The pandemic is far from over, but some airlines believe the travel industry is already booming.
Frontier Airlines, a Denver-based budget airline known for putting wildlife images on its planes, is set to become the second airline this year to list its stock on Thursday. Frontier plans to raise $ 266 million by selling 15 million shares at $ 19 each on the Nasdaq under the symbol ULCC, a nod to its “super low-cost carrier” strategy. An additional 15 million shares will be sold by existing Frontier shareholders.
The industry may be in the throes of one of the worst crises in its history, but travel is starting to pick up and carriers like Frontier and Sun Country Airlines, which completed an IPO in mid-March, say they are well positioned for the rebound. Unlike larger airlines, budget carriers don’t rely on business or international travel, which isn’t expected to rebound anytime soon. Frontier and Sun Country offer domestic flights to passengers visiting with family or friends or on a leisure trip, those who have led the recovery.
“The time is right,” said Barry Biffle, president and CEO of the airline, in an interview. “If you look, the vaccine is freeing up demand, and you see it everywhere. You see it in restaurants, you see it in hotels. “
Many investors seem to agree. Sun Country’s share price jumped over 40% when it hit the market a few weeks ago. Shares of established airlines have also risen in recent months.
Frontier, the latest of the country’s 10 largest airlines to go public, said it plans to use the money it raised to buy equipment, invest in sales and marketing, pay down debt and consolidate its liquidity reserves. The offer is expected to close on April 6.
The airline’s business model may be well suited for a recovery, but the risks abound. The recovery could be derailed if the Covid-19 vaccines prove ineffective in providing long-term protection or if they fail to protect people from the newer variants of the coronavirus.
A surge in jet fuel prices, which accounts for about a quarter of Frontier’s costs, could hamper its ability to keep prices low. And the competition will likely be fierce in the years to come. The discount companies will compete against each other along with the Big Four – American Airlines, Delta Air Lines, United Airlines and Southwest Airlines, which have vast resources and are eager to make up for lost revenue.
Still, the initial public offering marks an impressive turnaround for Frontier, which filed for 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 came out of restructuring a year later and was acquired in 2013 by a subsidiary of Indigo Partners, a private equity firm specializing in ultra-low cost airlines. Indigo previously invested and advised Spirit Airlines, Tigerair in Singapore, Volaris in Mexico and Wizz Air in Europe.
Like these companies, Frontier is actively focused on keeping costs down and passing those savings on to customers, sometimes offering rates so cheap that they can attract customers who might not have expected to pay. travel differently.
Today in businessUpdated
March 31, 2021, 6:27 p.m. ET
“They’re not in the same industry 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 want to have savings in the bank account.”
Under Indigo ownership, Frontier installed a new management team, including Mr. Biffle, and drastically cut costs by renegotiating contracts and outsourcing its call center, lost baggage services, catering and hospitality. ‘other functions. The airline has found ways to use its planes on more flights and has moved on to larger planes with closer seats. 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 security deposit, Frontier said he believed he could attract millions of passengers over the next decade. The airline expects demand to increase for short domestic trips as more people choose to work remotely. He believes he can profitably add up to 518 routes between the airports he already uses but which are not currently served by a very low cost carrier.
“We just believe that we have more integrated growth, that we also have lower costs and we believe that we have a great brand that positions us well in the low fare industry,” said Mr. Biffle.
The airline claims it is unique among budget airlines. While Spirit tends to serve more congested markets and Allegiant Air less congested, Frontier is better distributed. The airline said it runs planes more hours each day than most other major airlines and only offers some flights a few days a week, allowing it to serve smaller towns. In addition to Denver, Frontier has a large presence in Orlando, Florida 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 made $ 251 million in 2019 before losing almost that much last year. It has approximately $ 1 billion in cash or cash equivalents and employs approximately 5,000 people.
Deregulation of the US airline industry in 1978 paved the way for the growth of low cost carriers, which tend to operate point-to-point direct flights, often to secondary airports in major cities – an approach pioneered by Southwest. This strategy facilitates the efficient use of planes and crews, allowing airlines to offer relatively low fares. The more traditional star model used by American, United and Delta is more expensive to maintain but easier to develop once established.
The ultra-low-cost model is a more recent creation, a creation that European Ryanair is often credited with having popularized. Companies that use it are much more aggressive in keeping costs down and maximizing revenue. These airlines tend to use their planes an hour or two longer each day than other airlines and tend to cram more and more smaller seats on planes. They also charge for many services that even many low-cost airlines include in the price of the ticket, like seat selection or printed boarding passes.
But the big airlines are unlikely to easily cede ground to Frontier and its ilk. In March, for example, United, which operates the most flights at Denver Airport, announced plans to add dozens of non-stop flights between small towns in the Midwest and a handful of tourist destinations. Even before the pandemic, United and other major airlines were copying ultra-low cost carriers by offering lower fares and charging for more services.