Frontier Airlines must get deep concessions from employees and vendors and raise $70 million as part of a financial overhaul to keep it in business.
Without the restructuring, “Frontier would no longer be viable,” the chief executive of Frontier’s parent company, Republic Airways, wrote in an e-mail sent to employees Friday.
High fuel prices were a major contributor to a “disappointing” first quarter, in which Frontier had a $51 million pretax loss, CEO Bryan Bedford told employees. Frontier’s fuel expenses in the quarter were 24 percent higher than in the same period in 2010, causing a $30 million increase in expenditures.
Until December, Frontier was the second-largest airline at Denver International Airport, but it lost the position to fast-growing Southwest Airlines. Indianapolis-based Republic Airways bought Frontier out of bankruptcy in 2009. Frontier has about 4,900 employees, with the majority based in Denver, where it has its major hub.
Bedford said there must be a cost savings of $120 million. The company must have commitments for at least half of that before the board will allow Frontier to raise the additional $70 million in the financial markets.
The extra cash is “critical to fund the airline this coming winter as we complete the remainder of our restructuring program,” Bedford wrote.
Between $25 million and $30 million of the $120 million already has been trimmed through fleet and network changes, Bedford said. Another $25 million is related to labor costs.
“The remaining improvements will result from work we’re doing with several key stakeholders,” Bedford wrote, such as aircraft lessors, distribution partners, maintenance suppliers, and sales and ticket distribution groups.
“What we’re making are difficult changes so that we are viable in the future, rather than viable next week,” said Jim Reichart, Frontier’s vice president of marketing and sales.
The nearly 700 Frontier pilots are voting through Friday on a package of concessions including wage deferrals, elimination of a company 401(k) match this year, and sick-time and vacation reductions.
In exchange for ratification, the pilots would receive an equity interest in Frontier and Republic would have a minority interest by the end of 2014.
The amount of that stake hasn’t been determined, said Jeff Thomas, president of the Frontier Airlines Pilots Association.
Other large stakeholders, such as Airbus and General Electric, are watching the vote. The pilots association said it will not participate unless all the other stakeholders participate.
“Our goal, first and foremost, is to provide the steps necessary to continue the operation of Frontier beyond the next few months,” leaders of the pilot association told members in a recent letter.
Bedford said similar agreements would be sought from other Frontier employees if the pilots ratify the plan. They would receive equity and profit-sharing like the pilots.
Effective Friday, Bedford said he was reducing his pay 20 percent and will forgo any bonuses until all employee groups receive bonuses. Bedford received $1.2 million in salary, options and bonuses last year.
“This is a real challenge,” said aviation consultant Mike Boyd of Evergreen. “I give him (Bedford) credit for standing up and saying, ‘I’ve got a challenge.’ “
But what concerns Boyd is the labor situation, made messy after Republic bought Frontier and Midwest in 2009 and became a full-service airline in addition to its regional carrier service.
The employee unions still have not successfully integrated the pilot groups based on fractious seniority issues.
Reaction to the proposed restructuring was mixed Monday on Wall Street.
Bank of America Merrill Lynch issued a report upgrading Republic from “underperform” to “neutral” as the result of “management’s efforts to reduce the risk from its branded business.”
Helane Becker, aviation analyst for Dahlman Rose & Co., repeated the “hold” notice she put on Republic Airways in April.
“We believe investors should remain on the sidelines in the short term as there are economic concerns, volatile fuel prices and short-term revenue issues,” Becker said, adding: “Frontier is likely to flounder this year.”
Ann Schrader: 303-954-1967 or aschrader@denverpost.com
