Across the Aisle from Frontier’s SVP Commercial on the Future of the Airline’s Network (Part 1)

Last week, I had the chance to speak with Frontier’s Senior Vice President – Commercial, Daniel Shurz. Daniel and I had a long talk about the future of the airline… and the industry, as we wait to see if Indigo is able to finalize the purchase of the carrier.

I’ve trimmed the interview down from its original 4,500 word length and cut it in half but it’s still long. This part focuses on the route network strategy. Part 2 talks more about costs and the marketing side of the business, and it will run on Thursday.

Cranky: My first question is… did Indigo buy you? Wasn’t the deadline yesterday [October 31]?
Frontier VP Commercial, Daniel Shurz: The deadline was yesterday but it hasn’t yet been confirmed.

[Update 11/6 at 9pm: Indigo has confirmed the deal is going through]

Cranky: Ultimately, if this goes through, will it change anything for you. It gives you more funds, but does it change any part of the strategy that you’re already building?

Daniel: We do see the ultra low cost carrier (ULCC) space as the right space for the airline to be in, and Indigo is fully supportive of that concept. And the funds that they provide will allow us to accelerate the transition in certain areas. That’s why it’s so important. It gives us a clear road map to the future and owners who can fully support and fund that.

Cranky: I want to talk about the route network. The way I see it is you have almost 4 distinct types of flying today. There’s the Apple Vacations piece to beach destinations and there is the Denver traditional hub flying to places like LA. Then you have Denver to smaller city, sub-daily flying. And then you have this alternate airport base strategy with Trenton and Wilmington. Does this all fit in the new Frontier?

Daniel: I think they do all have a place, but let me take a step back as to why. In the US, we’ve always taken the view that Southwest is a low fare carrier. Southwest has a healthy 20% market share, but they’re increasingly not that low cost, low fare carrier of legend. And so ULCCs (the rest of the world’s LCCs by US standards are ULCCs) account for much higher share of traffic.

Into and out of the UK on intra-Europe flying, ULCCs account for over 50% of capacity. In all of Europe, it’s just over a third. Spirit and Allegiant represent slightly below 3% of US capacity. Even if you include Frontier, we want to get to the ULCC point, it’s still under 4.5% of the capacity. I think that leaves a significant opportunity for ULCCs in the US market, and I think it leaves an opportunity for differentiated strategies across the ULCCs.

Allegiant has a model that works extremely well and is extremely profitable and we have no intent on impinging on what they do. Spirit does what they do and we don’t want to impinge on what they do either. They do well and there’s plenty of space for all of us.

Cranky: What does that mean for Frontier in Denver?

Daniel: We’ve been working to evolve the Denver network to be more carefully designed to be sustainable and profitable. That has involved a mix of different activities. One is flying to smaller, less ULCC-competitive markets. One portion of that has been adjusting frequencies. We don’t have the same level of frequency to the big markets today as we did 5 years ago. A large part of what we’re pushing for is to make the operation more O&D [local] traffic based.

The rapid growth of Southwest in Denver led both United and Frontier to rely more on connecting customers, and we’ve been working quite aggressively to move the needle back in the other direction, with some good success. That’s what you’ll see in Denver. It will undoubtedly lead to more frequency changes in different markets. There’s no wholesale plan to make big changes, but to the extent we can continue to find smaller markets that work, we’ll add smaller markets. There’s more risk in those markets, but we’ve been pleased with the strategy in that context and we continue to grow.

This year we added service to Fresno and Eugene and to Greensboro. We’ve also gone into some bigger non-LCC served markets from Denver like Cleveland and Cincinnati and we’ve announced service next March from Denver to Memphis.

Cranky: Let me go back for a second. You say you’ve continued to grow in Denver but you’ve really had a couple years of major shrinkage.

Daniel: Absolutely. We continue to grow the number of cities we serve from Denver. We’ve reduced capacity in total and simplified the fleet. The Denver network is completely an Airbus network. All flying is on A319s and A320s. In Denver it’s been a broader and shallower approach. Shallower in terms of number of frequencies and broader in terms of the number of destinations.

Cranky: So does that means Denver is going to be relatively stable going forward?

Daniel: You’ve heard Indigo say based on the data we’ve shown them, Denver should be in terms of capacity reasonably stable with probably some opportunity for growth. It’s a very well-served market. It’s not an obvious place where there’s lots of growth opportunity but we have a significant presence in the market. We’ve made significant improvements to the Frontier business. Obviously, are we profitable as an airline at the level we need to be profitable? No, we’re not. But are we profitable as an airline? Yes, we were in 2012 and yes we’re confident we will be in 2013.

That’s driven obviously by big network changes, but it’s driven also in part by meaningful improvement in our Denver performance. We’re back to running a business with the right airplanes. And we’re running a business where we’re running extremely high load factors today, highest of any carrier in the US. I think stability to slow growth in Denver is the likely path going forward with the growth in the business likely going to other geographies. But that’s further down the road.

Cranky: Let’s talk about those other geographies a little. What about your flying outside Denver today?

Daniel: The Apple Vacations relationship is under a long term contract. We’ll continue to run those flights. We have a very good relationship with Apple.

And we continue to experiment in the Northeast. We’ve been happy with what we’ve seen so far, but it’s still the early days. We’re flying from, as you say, alternate airports and it takes time to get customers to understand the value of those airports. We believe the strategy to be a sound one…. We’ve told everyone internally and externally that it takes longer to ramp up in those markets than it does in Denver.

Cranky: It sounds like in the Northeast, even though you’re optimistic, results have been a little lukewarm so far?

Daniel: I’d say it’s just early to make a full judgment. We’re using low fares to fill up airplanes. We want people to try these airports. We’re happy with what we’re seeing so far. Our behavior should tell people something. We are putting a third aircraft into Trenton in February, which is based on what we’ve been seeing in the market. There’s definitely an educational effort. But the great thing we’re finding is that it’s the Northeast and the primary airports are not the most wonderful in the world.

Cranky: Nor can you enter them if you don’t have the slots.

Daniel: And they’re expensive to use from a customer perspective. They’re expensive to use from an airline perspective. They’re more delay prone that average.

Trenton has not had anything like [our service]. We’re trying to deliver the service in a different way than anyone has done it before. The last big jet carrier was Eastwind and they went out of business 14 years ago and we’re doing things very differently from the way they did.

And the world has changed. I think you’ve done work, Brett, to show how much domestic fares have risen notably on one airline, but also generally. And that’s what’s creating opportunity for ULCCs in the country. It’s that fare umbrella. The northeast never had low fares to the same extent since Southwest was never that big in the Northeast. And their failure to succeed in Philadelphia has led to fares rising. One of the things about Wilmington is that even though Baltimore fares are lower than in general in the northeast, they’re significantly higher than they were 5 to 10 years ago.

Cranky: And that, I assume is part of the reason why Spirit decided to consolidate its service in Baltimore and walk away from National. But Spirit also, they’ve set up shop in LaGuardia. They’ve been there for quite some time; they’re more interested in serving primary airports. They’re all about O’Hare. They’re all about LaGuardia. The way you’re talking about it is very different. It seems like the Northeast is more alternate airport, but in Denver it’s not that so much of course.

Daniel: Well, to some extent “Denver to small markets” and “alternate airports” are two sides of the same coin. Denver is a great destination. Our competition is primarily United regional jet flying from Denver and they run very high connecting traffic. The opportunity we’ve had and the one we’ve taken is to fly these markets with a much higher mix of local traffic.

While in the Northeast, we’re flying from an alternate airport but we’re flying to a big destination. So it’s not that we’re flying from, to use an obvious example, we’re not flying from Trenton to Greensboro but we’re flying from Trenton to Raleigh. And we’re doing that intentionally. We’re flying to the big destinations in Florida. We’re flying to Chicago, Detroit, Atlanta. It’s not that we’re offering alternate to alternate service.

Cranky: You do have airplanes on order that will be coming in. Where can we expect to see those airplanes go?

Daniel: I think we’re going to look broadly at where opportunity exists. I don’t want to get too specific. There’s been consolidation in the US industry, there’s been a trend to fare increases and the combination of the two has created opportunity in the domestic market. As we work our costs down, the amount of opportunity grows. And we’re working at the moment on where the opportunity is now and how we think the opportunity levels might change.

Obviously, if the Northeast strategy is successful, we will add further aircraft. But, we want to look more broadly than just the Northeast. And rationally, no matter how well Denver performs, the airline has always had a level of competitive risk that’s too high because too much of the revenue production is in Denver. We’ve got to move in a direction where we create more diversity of profitability streams.

Cranky: When will we see this effort take its next step?

Daniel: All I can say is watch this space. The airplane order that we have don’t start delivering into 2016. That’s not to say that the fleet will stay as is until 2016 but there’s nothing immediately on the horizon. We’re working on ideas and it depends on how good opportunities look. The better they look, the better the chance of us doing something sooner.

Part 2 will be published on Thursday.