanded our adjusted pre-tax margin to 5.2% nearly double the second quarter margin. Total operating revenue was 35% higher over the 2019 quarter, while capacity increased by 8% over the same period, contributing to a 26% increase in revenue per available seat mile. In fact, over the first nine months of the year, we've grown capacity about 12%, while increasing total operating revenues by 31% compared to the same period in 2019, demonstrating the strength of our leisure focused ultra-low cost business model. The strong revenue performance was underpinned by the achievement of a record $78 of ancillary revenue per passenger during the quarter, which eclipsed the record set last quarter by $3. Since the third quarter of 2019, we've grown ancillary revenue per passenger a remarkable 38%. And we're confident in achieving our targeted run rate of $85 per passenger by the end of 2023. We'll talk more about how we plan to continue to innovate and optimize our ancillary product offerings at our Investor Day on November 15th. Leisure travel demand remains strong and has undergone a fundamental increase versus customer propensity to travel prior to the pandemic. To gain more insight into emerging trends, we recently polled our customers to understand how they're thinking about future travel plans and their ability to travel. The results of the survey revealed an inclination to fly more frequently than they did pre-pandemic with over half of the survey respondents indicating that they now have…

Thank you, Barry, and good afternoon, everyone. Our third quarter revenue performance was once again exceptional, rising 35% over the same quarter in 2019. This is the third consecutive quarter we posted double-digit revenue growth over the respective 2019 quarters and it's a testament to the strong travel recovery that we believe is sustainable as Barry covered earlier. Our third quarter capacity was up over 8% over the 2019 quarter, while RASM increased 26% over the same period, from $0.896 to $0.1127, despite a high concentration of capacity deployed during off-peak periods in September. Revenue per passenger increased 24% to $135, with ancillary revenue computing $78 of that amount. Both RASM and revenue per passenger set an all-time third quarter record and ancillary revenue per passenger eclipsed the previous record. Ancillary performance continues to benefit from recent product expansion and enhancement, strong attachment rates and increased revenue integrity. As the third quarter progressed, utilization increased to over 11 hours per day. Our schedule for the fourth quarter sees a further improvement to over 11.5 hours per day as we continue normalizing stage length. We continue to grow our international footprint. Beginning next February, we will launch service from Denver, Chicago Midway and St. Louis to Montego Bay. We also will begin five new Caribbean routes from Atlanta next week. With the opening of our new crew base in Phoenix next month, we announced 12 routes from the city to destinations across the country. With these new routes, we will offer a total of '23 destinations from Phoenix, a rapidly growing market which has been underserved by ULCCs. That concludes my prepared remarks and so I'll now hand it over to Jimmy.

Thank you, Daniel, and welcome everyone. We generated a pretax margin of 6.4% on a GAAP basis and 5.2% on an adjusted basis during the third quarter above the top end of our guidance range. Adjusted pretax margin primarily includes $12 million of net transaction and merger related credits associated with the company's terminated combination with Spirit Airlines and reflects a nearly 250 basis point improvement over the prior quarter. The margin improvement is driven by the record ancillary revenue for passenger performance that drove a 35% increase in total operating revenue and a 26% increase in RASM versus 2019, coupled with an 8% reduction in our adjusted CASM plus net interest over the second quarter. Unit cost improvement is related to both a 13% reduction in the average fuel cost per gallon to $3.85 per gallon as well as a 5% reduction in our adjusted CASM ex-fuels to $0.609, due to improving utilization and cost management efforts across the business. We expect the fourth quarter to deliver further improvement in our unit cost, driven by improvements in utilization and continued cost management efforts. Our cost strategy is focused on expanding the cost advantage we have over the industry. The pillars of this strategy are: One, growing our industry-leading field efficiency; Two, having the lowest debt service cost; and three, achieving the lowest CASM ex-fuel capable in our business with a 2023 CASM ex-fuel target of below $0.06. We intend to maintain the lowest unit costs in the industry, including fuel, non-fuel costs and interest. As Barry mentioned, during the first six months of 2022, Frontier operated with the lowest adjusted CASM plus net interest of all U.S.-based carriers, with the improvement in our unit costs during the third quarter and the execution of our cost strategy, we expect our…

Thanks, Jimmy. Demand for affordable travel is greater than ever with a customer base that has more flexibility and plans to travel more often than they did pre-pandemic. We are better positioned than anyone to exploit this opportunity as our ultra-low cost fares are the most attractive for leisure customers. As a result to demonstrate our focus is to build shareholder value through our Low Fares Done Right business model, we look forward to expanding on our results and commentary for the quarter, and other elements of our business at the upcoming investor Day, November 15. We hope to see you there. We'll now move to Q&A.

[Operator Instructions] Our first question comes from Stephen Trent with Citi.

I'm just going to start off with one for now. I was wondering if you have any high level thoughts about the ultra-low cost business model in the event that we get downturn. So if you look back at the credit crunch, any sort of high level view of the extent to which carriers like Frontier thrived, because you had consumers maybe leaving the legacies and looking for cheaper fares while oil rolled off. I would just love to get your high level thoughts on that.

So Steve, we, I think everyone knows if you look at history, the lowest cost model going back to the 80s is generally the winter. In any recessionary environment, we've seen that with Southwest back in the 80s and 90s. We saw it with Ryanair, we saw it was Spirit back in there in the Great Recession. So typically, you would find an ultra-low cost carrier, especially ourselves, which is the lowest cost to fair most likely the best in a recessionary environment. And part of that is just simply because we'll have the lowest cost. So it's easier to cover our costs. There is generally trade down that you see in those type of recessions. But we also have higher ancillary, we see a lot more stickiness in that versus the fair revenue and it doesn't seem to fluctuate as much. So I think we're probably better positioned than most. I do think, though, that from what we know today, and depends upon how deep a recession could be. But if you look at the increase in propensity to travel and the fact that people are traveling more times per year on at least in their -- in what they've been doing right now and what they plan to do, I think a recessionary impact could only maybe just bring that back to what you had kind of pre-pandemic. So I think you couple that with the constrained industry capacity, and I'm not going to say there won't be any turbulence in our space, but I think we can see a very mild recession, if anything impacts us at all.

Our next question comes from Jamie Baker with JPMorgan.

So like other airlines, you're citing consumer -- shifting consumer travel patterns, is it driving any changes in how you schedule and fly the airline? Or is it just as simple as kind of sitting back and letting the revenue roll in?

Hey, Jamie, it's Daniel Shurz. So look, as we see demand -- as we see demand spread out a little bit across the weekend, we move away from the very peak -- the very peak to Friday, Sunday pattern. What is -- what’s it already starting to allow us to do is increase utilization on the shoulder days of the week and even just on the some -- now on the optic days of week because we've seen demand flattened this past week. It's actually benefit -- it's actually beneficial to the business, because we've got -- we're getting better demand across the week. And we're also expecting and we're seeing some evidence that it's starting to deseasonalize the business to some extent. I'm not going to say that our peak periods are suddenly going to become peaks, that's not it. But we're not -- we're seeing a little bit less, we're seeing a little bit less than oil seasonality as well. So I think it's it'll lead us to pushing utilization up a little bit, because we've got more ability to generate cash, we've got more ability to have cash positive fly on periods, what compares one when previously, we might have left a few airplanes sitting on the ground.

Does it disrupt maintenance schedules in any sort of measurable way?

No, in many ways actually flattening things out and making things more consistent across the week actually tends to help operationally in all sorts of ways, it helps. It helps, because you've got consistent access patterns for maintenance, it helps with your consistent patterns at the airport for staffing purposes, it helps because you get more efficiency from crews when you have consistency across the week. So it actually helps a little bit and potentially has a little bit of a benefit from a cost perspective as well.

Interesting. Second question, in the release you you've said that aircraft leases are expiring between what, this year and 2034? Is that front end loaded, back end loaded, fairly consistent? I'm just trying to think through, how the reality of rising interest rates and rising lease rates are going to flow through the P&L going forward?

Yeah, Jamie, yeah, our redelivery program is pretty consistent from about 24 through into the next decade, given that we typically do either 8 or 12 year leases on delivery of the aircraft. So kind of lags the delivery in the first place 8 to 12 years. So pretty consistent. From a current market perspective, we're in a really good position in terms of financing the airline. We have next 12 months COVID In terms of our aircraft deliveries, in fact, we have 35 of the next 37 aircraft deliveries financed. We've done it in a way that has kept the interest rate exposure on a lot of these leases. So in the recent run up that you've seen in interest rates, certainly for next 12 months, we're in really good shape to manage that. And then we have obviously aircraft deliveries beyond that. But that puts us in a very strong position from a financing perspective for the next year.

Thank you. One moment for questions. Our next question comes from Duane Pfennigwerth with Evercore. You may proceed.

Hey, thanks. Very, very pleasant questions so far, unlike publicly questioning your business model on other conference calls. But anyway, on fleet, how would you rate your confidence in ending 2023 with the 36 A321s? And are we right that, did some aircraft actually shift out of this year that you expected?

Yes. We have had a couple of aircraft shift from the end of this year into next year. I mean, they were due to deliver right at the end of the year, so it doesn't really have a meaningful impact on ASM production this year. We have visibility on our aircraft deliveries, probably largely into the middle of next year, and you have certainly seen some delays in aircraft deliveries. But it's nothing like you are seeing with Boeing. We are lucky that, we are delivering aircraft through Airbus, who have some supply chain issues, but not to the extent that you are seeing in other manufacturers. And so any delivery delays are generally modest of the two months to three month varieties. So the aircraft are coming, it's just whether they come in October, November, December next year.

Okay.

Look, there may be a case where a couple of aircraft like this year, rolled from the end of next year into 2024. But we will deal with that if that happens.

Can you walk us through the building blocks of capacity next year? It just feels like gauge is going to be up quite meaningfully. Can you -- how big a contributor would that be to the 30% you are targeting?

Well, like about half the capacity that we are bringing next year is already delivered to the aircraft or to the airline. We have been under utilizing the asset all across this year. I mean we moved to just over 11.5 hours in utilization in the fourth quarter, of this year. But if you look at the previous three quarters, you have been at 11 or below 11 hours in utilization. So some of that growth comes through using the assets that are in place today, and the rest of it comes with 321 Neo, that we took the first delivery of a month ago. And that move to delivering aircraft at 240 seats, it changes the ASM production in the airline quite materially for the block hours that are required to produce that production. And so, if we are growing the business towards 30% in ASM production, our block hour needs are in the low 20s. And so you are getting a significant efficiency gain in the business. And so your requirement for pilots or flight attendants mechanics to support the fleet is not as fast as 30%, if we push ASMs towards 30% mark.

Okay. That's helpful. Go ahead. Sorry.

So I was going to ask Daniel to answer the question on how it builds throughout the year.

So if you look at the year-on-year -- if you look at the shape of our current plans for next year, we are sitting with some similar growth in Q1 next year to Q4 this year. And then it picks up to above 30%, not much above 30%, but above 30% for the rest of the year. That's driven by the fact that we return to peak utilization or traditional pre-pandemic utilization late in the first quarter, and then we retain that utilization expectation for the rest of the year. So as Jimmy said, that's roughly half of the growth next year -- half of the growth is how much the utilization grows and delivery pace continues to pick up during the year in terms of number of aircraft.

Our next question comes from Michael Linenberg with Deutsche Bank.

Just a couple here. I want to go back just on utilization. I know, Daniel, you had mentioned, I think you're roughly 111, you're going to 115 in the fourth quarter. Next year, , where can we get on utilization? And I'm talking about hours per day, is that -- what's the aspirational number and how should we think about how that helps on CASM? If we go from, say, 11 hours to 12 hours, is that like half a cent of CASM unit cost improvement? Jimmy, how should we think about that?

So I'll answer the first part. Yes, we're looking to get utilization next year to over 12. We're looking to get slightly above 12 on the fleet is the plan for the full year. As per the CASM impact I’ll let Jimmy.

I mean, you can see this in your model, like an hour on utilization is probably about 0.2 to 0.3 in CASM ex-fuel. The fixed overhead that's recurring just drives that number.

And then just second question, and this is probably to Daniel, you guys have pretty meaningful overlap with Florida and even the Caribbean now and yet, you didn't call out in your release any sort of impact from Ian for Fiona, the two hurricanes, either last quarter or this quarter? Anything on -- impact on revenue or costs that we should be aware of?

So look, do we have an impact, yes. We estimate about a 0.1 margin impact in the third quarter. We're looking at -- looking at the fourth quarter and some of the demand impacts, we're guessing probably about a one point impact in the fourth quarter. I will say and we could see it, post hurricane we were able to we were able to recover our operation more quickly than some of the other airlines who have significant operations in Florida. So we did -- we again, some of the benefits, we've talked about the modular network and the modular way we design the operation. Well, once again, visible recovering operations post hurricane. But look, yes, the one airline that has really called it out. Our presence in Florida is almost exactly the same as theirs.

Our next question comes from Brandon Oglenski with Barclays.

Barry, can you talk to the sustainability of your ability to grow in the market? I know you guys didn't necessarily have a pilot availability issue this summer, but it was compounding factors external to your company. I think that made you pull back your schedule a little bit. So do you think you now have the pieces in place and the externalities solved that you can sustain that growth outlook in the 2023?

Look, we had the challenges that a lot of airlines faced. It was probably back to the overlap in Florida. I think those that with high concentrations in Florida were more impacted than others. And we were in that category and Jacksonville center was the big culprit that hit us back in March and April. I know that the -- they're working on their staffing issues, what we did as a knee jerk reaction is we cut a lot of flying into Florida and across the Jacksonville center. And that hurt our utilization that summer. We have rejiggered the schedule now. And so we're in a situation where we are more -- even more -- extreme modularity as Daniel described, so that we don't get impacted. We've also looked at the pairings, we talked about this before where we don't have three or four times that a crew crosses Jacksonville center, a maximum two per duty period. So we've lessened our risk now. And so look, we'll see what happens. I mean, we're eager to watch the holiday periods with air traffic control, and what happens during the spring break period. But what we've done is we've lessened our risk there. And so we think our ability to grow is cleared for takeoff.

And Barry if you have the available pipeline of pilot hiring and training as well, no bottlenecks there?

Yeah, so we have surplus as a result of pulling back to summer, we're slowly feathering them back in, we hope to have them fully utilized by the end of the quarter and then growing in. But as I said in my opening remarks, our cadet program has been wildly popular, we've had over 1300 applications so far, roughly half of those that have gone through financing with ATP have already gotten financed. So that's great to see. We announced our rotary transition program last week. There's a lot of pilots to come from there. And we've had our university program, which we haven't talked about a lot, but we've had it in place for several years. And that's really starting to just finally come to fruition producing pilots. So between those three programs, we expect within one year, the majority of our pilots will come from that. And we continue to see good, good numbers. So we feel pretty good about our, our pilot hiring at this point.

Right. Thank you. And lesson for me, Jimmy, do you think it's still right to be targeting a sub 6X ASM? I mean, there's been a lot of inflation across the board. You still think that's an attainable number though?

Yeah, look at there's been inflation and Frontier has experienced some inflation across its business, particularly around the airport world. What we've been doing in the last six months or so is really focusing on the elements of the cost base that we can control. And we've started to look at changing the way we do business, which is driving real cost savings into the business. If you look at our unit costs in Q3, and our unit costs going into Q4, we're seeing real step changes in our path towards success. Obviously, the 321neo gives you a significant boost in terms of seat density on the aircraft and average seats for departure, which really helps bring efficiency into the airline. But in the context of changing the way we do business, we really don't want to disclose a huge amount right now on that. We have our investor Day on November 15th. And our entire management team will be there where we will actually give you some insight into the things that we've been doing to change the way we look at our business from a frontier perspective and that is driving real savings. Part of the improvement in unit costs in the last quarter over Q2 and what we're seeing going into Q4 is on top of improving utilization and lengthening the stage really in the airline, is this project that we've been embarking on, which is showing real promise and real savings. So more to come in November.

Thank you. One moment for questions. Our next question comes from Ravi Shanker with Morgan Stanley. You may proceed.

Great. Thanks. So not to steal any magic away from the Analyst Day, but I think there is been a lot of potentially structural change in consumer behavior kind coming out of this pandemic so just wanted to ask on ancillary. Do you feel like there is any kind of real structural change in the way consumers are shopping for add-on stuff in addition to the base ticket? And also kind of what do you think some of these new proposed regulations on price transparency does to that?

Thanks, Ravi. It's Daniel. I'll talk about the two issues separately. Look, we are finding with our ongoing work on optimization, we are obviously driving better and better non-ticket revenue. You've seen that you saw a new record in the third quarter, and that's driven by -- we offer the lowest fare and the better we can drive our ancillary, the more we can drive the lowest fare in the market. And we give customer the choice of lots of different options and the more products we add, the more potential items customers can buy and customers find options, they find appealing and I think this has been proven. Are we seeing a huge structural shift in what people are buying? No, we're not. We're seeing better performance brought across the board on all of our ancillary products. The proposed DOT regulations, I'll just say this for right now, Airlines already display transparently all the products we sell and the pricing for all those products. No one buys the Frontier ticket on our website without knowing the price for any of the ancillary products they might want to buy. They are all extremely visible in the purchase process for those who have purchased them. Anything you might buy later is extremely clear and extremely obvious. We don't have a problem with price transparency. Our consumers don't get any gotchas in the process. They get to see everything that they need, and we will make that point clearly when we respond to we respond to timely proposals.

Thank you. One moment for questions. Our next question comes from Savi Syth with Raymond James. You may proceed.

Hey, good afternoon. If I may ask, Barry, it feels like you talked about pilot hiring and that's been a big kind of topic lately. It seems like there is a shift here. As you point out versus relying on regional airlines for hiring, you are going directly in hiring pilots and not relying on others. It seems like that's a shift and maybe might strengthen your kind of pilot offering. Does it lower cost in the long-term? Does it -- how does it change your positioning in the industry? Or is it just net neutral because you have just shifted you are getting your pilot?

Well, look, first and foremost, we are a safety-oriented business. And so I think with what we are doing right now, it's actually pretty exciting from a training perspective. I think we could end up with a more uniform training program that delivers much safer pilots. But the big component here is the fact that, we are controlling our destiny and we will control the sourcing of our pilots. And so, we just kind of put to bed this continuous drumbeat of the sky is falling. And so, we are just taking control of it. We don't know what's going to happen with regionals and everyone else, but we're just putting in programs that ensure that we have a solid supply for years to come.

And then in my follow-up on the kind of the CASM kind of commentary on sub six. To me, is that given the timing of the capacity and the kind of utilization rates? Is that like something you'd be able to reach by the second quarter of next year? Is that a realistic expectation?

I mean, Savi, we're not guiding quarters next year at this stage. But look, we will progress through Q1 is always a quarter that's slightly higher cost than the rest of the year, and so your trajectory towards $0.06 for the year, you should see it in Q1 but it'll obviously show up more closer to the second half of the year as you drive utilization and the assets come into the business. Like part of getting to sub six is delivering on the 321neos that come into the fleet during next year. I mean, it's not the sole component, but it's a significant portion of the improvement from where you expect to be in the fourth quarter for example, and then rolling through next year.

Our next question comes from Connor Cunningham with Melius Research.

Just on the RASM or all the implied RASM. I'm pretty surprised at the lack of decline, given you up higher capacity. There's a ton of noise just in holiday timing is. Can you just talk to the -- where you're seeing the strength in your markets relative to some of the others? Like, a lot of the guidance that you're hearing out of other carriers has some sort of deceleration implied in it. And then you really aren't seeing that right now, imagine some of its ancillary, but if there's any other color that you could provide on that, that would be helpful.

You've got them. The biggest point, we're seeing continued progress, and we expect to see continued progress in the fourth quarter on non-ticket as we work our way towards the goal of $85 by the end of 2023. So that provide some of it. We've also – looked, we've also -- as part of our work on November schedule where we've worked on a stream modularity and on thecost change, we've also looked to performance of the network, we've also made changes there that are going to help, drive volume in the business because we're focusing on whether or not things are doing well. And look, our brand is the most positive one in the ultra-low cost space and I think we're getting -- consumers are recognizing that and they're seeing the value we offer them. That's the thing. You can look the numbers up in the industry, including today on how really we've got the best value proposition out there and customers understand that.

And then Barry, I think you made some comments about potential Transatlantic and Deep South America, flying with the XLR. And like when I understand why that may be appealing, but it's 3X years stage length and all that stuff. So I'm just trying to trying -- I mean, there's been some struggles with ultra-low cost, long haul model over the years. So I'm just curious on why that may be appealing to you now and just any thoughts? That would be great.

Well, look, we have options on 18 XLRs that could come as early as 2026. And to be clear what I said -- what I was describing is what the aircraft can do. They are asking where could it fly? And obviously yes, it could go to South America, it could go to Hawaii, Europe. And so there's a lot of places that the airplane can fly. It obviously gives you the ability to fly several times our -- yes, maybe several times our average stage, that's if you use it to its full potential. But the reality is it enables us to fly longer sectors, and we've got a lot of options with the U.S. license to do that. And with 18 aircraft, by the time that comes in, this will be a small percentage of the fleet. But I think it'll enable us to fly some exciting destinations that will make our Frequent Flyer program and our Discount Den and all of our substitute subscription products just that much more powerful from a brand perspective. So will it materially change the economics and the financial of the company's? No. But indirectly, it will, because it will help propel the brand further.

Our next question comes from Andrew Didora with Bank of America.

I had a bunch of questions on utilization, but you've addressed all those by now. But I’ll ask Barry, strategically, when you you spoke in your prepared remarks about kind of the structural changes that you're seeing in travel, does that change the way you think about your network construction over the next few years as you grow? How do you think about the -- do you think there's more room for growth within a new markets or as a lot of this is just adding depth and breadth to the current network? Just curious on kind of how that -- how does these structural changes -- how you view these structural changes in terms of network construction? Thanks.

I can start and Daniel can add to it. I think one thing it helps is it actually really helps a carrier like us that often flies less than daily, because if they've got more flexibility, they can move to different days a lot easier. But I think what it's going to kind of cause us to do is just make sure that we have more and more of the right portfolio of places that they want to go and a lot more options. Because the truth is, if you if you look at the data, they're telling you they're going to travel more often. And so that means they're going to they're going to explore and experiment with more destinations. So having a really good footprint and breadth of service I think it's going to become more and more important. I don't know, Daniel, if you want to --

I think Barry is right. I think it definitely encourages frequency. We're already seeing -- we're already seeing that we -- we have a very large airport footprint. And so already our growth going forward is going to it's going to be more of a mix of frequency and them surely than as heavily new market focused as it was in the past. Look, we will also watch and I think that this bit is to -- we’re seeing this broadly. And we're seeing this flexibility and these trends towards flattening of demand patterns broadly. So -- because it happens broadly across the network, it doesn't inherently drive -- doesn't inherently drive one particular type of network growth. And look as we continue to add bases, Phoenix was a great example. We're having those problems in Phoenix. There also exists in cities in the front end network. As we as we continue to grow as we continue to add crew bases, we will find a lot more opportunity to have markets that connect the dots within the existing network.

Thank you. One moment for questions. Our next question comes from Thomas Fitzgerald with Cowen.

Thanks so much for the time. A lot of mine have already been answered, but I guess just quickly if you could provide maybe a little more color on the opportunity in the Phoenix market that you see and what -- [Technical Difficulty] you are excited about there?

Well, look, it's reasonably simple. Phoenix is a top ten metro area, relatively fast growing market. One of the top three or four fastest growing metro areas in the country, and it's a great mix of a good destination market, a good inbound tourist market and a strong outbound market, some of the best markets in the country from a ULCC perspective to have those characteristics. And Phoenix Sky Harbor Airport is incredibly well located for the metro area, and it's underserved by ULCC capacity today. And so, we are excited there. And look, we are a western brand. But we are a national brand, but we have a brand that is -- we have a brand that's rooted in the west, rooted in here in our hometown, obviously, of Denver, but that plays well across the Western United States. I think you look at the city of that scale, you looked at the metro area well over 4.5 million now and you look at how could you ULCC departures there out from the airport, tt's a natural opportunity. So much leisure demand.

Thank you. [Operator Instructions]. Our next question comes from Duane Pfennigwerth with Evercore. You may proceed.

Thanks for taking the follow-up and maybe you answered it with Phoenix. But Barry and Daniel, as you observe the domestic industry rebuild with regional carrier constraints and general pilot constraints and every carrier having a focus on scheduling that supports reliability, are there any new surprises or new thinking regarding the types of markets you want to target? We got to think there is more white space in midsize markets, given the industry's constraints but maybe there isn't a good way to target those with less than daily service and focus on reliability at the same time. So would love some thoughts on that topic and then have one more for you.

I'll start and I'll let Barry add. So when we look at capacity build back and I would say, to your point, actually is lack of capacity build back would be a better way to describe it in some cases, right? Lower regional capacity has an advantage. Maybe not always directly for us in the markets where there isn't a capacity, some of those regional markets are obviously quite small. But we look at examples of some of the longer haul markets we recently added from Las Vegas and what's notable with the lack of regional capacity is how many fewer connect options exist, for example and how often that creates marked options because there is simply fewer options options for customers even in some relatively bigger market. And I think, look, our expectation is there will be some changes in the way the network careers build their network. They have less regional capacity today. It's going to create opportunity for us. We have got the lowest total cost. We are focused on maintaining those lowest total cost, increasing our cost advantage. And as we do that we will find -- we will continue to find more markets, we can talk about them. But Barry, there's more you want to --

Look, I think you're right. I mean, it's just math. And it's economics, right? As you shrink the regional footprints and what's left is increasing its cost dramatically, they're starting to knock on pilot rates of our size, of our levels with a third of the seats. So when you start thinking about the economics of these flights, the costs are going up. So there's going to be fewer seats and much more expensive in small to midsize markets, which is going to create an opportunity for career like us. So I mean, it's just Economics 101.

No, I'll add one more thing. As we add more -- as we continue to have more pilot bases, there's more and more opportunity to the type of modular operations, there's more markets we can find ways to enter that we can operate reliably and that's going to be a growing opportunity over the years to come. With this growth there's more bases to come.

And then just real quick, I can't see it in your results and maybe you said it, but just given the overlaps on some of those Florida markets. How much did hurricane Ian impact you in 3Q and 4Q here?

I was asked earlier with -- the answer, I'll give it again. We think about a one point impact on our margin in Q3 and we think from the advanced -- the demand destruction affecting in Q4, probably about a one point impact in Q4.

Our next question comes from Anthony Berni with Susquehanna.

Just quick question on next year's CapEx. I'm assuming with all these deliveries CapEx will probably step up, but if you could just give us any sort of rough ballpark of that? That would be helpful.

We’ve financed the vast majority of the fleet that delivers next year and they're through operating leases. So obviously we're delivering a significant portion of aircraft, over 30 aircraft next year. And so that will be reflected in the CapEx number. However, because we finance on operating leases, they will not be coming out of the books as a typical asset like other airlines where they finance their aircraft on balance sheet through some sort of debt structure.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Barry Biffle for any further remarks.

Well, thank everybody for joining us, and we look forward to seeing you on November 15 at the NASDAQ in New York at our Investor Day. Thank you.

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