MIAMI – Ultra low-cost airline (ULCC) Frontier Airlines filed for a $100 million initial public offering (IPO) last week, in an offering underwritten by JP Morgan Chase, Deutsche Bank, Citigroup, and Evercore Partners. As part of its IPO, Frontier filed the required disclosures with the US Securities and Exchange Commission (SEC), revealing its financials for the last three calendar years as well as several strategic insights.

The Denver-based carrier is the only remaining major US airline to be privately held after Virgin America’s 2014 IPO (and subsequent 2016 purchase by Alaska Airlines). Frontier is the second carrier in as many months to file for an IPO on US markets after Brazilian ULCC Azul filed in February after a couple of false starts.

The culmination of a long journey

The current iteration of Frontier Airlines was founded in 1994, partly by executives from the old (1950-1986) Frontier Airlines in an attempt to fill the void left by Frontier Airlines shutting down its Denver Stapleton hub.

The new low-cost carrier kicked off service from Stapleton briefly using Boeing 737-200 and 737-300 jets and grew its Denver hub steadily over the next decade and a half, peaking somewhere north of 150 daily departures from Denver during its pre-bankruptcy phase. In the early 2000s’, the carrier switched to Airbus A318 and A319 jets and added LiveTV in seatbacks.

However, the US airline industry of the early 2000s’ was a brutal, brutal place and once Southwest entered the Denver market, Frontier was in trouble. The combination of elevated competition and a deteriorating economy led Frontier to file for Chapter 11 bankruptcy on April 10, 2008. Then things got really, really weird.

About a year before filing for bankruptcy, Frontier signed an 11-year service agreement for Republic Airlines to provide regional jet (RJ) feeder service (akin to that offered to the full-service airlines) with 17 Embraer E170 aircraft (76 seats) at the Denver hub.

Even at the time, this was a really bad idea (a reminder that this era also gave us Skybus, a ULCC based in Columbus…) given fuel prices, and predictably the agreement fell apart in 2008.

Frontier had also separately had feeder contracts with Mesa Airlines and Horizon Air, as well as a wholly owned Q400 division called Lynx Aviation. But Republic was apparently so encouraged by the rip-roaring success of its first link up with Frontier that it decided to buy the airline for $108.8 million (a total value of $258.8 million including a forgiven $150 million bankruptcy claim for the remainder of that RJ contract).

Simultaneously as it was acquiring Frontier, Republic also was looking to buy out Milwaukee-based Midwest Express. Once both airlines were in the fold, Republic moved to merge the two, briefly setting up a carrier with massive (140+ daily departure) hubs at Denver and Milwaukee. But once the economics of the situation caught up to them (we’ll never know if Milwaukee was a sustainable one-carrier hub because AirTran’s entrance into that market with its own hub trashed yields and ultimately killed both hubs), Milwaukee was pulled down by 2012.

At this point, Republic had had enough and decided to spin off Frontier to focus on regional operations, and Frontier began to transition its network to that of a ULCC. When Indigo Partners bought Frontier in October 2013 for $145 million ($36 million in cash), that transition to becoming a ULCC was sealed. And so here we are.

The raw numbers of the IPO are strong

According to the SEC documents filed by Frontier, the carrier’s financials since its transition to a ULCC business model have been very strong. From 2014-2016 revenue grew only about 8%, but the balance of the revenue coming from ancillary revenues jumped from 16.6% to 42.3% in 2016, indicating a successful transition to the ULCC business model.

Moreover, profitability jumped from a 14.3% operating margin in 2014 to 18.5% in 2016. Perhaps more impressively, Frontier expanded its operating margins between 2015 and 2016 even as most of its US airline peers saw margins and profits go in the opposite direction.

What you’re left with is a carrier that generated a $317 million operating profit and a $200 million net profit off of $1.71 billion in revenue in 2016.

Whatever the flaws with the IPO (and I will get into that below), Frontier’s margins are comparable to those of its larger ULCC competitors Allegiant and Spirit, and are much stronger than those of Virgin America at the time of its IPO back in 2014. Moreover, the ULCC business model has a proven track record of success around the world with a consistent path of expanding profits for ULCCs around the world in the last two decades.

So there’s a lot to like with Frontier’s IPO filing.

Two worrisome signs for the IPO

The challenge comes when you flip from financial metrics to operational ones. Most notably, Frontier grew its capacity by 20.6% in 2016 (and is up 48.9% from its 2014 number), and saw its total revenue per available seat mile (RASM) or unit revenue drop by a rough 27.8% from 2014-2016 and by 11.4% year-over-year between 2015 and 2016.

Now, this growth is essential to the model of any ULCC, and it’s in fact what allowed Frontier’s unit costs excluding fuel to drop by 14.5% over the same 2014-2016 period. But big capacity additions and RASM drops simply aren’t in line with what the current pearl-clutchers on Wall Street believes drives profitability, even if margins are expanding at the same time.

My worry for Frontier is that the success of their growth formula will be lopped off once they are exposed to public markets and the “discipline” of the current crop of Wall Street analysts. That would leave them with the worst of both worlds, a share price that doesn’t catch fire and no way to grow margins to compensate (the only way for a ULCC to increase profits is growth). So I wonder if exposing Frontier to public investor scrutiny may be harmful for the carrier’s business strategy.

The other worrisome statistic from the SEC filing is the fact that Frontier’s salaries, wages, and benefits (labor compensation) went up just 11.2% from 2014-2016 to $287 million despite capacity increasing nearly 50%.

That speaks to Frontier’s incredible cost discipline, yes, but unfortunately, in the current US airline market, it is unrealistic to expect that to continue. Frontier’s employees will demand a rich new labor contract to get to market competitiveness with Spirit and Allegiant and that will take its toll on Frontier’s finances.