Southwest's Bid for Frontier Raised to $170 Million

Yesterday was the deadline for Southwest and Republic to file their final bids for Frontier, and both airlines have qualified for the auction this week. Southwest ended up bidding much higher than its original forecast, though it's not as simple as the headline appears.

Southwest's bid ended up being $170 million. This includes only 40 of Frontier's 51 Airbus aircraft (the rest are under leases which will be rejected under bankruptcy law). It also includes Lynx and its fleet of Q400 aircraft, something that Southwest wasn't sure if it wanted in its original $113 million estimate (which was not a binding bid but rather an expression of interest).

The bid also includes a $3.5 million breakup fee that Southwest, if it wins, will have to pay Republic since that was something Republic negotiated in its original agreement with Frontier. Unsecured creditors will walk away with about 12 cents on the dollar. That may seem low, but it's better than Republic's sub-9 cent bid.

There is a lot more to this bid including how much debt will be assumed, so it's hard to compare the true value of this bid and the original estimate without further analysis.

The bids will be presented on Wednesday and the auction is scheduled to take place on Thursday. Hopefully we'll know the results by the end of the day, though it could stretch into Friday.

Republic wins to some extent regardless of what happens. If Southwest wins the bid, Republic gets its DIP financing repaid as well as a $3.5 million breakup bonus. Of course, its long term strategy to build a web of airlines gets into trouble as Midwest isn't exactly a huge prize without Frontier joining the mix. (Even then it's not that huge.)

My guess is that Southwest is going to win this one. The price is still low considering the fact that they get some airplanes they can sell off, they get slots at LaGuardia and National (potentially), and most importantly, they eliminate Frontier as a competitor and make Denver look a whole lot better on the income statement. It seems like a wise move for Southwest financially, so I would be surprised if they let this one slip away.