I certainly didn’t see this one coming. Thanks to a greatly increased bid and Southwest’s unwillingness to do a deal without labor’s buy-in (read BNET for more on this), Republic is the one walking away with Frontier. But 
I don’t want to talk about the deal. Let’s talk about what this will mean for Frontier and Southwest.
First of all, it means the animals live. Frontier will keep flying under its own name for now. I suppose it’s possible at some point that Republic will decide to merge Midwest and Frontier under one name, but my guess is that won’t happen.
See, Republic is a pro at flying airplanes under all different kinds of brands. So it wouldn’t surprise me to see them merge the operational side of the house along with back office functions while still keeping separate brands. Why bother? Well, Midwest still has some fleeting value in Milwaukee while we know Frontier has value in Denver.
Republic’s chief Bryan Bedford has already signaled that airplanes will start moving around. At the very end of an article talking about job losses that will hit Midwest because of the merger (100 out of the 1,000 left in Milwaukee will go), there was this nugget.
Also, Republic on Thursday emerged as the winning bidder in a bankruptcy auction for Denver-based Frontier Airlines. Bedford said some of the 138-seat Airbus A319 jets used by Republic will likely be shifted into service for Midwest flights to West Coast destinations.
So, Chautauqua flies Embraer regional jets for Midwest, Republic flies larger Embraer jets for Midwest, Midwest still flies some 717s for itself but that’s ending, and now Frontier will be flying A319s for Midwest (which have 136, not 138 seats, by the way)? I guess so. There’s no reason to change certificates here – they can use Frontier as their Airbus operator and have it operate for anyone they feel like. So we’ll see if that’s the plan.
Meanwhile, what does this mean for Southwest? Well they have to be pretty bummed right now. They had a cheap and easy way to test out international flying and a regional operation. Plus they were going to make Denver a profitable place. Now none of that is likely to happen. I’m really interested to see what will happen with Denver. Now that Frontier doesn’t look to be going anywhere, it isn’t looking good for Southwest’s operation there. Even if United fails, I would bet that a legacy would step in to pick up the pieces. So Southwest has to make some hard decisions now. Will they want to keep flying a large unprofitable operation in Denver?
There are a lot of interesting questions to answer now that the bidding is done.
26 comments on “Republic Wins the Right to Buy Frontier – Now What?”
And I can almost hear the sighs of relief from the Delta HQ from here…
Bet Airtran is also glad that that those Texans are staying out of ATL for now, too.
You keep saying Southwest is unprofitable in Denver – my experience has been that most of the flights I’ve been on through there have been 90% full….how do you know that it’s not holdng it’s own?
I keep going back and forth with the names and whether they’ll migrate to a single name, and I agree they’ll likely keep both. Besides, it works for Alaska / Horizon. They might have a bit of a different setup since Horizon is regional aircraft only and Alaska is mainline, but really if Alaska Air Group can make a dual brand work, I’m sure Republic can too.
@ Jim Carmignani: Jim, a high load factor doesn’t mean they are making money. There are other factors involved in making an operation profitable.
Jim Carmignani wrote:
Good question, Jim. Loads are rarely a sign of profitability – it all depends on how much those people are paying. The Airline Zone put together a recent presentation using government data that shows that Southwest’s unit revenue in Denver from April 1, 2008 through December 31, 2008 was 7.25 cents. Now, their systemwide unit costs for 2008 were at 10.15 cents excluding special items.
There are a couple of wildcards here. If the average flight length out of Denver is longer than the system, then the unit costs will be lower in Denver. (Unit costs goes down on longer flights.) But Denver airport is also quite expensive, so that will raise the unit costs. Either way, there’s a pretty big gap to cover there and it’s safe to say it’s not profitable.
I’m not surprised that labor was the sitcking point that killed the deal with WN. Still from the outside I scratch my head. Southwest is one of the most stable airlines in this country…at a not so stable time. Meanwhile Frontier, although profitable right now, was in bankruptcy. I’d bet dollars to donuts that Frontier is unprofitable again soon as oil spikes again or the economy takes another turn downwards. And how much does Republic really have to keep dumping into it’s subsidaries? Long run I see WN weathering downturns much better, and in this day and age I would love to have a shot at that kind of job security.
Still, the wild card is that WN has money to burn. I’ve read claims that DEN is a loser for Southwest, but what’s stopping them from using their deep pockets to stick it to Frontier and really turn the knife?? People in Denver are loyal to their pocket book just like anyone else around the country. Couldn’t WN slash prices and starve Frontier of passengers and revenue? Might end up costing more than $170 million but I’m guessing they could kill Frontier if they wanted.
A wrote:
I’m pretty sure they’ve tried. Fares have been incredibly low out of Denver, and Frontier has maintained well despite Southwest’s efforts. United pulled out capacity and that may have given Frontier the breathing room it needed, but I don’t know that Southwest can kill them now.
Southwest will find another way to beef up competition.
They certainly kept us all on our toes and surprised with every one of their moves…
It’s not over yet!
When I heard that Southwest’s deal was contingent on its pilots working something out with Frontier’s pilots, I had to wonder if WN had ever actually met a pilot.
“Even if United fails?” A little surprised to see that. With the U.S. Chapter 11 industry just as intact as ever, this seems quite improbable. Nobody would ever allow United Airlines to go out of business.
Southwest may have been playing above their pay-grade on this one. However, if you look at the history of contested mergers, the ones where the financially weaker group emerged as the “victor” eventually fell within 12 to 18 months. Don’t be surprised if Southwest doesn’t make a run at Republic soon after they close both deals.
As important as Denver is, the Frontier computer system is just as important. Buying a functioning system is much better than starting out from scratch.
Southwest has been around for a long time now and has done very well. Whatever they do will be good for WN. Just because they couldn’t buy Frontier now, doesn’t mean a year from now they won’t.
Who knows, United may one day need to start selling themselves off and start with Denver, then WN could grown then.
One wonders if DEN was ever really that profitable. UA and CO fought it out and was finally able to charge premiums DEN-West until Southwest came in. They hurt their own cause with Ted and now Frontier/Republic.
With sporadic history like that, and assuming UA either went under or simply pulled out/sold it off, what other legacy carrier would want to make a go of it?
DRG wrote:
I wouldn’t be so sure. They’ve said that about airlines like Pan Am and Eastern as well in the past. At some point, my bet is that United goes away in it’s current form. That might mean that Continental picks up the pieces and goes back into Denver, but we’ll see.
Greg wrote:
I don’t think Southwest would want all of Republic. They don’t want all those little RJs and they certainly don’t want to be flying for other airlines under contract.
The reservation system is good, but remember, Midwest has one of those as well.
The Traveling Optimist wrote:
There’s always room for a legacy carrier in Denver to be able to serve the markets that low cost carriers won’t. Somebody would move in.
I agree with A –
WN never loses. So it will slash fares, and drive Frontier out! Its gonna be war! Im not sure if anyone remembers…… WN told UA to back off intra CA with U2 flights back in the 90s. UA said F U…. and WN changed from a short-medium haul carrier… and ramped up, no, exploded across the transcon routes.
WN has been the bain of UA’s problems, for over a decade.
So all hell (no pun intended) is gonna break out in Denver. And Denver pax, are gonna win, for the short term at least! ..until WN buys republic haha
re: Frontier Computer System –
It’s Sabre Multi Host, anyone who can write the check can be a participant. SWA could, if they so desired, host in that system without acquiring another airline.
It seems to me that eveybody’s missing the most important question of all…
…does this mean that we’ll be able to enjoy fresh baked cookies on Frontier flights as well?
I don’t care if Southwest fares were $1 and Frontier $299 – I’ll be on Frontier EVERY TIME.
Cranky, Isn’t there some legal repercussions with Southwest dumping fares in an attempt to run their competitor out of business? It could be argued they’re abusing their oligopoly position in Denver.
That being said, yes, I want to find out about the cookies!
I think WN did what it wanted to do. It either wanted Frontier cheap with no bumps or for Republic to sweeten the deal and not come out as well off. If WN didn’t go to more effort then there was a reason (and labor issues might have been enough). Still, I wouldn’t be surprised to see WN aquire most of Frontier’s assets from Republic minus the labor issues. If oil hits $120 per barrel I’ll bet Republic starts selling assets, especially if WN has started to cover all of Frontier’s most lucrative routs (they did get to see the books). There could also be other deals in the works and Frontier might have been a “plan B” that due to the timing of the auctioin came before “plan A”. I know that Southwest has looked at buying Air Tran in the past. Air Tran would cost a lot more, but would be worth a lot more. If Southwest really were to go after Air Tran (or Alaska) this shows that they mean business when they spell out what they will offer labor and this could have been the real goal (but either would probably get some seniority and this way they would feel good about it). One thing is for sure, if WN bought Frontier that would be the last deal they could pull off for a long time. I’m sure they want the best deal that’s out there.
jordan wrote:
Only one problem with that plan. . . they’ve already been doing that for years and they’ve failed. Southwest has been very aggressive with fares in Denver and Frontier has been able to hold its own. I’m not sure what more Southwest can do.
ASFalcon13 wrote:
Excellent question. I wish I knew the answer, but it seems like a fine idea to me!
Nicholas Barnard wrote:
It’s almost impossible to prove. There have been countless examples of airlines dropping fares to unsustainable levels in order to punish or crush another airline. But the problem is that the variable cost is so low that the offending airlines can argue that they’re simply filling seats that would otherwise go empty and the revenue is more than the variable cost. It’s absurd, yes, but it’s hard to prove otherwise.
DIA is a strange place. Since moving to Colorado, I’ve only flown Frontier, despite having piles and piles of miles sitting with Delta/NWA, and Southwest’s legendary fare competitiveness. Frontier always just cheap *enough*, or happens to fly at the right time, to the right place… it’s almost uncanny how well they’ve planned their routes and times, at least for me, and I’ve heard similar anecdotal comments from others. As well, Southwest’s bid for Frontier did nothing to help their mindshare in this market — whether smart or not, there is tremendous brand loyalty toward Frontier by locals and Southwest’s surprise bid overnight turned Republic into heroes. Conquering heroes, but heroes all the same. Comments about “say hello to your Indiana-based airline” disappeared. I guess we hate Texas more than Indiana around here.
I think the comments about United’s precarious position are the most interesting in this article. I *live* here and it’s telling that I haven’t flown the dominant airline once; Their pricing is absurd. Even Continental has some spectacular deals from time to time to their hubs from Denver. Southwest and Frontier seem to have this stalemate: Upending the balance by having United flounder mightily may be the only thing that really changes the makeup of the market.
No one has mentioned what will happen to Republic’s contract with United, operating as United Express?
How about Republic now trying to raise $120 million dollars from new investors?
Chi Flyer wrote:
Well, we don’t know what will happen with the contract with United or any other major carrier. I’m sure United would love to dump them, but there is nobody else running big Embraers in the US right now.
As for the $120 million, I don’t know anything about that. Always good to raise money in this climate if they can do it for relatively low cost.
I believe it was in an article in the Monday printed edition of USA Today.
It was the Wall Street Journal.
http://online.wsj.com/article/SB125046693998435413.html
@ Chi Flyer:
Thanks for the link!