Struggling Frontier Airlines has cemented a deal to receive $75 million in loans and potentially sell a majority stake of its business, a significant financial lifeline that greatly increases the company’s chances of emerging from Chapter 11.
Under the agreement, announced Friday morning, Washington, D.C.- based private investment firm Perseus LLC will provide Frontier with loans as the airline heads into the slower fall season.
If the carrier meets certain financial and performance benchmarks, Perseus will provide another $25 million in financing as Frontier exits bankruptcy. The investment firm will then convert its $100 million in loans and investments into stock in the reorganized airline, amounting to a 79.9 percent majority stake.
Frontier said it hopes to emerge from bankruptcy by late spring.
“This makes me feel very good about going into the fall and weathering the things we need to weather,” Sean
Menke, Frontier’s chief executive officer, said in an interview Friday with members of the media.
The agreement, which must receive bankruptcy court approval, could help ensure that the Denver-based carrier is around for years to come. Still, Frontier left the door open for more job and flight cuts, saying it will continue its intense focus on driving down costs.
“I’d put the odds that (Frontier) will survive at 75 percent to 80 percent,” said Anthony Sabino, a law professor at St. John’s University in New York. “Clearly, Perseus has determined that this is the time to buy Frontier, that this is as cheap as it’s going to get, that it’s a good investment, that they are confident the economy will rebound and that Frontier can fix its problems. For the sake of Frontier, its customers, vendors, passengers and employees, let’s hope they’re right.”
Community and business leaders say the company’s survival is key to the health of the local airline industry. Frontier ranks as the second-largest carrier at Denver International Airport, employs 4,788 workers here and has a loyal customer base.
“The community has a great deal of affection for that airline, and its employees have returned that in terms of providing great service,” said Tom Clark, executive vice president of the Denver Metro Economic Development Corp. “This is good news for us.”
The carrier has been hammered in recent months by rising fuel prices that have battered the entire industry. Frontier reported $38.5 million in losses from the time it filed bankruptcy in early April through the end of May,
As a result, the carrier has laid down plans to reduce its flights by 17 percent this fall, eliminate at least 569 jobs and ground planes.
It also has cut back in numerous ways, slashing roughly $60 million to $70 million in annual costs since it filed bankruptcy, Menke estimated. At the same time, the carrier is looking to boost revenues, in part by charging more for services and amenities that used to be free.
On Friday, for example, the company said it will start charging travelers to switch flights on the day of their travel and to make changes on days before the flight. It hopes to unroll an a la carte pricing structure this fall where consumers can pay a bare-bones base price for a flight or fork over more for things like seat assignments and frequent flier miles.
Employees – who, along with executives, took temporary pay cuts recently – cheered the financing agreement after suffering through months of bad news.
“I haven’t even started work yet but my phone’s been ringing off the hook since first thing this morning,” John Stemmler, head of the Frontier Airline Pilots Association, said late Friday afternoon. “Other than the drop in fuel prices, it’s really the first good news we’ve had in awhile. It really seems to be some justification of the temporarily sacrifices we’ve made.”
Securing financing in the current environment, where fuel prices are battering airlines and banks are scaling back loans, is a feat in itself, observers said.
Frontier heralded the agreement as a vote of confidence in its business, but the company cautioned that it “is still a long process” to emerge from bankruptcy. The airline said it is still focusing on improving liquidity in other ways, and the company indicated it could make another announcement in coming weeks.
Frontier also will continue to find ways to reduce costs.
“We’re not done with this,” Menke said. “The competition is very stiff in the marketplace. Fuel is high and we need to continue to manage what is taking place.”
Perseus said it has created an affiliate called Go Flip Go – Flip refers to Frontier’s dolphin mascot – to handle the acquisition. The investment firm said it thinks Frontier can compete at DIA going forward despite heavy competition.
“Frontier, properly capitalized, ought to be able to succeed in that environment,” said Brian Leitch, Perseus’s Evergreen-based senior managing director, who has extensive experience in airline reorganizations. “Essentially, Frontier must demonstrate that it can be a successful airline. We believe it can be.”
If the plan comes to fruition, current shareholders will be wiped out when Frontier issues new stock after it emerges from bankruptcy. Secured creditors would receive stock – rather than cash – for their claims, although amounts and terms have not been determined. The airline’s creditor’s committee will have the chance to weigh in on the plan in bankruptcy court.
“We don’t know enough about the agreement yet,” said Steve Stapleton, a Dallas-based lawyer with Cowles & Thompson who represents a creditor in Frontier’s bankruptcy case. “We just don’t know what the plan of reorganization is.”
Highlights of the agreement
* Under the deal, which must receive approval from bankruptcy court, Perseus will provide Frontier with a $75 million loan in two stages, starting with $40 million as early as August. Frontier will then be able to draw from the other $35 million in the fall.
* Perseus will give Frontier another $25 million in funding as it emerges from Chapter 11 if the carrier meets certain financial requirements.
* Perseus can then convert the $75 million in loans and $25 million in additional financing into Frontier stock, representing a 79.9 percent stake in the company.
* Frontier will try to win bankruptcy court approval of the first part of the deal at an Aug. 5 hearing.
* The carrier also will meet with its creditor’s committee to discuss the plan. The group’s support will make it easier to push the plan through the bankruptcy court. The committee, however, could oppose the deal or offer an alternative.