To survive in a tough market, Frontier Airlines is focusing on service quality, a new feeder operation and a strategy of avoiding competitors United and Southwest Airlines
It may be a nice little airline, as Frontier's chef executive calls it, but running it is no little job. If anything, Jeff Potter's challenge in managing the relatively compact carrier entails the same burdens facing any airline executive. But his great advantage is that the size and scope of Denver's hometown airline make it a little easier to try some strategic manoeuvres that would terrify the executives of most airlines, be they low-cost carrier or legacy.
© John Johnston
Potter must work against the two forces that threaten Frontier. The first is giant rival United Airlines, the reinvigorated network carrier with most of the traffic at Denver's airport. The second is burgeoning Southwest Airlines, the king of all low-fare airlines that arrived in Denver in January 2006 and changed Frontier's world, and indeed that of Denver.
This is the vice squeezing Frontier: on one side is United's global reach and its lowered costs as it came out of bankruptcy in February 2006 with its new Denver-based low-cost unit Ted, and on the other is the immense marketing power of Southwest, the airline that has become synonymous with the lowest fare.
So Potter has to try things that are bold, but within the means of a $1 billion company. In the past few months he has taken the creative but potentially risky step of linking Frontier's fortunes to a marketing and referral deal with another low-fares carrier that is expanding enough to make it a competitor in future. His carrier is also building leisure destinations when most airlines are pursuing only business travellers, and above all stressing a high level of service when many executives are linking their fates solely to price.
Potter has one absolutely central belief, a fundamental one that is increasingly under challenge globally: service counts. Service makes the difference between one airline and another, and service keeps loyal customers. "We are not going to fall into the belief that we are in a commodity business. People may debate that, but at Frontier, our customers want a value proposition. We think we provide that."
Frontier at a glance
Revenue $994 million
Operating margin -0.79%
Net margin -1.4%
Year end March 2006
Airline Business financial ranking 80
Airline Business traffic ranking 75
RPK growth 14.7%
ASK growth 8.8%
Load factor 75.3%
In the low-fares, low-cost realm where price rules, this is a brave and rebellious proposal. Frontier differentiates itself in various ways. It has a fleet of all-new Airbus aircraft Live TV is available for purchase on all flights it has reserved seats a seat pitch of slightly over 30in (76.2cm) a relatively generous loyalty plan with nearly 1.8 million members and a fare philosophy that makes it competitive, but which is shaped by the principle of "a lot more for just a little bit more".
The airline has a powerful brand that reflects the theme of the home town and the West. Its distinctive livery shows a wild animal on each aircraft, and its advertising theme is: "A whole different animal". Its award-wining advertisements reflect this, with the animals themselves speaking on behalf of the carrier. They are something of a conversation topic around Denver, and keep the airline in the public eye in a community where people are more inclined to travel, with a young and growing population that readily hops on an aircraft for a weekend trip.
Potter, 47, is a true Westerner: quiet, calmly smiling, not inclined to excitability, wary of business-school jargon. He loves talking up his airline, as well as Denver and the West, but almost anywhere he goes that Frontier loyalists are few, he faces a slightly embarrassed reaction: people think that Frontier was going to be forced out of business. "A question I hear often enough is, 'Why is this man smiling?' Well, reports of our demise have been greatly exaggerated," he says, paraphrasing humorist Mark Twain.
As Potter says: "We've been preparing this company for a dozen or 13 years to compete against anybody." To do this, Frontier got rid of its older fleet, dumping all its Boeings, and invested in new software to target fuel savings. The Airbus fleet costs about 8% less to operate on a block-hour basis compared to the Boeing 737s they replaced because they are younger and more reliable. The carrier has increased its aircraft utilisation from nine hours daily in 2002 to 12 hours in the last quarter. It reduced its unit costs by almost 25% between 2002 and the last quarter, from 8¢ a passenger-mile in 2002 to just over 6¢ last year, not counting fuel. With fuel, unit costs this year are about the same as they were in 2002, just under 6.2¢.
Operating margins are rising, from 17.5% in 2002 to nearly 28% in 2006 (its fiscal year has a March end). Still, profits are elusive, and even though the airline makes money some months it loses it in too many quarters. For its fiscal years 2005 and 2006 it lost over $37 million. Its $3.9 million net profit for the three months to the end of June 2006, followed by a nominal profit of $500,000 for the three months to the end of September, was more than wiped out by the loss in the most recent quarter of $14.4 million.
Forces of nature
Stuart Klaskin, the Florida-based KKC Aviation consultant, says of the airline: "They're good people and good managers, but every time they seem to have the road ahead of them cleared, someone or something spills another obstacle in front of them." That is what happened to Frontier on the way to the kind of performance it was hoping for last year. The same winter blizzards that shut Denver and pushed rival United into a fourth-quarter loss slammed Frontier, taking more than $13 million off revenues. The fallout from the bad weather, Potter says, had an effect on bookings into the New Year.
But Potter is keeping to his strategy of meeting the competition any way but head-on: his strategy is to go where they do not. "Most people think that when you want to diversify, as we knew we had to, you add a focus city. Well, we already had a focus city at Kansas City, so instead we diversified with the Mexico routes and with off-hub flying," he says.
Jeff Potter grew up in a military family and initially planned to join the Marine Corps. But when cleaning aircraft on the night shift for the old Frontier Airlines in Spokane, Washington, a supervisor encouraged him to apply for a ticket agent's post and he was hooked. Potter later worked in marketing and route planning for the old Pacific Southwest Airlines.
He joined the new Frontier shortly after it was founded and was marketing vice-president from 1995 to April 2000. He then strayed east to Missouri's Kansas City, spending a year as chief executive of the now-defunct Vanguard Airlines.
Rejoining Frontier in May 2001 as executive vice-president and chief operating officer, he became president a month before 9/11. He added the title of chief executive in April 2002 with the retirement of Sam Addoms, Frontier's founder and present board chairman.
Potter, 47, describes his management style as "walking around and talking to folks a lot". He and his wife Kelly have a teenage daughter at home. One of his two other children serves in the military and one is in college in Denver.
Potter's Mexico moves were the first steps in this "avoidance strategy". He reasoned that Southwest had no plans to cross the border and that the Frontier product would win out on the Denver/Mexico routes where it competes with United. So Frontier went to warm-weather spots like Cabo San Lucas, Acapulco and Cancun, increasing its US/Mexico capacity by almost 30% in the past year. "We continue to be impressed with how well we're doing in Mexico," says Potter, as unit revenues on south-of-the-border routes are now growing by double digits, up from the 6% or 7% annual growth seen earlier this financial year.
Its three Mexico routes from its secondary hub at Kansas City have also done "extraordinarily well", he says. Frontier is now the largest US carrier to Mexico from Denver, even though United serves some of its Mexico destinations from the Mile High City. Its first service to a business destination in Mexico, and its first interior city there, Guadalajara, began last year.
Another step toward geographical diversity was to increase services to and within California. This included an ambitious project to fly between Los Angeles and San Francisco, using the major airports in each city instead of the secondary airports favoured by Southwest. The service, started in June 2006, has been "slow to develop", Potter says. But it has given the carrier confidence in off-hub flying such as San Francisco-Las Vegas. His next variation on the theme is to open a route in June from Dallas/Fort Worth to Mazatlan, in Mexico, which does not have services from other US carriers. Frontier has also gone north of the border, adding Calgary, a route that has attracted significant business traffic from the oil industry, and in May it will launch service to Vancouver. It may go "as far as Jamaica or Costa Rica, both of which we've spoken to over the last two or three years", says Potter.
In one of Frontier's most innovative marketing tactics, the airline created an arrangement with AirTran Airways that Potter proudly calls "the first low-cost carrier cross-referral programme anywhere". He says: "It is well meeting our expectations" of producing incremental revenues of as much as $10 million a year. The pact, which began in January, is not a codeshare, nor a capacity share or a flight co-ordinating deal. It is a referral deal. If one carrier does not fly to the traveller's destination, and the other one does, the airline website transfers the traveller to the other carrier and they earn frequent-flyer points in either loyalty programme.
Potter is looking for similar deals, as well as for possible traditional codeshares with other carriers, but stresses that the AirTran deal entails minimal costs and deep benefits such as near-national reach. Orlando-based AirTran is a rapidly growing airline, with spread beyond its East Coast home territory that will see it sooner or later competing with Frontier. However, Potter says the beauty of the referral pact is that "it does not take business away from either airline but increases it for both".
The other big step is more a series of little steps. Potter set up a regional feeder structure that will put Frontier into as many as 70 small and medium communities within 2,000km (1,200 miles) of Denver. Part of this is a new subsidiary dubbed Lynx that will fly 10 Bombardier Q400 turboprops to more than 60 cities within 800km radius of Denver after the new 74-seaters start arriving in May.
The other element is a new codesharing partner that will fly up to 17 Embraer 170s to replace the nine Bombardier CRJ700s now operated as Frontier Jet Express by the Horizon unit of Alaska Air Group. This new service, to be operated by Republic Airways, will start replacing the 70-seat CRJs in March and add its first new route, to Louisville, Kentucky, in April.
To develop this network across the region, Potter went out and asked communities to tell Frontier why they wanted service. "We didn't ask for revenue guarantees or subsidies or other incentives. We asked communities to tell us why they wanted us, and we got some completely unexpected requests that made a lot of sense." The request made headlines from Fargo, North Dakota, to Sun Valley, Idaho, to cities throughout California. The plan is a simple one, because connecting flights "offer higher yields when we have control of our fares and pricing", says Potter. A batch of new regional routes will be unveiled in mid-April. Of equal importance, by increasing the feed to and through Denver, Frontier gains deep access into towns that Southwest, with its 137-seat Boeing 737s, is too big to serve.
This regional network within a network should also give Denver a time-of-day and day-of-week cushion, providing flow traffic at times when local traffic might have peaked, and so offer an umbrella throughout the region. Giving the hub a steady traffic stream is central to Potter's fleet strategy. To support this, Frontier reworked its Airbus order to include the larger A320s. By 2011 it will have 10 of these bigger jets, along with 49 of the 132-seat A319s and 11 of the 114-seat A318s. Frontier is the only North American operator of the A318, of which it currently has seven. Potter defends the A318, which some airline executives have called inefficient, as "exactly right for time of day changes".
Whether these manoeuvres will carry Frontier to profitability before investors lose confidence is still an open question, says consultant Klaskin. "Its future is so far from assured that I think they're going to have to be constantly innovating, constantly experimenting." And it is far from certain whether Frontier, the subject of persistent takeover rumours, will escape industry consolidation. Potter says: "Our plan is to grow on our own and grow our way to stability." He says Frontier would not consider a merger or other deal unless industry consolidation gave it no choice.
For more on Frontier's talking animals, the airline's new route launches, and Jeff Potter's long and varied airline career, click hereInterview with Jeff Potter
(6 June 2006)