Posted: March 24, 2009
Long, strange trip for Frontier
Airline eyes return to upright position after profitable quarterBy Nora Caley
When Frontier Airlines filed for Chapter 11 bankruptcy protection in April last year, the carrier was the fourth to file for bankruptcy within a few weeks. But while Aloha, ATA, and Skybus ceased operations, Denver-based Frontier is not only still flying but recorded a net profit of $1.1 million for the quarter ending December 2008. As the airline works to emerge from bankruptcy, the rest of Denver’s aviation industry has its own challenges. Denver International Airport had a slight decrease in passenger counts at the end of 2008, and some expansion projects have been delayed. Chicago-based United Airlines emerged from bankruptcy in 2006 but is losing money. Dallas-based Southwest Airlines is becoming more competitive.
Industry experts say Frontier is not like other airlines. “Usually you go into bankruptcy because there is bloat and fat,” said Mike Boyd, president of the aviation consulting firm Boyd Group International, in Evergreen. “But for Frontier it never was that.” Frontier filed for protection after Greenwood Village-based First Data, the credit card processor, said it would start withholding 100 percent of credit card receipts, up from 45 percent. That would have severely limited Frontier’s cash flow, so it acted quickly. “The automatic stay provision of the bankruptcy code prohibits the credit card processor from increasing its holdback,” the airline says on its website. In its December operating report, Frontier indicated it had sold four aircraft, negotiated concessions from all represented labor groups and launched the AirFairs pricing that lets customers choose Economy, Classic or Classic Plus.
Photo courtesy Frontier Airlines. Photography by Tim Samples.
Jim Young, vice president of sales, marketing and distribution, says AirFairs offers flexibility in a commodity-driven marketplace. “We have people tell us all the time that they would pay a few more dollars to fly on Frontier, but if somebody offers a fare for even a few dollars less, we find people typically go for the lowest price,” he said. The airline also laid off workers. When it declared bankruptcy, Frontier had about 6,000 employees. Today it has about 5,000. Still, the airline is beloved in Denver, said Henry H. Harteveldt, a travel analyst for Forrester Research Inc. in San Francisco. “Frontier is nice to customers and employees, and management is trying to maintain good labor relations,” he said.
Boyd notes that Frontier’s flight attendants are not unionized, an anomaly in the industry. “Flight attendants are normally a group that is out there alone, and they feel cut off,” he said. “The fact that they haven’t felt the need to unionize speaks volumes about the airline.” Donald P. Schenk, president and chief executive officer of ACA Associates, a New York-based airline consulting firm, says smaller airlines have the advantage of higher levels of employee morale, and therefore, better customer service.
“A huge challenge for legacy airlines is a large portion of employees have worked for them for 20, 30 or 40 years,” he said. “They have in good faith bargained for a deal which the economy no longer lets the airline keep. They are stuck in jobs they no longer like, working for a company they don’t believe has treated them fairly.” Boyd added that Frontier’s “A Whole Different Animal” campaign doesn’t hurt. “Competitively that may be cheating,” he said. “You take a shot at Frontier, and you’re taking a shot at a cuddly little deer or bear.”
In 2008, Frontier’s market share at DIA was about 22 percent, compared to United’s 50 percent and Southwest’s 9 percent. Harteveldt doesn’t think there is enough room for three major airlines. “I don’t think Denver is a market where Frontier can win,” he said. “I would encourage them to explore options, maybe Colorado Springs.” Passenger traffic at DIA decreased 4.7 percent in November 2008 compared to November 2007. However, traffic was up earlier in 2008, which helped the passenger count reach 50 million for the year on Dec. 23. DIA was not expected to reach the 50 million passengers-a-year mark until 2010.
“People are still taking vacations, and business travelers are still flying,” DIA spokesman Chuck Cannon said. “The aviation industry depends on lots of things like the price of oil and the economy. We can’t do anything about the price of oil or the economy.” Southwest Airlines did protect itself from some oil price fluctuations. For part of 2008, the discount carrier locked in 70 percent of its fuel purchases at $51 a barrel. The rest of the purchases for the year were for varying prices, which reached a well-publicized $147 over the summer. “Our fuel hedges saved us over $1 billion in 2008,” spokesman Chris Mainz says. He adds that Southwest’s hedge portfolio is now only about 10 percent.
The hedging strategy doesn’t work for everybody. For fourth quarter 2008, United recorded $370 million in cash losses on fuel hedges that settled in the quarter. The company had a fourth quarter loss of $1.3 billion, including the fuel charges. In an e-mail to employees, United’s chief executive officer Glenn Tilton said, “The combined effect of high fuel prices in the first half of the year and hedge contracts in the second half drove a $2.9 billion increase in our expenses compared to 2007 fuel prices, masking improvements in every other area of our business.” Tilton, a former oil executive with Chevron-Texaco, came to United in 2002.
“The weakest airline now in Denver is probably United,” Boyd said. “They have no airplanes on order, no fleet plan, no long-term strategy.” Ted, United’s discount product, ceased operations earlier this year. United is reconfiguring the 56 A320s in Ted’s fleet, adding first-class seats. In January, the airline announced an additional 1,000 layoffs, then announced it would enter a partnership with Aer Lingus to fly from Washington Dulles to Madrid, starting in 2010. Boyd said United is likely looking for a merger partner, “but no one wants to merge with them.”
Meanwhile, Southwest is growing. When it returned to Denver in January 2006 after a 20-year absence, the airline flew 13 daily nonstop flights. In January 2009 it had 115 daily nonstop flights. It doesn’t plan to continue the growth this year. “We will probably reduce capacity by 4 percent, which is a bit of a departure,” Mainz said. Although passengers complain about the non-reserved seating policy, Southwest is still strong. “They have the cash, the aircraft, the employees, and they have everything it takes to pretty much gain control of most markets in the country,” said Schenk, the airline consultant.
Mainz says Southwest plans to continue its “Want to get away?” ads to attract leisure travelers, and the “No Hidden Fees” ads to attract business travelers. The airline is testing Wi-Fi equipment for passengers who want in-flight Internet access. United offers no specifics about its Denver plans. “Denver continues to be an important hub to United, and we look forward to remaining a part of the community here,” spokesman Jeff Kovick said.
As for the rest of Denver aviation, DIA is still talking about its Ascent to Asia campaign, its ongoing effort to attract air service to Japan, China or Korea. “We have been talking to a number of different Asian airlines for a number of years,” Cannon says. “Air service doesn’t happen overnight.” He says there are still plans to build a hotel and expand Concourse C, but those plans are on hold.
Frontier hopes to emerge from bankruptcy soon. “The process now depends on attracting an equity partner or plan sponsor for our exit,” Young says. “The sooner we can attract an investor, the sooner we can start the process of going through the bankruptcy court process for emerging.”