Southwest Airlines lost its bid to acquire Frontier Airlines in the bankruptcy auction this week. The bid was a long shot because its competition was Republic Holdings, a DIP lender to Frontier and the largest unsecured creditor.
Southwest would have had to offered an extraordinary deal to overcome the depth of the relationship between Frontier and Republic. It just wasn’t to be.
So what does this mean for Southwest? It means struggling along in Denver continues. Several analyses conclude that Southwest is losing money in Denver.
It also represents, we think, another miscalcuation on Southwest’s part. The airline entered Philadelphia, thinking US Airways was going to liquidate or be so weakened that it would withdraw from PHL in one of its bankruptcies. Wrong on both counts.
Southwest, with the industry’s best balance sheet, figured Frontier, with one of the industry’s weakest balance sheets (but not in bankruptcy at the time), could not withstand being squeezed between United and Southwest in Denver. Wrong again. Frontier proved remarkably resilient and proved it could retain its traffic and hold its own against new competition from Southwest.
Southwest is the legacy LCC. It has been struggling to maintain profitability since its low-price protection in fuel hedging ran out. The move to acquire Frontier would have turned Denver into a profitable operation and provided a modern IT system that would jump start international services and potential assigned seating, long a Southwest weakness.
Now it’s back to the drawing board.