Frontier Airlines Holdings Inc.

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Frontier Airlines Holdings Inc.

Frontier Center One
7001 Tower Road
Denver, Colorado 80249-7312
U.S.A.
Telephone: (720) 374-4200
Toll Free: (800) 265-5505
Fax: (720) 374-4375
Web site: http://www.frontierairlines.com

Public Company
Incorporated: 1946 as Monarch Air Lines
Employees: 4,770
Sales: $994.3 million (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: FRNT
NAIC: 481111 Scheduled Passenger Air Transportation

Frontier Airlines Holdings Inc., through its primary holding Frontier Airlines, is a low-cost carrier based in Denver and serving primarily the western and central United States, as well as Mexico and Canada. Frontier Airlines was established in 1950, went out of business during the 1980s, and was reborn in 1993, with the new company retaining the name and many of the employees of the carrier that had previously served the Rockies and the Midwest for nearly 50 years. When the new Frontier began flying during the summer of 1994, the carrier's fleet consisted of two Boeing 737s. A little over ten years later, Frontier could boast a fleet of 55 planes and had grown to become the second largest carrier flying out of Denver International Airport.

A FLOCK OF POSTWAR START-UPS

A merger of three small postwar carriers created the original Frontier Airlines on June 1, 1950. All three flew war surplus Douglas DC-3s (known as C-47s in the U.S. military) in their struggle to eke out a living carrying whatever mail and passengers they could across the western sky. Monarch Air Lines began flying out of Denver in 1947. Future partner Challenger Airlines began serving Denver from its Salt Lake City base the following year, when the last of the three, Arizona Airways, began its flights to the Mexican border. After the three combined to become Frontier Airlines, the new carrier's territory spanned 40 cities along the Rocky Mountains from Montana to the Mexican border. Central Airlines, which would merge with Frontier in 1967, was of the same generation, beginning operations in 1949. Monarch supplied Frontier's first president, HalS.Darr.

Mines, dams, national parks, and other developments diverted increasing streams of passengers to the West, many of whom flew on Frontier Airlines. By 1960, more than 30 new cities had been added, extending the airline's routes east into the Dakotas and Missouri.

New low-cost fare plans spurred still more passengers to fly Frontier in the 1960s, making it the country's fastest-growing regional carrier. The Vacationland Fare effectively gave passengers a 30-day pass for $100. The Standby Plan offered last-minute available seats for half price.

The company began flying the Convair 340, a popular replacement for the smaller DC-3, in 1959. These were replaced by still larger, faster Convair 580 turbojet aircraft within a few years. As impressive as the Convair 580 was, the five Boeing 727-100 airliners Frontier bought in 1965 for $55 million propelled the company into the age of modern jet travel. General Tire and Rubber Company bought a controlling interest in the airline through its subsidiary RKO General, Inc. The company's 1966 revenues were $1.74 million, resulting in its highest-ever profits. Frontier's fleet included 20 planes, two of them 727s.

The company proved continuously successful in winning new routes from the Civil Aeronautics Board. After its merger with Fort Worth's Central Airlines in October 1967, Frontier served 114 cities with 56 planes.

A BIT OF TURBULENCE

The entry into Kansas City and St. Louis brought Frontier into direct competition—vigorous competition—with Trans World Airlines. In 1969, Frontier replaced its first five 727s with Boeing 737s. It also opened its combination headquarters and maintenance center in Denver. In spite of the optimistic additions, the airline failed to turn a profit in 1970. Al Feldman had assumed the company's leadership in 1971, and he instituted a quick turnaround.

Frontier continued to offer new routes and set new records, serving its highest number of paying passengers in 1973 while receiving fewer complaints than any other regional airline. Its first international flight landed in Winnipeg in 1974. Four years later, Frontier crossed the border into Mexico.

Although fuel costs rose and traffic fell, 1980 gave Frontier its highest profit to date: $23.2 million. The company had grown to employ 5,800 people and operated 60 aircraft, serving 86 cities. In 1982, the company phased out its turboprops and added the state-of-the-art McDonnell-Douglas MD-80. Reflecting its enormous strides, the company was reorganized, becoming a subsidiary of Frontier Holdings, Inc., on May 6, 1982.

A blizzard closed the Denver airport for two days around Christmas 1982, helping to smother the company's profits. After a terrific decade, Frontier lost about $45 million over the next two years, placing the company in its most serious crisis.

After proposals to sell the company's shares to its employees and a bid by corporate raider Frank Lorenzo, Frontier Airlines was sold to People Express Airlines in 1985. Frontier continued to falter, however, and filed for bankruptcy in 1986. Its assets were sold off and many of its routes were taken over by Lorenzo's Continental Airlines.

A NEW FRONTIER IN THE NINETIES

A $7.6 million initial public offering plus other venture capital funded the launch of a new Denver-based Frontier Airlines in 1993. Samuel D. Addoms, known for his ability to turn around ailing companies, signed on as part of Frontier's leadership, becoming the company's CEO in January 1995. Unlike another new airline that had purchased the venerable name of a bankrupt carrier, Pan Am, at an auction, the new Frontier retained many connections to its former self. Its first CEO, Hank Lund, had been an executive at the original airline, and seven other former executives joined him. In addition, after digesting 5,000 resumes, the company filled 150 of 200 available slots with former Frontier employees.

On July 5, 1994, the reborn airline began flying between Denver and a handful of cities in North Dakota. Soon airports in Montana, Nebraska, New Mexico, Nevada, and Texas again began receiving requests to land from jets with a name they had not heard in several years. Ironically, the carrier's old rival, Continental, helped provide space for Frontier when it scaled back its operations at the new $4 billion Denver International Airport. Frontier's rebirth had originally been conceived as a charter operation.

COMPANY PERSPECTIVES

Let's face it. Air travel is a pretty straightforward business. You need to go someplace; we'll take you there on one of our planes. But that's not what we're all about. Our tagline "A whole different animal" means we approach our business with four key principles in mind. We're affordable, we're flexible, we're accommodating, we're comfortable. These are the four legs that we stand on. They're who we are. "A whole different animal" represents our promise to you. Simply put, our goal is to do the little things that make a big difference to you.

The company's early strategy paralleled that of the original: providing flights on underserved routes rather than striving for the low prices of some of its contemporaries. However, just as with the original, price competition in major markets became part of Frontier's game plan.

United Airlines, which had more than a 70 percent market share at Denver International, proved a formidable competitor for Frontier. The startup airline had hoped to be a regional feeder for the massive United, but the larger airline refused to use Frontier for feeder flights. (United's employees had killed its bid for the old Frontier in the mid-1980s, protesting the absorption of Frontier employees.) Frontier's planes remained less than half full until late in 1995 when, like its predecessor, it began competing on a price basis in major markets. In fact, operations in its original eight markets were suspended so the planes could be deployed on higher-volume routes.

The fledgling airline continued the struggle to achieve profitability, though a secondary public offering brought in $7.3 million of needed capital in September 1995. Additional stock worth $3 million had been sold in May.

MONOPOLIES AND MERGERS

In 1997, Frontier accused United Airlines of such unfair competitive practices as dumping, or intentionally operating a large number of flights temporarily in order to gain market share. Specifically, Frontier alleged that when it began service to a new destination, United would add numerous flights to the same destination and lower its prices to match fares offered by Frontier. In cases when Frontier was then forced to pull out of such destinations, United would scale back its flights and restore higher prices. In part as a result of the allegations made by Frontier, the U.S. Department of Transportation issued new guidelines regarding unfair competition.

Another challenge presented to Frontier during the late 1990s occurred in the form of a prospective merger. As a low-price Colorado airline, Western Pacific was often compared with the new Frontier, and talk of a merger between the two companies arose. They both operated the Boeing 737; WestPac, based 100 miles south of Denver at Colorado Springs, operated 19, which would have made a combined fleet of 34 aircraft.

In June 1997, the two agreed to merge. A few months later, however, the merger was called off. Differences in culture and operating philosophy were cited as the prime factors; some analysts speculated that WestPac's substantial losses played a large role as well. The next week, WestPac announced it was seeking Chapter 11 bankruptcy protection, though it planned to remain in the air. WestPac went out of business early in 1998.

After WestPac's closure, Frontier embarked on a period of profitability, carving out a niche as the only low-cost carrier at Denver International Airport. Rather than operating as a feeder carrier to a larger airline, Frontier expanded its number of destinations, catering to vacationers and business travelers looking for lower fares. Frontier CEO Addoms held costs down—serving minimal in-flight food, for example, and employing a largely nonunion workforce—and offered customers better deals than most competitors, particularly on last-minute bookings. A Business Week article in June 2001 ranked Frontier 14th in a list of "hot growth" companies, citing an annual average growth of 46 percent for the previous three years. Frontier seemed positioned for considerable future success, though an unforeseen obstacle lurked just around the bend.

KEY DATES

1950:: Frontier Airlines is founded.
1967:: Frontier merges with Central Airlines.
1985:: Frontier is sold to People Express Airlines.
1986:: Frontier files for bankruptcy.
1993:: New Denver-based Frontier Airlines is launched.
1994:: The new Frontier Airlines begins flying between Denver and a few cities in North Dakota.
2006:: Frontier reorganizes under a holding company called Frontier Airlines Holdings Inc.

CHALLENGES AND OPPORTUNITIES IN THE NEW CENTURY

On September 11, 2001, when terrorists used passenger planes as weapons in a devastating attack on the United States, the public reacted with shock and grief. Business leaders, particularly those in the travel industry, immediately recognized that the attacks would have a significant negative impact on their companies. Within days, Frontier executives had established a plan for survival: the company announced that it would cut hundreds of jobs, employees from the top down would receive pay cuts, and service to a number of cities would be reduced. As expected, the number of air passengers dropped off considerably in the weeks after September 11, and airlines lost millions of dollars. Thanks in part to aid payments from the government, Frontier began its recovery fairly quickly, beginning to restore cut flights as early as November 2001.

Frontier's small size was instrumental in helping it to bounce back quickly. It suffered less significant losses than its larger counterparts and was able to adapt more easily to the changing environment. Frontier picked up passengers that were left stranded by canceled United flights or alienated by the ticket restrictions common among large carriers. Taking steps to differentiate itself from competitors, Frontier eliminated restrictions such as the requirement for a round-trip purchase or Saturday-night stay. In 2003 Frontier announced that it had ended its advanced-purchase requirement and made the fares for each flight uniform regardless of the time of day or the day of the week. Frontier also sought customer allegiance through television advertising campaigns that branded the airline as a uniquely fun entity. Commercials featuring the airline's motto "A whole different animal" depicted humorous conversations among the animals whose images had long adorned the tails of Frontier's planes.

In addition to making customer loyalty a priority, Frontier executives also sought a high level of employee satisfaction. CEO Addoms, as well as his successor, Jeffrey S. Potter, made it a practice to consult with employees before instituting changes. Alex Markels wrote in a 2002 New York Times article that "Frontier's relations with its flight attendants are so good that they recently voted against unionizing."

While Frontier emerged from the difficult period following the September 11, 2001 terrorist attacks on the United States and enjoyed a period of growth, it soon encountered renewed competition and additional obstacles. In 2003 United Airlines launched a low-cost carrier, known as Ted, that also used Denver as a major hub. Rising fuel costs in 2004 and 2005 posed substantial challenges to all airlines, increasing costs at a time when stiff competition resulted in low fares. In early 2006, low-fare industry leader Southwest Airlines began flying a number of routes out of Denver, putting greater competitive pressure on Frontier. Also early in 2006, United Airlines emerged from a protracted bankruptcy reorganization as a smaller, leaner entity, better able to compete with companies like Frontier.

Frontier responded to the increased competition by seeking new ways to cut costs, by adding new planes to its fleet, and by attempting to outperform its rivals in terms of service. According to the readers of Business Traveler magazine, Frontier had succeeded in earning customer loyalty: a 2006 reader's survey named Frontier the best low-cost airline in the United States. That same year, Frontier formed a partnership with another low-fare carrier, AirTran Airways. The agreement allowed for the carriers to refer customers to each other on noncompeting routes, and customers' frequent-flier mileage points could be earned and redeemed on both airlines.

In spite of the stiff competition Frontier Airlines faced, many analysts predicted continued success for the relatively young carrier. In 2006 Frontier formed a holding company called Frontier Airlines Holdings Inc., making Frontier Airlines a wholly owned subsidiary. The company asserted that its new structure would make it easier to acquire assets and to access financing. In a 2006 interview with the New York Times, CEO Potter explained the allure of working in the airline business, in spite of its unpredictable nature and cutthroat competition: "I think it's a great business…. Once you get into it, it's hard to get out, in the sense that it's so challenging. If your passion is to get rich and make a lot of money, this isn't your direction. But I would also tell you that you have the wrong passion."

Frederick C. Ingram

Updated, Judy Galens