Markets

Why Frontier Airlines Isn't Going Anywhere Any Time Soon

By Brett Snyder

Updated on: January 25, 2011 / 6:16 PM EST / MoneyWatch

Douglas McIntyre recently looked into a crystal ball at AOL's DailyFinance to predict which companies won't be around by the end of 2011. One airline, Frontier -- currently owned by Republic (RJET) -- made the list. McIntyre seems to think an acquisition is inevitable, but that makes no sense to me.

The basic premise of his piece is that "Frontier's Milwaukee hub, which serves the East and Midwest, and its Denver hub, which serves the West, the South, and Mexico, would be valuable to a larger carrier."

I disagree. There is little to no value in Frontier for most larger carriers, at least none that they could unlock.

Big airlines, high operating costs
Let's start with the really big guys like Delta (DAL), American (AMR), United (UAL), and US Airways (LCC) -- the so-called legacy carriers. Acquiring Frontier makes little sense for them simply because of cost. In the third quarter of 2010, Frontier saw its unit costs (the cost of flying an airline seat -- whether it has a butt in it or not -- one mile) at 10.60 cents while its unit revenues were 11.15 cents. American's unit cost was 12.75 cents while Delta was at 12.48 cents. Even with adjustments for flight distances, the Frontier operation is not profitable when you apply legacy airline costs.

McIntyre argues that "Two airlines together can have a better margin than separately," but that's only true if you're combining two compatible airlines. It's why you don't see low cost carriers merge with legacy carriers except under extraordinary circumstances. America West, for example, pulled US Airways out of bankruptcy, but was able to use the courts to make massive changes before doing so. That wouldn't be the case here.

Taking out the competition -- not
You might argue that United would be interested in buying Frontier in order to eliminate a competitor in its Denver hub. United is currently in the middle of a complex merger with Continental, and it's not going to be interested in taking on yet another merger at the same time. In addition, the acquisition of Frontier might have the opposite effect by strengthening the third large Denver airline, Southwest (LUV).

What about Southwest? Southwest tried to buy Frontier out of bankruptcy when it was just a Denver-hubbed operation, but it withdrew its bid and Republic won. Would Southwest go back to try again? I can't imagine that happening. Southwest is preoccupied with its acquisition of AirTran, and it has a load of other complicated projects underway. It simply doesn't have the bandwidth to buy Frontier, even if it wanted to.

Peaceful coexistence
But even if it did have the bandwidth, this still wouldn't be an appealing deal. Southwest and Frontier have proven they can coexist in Denver by catering to different types of people, especially now that air travel has begun to rebound. Frontier's customers like the inflight entertainment, assigned seats, etc. If Southwest bought Frontier, those things would go away, sending those customers back to United.

In addition, Southwest decided to build Denver up further on its own when it failed to get Frontier in bankruptcy. So it already has the operation it wants now. An acquisition would simply add a bunch of airplanes that Southwest doesn't want.

Bloodbath in Milwaukee
JetBlue has also been floated as a possibility in some circles. Many people point to the fact that the airlines both operate Airbus and Embraer fleets, but that still doesn't help make a strong case.

If JetBlue buys Frontier, it enters into a low cost bloodbath in Milwaukee along with a massively competitive operation in Denver with United and Southwest. JetBlue has a growth strategy that has worked for it, so why should it go buy another airline? It shouldn't.

Republic, for which it stands
All this speculation, of course, assumes that current owner Republic even wants to sell Frontier. That doesn't make sense either. Republic cut its teeth on the regional side of the business, an area which has seen increasingly squeezed margins and few, if any, opportunities for growth. That was the whole reason Republic purchased Frontier and other branded operations; it needed a way to grow out of its niche. Selling Frontier would put Republic right back where it started. The company doesn't want that.

It's easy to jump on the bandwagon and assume that all small airlines will get eaten up by larger ones, but it's just not true. The myth that small airlines are, as McIntyre suggests, "simply too small to compete in the domestic carrier market," is a stretch. There will always be an opportunity for niche airlines. Whether Frontier can continue to operate independently in the long run remains an open question, but I'd be astonished if it's not still flying solo this time next year.

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Photo via Flickr user randomduck/CC 2.0