Close Call: Southwest's Attempted Acquisition Of Frontier Airlines

Photo: John Pullen | John Pullen Writes

Airline mergers have played a critical role in shaping today’s US airline industry. The Big Four airlines of the United States, American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines, have managed to operate on a scale that dwarfs that of their competitors thanks to acquisitions of other carriers.

Southwest’s size and network were partially influenced by its acquisition of AirTran Airways, which eliminated a key competitor in several markets Southwest served. The deal also granted Southwest access to significant infrastructure at Hartsfield-Jackson Atlanta International Airport, a destination that had remained notably absent from the carrier’s route map.

While the AirTran deal positioned Southwest for larger-scale operations, it was not Southwest’s original acquisition target. Rather, the Dallas-based budget carrier originally set its sights on Frontier Airlines in an attempt to grow quickly in the Denver market.

Southwest Airlines Made A Bid To Acquire Frontier In 2009

Photo: John Pullen | John Pullen Writes

Frontier Airlines was in a challenging position by 2008. The carrier was forced to file for Chapter 11 bankruptcy, and was sent to auction to find a new buyer. The low-cost carrier was known for serving secondary and select major markets from Denver International Airport with low fares and friendly customer service, two very similar brand pillars to Southwest Airlines.

As potential buyers reviewed Frontier, Southwest recognized these commonalities. Even more tantalizing was Frontier’s large schedule and infrastructure at Denver Airport, a destination Southwest had been growing in rapidly since it entered the market in 2006. Recognizing the importance of these assets, Southwest eventually placed a bid to acquire Frontier Airlines.

On August 10, 2009, Southwest made an offer to acquire Frontier for $170 million. As a part of the deal, Southwest would acquire about 80% of Frontier’s fleet (which equated to about 40 aircraft) and would operate the budget airline as a subsidiary. Over time, Southwest would phase out Frontier’s fleet of Airbus A320 family jets and replace them with Boeing 737s. The airline also promised to maintain all of Frontier’s routes from Denver, while expanding into new markets not served by either airline.

Photo: John Pullen | John Pullen Writes

However, a key element of the proposed deal was its contingency on the two airlines’ pilot groups coming to an agreement prior to the acquisition. Unions can often cause hurdles in airline mergers, and this provision was likely trying to emulate the success of Delta and Northwest Airlines. The two carriers reached agreement between their pilot groups before the merger officially launched in a bid to create a more seamless integration, according to The New York Times.

Ultimately, Southwest and Frontier pilots failed to reach a deal prior to the deadline, rendering Southwest’s offer unacceptable. As a result, Republic Airways acquired Frontier Airlines instead, though the carrier changed ownership again before becoming the ultra-low-cost airline it is today.

Why Did Southwest Want Frontier Airlines?

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By the mid-2000s, Southwest had solidified itself as a major low-cost carrier that played a critical role in keeping fares down in the markets it served. However, by the late 2000s, market conditions were shifting against low-cost carriers, especially Southwest. Fuel prices continued to increase, acting as a great equalizer and absorbing the cost advantage budget airlines historically wielded. 

To make matters worse, Southwest had lost its fuel hedges, which largely shielded it from the volatile fuel prices of the early and mid-2000s. So, by 2009, the once fast-growing airline was limiting its capacity expansions to select successful markets. Denver was among them. According to CNBC, by 2009, Southwest had reached 113 daily flights from the Mile High City. By comparison, Frontier was operating 168 daily flights from DEN.

Southwest’s success with Denver Airport, coupled with the bleak conditions for budget airlines, meant that growing in Denver was its best course of action. Thus, Frontier’s bankruptcy positioned it to be a very attractive acquisition target for Southwest to pursue. After the failed merger attempt, both airlines were forced to chart their own way forward.

A Southwest-Frontier Deal May Not Have Been Impactful In The Long Term

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A combined Southwest and Frontier would certainly have sparked some major changes in the Denver market in the short term. However, it might not have been very consequential in the long term, as both airlines have managed to press forward without joining forces.

Southwest made major investments in Denver in the 2010s. The airline opened a new crew base and launched new routes across its domestic and international network. According to Southwest, today, the carrier operates up to 302 daily flights from the Mile High City to over 92 destinations. The airport has become the busiest station in the Southwest network.

Until recently, Southwest’s business model and strategy had stayed relatively consistent. Meanwhile, Frontier changed its business model radically in the years following its bankruptcy. According to CBS, Republic Airways sold the carrier to Indigo Partners in 2013, which then transitioned Frontier into the ultra-low-cost carrier it is known as today. Following its transition, Frontier pursued a nation-wide expansion, further shrinking its Denver footprint. 

While both carriers found success in the 2010s, the post-COVID realities of the airline industry could not have been circumvented through consolidation between the two brands. Costs associated with labor (especially in regards to pilots) spiked, further eroding the margins of airlines focused on maintaining a competitive cost structure. Meanwhile, demand for premium travel options has steadily risen, something budget airlines are not positioned to capitalize on.

Photo: John Pullen | John Pullen Writes

A combined Frontier-Southwest would have resulted in a larger company facing the same challenges. Though the failed deal certainly would have changed the competitive landscape in Denver (and other markets where ultra-low-cost Frontier now significantly competes in), it most likely would have done nothing to evolve their low-cost business model to remain competitive in the post-COVID market.

Now, Southwest and Frontier will have to chart their own course forward. Both have been working to roll out premium seating options, while Southwest has implemented fees for formerly free perks like checked baggage and flight flexibility. Given that these changes may have been unavoidable given the state of the industry, a merger could not have done enough to spare them financial struggles in today’s market.