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Bad News for Denver Fliers Could Be Good for Everyone Else

Adam Levine-Weinberg
October 13, 2013

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 simila