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Southwest Airlines Moves In on Frontier


A bidding war for tiny Frontier Airlines? The bankrupt carrier, which in June agreed to be acquired by Republic Airways (RJET) for $108.8 million, has drawn the interest of Southwest Airlines (LUV), a major rival in the contested Denver market. Southwest submitted a nonbinding proposal on July 30 offering to pay a minimum of $113.6 million for Denver-based Frontier. Any other interested parties have until Aug. 10 to submit a binding bid for the carrier under terms approved by a U.S. Bankruptcy Court's review of Republic's proposal. An auction is scheduled for Aug. 11 at Davis, Polk & Wardwell, the New York law firm representing Frontier in the restructuring.

Southwest says it would operate Frontier as a wholly owned subsidiary "for a period of time with its Airbus aircraft and personnel." But that period would end within about two years, after which Southwest would not add Frontier's Airbus jets to its all-Boeing 737 fleet.

Southwest's bid, if successful, would mark a tiny step in the U.S. airline industry's consolidation and could swiftly reorder the competitive balance at Denver, a hub for United Airlines (UAUA), long the dominant carrier. Over time, Frontier's domestic capacity in Denver, currently about 10% of the market, would likely supplement Southwest's operation incrementally, as growth warrants. In the interim, Southwest would immediately become a stronger competitor to United, which has a 36% market share at Denver, compared with 21% for Frontier and 12% for Southwest, according to the Bureau of Transportation Statistics.

As United has been cutting capacity at Denver in response to the downturn in air travel, coupled with its own efforts to curb costs, Southwest has identified the market as one of its biggest strategic opportunities. With Frontier the carrier could easily become the largest player in Denver. If its bid is successful, Southwest would also need to determine whether to expand into two important airports Frontier serves but Southwest has long avoided: Atlanta, the busiest U.S. airport and a hub Delta Air Lines (DAL) has defended staunchly; and Washington's Reagan-National Airport, which has "perimeter" constraints on how far flights can operate.

Less Competition, Pricier Tickets? Another byproduct could be higher fares, as Southwest culls overlapping Frontier flights. Competition at Denver has been fierce, with Southwest claiming much of the credit for lowering fares. Average fares from Denver have fallen by over 10% in the past year, 35.5% from 2001 to 2009, and now stand at $292, according to federal data. Since 2001, only Long Beach, Calif.; Charlotte, N.C.; Richmond, Va.; and White Plains, N.Y., have seen steeper fare decreases among the top 100 U.S. airports.

The Frontier bid also would give Southwest entrée to Mexico, where it does not yet offer flights. On a conference call with reporters, Bob Jordan, Southwest's executive vice-president for strategy and planning, said the company is pleased about the prospects of expanding into Mexico with a Frontier acquisition. "I can tell you that we are very interested in doing the due diligence work in understanding the near-international market," Jordan said. "I think that's a very exciting opportunity for Southwest Airlines." Acquiring a carrier with Mexican destinations, as well as marketing relationships, facility leases, and other necessary infrastructure, makes it easier and less expensive for Southwest to enlarge its network.

The Dallas-based airline has struggled to expand its services abroad, taking tentative steps in recent months to develop code-sharing agreements with Canada's WestJet Airlines and Volaris, a low-cost airline in Mexico. In May, Southwest decided to delay plans for its WestJet partnership, and final details of the Volaris alliance are not expected until mid-2010. Frontier also would give Southwest additional landing slots at New York's slot-constrained LaGuardia airport—which it began serving in June—and could give the company additional opportunities to more easily link the metro New York and Philadelphia markets to destinations in the West with one-stop service.

A spokesman for Indianapolis-based Republic said the airline will review Southwest's bid but has no additional comment. On June 23, a day after announcing its Frontier bid, Republic also said it is acquiring Midwest Airlines for $31 million from TPG, the Texas-based private equity firm.
Bachman is an associate editor for Businessweek.com.

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