Frontier files for bankruptcy, remains running

April 11, 2008 6:27:46 PM PDT
On Monday, Frontier Airlines was looking at plans to boost revenue and promote a new turboprop service. By Friday, the carrier was restructuring under the shield of bankruptcy court. The Denver-based carrier, which will continue to operate as it reorganizes, blamed not high fuel costs or competition but credit card processor First Data Corp.'s decision to hold back up to 100 percent of proceeds from ticket sales until the passenger's flights are completed.

"This change in established practices would have represented a material change to our cash forecasts and business plan," Chief Executive Officer Sean Menke said in a statement. "Unchecked, it would have put severe restraints on Frontier's liquidity and would have made it impossible for us to continue normal operations."

The filing will prevent First Data from implementing the change until Frontier emerges from bankruptcy or the judge makes an independent decision. "We are prepared to litigate this issue if necessary," Menke said.

First Data spokeswoman Elizabeth Grice did not return a call seeking comment but e-mailed a statement that said in part: "The terms of our agreement with Frontier Airlines are not unique; they are considered standard industry practice and terms originally agreed upon by Frontier."

The statement said the company is continuing to work with Frontier in "as constructive a manner as possible."

Analysts had mixed views about whether Frontier will emerge successfully given the flagging U.S. economy and persistently high fuel costs plaguing the industry. Three other airlines have filed bankruptcy petitions recently.

The company's survival will be "a function of how they perform relative to their plan," industry analyst Robert Mann said. "It's hard to know. It's obviously a business in which every carrier is under stress and will have to rely on some of its cash to carry it through."

ATA Airlines, Skybus and Aloha Airgroup also filed for bankruptcy in the past three weeks.

From its hub at Denver International Airport, Frontier battles Southwest and United Airlines in an atmosphere that has kept ticket prices low despite rising fuel costs, the slowing economy and a credit crisis in financial markets. It has about 21 percent of the market at the airport, where it leases 21 gates.

Frontier blamed a 16.3 percent jump in fuel costs a third-quarter loss that more than doubled from the previous year. At the end of last year, it had assets of $98.3 million and debts of $92.2 million.

Since Menke took over last year, the carrier has adjusted routes, put four jets up for sale, laid off 100 employees and conducted an extensive review of its schedule in an effort to rein in costs. It also launched the Lynx Aviation turboprop subsidiary to tap into small and mid-sized markets underserved by larger carriers.

Last week, Calyon Securities analyst Ray Neidl voiced concerns about some budget airlines and said Frontier's cash holdings were likely to fall below 10 percent of expected revenue by the end of the year. He estimated it would have less than 5 percent of revenue in cash at the end of 2009.

Two days ago, First Data notified Frontier that it wanted to step up the holdback from the current 45 percent up to 100 percent by May 1, airline spokesman Joe Hodas said.

He referred questions about the reasons to First Data and declined to say whether the airline would have filed for bankruptcy without the processor's decision. He did say there was no bankruptcy plan before the processor's notice was issued.

In a research note to clients Friday, Neidl said the bankruptcy "happened more quickly than we expected."

"We do not see a future for Frontier as it faces tough competition in Denver from United on the network side and Southwest on the low cost side," he wrote.

Industry analyst Mike Boyd said it appeared the bankruptcy was triggered by Wall Street speculation about Frontier, which likely raised concern at First Data.

Menke believes the carrier has continued to perform well with record traffic and revenue in March, and would be able to remain out of bankruptcy until this week when it received the notice from First Data.

Hodas said, "We're looking to essentially straighten out our finances. We are gong to continue strategic operations."

Airport spokesman Chuck Cannon said they do not believe the filing will have an impact on the facility. He said Frontier is up to date on its payments which average about $4 million a month for landing fees and leases.

John Stemmler, who heads the Frontier Airline Pilots Association, said First Data's decision was a shock to the airline.

"Had it not been for First Data, we really had our act together," he said.

Stemmler said he believes the airline's 700 pilots will continue to support management.

The creditor listed in bankruptcy court documents as having by far the largest general unsecured claim against Frontier was US Bank with $93.5 million.

Frontier passenger Preston Tucker, 19, a University of Colorado student, said he didn't expect the filing to affect his plans. "As long as they keep flying, it is not going to cause problems," he said.

Frontier opened in 1994 with fewer than 200 employees and two planes, flying between its Denver home and three cities in North Dakota. The airline now has about 350 flights to more than 60 cities and employs about 6,000 people.

AP Writer Ivan Moreno contributed to this report.


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