An overwhelming majority of Frontier pilots ratified a plan for significant cost savings in the face of fuel price increases experienced since the beginning of the year. The concessions, coupled with a recent abatement in fuel costs are expected to put the low-cost carrier on a good track for recovery despite heavy competition over its main hub at Denver.
With 89% of the pilots participating, the vote was 498 to 58, or 89.6% in favor and 10.4% opposed, said the company. The move is part of an effort to reduce costs by USD120 million annually.
“This agreement is an important element of our larger plan to secure the future of Frontier Airlines,” said Republic Airways Holdings CEO Bryan Bedford, who also chairs Frontier’s parent company. “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 USD120 million. As a result of these accomplishments, our board will move forward with its commitment to invest additional liquidity in Frontier to fund the airline’s operations and future growth.”
Pilots gain an equity position at their airline in return for Republic raising USD70 million and finding new investors to reduce the parent-company’s equity stake to a minority position by 2014. Planned pay increases have been delayed as have pension contributions as part of the deal which also extended the current contract to 2014. The first step is to stabilize the company before seeking increased funding.
The fortunes of Frontier reverses Republic’s position of only a few years ago when its liquidity position allowed it to act as a major financier to various airlines including Frontier and Midwest which were eventually acquired and merged, US Airways and Mokulele. These investments were part of an effort that eventually diversified Republic’s interest beyond its traditional role of providing capacity to its mainline partners. The move cost it USD140 million for Frontier and Midwest in addition to assuming USD1 billion in Frontier debt.
Mr Bedford is continuing efforts to wrest additional concessions by negotiating agreements with key stakeholders, including aircraft lessors, significant suppliers and distribution partners. In addition, the company is seeking similar concessions from other labor groups.
Mr Bedford was adamant the carrier would not shut down and said that it was now business as usual at the Denver-based, low-cost airline. While speculation mounted as to whether the company might make a good takeover target for other LCCs, Mr Bedford indicated there have been do such talks.
Its break-even projections for 2011, were quickly replaced by fiscal brinkmanship as the carrier watched as its fuel-costs rose costing it an additional USD250 million. In response, Republic moved to restructure its network, fleet and contracts in an effort to survive.
"We understand the significant challenges Frontier faces due to soaring energy prices,” said Frontier Airline Pilots Association President Jeff Thomas said. “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. We appreciate Republic leadership's recognising 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.”
The concessionary agreement comes as every other US carrier is facing tough labor negotiations this year which centre on regaining the concessions labor made in the post/911, bankruptcy period. At least one carrier – Air Canada – has already sustained a short-lived strike over pensions.
Airline management efforts to convince labor that the industry is now facing a permanent restructuring of airline economics, has been met with less than sympathetic union ears. Unions not only cite executive pay but also successful efforts at increasing revenue and liquidity which were instrumental in the industry’s recovery strategy during the recession.
Moves by unions to regain what was lost in bankruptcy and previous contracts comes as low-cost carriers are continuing to gain market share over their mainline counterparts. Low-cost airline load factor outpaced that of the major carriers in May. As with mainline airlines, LCCs have restructured to attract more business travelers which continue to migrate to LCCs as the result of the numerous fare increases imposed between December and April. Consequently, mainline and LCCs are both facing increasing cost pressures not just from the competitive LCC industry but from fuel.
Meanwhile, the grand-daddy of LCCs – Southwest – celebrated its 40th anniversary 18-June with the recently closed acquisition of AirTran. The contribution of Southwest to the changing worldwide airline dynamics cannot be underestimated since its success spawned many copied both in the US and abroad.
Its success has brought employees along giving the some of the highest pay in the industry, not to mention the highest satisfaction rate. It now boasts the fact that it is the largest domestic airlines, having taken advantage of all the major-carrier, domestic cutbacks over the passed four decades.
The start of Southwest is the stuff of legend with Herb Kelleher mapping out a strategy on a bar napkin which competes only with Fed Ex’s beginnings despite the fact the business plan received a failing grade while Fred Smith was still in college.
For the future, the company will focus on its fleet strategy sing 737-800s it is in the process of acquiring for its fleet that now numbers 700 aircraft. It is reworking its computer reservations system, similar to what other North American LCCs WestJet and JetBlue in order to accommodate more business travelers as well as ancillary revenue. Such revenue has become increasingly important as illustrated by the fact that in 2010 US Airways made about half a million in profits, the vast majority of which came from ancillaries. Indeed, US airlines have indicated that growing ancillaries will become critical to profitability in the future.
Analysts have accused Southwest of leaving revenue on the table by its refusal not to charge first and second bag fees. But it has taken another path in developing new ancillary products rather than charging for services that used to come with the cost of the ticket.
Its AirTran acquisition ushers in international service or the first time, something that otherwise would have had to wait the end of its CRS transition. It is lustily eyeing Hawaiian service which should change the dynamics there despite the fact that Alaska is already doing that.
While the past four decades have seen the airline from a feisty upstart in the role of David to the rest of the industry’s Goliath, to a highly sophisticated organisation, it continues to remember its roots in offering a laid-back, down home welcome to passengers.