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.
However, Frontier owner Republic Airways (NASDAQOTH:RJETQ) 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.
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.
Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool recommends Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.