Republic's Frontier win is likely a win for Denver, too

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The true winner in the Frontier Airline sweepstakes is Denver, which is likely to see even more competition and cheaper fares.

A close second is Republic Airways Holdings, which trumped Southwest in a bid to buy Frontier, picking up the bankrupt Denver-based airline for a mere $108.7 million.

The loser is Southwest, which missed its chance to take over a competitor and capture more Denver market share — despite a $170 million bid for Frontier — when it made the deal contingent on pilots striking a deal.

While Republic executives had acknowledged they had no stomach — or pockets — for a bidding war with Southwest, the airline did up the ante just before the auction by agreeing to cancel a $150 million secured claim in Frontier’s bankruptcy, providing unsecured creditors a higher collection on their claims.

That concession closed the gap a bit between the bids. Many in the Frontier camp preferred Republic, too, because the Indianapolis-based aviation company planned to keep the Denver operation intact, operating it as a subsidiary but carrying the same brand. With the pilots’ standoff, though, that all became moot.

"I was surprised at the outcome," said Darin Lee, analyst and principal of consultancy LECG. "It means that things might heat up even more at Denver. Southwest has clearly signaled that it views Denver as a key area for further expansion and I don’t think they will let Republic-Frontier stand in their way."

Darryl Jenkins, aviation analyst and founder of airline economics website the Airline Zone, said, "Denver will have a well-served hub with three carriers."

Visit Denver CEO Richard Scharf said, "We are very proud that Denver International Airport has the lowest average fare of any of the top 10 major airports and that we have seen the greatest reduction of average fares of any major airport in the country. Keeping Frontier Airlines is a huge step towards helping us maintain that record of great low fares. Most importantly, they are a quality airline that prides themselves on service."

Before the recession, Denver was the ninth-largest domestic travel market and had the fouth-fastest growth rate among the top 40 markets, according to the Airline Zone. Most analysts saw Denver as one of the few places Southwest could grow. But the airline was having a tough time cracking the market dominance of United and Frontier, a home-town favorite.

Denver Int'l Airport"Frontier has successfully defended its hub against Southwest and captures a greater share of the local traffic than Southwest," according to an an Airline Zone analysis. "United has not been harmed by Southwest’s incursion into Denver."

United controls a bit more than third of the Denver traffic, while Frontier accounts for just a bit less than a quarter. Southwest has slightly more than a tenth, the Airline Zone reported.

For revenue, it’s much the same, with United grabbing 43% of the share, Frontier 19% and Southwest 9%.

"Southwest will look at its pricing and its schedule," Jenkins said.

And when it comes to pricing, according to Jenkins and the Airline Zone, Southwest has a bit to be worried about.

The average purchased fare for competing routes from Denver is $101.95 for Frontier and $110.78 for Southwest, the Airline Zone reported. On average, Frontier’s fare on competing routes is 8% lower than Southwest's.

Frontier has lower fares on 74% of the routes (28 of 38) in which it competes against Southwest. But Southwest will face pressure to increase fares network-wide.

"Eventually, Southwest must raise fares if it is to earn its cost of capital," said analyst Vaughn Cordle of consultancy AirlineForecasts. "Based on our recent analysis, an approximate 5% average fare hike would result in a $1 per share earnings in 2010.

"Without an acquisition, Southwest has no choice but to compete on price and depend on a war of attrition for its growth. United benefits in the longer term because a Republic-owned Frontier will be a much weaker competitor. However, having three big competitors in Denver instead of two will certainly result in lower average fares."

But Republic also faces challenges, Cordle said.

"Republic will likely replace a significant number of Frontier’s aircraft with new regional jets — E190s are the likely choice — to lower costs," he said. "Republic is a tiny bird with a $200 million market cap versus Southwest’s $6.2 billion.

"This weak financial leverage and growth capacity suggests that Republic will want to move aggressively to displace as many Airbuses as fast as practical to lower its average costs. It’s the only way Republic-owned Frontier can win a war of attrition with Southwest and United out of Denver."

Jeri Clausing contributed to this report.

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