Southwest Details Its Frontier Bid and I Like It

Yesterday, Southwest submitted its complete bid to buy Frontier and I have to say that I like what I’m seeing here. There is a lot going on in this bid, and if they win, it will have a huge impact on customers. We could be looking at the possibility of Southwest coming to a slew of new, smaller markets on top of other big domestic and near-international ones. That doesn’t mean this would be an easy merger (they never are), but for the price, the benefits could be huge.

Southwest Southwest Tries to Eat Frontierended up putting its bid in at $170 million for Frontier and its Lynx subsidiary (more on that in a minute). Republic has also, as we know, submitted its bid. So, the two will bring their proposals on Wednesday and the auction should take place on Thursday. That’s when we’ll know who wins. At first look, the Southwest bid is better for creditors, but that’s the stuff I write about on BNET. Here, I want to talk about what will happen for the customer.

First, Southwest says that if it wins, it only wants to take 40 out of the 51 airplanes in the Frontier Airbus fleet. So my guess is that almost immediately you’ll see a cut in frequency on overlapping routes. Look at Denver to Vegas, for example, Combined they have 15 flights a day. They don’t need that, and it’s a similar situation on other overlapping routes as well. So then where will the 40 remaining planes go?

They’ve said that it will take 24 months for a full transition from Frontier to Southwest. So at the end of those 24 months, the Airbuses will be gone and they’ll have been replaced with 737s. Until then, they won’t be dropping any cities. (They will, however, be dropping Dallas/Ft Worth in favor of Southwest’s existing Love Field service.)

On a media call today, someone from Atlanta asked about their Atlanta plans. Southwest execs said that they do intend to keep flying to Atlanta initially under the Frontier name and eventually as Southwest. I asked them about Washington/National and whether they would be able to keep the beyond-perimeter slots that Frontier owns. They said that they think they’ll be able to, but they’re still studying it. So they want them for sure.

They will also be keeping Anchorage and Mexico flying. Of course, this could all change once the transition is done in 24 months, but for now it makes sense to try them out and see how they work. If they’re happy with the results, then they’ll keep them. If not, well, they won’t. It’s a great test bed for future opportunities. Oh, and Frontier is profitable right now so it’s a pretty nice testbed to have.

But the most interesting thing to me is the fact that they have decided to include Lynx in their bid. Originally, they weren’t sure about that, but they’ve decided to keep it. That means that they want those Q400s and they want to start offering service to smaller cities. It was more than a year and a half ago that I wrote this:

That’s why I think that ExpressJet could do very well if only they were Southwest Express. The connection to a large airline’s frequent flier program and access to passenger feed from a broader route network would be exactly what they’d need. Just look at the routes that are working here and you can see them fitting into the Southwest network quite nicely.

Now I have high hopes that this is what will happen. Though instead of the high cost Embraer regional jet, they will use the very cost efficient Q400 turboprop. This could be big if it works.

On the call, Southwest made it clear that it didn’t really know how this would play out. There was even discussion about having someone else possibly operate Lynx for Southwest, but none of that has been decided. I imagine that labor will dictate what happens there. If they can get reasonable rates from the flight crews, then they might try to keep it in house. I hope that’s what happens because an outsourced operation could be very problematic for Southwest.

All I know for now is that this acquisition could open up an incredibly large range of opportunity for Southwest. It gets them into Atlanta and probably Washington/National. It puts them in Mexico. And it gives them a second fleet type (Q400s) that can serve a ton of routes that aren’t currently on their map today.

Oh yeah, and they eliminate a competitor in Denver and make the place profitable. That alone makes Frontier worth buying for $170 million or more, but there is much more that’s possible. While the basic purchase of Frontier isn’t a bold move, what they might end up doing with it certainly is.

They just need to make sure that they keep the Southwest culture intact. The people piece is the most difficult and most important by far.

30 Responses to Southwest Details Its Frontier Bid and I Like It

  1. David SFeastbay says:

    Mexico would be interesting to see how it plays out being it would be an international market which they have never dealt with before. It would be very big for them since they are a big player in the southwest which does a lot of vaction travel to Mexico and has a very large Mexican population who would travel home to visit family.

    Anchorage doesn’t seem to fit for them unless they want to try invading the state and push Alaska Airlines out.

    A commuter carrier and international market, two things Southwest has no experience in. It will be an interesting ride for them.

  2. A says:

    Keeping those Q400’s is interesting and to a lesser extent the Mexico destinations. Perhaps Southwest is seeing that they have to branch out more to add growth opportunities. Is WN begining to hit the wall in terms of their 30+ year growth strategy?

  3. John E says:

    Doesnt Frontier have Live TV? Cranky, do you think WN will do some test marketing of that feature elsewhere in their routes?

  4. Dan says:

    Crank,

    Will WN have to keep the Frontier operating certificate around to operate in Mexico and also to keep the DCA slots? Or is the idea to test it while the certificate is still around, and if it’s profitable, then transition all of that to the WN certificate?

    As an aside, do you know what benefit the airline has in merging operating certificates?

  5. Oliver says:

    It was great news to hear a few more details on the bid. I too was happy to hear that the Q400 Lynx operation is part of this bid. Many smaller markets can be served with the Q400…
    I think there’s a lot of possibilities with this acquisition that Southwest is jumping on. Perhaps they could get into Hawaii again and go to other Latin American or Caribbean destinations also.

  6. Karl says:

    Cranks,

    Check out this group on LinkedIn http://www.linkedin.com/groups?about=&gid=2072193&trk=anet_ug_grppro

    My entire firm seems to have adopted it daily, worth a look I think.

  7. Kim says:

    It would be awesome if Southwest continued the Anchorage routes and gave Alaska Air a run for their money. Alaska pretty much has a monopoly here (especially out of Fairbanks) and charges insane amounts because we basically have no other choice in the winter months. I would love to be able to fly out of here for less than $800.

  8. Steven says:

    Southwest prides themselves on low fairs, if they win the bid what are the odds that they will charge those famous low fares on a route like Denver-Aspen? I would be so happy to be able to pay $150-300 for a fort lauderdale-aspen via Denver versus the usual $400-500 for frontier Or delta

  9. CF says:

    A wrote:

    Is WN begining to hit the wall in terms of their 30+ year growth strategy?

    I think there’s no question about that. They’ve really started to move into non-traditional markets with Philly, Denver and now the extremes of LaGuardia and Boston. They are definitely looking for future growth opportunity, though I still think this is primarily about clearing out a competitor in Denver.

    John E wrote:

    Doesnt Frontier have Live TV? Cranky, do you think WN will do some test marketing of that feature elsewhere in their routes?

    Yes, Frontier has LiveTV and I don’t think you’ll see it on a single Southwest airplane. I imagine they’ll keep it operating on Frontier, and if they like what they’re seeing, then maybe they’d consider it. But I would be very surprised.

    Dan wrote:

    Crank,
    Will WN have to keep the Frontier operating certificate around to operate in Mexico and also to keep the DCA slots? Or is the idea to test it while the certificate is still around, and if it’s profitable, then transition all of that to the WN certificate?
    As an aside, do you know what benefit the airline has in merging operating certificates?

    They will only keep the operating certificate for the 24 month transition period. Once the Airbuses are out of the fleet, that will go away as well. There are costs to maintaining two certificates so the duplicate costs go away with a single certificate.

    Steven wrote:

    Southwest prides themselves on low fairs, if they win the bid what are the odds that they will charge those famous low fares on a route like Denver-Aspen?

    It remains to be seen if they’d even bother to keep Aspen. I think that the Q400s could be better to use in other places with better results, but I can’t imagine they would stray from their traditional low, reasonable fare strategy.

  10. JJG says:

    Talk about those Q400s CF. Might those aircraft form the backbone of an “overlay” network 5 years down the road? Q400s serving smaller but profitable markets linking in to DEN, MDW, and maybe others? They simply can’t go to Fargo or Green Bay as currently configured and probably struggle with existing smaller airports like Boise with the current 737-only fleet. Can they fly Q400s cheap enough to open a whole new universe?

  11. RobG7aChattTN says:

    I think Southwest has toyed with the idea of a second smaller aircraft to use as feeders for their larger cities. Also, near-international has been in the plans for quite some time. The code-share with Volaris is unpopular with SWAPA, the Southwest Arilines Pilot’s union…they want to fly the routs themselves and their contract hasn’t been signed yet. I was hoping that they would keep the ATL gates. It will be interesting how Air Tran takes to this. Southwest and Air Tran have been butting heads lately and this just adds to that. I think Anchorage is a good idea to keep. All summer long there are tourists going up there and all winter long Alaskans take their pipeline money and get out of there for a little sun. Alaska Airlines has quite a strangle hold on the route. The downside is that the obvious city to connect is SEA and landing fees are so high there. Maybe they will overfly to OAK.

  12. Shane says:

    How much do the Q400’s cost? I could imagine that these would not just be used for bringing in smaller markets, but also for connecting the dots between their existing smaller markets in a point-to-point configuration where 737’s wouldn’t work.

    The international aspect is brilliant. They can use Frontier’s infrastructure and gate leases to connect in some of Southwest’s larger focus cities. Plus Southwest already has a lot of service to Frontier’s other international cities: SLC & MCI.

    DCA: do you think they wish now they had kept the 4 ATA slots? That would give them 7 slots which would begin to give them some operational efficiencies.

  13. SAN Greg says:

    Spoken like a true disciple of Southwest.

  14. CF says:

    JJG wrote:

    Can they fly Q400s cheap enough to open a whole new universe?

    That’s certainly the million dollar question. I think they’re hoping the answer is yes (and I would tend to agree that there’s a market for them). Of course, labor costs will be a big part of that. There are half the number of seats on a Q400 as on a 737, so higher labor costs are more pronounced on a per passenger basis. Will they be able to come to terms with their pilots and flight attendants to operate the planes? (I hope so.) If not, would they consider outsourcing the Q400 operation (I think that would be a mistake.) But my guess is that the bet here is that they can make this into a growth opportunity.

    Shane wrote:

    How much do the Q400’s cost? I could imagine that these would not just be used for bringing in smaller markets, but also for connecting the dots between their existing smaller markets in a point-to-point configuration where 737’s wouldn’t work. . . DCA: do you think they wish now they had kept the 4 ATA slots?

    A Q400 lists for about $25 million, but you can bet they could get some for cheaper than that. If not from Bombardier, SAS probably has some lying around . . .

    I think you’re right about connecting the dots between existing cities. Look at what ExpressJet tried to do. A market like Ontario to Tucson could work on a Q400 but not a 737.

    They probably do wish they had those DCA slots, but I thought those weren’t theirs to give up. Didn’t those just go back into the pool?

  15. NM says:

    Great to hear that Southwest will eventually fly to/from ATL.

  16. Oliver says:

    It would be interesting to see how Southwest would deploy the Q400s.
    I could see a Q400 being useful for some midday or late night flights.

    Point-to-point routes make sense to connect the dots of the smaller markets. But wouldn’t SWA need MORE Q400s to expand this way?

    Is Lynx (and therefore SWA if they win the bid) going to acquire more Q400s other than the current 11 in the fleet? 11 planes isn’t that many to spread around the whole SWA network…

  17. Stephen says:

    I think that the Q400’s could actually work in the WN fleet if they were to do it as a WN express. It would give WN a whole new market for them and I believe they could make it profitable for the long haul.

  18. Shane says:

    @ CF:
    I was kind-of accurate, ATA had 2 slots that Southwest turned down when they purchased the LGA slots:
    http://tinyurl.com/nw9neo

    AirTran ended up purchasing those and I guess the other 2 ATA slots at DCA were forfeited.

  19. CF says:

    Oliver wrote:

    But wouldn’t SWA need MORE Q400s to expand this way?

    I would think that there’s opportunity for them to expand to more than a small fleet of 11 airplane but they certainly don’t need more than 11 to see how it will work out. If it’s good, well, then they’ll grow it.

    @ Shane:
    Thanks for checking that out. They probably do wish they had those.

  20. ATLguy says:

    Cranky and other commenters:
    I have been laughing everytime people state in blog posts or news articles about how this will “get Southwest into Atlanta.”

    Two questions:
    1.) What kept Southwest out of Atlanta before?

    Especially if your answer is “gates” then please answer the following:
    2.) Do you realize Frontier has zero gates in Atlanta presently?

    Frontier uses the Midwest Airlines gate (owned by Midwest) and subleases half of Midwest’s ticket counter, and Midwest’s office space. Additionally, Frontier only has employees above the wing (customer service). Ramp handling is done by…. Midwest Airlines.

    I just see all over the place that the ATL aspect is hyped up…. but I see coming to ATL as the same problem as before: Frontier has no assets here. Still have to share a gate with someone else (and work around Midwest’s three daily flights) or use the common use gates like Spirit, Air Canada, etc.

  21. CF says:

    ATLguy wrote:

    Cranky and other commenters:
    I have been laughing everytime people state in blog posts or news articles about how this will “get Southwest into Atlanta.”

    I’m not sure if you’re suggesting that I said that or not, but I certainly did not. It is true that this will “get Southwest into Atlanta” in the sense that they aren’t there now. But have they been barred from flying to Atlanta before? No. They could get in there if they wanted, but they’ve chosen not to. So I think the only thing that had been keeping them out is time. They’ve opened four cities that they felt were more important this year, and Atlanta had to be sitting there on a short list.

    I think that Atlanta may look a lot like LaGuardia. It’s a spoke in the system that exists so that Southwest customers around the country can get to all major cities. Atlanta is one of those, and they should fly there.

  22. oldiesfan6479 says:

    CF wrote:A Q400 lists for about $25 million, but you can bet they could get some for cheaper than that. If not from Bombardier, SAS probably has some lying around . . .

    Lying around–was that “pun intended”? As in…gear collapsed?

  23. CF says:

    @ oldiesfan6479:
    It actually wasn’t intended, but pretty good eh? ;)

  24. Allan says:

    Why does Southwest hate on the Airbus’ Frontier uses? I’m an A List member on Southwest with a ton a rapid reward tickets. I also vacation in Mexico a lot and in the past have used the LAX to Cabo route on Frontier. I love their planes. The cabin is much more attractive than the Southwest 737’s.

    It would be nice to see Southwest use those planes and maybe bring seat back entertainment to their existing 737’s.

  25. CF says:

    Allan wrote:

    Why does Southwest hate on the Airbus’ Frontier uses?

    They simply don’t want to operate a second fleet type that is used for the same purpose as their existing 737s. That doesn’t mean they can’t upgrade their own cabins with TV if they wanted to, but I’d be surprised. I do think fleetwide wifi is more likely.

  26. DRG says:

    Apparently Southwest made reaching an agreement between its pilots and Frontier pilots a condition for its bid. Has Southwest ever met a pilot?

  27. DRG says:

    @ oldiesfan6479:

    Scandinavian (as brands itself now) is buying more Q400s.

  28. David SFeastbay says:

    WN has annouced that it’s bid for Frontier was not selected at the auction.

  29. CF says:

    David SFeastbay wrote:

    WN has annouced that it’s bid for Frontier was not selected at the auction.

    Indeed. This week has been record-breaking with the amount of news. I need to wrap my head around this one.

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