Category Archives: Business

Southwest Bids for Frontier Airlines

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DISCLAIMER: Although I am a Southwest employee, I am just a dispatcher and have NO inside knowledge regarding this transaction. The following analysis is purely speculation. This post and the rest of AndyBox.com are solely my own and do not reflect the position of Southwest Airlines, its Board of Directors, its Leadership, or anyone else who has any authority whatsoever over anything.

On Monday Southwest submitted a binding $170 million dollar bid to acquire Denver-based Frontier Airlines, which has been operating under bankruptcy protection since 2008. Frontier is a low-cost, hub-and-spoke carrier based in Denver. Republic Airways Holdings Company had previously submitted a bid for $108 million. Southwest claims its plan is to purchase 80 percent of Frontier’s Airbus aircraft and all of its subsidiary regional carrier, Lynx. We will maintain service to all existing markets and add new ones from Denver. Over the first 24 months, we will dispose of all acquired Airbus aircraft (about 40, mostly leased) and replace them with Boeing 737s. As needed we will hire Frontier employees to fill any openings that develop at Southwest. All of this information is available in Monday’s press release.

Here’s my take. I think this is a brilliant move by Southwest. Frontier is a good airline with great routes, annual revenue over $1 billion, and profitable operations over the last several months (unlike us, I might add). We might be able to buy such a valuable company for less than $200 million. Denver is the fastest-growing station in our history, but we’ve been competing hard against United and Frontier, which has a loyal following among Denver residents. By purchasing Frontier, we eliminate a major competitor and gain both significant pricing power and a huge amount of market share, more than doubling our current share in Denver. The Denver benefit alone could be worth the price. Based on what I’ve read, I’m fairly confident that we will be the winning bidder.

Regional Carrier

On top of this, for the first time we will own (and operate, it appears) a regional carrier, something I have wondered about for years. Regionals are typically used by network carriers to feed their hubs. For example, American Eagle flies (in part) between DFW and many, many small Texas cities to fill up mainline American flights via connections. I figure we might do some of that, but we might also use those Q400 turboprops for point-to-point routes that aren’t popular enough to fill a 737, such as HRL-ELP or DAL-CRP. Currently Lynx flies between Denver and small cities like Aspen and Jackson Hole. With only about 10 Q400s, we won’t have a ton of options unless we take the concept systemwide and buy a lot more of that model or possibly some Embraers. Keep in mind that smaller aircraft generally have higher operating costs per seat. It’s also possible we might sell off Lynx instead to avoid the extra cost and complexity. But the truth is that Southwest’s low costs depend on growth. Excluding the Frontier deal, we are currently shrinking, which drives our costs up and threatens our profitability. A smaller aircraft could be a great way to open up potentially hundreds of new markets.

New Destinations

Frontier flies to many interesting destinations that we don’t serve yet. Some are in the US. Anchorage. Jackson Hole. Durango. Atlanta (currently the biggest hole in our route map, IMO). Others are international. Cancun. Cabo San Lucas. Cozumel. San Jose, Costa Rica. Our 737-700s could reach all of those destinations without modifications, and our customers would love it.

Frontier Route Map

DCA and LGA Slots?

Frontier operates at Washington National and New York LaGuardia, two slot-controlled airports. We might or might not get those slots with the purchase. If we did, those assets alone would be extremely valuable.

Denver

Assuming we keep the same level of service, Denver will become by far our biggest airport, with perhaps 300 or more daily departures. We’ll need to add a maintenance base and crew bases there. Fortunately it’s a great airport with modern facilities, 6 huge runways, 3 simultaneous CAT III approaches, and room for more gates as needed.

People

Employee and culture integration has always been one of my biggest concerns in any acquisition or merger. I’m sure many of you have heard about or met some unpleasant airline employees whom we don’t want at SWA. I don’t know much about Frontier’s people except that they seem to be very spirited and loyal to their company. The culture is quirky like ours, as you can see from the cool animals painted on the tails of their aircraft. I’m sure they have many talented people on staff, and I hope that many of them end up joining our family.

I suspect that most of them at the stations will stay. The headquarters folks would have to move to Dallas, and many will balk for various reasons. Heck, if I lived in Denver and all my friends and family were in Denver, I doubt I’d want to move to Dallas. I also fear that many of them might be understandably bitter about the loss of Frontier’s identity.

Lots of questions abound among the unionized groups regarding seniority, which is very important to many union members due to the associated benefits. No perfect method exists for combining seniority lists. By design, each union wants whatever is best for itself. Frontier is only about 20 percent unionized versus 80+ percent at SWA. I know the pilots and dispatchers are union. They have about 15 dispatchers. If any of them join our office, I will do my best to welcome them regardless of how the seniority plays out. For the record, I am embarrassed by some of the negative and arrogant things that some Southwest employees are saying and posting about Frontier employees. I’m just happy to have a job myself and hope the Frontier folks get to keep theirs, as well.

If you really want to dig into this issue, you can listen to an interesting conference call with two of our execs regarding the bid. The Dallas Morning News also has a nice piece analyzing the conference call.

The auction isn’t until Thursday, and even if we win, we still have many, many details to work out. I am very excited and eager to see how the drama unfolds.

This and That

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I can’t decide on one topic to blog about, so here is a cornucopia of random thoughts.

  • I’m not sure what I think about the new GM plan. It looks like all the shareholders and creditors will get screwed, the government will use my money to become the majority owner of GM, and yet another fatally flawed business will be allowed to live simply because it was “too big to fail”. These things bother me. However, although I’m not an economist, I can believe the argument that a total GM failure would be a disaster for millions and millions of people.
  • I’m really excited about doing green projects for our house. If our budget were unlimited, I would add solar panels, low-flow toilets, solar water heating, new windows, solar screens, a rainwater collection system, and a hot water recirculating pump. Unfortunately, the reality of our budget finally sunk in, and we’ll have to space these projects out.
  • I just saw a piece on ESPN about a pitcher from San Diego State who can break 100mph with his fastball. That makes me happy.
  • Princess Cruises is offering West Coast repositioning cruises in September as they transition between summer and winter schedules. One goes from Vancouver to San Francisco over 2 nights. Another is a 1-nighter from Seattle to Vancouver. It’s almost like a hotel stay rather than a cruise.
  • Il Divo is singing at Nokia Theater in June. Look up Il Divo on YouTube. They are AWESOME.

In the News

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I thought I might comment on a few interesting items from the news this week:

  1. A-Rod. I quit following baseball closely soon after Nolan Ryan retired in 1993 but still have some interest in it. Pitchers intrigue me most with their arsenal of different deliveries, spins, speeds, and locations. If I played, I would want to be a pitcher, a strikeout king. How great it must feel to be able to fool a batter so badly that he gets called out at the plate.
    Anyway, back to A-Rod. As you’ve probably seen, this week he admitted to using performance-enhancing drugs in the early 2000s, some of his best years. I became a skeptic of baseball players years ago once steroid spectulation started hovering around home-run master Mark McGuire. Since then many players have either been accused or admitted to doping. A-Rod is obviously one of the biggest. Although I’m disappointed that he cheated, I have to admire him for admitting his mistakes and apologizing. He could have followed the lead of many of his predecessors and denied it until the end. I’m also disappointed in the players’ union, who Bud Selig says fought all his efforts to introduce mandatory drug testing for years. I get drug tested for my job. So do many other people. Why can’t they?
  2. Anti-Smoking Bill. The Fort Worth Star-Telegram reports that Texas state lawmakers are working on a bill to ban smoking statewide in public buildings, including “restaurants, bars, shopping malls, and sports arenas”, according to the article. I fully support this bill. It would make Texas a healthier and more pleasant place for us non-smokers and would give the smokers another reason to quit. I would also love to see Congress double or triple the cigarette tax and use the money for anti-smoking campaigns and lung cancer research.
  3. Movin’ 107.5 is Gone. When 107.5 first switched from playing smooth jazz to 80s/90s party music, I was devastated. I LOVED The Oasis and thought it offered music that no other radio station in DFW really offered. Movin’ played much of the same music I could find on other stations like 106.1 plus some songs from my junior high and high school days. After mourning a bit, I started listening to Movin’ when the mood hit. Tuesday afternoon, Movin’ abruptly switched to a Spanish-language station to address the large Spanish-speaking market in DFW. All the music people at Movin’ were fired, which angers me and makes me glad I don’t work in the radio business. It would be like Southwest suddenly deciding it was grounding all its 737s, flying A320s instead, and replacing all of us with new dispatchers trained on the A320. In the middle of the day.

The Future of Oil?

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Oil jumped over $16/barrel on Monday, the biggest one-day gain ever. The price of oil had dropped below $100 for a short while, reducing gasoline and jet fuel prices a bit. While reading about the jump, I found an interesting article by one of the “peak oil” theorists, who believe that the world’s oil supply either already has or soon will peak and then level off or start falling. The author believes that the Saudis have significantly overstated their reserves. He also believes that growth in demand from India and China will continue so rapidly that the world’s supply will be unable to meet demand, sending oil prices up to $300, $400, or even $500 a barrel. $500 oil would transform our economy in ways we can only begin to imagine. If $140 oil sent gasoline and jet fuel prices up to $4/gallon, $500 oil might drive gasoline and jet fuel over $14/gallon. For me in my fuel-efficient Honda Fit, my 16-mile round trip to work would cost $7. A drive to Wichita Falls and back to visit family would cost over $100. Air travel might become so expensive that few could afford it, jeopardizing the entire industry and my job. The price of most goods would skyrocket due to transportation costs.

Now, are these peak oil theorists right or just a bunch of naive pessimists? Only God knows. I hope they are wrong, but I certainly don’t know enough about the issue to know which perspective is correct. Either way, we must become more efficient with our natural resources, both as a society and individually. Otherwise, my son and niece will have to deal with a mess they didn’t create.

Microloans You Can Provide

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For a variety of reasons, including poor performance and disappointing changes in their policies, I decided to sell my eBay stock and give the money to someone who needed it more than eBay or I did. I debated what to do with the money for a while. Finally I gave most of it to fund microloans through WorldVision, one of my favorite organizations. Microloans, as the name implies, are small loans given to people in developing countries who run very small businesses or want to start new ones. Recipients of the loans generally are part of a group that shares ideas, supports its members, and cross-guarantees the loans. They also receive training in business management to help them use the loans most effectively. Due to their support, training, and strong desire to succeed, they repay the loans 96 percent of the time. I imagine that’s higher than a typical bank would get and certainly much higher than I got from my Prosper.com borrowers. Instead of returning to the original lender, the repaid loan stays in a fund and then goes out to another borrower, making microloan programs almost self-perpetutating. Microfinance is a fantastic idea that is changing lives all over the world. I encourage you to get involved! Skip one dinner out this month and use the money to help change someone’s life instead.

The Airline Biz

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Surely I’m biased, but I think the airline business is both one of the most difficult and most fascinating industries around. Certainly it’s one of the most competitive, with constant fare wars, extremely high costs, many players, and a host of other complications. Right now rumors abound of mergers, including Northwest-Delta and United-Continental. Although I have no insider knowledge, I think there’s a chance Southwest will jump in if those mergers go through. We could buy assets of an existing airline or buy one outright. I keep wondering about AirTran, an Orlando-based airline that operates a hub in Atlanta, the world’s busiest airport and a major city that we don’t serve. It flies 737s like us plus 717s, a smaller aircraft from Boeing that would allow us to serve some “thinner” markets that don’t have enough traffic for 737 service. Their costs are low, as is their market capitalization (the value of all its stock). The hardest part would be merging the two employee groups, but we’ve done it before (see Morris Air). This should be an interesting year!

Speaking of Southwest, have you visited our Southwest community page? A number of employees post articles on a variety of topics, and many of our customers respond. It’s well-done and quite informative!

I also bet you’re hoping for a baby gender update, eh? Patience, patience…Our appointment is at 4:00 pm. I’ll post it tonight for all to see after our CARES team meeting.