Republic Beats Southwest In Bid To Buy Frontier

Republic Airways Holdings last night emerged victorious in its bid to purchase Frontier Airlines from bankruptcy, beating out Southwest Airlines, which, even though it raised Republic's offer, was unable to reconcile differences between its and Frontier's pilot groups.

Frontier president and CEO Sean Menke said the outcome inaugurates "a wonderful new chapter for this proud organization," noting that when the carrier emerges from bankruptcy, slated for this fall, it can "maintain normal operations as a subsidiary of Republic," a sharp contrast with Southwest's proposal to merge the two operations under the Southwest flag, rationalize operations out of Frontier's Denver hub and convert Frontier's Airbus fleet to Boeing 737s.

A U.S. bankruptcy court last night blessed Republic's plan to purchase 100 percent of Frontier's stock for $108.75 million and waive a $150 million unsecured claim. "Republic waived virtually all conditions precedent to closing and has advised Frontier that it yesterday received Hart-Scott-Rodino antitrust clearance for the transaction," Frontier said in a statement.

While Southwest this month raised Republic's bid with an offer of $170 million, the carrier detailed "several contingencies to be resolved for a deal to go through." Among them, Southwest would not proceed unless the pilot unions from the two carriers could reach a mutual agreement—a prospect that began to deteriorate this week. "We said all along that we would only move forward on this deal if it proved to be the right decision for our employees and financially prudent for our company," Southwest chairman, president and CEO Gary Kelly said in a statement last night.

Indianapolis-based Republic operates three regional carriers—Chautauqua Airlines, Republic Airlines and Shuttle America—and late last month completed its acquisition of Midwest Airlines from private equity firm TPG Capital for $6 million in cash and a $25 million, five-year note. Frontier would serve as a wholly owned subsidiary alongside its other carriers, Republic said when announcing its bid in June.

Republic chairman, president and CEO Bryan Bedford in a statement last night said, "Now, we have to turn our attention to the important work of integrating two great brands: Frontier and Midwest Airlines, which enjoy strong loyalty in Denver and Milwaukee."

A merger with Frontier would have given Southwest the ability to expand its U.S.-only route map to Mexico and Canada, the chance to maintain its growth, which this year has been stunted for the first time in its history, and a prospect for profitability in the Denver market.

"Southwest remains committed to serving the Denver market with our low fares and excellent customer service," Kelly said. "We began serving Denver in 2006 with just 13 flights and have grown to offer 112 nonstop daily flights today. We are very pleased with the response we have seen to our service and growth in Denver, and we will continue to compete vigorously in the market."

Analysts said a merger with Frontier would have given Southwest a leg up in the Denver market. In examining the revenue environment, aviation analyst Darryl Jenkins, founder of The Airline Zone, said last week that United Airlines is the dominant business carrier in Denver.

"United has a very big revenue premium over both Frontier and Southwest in terms of what they're getting," he said. "They're probably getting the lion's share of the business travel into and out of Denver."

"From a corporate side, most of our folks don't fly Southwest as much as they do United and Frontier," Robert Polk, CEO of Denver-based Polk Majestic Travel Group, told BTN this week. "I think we'll see some changes from Southwest Airlines going forward, and I think they'll have to be more business-friendly, especially if they are successful in this."

Polk said Frontier has corporate discount programs in place with "most of our major customers," while Southwest—which has long declined to play the corporate discounting game—does not. Furthermore, Polk noted that Frontier offers full global distribution system capabilities—another offering that resonates with corporates but is not fully embraced by Southwest.

Jenkins said if Southwest and Frontier were combined as they stood today, "We'd see United would have about 43 percent of revenue and the new Southwest Denver would have about 28 percent of the revenue. United would have about 37 percent of the passengers and the new Southwest would have about 36 percent of the passengers. You'd have pretty equal competition."

Boyd Group International president Michael Boyd said Frontier has been "hammering Southwest" in Denver. "In directly competitive markets, Frontier generally had higher load factors, greater market share and commanded higher average fares than Southwest. Frontier was doing very well, giving Southwest at the least a competitive bloody nose."

Jenkins said of Southwest, "Currently, they're losing money in Denver."

(BTNonline, June 24) http://www.btnonline.com/businesstravelnews/search/article_display.jsp?vnu_content_id=1003987222 .