New Owner For Frontier Air On the Horizon

Denver-hubbed Frontier Airlines seems to be catching the lucrative spirit of bargain-basement rates -- with an extra charge for the measliest of amenities such as that carry-on bag you put into the overhead bin (if you book through a third party) -- in more ways than one.

Indigo Partners L.L.C., a Phoenix-based investment firm that was a major backer of ultra-low-cost Spirit Airlines until it divested itself of 12 million shares of split stock recently, is said to be close to a deal with Indianapolis-based Republic Airways Holdings for the carrier. Indigo managing partners William “Bill” Franke and John Wilson resigned from Spirit’s board of directors at the end of July. 



“The reason is, presumably, that Indigo will soon own a low-cost competitor, Frontier, and will battle for U.S. travelers,” the Philadelphia Inquirer’s Linda Loyd reports. “Ultra-low-cost carriers fly reduced schedules compared with major airlines,” Loyd continues. “By operating routes two or three times a week, instead of daily, fewer crews are required, planes are full, and aircraft maintenance is spread over longer periods of time. Their focus is on leisure travelers.”

Republic said late last month that it had entered into an exclusive, non-binding term sheet to sell to an unnamed third party, as Ed Sealover reported in the Denver Business Journal, hoping to complete the deal by the end of September. It did not say with whom, however.

The planned sale “promises to bring new energy to a brand that has made its mark by serving small markets like Delaware, but has been held back by an uncertain future,” industry observers and state officials tell the News Journal’s Aaron Nathans in Delaware Online.

“This ownership change will remove the curse of Republic Airlines management, and so I would expect that far more intelligent decisions are made if Franke takes over,” Jay Sorensen, president of airline consultancy IdeaWorks Company, tells Nathans.

Republic has been looking to spin off Spirit since at least January 2012, after winning a bidding war against Southwest Airlines in 2009 with its $1.1 billion offer. “Southwest Airlines was the ultimate winner, by far, as the acquisition has proven to be an unmitigated disaster for Republic Airways,” Jonathan Yates wrote in The Motley Fool last September.

The Los Angeles Times’ Hugo Martin writes that Fred Lowrance, VP and senior research analyst at Nashville-based Avondale Partners, tells him “it would make sense for Indigo to transform Frontier from a typical low-cost carrier to an ultra-cheap airline because Spirit has been so profitable.”

Its profit margin of 8.5% in the three-month period ending June 30 is “more than twice the rate of many of its competitors, and shares of Spirit have nearly tripled in value since the company went public in 2011,” Martin reports. “That business model has proven successful,” according to Lowrance.

Frontier’s strategy is already “much like” Spirit’s and Los Vegas-based Allegiant, the Inquirer’s Loyd points out. “They use a mix of smaller secondary airports -- where landing fees are lower, but are close to large metropolitan areas -- and some major airports.”

Stephen Williams, director of several small airports operated by the Delaware River and Bay Authority, tells Loyd that “my expectation is that any potential new [Frontier] owner would continue the secondary-airports strategy.”

It’s certainly getting into the swing of putting a price point on everything and anything, having begun to charge last week for carry-ons if tickets were purchased on sites such as Orbitz and Expedia, according to Loyd.

Franke, 75, a co-founder of Indigo, “has an extensive background in the airline industry and in Latin America, both as an investor and an executive,” according toBloomberg Businessweek

Writing in Airline Business in 2010, Franke said that the “next ‘big deal’” seemed to appear daily on his firm’s doorstep. They all “generally include a business plan with hockey-stick-earnings forecasts,” he observed, “… whether that next big deal is in take-privates, or low-cost (insert your favorite market), or long-haul premium service (or was it low-cost, long-haul?), or air taxi, or regional jet redeployment,” etc. 

He wasn’t buying any of it.

“Obviously, many of these ideas are just opportunities to turn big piles of money into much smaller piles. What the industry really needs is predictability in results and a business model that succeeds through economic cycles.”

In buying Spirit -- presumably, because Indigo has refused comment as premature thus far -- it goes without saying that he feels it is doing just that.

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