Frontier Airlines pilots OK deal to trade concessions for equity

Members of the Frontier Airlines Pilots Association voted Friday to trade pay and benefit concessions for partial ownership in Frontier Airlines and a promise by parent Republic Airways Holdings give up control of the airline.

The agreement announced earlier promised “a good faith effort by the company to attract equity investment(s) in Frontier that would reduce the Company’s ownership of Frontier to a minority interest by December 31, 2014.”

Bryan Bedford, chairman, president and CEO of Frontier and Republic, called the deal “an important element of our larger plan to secure the future of Frontier Airlines.”

“The new pilot agreement combined with other savings we have been able to secure in recent weeks bring us more than halfway to our annual profitability improvement goal of $120 million,” Bedford said.

“As a result of these accomplishments, our board will move forward with its commitment to invest additional liquidity in Frontier to fund the airlines operations and future growth.”

The vote was 498 to 58 in favor.

“We understand the significant challenges Frontier faces due to soaring energy prices. We believe the Frontier pilots’ investment in Frontier Airlines will be beneficial to our pilots, our fellow Frontier employees, and the communities and customers we serve,” FAPA president Jeff Thomas said.

“We appreciate Republic leadership’s recognizing the issues and interests of our pilots as well as their constructive, cooperative efforts in crafting this agreement. We are confident this agreement will allow Frontier to flourish and grow in the future,” Thomas said.

According to an SEC filing June 10, the pilots agreed to allow the company to:

• Postpone certain pay increases

• Reduce contributions to the pilots’ 401(k) plan

• Reduce accruals for vacation days and sick days, and

• Extend the collective bargaining agreement by two years.

In exchange, Frontier agreed:

• Give pilots an equity share in Frontier.

• Give Frontier employees profit sharing.

• Grow the fleet.

• Raise at least $70 million through debt or other financings.

• “Material executive of Frontier’s restructuring program” by the end of 2011, and

• Work to reduce its ownership in Frontier.

Republic bought Frontier in October 2009 and has continued to operate it under that brand, with its largest operations out of Denver. In 2008, a horrible year in the airline industry, Republic had net income of $84.6 million. In 2009, it made $36.4 million. In 2010, its first full year with Frontier, Republic lost $13.9 million.

In a note Friday, Deutsche Bank airline analyst Michael Linenberg raised a more fundamental question about Frontier’s future.

“While we think pilot approval will move Frontier closer to its goal of $120 million of profit improvement (we estimate all labor plus fleet rationalization savings to drive $45 – $50 million of improvements), which is what the company believes is necessary in order to achieve profitability, this does not address the overall strategic importance of Frontier and whether Denver can profitably support three airline hubs,” Linenberg wrote.

He noted that in the week of June 6-12, Frontier had fallen to third place in capacity at Denver – 274,896 seats, behind United Airlines with 498,917 seats and Southwest Airlines with 279,316 seats. Included Continental in United’s numbers, and the merged companies had 535,183 seats, nearly twice as many as either Southwest or Frontier.

In the first quarter, Frontier and Republic handled 2,256,492 passengers at Denver International Airport, compared to 2,513,425 for Southwest. A year earlier, Frontier led Southwest, 2,294,177 to 1,898,626.

Southwest, of course, had made a bid for Frontier Airlines in summer 2009, but its bid failed after FAPA and Southwest Airlines Pilots’ Association didn’t reach a deal in time on how the two unions would work together.

Michael Boyd of the Boyd Group had a report out May 23 that “Southwest has moved within a hair of being the largest domestic-market carrier at Denver International” as of fourth quarter 2010, referring to local Denver origin-and-destination traffic.

“Depending on shifts in capacity within the UA/CO system, Southwest could well eclipse United by the end of 2011 as the largest local O&D carrier at DEN,” Boyd wrote.

His numbers were that United and Continental combined had 1.92 million local O&D passengers that quarter, while Southwest plus AirTran Airways had 1.70 million.

Milwaukee had featured another three-way battle, this one between Frontier, Southwest and AirTran Airways. But Southwest bought AirTran on May 2. Republic had bought Milwaukee-based Midwest Airlines in 2009 and folded it into Frontier.

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