PART II: Southwest Bids for Frontier Airlines
PART II: Southwest Bids for Frontier Airlines
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Follow-up Q&A with Ron Ricks, Executive Vice President Corporate Services and Corporate Secretary
Yesterday, Southwest Airlines confirmed that it is preparing a bid to acquire Denver-based Frontier Airlines, which will be sold at auction in bankruptcy court next month. I was able to speak with Ron Ricks, our Executive Vice President Corporate Services and Corporate Secretary, again this afternoon and ask him some of the questions that were raised yesterday following the announcement. (I apologize for the delay, folks.)
1. This is clearly a very emotional issue, and some Frontier employees have expressed fear and concerns about our bid. What will happen to Frontier employees? Why should they welcome this news?
We understand the sensitivities and emotion surrounding this issue. These are uncertain times for all of us, and change is always hard. Frontier is a beloved airline, but they have been in bankruptcy protection since April 2008. And, the combination of simply awful economic conditions and high jet fuel prices remain, creating a great threat to the airline industry as a whole, especially to those that are not financially prepared. Southwest is prepared, and our current financial strength, liquidity, access to credit, and cash reserves demonstrate that. An acquisition of Frontier by Southwest will infuse much needed financial stability, and allow Frontier to emerge from bankruptcy.
As we’ve said, Frontier would continue to operate independently and separately for a period of time with its existing Airbus aircraft and personnel. Over time, however, Frontier employees would be hired into Southwest as needed to support our fleet growth and expanded operations.
I hope that Frontier Employees can take some comfort in the fact that Southwest has a 38-year track record of excellent Employee relations, treating people with respect, excellent union relationships, and industry leading pay.
2. We’ve said that we believe this move would increase competition in Denver. Can you explain how Southwest’s acquisition of Frontier will enhance competition?
Southwest has a 38-year history of reducing fares and stimulating new traffic, particularly in markets where we compete against large airlines (like United) in major cities (like Denver). How, you ask? Consider this. Today, Southwest is the third largest airline in Denver, carrying only 14 percent of Denver passengers. United, by far Denver's largest airline, carries about 50 percent of Denver's passengers. The combination of Southwest and Frontier in Denver will still be smaller than United (about one-third of flights to United's 50%) but will immediately position Southwest as a larger and more effective low-fare alternative to United. The acquisition would allow us to significantly expand travel options and low fares for millions of passengers travelling to, from, or through Denver.
It is also worth noting that Southwest has historically priced its fares independent of the number of airlines it is competing against, because Southwest also competes with ground transportation (rail, bus, car) and takes that competition into account in setting its fares.
3. What will happen to the smaller routes like Aspen that Frontier currently flies?
Following an acquisition, Frontier would continue to serve those routes just like it does today, at least during the transition period, before Frontier's service could be fully combined into Southwest. We are still evaluating all the routes that Frontier flies and have not made any final decisions. Of course, one of the interesting aspects of Frontier is the Lynx operation. Lynx serves a number of smaller markets in Colorado and other states. As part of the due diligence work with Frontier over the next week, Southwest will learn more about Lynx in order to develop a plan as part of our bid.
4. What about routes that Southwest and Frontier both serve – will that capacity be reduced?
In Denver today, there are a number of markets that both Southwest and Frontier serve: there are markets that each carrier serves that the other does not; and there are cities served by Frontier that are not on the Southwest routemap at all, such as Atlanta. Additionally, there are many markets without nonstop service from Denver, and literally dozens of markets that are served by only one carrier – United.
As part of the due diligence, we will take a look at all of these routes, and certainly some adjustments may be made. Capacity may be reduced in some markets but increased in others. Our goal is to offer the best combination of flights and fares for our Denver Customers.
The important point to remember here is that this acquisition would allow Southwest to greatly expand its Denver service on an overall basis, and thereby offer a greater level of low-fare competition against United and more flight options for Denver. It is our plan to bring more, not less, competition and low fares to Denver through an acquisition of Frontier.
5. Is Southwest planning to enter into routes currently only served by United?
We have not made any final decisions, but Southwest is evaluating those United monopoly routes. Bottomline, routes served by only one carrier, in this case United, offer a great opportunity for us to bring more service and lower fares to the market.
Southwest's entry into Denver in January 2006 forced other airlines to lower their fares significantly. For example, after Southwest entered Denver, United reduced its fares 30 percent or more between Denver and Albuquerque, Kansas City, Phoenix and Salt Lake City. United dropped its fares by double-digit margins in numerous other Denver markets as well. At the same time, passenger traffic rose by 30 percent in those same markets, as travelers took advantage of lower fares and more flight options, not just from Southwest, but from the other airlines responding to Southwest as well.
We have a long history of successfully competing against large airlines in other major cities - for example in Chicago, where Southwest has long battled American and United; in Philadelphia, against a much larger US Airways; and in Salt Lake City, where we compete vigorously against the once-dominant Delta airlines. In these cases, and many others, Southwest has dramatically lowered the cost of air travel by forcing the bigger airlines to reduce their fares and offer more flight options to consumers. In doing so, Southwest has given millions of Americans new opportunities for affordable travel.
This is the essence of the "Southwest Effect," as the U.S. Department of Transportation dubbed it - fares go down and traffic goes up when Southwest enters new markets. As a result, consumers win. We look forward to doing the same, for the benefit of consumers in Denver and throughout the country, if our acquisition of Frontier airlines is approved.
6. Why wouldn’t we keep Frontier’s Airbus planes?
Again, Frontier would operate its Airbus aircraft as they do today until we could retire the Airbus fleet and transition to Boeing 737s. We take great pride in our all Boeing 737 fleet. The 737 has a well-established reputation for performance and reliability. And, operating one aircraft model allows for better training, maintenance, and operational efficiencies.
7. There are a lot of things about the Frontier brand that Denver Customers really enjoy – like seatback TV’s. What is going to happen to those amenities?
There are, of course, some service differences between the two carriers. Frontier offers assigned seating for example, while Southwest is proud of our popular open seating environment. Frontier charges for the first two checked bags (in Economy), while Southwest does not. As part of our due diligence work we look forward to learning about our differences, and looking for ways to continue to improve Southwest’s service offering. What won’t change is our legendary Customer Service.
8. Frontier is the hometown carrier in Denver – how will the community be affected by the acquisition?
We are very aware that Frontier is beloved in its hometown, just as Southwest is admired and respected in many of the communities we serve and where we have large number of Employees. As a Company, we want to earn that same level of appreciation in Denver. We have more than 400 Employees that currently call Denver home – many of whom are Colorado natives - and are already an active part of the community.
The truth is, we strive to be the hometown carrier in every city we serve. From charitable giving to community involvement to sponsorships, our Employees and our Company are part of the fabric of the community. Southwest was founded on a sense of family, and that extends to our Employees, Customers, and the community.
Regardless of whether Southwest is successful with respect to our bid, Frontier is being auctioned pursuant to an order of the bankruptcy court. Thus, the only thing any of us can know with certainty is that Frontier would undergo change of some kind and to some degree. The future, with or without Southwest, cannot be certain. But, with Southwest, the largest carrier of passengers in America and the most consistently successful airline in commercial aviation history, Denver and Frontier's employees will have a strong and dedicated partner.
9. Given the tough economy and volatile energy prices, Southwest has had its own financial challenges is the past year. Why is Southwest in a position to buy Frontier?
Southwest has always prepared in good times to weather the bad times, and to be able to take advantage of opportunities when they present themselves. Our financial strength, strong balance sheet, liquidity, and access to capital allow us to both weather the current economic storm and take advantage of an opportunity to grow in Denver by acquiring Frontier.
Since opening in January 2006, Denver has been our fastest growing city – ever! We are proud of our Denver operation, and the results that we have achieved in such a short period of time. We are extremely and equally proud of the service options and new low fares we have brought to the market.
Again, regardless of whether Southwest is successful with our bid, Frontier is being auctioned in bankruptcy court. The only thing we know for sure is that Frontier will undergo some kind of change. But, with Southwest, the most consistently successful airline in commercial aviation history, Denver and Frontier's employees will have a strong and dedicated partner.
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