LISTEN or READ: Conference Call held 8/10/09 to discuss Southwest’s bid for Frontier
LISTEN or READ: Conference Call held 8/10/09 to discuss Southwest’s bid for Frontier
To listen to a conference call held today to discuss Southwest’s bid proposal with Ron Ricks, Executive Vice President Corporate Services and Corporate Secretary, and Bob Jordan, Executive Vice President, Strategy and Planning, please click HERE. The Transcript from the call is below.
Operator: Good day and welcome to the Southwest Airlines conference call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Ms. Beth Harbin. Please go ahead, ma’am.
Beth Harbin: Thanks Michael and good afternoon to everyone. I’m sure you have now seen our announcement today about submitting our binding cash offer of more than $170 million to acquire Frontier Airlines, which will be sold as part of Frontier’s bankruptcy case.
With me again today are two of our executive vice presidents, Ron Ricks, Executive Vice President, Corporate Services and Corporate Secretary of our board of directors and Bob Jordan. He’s our Executive Vice President, Strategy and Planning.
Now I’ve gotten some feedback from some of you all that we need to differentiate our speakers just a little bit better so you may hear my voice chime in just a time or two so that we can do that. I’d also like to preface your questions with a reminder that this is yet another step in an ongoing process.
There is still much to do. And on that note I’d like to turn it over to Ron Ricks if I can for a brief update on where we are on the auction process and what we have left to do.
Ron Ricks: Thank you, Beth and good afternoon. The process from here is simple in some respects, vague in some respects and complicated in every respect. We filed our bid officially at noon today.
The bid will go to the bankruptcy lawyers and investment bankers and advisors for the debtor, Frontier Airlines, as well as the creditors’ committee. And they will probably spend the next day, the rest of today and tomorrow studying that bid.
It’s a complicated document. Then Wednesday we will be in New York to make a presentation to the debtor, Frontier Airlines, and the creditors’ committee to go through the bid in great detail and to answer as many questions as they have.
Once that process is complete, which probably will take the bulk of the day on Wednesday, presently there is scheduled to begin on Thursday morning at auction in bankruptcy. And if necessary there is time reserved as I understand it to carry over into Friday.
So that’s where we are in terms of the process. And if you have any other questions about that process we’ll be happy to try and answer them.
Beth Harbin: So Michael, I think what we’ll do at this point is turn it back to you to give the instructions on how we might queue up questions.
Operator: Okay. Wonderful. Today’s question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you’re calling from a speakerphone, please make sure that your mute function has been deactivated so that your signal may reach our equipment. Again, that is star 1 for questions. We’ll pause for a moment to assemble the queue.
And we will take our first question from David Johnson with KRLD.
David Johnson: Hi guys. So (how did the price quote 50%)? Who are you bidding against?
Bob Jordan: Well, David, this is Bob and there’s a number of things here. You’ve got to remember that our bid or our submission about 10 days ago really wasn’t a bid. It was simply a placeholder to get us in the process here.
But just to lay out a couple of items, primarily number one, we as part of working through the Fleet plan, that process creates claims, which then need to be dealt with in bankruptcy. So a part of that relates to those claims. We have also as part of our bid increased beyond Republic’s offer the percentage on the dollar so to speak that we are paying on the unsecured claims portion as well.
There is also technically an increase in the refinancing of the DIP, the Debtor In Possession financing as well. But it’s important to remember that the bid so to speak or the submission about ten days ago really was not a bid. This is our bid.
Ron Ricks: David, this is Ron Ricks. Just from a bankruptcy law standpoint the court procedures required in what’s called the initial indication of interest to put in a number.
The number is just a placeholder. It wasn’t really a bid. In other words it wasn’t based on any analysis of the assets that we were purchasing. But a number was required so as Bob says, it was a number but it wasn’t a bid. This is our first bid.
David Johnson: And there are still only two bidders.
Bob Jordan: As far as we know all bids had to be in by noon Eastern and as far as we know we, Republic and Southwest Airlines.
David Johnson: Thank you.
Bob Jordan: You’re welcome.
Operator: And we will go next to Ann Schrader with Denver Post.
Ann Schrader: Yes. There has been perhaps some misconceptions on the part of perhaps the Frontier people particularly the employees. Can you kind of walk through what you envision for the equipment and the people from Frontier?
Bob Jordan: Well, Ann, we have done a lot of work.
Beth Harbin: This is Bob.
Bob Jordan: I’m sorry. This is Bob. Actually I didn’t want to call out our names because a couple of the really good quotes from Ron from last week were attributed to me.
So but as part of working through the due diligence in the last ten days, you’ve got to work through a lot of things in terms of contracts and as you said, assets and that kind of thing. And the biggest group is working through the Fleet plan and we still have some work to do.
Our current bid that we submitted today anticipates that we will retain approximately 80% of the Airbus fleet and all of Lynx. So as part of working through that - well, I’m sorry - in addition to that, Frontier will continue to operate post-close.
So you’ve got to remember that this does not all transition to Southwest Airlines in day one. So if you think about the employee group for example, Frontier needs employees to continue to operate in that period. As we move the fleet over over a period of about 24 months from Airbus to Southwest Airlines’ Boeings, Southwest needs employees as well to operate.
And we need to work assuming the winning bidder. We need to work with Frontier management to work through a transition plan. And just to give you a little perspective on just the reality of number of employees, Southwest Airlines on its own without respect to Frontier hires about 1000 folks a year simply to replace attrition that we have just to give you a little perspective in terms of our hiring.
Operator: Okay. We’ll go next to Mary Schlangenstein with Bloomberg News.
Mary Schlangenstein: Hi. Thanks. I just wanted to ask quickly in terms of the scheduling, the auction apparently was originally scheduled for tomorrow. Did you actually ask for a delay? Or how was that worked out?
And then my second question is there has been some Frontier employee opposition. You have seen the comments about keeping the tails, things like that. Are you concerned at all that you would have some employee back last similar to what happened with Delta’s employees against the US Airways offer?
Ron Ricks: Mary, this is Ron. We did not ask for a delay and we don’t know why the schedule was changed. But I suspect it was due to the complexity of the documents that we filed necessarily as part of our bid. There is just a lot to digest.
So I think I’m assuming you would need to check with the creditors’ committee and the debtor to know for sure. But I think it’s very logical to assume and actually desirable from our perspective that there was a little more time because there is so much more in the bid than just the number of more than $170 million that has to be thought through and analyzed.
And we think it’s a good thing from Southwest Airlines’ perspective that those parties, the debtor and the creditors, take the time to analyze our bid. And then are willing to meet with us on Wednesday to go through it because there is lots of detail in the bid that may not be obvious upon first read just because of the complexity of the document.
So we think it was just bowing to reality in terms of the time needed to understand the nature of our proposal.
Mary Schlangenstein: Okay. And then what about the employee question?
Ron Ricks: Of course we’re always concerned about perceptions particularly in the case of Frontier employees but we’re not surprised. These are very trying times in a very tough business.
Frontier Airlines is up for sale in bankruptcy and that creates a lot of uncertainty and a lot of nervousness. And it would be very surprising if Frontier employees did not have a lot of questions. Last week when we announced our initial indication of interest we did not have a lot of details.
And we think and we hope that as the Frontier employees come to better understand the nature of our proposal our goals and desires and hopes and aspirations for Frontier’s future, that they will come to appreciate what Southwest Airlines is attempting to do here.
The fact that some people have raised concerns is not surprising to us. We would have been surprised otherwise, frankly, given the difficult economic times that we’re in together that all airlines are in. But in particular the difficult time that Frontier Airlines has had.
So we’re trying to address those concerns by informing people as best we can what we hope to do in Denver once we’re the successful bidder.
Mary Schlangenstein: Okay and real quickly one other...
Bob Jordan: Let me just add one thing. It’s just important to note I think that just in the same way that Southwest Airlines employees love Southwest Airlines, I am sure Frontier Airlines employees love Frontier.
And believe me, Southwest, we take no offense to Frontier employees demonstrating the fact that they love their company.
Mary Schlangenstein: Are there any major assets that you would not buy under this bid?
Bob Jordan: I think we again have done a lot - I’m sorry, this is Bob. We have done a lot of due diligence in the last ten days. And there are a few things left to decide. The primary item though I would tell you we have discovered is we have worked through the Fleet plan.
Obviously the transition plan to move from Airbus to Boeing is very complicated to work through. Those orders or leases or aircraft that are owned play out over a period of time and we have worked very hard on that. So I would say the primary asset is the reduction in the Airbus fleet to about 80% of where it sits today, which I think is 51.
Mary Schlangenstein: Okay. Thank you.
Bob Jordan: You’re welcome.
Operator: And we will go next to Dan Reed of USA Today.
Dan Reed: Hey guys.
Bob Jordan: Hello Dan.
Dan Reed: Question on the fleet. When you reduce to 80% of the current Frontier fleet, if you could walk me through that. Maybe I’m a little dense. I guess you can probably scratch the maybe on that.
When you go to 80 are you going to continue 80% of the 51, which is going to be roughly 40 planes post-closing for two years? Are you going to gradually work out of those as they come off lease or as you can negotiate out on those?
Bob Jordan: Yeah, Dan. This is Bob. You’re not dense, you’re very close. Our plan would be to operate about the 40, 80% on day one. So there would be a number of aircraft rejected, which means you would have sort of a literal drop to 40 or so in that time period.
Then over the course of about 24 months we would transition the remaining 40 from Airbus to Southwest Airlines’ Boeing fleet. And it’s important also to remember that our intent is to continue to operate Lynx as well and then to talk for just a second about the market.
So what happens when you reduce to 40 or so? It’s our intent to serve all of the markets that are served by both Frontier and Southwest today on day one. It’s also our intent to add additional non-stop markets that are neither served by Frontier or Southwest today. Again, very early in the process.
Dan Reed: The Lynx question - do you intend to operate Lynx merely during the 24 months or so transition period or beyond?
Bob Jordan: This is Bob and that’s a great question. What I would tell you today is that it is part of our bid to acquire Lynx. So if we are lucky enough to be named the winner we will have purchased Lynx in addition to the mainline fleet.
Now we over the course of the fall as we work towards closing the transaction there are a number of things to evaluate - whether we operate that ourselves as Southwest Airlines, whether we look to somebody else to operate that. But there are a lot of options to be studied, which we have really gone through very little detail at this point.
The commitment I’ll make though is that in any case it is our intent to ensure that the service remains.
Dan Reed: Remains beyond 24 months or remains?
Bob Jordan: Remains beyond that period as it is today. So to continue the Lynx service.
Dan Reed: Okay. Thanks.
Bob Jordan: Yes sir.
Operator: And we will go next to Eric Torbenson with the Dallas Morning News.
Eric Torbenson: Gentlemen, good afternoon. Most of my questions got asked there but can you enlighten us at all about what specifically is due Republic Airways Holdings in the event that you are the successful and court approved winner since they are owed some sort of termination fee for the deal?
And I’m less clear about how much of that DIP money that they have put up and whether or not you essentially have to pay them or rework the DIP that involves some sort of payment to Republic. Can you help us there?
Ron Ricks: Eric, this is Ron. You are right on target. The way the bankruptcy process works if we are the successful bidder we in effect will replace them as the DIP lender, the Debtor In Possession financer.
And you’re right, Republic’s bid, which was tentatively approved by the court subject to a higher and better bid received in the auction process does include a break up fee for Republic. And that is included in our bid.
Eric Torbenson: Okay.
Ron Ricks: We are also increasing - our proposal would increase the debtor in possession loan. So that’s key we think because I think Bob Jordan already alluded to the fact that our bid includes a significant increase in the amount of money that would be received by the unsecured creditors versus the Republic bid.
In addition to that, our bid provides Frontier with more working capital than the Republic bid.
Eric Torbenson: Can you quantify at all the percentage increase for the unsecured creditors that your bid has over Republic’s bid?
Bob Jordan: Eric, it’s our intent in the bid to increase from I believe Republic’s 8.7 cents on the dollar to our bid is at 12 cents today. So it’s just important to remember too that Republic is about 50% of that unsecured claims pool.
Ron Ricks: 30%.
Eric Torbenson: 30% or 50?
Bob Jordan: Right at 30.
Eric Torbenson: Okay. Right at 30.
Bob Jordan: 30% increase from 8.7 to 12 cents on the dollar.
Eric Torbenson: Got you. Okay. Just real quickly, the Mexico flying that Frontier currently operates, it sounds like you intend to do that.
And I wonder is there any sort of hook up or stumble in terms of getting the permission to fly into Mexico transitioned to Southwest’s name versus Frontier? Or is that not just a technicality in terms of your interest of continuing to fly to Mexico?
Ron Ricks: Eric, this is Ron. We hope it’s a technicality but in the meantime we have a 24 month transition period to work through that. And we think we should be able to work through those technicalities through over that timeframe.
Eric Torbenson: Thanks gentlemen. Good luck.
Ron Ricks: You bet. Thank you.
Operator: And we will take our next question from Josh Freed of the Associated Press.
Josh Freed: Hi. So can you say whether you would be assuming any additional Frontier debt? And if so, how much?
Bob Jordan: Josh, this is Bob. That’s a complicated question. I’m not a finance expert. We are assuming debt as part of this in the same way you are receiving assets, cash and accounts receivable, that kind of thing. I don’t have an exact number in my head unfortunately.
Josh Freed: Okay. And then just to clarify on the fleet, so the 20% of the flee that you would not be taking, are those leased aircraft that you are assuming Frontier would then reject through bankruptcy?
Bob Jordan: Yes. This is Bob. Those are primarily rejected leases or lease returns.
Josh Freed: Yeah. Okay. And I imagine we know the answer to this but does your bid anticipate any return at all for Frontier shareholders or would their shares continue to be canceled just the same under your bid as they would under the Republic one?
Bob Jordan: This is Bob again and no, it is not. Those shares would be canceled.
Josh Freed: All right. And last question, kind of the big picture question - could you maybe kind of articulate for us the thinking behind buying Frontier especially in light of the plan apparently to basically absorb it into Southwest and the plan to get rid of the aircraft?
I mean if you’re not going to keep the planes and long-term you’re not going to keep the name, why buy the airline?
Bob Jordan: Well, again this is Bob. I think it’s pretty simple on a couple of fronts at least from the Southwest perspective. Again, Frontier is for sale in bankruptcy. So something is going to happen to Frontier over the course of this week and we want to be a part of that.
Second, we want to grow. Southwest is a growth company. We have 38 years of demonstrated growth, low fares, great customer service, great employee relations and all those things that you know about. And this provides us a great way to grow substantially in a city that is very important to us.
Josh Freed: All right. Thank you.
Bob Jordan: You’re welcome.
Operator: And we will go next to Ed Fealover of Denver Business Journal.
Ed Fealover: Thank you very much. Gentlemen, I know we have talked a little bit around this but I’m wondering if you have any numbers. Specifically, do you have any idea what percentage of current Frontier employees you anticipate being employed by Southwest in 24 months?
And also along with that, given the level of unemployment we see currently, the country, do you believe the bankruptcy court should or will take that number into account as it decides on the winning bid?
Ron Ricks: This is Ron. I can’t really comment on the last part of your question because we just don’t know what the bankruptcy court will take into consideration. But the way we’re focusing on it is that we are keeping in addition to all of Lynx, 80% of Frontier’s mainline Airbus fleet.
And we need employees to operate that part of Frontier’s operation that will remain post-closing. Bob Jordan already alluded to the fact that we have about 1000 positions a year at Southwest that we have to fill to normal attrition anyway.
So you put those two thoughts together that we always need good people at Southwest Airlines coupled with the fact that we’re going to maintain the bulk of Frontier’s operation, maintain service to all markets, expand service to new non-stop destinations that neither Frontier nor Southwest serves today and that creates a need for people.
We don’t know the exact number today. We can’t predict that. But we do know that we’re talking about a lot of Frontier employees that we hope to turn into loyal, happy Southwest employees.
Ed Fealover: And just as a follow up to that, I mean just using your numbers there, if you have a turnover of 1000 positions per year, does that realistically say that we could expect a maximum of 2000 Frontier employees to be employed by Southwest?
Ron Ricks: Not necessarily because of course if it’s a new position created at Southwest Airlines then there has to be an interview process associated with that. So it’s impossible to say that every position that comes open at Southwest would be filled by a Frontier employee.
But in the initial two-year transition period, certainly because we are keeping so many aircraft through the bankruptcy process and operating them in such a way that we’re going to maintain levels of service and grow levels of service. We still need those people.
Ed Fealover: Thank you.
Ron Ricks: Yes sir.
Operator: And we’ll go next to Andy Compart with Aviation Daily.
Andy Compart: Hi. How are you guys doing?
Bob Jordan: Good afternoon.
Ron Ricks: All right, Andy.
Andy Compart: Great. Can you say - I just want to clarify one thing first. You’re saying you would continue operating Lynx professionally, either yourself or someone else in contracting off the service 24 months and beyond 24 months?
Bob Jordan: Yeah, Andy. This is Bob. In this environment or any environment it’s a little tough to say perpetually.
Andy Compart: So you don’t contemplate an end point?
Bob Jordan: No. And I think again, our intent is I think when we talked ten days ago we talked to you about we don’t know much about Lynx and we need to study it. The big change over the last ten days is our bid includes Lynx.
That is a big change. Now and as part of that it’s our intention to maintain the service, those aircraft, the markets, etcetera. Now when you get into again working through the close, again if we’re fortunate enough to be named the winning bidder, then we have to think through options.
Do we want to operate that? For example, would you want a third party to operate that for Southwest Airlines or sell that to a third - I’m just sort of naming options. There are a lot of things you could do as a way to maintain the service.
But it’s our intention at this point to acquire Lynx and maintain that service. We have no intent to draw that service down.
Andy Compart: And I guess my follow up question on this is why? I mean (Barry Kelly) has said we originally had been one operator with regional service.
And really Frontier operates as a feeder and Southwest isn’t really about feeding or doing small routes to feed bigger routes. Why? What changed your mind in the last ten days? Why do you think Lynx is a good idea and definitely something you’re going to keep?
Ron Ricks: Andy, this is Ron. I’ll take a stab at that. I think as Bob said, we have learned a lot about Lynx just as we have learned a lot about Frontier.
So we have learned that Frontier has a strong franchise in Denver, has devoted employees and a very strong brand and that includes Lynx. Lynx is a very popular part of the Frontier brand and serves a lot of important smaller communities.
And we have learned through this process that Lynx has a strong operation that works very well with the mainline operation. And we learned a long time ago that just because we have one way of doing things doesn’t mean we can’t learn from someone else.
And we’re learning from Frontier in this case that Lynx is a valuable asset and we wanted to make sure that it was part of our business.
Andy Compart: And you believe it’s a profitable operation?
Ron Ricks: Yes we do. And we think it can become more so particularly when you think about Southwest Airlines being the largest carrier of passengers in the United States of America with a very extensive national network providing more feed to Lynx and vice versa.
So we think there is a growth opportunity there as well whether it’s operated directly by Southwest Airlines or by some other for example, experienced commuter type operator that might be interested in a marketing alliance with Southwest.
Andy Compart: And the last thing on Republic - can you say how much (as I always say), with a secured claim as well?
Ron Ricks: I’m sorry?
Andy Compart: Republic obviously has a big secured claim as well. Can you say how much you think Republic would end up with if they lose the bid? Do you have any idea what that total would...?
Bob Jordan: If they lose the bid.
Andy Compart: Right.
Bob Jordan: This is Bob. Well, I’m just trying to think through that question. So if Southwest wins?
Andy Compart: Right.
Bob Jordan: So obviously we repay their DIP, that’s $40 million. They have the break up fee, which Ron described, which is between 3-1/2 and four depending on expenses.
They would be paid as an unsecured creditor as well. I’m trying to do the math in my head. I’m going to guess somewhere on the order of $20 million, about 20. And then I’m just thinking through, I think that’s the extent unless I’m missing something.
Ron Ricks: This is Ron. I think those are the big numbers. I agree with Bob. You have those three components of it because Republic is I believe the largest unsecured creditor of Frontier.
So the increase in the bid that we made for the unsecured creditors means an increase in the money that would go to Republic as an unsecured creditor.
Andy Compart: Okay. Thanks.
Ron Ricks: You’re welcome.
Operator: And we will go next to Jay Gormley of CBS in Dallas.
Jay Gormley: Hi gentlemen. How are you doing?
Ron Ricks: All right, thank you.
Bob Jordan: Thank you.
Jay Gormley: I’ve got a question. There was a recent report in the Associated Press about two weeks ago talking about the fate of airlines, that there were less runs, less direct links, people were paying more fees, everything from bags - I know you guys don’t charge for bags, but fees for everything. It was going to take more time to travel from Point A to Point B, you’re going to require more connections. And basically the story was you were getting less for more.
And I was wondering why now take a chance in this economy considering the fate of the airline business is not looking so bright in the coming months and yet you’re going to take this leap of faith and actually expand when other airlines are actually cutting back?
Is this one of those philosophies where in the real estate market you buy low when the real estate market is down?
Bob Jordan: Well, Jay, a couple of things. I love the first half of the question. I actually love the entire question. I think you know the Southwest story.
We are always prepared. We are the most profitable, financially successful airline in the history of the airline industry, most consistently profitable, great balance sheet and well prepared to take advantage of an opportunity that presents itself in good times and bad.
And this is a great opportunity. And again, Frontier is going to be sold. We didn’t create this opportunity. This opportunity is here for Southwest Airlines. Back to the first part of your question, you’re right. There are a lot of things in the airline industry today on average that I think the average consumer or traveler could be troubled with.
And I’d like to contrast that against Southwest Airlines. So Southwest in Denver and this transaction would allow us to really increase our presence in Denver. We don’t charge fees. So we don’t have the first bag fee, the second bag fee. We are providing more not less service.
It’s our intent to provide more non-stop service, not less non-stop service out of Denver, more options. We provide wonderful customer service. We continue to rank at the top of customer service rankings nearly every month. So this is a great way to bring even more of the great brand that we have to Denver.
Beth Harbin: That was Bob.
Jay Gormley: I guess the second part of my question would be with the economy the way it is right now, the first thing a company cuts is business travel. The second thing they cut is advertising - whatever business it may be.
So if business travelers are not traveling as much and the economy is kind of in the toilet, obviously the airline industry is affected. And again, why expand when people are traveling less?
Ron Ricks: Jay, this is Ron Ricks. Number one, and we got into this a little bit I think in the last conference call, all markets are not the same. So just as Dallas for example, has not suffered as badly as other regional areas of the country in this economy, neither has Denver.
Denver remains a stronger market relatively and we think as things start to turn around while others zag Southwest Airlines always likes to zig. And we want to position ourselves to move faster in with growth when the economy turns around.
But even in the absence of that, Denver remains a very strong market today both as a very strong leisure market in addition to being a solid business market. So back to Bob Jordan’s point that he made earlier, the financial strength that Southwest Airlines has built up enables us to take advantage of opportunities, which as he said, presented itself to us.
We were not in search of it so much as it was presented to us by virtue of the bankruptcy court auction. So we’re cautious of course, which is one reason if you look at the numbers that we did decide to reject some of the unfavorable leases on the airplanes and right size the fleet if you will for market conditions today but position the combined entity of Southwest and Frontier as growth resumes.
As this cycle comes to an end we certainly all hope and there is a rebound, Southwest Airlines’ financial strength puts us in a position to quickly acquire new Boeing 737-700s to ramp up the service that we’d like to ramp up in Denver.
Jay Gormley: All right. Thank you gentlemen.
Ron Ricks: You’re welcome.
Operator: And we will go next to Bill Zeeble of KERA Public Radio.
Bill Zeeble: Just an obvious quick and simple question. This means what for customers? We can imagine increased options to fly to new places but expand on that if you will please.
Bob Jordan: Bill, the quick answer is it means more service and lower fares.
Bill Zeeble: Right. Can you expand on that?
Bob Jordan: Bill, this is Bob. It also means that the combined Southwest Airlines and Frontier in Denver can compete even more vigorously against the truly dominant carrier, which is United and bring more low fares to the market.
Bill Zeeble: And how important is that international element?
Bob Jordan: Frontier’s international element?
Bill Zeeble: Yes.
Bob Jordan: This is Bob. I think it’s very important. We have talked a lot over the last 18 to 24 months about our interest in entering the near international markets, for example Mexico.
Frontier is there so this gives us a fantastic way to learn and to some extent hopefully jumpstart that process. It’s our intent to continue to serve those markets. Again, we have a lot to work through this fall and then into the transition over the 24 months.
But it’s our intent to use Frontier’s experience really to jumpstart our ability to do some of those things.
Operator: And we will go next to Jason Whitely of WFAA TV.
Jason Whitely: Hi there Rick and Bob. I’m sorry - Ron, Bob and Beth. Question for you - if this is approved.
If you guys are the successful bidders here and you get federal approval, realistically how long would it take for Southwest to take over operation of those 40 planes and Lynx and the routes that Frontier flies now?
Bob Jordan: This is Bob. I think it’s a couple of things. I think there is a period of time that it takes just to close. And that involves I think primarily the time involved in the DOJ proceedings and Ron can talk more to that.
So post-close, though, so now you’re talking about the transition plan integrating and moving Frontier into Southwest Airlines, it’s our best guess at this point that that would be about 24 months. Again, starting with the 40 on day one, so you can think of that as sort of the day after close maybe not literally.
And then moving from 40 down to a full transition to Southwest over a 24-month period.
Jason Whitely: When would day one be though?
Bob Jordan: Well, day one would literally be - again, this may not be exact in terms of literally day one - but immediately after closing the transaction.
Jason Whitely: And is that something that happens? I mean that’s not something that happens as soon as Thursday if you guys are the successful bidder though, is it?
Bob Jordan: Oh no. And I’m going to let Ron talk to that because a lot of that is really DOJ kind of stuff.
Jason Whitely: Got you.
Ron Ricks: That’s right. This is Ron. There are a couple of contingencies if you will built into our bid, things that have to happen in order for us to close. It’s just like a transaction on a house. You enter into a contract to buy something but then certain things have to happen to be resolved before you can actually go to close.
One of the things that has to be resolved is as a matter of law, anytime one airline attempts to acquire another, that must go through a process for approval by the United States Department of Justice, which is as we said in our press release, normal and customary.
We do not control the timing of that. If history is our guide the normal in quotes if you will time period would estimated to be four to six months in terms of a potential closing.
Jason Whitely: Got you. Two last quick questions for you - Frontier has gates at DFW airport. Have you guys thought about what might happen to those gates, whether you’ll see them or what happens to them?
Bob Jordan: It’s our understanding that Frontier’s lease on those gates expires at the end of this year. And it would our intent to allow that lease to expire and provide the service to Denver out of Dallas Love Field.
Jason Whitely: Got you. Last thing for you guys, too. What’s a statement you think this sends competitively to the legacy carriers like United, like American?
Ron Ricks: This is Ron. I don’t know that I can really speculate on that. I think Southwest Airlines has always been an aggressive competitor. We have always been a growth company and the legacy carriers know that.
They’re used to that. My guess is they would expect they’re looking upon this as a natural move by Southwest Airlines but nothing new.
Jason Whitely: Thanks guys. That’s all I had. Okay. Thanks. Good luck.
Ron Ricks: Thank you.
Bob Jordan: Thank you.
Operator: And we will now go to Dan Webb of Boardingarea.com.
Bob Jordan: Hello Dan.
Dan Webb: Hi. Good afternoon guys. I think the biggest questions have been answered already but I have a couple questions. First on the fleet, with those 40 Airbus aircraft, would it be a one-for-one replacement with the 737s?
Bob Jordan: Yes. This is Bob and again, the fleet plan is one of the more complicated pieces of all of this because you’ve got just to give you a flavor, you’ve got to work through commitments that Frontier already has on the books.
And when you can change some of those what you might want to reject or accept in bankruptcy. You then on the other side have to work through at Southwest Airlines when we can acquire 737s whether those are new or leased to replace the left.
So it’s very complicated and we’re still continuing to work that. I think the way to think about it is that the fleet on the Frontier side will reduce to 40 on day one or again close to day one. And then there would be a plan after that to begin to ramp the 40 down and to begin to add 737s on the Southwest side.
I wouldn’t expect that it would be extremely smooth, one a month kind of thing. It’s going to be as we can do that. But we are continuing to work on that.
Dan Webb: All right. There would be 40 737s basically.
Bob Jordan: There would be 40 on day one?
Dan Webb: Well, not on day one, over time.
Bob Jordan: Yes. Over time the intent would be to replace all of those Airbuses Frontier has, the 40, with 737s.
Dan Webb: Okay. And my other quick question - you did talk about the near international markets a little bit. One area where United flies but Frontier and Southwest doesn’t is Canada, I think Vancouver, Calgary and Toronto. Would you be interested in Canada and does that affect the WestJet partnership at all?
Bob Jordan: This is Bob. That’s a great question and again, I would just reiterate that we are very interested in serving near international markets as Southwest Airlines.
And it is our intent to continue to serve whether it is day one or at the end of the 24 months, continuing to serve the markets that Frontier serves today. And this does not distract from our co-chair agreements with either WestJet or Volaris at all.
We continue to be committed to those and excited about that beginning next year.
Dan Webb: Okay. And then just one last quick question - as I was looking at some of the markets where Frontier and Southwest don’t compete with United, a lot of it is simply where United has just regional service. Does this mean that maybe you’ll want to try to expand Lynx to compete with United in those markets?
Ron Ricks: This is Ron. Again, a very insightful question - we found out that there are a large number of non-stop monopoly routes with high average fares with United being the monopoly provider on those routes, including a lot of markets such as the ones you just described.
So it does create a lot of growth opportunity for Lynx. But there were a number of large mainline markets that are enticing to us as well. And those or some of those are included in our plan to expand new non-stop destinations right away that are not currently served by either Frontier or Southwest.
Dan Webb: Okay. And then last one I promise. I know this is a little bit of a stretch but one of those markets is Honolulu. Any chance?
Ron Ricks: I think the key word in your question was stretch.
Dan Webb: Yeah. I thought it was worth a shot.
Ron Ricks: In terms of the distance required to be flown non-stop Denver-Honolulu, the stretch for the fleet that either one of us has.
Dan Webb: All right. Well, thanks very much guys.
Bob Jordan: Thank you.
Operator: And we will go next to Kelly Yamanouchi of Atlanta Journal Constitution.
Kelly Yamanouchi: Hi there. As I understand from your announcement you will maintain flights to all existing markets. So is it right that Southwest will fly to Atlanta both before and after the transition to the Boeing aircraft and the Southwest brand?
Bob Jordan: Kelly, this is Bob. I think that is a very reasonable assumption in terms of what we have announced today.
Again, it’s our intent to not only continue to serve the markets that are served by both a combination of Frontier and Southwest today but as both Ron and I have talked about, it’s our intent to add a number of new non-stop markets that are not served by either carrier.
Kelly Yamanouchi: Okay. What are your plans for Atlanta? How large would you like to become here?
Ron Ricks: Kelly, this is Ron. I’ll jump in here. I think we’re focused on the auction this week. And we just first we have got all of our brain power focused on that issue. It’s tough enough and there are a lot of questions such as that one that we’ll just have to take up if we’re fortunate enough to prevail.
Kelly Yamanouchi: Is there a chance that you could later decide to pull out of those new markets further along in the process?
Ron Ricks: This is Ron. The airline business is very uncertain and you can’t predict the future. But if you look at Southwest Airlines’’ track record with regard to staying in markets once we enter, it’s a pretty good record.
And there are very few instances where for whatever reason we were compelled to exit a market once we entered it.
Kelly Yamanouchi: Okay. Thank you.
Ron Ricks: You’re welcome.
Operator: And we will go next to Lori Ranson of Airline Business.
Lori Ranson: Hello everyone. I just have a quick clarification. You said that you estimate Republic would get around $20 million on its unsecured claim based on what you’re paying on the dollar?
Bob Jordan: Yes that’s right. This is Bob. From - I’m going a little bit off of memory here but and we have created - you’ve got to remember too it’s a little complicated because we have created additional unsecured claims as part of our bid.
That’s one of the complexities but the combination of that and then the size of Republic’s claim and then moving from the 8.7 cents Republic was going to pay to the 12 that is in our bid, I believe Republic is about in the $20 million range in terms of the payout from the unsecured pool.
Lori Ranson: And it may be too complex but would you be able to explain the additional unsecured claims that are included in your bid?
Bob Jordan: Those are primarily - again this is Bob. Those are primarily created through the modification of the fleet plan.
Lori Ranson: Right.
Bob Jordan: So to probably reach above what I know just a little bit, if we for example reject a lease on an aircraft and that aircraft lease was agreed to prior to the bankruptcy proceeding, then that creates an unsecured claim.
If we reject a lease and that lease was affirmed after the bankruptcy proceedings, so post-petition, that becomes an administrative claim. And the administrative claims are paid off basically sort of dollar for dollar. And the unsecured claims are paid off according to the bid and in our case, 12 cents on the dollar.
Lori Ranson: Right. Thank you very much.
Bob Jordan: You’re welcome.
Operator: And we will go next to Tom Spalding of the Indianapolis Star.
Beth Harbin: Hello Tom.
Operator: Mr. Spalding?
Tom Spalding: I’m sorry. Pardon me. Good afternoon guys.
Bob Jordan: Good afternoon.
Ron Ricks: Good afternoon.
Tom Spalding: From your perspective, did you take Republic’s offer as a bluff seriously? And can they match this amount? And secondly, because I thought the $108 million had offered was just for Frontier, not involving Lynx. Has that changed the amount that they would be bidding if they didn’t go after Lynx?
Ron Ricks: Tom, this is Ron Ricks. We don’t know for sure but our impression was that the Republic bid included Lynx. That’s number one.
And with regard to the bluff question, of course there is no way we can speculate on that. However, I would comment that under the bankruptcy procedures if no one else bid, they got it. So it’s hard to think of it as a bluff in that sense.
It appears to us to be serious in the sense that if Southwest had not come along with an attempt to trump their bid they would have acquired it and been saddled with responsibility for operating it, which presumably they have contemplated.
Tom Spalding: Thank you.
Ron Ricks: You’re welcome.
Operator: And we will go next to Seth Kaplan of Airline Weekly.
Seth Kaplan: Hey. Good afternoon.
Ron Ricks: Good afternoon.
Bob Jordan: Hello.
Seth Kaplan: Just wondering if you could talk a little bit more about how you picture Denver going forward?
The reason I’m asking is because obviously if you combined your network and Frontier’s out of there Denver while it is a big airline market would be very over served relative to just your normal presence even in a big market.
You just don’t have hubs like that and your other big focus cities are a bit smaller. So I’m just wondering if you could talk a little bit about that and then I’ll (need time to follow up).
Bob Jordan: Sure. This is Bob. Denver is extremely important on a number of fronts. And you’ve got to remember too, I think what’s important to remember is that the combination of Southwest Airlines and Frontier today so to put our relative market shares together I think is in about the 38% range.
United is I believe 50 to 51. United is by far the largest carrier in the market. This really does a couple of things. It allows us to again grow quickly in a market that is very important simply through acquiring Frontier and Frontier’s customer base.
It also provides to the community a financially stable source of low fares, great customer service on into the future for decades to come. And it also provides us at Southwest as it strengthens Southwest in Denver through the combination of Southwest and Frontier an even more viable way to compete very aggressively against United, the dominant carrier in the market and to bring low fares to those routes served by United.
You’ve got to also make sure I’ll point out again that it was Southwest that brought low fares to the Denver market. Prior to our entry I would not classify the fare competition in Denver as a big risk competition. It’s Southwest Airlines that created the fare competition, created the low fare niche in Denver.
Seth Kaplan: Right. And I’m just wondering also, of course Frontier as you’re well aware has become over the past bunch of months a rather profitable airline in its own right with obviously a bankruptcy cost structure but also taking revenue premiums over Southwest among other airlines.
I’m just wondering how you picture being able to use them perhaps if they become yours, being able to look at some of what they have done. They have kind of an unusual fare structure and so forth. If there is any of that that might make its way into Southwest in the long run?
Ron Ricks: Great question. This is Ron Ricks. As you know, Southwest Airlines itself is undergoing a lot of change with regard to our revenue model to deal with the changing economic environment.
And we recognize full well that Frontier has been successful in adjusting to this new airline operating environment, particularly on the revenue side in the Denver market. And absolutely we want and expect to learn a great deal from them about they have done it and to emulate the positive aspects of what they have done.
Seth Kaplan: Thanks so much.
Ron Ricks: Yes sir.
Bob Jordan: You’re welcome.
Operator: And we will take a follow up question from Dan Reed of USA Today.
Dan Reed: Hey guys, one more. On the Lynx question, have you guys had any formal or informal or even via third party with Republic regarding any interest they might have in operating Lynx as a contractor or buyer or what not?
I mean they’re in a position where they’re going to get money. They could also get a contract by losing. Not a bad position for them to be in but I mean is that part of your thinking that they could be in the mix on Lynx?
Ron Ricks: Dan, this is Ron. That’s great thinking and unfortunately the answer is no because we’re a competitor in the bankruptcy process. So we haven’t had any direct communications.
And it would be inappropriate to do so. So these are the types of things that could get rather interesting at the auction if under the auspices of the bankruptcy court a discussion such as that are entitled to occur.
Dan Reed: Okay. Thanks a lot.
Ron Ricks: You bet.
Operator: And we’ll take another follow up question from Ann Schrader with the Denver Post.
Ann Schrader: Hi there.
Ron Ricks: Hi Ann.
Bob Jordan: Hi Ann.
Ann Schrader: I’ve got a question concerning whether or not you have ever really made money here in Denver. And if by acquiring Frontier you’re acquiring the competitor that’s kind of kicked your butt?
Ron Ricks: Well, this is the airline industry. This is Ron.
Ann Schrader: Okay.
Ron Ricks: This is the airline industry, Ann. And that means that at one time or another there is a lot of butt kicking going on. So that’s impossible to answer that question the way it was presented.
But Denver has been a very good market for us in terms of growth opportunities, on which we were initially surprised by in terms of the reception we received, in terms of passenger demand. And I’ll also say and there are a lot of people on this call who have covered the industry for many, many years.
And they well know that it’s not unusual for airlines not to be overwhelmingly profitable when initiating service to new markets. That’s easy to say since in this industry it’s not unusual to say that routes are unprofitable as a general nature since the airline industry as a whole since the invention of the Ford tri-motor has lost money.
But having said that, Denver - we would not be doing this if we didn’t think that it was an opportunity to grow in a profitable manner in Denver.
Ann Schrader: Okay. One more question - Frontier is on the A Concourse in Denver and you’re on the C Concourse. What about consolidation?
Ron Ricks: This is Ron again, Ann, and great question. We haven’t gotten quite there yet because again we’re focused on the auction process. But these are the types of things that if we were successful, learning from our colleagues at Frontier, learning from our friends at DIA.
There might be opportunities for efficiencies and economies of scale that would benefit both Southwest and Frontier as well as the airport. And we’d be happy to talk to them about it.
Ann Schrader: Okay. Thank you.
Ron Ricks: You bet.
Operator: And we will go back to Eric Torbenson of the Dallas Morning News.
Eric Torbenson: Thanks for the double dip. I appreciate it. Do you need a side letter with SWAPA to do this or have you sort of set up with SWAPA guys to line out if you’re going to add Frontier pilots in a seniority way?
I guess the question is have you talked this through with SWAPA to the point where they are comfortable with the prospect of down the road potentially bringing on Frontier retrained pilots?
Ron Ricks: As always, Eric, this is Ron. Your questions are knowledgeable and you’re right not only as a matter of the way we do things here at Southwest in terms of working with our labor unions but in this case and I will not get down in the weeds here unless someone drags me there.
But as a matter of federal law that exists today it is a requirement that the unions in this case using your example, the Southwest Airlines Pilots Association as well as the Frontier Airlines Pilots Association need to discuss how the employee groups can be combined together in an appropriate manner.
And that’s not only something that we respect as a matter of law. It’s something that we want to happen because it is a contingency in our bid. We do not want to proceed if our employees are not behind us in this endeavor. And so that is a condition of our bid.
We’re optimistic cautiously of course because negotiations really haven’t begun yet. But the Frontier pilots are ably represented and Southwest Airlines pilots are equally ably represented. And I know that they’re interested, very much so, and conversations between those two groups have already begun.
And we’re willing to be as flexible and as open as possible to facilitate those discussions toward a harmonious conclusion.
Eric Torbenson: Got you. And real quickly on the DFW flying, so their lease ends, you fly in theory your branded aircraft from Love to Denver but obviously taking a stop somewhere there at least for the next few years.
You wouldn’t kind of bounce around the idea of taking a Q1 and reconfiguring it to fly directly? I know that’s a really silly question but I just wanted to ask.
Bob Jordan: Actually I think I’ll write that question down and ask someone else what they think about it. But great question. But yes, you’re alluding to the restrictions under the Ride Amendment that will remain in terms of non-stop service until the fall of 2014.
We are providing very nice, one-stop, same-plane service to Denver now to Dallas Love Field. And we think this is an opportunity for us to expand upon that opportunity.
Eric Torbenson: Got you. Thanks so much.
Bob Jordan: You’re welcome.
Operator: And we’ll go back to Mary Schlangenstein of Bloomberg News.
Bob Jordan: Hello Mary.
Mary Schlangenstein: Hi. Ron, can you be a little bit more specific? I mean does SWAPA basically have a right of first refusal or do they just have to agree that they’ll play nice with the Frontier guys before the bid can proceed?
Ron Ricks: Sure Mary. I’ll try to answer it and again I don’t want to bore everyone to death with a bunch of legalese on my part.
But there is a law that was passed by Congress at the initiative of the two United States Senators from Missouri who were concerned about the way the merger occurred between American and TWA.
And that law passed at the behest of Senators McCaskill and Bond from Missouri in effect mandates that in a case like this the unions have an opportunity to get together to work out amongst themselves how the employees would be integrated into the acquiring carrier.
And absent an agreement by which that is done, under the law there is a right to go to binding and final arbitration. And of course Southwest Airlines intends to follow the letter and the spirit of that law. But beyond that, Mary, the point here is that we don’t want to go forward unless we have the support of the work groups.
And therefore it is a condition of our bid that they reach agreement in advance of arbitration because we want this to be a positive endeavor for all concerned.
Mary Schlangenstein: Okay. My second question quickly was you mentioned that your bid provides more working capital than Republic’s. Can you quantify that?
Bob Jordan: This is Bob. Really two categories - number one, both bids both Republic’s and ours provide about $40 million in terms of a working capital infusion to Frontier.
Just basically think of that as money for the business. On the Debtor In Possession financings, which is additional money to the business, Frontier has a current DIP of $40 million and Southwest has boosted that in our bid to 50. So we would repay the Republic DIP at 40 and infuse an additional $10 million into Frontier.
Mary Schlangenstein: Great. Okay. Thank you.
Ron Ricks: You’re welcome.
Operator: And we will go next to Brett Snyder of The Cranky Flyer.
Brett Snyder: Hi guys.
Bob Jordan: Hello. How are you doing?
Brett Snyder: Good. How are you?
Bob Jordan: Just fine.
Brett Snyder: So I have a question for you about the Washington National potential operation there. Do you know are you able to acquire the beyond perimeter slots or would those have to go out to be refit again under the laws?
Ron Ricks: This is Ron Ricks. We’re looking at that question. I don’t have a definitive answer for you today but I think the short answer is that we can obtain those slots.
And I think there are six slots, which normally would I think translate to the way the slot program works in the three round trips per day.
Brett Snyder: Okay. Yeah, I was just curious because I thought I remember that TWA had to give theirs or American had to give their up when they purchased TWA.
Ron Ricks: In a technical way I think it’s while these particular slots are not the types of slots that can be sold, I think they can be reassigned. And there is precedent and authority for the government to reassign them to the acquiring airline in a case like this.
Brett Snyder: Okay. Thank you.
Ron Ricks: Yes sir.
Operator: And we’ll go next to Mike Fabey of Travel Weekly.
Mike Fabey: Thanks. How are you doing? Going back to the question with the unions and this might be addressing that but the Frontier folks when they come in, where would they fall on the seniority list?
Ron Ricks: That’s a great question. That is the heart and soul of the discussion. That is the issue that has to be resolved by the unions. So that’s a matter of negotiation.
So if you start out with the premise that the Southwest Airlines pilots for example, if you’re referring to that work group would want to hold seniority and you would have concerns on the other side. And therefore you have to take into consideration how do you address those concerns.
So for example, Southwest Airlines is fortunate from an employee perspective in that in every craft and class of employees at Southwest Airlines we have the highest compensation and benefits. So we cannot only talk about the prospect of better compensation and benefits for Frontier employees. But there are some other things that we can put on the table to make the transition more palatable if you will for the Frontier employees. But these are all matters that the narrow issue itself, which by narrow I don’t mean it’s unimportant.
It’s very important. The narrow issue itself of seniority integration is the matter under the McCaskill-Bond legislation that has to be dealt with by the unions themselves. And they are in talks to do that.
Mike Fabey: Okay. Thanks. And you also mentioned how you’re willing to learn from Frontier. I’m just curious to kind of very quickly go into a whole philosophical difference of the way you two operate because they are a much more traditional carrier than you.
Ron Ricks: That’s true. This is Ron. They are a more traditional carrier. And we have I think in order to keep things in perspective here too, Southwest Airlines has 535 Boeing 737s.
We’re the largest carrier of passengers in America. We have the most flights of any airline in America. Integrating Frontier Airlines and emulating Frontier Airlines in some respects does not necessarily equate to revamping the way that Southwest Airlines operates in every respect.
We are so big and our reach is so vast at this time that there is a way to tweak and to modify things just as Southwest Airlines has done on its own. A lot of the things that we have done recently in terms of our own revenue initiatives are differences as compared to the way Southwest Airlines has done things in the past. So it’s an incremental change not a pervasive change.
Bob Jordan: And this is Bob. If I could just add one thing, as we do surveys time and again about what is important to our customers or what are important to customers across the broad airline industry?
And it always comes back to three things - the schedule, who has the best schedule? Do you operate the flights and enough flights when somebody wants to fly? Number two, do you have low fares? Do you have the right price point?
And number three, do you have great customer service especially as expressed in terms of on time performance? Do we get you there on time? And nobody has a better record in those three categories than Southwest Airlines.
Mike Fabey: Thank you.
Ron Ricks: You’re welcome.
Bob Jordan: You’re welcome.
Operator: And this does conclude today’s question and answer session. I would like to turn the conference back to Beth Harbin for further comments and closing remarks.
Beth Harbin: Well, thank you very much Ron and Bob - we always appreciate your time - and to our callers for your interest in Southwest Airlines. If you have additional questions you can call the PR department at 214-792-4847. That’s 214-792-4847. And have a great day.
Operator: And this does conclude today’s Southwest Airlines conference call. We thank you for your participation.
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