Posted by: Justin Bachman on July 31, 2009

Analysts are beginning to contemplate the ramifications of Southwest’s (LUV) surprise bid for Frontier and a few areas of consensus are emerging. First, United Airlines (UAUA) is likely to face a much stronger competitor if Southwest acquires Frontier and rationalizes overlapping capacity in the Denver market. “Southwest’s move could ultimately force UAL to restructure its Denver hub which in the past we’ve argued needs to be done regardless,” analyst Dan McKenzie of Next Generation Equity Research wrote Friday in a note to clients.
Secondly, Frontier is worth potentially far more to Southwest than it would be for other bidders, namely Republic Airways (RJET), the Indiana-based regional carrier that flies under contract for a variety of the majors. Vaughn Cordle, an analyst at AirlineForecasts LLC and a former airline pilot, estimates in a note today that “Southwest’s [net] annual earnings from this new component of business could exceed the current bid on the table. A quick-and-dirty estimate implies EPS improve by ~12 to 15 cents and the share price increases $2 to $3. Basically the acquisition strategy results in a 35% boost in the share price from the pre- announcement value.”
Adding Frontier’s profitable routes – and given Southwest’s cost advantages – the Budget King may soon become the player of record at an important hub airport. Southwest has played this role before, capitalizing on Philadelphia and Las Vegas as US Airways (LCC) was reducing its capacity at both those hub airports. It’s not for nothing that Southwest CEO Gary Kelly was in Denver Thursday doing local television interviews and not talking with Wall Street or other national press. The company needs him splashed around Colorado to reassure local travelers Southwest is committed to maintaining abundant service if and when it absorbs Frontier.
“The Southwest (bid) could be the best thing since sliced bread. Or not,” John Stemmler, president of the Frontier Airlines Pilots Association, said today in a telephone chat. He says many Frontier employees are weighing the bids with a mindset that Republic would likely keep a full operation, while Southwest is more likely to scuttle much of Frontier’s domestic capacity out of Denver and eliminate redundant administrative jobs. But that may not be the case. “It’s so hard to tell right now because we don’t know what Southwest wants,” Stemmler says. To gather some answers on that front, leaders of Frontier’s pilot union are meeting with Southwest executives, including Kelly, and Southwest pilots’ leadership Monday and Tuesday in Dallas. Frontier’s 718 pilots have a spot on the airline’s creditor committee, as well as an unsecured claim in the bankruptcy, giving it some voice in the Aug. 11 auction. “As far as frontline people go, it’s all a matter of how much growth they want and how much they’re willing to keep on,” he says. The hope at Frontier is that Southwest is “not just buying the airplanes to get rid of a competitor,” Stemmler says. “We actually do what we do quite well.”
Great Stuff. Let's force UAL and AA out of business.
After taking over most of the domestic flights from Denver of Frontier I could see SWA keeping the Frontier brand and aircraft to start short transborder flights. Think Mexico, Canada, and the few Caribbean routes already operated by Frontier from already developed Southwest cities (Dallas, Houston, Chicago Midway, Phoenix, Baltimore).
I would call myself a Southwest Loyalist. Part of that might be that I am a Texan who grew up in an area where Southwest was basically the only jet service, yet was still able to take me around the country fairly easily, with decent rates, and comparatively superior human customer service. Part of me just likes their business model.
I am also a very big fan of Frontier, and when I lived in Denver I flew them as often as possible. Partly because at that time we didn't have Southwest as an option, but it went farther than that. I felt like I was, often, on a Southwest flight -- I got good rates (not as good as SWA, but Frontier doesn't have SWA's cash to hedge), the customer service in the terminal and inside the plane was stellar, and I liked the web interface.
Seeing these two come together sounds like a good thing. Then again, in some ways maybe not the best. Redundancy certainly seems like an issue as SWA really does run quite lean compared to the rest of the industry, and how well their model would work with that type of redundancy I do question. But I don't think it's to take away a competitor, either -- Frontier is a GREAT brand, and anyone would be lucky to have their flight crews!
I love those A300s, too :)
Watch out Frontier. Many years ago United bought frontier allowing the frontier employees believing they would have jobs. Instead UAL dumped all the employees at the last minute and kept only the aircraft. Also, what happens when and if the govt policy allows the unions to organize? I think that alone will tell the tale.
Keep in mind that one of SW's key cost advantages comes from an all Boeing 737 fleet. This is not to be underestimated. They would have to deal with Frontier's Airbus leases and associated plane maintenance costs.
Personally, I'm just hoping that all of my accrued Frontier miles don't get dumped.
Sounds great -
Not only should they merge, but SWA should lobby Congress to remove the last of the Wright Amendments restrictions now rather than waiting until 2014.
Anti-competitive crap like the Wright Amendment frosts me. Wonder how much money Wright got from American Airlines in a payoff for that deal... one of the most corrupt politicians to ever hit D.C. - and that's saying something for that bunch.
Go SWA!
- Bill
Just look at how SW bought ATA. This is an asset buy. Just like ATA.
Like lots of Denver business travelers, I've avoided United as much as possible over the last 10 years. Frontier has been a fabulous alternative, but as fuel prices skyrocketed and Frontier went bankrupt due to credit limitations, SWA was there to pick up the pieces with more favorable fares to Chicago, Texas and the west coast. In terms of routes, they don't have a whole lot of overlap, although there is some.
Frontier being a one airplane airline makes them very similar to SWA in terms of maintenance. But they do have the leases, which others have pointed out. Frontier's customer service is the equal of Southwest. That means a very loyal bunch of flyers both here in Denver and for the destination ski traffic during the winter. I have never had a problem with either airline. Like many travelers I have experienced many crazy things flying on the not so "friendly" skies of United.
I hope that this deal goes through with minimal disruption and that Southwest has the sense to welcome Frontier employees with open arms. Both SWA and Frontier are a great airlines that know how to treat customers.
NOTE TO: Johnnyp...It was Continental Airlines that purchased the original Frontier Airlines in the mid 1980’s, not United Airlines.
As much as I would like to believe that F9 and WN will be integrated, let's not kid ourselves. F9 has slots at LGA and DCA and this is an asset buy to help beef up the battle against UA in DEN. Eliminating F9 makes the fight against easier.
The Airbuses will eventually go because there's no way they will double up on parts and maintenance (good bye 18" wide seats and TV). FYI they don't fly A300s, but I know you meant to say A318, A319 and A320s.
WN's playbook is attack the fortress hub slowly by cherry picking the routes first. You know it has already attacked US in PHL and LAS with success and has been progressing in DEN against UA and MSP against NW/DL. But the difference in DEN is that WN has two entrenched competitors.
I live in Denver so I feel badly for the local employees. Hopefully WN keeps many of them. Republic is not going to outbid WN. It would be interesting to see if AirTran makes a move for F9. I think that is the alliance that WN really is trying to avoid.
As a flyer, I think we'll have to see if it is a win for Denver. There actually is a lot of overlap in the cities the two carriers serve directly, but a lot of the service is very "thin". Here are a couple of examples. DEN to FLL on Fridays F9 offers one non stop departing at 8:25. WN offers a single non stop departing at 10:30. If the combined offering is a single non stop, then we lost service. However, if WN wants to own this market they go with two or three non stops as UA does not offer any on Fridays. Of course, WN offers several connecting flights to FLL and this is just not an option with F9.
The non overlapping assets must be interesting to WN. The gates in ATL and DFW come to mind. Question is, what will F9 do with those gates? It seems unlikely that in the case of ATL that they will commit the gates to just Denver. It seems likely that they would also want to offer service to BWI, Midway and to LAS as well as Denver.
In another market, DEN to ABQ, F9 offers 4 or 5 non stops depending on the day and F9 three. It seems unlikely here that the combined company would end up with more than 5 non stop flights. The additional capacity would either be redeployed or removed.
The other risk to Denver actually is that the Mexico and Alaska flights are redeployed. From a logisitical standpoint, it would probably make more sense to fly those flights from PHX or Seattle respectively.
I think in the final analysis, a strong competitor to UAL is probably going to be best for Denver. In reality, F9 was at most a thorn in UAL's side and that WN probably offers a much larger challenge to UAL and that is probably going to mean more service for Denver.
Government talks about keeping people off welfare..If southwest buys F9 and the employers lose their jobs its because our government will not step up and help our people of the USA get off welfare.They can make sure republic buys and guaranteed all employers have jobs. Southwest doesn't care about the employers and family of frontier, so remember they are another reason our taxes go up.{KEEP PEOPLE OFf WELFARE, KEEP JOBS.]
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BusinessWeek editor Justin Bachman provides road warriors with the latest news, trends in business travel, which as most readers are aware, has all the romance of taking a school bus cross country. Come here to pick up travel news and tips or just commiserate about your latest business trip gone awry.