Mergers & Acquisitions and Airlines and Republic Airways and Transportation, Distribution & Logistics

Republic Airways selling Frontier in $145M deal

October 1, 2013

 Indigo Partners LLC, led by veteran airline executive William Franke, has agreed to buy Frontier Airlines from Indianapolis-based Republic Airways Holdings Inc. for $36 million in cash.

The total value of the transaction is $145 million including debt, the companies said Tuesday in a prepared statement. Republic, which operates regional flights for larger carriers, decided to shed Denver-based Frontier in November 2011, two years after buying the company to bring it out of bankruptcy.

Shares in Republic rose more than 6 percent in morning trading, to $12.64 each. They have more than doubled in value this year.

The sale will end Republic CEO Bryan Bedford’s bid to operate commuter carriers alongside an airline that competed on main jet routes. Bedford returned Frontier to profit in 2012 after reducing annual operating costs more than $120 million by cutting jobs, dropping some markets and modifying leases, vendor contracts and labor agreements.

“This transaction is a direct result of Frontier’s successful restructuring, continued cost reduction efforts and laser focus on revenue generation,” Bedford said Tuesday.

The transaction is expected to be completed by December.

Republic will also hand over its rights relating to an Airbus SAS A32neo order in exchange for reimbursement of pre-delivery deposits totaling $32 million, according to the statement.

Franke resigned as chairman of Spirit Airlines Inc. in July and sold Indigo’s 17-percent stake in the Miramar, Fla.-based carrier.

Republic bought Frontier in October 2009 for $108.8 million and an agreement not to pursue a $150 million unsecured bankruptcy claim. Southwest Airlines Co. withdrew its $170 million Frontier bid after its pilots couldn’t agree with their counterparts at the smaller carrier on how to mesh seniority lists.

Frontier filed for bankruptcy protection in April 2008. The airline’s main base of operations is Denver, where it carries about 19 percent of passengers, according to the U.S. Transportation Department. Southwest and United Continental Holdings Inc. each control about 25 percent of that market.

Republic ferries passengers to hub airports for AMR Corp.’s American Airlines, United, Delta Air Lines Inc. and US Airways Group Inc. In addition to Frontier, it owns Chautauqua Airlines, Republic Airlines and Shuttle America.

Franke is a pioneer of the cheap tickets and high fees airline business that has spread overseas and is growing in the U.S.

Spirit Airlines earned consistent profits by jamming more seats on its planes and charging extra for things that other airlines do for free, such as printing a boarding pass at the airport, or using the overhead bin.

Franke made it clear that he'll steer Frontier in the same direction as Spirit.

"We endorse and will support continued efforts to build Frontier into a leading nationwide ultra-low cost carrier," Franke said in a statement announcing the deal on Tuesday.

Frontier began moving in that direction last year as Republic Airways got ready to sell it. On Aug. 6 it began charging as much as $100 each way for carry-on bags for some tickets purchased somewhere other than Frontier's website.

The companies said they expect the sale to close in December if several conditions are met, including agreements being reached by the end of this month with the Association of Flight Attendants-CWA and a group tied to Frontier's former pilots union.

There's been a Frontier Airlines in Denver since the 1950s, but that airline was absorbed by People Express and disappeared in 1986. The current version was founded in 1994 by executives from the old Frontier. In 2008 it filed for bankruptcy protection after oil prices spiked. Republic outbid Southwest Airlines to buy Frontier in bankruptcy court in 2009. But Frontier was never a good fit with Republic's main business of operating regional flights for big airlines such as Delta and United.

As recently as last year, nine out of 10 Frontier flights touched Denver. It's been well-thought-of there, where it was seen as an alternative to United and other big airlines. But it's been struggling in that unusually competitive city. United hauled 40 percent of domestic travelers there last year, followed by Southwest with 25 percent and Frontier with 22 percent. Frontier has been adding new cities, such as Trenton, N.J., and it began flying some routes that don't touch Denver at all, such as Kansas City, Mo., to Puerto Vallarta, and Omaha, Neb., to Orlando, Fla.

Franke was born in Texas, but lived in Paraguay and Argentina when he was young, and graduated from high school in Brazil, he said during a Nov. 27, 2012, talk at Northern Arizona University's business school, which is named after him. Franke's talk is posted on YouTube.

Franke got a law degree from Stanford, then spent three years in the Army after "Uncle Sam grabbed me" and he became an infantry platoon leader.

He said he agreed to a request from Arizona Gov. Fife Symington in 1992 to help America West Airlines during its bankruptcy. Franke talked to big creditors like General Electric and Boeing, and ended up being the airline's CEO from 1993 until 2001. He later started Indigo, which focused on investing in airlines.

He decided that Southwest's model could work outside the U.S., in emerging markets "as people needed to get off of a bus and onto an airplane, they needed to find a product that matched up with their income level, that gave them air service at a reasonable fare." Besides investing in Spirit, Franke was an early investor in Irish discount carrier Ryanair, which is widely seen as the first of the ultra-discount, no-frills airlines. He also invested in Hungarian discounter Wizz Air — which charges 10 euros for larger carry-on bags — and Mandala Airlines in Indonesia.

He has also invested in Tiger Air in Singapore, and in 2010 invested in the discount Mexican airline Volaris.

Frontier doesn't necessarily threaten Spirit. The two airlines overlap on just 3 percent of Spirit's flights, wrote Wolfe Research analyst Hunter Keay in a note before the deal was announced. Spirit has its eye on 400 cities where it could grow, leaving it lots of room even if Frontier begins competing more directly, Keay wrote.

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