Frontier Airlines I.P.O. Signals a Travel Industry Recovery
The pandemic is not over, but some airlines believe the travel business is already on the rise.
Frontier Airlines, a Denver-based budget company known for putting wildlife images on its planes, is expected to become the second airline this year to list its shares on Thursday. Frontier plans to raise $ 266 million by selling 15 million shares at $ 19 each on the Nasdaq under the ULCC symbol, a nod to its strategy as an “extremely low-cost carrier.” Another 15 million shares will be sold by existing Frontier shareholders.
The industry may be facing one of the worst crises in its history, but travel is starting to recover and airlines such as Frontier and Sun Country Airlines, which completed an initial public offering in mid-March, say they are in a good position to recovery. Unlike most airlines, budget airlines do not rely on corporate or international travel, which is not expected to recover any time soon. Frontier and Sun Country offer domestic flights to passengers visiting family or friends or on leisure trips, the kind that led to the recovery.
“Now is the time,” Barry Biffle, president and CEO of the airline, said in an interview. “If you look, the vaccine unlocks the demand and you see it everywhere. You see it in restaurants, you see it in hotels.”
Many investors seem to agree. Sun Country’s share price rose more than 40 percent when it hit the market a few weeks ago. Shares of established airlines have also rallied in recent months.
Frontier, the last of the country’s 10 largest airlines to publish, said it planned to use the money raised to buy equipment, invest in sales and marketing, pay off debt and increase its inventories. The offer is expected to close on April 6.
The airline business model may be suitable for recovery, but the risks abound. Recovery could be derailed if Covid-19 vaccines prove ineffective in providing long-term protection or if they fail to protect humans from new strains of the Koran virus.
Rising jet fuel prices, which account for about a quarter of Frontier costs, could hamper its ability to keep fares low. And the competition is likely to be fierce in the coming years. Discounted airlines will be against each other as well as the four major airlines – American Airlines, Delta Air Lines, United Airlines and Southwest Airlines, which have huge resources and are willing to make up for lost revenue.
However, the initial public offering marks an impressive recovery for Frontier, which sought bankruptcy protection in 2008 during the financial crisis. The airline had struggled with high fuel costs and intense competition from United and Southwest at Denver Airport. Frontier emerged from the restructuring a year later and was acquired in 2013 by a subsidiary of Indigo Partners, a privately held equity firm specializing in low-cost airlines. Indigo has invested in the past and advises Spirit Airlines, Tigerair in Singapore, Volaris in Mexico and Wizz Air in Europe.
Like these companies, Frontier is careful to keep costs low and pass on these savings to customers, sometimes offering fares so cheap that they can attract customers who would not otherwise plan to travel.
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March 31, 2021, 6:27 p.m. ET
“They do not belong to the same company as America, Delta and United,” said Michael Boyd, president of Boyd Group International, an airline consulting and forecasting company in Evergreen, Colo. “When they enter a market, their main competitor is a Home Appliance Store. They have withdrawn savings from the bank account. “
Under Indigo, Frontier set up a new management team, including Mr. Biffle, and cut costs sharply by renegotiating contracts and outsourcing the call center, losing luggage service, catering, and more. The airline found ways to use its planes on more flights and switched to larger aircraft with seats filled with each other. The airline has 104 Airbus A320 aircraft in its relatively young fleet, and plans to add 156 more by the end of 2028.
In a title deposit, Frontier said he believed he could entice millions of passengers over the next decade. The airline expects an increase in demand for short domestic travel as more people choose to work remotely. He believes he could add up to 518 profitable routes between airports he already uses but which are not currently operated by an extremely low cost carrier.
“We just think we have more integrated growth, we also have lower costs and we think we have a great brand that puts us well in the low-cost space,” Biffle said.
The airline claims to be unique among low cost airlines. Although Spirit tends to cater to busier markets and Allegiant Air less crowded, Frontier is more evenly distributed. The airline said it continued to fly for longer hours each day from most major airlines and offered a few flights only a few days a week, allowing it to serve smaller cities. In addition to Denver, Frontier has a strong presence in Orlando, Florida and Las Vegas.
Frontier also claims to be more fuel efficient than its peers, which it hopes will appeal to environmentally conscious consumers.
The airline earned $ 251 million in 2019 before losing almost as much as last year. It has about $ 1 billion in cash or cash equivalents and employs about 5,000 people.
The deregulation of the US aviation industry in 1978 paved the way for the development of low-cost carriers, which tended to operate direct point-to-point flights, often to secondary airports in large cities – an approach pioneered by the Southwest. This strategy facilitates the efficient use of aircraft and crews, allowing airlines to offer relatively low fares. The more traditional hub-and-speak model used by American, United and Delta is more expensive to maintain, but is easier to develop once established.
The extremely low cost model is a more recent creation, a model that Ryanair Europe is often considered popular. Companies that use it are much more aggressive in keeping costs low and maximizing revenue. These airlines tend to use their planes one or two hours each day from other airlines and tend to push more and smaller seats on the planes. They also charge for many services that even many discount airlines include in the ticket price, such as seat selection or printed boarding passes.
However, the major airlines are unlikely to easily cede Frontier and the like. In March, for example, United, which operates most flights at Denver Airport, announced plans to add dozens of nonstop flights between small Midwestern cities and a handful of tourist destinations. Even before the pandemic, United and other major airlines were copying low-cost airlines by offering lower fares and charges for more services.