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.