An Airline of Good Service and Low-Fares - Assignment Example

Frontier An Running head: FRONTIER PORTFOLIO Frontier: An Airline of Good Service and Low-Fares of Client of Frontier An 2 Frontier: An Airline of Good Service and Low-Fares Brief History Frontier Airlines began as a hometown carrier and was in operation for 40 years before it was purchased in 1986. In its origins, the airline was a carrier in Denver and had transported 87 million passengers during its time in operation. The airline had a fantastic reputation in service and safety, and was a solid acquisition . In 1993, Frontier Airlines decided to take on a “rebirth” of its company, collaborating with other airlines to fill in the gaps left by Continental Airlines when it eliminated most of its Denver flights. Executives from the former Frontier Airlines, together with the founders put together a business plan to reformulate the company into a new incarnation and call it ‘Frontier’. With an investment of $516,000, the business could forge a new place for itself in the market. On February 9, 1994, this plan was put into action as the newly formed company became incorporated. The head office was opened on March 15, starting an airline that could serve both coasts and earn a position as a ‘national’ airline (Our History, 2009). In April of 1994, private stock placements net $1.3 million, and by May 20 public stock offerings earn $7.6 million which covers the startup financing as outlined in the business plan. By June 9, the first reservation is made by our first passenger and the company is ready to fly! By July 1, 1994, Continental Airlines has vacated 25 routes through Denver, which allows Frontier to launch its first flights on July 5th. In the first month of service, Frontier carries 5,922 passengers and in the next five months, the airline has added several new routes. Within the first six months that Frontier has been flying, the airline Frontier An 3 has transported 145,412 passengers, employed 330 employees and attained five aircraft that are Boeing 737-200 (1993, 2009). In March of 1996, the airline boards its one-millionth passenger with a grand celebration. We are now flying to Las Vegas, Los Angeles, and other locations, and will be adding flights to Seatle/Tacoma, San Diego, and St Louis during the year. The airline ends flights to Fargo and Bismarck, N.D., which is an end to the original eight destinations flown by the airline. At the end of 1996, the airline has increased its size in eighteen months of operation to a fleet of 10 737’s, 725 employees, and 1,877,3372 passengers. (1993, 2009). In 1997, Frontier announces that it will merge with Western Pacific, but the merger is called off in September. However, Western Pacific is forced to shut down operations in February of 1998, allowing Frontier to become the principal carrier out of Denver International Airport, offering low-fare prices and quality service. By the end of 1998 we have grown to a fleet size of 17 Boeing 737 aircraft, 1200 employees, and a total of 4,724,246 passengers from opening for business in July of 1994 (1993, 2009). Between 1999 and 2004, great things were accomplished in the company. We added flights to Mexico and Alaska, and other destinations. In 1999, Frontier is named “Best Domestic Low-Fare Carrier” by Entrepreneur Magazine in their sixth annual published Business Travel Awards program. In 1999, Frontier had its first year showing profits and Frontier An 4 the company shows its appreciation to the employees by giving bonuses equaling $1.8 million. Other awards and considerations are announced in 1999, including Entrepreneur of the Year for the Ernst & Young LLP 1999 rocky Mountain Entrepreneur of the Year, the Maintenance Department is awarded the Federal Aviation Administration’s Aviation Maintenance Technician Employers Diamond Certificate of Excellence (which they have won in every consecutive year since), and Frontier stock is “named to the Russell 2000 index of small-capitalization stocks“(1999 2009). By the end of 2004, Frontier had been a vital part of the airline industry for ten years. The fleet had grown to six 737’s, 35 Airbus A319’s and six Airbus A318’s. The company employment levels were at 4,500 and the number of passengers that had flew with the airline had reached 23,084,433 since the first passenger booked a flight in July of 1994. Financial Performance Since Deregulation The overall effect of the Airline Deregulation Act of 1978 was to create a more competitive atmosphere in the industry. Frontier Airlines found itself performing poorly through the 1980’s, although this could be more reflective of the recession of the decade, rather than a reflection of deregulation. In 1982 net income for Frontier Airlines was 17.2 million, which took a dramatic decline to -13.8 million(Meyer, 1987). In comparison to the performance of other airlines, this decline was standard for the industry. However, the company did not fully recover and the result was the sale in 1986. Frontier An 4 Since deregulation, competition within the markets has opened the door for smaller airlines to participate in markets that were formerly dominated by the larger airline companies who had significantly greater resources. Frontier has entered these markets and found success as a smaller airline, better fares and a continued quality service. Larger airlines have developed small subsidiaries, such as United’s low-fare airline Ted, in attempts to compete with Frontier and other small airlines with low-fares. United is Frontier’s principle competition (Potter 2007). Route Structure and Hub Strategies Fig. 1 Frontier An 6 Frontier airlines currently operates out of the Denver hub exclusively, using a hub and spoke plan, servicing most major cities, with seasonal service to Mexico, Anchorage and Costa Rica. The number of domestic destinations available to passengers numbers more than 50, with international flights to Costa Rica and Mexico. The current route system strategy is to connect the Denver hub to the top business and leisure destinations. The company is currently serving 44 of the top 50 destinations defined by the U.S. Department of Transportation from the Origin ad Market Survey from the hub in Denver (Potter 2007). Two operating partnerships have been entered into by Frontier. In a relationship with Great Lakes Aviation and Frontier Airlines Holdings, Inc., 31 regional destinations are offered under the codeshare by Lynx Aviation operates 10 Q400 aircraft. This agreement serves a dozen regional markets that are within a radius of 600 miles from the Denver hub. Aircraft Fleet In 2007, the Annual Report showed that the following configuration of financed to owned aircraft was: Aircraft No. of Year of Approximate Lease Model Aircraft Manufacture Seating Capacity Expiration A319 36 2001 – 2007 132 2013 - 2019 A319 13 2001 – 2006 132 Owned A318 2 2004 114 2016 A318 8 2003 – 2007 114 Owned Fig. 2 The current fleet, as of 2008 is comprised of 56 aircraft which includes the following: 43 Airbus A319’s, 11 Airbus A318’s, and 2 Airbus A320’s (Fact, 2009). In the 2007 annual report, the company reported taking “ delivery of six new Airbus A319 aircraft and one new Airbus A318 aircraft (3 owned and 4 leased), for an increase of seven aircraft and a fleet total of 57 available for revenue service at year end” (Potter, 2007). The fleet, in 2008 stood at “62 aircraft, including two Airbus A320, 49 Airbus A319 and 11 Airbus A318 jets. Subsidiary Lynx Aviation has 10 Bombardier Q400 propeller-driven planes” (Frontier, 2008). The average age of the fleet is currently at 3.8 for the fleet at 61 aircraft (Average, 2008). Personnel Issues Frontier, as of May 1 2007, employs 5,265 employee, which includes 4,334 full time and 931 part employees. Included in this figure are 666 pilots, 978 flight attendants, 1,256 customer service agents, 517 ramp service agents, 334 reservations agents, 132 aircraft appearance agents, 45 catering agents, 341 mechanics, and 996 general management and administrative personnel (Potter, 2007). Of the numbers in of our employees, 22% are in union groups. The following table is representative of the collective bargaining agreements and the dates the contracts are amendable: Employee Group Approximate Number of Employees Representing Union Contract Amendable Date Pilots 666 Frontier Airline Pilots Association March 2011 Mechanics 281 Teamsters Airline Division July 2008 Dispatchers 16 Transport Workers Union Under Negotiation Aircraft appearance agents and maintenance cleaners 132 Teamsters Airline Division October 2013 Material Specialist 22 International Brotherhood of Teamsters Under Negotiation Fig.3 The National Mediation Board notified Frontier in September of 2006 that two unions had petitioned to represent flight attendants working for Frontier. The two unions that petitioned for this right were the International Brotherhood of Teamsters (IBT), and the Frontier Flight Attendants Association (FFAA). The FFAA did not gain sufficient authorization cards to make the ballot and the flight attendants voted on November 30, 2006 against joining the IBT. This represents a fifth time that the flight attendants have voted against union representation (Potter 2007). Frontier has created a bonus program for its employees that is designated under the profit Frontier An 9 sharing program which will contribute stock shares under the Employee Stock Ownership Program (ESOP). The bonuses are at the discretion of the Board of Directors. As well as bonuses for current employees, a program of competitive wages is used to attract the best employees. Frontier also has implemented a 401(k) Retirement Savings Plan as of May 2000, which offers and increasing match contribution by the corporation. Those who participate will receive up to 50% for up to 10% of the total salary. The company contributed shares of stock to the ESOP with an average of 350,000 dollars per year for 2005 - 2007 (Potter 2007). Continuing programs of training are expected to completed by employees who serve as pilots, flight attendants, ground service personnel, reservations personnel, and mechanics. New employees will submit to drug testing before final acceptance as a Frontier employee. Employees whose jobs are related to the safety and security of airline functions will be required to submit to random testing for drugs and alcohol, with a willingness to submit to a mandatory test after a reported incident (Potter 2007). Fare Wars In order to compete in the market, Frontier has partnered with another low-fare airline in order to spread marketing opportunities across a larger spectrum. In joining with AirtTran in 2006, a cooperative Low Cost Carrier referral and frequent flyer relationship became the first of its kind in the industry. In joining forces, both carriers are able to increase the number of destination options available to passengers by phone and online Frontier An 10 reservations. Earning and redeeming mileage and travel credits are now available through both airlines (Potter 2007). Marketing and Distribution Frontier offers low-fare flights for business and leisure travelers, appealing to customers who are conscious of value and sensitive to pricing issues. In creating an image for travelers to trust, Frontier also attempts to balance the product offered by programs such as the frequent flyer program, excellence in service level, advanced seat assignments, non-stop service, and live television capability in technology that allows for passengers to view from the back of the seat in front of them (Potter 2007). Our marketing targets leisure markets through discounted fares, newspaper, radio, and television advertising, as well as marketing over the Internet. A new strategy has been developed to assist in creating brand identity. Frontier uses the identifier “A Whole Different Animal” to set the airline apart from competitors. Extensive marketing surveys and focus groups have been used to ensure that this branding has had an effect on increase (Potter 2007). Along with the new branding, the company has set up a sponsorship agreement as an exclusive airline for The Pepsi Center in Denver, for the Denver Nuggets, for the Colorado Avalanche, the Colorado Mammoth, the Colorado Crush, the Colorado Crush, as well as the Air Force Academy, Colorado State University, University of Colorado, the Frontier An 11 University of Northern Colorado, the University of Denver, and the University of Wyoming. In conjunction with these agreements, logos and advertising considerations are made to Frontier (Potter 2007). In May of 2006, a new version of the website was launched in order to reduce the commissions paid to travel websites owned outside the corporation. As a result, bookings have increased to 37.4% on the internal website, over the 36.0% that was previously calculated. The new website allows the travel to view up to three days before and after the initial desired date of travel in order to provide a broader informative base on which to make travel decisions (Potter 2007). Southwest Airlines, the largest low-fare airline in the U.S., started offering service to Denver in January of 2006. Currently, the airline has 36 flights out of the Denver hub to 10 destinations and will implement another six. Southwest was the originator of the low-fare model by have one fleet of aircraft which is dedicated to value pricing with only one class of seating. Currently Southwest has a significantly favorable fuel hedging position and is able to offer fares that are lower than other airlines, even those who use similar models. It is the intent of Frontier to match these models in the markets where there is direct competition so that a market share can be retained. This competing advantage has impacted yields, as well as plans that Southwest might expand into markets we currently do not share (Potter 2007). Frontier An 12 United has a fleet of aircraft that are dedicated to the brand name Ted, which offer a competing low-fare pricing that follows the low-fare model. During the month of March in 2007, departures from Denver dropped from 55.9% to 55.4% the previous year. In that same month, Southwest saw an increase to 4.6% from 3.1% and Frontier was at 21.9%, up from 20.5% the previous year. Frontier finds itself in direct competition with United and with Southwest in 87.% of the markets within which the airline operates. Frontier uses efforts in branding to create recognition, along with agreements with other corporations and entities for sponsorship, in order to keep brand recognition high, while maintaining a controlled marketing budget. Providing easy access to reservations via the internet with offered low prices and visible flexibility allows for private consumers to have a user-friendly experience. While keeping a high level of service and by providing technologically advanced entertainment to passengers, the airline has the capability of competing in today’s market (Potter 2007).. International Operations Under agreements that the United States has with most foreign governments, ‘open skies’ agreements allow for multiple carriers to designated to foreign routes. However, some countries limit the number of airlines that serve these routes. Limitations are imposed by some foreign governments on the “ability of air carriers to serve a particular city and/or airport within their country from the U.S.” (Potter, 2007). Authorization from both the U.S. and the foreign country must be obtained to establish routes in and out of a foreign city. Research has shown that these routes have more value, and because of that value Frontier An 13 have been sold between carriers as needed (Potter, 2007). According to the Frontier Airline 2007 Annual Report (Potter 2007), “On April 3, 2007, the U.S. Department of Transportation issued an “Open-Skies Notice” inviting all U.S. air carriers now certificated to conduct foreign scheduled air transportation and interested in applying for blanket open-skies certificate authority to file applications with the Department. We filed for this blanket authority in April 2007.” Frontier Airline Performance Report In the history of Frontier, successful operations has highlighted most years. Since its ‘rebirth’ in 1994, the first ten years of operation saw growth and consistent yearly expansion. After a modest start-up investment of $516,000, the corporation was able tot meet it’s start-up budget and exceed expectations. The airline was able to pick up where others failed, and succeed in under the business model of a low-fare airline with no differentiation between seating class. In the last year, Frontier was put in a position by a creditor to file for Chapter 11 bankruptcy. Despite claims that the corporation was on solid ground and the bankruptcy of three other carriers, Frontier filed during the week of April 11, 2008. According to the company press release on the subject, First Data, a credit card processor attempted to withhold proceeds from ticket sales. This move restricted the expected cash flow that Frontier would need for operating costs (Frontier 2008). First Data made this move as a Frontier An 13 preemptive move because of the closing of other airlines creating significant risk for losses from prepaid tickets that can not be used and would cavalcade of losses. Frontier has succeeded by utilizing the hub and spoke method of operation, using Denver as its hub. One consequence of its bankruptcy, however, may be a reassessment of the use of Denver as its hub. Since the appearance of Southwest Airlines as a major, target specific competitor, the company has struggled with declines in profits. Changing the route practices and using another market as the hub, might help to increase profits. The bankruptcy might give the company time to reassess its presence and reinvent its practices (Frontier 2008). However, it is reported that in December of 2008 the airline posted a profit of $18.7 million dollars, which was “the airline’s best-ever performance for the month” (Mutzabaugh, 2008). This turn in fortune marks profits for two months in a row after losses of $100 million from April to October. Exercising “deep cost cuts and anew fare system”, created an overall profit of $1.1 million for the quarter (Mutzabaugh, 2008). The airline sold aircraft in order to help bolster the profit margin, which increased cash flow. According to Frontier CEO Sean Menke, “For the first time in five years, we’ve actually recorded a profit for the December quarter,” (a quote attributed to The Denver Post by Mutzabaugh, 2008). This show of profit sets the stage for a turn around for the airline that may see its way through the bankrupt status. Frontier An 15 Frontier has an appropriate balance of aircraft those owned and those that are still mortgaged. The fleet has an average age of 3.8 years old, with nothing manufactured before the year 2001. The company has used these as assets when needed, selling aircraft to help buoy the economic state of the company during the current financial crisis. Frontier appears to have solid and responsible methods in dealing with its employees. Bonus programs in the form of shares, financial incentives, and performance bonuses are available when deemed appropriate by the board, as well as a 401k retirement plan. In addition to these benefits, medical, dental, free flight benefits, vacation/sick leave, employee stock ownership plan, paid holidays, and tuition assistance are available for employees (Benefits 2009). Frontier has an ongoing issue with the flight attendants moving to unionize, however they have habitually moved to vote down unionization with the IBT. There have been attempts to organize the Frontier Flight Attendant Association (FFAA), but these attempts have not been successful due to a lack of proper legal supporting documentation. The organization was first developed in 2004, and has moved on being part of a vote as recently as 2007, but did not have the authorization card to make the ballot. Management would, of course, rather stop a union from forming for the flight attendants, however with over 800 attendants, the group would like to see more leverage available in order to support a contractual employment situation. This FFAA would be a member of the AFA, which is a part of the Communications Workers of America, forming the AFL-CIO. Frontier An 16 (Frontier Flight 2004). In 2009, the FFAA is going to make another attempt to organize the flight attendants as an unstable economy has left many employees worried about the security of their job and in the way in which it is administered by management (Walsh, 2009) One area that Frontier Airlines has been extremely successful is in marketing strategy. The strategy has not been accomplished by high concept, powerful and expensive campaigns, but by using a ‘puppy dog’ technique to appear harmless to their competitors, allowing them to make mistakes that Frontier doesn’t have to make. According to Yoffie (2003: 25), Frontier was very careful to not directly compete with United on routes and destinations, while ‘skimming’ a limited number of the routes that United traveled. This method of staying out of the line of marketing site for United allowed it to operate without being targeted by the larger airline. However, Western Pacific took on United, attempting to steal its customers with lower pricing, which led to its demise under a counterattack from United that had more resources to overcome this threat. Unfortunately, Frontier was also affected as ’guilt by association’, but managed to survive, benefiting from the ultimate demise of Western Pacific. Southwest Airlines, the most successful airline in the model of the low-fare, no-frills, structure, who also first utilized this structure, has been running successfully since it opened on these terms since 1971 (Ries, 2006: 25). This is an example of how a good plan can be sustained if the working model is respected and maintained. Frontier has Frontier An 17 moved to more of a full-service airline on some levels and has paid for that change in practice. In order to maintain its position in the coming decade and navigate the current economic maelstrom, it would be wise to take a simplifying approach to offering low-fares by cutting costs and unnecessary frills from their service. One might question the latest trend that has been implemented by Frontier in providing TV service at each seat for the passengers. While this service undoubtedly mirrors the industry standard, in that viewing is a paid service to the customer, such moves need to be weighed in light of future financial climates that might move to be a continuing state of decline for some time. Frontier Airlines has survived several periods of difficult financial worries and has competed successfully against several major airlines, holding its own against the example of other low-fare airlines that have succumbed to financial ruin. Despite the current bankruptcy, financials appear to be viable and hold hope for recovery. Smart moves that sustain their place in the market, with conservative practices in competition will continue to maintain their place in the airline industry. Frontier Airlines will continue to survive the next decade with a continuing conservative attitude towards financing, taking preventative measures similar to the bankruptcy that took place in response to the move by Data First, and in situating itself as ’the other guy’. Using systems of partnering and by supporting its peers, as in the deal with AirTran for the referral program, the corporation can ride out the coming economy. Frontier An 18 Illustrations Figure 1. Frontier Route Map. Available from http://www.frontierairlines.com/fron tier/plan-book/routes-timetables/route-map.do Figure 3. Aircraft Statistics. Available from http://www.frontierairlines.com/frontier/who-we-are/investor-relations/annual- reports-proxy.do Figure 2. Amendable Date Table for Union Contracts. Available from http://www.frontierairlines.com/frontier/who-we-are/investor-relations/annual- reports-proxy.do Frontier An 19 List of References “1993 - 1998: Our (re)birth years!”. (2009). Frontier. Accessed on 12 February 2009 from, http://www.frontierairlines.com/frontier/who-we-are/wwa-1993-1998.do “1999 - 2004: our wonder years!”. (2009). Frontier. Accessed on 12 February 2009 from, http://www.frontierairlines.com/frontier/who-we-are/wwa-1999-2004.do “Average Fleet Age for Selected U.S. Carriers” (2008). Airsafe. Accessed on 14 February 2009 from, http://www.airsafe.com/events/airlines/fleetage.htm “Benefits” (2009). Frontier. Accessed on 15 February 2009 from, http://www. frontierairlines.com/frontier/work-with-us/why-frontier/benefits.do “Fact Sheet” (2009). Frontier. Accessed on 13 February 2009 from http://www.frontierairlines.com/frontier/who-we-are/company-info/fact-sheet.do “Frontier Files for Chapter 11 Bankruptcy, Plans to Keep Flying” (11 April 2008). Rocky Mountain News. Accessed on 14 February 2009 from, http://www.rockymountai nnews.com/news/2008/apr/11/frontier-airlines-files-bankruptcy/ “Frontier Flight Attendants Launch Organizing Campaign: Some 800 Employees Seek Workplace Fairness and Respect” (8 November 2004). Association of Flight Attendants - CWA. Accessed on February 15 2009 from, http://afanet.org/default .asp?id=509 Meyer, J. R., & Oster, C. V. (1987). Deregulation and the future of intercity passenger travel. MIT Press series on the regulation of economic activity, 15. Cambridge, Mass: MIT Press. Frontier An 20 Mutzabaugh, B. (2008). USA Today: Today in the Sky. Accessed on February 15 2009 from, http://www.usatoday.com/travel/flights/item.aspx?type=blog&ak=6209 5302.blog “Our History” (2009). Frontier. Accessed on 12 February 2009 from, http://www.frontierairlines.com/frontier/who-we-are/company-info/our-history.do Potter, Jeff. (30 July 2007). Frontier Airlines: Fiscal Annual Report 2007. Accessed on 12 February 2009 from, http://www.frontierairlines.com/frontier/who-we- are/investor-relations/annual-reports-proxy.do Ries, A., & Trout, J. (2006). Marketing warfare. New York: McGraw-Hill. “Routes and Time Tables”. (2009). Frontier. Accessed on 13 February 2009 from http://www.frontierairlines.com/frontier/plan-book/routes-timetables/route- map.do Walsh, Chris. (16 February 2009). “Union again setting sights on Frontier flight attendants”. Airport Business. Accessed on 16 February 2009 from, http://www.airportbusiness.com/online/article.jsp?siteSection=1&id=14000 Yoffie, D. B., & Kwak, M. (2003). Judo strategy: Turning your competitors strength to your advantage. Boston, Mass: Harvard Business School Press. Read More