Frontier Airlines chief executive Jeff Potter’s job these days is to be an optimist among pessimists – and to try to create reasons for that optimism.
Airline competition at Denver International Airport has become more cutthroat with the growth of newcomer Southwest Airlines and United Airlines’ emergence from bankruptcy.
Denver-based Frontier is seen as the airline with the most to lose because of its concentration here. Frontier has its sole hub at DIA, and about 93 percent of its passenger capacity is based there.
In the past year, Potter has sought to reposition Frontier by branching out with more international flights and plans for new short-haul flights to smaller mountain airports. That has the advantage of getting Frontier to places Southwest can’t.
While Southwest flies only domestically, Frontier started flying to Canada last year and has significantly grown its service to Mexico. It now is the largest carrier between Denver and Mexico.
Potter says he also has an interest in flying to the Caribbean and Central America.
“Believe it or not, we’ve had discussions with Jamaica over the past two to three years,” Potter said. Costa Rica is another possibility Frontier has weighed.
And while Southwest has only Boeing 737s, Frontier has ordered 10 smaller Q400 turboprop planes better for flying to places such as Aspen and Vail. Frontier also plans to expand its regional jet fleet, which is often used for markets smaller than a larger plane can support.
That all adds up to decreasing the share of Frontier’s capacity that competes directly against Southwest. The strategic moves will roll out over the next year.
“In hindsight, I’d love to see them all happen yesterday,” Potter said.
Analysts and Wall Street have signaled that those efforts may be too little and too late.
“Frontier needs a plan that will work regardless of the efforts of Southwest,” Prudential Equity Group senior analyst Robert McAdoo wrote in a report last week. He noted that strategic changes will take more than a year to have a significant effect.
“I think what folks are waiting for is … they want to see it in action,” said Potter, who believes the changes will lead to a more stable enterprise.
In spite of moves to diversify, Potter said Frontier’s greatest strength is still its home base in Denver. “We’re fortunate enough to have a strong backing – a good loyalty base here in Denver,” he said.
Loyalty is a hard thing to come by in the airline industry, where airline tickets have become a commodity and passengers often just search for the lowest price.
Frontier, which lost money when Southwest entered the Denver market, later admitted it overreacted to Southwest and cut fares too much. Now it has better intelligence about how to price against Southwest and touts its “product” – including live DirecTV screens at every seat and assigned seating – as better than Southwest’s and therefore worth choosing.
“I’m sure there are Frontier customers who choose them because of their product, but, likewise, there are Southwest customers who choose Southwest because they prefer our product,” said Southwest CEO Gary Kelly. “No one company will ever own 100 percent of customers and customer loyalty, and that’s what competition is all about. I think it’s important to know who you are as a company.”
Aware of the risk
Last week, McAdoo lowered his rating on Frontier to “underweight,” partly because the carrier did not respond to Southwest by reducing flights. US Airways successfully competed with Southwest by cutting capacity to match demand from customers willing to pay for extra amenities such as assigned seats.
In his report, McAdoo said Frontier has been unwilling to cut capacity because it believes such reductions “might be viewed as taking a cut-and-run stance versus Southwest, thus encouraging further Southwest Denver expansion.”
Potter is aware of the risk.
“Even though maybe the economics would tell you that you need to cut a flight, you have to consider that if you cut a flight, maybe one of your competitors adds a flight,” Potter said. “That doesn’t mean we don’t take those steps at certain times, but you have to understand the implications.”
Frontier recently decided to pull out of Baltimore/Washington International Thurgood Marshall Airport by ending its Denver-BWI flight, for example. It’s a route that Southwest also flies.
McAdoo believes Frontier’s Q400 operation and expanded regional jet fleet will “add new pools of revenue from non-Southwest cities,” but will not have significant impact until early 2008.
Calyon Securities analyst Ray Neidl in December lowered his rating on Frontier shares to “reduce,” due in part to uncertainty, expected continuing losses and the company entering its slower period.
If there are mergers among smaller low-cost carriers, Neidl says Frontier would be a “likely dance partner” because it’s being squeezed in Denver by United and Southwest.
Potter said mergers can be very disruptive in the short term, but he acknowledges that the financial benefits are valuable, particularly to shareholders.
“Our focus is to continue to grow this organization organically,” Potter said. But, he added, “as part of my responsibility, I look at all kinds of different ideas and thoughts.”
Other strategies
The airline recently announced a marketing partnership with fellow low-cost carrier AirTran, for example.
Other strategies intended to boost Frontier’s revenue include:
Attempting to expand outside of Denver by offering short-haul flights between Los Angeles and San Francisco. An earlier attempt at a Los Angeles focus city failed.
Selling extra amenities such as travel insurance and vacation packages.
Gaining a competitive advantage by excelling in smooth operations. Before last month’s major snowstorms, Frontier had begun working to improve its on-time and baggage-handling performance. The storms may have detracted from its efforts.
Relatively small things such as fluctuation in lost-baggage rates could become more critical to an airline with a major competitor aiming to gain customers and market share.
What makes Southwest seem threatening is its size – it has grown to become the largest U.S. carrier measured by the number of domestic passengers it carries – and its successful business model.
Now Southwest is growing and has ordered a lot of new airplanes that it will have to fly someplace, said Evergreen- based aviation consultant Mike Boyd. There’s a good chance that growth will mean more flights to and from Denver.
“The name of the game is revenue. How do you get more revenue than your competition? (Frontier is) looking at very sound ways of doing that,” Boyd said.
While others cast doubt on Frontier, Potter continues to believe his airline can learn to compete in a “very, very challenging environment.”
“I look in the mirror and say, until we do stabilize and show sustainable profitability, there’s always going to be skepticism.”
Staff writer Kelly Yamanouchi can be reached at 303-954-1488 or kyamanouchi@denverpost.com.
