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US low-cost Frontier issues dark warning about future
Darren Shannon, Washington DC (29Nov05, 21:35 GMT, 793 words)
US low-cost carrier Frontier Airlines today warned its fleet expansion could be curtailed if it cannot obtain new, favorable financing agreements, and that failure to complete the acquisition of up to 15 more Airbus A319 aircraft could deplete its ability to combat rivals also operating from its Denver hub.
The airline in a US Securities and Exchange Commission (SEC) filing also says its reliance on Denver and the possibility of higher airport fees limit’s the carrier’s ability to maintain operations.
Frontier’s warning coincides with an announcement that it intends to raise $80 million from a debt issue planned for early December.
This $80 million, however, will not be sufficient for Frontier’s medium- and long-term needs. This includes the sourcing of funds to finance at least four A319s on order from Airbus, and possibly four additional leases.
“As of September 30 2005, we had commitments to purchase 11 additional new Airbus A319 aircraft, and plans to lease as many as four new Airbus A319 aircraft from third party lessors, over approximately the next two years. We have secured financing commitments for seven of these additional aircraft, including commitments for all of our Airbus deliveries through February 2007,” says Frontier in the filing.
However, it adds: “To complete the purchase of the remaining aircraft, we must secure aircraft financing, which we may not be able to obtain on terms acceptable to us, if at all.”
This inability “could have a material adverse effect on our cash balances or result in delays in or our inability to take delivery of Airbus aircraft that we have agreed to purchase, which would impair our strategy for long-term growth and could result in the loss of pre-delivery payments and deposits previously paid to the manufacturer, and the imposition of other penalties or the payment of damages for failure to take delivery of the aircraft in accordance with the terms of the purchase agreement with [Airbus],” warns Frontier.
The airline values its 11 aircraft commitment at $479.2 million. This in addition to the $346.5 million debt declared on September 30, and maturities of $21.7 million in fiscal year 2006, $22.9 million in fiscal year 2007, $24.2 million in fiscal year 2008, $26 million in 2009, $27.1 million in 2010, and an aggregate of $224.6 million thereafter.
Frontier says these aircraft are essential for its survival. “Our growth strategy involves adding up to 15 additional Airbus aircraft, increasing the frequency of flights to markets we currently serve, expanding the number of markets served and increasing flight connection opportunities. It is critical that we achieve our growth strategy in order for our business to attain economies of scale and to sustain or improve our results of operations.
“Increasing the number of markets we serve depends on our ability to access suitable airports located in our targeted geographic markets in a manner that is consistent with our cost strategy. We may also need to obtain additional gates and other operational facilities at our Denver hub.”
However, Frontier may need to address contraction rather than expansion at its hub. “We are negotiating final terms and conditions for the permanent lease of two gates we use at [Denver] that were previously occupied by United and have been returned to the airport,” notes the airline. “If we cannot agree on final terms, the airport will take back control of these gates, and we may need to alter our overall flight schedules over the remaining gates in a manner that will increase connecting times for our passengers connecting through [Denver].
“This change in flight schedules could result in a decrease in passenger bookings and a loss of revenue from connecting traffic,” Frontier adds.
Regardless of these negotiations, Frontier has a more immediate and potentially more dangerous problem. “Southwest Airlines recently announced that it will start service to and from Denver in January 2006, initially with 13 daily departures-four between Denver and Chicago Midway Airport, five between Denver and Las Vegas, and four between Denver and Phoenix. Southwest’s introductory fares on these routes were significantly below the fares we were able to obtain prior to their arrival.
“Fare pressure exerted by Southwest on its announced routes and on any future expansion in Denver by Southwest will require us to be fare competitive, and may place downward pressure on our yields,” says Frontier.
In addition United Airlines, which uses Denver as a base for its Ted low-cost subsidiary could add to its current operations, which currently account for about 56% of all revenue passengers at the airport. “The uncertainty regarding United’s business plan, its ability to restructure under Chapter 11, and the potential for United and Southwest to place downward pressure on airfares charged in the Denver market may impair our ability to maintain yields required for profitable operations.”
Source: Air Transport Intelligence news
Darren Shannon, Washington DC (29Nov05, 21:35 GMT, 793 words)
US low-cost carrier Frontier Airlines today warned its fleet expansion could be curtailed if it cannot obtain new, favorable financing agreements, and that failure to complete the acquisition of up to 15 more Airbus A319 aircraft could deplete its ability to combat rivals also operating from its Denver hub.
The airline in a US Securities and Exchange Commission (SEC) filing also says its reliance on Denver and the possibility of higher airport fees limit’s the carrier’s ability to maintain operations.
Frontier’s warning coincides with an announcement that it intends to raise $80 million from a debt issue planned for early December.
This $80 million, however, will not be sufficient for Frontier’s medium- and long-term needs. This includes the sourcing of funds to finance at least four A319s on order from Airbus, and possibly four additional leases.
“As of September 30 2005, we had commitments to purchase 11 additional new Airbus A319 aircraft, and plans to lease as many as four new Airbus A319 aircraft from third party lessors, over approximately the next two years. We have secured financing commitments for seven of these additional aircraft, including commitments for all of our Airbus deliveries through February 2007,” says Frontier in the filing.
However, it adds: “To complete the purchase of the remaining aircraft, we must secure aircraft financing, which we may not be able to obtain on terms acceptable to us, if at all.”
This inability “could have a material adverse effect on our cash balances or result in delays in or our inability to take delivery of Airbus aircraft that we have agreed to purchase, which would impair our strategy for long-term growth and could result in the loss of pre-delivery payments and deposits previously paid to the manufacturer, and the imposition of other penalties or the payment of damages for failure to take delivery of the aircraft in accordance with the terms of the purchase agreement with [Airbus],” warns Frontier.
The airline values its 11 aircraft commitment at $479.2 million. This in addition to the $346.5 million debt declared on September 30, and maturities of $21.7 million in fiscal year 2006, $22.9 million in fiscal year 2007, $24.2 million in fiscal year 2008, $26 million in 2009, $27.1 million in 2010, and an aggregate of $224.6 million thereafter.
Frontier says these aircraft are essential for its survival. “Our growth strategy involves adding up to 15 additional Airbus aircraft, increasing the frequency of flights to markets we currently serve, expanding the number of markets served and increasing flight connection opportunities. It is critical that we achieve our growth strategy in order for our business to attain economies of scale and to sustain or improve our results of operations.
“Increasing the number of markets we serve depends on our ability to access suitable airports located in our targeted geographic markets in a manner that is consistent with our cost strategy. We may also need to obtain additional gates and other operational facilities at our Denver hub.”
However, Frontier may need to address contraction rather than expansion at its hub. “We are negotiating final terms and conditions for the permanent lease of two gates we use at [Denver] that were previously occupied by United and have been returned to the airport,” notes the airline. “If we cannot agree on final terms, the airport will take back control of these gates, and we may need to alter our overall flight schedules over the remaining gates in a manner that will increase connecting times for our passengers connecting through [Denver].
“This change in flight schedules could result in a decrease in passenger bookings and a loss of revenue from connecting traffic,” Frontier adds.
Regardless of these negotiations, Frontier has a more immediate and potentially more dangerous problem. “Southwest Airlines recently announced that it will start service to and from Denver in January 2006, initially with 13 daily departures-four between Denver and Chicago Midway Airport, five between Denver and Las Vegas, and four between Denver and Phoenix. Southwest’s introductory fares on these routes were significantly below the fares we were able to obtain prior to their arrival.
“Fare pressure exerted by Southwest on its announced routes and on any future expansion in Denver by Southwest will require us to be fare competitive, and may place downward pressure on our yields,” says Frontier.
In addition United Airlines, which uses Denver as a base for its Ted low-cost subsidiary could add to its current operations, which currently account for about 56% of all revenue passengers at the airport. “The uncertainty regarding United’s business plan, its ability to restructure under Chapter 11, and the potential for United and Southwest to place downward pressure on airfares charged in the Denver market may impair our ability to maintain yields required for profitable operations.”
Source: Air Transport Intelligence news
