Why Does Southwest Want to Buy Frontier?

Last Updated Jul 31, 2009 10:33 AM EDT

Yesterday, Southwest announced that it was entering a bid to buy Frontier out of bankruptcy. Why exactly would they want to do that?

As far as I'm concerned, this is only about eliminating a competitor. Sure, there are other minor benefits, but for the most part, it's all about cleaning up Denver and strengthening its position there. There really isn't room for three airlines in Denver, and Southwest figures that for just over $100 million, they can fix that problem. And United will probably be pretty happy to see it, despite what you'll read over at the WSJ.

Southwest execs have already said that they have no interest in keeping the Airbus aircraft in the Frontier fleet. They would continue to operate them until they are able to replace them all with 737s. The Frontier name would only continue to exist until the Airbuses disappear - then it would all be under the Southwest name. Those Frontier employees that are Southwest material will eventually join the Southwest ranks, and the cultures probably wouldn't be that hard to mesh.

Sure, Southwest can pick up some slots at LaGuardia and some Mexico flying, but that's all relatively minor. They also can get Lynx, the regional operator of Q400s, but they could also get Q400s on their own if they really wanted to. I'd like to see them try to turn Lynx into a Southwest-branded operation, but I'm not holding my breath. Either way, it's a relatively minor benefit in the scheme of things. The real prize is making Denver work better.

United is probably cautiously optimistic here. You're never happy to see Southwest target one of your hubs, but really Southwest has been doing that anyway and it wasn't about to change. This move will simply just remove a competitor from the market and United should benefit. Besides, they don't have to even pay for the privilege, and they make Southwest shell out $100 million. Sweet.

I would also imagine that Southwest + Frontier will end up retrenching in Denver. Sure, they'll gain a couple cities, but they'll also ditch some as well. Even if they took over Lynx, I doubt we'd see them continue to serve places like Durango and Colorado Springs from Denver. Mexico and Anchorage might be on the chopping block as well, though time will tell. Any moves like that would benefit United.

There actually is another good benefit for Southwest. This is also an opportunity to put its airplanes somewhere else. Southwest has been struggling to find places to stick its capacity lately, because for the first time ever it's trying to shrink, along with the rest of the industry, but it's not shrinking enough. That's why we've seen Southwest go into four new cities this year (Boston, Milwaukee, LaGuardia, and Minneapolis). They can reduce capacity elsewhere in their system and funnel it into new cities instead. I think there is probably a similar thought about this move.

We should know more by August 10. That's when the final bid is due, and it should give us a little more insight into what Southwest plans on doing with the airline. Of course, they could decide to walk away entirely, but if they've been working on this bid for awhile (as they've said), then I doubt we'll be seeing them walk away any time soon.

They keep saying they're "in it to win it" but that could mean anything. If this turns into a bidding war, then the "winner" may very well be the one who doesn't end up taking over Frontier. (Just ask Pan Am vets how great that bidding war over National turned out.) But at the current price, it's probably a steal, and that's why Southwest can't pass it up, despite the fact that they know there will be headaches ahead, as with any integration.