Denver-based Frontier Airlines is enjoying record profitability that in the past 12 months propelled it to the fifth-most-profitable airline in the U.S. and seventh in the world, according to industry analysts.
“They’re following a model that works at most places where it is tried,” said Airline Weekly industry analyst Seth Kaplan. “They’re not having to reinvent the wheel. They still have to execute it right, but the consensus at this point is rather clear: It’s working.”
Frontier logged a net profit of $54 million and an operating margin of 21 percent from April through June 2015, according to Airline Weekly analysis of second-quarter financial data compiled by the U.S. Department of Transportation.
The airline’s operating margin in the second quarter of 2014 was 15 percent, up from 5 percent in the first quarter of 2014.
Worldwide, airlines logged an average operating margin of about 8 percent for the same period, Kaplan said.
“In the first five to six months of the year, we did a lot of restructuring in the business and began moving aircraft and operations to more profitable areas of the U.S., and that has yielded a benefit,” Frontier chief financial officer Jimmy Dempsey said. “And you can’t underestimate the benefit of lower oil prices.”
The four most profitable U.S. carriers in the 12 months that ended in June — the most recent data available — are Allegiant Air, followed by Spirit, Alaska and Southwest, according to the Airline Weekly analysis.
Private equity firm Indigo Partners purchased Frontier in 2013. The local airline’s upward trajectory since converting to an ultra-low-cost-carrier model is a fast-tracked parallel to Spirit Airlines, which Indigo acquired in 2006.
After making that airline hugely profitable, Indigo took Spirit public in 2011.
This increases speculation among industry analysts that Frontier is ramping up for the same — and they’re saying it’s a matter of when, not if, the airline becomes a public company again.
Dempsey would not comment.
“It’s a similar transformation to what (Indigo) did at Spirit, and, if anything, they seem to be pulling off the trick more quickly than in the past,” Kaplan said. “If I have something that is doing rather well, and it’s a low-hanging fruit, and there are people out there thinking ‘how much better can this get? I want a piece of it,’ that would seem like a good time.”
Of course, when Indigo took over Spirit, much of the airline industry was losing money or in bankruptcy. It’s much different now.
Indigo is “probably getting a little better at this time, and it’s a rather good time to be a U.S. airline,” Kaplan said.
U.S. passenger airlines reported second-quarter 2015 after-tax net profits of $5.5 billion — a huge leap from $3.1 billion in the first quarter and well over the $3.6 billion in second quarter of 2015, according to U.S. DOT data.
Frontier was stuck in a three-way tug-of-war in Denver between behemoth United and fan favorite Southwest when it began its ULCC transition.
The airline could not compete on scale with those two, or nationally with other legacy carriers, so it
had to go for the cost advantage. This margin could decrease as carriers such as American, Delta and United are able to compete on price in some markets.
And, despite making big money, the airline has struggled in the court of public opinion.
Complaints filed with the DOT against Frontier are up 188 percent for the first six months of 2015 over the same time last year.
However, complaints filed directly with the airline are down 20 percent since last year, Frontier spokesman Jim Faulkner said. September’s performance numbers also look promising, he said, with on-time arrivals at 86.5 percent and on-time departures at 75.5 percent so far — the best in 10 years.
And people still are flying Frontier in droves — a fact that Kaplan says makes it important to not only listen to what people say but also to watch what they do.
“That’s not to say that people are lying — they are telling the truth that there are elements of flying Frontier that they don’t like,” he said. “There are lots of things we all want, but … only some people care about those things enough, or have enough money to truly pay for what it costs to provide lots of leg room or TV on their flights.”
Dempsey says Frontier is about halfway through the ULCC conversion. The introduction of bundled options like The Works package, fare sales for $15 tickets and adding new direct routes will help Frontier continue to hold the edge.
Frontier will continue to decrease overhead by replacing some of its aging fleet with new Airbus A320 and A321 planes.
So is there a time Frontier can put its feet up and say, “Good job, we’re done”?
“I don’t think you can ever do that in an airline,” Dempsey said. “We’re focused on our business and running a good airline.”
The Denver Post (Business)