Long, strange trip for Frontier: Airline eyes return to upright position after profitable quarter

ColoradoBiz, March, 2009 by 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.

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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.

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."

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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.