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Get Four
|  | FEBRUARY 6, 2006
By Michael Arndt Frontier: The Little Airline that CouldIts stock took a nosedive when Southwest moved into Denver, but the plucky small carrier is fighting back with low fares and better serviceSince Jeff S. Potter became chief operating officer of Frontier Airlines (FRNT ) in 2001, he's had his share of trials and tribulations, from the post-September 11 plunge in traffic to sky-high fuel bills. Still, the discount carrier has managed to grow by 20% a year and counted as one of only a handful of airlines that could boast two profitable quarters in 2005. Now Frontier's CEO, Potter finds himself up against a force that has many investors running scared: Southwest Airlines (LUV ), the largest and richest carrier in the domestic industry, has just launched service in Frontier's hometown hub, Denver. Southwest has handily crushed the competition as it has spread across the U.S. In fact, simply by announcing its Jan. 3 entrance into the nation's No. 5 airport, the juggernaut knocked 28% off Frontier's share price. And the stock has only sunk further since then, to new 52-week lows. FUEL FEARS. How short-sighted: Frontier may soon prove itself the little airline that could. Thanks to its own low cost structure, some deft redeployment of planes, superior in-cabin services, and a loyal following that likes the plucky company, Potter says Frontier's growth should be unaffected and he feels "very positive on the Frontier story." January bookings -- traffic is surging, though at lower fares -- suggest he's right. Other upstarts are showing they can beat Southwest at its own game, too. While major carriers such as United Airlines (UAUA ) and Delta Air Lines (DALRQ ) are ceding ever more of the U.S. market to Southwest, JetBlue Airways (JBLU ) and AirTran Airways (AAI ) have expanded coast to coast, serving many of the same destinations and bargain-hunting passengers as Southwest. Yes, fuel costs are hurting them: JetBlue, for one, now warns it will lose money throughout 2006 unless fuel prices ease. But these up-and-comers will grow more competitive as Southwest, which locked in fuel at cheap prices years back, is forced to buy more of its fuel at today's prices as its hedges expire. Although Potter and other Frontier executives say they expected Southwest to show up some time in 2006, they didn't think it would happen quite so early. In late October, Southwest chief Gary C. Kelly announced the Dallas-based airline would begin flying to and from Denver barely 10 weeks later. LOSSES, BUT LESSER. With one-way fares as low as $59, Southwest opened with 13 departures a day to Las Vegas, Phoenix, and Chicago. But that's only the beginning. Taking a third gate at Denver International Airport in March, Southwest will add two more cities, and Kelly says its schedule could triple by yearend when it gets two more gates. "It's a ripe opportunity," he adds. But Southwest will face a tough fight. Potter, 45, has worked on and off at Frontier since its founding in 1994 and knows how to compete with the industry's big guys. United Airlines and its budget affiliate, Ted, dominate Denver with 55% of its airport traffic. But by consistently underpricing United and adding as many as five markets a year, Frontier has steadily increased its market share, now 21%. With flights to 55 destinations in the U.S. and Mexico, it now ranks second in Denver. Revenue should top $960 million in its current fiscal year, which ends Mar. 31, and industry analysts forecast Frontier will post a modest loss -- while the major airlines rack up losses of 9 and 10 figures. Like other airlines that Southwest has targeted, Frontier slashed its fares by 20% or more to match Southwest's introductory bargains. In Philadelphia, a market that Southwest entered 20 months ago, incumbent No.1 carrier US Airways Group (LCC ) couldn't weather a price war and beat a hasty retreat. But unlike the so-called legacy carriers, Frontier can make money even with cut-rate fares if fuel prices abate, says Paul H. Tate, the company's chief financial officer. FLEXIBLE FLYERS. Indeed, with a younger, mostly nonunion workforce that quickly gets its planes back in the air, Frontier enjoys nonfuel costs even lower than Southwest's. And with fuel likely to stay sky high, Tate says he's evaluating 55 proposals to get back in the black, including pinching pennies further, slowing takeoff speeds, and sending airport employees home early if they run out of things to do. Potter, who hired into the industry as an aircraft cleaner while in college in 1980, also has slowed Frontier's build-out to two or three new markets in 2006. That way he can add planes to routes that Southwest is flying and maintain an edge in scheduling. Even if Southwest does triple its flight offerings in Denver, Frontier can outflank it, Potter argues: It is adding seven new planes this year and five more in 2007. Indeed, Frontier carried 15,000 more passengers on routes that Southwest flies in January, up 38% from a year ago, though its cheaper fares mean the upsurge doesn't all flow to the bottom line. The other trump card is service. Frontier offers roomier seats and 24 channels of pay-for-view TV on seat-back screens in all of its aircraft. "Southwest is going to have a hard time penetrating the Denver market," says Glenn D. Engel, an analyst with Goldman Sachs. "This won't be as bad for Frontier as the market expects." WILL INVESTORS FLEE? Of course, things could get rough. United, which on Feb. 1 exited bankruptcy with a lightened balance sheet, could fight back against Southwest by flooding the market with more flights and cut-rate fares. That could steal passengers from Frontier, too. And fuel prices are blowing a hole in Frontier's budget. The airline's stock, which analyst Raymond Neidl of Calyon Securities downgraded to "neutral" from "add" on Jan. 31, closed at $6.82 on Feb. 3, barely half its 52-week peak in late July. Analyst Michael L. Linenberg of Merrill Lynch & Co. is urging investors to sell Frontier stock, figuring its earnings will slip as Southwest expands. But even he agrees that Frontier should survive. And with the right operations and strategy, Frontier may prove that nimble rivals can take on the fearsome new ruler of the skies.  Arndt is a correspondent for BusinessWeek in the Chicago
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