Leeham News and Analysis

Frontier in chapter 11

We’re going to deviate for a minute from our usual focus on Airbus and Boeing matters to comment on the bankruptcy filing of Frontier Airlines late yesterday.

We’ve followed Frontier closely since inception because we personally knew people in the executive ranks, one of our clients advised Frontier on airplane deals and Airbus had become the sole supplier of mainline jets in a competition that we also followed closely.

When Frontier announced its results for the December quarter, the cash level had declined but that didn’t worry officials. One said this during the conference call, which we wrote for Commercial Aviation Online:

The airline ended the quarter with $170.4m in cash, down slightly from $203m at 30 September. While the cash position hasn’t varied much during the past year, it’s down sharply compared with the year ended 31 March 2006.

This doesn’t worry EVP-CFO Paul Tate, who says the current cash level is fine. In the earnings call with analysts, Tate said Frontier considers its liquidity to be more than raw cash. Rather, he considers it to be a combination of cash and the equity that can be tapped in 22 owned Airbus A318s and A319s.

In fact, four of these are for outright sale, to be replaced by two larger A320s to be delivered this year. Frontier has executed previous sale/leasebacks, raising cash.

Tate admitted he’d like to have $300m or $400m in cash but that doing so has a “cost” to it. “Without diluting shareholders, we’d have to do sale/leasebacks. I don’t see any need to do that.”

“We have a pretty sophisticated model that goes forward 20 years and this is much more well-founded than some other bogus [cash] measure,” Tate said. Tate dismissed 25% cash-to-revenues goals as “bogus” and attributable to “pundits.”

We found the comments to be rather appalling, not just for the content but also for telling the “pundits” (analysts) on the conference call that essentially they were stupid.

In an analysis we did a short time later, also for Commercial Aviation Online, we wrote this:

Frontier’s cash-to-revenue level is a paltry 13.2% for the trailing 12 months ended 31 December 2007, of $170m on revenues of $1.29bn. Tate suggested that Frontier has plenty of other liquidity it can tap in its 22 owned Airbus A318/A319s. Frontier previously executed sale/leasebacks for these aircraft types and currently has two each for outright sale, although the attractiveness and value realization potential of the less-than-popular A318s remains questionable.

A review of the cash-to-revenues percentage for the trailing 12 months to 31 December for 10 reporting carriers in the US is 22.2% . Delta Air Lines has the lowest level but it also has a $1bn untapped line of credit which, if considered, brings Delta up to the average at 22.4%.

Frontier is clearly in the weakest position to weather a prolonged recession or a major squeeze at its Denver (CO) hub between giant United Airlines and interloper Southwest Airlines. Frontier’s efforts to diversify itself have largely been failures, with the company entering and withdrawing from routes on a regular basis.

Frontier filed bankruptcy because it said a credit card company wanted to sharply increase the cash hold back on tickets sold, which would have had a material adverse affect on Frontier’s cash position.

If the airline had had a better business plan and better cash management policies, perhaps Chapter 11 would not have been necessary.