By Ed Sealover – Reporter, Denver Business Journal
Aug 30, 2018, 7:45am MDT Updated Aug 30, 2018, 12:04pm MDT
In announcing their intention to move ahead with an initial public stock offering, Frontier Airlines officials laid out a convincing business case that their “Low Fares Done Right” ultra-low-cost-carrier business model had been exactly the success they predicted it would be.
The once-bankrupt Denver-based airline, a subsidiary of Phoenix-based private equity firm Indigo Partners LLC, saw net income rise from $140 million in 2014 to $200 million by 2016. It boosted its passenger counts by 22 percent over those years while continuing to fill more than 87 percent of each flight’s seats. And it dropped its adjusted cost per available seat mile to 5.43 cents, excluding fuel — a number that one industry watcher calls “astoundingly low.”
But despite the improved financials, 17 months after announcing the IPO, Frontier remains in a stagnant state of ownership. And it now faces non-financial issues, both with its pilots and its customer service.
And so, the grand experiment that the company launched in 2014 to remake an airline that nearly closed three years earlier is at a pivotal point. At a time when most observers agree there is room for new upstart airlines to take significant market share while larger airlines consolidate and leave some cities without competition, Frontier must be careful that the cost-cutting methods and massive growth that have put it in this position don’t now lead to its undoing.
“It seems to me that the ultra-low-cost model that they’ve been so successful in means that the management has been so incredibly effective in doing what they want to do. But they are creating a lot of collateral damage along the way,” said James Simmons, a professor of aviation and aerospace science at Metropolitan State University of Denver. “If I were the management of Frontier, what I’d be doing right now is trying to find the labor peace with pilots and others.”
New planes, routes and customers
Frontier Airlines, launched in its current iteration in Denver in 1994, has arguably undergone more change than any airline in America over the past 10 years. After a successful run into the national spotlight, it filed for bankruptcy protection in 2008, was purchased by Republic Airways Holdings in 2009, got sold to one-time Spirit Airlines (Nasdaq: SAVE) owner Indigo in late 2013 and converted in 2014 to an ultra-low-cost model where it charges substantially less for tickets but tacks on fees for everything from seat selection to carry-on bags.
But maybe the biggest change is that since 2014, it’s been profitable — very profitable, in fact. According to a lawsuit filed against Frontier by the Air Line Pilots Association Intl. in the U.S. District Court for the Northern District of Illinois, the airline turned profits of 14.1 percent in 2014, 16.9 percent in 2015 and 18.4 percent in 2016. Aviation database FlightGlobal listed the company as having $165 million in net income in 2017 — smaller than the year before, but miles away from its money-losing years during and just after the Great Recession.
Frontier corporate communications director Richard Oliver said that officials could not speak with the Denver Business Journal for this story, adding that they technically are in a quiet period.
But the secret to the airline’s success is quite clear from the public announcements the company has made, as well as from the IPO registration documents. An airline that, as recently as 2013, began or ended more than 90 percent of its flights at Denver International Airport is finding more passengers in more cities who are willing to fly it at its heavily reduced fares.
When Frontier filed the IPO registration form in April 2017, for instance, it noted that it had flown passengers out of 61 airports over the previous 12 months, with just 40 percent of flights touching Denver. In a news release issued Aug. 16 to announce changes to its loyalty program, the company noted it now offers flights to more than 90 destinations in the U.S., Canada, Mexico and the Dominican Republic — an astounding 50 percent jump in airports served in less than 18 months.
The route expansion follows a massive investment in new planes. In November it announced that it was buying 134 new Airbus planes at a cost of $15 billion, taking what FlightGlobal says is now a 76-jet fleet and growing it by 193 planes, including previous orders that it has placed. CEO Barry Biffle said at the time that the airline, which flew 14.9 million passengers in 2016, would deliver more than 50 million passengers a year by 2026.
The expansion of routes is not haphazard. Frontier officials reported in their IPO registration that they see significant opportunities for growth in medium-sized markets where there is little or no presence from other ultra-low-cost carriers such as Spirit or Allegiant Air. The plans involve winning some customers from higher-priced airlines but also creating new customers who previously saw high ticket prices as a barrier to wanting to fly at all.
“According to the DOT, there were over 500 million domestic passengers in the United States during the 12 months ended September 30, 2016. Of these passengers, over 300 million paid a fare that was at least 30 percent above our cost basis per passenger during the same period, for the stage length associated with such fares,” the company wrote in the IPO registration. “As a result, we believe that there are a significant number of markets in which we could operate profitably with our low fares, and we believe our entry into such markets could drive substantial passenger volume growth in those markets.”
Risks of rapid expansion
Ashley Raiteri, the former chief information officer of passenger-rights company AirHelp, said that the continued growth and success of Frontier could push legacy airlines like United, Delta and American to consider whether they need to launch ultra-low-cost offshoots to keep up with the migration of American fliers to that model, as fliers have done in Europe. With overall U.S. passenger counts growing at 2.5 percent a year, more business models for airlines certainly can be supported, he said.
“I would expect there will be a market leader for ultra-low-cost, and it’s not going to be Spirit,” Raiteri said, alluding to that company’s years-running hold on having the most per-passenger consumer complaints filed against it. “So, if Frontier is successful and builds loyalty, they could be the No. 1 ultra-low-cost carrier.”
Ahmed Abdelghany, professor of operations management at Embry-Riddle Aeronautical University in Daytona Beach, Florida, also called the expansion impressive. But he noted that as Frontier publicizes its entry into a number of new cities, it also is reducing frequency to many cities that have long been a mainstay for it.
According to FlightGlobal data, Frontier reduced the number of flights in and out of Houston 63 percent between August 2017 and August 2018, while it also cut travel to and from San Francisco by 53 percent, Los Angeles by 46 percent and Phoenix by 42 percent. Travel just in and out of DIA showed a similar pattern: Flights were up 48 percent year-over-year to Austin and 23 percent to Salt Lake City, but down 50 percent to Orlando and 41 percent to Portland, Oregon.
“This is something that worries me sometimes, this dramatic change,” said Abdelghany, who has written two books on airline network planning. “They try routes and then they withdraw, which is something expensive. It might indicate they have questions, though people will judge typically the overall size of the network.”
Employees get noisy
Meanwhile, the public discourse between Frontier’s pilots union and its management has gone from troubled to flat-out acrimonious in the past year as no progress appears to have been made on negotiations for a new contract.
In September 2017, the 1,200 pilots voted to walk off the job if the ALPA couldn’t come to an agreement with airline management, and in April they asked the National Mediation Board to release them from multi-year talks so that they could prepare for a work stoppage. (The NMB has not made a decision yet on that request.) Then, in mid-July, the union rolled out a 37-foot-long mobile strike vehicle that it will move around the country to try to drum up public support for its cause, and just two weeks later it filed a lawsuit accusing Frontier officials of having negotiated in bad faith despite an August 2017 ruling by a third-party arbitrator that Frontier must begin to bargain in good faith with the pilots.
The suit comes as Frontier continues to push higher utilization of its planes as part of its efforts to reduce costs. The IPO registration statement said that the jets flew 12.6 hours per day in 2016 — double the 6.3 hours a day that planes from competitor Allegiant flew that year and 24.8 percent more than legacy carriers flew their planes.
“They are pushing to fly the planes more than 14 hours a day, which is unsustainable,” said Capt. Alan Christie, an Avon resident and secretary-treasurer of the Frontier pilots union. “But the airline has never asked us to fly an unsafe airplane.”
Pilots are pushing so hard for a new contract because their pay levels now have dipped to more than 50 percent below their closest industry peer, Christie said. They want industry-standard pay rates, retirement contributions and “some modicum of job security,” he said during a July interview aboard the union’s mobile strike center when it was parked in front of the Denver City and County Building.
Labor unrest has spread as well to the gate crews and ground crews, whose jobs have been outsourced to contractor companies. Gate crews, which have been cut in half to one person per shift at each gate in recent years, nearly walked off their jobs a few months ago after ground-crew workers got a raise and they did not, said a long-time Frontier employee who asked to remain anonymous because of fear of job loss.
Those customer-service workers ended up getting raises of as much as $2 per hour depending on their tenure, and they got $1,000 bonuses with another $500 boost scheduled for Sept. 1. But their break room was moved from a sizable area to one with no running water, and frustration continues to mount as many of those employees find themselves working longer hours, that employee said.
“Frontier is adding a lot of cities. They’re adding more cities than we can keep track of sometimes,” that worker said. “How in the hell we can get crews to handle that, I don’t know.”
But one of the biggest factors in Frontier’s financial success has been its ability to cut costs and to make its revenue stream more efficient.
The airline, for example, reconfigured the seats on its A320 aircraft in 2015 so that it could fit 180 onto each plane, 12 more than it had in the past. With the replacement of smaller A319 planes with the larger A320 models, the average number of seats per plane jumped from 145 in 2013 to 176 in March 2017, according to the IPO statement — a boost that either makes the planes economical or cramped, depending on your point of view.
Meanwhile, Frontier raised its non-ticket revenue from $401 million in 2015 to $726 million in 2016, as more passengers were willing to buy snacks, pay booking fees and plunk down money to choose their seats.
That maximization of seat density, in combination with the transition to larger aircraft and the contracting with operational companies, reduced the adjusted cost per available seat mile, excluding fuel, to 5.43 cents in 2016. Not only was that a 31 percent drop from 2013, the last time that Indigo was not in charge of the airline for a full calendar year, but it was far below the 9.08-cent average CASM ex-fuel cost of legacy carriers.
“That’s astoundingly low,” Simmons said. “But doing that comes at a price, and that price is customer service.”
After several years of reducing passenger complaints made about it to the U.S. Department of Transportation, Frontier has seen that number rise in recent months, to the point where it fell behind even Spirit in April and May, getting tagged with 3.3 complaints for every 100,000 enplanements. That was an especially tough blow, as the company said in its IPO registration statement that its “high level of operational performance resulted in a reduction in the rate of our customers’ complaints for the year ended December 31, 2016 as compared to 2015.”
Its on-time arrival percentage, a statistic whose improvement was a key focus of Biffle’s shortly after his 2015 elevation to president, has sagged as well this year, falling in May to a next-to-last ranking among the 17 largest U.S. airlines. It was able to land planes within 15 minutes of their scheduled time just 71.8 percent of the time.
Abdelghany warned that for as much success as Frontier is having, a labor stoppage could be very detrimental to its reputation and its ability to keep new customers in cities where it’s just beginning to see success. And the airline does not need that setback at a time when American passengers are showing more of a proclivity for low-service, low-cost flights and are eager to find their brand in that realm.
“The more important thing is keeping control of the costs. These airlines are able to charge low fares because of their structure,” he said. “As long as they can grow wisely, they have a chance to compete and enter more new markets.”
Simmons, though, said that even with the financial success, Frontier risks facing a backlash if it can’t rein in its customer-service issues causing the complaints and if it can’t avert a work stoppage that permanently would change the new reputation the company has been working to cultivate.
What about that IPO?
And that IPO that still hasn’t surfaced? Frontier officials aren’t talking about it.
Neither Abdelghany nor Simmons were particularly worried about its delay, saying that it’s clear Frontier is finding the money to commit to planes that typically would be brought by a public offering.
Simmons, though, said the delay only will continue to fuel long-running rumors, denied in the past by Frontier leaders, that Indigo will look to merge its newest airline with its former holding, Spirit Airlines, to create a large nationwide ultra-low-cost carrier to try to dominate that segment of the market. The two companies fly the same types of planes now. And even though Frontier has expanded its base beyond the western U.S. into Spirit’s traditional territory in the East, its focus on going into airports where Spirit isn’t means that the overlap in their routes could be fairly minimal, he said.
Regardless of whether it goes public, stays private or combines forces with another flier, Frontier has shown that it has a blueprint to success — if only it can keep its biggest critics, both internally and externally, from messing that up.
“They seem to be really good at finding routes. And their management has good instincts about attracting the public,” Simmons added. “But I think their corporate problems with the pilots need to be worked out.”