Bad News for Denver Fliers Could Be Good for Everyone Else

Frontier Airlines has historically been one of the top carriers in Denver. In fact, after the original Frontier Airlines went bankrupt in 1986, several former executives started a "new" Frontier Airlines to provide better airline service in the Denver area.

Frontier Airlines is one of the largest carriers in Denver. Photo: Frontier Airlines.

However, Frontier owner Republic Airways (NASDAQ: RJET  ) recently agreed to sell the airline to private equity firm Indigo Partners. Indigo plans for Frontier to grow over time, but if anything, the carrier is likely to shrink in Denver. This means that Denver airfares could be going up just as fliers in other cities are seeing some price relief.

Low-fare Denver
Denver International Airport currently serves as a hub for Frontier as well as legacy carrier United Continental (NYSE: UAL  ) . Southwest Airlines (NYSE: LUV  ) has a major focus-city operation in Denver, too, and now carries more local (i.e., non-connecting) traffic than United or Frontier.

Denver fliers have benefited significantly from this unusually competitive environment. In fact, the average domestic airfare in Denver dropped 27.6% between the first quarter of 2000 and the first quarter of 2013. That was the third biggest drop among U.S. airports.

A new plan?
Indigo -- Frontier's new owner -- is planning to convert it to an "ultra-low-cost carrier," or ULCC, model similar to the one it introduced for its last U.S. airline investment: Spirit Airlines (NASDAQ: SAVE  ) . The defining feature of ULCCs is that they offer low base fares to stimulate demand and then charge extra for everything else.

So far, Frontier has begun the transition to an ultra-low-cost carrier model while maintaining a hub-and-spoke route structure based in Denver. However, the hub-and-spoke structure doesn't fit well with the ULCC model, because it costs more to route passengers on connecting flights than on a nonstop. (For this reason, Spirit focuses its growth on city-pairs with plenty of local traffic.)

As a result, while Frontier will continue to be based in Denver, it's very likely that the carrier will scale back its Denver flight schedule. Some of the markets it serves from Denver don't have many local passengers, and so Frontier would probably be better off shifting that capacity to markets with plenty of nonstop traffic.

Early warning signs?
Frontier has already taken tentative steps toward de-emphasizing the Denver hub. The airline has cut capacity in Denver significantly this year, primarily by ending most of the regional flights that had been operated by other Republic subsidiaries.

Meanwhile, Frontier has started service in two new markets where it is the only commercial carrier: Trenton, N.J., and Wilmington, Del. Frontier opened its Trenton focus city late last year and has already expanded it twice. Just last week, Frontier announced that it will begin flights from Trenton to Cincinnati and Charlotte, N.C., in early 2014.

Spirit has been very successful in a number of small, secondary airports, so it seems likely that Frontier will continue to look for similar niche markets when possible. Furthermore, Frontier is improving its brand recognition in many of the larger markets that it serves from Trenton and Wilmington. That could enable further expansion in the next few years.

Foolish bottom line
With Frontier going private, it may take a while to learn what its exact plans are in Denver. Frontier Airlines is still a Denver institution, but it's unlikely that the company will remain so Denver-centric as it transitions to the ULCC model. Frontier is already trimming its presence in Denver and will probably continue to cut back on routes that require a lot of connecting traffic to keep its planes full.

This could lead to somewhat higher airfares in Denver going forward, as United and Southwest are likely to raise prices if they encounter less competition there. Still, Frontier is unlikely to abandon Denver entirely, and Spirit also has a small presence there, both of which should mitigate this tendency.

Whichever cities end up receiving expanded Frontier service will be the big beneficiaries. ULCCs can play a big role in keeping airfares down, because competitors don't want to lose too many price-sensitive customers. Fliers in the Trenton area have been very pleased with Frontier's arrival so far, and travelers in Frontier's future markets will probably be equally happy.

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Read/Post Comments (4) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 13, 2013, at 11:12 PM, rayschum wrote:

    So, why do you ignore the words from the investor and wrap other "opinions" into news stories? Even "Spirit" runs a hub in Fort Lauderdale.

  • Report this Comment On October 14, 2013, at 8:55 AM, Inspectigator wrote:

    It is stunning that executives are trying to run large airlines like generic businesses, where cutting costs below your competitors is the the key to success. Whatever happened to offering a better product? How about motivating employees to make the product experience a pleasant one? I realize it comes down to what the flying public is willing to pay for and to tolerate, but then the airlines have stopped trying to offer something creative that might attract an extra dollar.

    Regardless, low and ultra-low cost airlines are going to be on the wrong end of the line when a pilot shortage arrives, the majors are just giddy with anticipation of their demise. That huge drop in fares you attribute to the low-cost carriers is going to reverse when those low-cost carriers cut flying when they can't find pilots, which is already happening. Look at fares bouncing back where Great Lakes Airlines has cut back, up 30% already this year. Great Lakes and the regionals are reporting pilots leaving faster than they can be replaced. The only way budget carriers are going to keep pilots and keep flying is to pay pilots more than the majors do, that could get into an ugly bidding war.

    On top of that, business aviation is hitting their pilot retirement bubble, and predicting increased flying. They are looking for more pilots than the airlines, and they can justify higher pay than the airlines now pay. The Middle-East and China are offering double the pay of the U.S. airlines, the U.S. military is offering big bonuses and better quality of life to their pilots than the airlines. Flight schools are shutting down as young people balk at the high costs and very low pay for the career. What is being called a "perfect storm" of conditions is about to cut an essential and difficult to produce resource from the airline industry. Probably not a good time to be re-inventing and expanding on the ultra-low-cost model.

  • Report this Comment On October 14, 2013, at 10:34 AM, TMFGemHunter wrote:

    I've discussed this issue elsewhere, but I think the "pilot crisis" will have a minor effect on ultra-low cost carriers. Note that Southwest (a low-cost carrier) already has some of the best pay rates in the passenger airline industry.

    The regional airlines will bear the brunt of this problem (to the extent that it exists). Great Lakes, which you cited above, flies planes with 30 or fewer seats. Spirit's planes have about 155-160 seats on average. So Spirit could pay pilots 3 times as much as much as Great Lakes and still be paying less per passenger.

    In other words, a pilot shortage will hit the massive

    fleet of 50 seat and smaller RJs first. That will probably increase costs for the regional airlines, and those costs will eventually get passed through to the legacies. So the legacy carriers are actually much more likely to get hurt if there is a pilot shortage.

    However, what's more likely to happen is that increases in pilot wage rates will draw more people into the career. Any "pilot shortage" will be a temporary thing, lasting only until more pilots can be trained.

    Adam

  • Report this Comment On October 14, 2013, at 1:15 PM, Inspectigator wrote:

    A pilot education from start to Airline Transport Pilot license takes close to $200k for every expense at Embry-Riddle, and takes 3-4 years minimum. But even with a sudden surge of highly capable, wealthy, and motivated kids going into the profession, it will take years to increase the capacity of flight schools in any significant way. Our U.S. civilian flight schools are a shadow of the size they were decades ago, our military flight schools are a fraction of their previous size, and the Chinese have bought out all our unused facilities that weren't repurposed long ago. PanAm is now owned by the Chinese.

    Warren Buffet bought Flight Safety International years ago predicting this shortage, but downsized his U.S. facilities when the recession hit and the retirement age was raised to avoid a shortage. This isn't just about pumping more raw materials into the pilot puppy mills that now produce our pilots. We don't have an infrastructure.

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