Frontier is Finally Sold … If the Unions Say OK

It was one of the worst-kept secrets in the airline industry, but what had been known for months is now finally public. Former Spirit-backer Indigo Partners will buy Frontier Airlines from Republic, and we should all be thankful. This is going to be good for everyone involved, though the pilots and flight attendants have to agree that’s the case before it goes through.

Indigo Buys Frontier

Republic’s specialty is the regional market, and it has long flown regional jets under contract for major airlines. But a few years back, that market was looking bleak. The regionals had grown quickly but there weren’t many opportunities for the same kind of thing to continue in the future. Legacy airlines began consolidating and regionals had to fight harder with lower margins just to keep the business they had. Republic, seeing this, put together a strategy to go into the branded airline space.

Republic Goes on a Buying Spree, Then Tries to Get Out
The original plan was to buy Midwest and run it as an upscale airline with Frontier operating at the discount end of the spectrum. This would provide Republic with growth opportunities in two ways. One, it would grow through the growth of these airlines. Two, it would grow its regional business by placing new regional airplanes with those airlines. The strategy failed.

The first effort was to consolidate everything under the Frontier brand and run it that way. But eventually, Republic realized this whole thing was just a distraction and it couldn’t really help Frontier succeed. While all this was going on, Frontier did something pretty amazing. It turned itself around and began making profits when it shrunk and re-organized as an ultra low cost carrier. But Republic wanted out, and Frontier had to have felt the same way.

In Steps Indigo, Free of Spirit
It had long been known that Indigo Partners was interested. Indigo is run by former America West CEO Bill Franke. Franke has put his money behind several of these ultra low cost carriers with mixed results. He backed Wizz Air in Europe, Tiger in Asia, and Volaris in Mexico among others. But in the US, he got behind Spirit. The airline’s fortunes soared. The rumors quickly started bubbling that Indigo and Spirit would make a merger play for Frontier. A lot of people thought it made sense with those old metrics of fleet commonality and strategy being bandied about.

But it wasn’t to be. This summer, Franke and another Indigo representative resigned from the Board at Spirit and basically cut all official ties. The rumor mill then shifted to the obvious – Indigo was making a play for Frontier on its own.

The discussions went on forever and the self-imposed deadline continued to be pushed. Finally, earlier this week, the deal was done…ish. Indigo agreed to buy Frontier from Republic for $36 million in cash plus the assumption of $109 million in debt obligations. There is one big caveat here. The pilots and flight attendants have to come to an agreement with the new owners by the end of October or the deal is off. So it lies in the hands of labor now.

I can only assume that the trade-off here is between future growth prospects and current earnings. Otherwise, the deal would have been done long ago. Will labor be willing to agree to something that only works in their favor if there’s growth and profit in the future? They should.

After Contraction, Growth is Coming
Frontier as it is today is a marginally-profitable, shrinking airline. And that’s pretty much the nicest thing that can be said considering how bad things were before.

In August 2013, Frontier flew just shy of 1 billion available seat miles. That was down 17 percent from August 2012 and down a whopping 28 percent from August 2010. The airline has retired a bunch of airplanes and has started to remake its network with less focus on Denver. Republic hasn’t been interested in pouring more money into the airline so it had to work with what it had.

Now with Indigo in the picture, it will be time to grow aggressively. How do I know? Well, there are a couple reasons. First, Indigo has agreed to pay $32 million to Republic for the cost of the pre-delivery deposits on the 80 A320neo airplanes on order. So those 80 airplanes will be flown by Frontier. Second, and this one is just casually mentioned in the release, “Indigo plans to invest additional funds directly in Frontier after the closing.” So you now have airplanes on order and more funds coming in to recapitalize the airline. The ultra low cost segment is the fastest growing in the US and Frontier is going to make a run at it.

The question is, how will it be different from Spirit? On the customer side, I’d like think that Frontier will try to be a friendlier version of Spirit, and one that operates largely on time. That would be a big change. But the route structure is going to evolve differently as well. Frontier today looks like a hybrid, and I’m not sure how much that’ll change. But I’m working on getting some answers to that. One thing is clear – there is plenty of room in this ultra low cost space right now.

At this point, we just need to wait and see if the unions agree to the deal. If so, then Frontier is on its way to becoming a big player in the ultra low cost carrier segment. Otherwise, it goes back into limbo.


30 Responses to Frontier is Finally Sold … If the Unions Say OK

  1. Sanjeev M says:

    So now they’ll put 180 seats in an A320? Sounds ULCC to me. Good luck to them.

  2. Shane says:

    Perhaps the unions will remember the “save the cookie” campaign and consider that stagnation and trying to relive the “glory years” may not be in their interest and is more risky than agreeing to major changes.

  3. ANCJason says:

    I could live with a Frontier-style in-flight atmosphere with a Spirit-style seating chart. I’ve flown out of RFD to DEN and into TTN/out of ILG with them and really enjoyed the experience. I really like the secondary airport approach and hope that Indigo can find the economics and make a success of perpetuating that business model (i.e. Latrobe). There’s nothing better than a big jet at a small airport to lower your stress level 50%.

  4. MeanMeosh says:

    Agree with ANCJason – I can live with the small seats, odd flight times, and flying in to outlying airports if Frontier can maintain their in-flight atmosphere and decent on-time performance. I would love nothing more than for Frontier to make a push at DFW, and provide an alternative to the WN/USAA monopoly that doesn’t involve having to deal with Spirit (nothing against WN, really, but DAL just isn’t very convenient from where I live). The question in my mind is, will Indigo do what’s necessary to keep the front line employees reasonably happy so they can pull that off. Unhappy employees just makes the airline Spirit v.2, except with some fancy tails added in.

    • ANCJason says:

      Spot on with “decent on-time” performance. When I flew F9 MDW-TTN, the flight was three hours late due to mechanical (and it really was mechanical). I got an email a few days later from F9 with a $30 voucher for my next flight. I wasn’t expecting that. I would speculate to say that that probably won’t happen under Indigo’s steering but we’ll just have to wait and see. If they keep the IFE and those little snack boxes with that cheese that I can’t seem to find anywhere else then they can feel free to move me a couple of inches closer to the tray table.

  5. I read some where yesterday that this could help UA/WN in Denver. I didn’t get that unless the new owner moves Frontier out of DEN and bases it else where. If they stayed in DEN with new planes on order and more money being put in, how would that help WN/UA? The only answer I could come up with is if they turned Frontier into the Allegiant of Denver.

    • CF says:

      David SF – I think the assumption is that as the airline moves more toward a ULCC operation, the Denver hub will at least shrink. So that would be good for United and Southwest.

    • davywavy says:

      When the deal was leaked, ate at night, to the WSJ, they contacted an airline analyst and asked for a reaction. She suggested, without much knowledge of the deal, that Frontier might downsize at DEN, and this was accepted as gospel – for a while.

      Then William Franke, of Indigo, suggested the reverse, that the airline might grow in Denver:

      http://www.willitsnews.com/ci_24218572/report-frontier-airlines-be-sold-indigo-partners-llc

      “Frontier Airlines sold to Indigo Partners, will remain based in Denver

      .”As the airline grows, inevitably all parts of the airline grows, and with the Denver as the headquarters, you would expect to see growth there.”

      • Wow. I just read that article and Republic got hosed. They bought Frontier for “$109 million, plus the assumption of $1 billion in debt and aircraft lease obligations.” They sold Frontier for $36 million cash, and the assumption of $109 million in debt.

        I wonder how long this is going to be an albatross around Republic’s neck.

        • davywavy says:

          Republic didn’t actually pay $109 million because $40 was repayment of the DIP Financing loan, which was repaid immediately to Republic.

          There are some interesting things in this new deal and while Republic doesn’t come out of it well, it doesn’t come out quite as badly as some suppose.

          The $150 million tat Frontier supposedly owes Republic, the unsecured claim (from the auction) for example, was always a completely notional figure, and reduced from the original $260 milliion claim.

          It was what Republic said was due to them for the cancellation of their original contract with Frontier for 10 x E170’s to do contract flying.

          But Republic was scarcely out of pocket – within two months it had struck a deal with Midwest for those same 10 x E170’s to fly for them. So Republic earned money from those E1770’s for flying them and at the same time was owed money by Frontier for not flying them. :-)

  6. Eric C says:

    The pilots of Frontier are represented by IBT, yet Indigo and Republic have been in contractual negotiations with an entity called FAPAInvest, LLC, as reported in their own press releases. I believe that alone is a violation of the RLA, possibly worse, as Republic and Indigo are very deliberately not negotiating with the legal representatives of the F9 pilots. How can a sale be a sale when it is conditioned on a contract that can’t be binding? This is going to be a very interesting story to watch develop.

    • Ben says:

      It appears FAPAInvest, LLC is the F9 Pilots. http://fapainvest.com/

      • Eric C says:

        Nope. There is no bargaining unit known as the F9 pilots. All pilots operating for Republic subsidiaries are part of a single integrated seniority list that collectively chose IBT for representation. IBT has a legal responsibility to represent all pilots on the seniority list, and as such a the only entity that can legally do so. The people (I’m lead to believe person) at FAPAInvest cannot be voted out of office, nor can the F9 pilots vote to ratify any contract that might be signed. Any contract signed by them would be a violation of the RLA since they do not represent the people whom the contract would apply to. I hope that clarifies a somewhat muddy issue. FAPA is certainly misrepresenting their ability to negotiate on behalf of Frontier pilots.

        • Eric C says:

          If it helps to understand, there is no such group as the Frontier pilots. There are only the Republic pilots, some of whom are presently assigned duty on the Frontier certificate, just as some are assigned to Chautauqua or Shuttle.

          That some of the Frontier pilots absolutely reject being merged with a regional airline doesn’t make it not so.

        • davywavy says:

          FAPA doesn’t claim to represent the Frontier pilots – it isn’t a union anymore – the IBT is the union for Frontier pilots.

          The discussions in question are with “FAPAInvest”, which isn’t a union, either. The clue is in the name.

    • This is quite an interesting wrinkle. But I’d be amazed if Indigo hasn’t had their lawyers all over this corner.

      That being said, it does appear that the pilots are roughly divided, from Teamsters Local 357: “With a single seniority list, but four separate certificates, pilots cannot simply bid from ATL to DEN even if there is a vacancy and they?re senior enough to bid it. RAH strictly enforces a ?no crossing of certificates or types? unless FO to CA .”

  7. Doesn’t Frontier still have some union issues regarding representation of the pilots?

    I could be wrong but I think there is a now niche for another true LCC, especially if it is well funded to expand quickly. Somewhat better than Spirit with a differentiated product but cheaper than Southwest.

    JetBlue and Airtran seemed to be doing OK with that kind of formula and Southwest isn’t the competitor it was even 2 years ago..

    Another possibility is for Frontier to be separated from Republic then flipped to Spirit after a period of harmonization as Spirit II. That match still seems to make some sense.

  8. ANCJason says:

    Major party foul by Brett for bringing the Indigo Girls into this. I had about 92% forgotten that they even existed until today.

    • CF says:

      ANCJason – If you’d like I could sing Galileo to you to bring back some memories. (Strangely, my freshman roommate loved that song and played it over, and over, and over again.)

  9. Are those the Indigo girls or is that an old picture of Heart? In any event, I hope the unions go along with the new ownership. If they don’t, I really don’t see much of a long term future for Frontier.

  10. Sean S. says:

    Unlikely, but I would like to see a resumption of significant service to MKE again. While MKE suffers from the same problem many mid-sized city airports do, I believe there are geographical features about its location (the lakes for one) that give it a far broader base of PAX than the average mid-sized city airport has competition-wise. Both Midway and O’Hare are not especially great alternatives due to the drive/traffic, and MSP is simply too far.

  11. A says:

    When I think Frontier I think about their marketing from the early 00’s where they claimed a national network with everything connecting in DEN. If that’s going away, what will be the new approach? Copy Southwest? Everybody says the “hub” system has to have good O/D traffic. I’d guess United owns that in Denver.

    Dropping DEN makes sense to me. From my home airport I can fly direct to DEN on United, Delta, Spirit, Southwest, and Frontier. Probably somebody else too. That’s crazy capacity and flights are cheap as a result. Good for my skiing vacation, not good for Frontier.

  12. yo says:

    My condolences for anyone that has to work for that sack of crap named Bill Franke. A more callous, nasty, evil man never existed in the airline biz (and that is including pilots). I was at AWA when, on his last day, we were forced to go to the lobby to “clap him out” as he was leaving. I just told everyone to clap because he was leaving. If you work for F9 and can possibly do it…LEAVE NOW!

  13. Tom Martin says:

    One of the problems with RJET owning F9 (I think you commented earlier Cranky), was branding. Since RJET flew under contract, they essential did not marketing before buying F9 since they flew under contract. Many customer were confused when they purchased a Frontier ticket, which said ‘operated by Republic’ and the aircraft said Midwest. Too bad, for an airline that had such a strong recognition in certain areas of the country.

    Another problem, was they competed with themselves. It’s one thing for SkyWest to operate SMFLAX for AA/DL/UA (all under contract), but RJET ended up competing with itself in DEN. I believe at one time, RJET was providing UAX from FAR-DFW-LAS, as was F9. Difficult to compete with yourself when one route is under contract, and the other is a brand you are trying to promote.

    I absolutely love Frontier, but since they’ve reduced DFW service (DEN only now), I can only fly them to the West Coast. I recently flew Spirit DFWLAX and was impressed. As long as you know they charge for ‘everything’ you’ll be fine. Spirit provided a clean new airplane, friendly cabin crew, and on time flights. Seating was actually not as bad as I anticipated. I plan on flying them again.

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