Frontier's fortunes linked to oil costs

Carrier may need millions in loans sooner than later

By Chris Walsh, Rocky Mountain News (Contact)

Friday, May 30, 2008

Bankrupt Frontier Airlines might need to secure millions of dollars in financing sooner than initially planned, as its ability to survive takes a hit each day the price of oil rises, experts say.

Other observers are more optimistic about their chances of a successful emergence from Chapter 11.

The homegrown carrier's annual fuel costs have soared nearly $100 million in the past seven weeks alone based on the current price of oil, according to Rocky Mountain News estimates. At the same time, Frontier reported this week that its available cash balance had dipped to $108 million as of April 30, compared with $170 million at the end of last year.

Some bankruptcy experts say the surge in oil prices over the past two months, coupled with growing hesitancy on the part of lenders, could give Frontier a shorter window to lock up the financing it needs to survive and emerge from Chapter 11.

"Banks are very unwilling to lend money right now, whether it's to an airline trying to restructure or to John Smith trying to get a house," said Anthony Sabino, a law professor at St. John's University in New York. "So I think it gets more difficult, but not impossible, for Frontier to get financing as long as oil prices keep rising."

Frontier didn't see an immediate need for financing when it entered Chapter 11 in April, largely because of the circumstances surrounding its bankruptcy.

The carrier said it essentially was forced into the move after the company that handles its credit-card sales to consumers - Greenwood Village-based First Data - demanded a significant increase in collateral. First Data uses the collateral as a reserve in case Frontier goes out of business.

The collateral boost would have tied up a significant amount of Frontier's available cash, which it uses to fund operations. By filing for bankruptcy protection, Frontier at least temporarily prevented the increase.

The carrier announced a new agreement with First Data on Friday, agreeing to have an undisclosed portion of credit-card receipts withheld until the money fills a new reserve account. The required balance - which the companies also did not disclose - will be based on a measure of the carrier's future traffic.

Frontier had a modest cash balance on hand going into Chapter 11. The situation has changed considerably since then.

Oil prices have rocketed about $19 a barrel - to more than $126 - since early April. Frontier paid 34 percent more for fuel from April 11 to April 30 than it did during a comparable period a year earlier. Without fuel hedges - contracts Frontier entered into in the past that lock in the price of oil - those costs would have risen 65 percent, the carrier said.

Most of Frontier's hedging contracts became void when it filed for bankruptcy, so the carrier doesn't have that protection going forward.

"The fundamental problem for Frontier is fuel, but the problems they're facing are not unique," said Dave Swierenga, an economist at aviation consulting firm AeroEcon. "Airlines are in a terrible place, and they cannot boost ticket prices to compensate."

Debtor-in-possession financing provides companies with cash to fund their day-to-day operations, such as paying wages and buying jet fuel. Frontier hasn't revealed publicly how much money it's seeking, but experts say an airline typically needs to have at least one year's worth of cash needs on hand when it exits bankruptcy. So the carrier could need an additional $100 million in cash or more, according to some estimates.

Frontier says it is working aggressively to line up funding but that it does not have a specific timeline in place. In addition to regular meetings with bankers on the East Coast, the carrier has taken steps to lower costs and raise more revenue by abandoning poorly performing routes, moving capacity into high-profit markets, selling four of its planes and shedding unfavorable leases. Frontier also is trying to restructure its contracts, such as one with online ticketing site Expedia, which recently stopped listing the carrier's fares.

Perhaps most importantly, Frontier is entering what is traditionally the busiest - and most profitable - season for airlines. That should provide it with a near-term cash cushion.

"We are going into the summer period, which is typically a very strong period for us, and that can't be overstated," said Frontier spokesman Steve Snyder. "That gives us some time to look at a number of different options . . . with regards to DIP financing and business strategies in general."

After the summer, though, Frontier's situation could get dicey if it hasn't lined up financing, said George Hamlin, a managing director at aviation consulting firm Airline Capital Associates. Airline travel drops precipitously in the fall, increasing the cash needs of most airlines.

"I'd say the real crunch time for Frontier starts in September, when the kids and families go back to school and traffic begins to drop off," Hamlin said.

Securing money won't be easy.

The airline industry is volatile even in the best of times, and most carriers typically operate on thin margins. In the current environment, airlines offer an even bigger risk to lenders.

The companies getting funding now are those that have some leeway to deal with various challenges, such as a recession or a drop-off in air travel, said Dave S. Maney, co-founder and chairman of local investment bank Headwaters MB.

"That is Frontier's dilemma. They don't have a lot of margin for error," Maney said. "The strongest of the airlines can take multiple bullets and still be standing. An airline like Frontier, right at this moment, unfortunately, may be in a position where after one or two shots they're gone."

The carrier's finances have taken a hit since it filed for bankruptcy.

Frontier recorded a $16.5 million loss for a three-week period in April, according to documents filed this week with the bankruptcy court. Its available cash balance fell $7.5 million during that time and is down from $170 million at the end of 2007.

The carrier also is facing fierce competition from Southwest Airlines at its main hub in Denver, something banks will no doubt look at when deciding whether to make a loan.

But Frontier's situation isn't necessarily as dire as it seems, some say.

A big chunk of the cash decrease since December resulted from a reclassification rather than an actual operational need. Frontier moved $50 million in unrestricted cash to restricted cash, which is earmarked for specific obligations. A move to sell four planes also will boost Frontier's available cash by $37.5 million.

Some of Frontier's $16.5 million net loss was tied to the launch of new turboprop service and a recently terminated partnership with Republic Airways - costs that the company won't incur again.

The debt markets also have eased up in recent weeks and could continue moving in that direction, which might actually make it easier for Frontier to get funding in several months as opposed to now, Maney said.

"We've gone from a period of momentary panic, or near panic, in the debt-capital markets to one where people realized that world is not ending," Maney said. "I also believe in regards to the overall economy that we are going through the experience of being shot at and missed. Every pundit on the planet said we're going into a big recession, but from what we have seen . . . that doesn't seem to be the case."

walshc@RockyMountainNews.com or 303-954-2744

• May 31, 2008

  7:14 p.m.

  Suggest removal

  jacka writes:

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