Would you purchase Frontier? Would you sell it right now? And what the OEMs are worrying about beyond the 787 battery.

Victoria
By Victoria April 10, 2013 10:54

Would you purchase Frontier? Would you sell it right now? And what the OEMs are worrying about beyond the 787 battery.

 

Frontier Airlines yesterday announced the appointment of Holly Nelson as chief accounting officer and treasurer. She arrives from ATP but prior to joining there, Nelson worked at Virgin America, where she served as senior vice president and chief financial officer.

 

Now this move could be a real winner for Holly as the separation of Frontier from parent company Republic Airways and its transformation into a LCC could well be given a real boost as Indigo Partners and Anchorage Capital Group are competing to take control of Frontier for a purchase price of around $20m to $50m.

 

It is certain that the purchase price will be the sticking point as there is a great deal of debt to be taken-on in this sale/purchase, the real spend for any suitor is in the recapitalization of Frontier that will take a good $100m to $200m.  This, some say, might lead to a scenario where a cash purchase is written out of any deal in favour of Republic Airways retaining a minority stake in Frontier but Indigo for one is unlikely to want this. 

 

Republic purchased Frontier out of bankruptcy in 2009 for $109 million and assumed $1 billion in debt and lease obligations. In anyone’s book this has turned into a bad deal and as such holding onto a stake in the airline might be a good option if Indigo Partners or the like are going to turn the carrier around and merge it with Spirit Airlines, which it owns.

 

Frontier has gone from posting pre-tax losses of $148m to pre-tax profits of $24m in 2012 and that is to be commended. BarCap, which is running the sale, has its work cut out to find a good deal for Republic Airways in all of this though. For any investor the real problem to look into is that of Frontier’s total loss of market lead at its hub in Denver at the hands of mighty Southwest – Can they come back from that and turn a profit at the same time? That is a big ask when 40% of its flights begin in Denver but if the airline were merged with Spirit then we know they can win, but in the process fares will fall in the US market.

 

Airline Economics has been raving about the economics at Spirit Airlines and easyJet, among others for three years now, to the benefit of those that followed our picks, we were in the process of thinking about adding Republic to the list because of Frontier. One wonders – Should Republic keep hold of Frontier and see through what it has started?

 

In addition: As reported here first by some margin, the 787 will fly commercially once again in late May early June 2013 as United Airlines confirms that it is putting its grounded 787 back in the flight schedule from May 31 for international 787 flights to resume from June 10, 2013 from Denver to Tokyo. Our thanks to our senior friends at Boeing for giving us correct information at a time when all, including top brass at Boeing, were talking about “weeks”.

 

It is now time to turn back to the main story affecting aircraft production: If we take combined OEM build rate increases of 55% by 2015, and factor-in proposed regulatory changes in the EU and USA affecting raw materials such as cadmium and chromium, which are used in Metal Finishing then we have a situation of having either significantly increased production costs and/or reduced production rates and possibly the need for design changes.

The problem lay in the supply chain to the manufacturing majors, the last few years have all been about problems trying to keep-up with production increases and the lack of finance leading Boeing and Airbus to purchase key suppliers. Now though, proposed regulations may require businesses to carry insurance to finance potential environmental clean-ups. That would likely force many finishing facilities to close. Recently, several prominent finishers have been purchased through corporate acquisitions in order to guarantee capacity. This trend will continue to gather pace.

 

Victoria
By Victoria April 10, 2013 10:54
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