Southwest bids $170 million for Frontier Airlines
August 10, 2009
All of a sudden Frontier Airlines is the popular kid at the dance.Southwest Airlines bid $170 million on Monday to take Frontier out of bankruptcy protection, well above the $108.8 million offered by regional jet operator Republic Airways Holdings Inc.Asked if Republic will bid at the bankruptcy court auction planned for Thursday, spokesman Carlo Bertolini said, “I think we’ll be present there. What our next step is, I don’t have any detail on that.”Frontier’s route network looks like a spider, with a body in Denver and about 50 legs to cities around the U.S. as well as Mexico and Costa Rica. Southwest already competes in Denver with Frontier as well as United Airlines, which has a hub there.Buying Frontier would give Southwest service in several new cities, and take out one of its two big competitors in Denver. Southwest would have about 36 percent of Denver passengers, compared with about 37 percent for United, according to an analysis by airline analyst Darryl Jenkins of The Airline Zone.”This provides us a great way to grow substantially in a city that is very important to us,” said Bob Jordan, Southwest’s executive vice president for strategy and planning.For Republic, buying Frontier would put it in the business of competing for its own passengers instead of flying passengers fed to it by big-name carriers such as Delta Air Lines Inc. and UAL Corp.’s United, as it does now.Republic will benefit from Southwest’s bid even if it loses at the auction. Republic would get roughly $20 million as an unsecured creditor in Frontier’s bankruptcy – more than it would have gotten previously, because Southwest’s bid is higher. It also stands to get its $40 million debtor-in-possession loan to Frontier repaid, and a breakup fee of as much as $4 million.Southwest’s bid would leave unsecured creditors to get about 12 cents on the dollar, versus 8.7 cents under Republic’s bid, according to Ron Ricks, Southwest’s executive vice president of corporate services. Current Frontier shareholders would be wiped out under either proposal.Southwest said it would keep all of Frontier’s current markets, including Atlanta, one of the last big markets where Southwest doesn’t currently fly. It would phase out Frontier’s Airbus fleet in favor of Southwest’s fleet of Boeing 737s over about two years. Southwest said it would keep about 40 of Frontier’s 51 planes, rejecting leases on the rest as allowed in bankruptcy court. Its bid also includes Frontier’s regional carrier Lynx.Bertolini, the Republic spokesman, said the two bids are not nearly as far apart as it first appears because of expenses such as aircraft lease rejections included in Southwest’s bid. Creditors other than Republic would only get roughly $5 million to $6 million more under Southwest’s current bid, he said.Helane Becker, an analyst with Jesup & Lamont Securities Co., said it’s unlikely that Republic will top Southwest’s bid. She pointed out that Republic had just $97.4 million in cash at the end of June.”I seriously doubt they have the capital to do that,” she said. “This is an all-cash bid. Southwest is going to write a check.”Frontier spokesman Steve Snyder said the carrier wouldn’t have any comment until it finishes reviewing Southwest’s bid.Either airline would need approval from federal antitrust regulators to buy Frontier. But they’re more likely to look askance at Southwest’s bid because it would eliminate a competitor in Denver. Southwest also said it wants its pilots and Frontier’s to agree on several integration issues before it finalizes the deal. Southwest spokesman Chris Mainz said that means labor groups must agree on the process for integrating their seniority lists, the rankings that affect pilot bidding for routes and schedules.A bankruptcy judge had already approved Republic’s bid. But the bankruptcy process allows other bidders to step forward. That’s what Southwest Airlines Co. did on July 30, initially offering a nonbinding bid of $113.6 million. That was basically a placeholder to give it the chance to look at Frontier’s books and decide whether it wanted to submit a binding bid.Denver-based Frontier has been operating under Chapter 11 protection since April 2008.Shares of Dallas-based Southwest fell 24 cents, or 2.6 percent, to close at $8.87, while shares of Indianapolis-based Republic lost 29 cents, or 4.9 percent, to close at $5.65.