Frontier Becomes 4th U.S. Airline in Month to File for Bankruptcy
Saturday, April 12, 2008
Frontier Airlines, a low-cost carrier based in Denver, filed for bankruptcy protection yesterday, becoming the fourth U.S. airline to apply for Chapter 11 in the past month.
Frontier pledged to continue to fly its full schedule, honor its frequent-flier program and pay its employees and suppliers during its reorganization. The airline operates three flights between Reagan National and Denver International airports each day.
The airline was forced into bankruptcy after its principal credit-card processor, First Data, announced that it would increase the amount of ticket-purchase proceeds that it temporarily withholds from Frontier.
When a traveler purchases a ticket using a credit card, the processor holds a portion of the funds until the time of the flight, in case the flight is canceled and the ticket must be refunded. Frontier's agreement with First Data allows the processor to hold 45 percent of the ticket charges, Frontier spokesman Steve Synder said. First Data told the airline last week that it would boost that holdback to 100 percent by May 1.
"That put us in a difficult position from a liquidity standpoint," Synder said.
The terms of the agreement are considered standard industry practice, First Data spokeswoman Elizabeth Grice said in an e-mail.
But the cash that Frontier would have been stockpiling from summer bookings would decrease, airline analyst Jamie Baker of J.P. Morgan wrote yesterday.
Bankruptcy protection will block First Data from increasing the holdback, giving Frontier time and legal protection to obtain additional financing and liquidity. .
The airline has enough cash to meet its current operating needs, it said.
Frontier president and chief executive Sean E. Menke said in a statement that the move was unexpected. "We felt that Frontier would be able to withstand the challenges confronting the U.S. airline industry, which include unprecedented and significant increases in the cost of jet fuel and the impact of the credit crisis in the financial markets, without seeking bankruptcy protection," he said.
The 14-year-old airline, which flies to 70 destinations from its hub in Denver, has eliminated unprofitable routes since Menke returned to the company last fall. And it recently laid off 100 employees and put four jets up for sale to cut costs, as it battled fuel prices and competition in Denver.
At the end of last year, Frontier had assets of $98.3 million and debts of $92.2 million, according to Chapter 11 court documents.
Menke emphasized yesterday that the airline filed for Chapter 11 bankruptcy for "very different reasons than those of other recent carriers." ATA cited losing a key contract for its military-charter business. Aloha Airgroup said competition drove it out of business. And Skybus said it could no longer fight mounting jet-fuel prices and the economic downturn.
Analysts said that rising fuel costs have amplified the problems that led to all four bankruptcy filings. "It's just natural that weaker, smaller, under-capitalized companies are failing," said aviation analyst Ray Neidl of Calyon Securities. "I'm surprised it took this long."
Lynn Settle of Warsaw, Va., said yesterday that she was happy that her flight from National to Denver wasn't canceled. But Frontier's bankruptcy -- combined with hundreds of flight cancellations by American Airlines this week-- has made her wary.
"It's kind of scary what's happening with the airlines," she said.