Frontier Airlines Loves to Compete With United Continental

Throughout its 20-year corporate history, Frontier Airlines has operated a hub in Denver where it competes directly with United Continental (NYSE: UAL  ) . These days, Frontier executives really like competing with United.

This isn't that surprising, as United has the highest cost structure among all major U.S. airlines. As a result, Frontier is concentrating the bulk of its growth in 2014 on markets where United is the top carrier. By offering low fares on heavily traveled routes from cities like Cleveland and Washington, Frontier can be sure to under-price United and thereby gain new customers.

Frontier's first new stop
The impetus for Frontier's first round of expansion was United Continental's decision earlier this year to shut down its Cleveland hub. Due to the hub closure, United has slashed 60% of its daily departures in Cleveland within the last three months.

United Continental has dropped 60% of its flights in Cleveland this year. Photo: The Motley Fool

Even after ending hub operations in Cleveland, United still is the largest airline there. But it no longer dominates the market as it did prior to this year, which created an opportunity for Frontier Airlines to move in and gain market share with lower ticket prices.

In February, Frontier began flying to Cleveland from its new Northeast focus city in Trenton, N.J. -- a route that was planned prior to the United hub closure announcement. On the same day that this new service began, Frontier announced plans to begin flights to Orlando (four times weekly) and seasonal service to Seattle (three times weekly).

Frontier quickly became more ambitious, and in March it announced plans to add six more cities to its Cleveland route map: Atlanta, Fort Lauderdale, Fort Myers, Raleigh-Durham, Phoenix, and Tampa. Frontier has started service on all of these new routes within the past few days.

Last month, Frontier announced additional growth plans. By mid-September, it will start routes connecting Cleveland to Dallas/Fort Worth and Las Vegas. Finally, on Monday, Frontier added another three big cities to its Cleveland expansion plans. In October, it will begin flying from Cleveland to Chicago-O'Hare, New York-LaGuardia, and Washington-Dulles.

In total, this will give Frontier Airlines 17 routes from Cleveland (including scheduled charter routes to Cancun and Punta Cana), up from just three at the beginning of 2014. Interestingly enough, 11 of these routes will overlap with the remaining routes United will fly.

Frontier has seen United's hub closure in Cleveland as an opportunity to expand there. Photo: The Motley Fool

In other words, for the most part Frontier is not trying to replace flights that United dropped. Instead, it is going head-to-head with United's remaining routes. This may imply that Frontier executives think the United hub closure will make Cleveland-based travelers more receptive to other airlines.

Growing in D.C.
Cleveland isn't the only place where Frontier is eager to go head-to-head with United. Last month, it announced plans to start 14 routes at Washington's Dulles International Airport, where United continues to operate a hub.

By early September, Frontier will fly from Dulles to Atlanta, Charlotte, Chicago, Cincinnati, Detroit, Fort Lauderdale, Fort Myers, Las Vegas, Memphis, Minneapolis-St. Paul, Orlando, St. Augustine, St. Louis, and Tampa. (It will also add flights to Cleveland in October, as previously noted.) Most routes will operate four-to-six times weekly.

As in Cleveland, Frontier presumably sees an opportunity to win price-sensitive customers away from United Continental in Washington, D.C. Considering just how much United has been struggling recently, it seems like a smart strategy!

Foolish final thoughts
I don't think it is a coincidence that Frontier Airlines is focusing much of its expansion plans on routes where it will compete directly with United Continental. While Cleveland might qualify as an underserved market now that United has closed its hub there, Washington is already gaining plenty of low-cost carrier competition at Reagan National Airport this summer.

The logic behind Frontier's expansion in Cleveland and Washington, D.C., is simple. United has the highest cost structure among U.S. airlines, and it currently operates on razor-thin margins. This means that it can't afford cut prices very much to match Frontier's much-lower fares. (United also has relatively poor customer satisfaction scores.)

This means that Frontier can come in with significantly lower fares and still make money. While Frontier isn't known for excellent customer service, it's no worse than United. Frontier thus has a good formula for luring away price-sensitive United Airlines customers -- and United doesn't have a good response.

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