Home — Travel n Tour Frontier Airlines I.P.O. Signals a Travel Industry Recovery

Frontier Airlines I.P.O. Signals a Travel Industry Recovery

by geiw5

The pandemic is far from over, but some airlines believe the travel business is already on an upswing.

Frontier Airlines, a budget carrier that is based in Denver and known for putting images of wild animal on its planes, is expected on Thursday to become the second airline this year to list its shares on a stock exchange. Frontier plans to raise $266 million by selling 15 million shares at $19 each on Nasdaq under the symbol ULCC, a nod to its strategy as an “ultra-low-cost carrier.” Another 15 million shares will be sold by Frontier’s existing stockholders.

The industry may be struggling through one of the worst crises in its history, but travel is starting to recover and carriers like Frontier and Sun Country Airlines, which finished an initial public offering in mid-March, say they are well positioned for the rebound. Unlike the largest airlines, budget carriers don’t rely on corporate or international travel, which are not expected to bounce back any time soon. Frontier and Sun Country offer domestic flights to passengers visiting family or friends or going on leisure trips, the kind who have been leading the recovery.

“The time is now,” Barry Biffle, the airline’s president and chief executive, said in an interview. “If you look, the vaccine is unlocking the demand, and you’re seeing it everywhere. You’re seeing it in restaurants, you’re seeing it in hotels.”

Many investors seem to agree. Sun Country’s stock price jumped more than 40 percent when it hit the market a couple of weeks ago. Shares of established airlines have also rallied in recent months.

Frontier, the last of the nation’s 10 largest airlines to go public, said it planned to use the money it raised to buy equipment, invest in sales and marketing, repay debt and shore up its cash reserves. The offering is expected to close on April 6.

The airline’s business model may be well suited for a recovery, but risks abound. The recovery could be derailed if the Covid-19 vaccines prove ineffective at providing long-term protection or if they fail to shield people from new coronavirus variants.

A spike in jet fuel prices, which account for about a quarter of Frontier’s costs, could hinder its ability to keep fares low. And competition will probably be fierce in the years ahead. Discount companies will be up against one another as well as the four big airlines — American Airlines, Delta Air Lines, United Airlines and Southwest Airlines, which have vast resources and are eager to make up lost revenue.

Still, the initial public offering marks an impressive turnaround for Frontier, which sought bankruptcy protection in 2008 during the financial crisis. The airline had struggled with high fuel costs and intense competition from United and Southwest at the Denver airport. Frontier emerged from restructuring a year later and was acquired in 2013 by an affiliate of Indigo Partners, a private equity firm that specializes in ultra-low-cost airlines. Indigo has previously invested in and advised Spirit Airlines, Tigerair in Singapore, Volaris in Mexico and Wizz Air in Europe.

Like those companies, Frontier focuses intently on keeping costs low and passing those savings onto customers, sometimes offering fares so cheap that they can attract customers who weren’t otherwise planning to travel.

“They’re not in the same business as American, Delta and United,” said Michael Boyd, president of Boyd Group International, an aviation consulting and forecasting firm in Evergreen, Colo. “When they go into a market, their main competitor is Home Depot. They’re after getting savings out of the bank account.”

Under Indigo’s ownership, Frontier installed a new management team, including Mr. Biffle, and sharply cut costs by renegotiating contracts and outsourcing its call center, lost baggage services, catering and other functions. The airline found ways to use its planes on more flights and switched to bigger planes with seats packed closer together. The airline has 104 Airbus A320 planes in its relatively young fleet, and plans to add 156 more by the end of 2028.

In a securities filing, Frontier said it believed that it could lure millions of passengers over the coming decade. The airline expects demand to rise for short domestic trips as more people choose to work remotely. It believes it could profitably add as many as 518 routes between airports that it already uses but that are not currently served by an ultra-low-cost carrier.

“We just believe we’ve got more embedded growth, we’ve also got lower costs, and we believe we’ve got a great brand that positions us well in the low-fare space,” Mr. Biffle said.

The airline claims it is unique among low-cost airlines. While Spirit tends to serve more-crowded markets and Allegiant Air less-crowded ones, Frontier is more evenly distributed. The airline said it kept planes moving for more hours every day than most other major airlines and offers some flights only a few days a week, allowing it to serve smaller cities. In addition to Denver, Frontier has a big presence in Orlando, Fla., and Las Vegas.

Frontier also claims to be more fuel-efficient than its peers, which it hopes will appeal to environmentally conscious consumers.

The airline earned $251 million in 2019 before losing nearly as much last year. It has about $1 billion in cash or cash equivalents and employs about 5,000 people.

Deregulation of the U.S. airline industry in 1978 paved the way for the growth of low-cost carriers, which tend to operate direct, point-to-point flights, often to secondary airports in major cities — an approach pioneered by Southwest. That strategy makes it easier to put planes and crews to efficient use, allowing the airlines to offer relatively low fares. The more traditional hub-and-spoke model used by American, United and Delta is more expensive to maintain but easier to grow once established.

The ultra-low-cost model is a more recent creation, one that Europe’s Ryanair is often credited with popularizing. Companies that use it are much more aggressive about keeping costs low and maximizing revenue. These airlines tend to use their planes an hour or two more each day than other airlines and tend to cram more and smaller seats into planes. They also charge for lots of services that even many conventional discount airlines include in the ticket price, such as seat selection or printed boarding passes.

But larger airlines are unlikely to easily cede ground to Frontier and its ilk. In March, for example, United, which operates the most flights at the Denver airport, announced plans to add dozens of nonstop flights between small Midwestern cities and a handful of tourist destinations. Even before the pandemic, United and other large airlines were copying ultra-low-cost companies by offering lower fares and charging for more services.

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