Published in August 2015 issue

Is it really a whole different animal?

Barely a year after Republic Airways sold Frontier Airlines to a phoenix-based private equity firm, indigo partners, a decision was made to transition the airline from a low-cost carrier (LCC) to an ultra-low-cost carrier (ULCC).

For an airline that used to call itself ‘a whole different animal’, the change has been a turbulent ride. By May 2015, its missteps had led to a barrage of customer complaints, a federal report that ranked it the worst for on-time performance among the nation’s top airlines, and a sudden change of top management.

Buckle your seat belt.

By Michael Manning

The frontier airlines (F9) of today bears little resemblance to the well-regarded ‘hometown airline’ headquartered in Denver for the past 20 years. That warmly remembered Frontier began on July 5, 1994, as a scrappy entrepreneurial upstart, its fleet of Boeing 737-200 and -300 aircraft successfully competing with Southwest (WN), JetBlue (B6), and Virgin America (VX). In 1999, it began a four-year fleet overhaul program to acquire an all-Airbus fleet of A318, A319, and A320 aircraft. Its service to North Dakota destinations (since discontinued) was well received, and, under the command of Chief Executive Officer Sam Addoms, the carrier rapidly expanded nationwide.

A new aircraft color scheme, created by the design firm Genesis, featured animals on the tails of Frontier’s fleet. Before long, the airline was cited on Fortune’s list of fastest-growing companies.

In 2003, Frontier was granted flag carrier status by the Federal Aviation Administration (FAA), allowing flights between Alaska and Hawaii— going beyond the previous limit of two hours from the US border. Mexican destinations Cancun, Cozumel, and Puerto Vallarta came soon afterward. By 2005, the airline’s fleet was all-Airbus.

But then Sam Addoms retired. A succession of CEOs followed and the company began incurring losses.

CHAPTER 11 REORGANIZATION

On April 10, 2008, Frontier filed for Chapter 11 bankruptcy protection after First Data, the airline’s credit card processor, attempted to withhold proceeds from ticket sales—on the heels of bankruptcy declarations from Aloha Airlines (AQ), ATA (TZ) and Skybus Airlines (SX). Frontier, which kept on flying, returned to profitability in November 2008 with $2.9 million in net income.

Soon after, Republic Airways, Southwest and AirTran (FL) appeared on the scene to acquire Frontier’s assets.

REPUBLIC ACQUIRES MIDWEST AND FRONTIER

As the US economy plunged in 2009, Republic Airways Holdings, Inc. acquired Oak Creek, Wisconsin-based Midwest Airlines (YX) for $31 million—93% less than the $451 million paid by TPG Capital and Northwest Airlines just two and half years earlier. Formerly known as Midwest Express until 2002, the airline, with its fleet of DC-9s and MD-80s, is well remembered by customers for its extra-wide 2×2 leather seats and gourmet meals. However, after a 14-year record of profitability, the airline began losing money following the 9/11 terrorist attacks. From 2001 to 2009, the airline lost $500 million (with the exception of 2006, when it posted a profit of $1 million).

Three months after acquiring Midwest, Republic purchased Frontier for $109 million. On October 1, 2009, Frontier officially exited bankruptcy and relocated its executive positions from Denver to Republic’s offices in Indianapolis, Indiana. Republic, seeking to diversify its portfolio as a provider of fixed-fee regional airline services to large carriers (including F9), consolidated the two carriers, with Frontier emerging as the surviving brand, on April 13, 2010.

With Frontier’s fortress hub at Denver International Airport (DEN), the decision was made to downsize the former Midwest Airlines hubs at Kansas City International Airport (MCI) and Milwaukee’s General Mitchell International Airport (MKE). In June of 2011, Republic began an aggressive cost-cutting program at Frontier.

On January 26, 2012, David Siegel, a veteran airline executive who was an independent board director at Republic, was named Frontier’s new president and CEO. The following day, Republic announced it was returning all Frontier executive positions to DEN. Republic Chairman Bryan Bedford announced that Frontier aimed to become profitable by the end of 2012.

Bedford’s projected goal of $120 million in cost savings was met by grounding small jets, eliminating unprofitable flights, and cutting capacity. Nearly 1,000 flight attendants agreed to wage concessions, as its pilots had done—saving the company an estimated $16 million in labor costs over four years. In exchange, the pilots and flight attendants agreed to receive equity in Frontier and be eligible for profit sharing.

But consistent profitability eluded the carrier. In May 2012, Republic enlisted Barclays Capital as financial advisers to find a buyer for Frontier while it shored up the company’s balance sheet.

COST CUTTING TO THE BONE

David Siegel had been a director of Republic Airways Holdings since 2009. Prior to serving as president, CEO, and interim COO of Frontier Airlines, he had been president and CEO of US Airways and had held senior executive roles at Northwest and Continental Airlines.

“We have been focused inwardly on our survival,” Siegel said as he took over in 2012. “This is a new chapter for us. Now we can start to grow again.”

Siegel quickly announced that the airline needed to “figure out how we can treat our best customer even better and give our price-sensitive customers options that they can choose from. That’s the tricky thing.” The key to his agenda: transforming Frontier from an LCC to a ULCC. He started to do so in May 2013.

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TRANSITIONING FRONTIER TO AN ULCC

Frontier’s ULCC transformation began by adding two seats to each of its 41 Airbus A319s after removing one of their three lavatories, thus increasing capacity from 136 seats to 138. Similarly, six seats were added to its 16 Airbus A320s by switching to a slim-line type of seat, thereby raising capacity from 162 to 168. With these changes, the airline could put more passengers on each flight, boost sales, and spread operating costs across more seats on each plane with lighter weight. The Airbus A318 fleet was phased out.

Beginning July 1, 2013, Frontier began unbundling its services, and customers were given the option of choosing only the services they needed. Two main classes were now offered at the time of booking: ‘The Basics’, the cheapest option, based on à la carte pricing, with charges for seat assignments, bags, and carry-on luggage; and the more expensive ‘Classic Plus’, which allowed free-of-charge itinerary changes, first checked-in bag, and carry-on luggage, priority check-in and boarding, fully refundable tickets, and 150% credit on elite qualification miles.

Accordingly, Frontier began charging $25 to customers who booked tickets through third-party websites, excluding certain members of its frequent flier program. This was meant to encourage travelers to book flights on the airline’s website, rather than on others like Orbitz and Expedia.

Under Republic’s ownership, Frontier reported a 2012 income (before taxes) of $23.9 million, compared with its 2011 loss of $95.3 million. Revenue grew from $1.3 billion in 2011 to $1.4 billion in 2012, in large part because the airline had eliminated nearly a third of its scheduled monthly flights. Its fleet of 100 aircraft was eventually reduced to today’s 54 (not including new aircraft orders).

SALE OF FRONTIER TO INDIGO PARTNERS

On July 26, 2014, Republic announced that it had reached an agreement to sell its Frontier unit to the Phoenix-based private equity firm Indigo Partners LLC.

Indigo, founded in 2002, had bought Spirit in 2006, and Franke, a former CEO of America West Airlines (HP), is credited with introducing Spirit’s fee-based model, which helped turn it into one of the fastest growing carriers in the US.

Currently holding a 49% stake in Wizz Air Hungary Airlines (W6), Indigo is also a shareholder in Mexico-based Volaris Airlines (Y4) and Tiger Airways Singapore (TR).

Under the terms of the sale, Republic Airways Holdings announced that it had agreed to sell Frontier—the nation’s 10th-largest airline—to an affiliate of Indigo Partners for $36 million in cash. Indigo assumed $109 million of Frontier’s debt and Republic received a $32 million reimbursement for deposits placed on certain jet purchases.

Under Frontier’s new private owner, the full-year financial results for 2014 were not released publicly.

FLEET COMMITMENTS

Prior to Indigo’s acquisition and during the 49th Paris Air Show in June 2011, Republic signed a Letter of Intent (LOI) to buy 80 fuel-efficient Airbus neo (New Engine Option) aircraft. The current order, in 2015, stands at 18 A319neo and 62 A320neo aircraft. Ultimately, the fleet will grow from 55 to 88 Airbus aircraft.

According to Frontier, the A320neo family aircraft are 15% more fuel-efficient than those making up its current fleet. The airline estimates that the new jets will provide annual fuel savings of $90 million—approximately 5% of Frontier’s profit margin.

In addition, Frontier placed a firm order in November 2014 for nine Airbus A321ceo (Current Engine Option) aircraft; with the first due to come online in October, 2015. The airline currently flies a fleet of 24 Airbus A319ceo and 30 A320ceo aircraft.


 

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STRUGGLING TO FIND A STABLE

OPERATING PLAN

While Republic returned to its core business of fixed-fee based regional flying, Frontier’s move from a LCC to an ULCC has been a rough ride.

Settling on a route structure has been a struggle. Frontier began operating flights at regional airports in California, Illinois and Pennsylvania— and quickly abandoned the idea. The airline then set its sights on operating out of smaller, underutilized airports.

Frontier picked New Castle Airport (ILG), in Wilmington, Delaware, to begin nonstop service to Detroit (DTW), Chicago (MDW), Denver, Atlanta (ATL), and Fort Myers (RSW). However, those routes were canceled within months.

Frontier had better luck at New Jersey’s Trenton- Mercer Airport (TTN), although, there too, the airline soon gave up on several routes: to Nashville, St. Louis, Indianapolis, Milwaukee, Cleveland, and Nassau. It now runs 11 routes out of TNN: to Atlanta, Chicago (ORD and MDW), Charlotte, Raleigh-Durham, Fort Myers, Orlando (MCO), St. Augustine, Tampa, Fort Lauderdale and West Palm Beach.

After more than 20 years of service as Denver’s hometown airline, Frontier reduced its hub-and-spoke model in favor of a point-to-point strategy similar to that of Spirit and Allegiant Air (G4), insisting that its connecting hub has been unprofitable.

To wit, in 2012, Frontier operated over 150 daily departures in DEN. In November 2014, Siegel announced in a letter to staff that the carrier would cut back jobs and flights, slashing an already-reduced schedule of 85 daily departures from DEN to 70 in 2015, dropping to the third spot behind Southwest and United in market share at the airport. Siegel stated that the move was due to rising taxes and landing fees in DEN and an increase in point-to point flying versus connecting traffic.

However, in a highly publicized retort, Denver Mayor Michael Hancock responded to Siegel’s statement by releasing a letter alleging that Frontier’s officials had rebuffed a number of economic incentives, from eliminating the aircraft parts sales and use tax to restructuring debt and taking back leases on certain properties.

MOUNTING OPERATIONAL ISSUES

In January 2015, Frontier announced that it was outsourcing 1,160 ticket agents, phone reservation agents, ramp and baggage handlers in Denver, and further 140 positions in Milwaukee.

The airline’s spokesman, Todd Lehmacher, said in a statement: “These changes continue to be part of a comprehensive companywide strategy that is crucial for Frontier to successfully compete in the marketplace as an ultra-low-cost carrier, allowing it to offer customers much needed relief from high airfares nationwide. Low fares are only achieved through low costs.”

Three months later, in mid-March, Frontier switched its reservation system from Sabre to Navitaire’s New Skies. Such software changes have caused trouble for carriers and their passengers in the past (United Airlines and Virgin America, to cite but two examples), but Frontier’s problems have been pronounced. Passengers have endured incorrect website information, canceled flights, lengthy lines at airport check-in desks, and being placed on hold on the telephone for hours. A Cleveland-area councilman and his son informed The Plain Dealer that they had spent 27 hours trying to return to CLE from MCO. The airline’s online flight tracker had showed the flight as on time, although it had been canceled.

“It’s a little bit messy when you go through the changes,” Frontier spokeswoman Tyri Squyres told Cleveland.com at the time. “We’re working really hard to make things better. We’ve been problem-solving around the clock the past few days.”

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A WHOLE DIFFERENT ANIMAL?

Until 2013, Frontier’s livery had consisted of an impeccable white fuselage with large billboard Frontier titles on each side of its aircraft. The slogan “A Whole Different Animal” accompanied beautiful wildlife photos on the aircraft tails. In 2014, however, as part of a rebranding effort—featuring the original Frontier stylized “F” by which the airline was known in the late 1970s—the airline updated its livery and dropped the slogan for a much simpler “flyfrontier.com.” With a new livery and an attempt to become America’s next ULCC, Frontier’s operations are in disarray. Once a well-regarded LCC that was considered the pride of Denver as ‘the hometown airline’, the transition to a ULCC business model has seen one pratfall after another. The November showdown in the press with Denver Mayor Hancock over city incentives to retain Frontier’s operations at DEN was a major embarrassment. Relentless cost-cutting has diminished Frontier’s once-reliable service and onboard product offering.

The airline has paid a high price for its move to lower costs, including a systemic breakdown of the carrier’s New Skies software reservation- and flight-management system—in place of the highly regarded Sabre computer technology product used by 400 airlines and 350,000 travel agents worldwide. This nightmare included stranded passengers forced to incur hotel stays or higher rebooking costs on other carriers after Frontier canceled flights with little or no notice. The failure of the airline’s website added insult to injury. Passengers were even informed through Facebook to clear their computer cache and try using Google’s Chrome as their designated Internet browser.

Meanwhile, Frontier failed in its attempt to copy Allegiant’s strategy to serve smaller focus cities at underserved airports. While Allegiant was able to operate a low utilization schedule with cheaply purchased MD-80 aircraft flying at peak times, Frontier’s newer Airbus fleet required higher utilization. And yet, amazingly, during a January 2015 economic summit in Dublin, Ireland, Chairman William Franke strongly hinted at consolidation among ULCCs—prompting speculation that Spirit Airlines was under consideration.

Point-to-point flying from larger cities, where leisure routes tend to become profitable quickly, appeared to be the strategy of choice for Frontier. However, a few days after a government report showed that Frontier ranked last among US carriers in on-time performance and customer complaints, the airline’s CEO, David Siegel, resigned on May 13, 2015. The airline said that he had resigned for personal reasons and declined to elaborate.

Instead of replacing Siegel with a new CEO, Frontier has created an Office of the Chief Executive, which will be made up of Frontier’s President Barry Biffle and board chairman Bill Franke. This move may help Frontier’s transformation into a ULCC, given that both have experience in running and turning an LCC into a successful ULCC (Spirit).

In the meantime, one thing is clear: Frontier’s scheduled operations must stabilize for travelers to regain trust that the airline is reliable and here to stay. For the flying public, Frontier is no longer the “Whole Different Animal” it used to be.