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.
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.
