The low-fares, high-fees business model is expanding across the airline industry, and now a third ultralow-cost carrier appears ready to enter the battle between Spirit Airlines (SAVE) and Allegiant Travel (ALGT) for America’s cheapest travelers.
Frontier Airlines, the Denver-based airline known for the majestic wild animals painted on its jets’ tails, may soon become a legitimate down-market competitor. For years, Spirit and Allegiant have seen torrid growth in that segment of the U.S. market, as legacy airlines such as Delta (DAL), United (UAL) and American have merged, trimmed capacity, boosted fares, and aggressively sought high-paying business travelers.
William Franke, Spirit’s chairman and managing partner of Indigo Partners, a private equity firm that focuses on airlines, is negotiating to acquire Frontier Airlines from Republic Airways Holdings (RJET) and turn it into the same type of operation he pioneered at Spirit, Dow Jones reported this week. Indigo will sell its 16 percent stake in Spirit, and Franke and another Indigo partner, John Wilson, will resign from Spirit’s board next month. The pending sale of 12 million shares prompted an 8 percent drop in Spirit’s stock price on July 30.
Republic, which flies regional jets on behalf of the major airlines, acquired Frontier in August 2009 as a way to diversify its revenue beyond the contracts it signs with the large hub-and-spoke airlines. But that experiment largely failed, and Republic has been trying to sell the airline for more than a year while cutting costs and flights at Frontier. Last week Republic told investors it had signed a nonbinding agreement with a buyer to negotiate Frontier’s sale and delayed its shareholder meeting into September, presuming a deal could close in August. A Republic spokesman declined to comment, and a Spirit spokeswoman did not respond to a request for comment.
Frontier could present Phoenix-based Indigo an opportunity to expand the leisure-travel model in the U.S. that has enjoyed immense popularity worldwide, with players such as Ryanair Holdings (RYAAY), easyJet (ESYJY), Wizz Air, and Volaris. Such airlines offer low fares but then assess fees for nearly every aspect of a flight, from water to carrying aboard a bag. Frontier also has an attractive asset in its early orders for new versions of Airbus’s A320neo and A319neo models. Two years ago Republic placed 40 firm orders and 40 options for the new planes, giving it a lucrative placement in the order queue for a hot-selling airplane, Cowen & Co. (COWN) aviation analyst Helane Becker says.
Franke, a former chief executive of America West Airlines, has compiled “a really good track record” in the industry, Becker says, calling Frontier “definitely a turnaround story” that could eventually be sold to a larger carrier or taken public in three to five years if any revamp is successful. (Southwest Airlines (LUV) bid unsuccessfully for Frontier in 2009.) “I think they’ve got a following,” the analyst says of Frontier. “There are people, in Denver especially, who are loyalists. They like the airline and would continue to support it.”
Still, even amid all the new leisure travel Spirit and Allegiant have stimulated in recent years, there could be a limit to the ultralow-cost model’s U.S. growth, says George Ferguson, an airline analyst with Bloomberg Industries. “I think we like a bit more of a refined flying experience, as we typically get two to three weeks of vacation per year, where Europeans get five or six weeks and need to stretch the vacation dollar a bit more,” he wrote in an e-mail today. “We are much more of a car culture and will drive down 95 to Disney World, so we have all our junk with us when we get there.”