Southwest Bids for Frontier Airlines

Posted on August 11, 2009 by Andy

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.

Time Off

Posted on February 11, 2009 by Andy

Sorry I’ve been so quiet on here lately. It’s been really busy around the Box household! I did just update Brenden’s page with the latest on his development and some cute pics. Jenny has lots of great pics on Facebook. If you’re not on Facebook, you need to join so you can see our cute pics. Anyway, I just came off a 7-day stretch and now have several days off unless I get some more overtime.

As many of you know already, we have an exciting project in the works that’s taking up some of our time and much of our mental energy. Unfortunately we can’t go public yet, but we hope to soon. For now just know that God is putting together the pieces for an exciting new adventure. I had a trainee at work for a couple of days, a really great guy who used to dispatch for Champion Air and Northwest. Brenden is doing great. We await his slightly overdue 6-month checkup on Thursday to see whether his head has rounded out acceptably. Since he normally sleeps on his stomach now (by his choice), I don’t know what else we can do! He’s eating all sorts of stuff now that Jenny fixes up for him. I’ll definitely try to blog more over this coming break, so check back in a bit.

Hi Ho, Hi Ho, It’s Off to Work I Go

Posted on December 25, 2008 by Andy

This past week has been crazy, particularly at work. It’s been possibly the worst 7 days in the history of Southwest Airlines’ operations, with the obvious exception of Sept 11. Snow, ice, deicing delays, fog, and other issues have wreaked havoc on our flights in places you’d expect, like Chicago and the Northeast, and places you wouldn’t, such as Vegas and Portland. The majority of my inherited flights have run late for the last week. Tonight, Christmas Eve, I finally have a quiet night. I’m on a stretch of 16 straight shifts, which I normally wouldn’t do, but I picked up some overtime over Christmas and a traded shift at the beginning. I get some time off starting the morning of Jan 1. Halfway there!

SWA to LGA 2009

Posted on November 19, 2008 by Andy

SWA is in the process of securing 14 slots at New York City’s LaGuardia (LGA), marking the first time we have ever entered the NYC market (ISP doesn’t count since it draws mainly from the Long Island area, not NYC proper). Historically we have avoided the 3 New York metro airports due to high costs, lack of gate/slot availability, and chronic delays. However, by staying out of the largest aviation market in the world, we have cost ourselves huge amounts of revenue. We are now getting a few slots from ATA, which should allow 7 daily round trips to and from LGA. I have mixed feelings. The extra revenue will be significant, but LGA is an operational nightmare, similar to Philadelphia (PHL) if not worse in terms of delays.

Southwest Posts a Loss…and a Profit

Posted on October 16, 2008 by Andy

You might have read some confusing news about Southwest’s earnings report today. Depending on which article you read, the headline might say we posted a loss or that we posted a profit. Both are correct in their own way. From an accounting perspective, we technically posted a loss due to a one-time charge of $247 million related to our fuel hedging. In a nutshell, we have a group of contracts to buy oil at certain prices on a variety of future dates. We carry that portfolio of contracts on our books as an asset. Each quarter the value of that portfolio goes up and down with the current price of oil, and our income statement has to reflect that change. This is known as mark-to-market accounting. In the 2nd quarter, since oil rose so much, we reported a huge gain because our hedging portfolio became more valuable. In the 3rd quarter, oil dropped sharply, so we recorded a hefty charge.

From actually operating the airline, we posted a small profit thanks to the benefits of our settled fuel hedges. Unfortunately, the charge from our future hedges’ drop in value was more than the profit we made from flying customers and cargo around, so we posted a loss for the quarter. Clear as mud? The New York Times posted a helpful article on the topic that might explain it better.

I know many of you aren’t that interested in SWA’s accounting practices. But there’s a lot of confusion out there regarding our hedging program, so I wanted to clarify it a bit.

New Gig Update

Posted on October 12, 2008 by Andy

Sunday morning I wrapped my first three official days as a trainer at work. My trainee was a great guy who came from AirTran’s dispatch office. He knows his stuff, has a good attitude, and is eager to learn, all of which make my job much easier. He seems like an excellent addition to our office.

The training experience reminded me of my early days in the office, which seem like such a long time ago even though less than 4 years have passed. I was much less confident than my trainee since I had never dispatched before. I was terrified when the phone rang and I had to answer it. I pored over my airport notes and diagrams and NOTAMs and forecasts, afraid that I would miss something. Despite my fear, it was so exciting to be working a real desk with real flights after working so hard to get there. It’s both a bit scary and very satisfying to become the guy on the other side, trying to help out the next class of dispatchers, teach them as much as possible, and give them confidence that they can use our software and policies to handle any situation that might arise.