Southwest makes counter-bid for Frontier Airlines
The Associated Press
Aspen, CO Colorado
DALLAS – Southwest Airlines Co. is trying to trump a rival bid and acquire Frontier Airlines, a Denver-based carrier operating under bankruptcy protection.
The move could strengthen Southwest’s position in Denver and speed the low-cost carrier’s expansion into new markets such as Atlanta and resort areas in Mexico.
A court had already approved the sale of Frontier Airlines Holdings Inc. to the parent of Republic Airways for $108.8 million, but that deal can be nixed if a better offer comes along.
Dallas-based Southwest said Thursday it submitted a nonbinding bid of $113.6 million. Southwest hopes that making the bid will allow it to talk with Frontier and get information to help shape its final proposal.
Southwest said it faces an Aug. 10 deadline for submitting a binding bid. If there is more than one qualified bidder, an auction will be held the following day.
“We are in this to win, and we think we have the resources to be successful,” said Southwest executive vice president Ron Ricks.
U.S. airlines are struggling through a terrible slump in travel, as the recession has grounded many business passengers. But Southwest has $2.2 billion in cash and short-term investments and could probably borrow on its investment-grade credit rating.
Southwest said it would operate Frontier as a separate wholly owned subsidiary for a couple of years until its operations can be combined with Southwest.
Ricks said Southwest had “been considering a bid for some time, independent of any action Republic took with its bid proposal. In the past month, we began an intensive study of the airline and expressed that interest to Frontier.”
Republic spokesman Carlo Bertolini said his company was reviewing Southwest’s announcement and it was too early to know if Republic would raise its bid.
Southwest recently went back into Frontier’s home market of Denver, where it also competes against UAL Corp.’s United Airlines. Mike Boyd, an airline consultant in the Denver area, said that explains Southwest’s interest in Frontier.
“This is about a tactical need by Southwest to take out their major competitor in Denver,” Boyd said. “They’ve got to make Denver profitable, and if they’re going to do that, they need to take out Frontier.”
United said it operates 436 daily departures on average from Denver compared with 168 by Frontier and 113 by Southwest.
Jean Medina, a spokeswoman for UAL Corp.’s United, said the Chicago-based airline was not interested in a bid for Frontier and wasn’t worried about a beefed-up Southwest. “We have long competed with them virtually everywhere in the U.S. and will continue to do so vigorously,” she said.
Frontier flies from its Denver hub to about 50 locations including Mexico and Costa Rica. It overlaps with Southwest on about 27 U.S. routes and serves about a dozen others that Southwest doesn’t, including Atlanta – a hub for Delta and AirTran – Washington’s Reagan Airport, five cities in Mexico and one in Costa Rica.
Southwest executive vice president Bob Jordan said the airline is interested in studying how Frontier serves Mexico and whether Southwest could take over that service. Southwest eventually plans to sell travel to Mexico on a partner airline, Volaris.
Southwest has used previous acquisitions to expand. It bought Morris Air in 1993 to grow in the Pacific Northwest, and bought assets from bankrupt ATA Airlines at New York’s LaGuardia Airport, where it began service this year.
Officials at Southwest, which operates an all-Boeing 737 fleet, said they would eventually replace Frontier’s Airbus jets with Boeing planes.
They also said they would combine the two frequent-flier programs, although Frontier bases rewards on miles and Southwest uses trips.
Frontier filed for bankruptcy protection in April 2008 after its credit-card processor moved to hold back a big chunk of the proceeds from ticket sales, raising the prospect of a cash crunch. According to court documents, a consultant hired by the airline began contacting potential buyers in January, and some met with the airline’s management over the next two months.
Some prospective investors backed out, however, because of lack of available credit and the downturn in the airline industry.
Indianapolis-based Republic Airways Holdings Inc. submitted its bid in May. Republic extended Frontier a $40 million debtor-in-possession loan and holds a $150 million unsecured claim. Republic operates a regional airline, Chautauqua Airlines and Shuttle America.
Shares of Southwest rose 6 cents to close at $7.73. Republic shares dipped 3 cents to close at $5.19.
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