Why Frontier Airlines Could Soon Adopt Spirit Airlines’ Ultra Low-Cost Model

Love it or hate it, the Spirit Airlines (NASDAQ:SAVE) model of unbundled airfares has proven to be both successful and profitable, and the United States could see ultra-low base fares and added fees pop up on yet another familiar carrier in the near future: Frontier Airlines.

Phoenix-based private equity firm Indigo Partners LLC invested in Spirit Airlines in 2006, but began divesting itself from the carrier last month, with Indigo owner William Franke and Indigo principal John Wilson both resigning from the Spirit board of directors. Now, the firm is reportedly in talks to purchase Denver-based Frontier Airlines from its parent company, Republic Airways (NASDAQ:RJET).

While both Indigo Partners and Republic Airways have declined to comment on the matter, Republic reportedly told investors in an earnings call in July that it expected to sell Frontier to an unnamed purchaser by September. Analysts anticipate the result to be another super-discounted airline in the U.S. domestic market to rival both Spirit and Allegiant Air (NASDAQ:ALGT).

Indigo Partners has made its name investing in ultra-low-cost carriers around the world, like Singapore’s Tiger Airways, Wizz Air Hungary Airlines and Volaris in Mexico. The firm helped turn Spirit into the fee-heavy airline that it is today, achieving one of the highest profit margins in the U.S. airline industry.

In 2013, carry-on bag fees range from $25 to $100, while the first checked bag costs between $20 and $100, and the second checked bag costs between $30 and $100, according to Spirit.com. Everything from choosing a seat next to your friend to getting a snack on the plane also incurs an additional fee, making $9 base fares exponentially larger by the time you arrive at your destination.

Spirit Airlines derived more than one-third of its profits (or about $48.72 per person) from charges beyond the base fare for flights in 2012, more than any other carrier in the world. Allegiant Air was close behind with about 30 percent of its profits (or about $38.86 per person) from ancillary fees, according to a study from IdeaWorksCompany released in June. Frontier Airlines, meanwhile, did not come close to cracking the top 10 list of carriers earning ancillary revenue -- though it has already implemented several changes in that direction.

“Frontier began reforming itself into an ‘ultra-low-cost carrier’ more than a year ago,” noted Henry Harteveldt, travel industry analyst at Hudson Crossing. “The airline has blatantly copied from both Spirit and Allegiant.”

Like Spirit and Allegiant, Frontier flies reduced schedules when compared with major airlines, and uses a mix of regional hubs and smaller secondary airports where landing fees are lower. This past week, Frontier Airlines announced that it would charge travelers who purchased certain fares through travel agencies or third-party websites a fee to bring luggage aboard its planes. It also announced plans to charge passengers on its least expensive fares for non-alcoholic beverages.

“It's easy to copy these business moves,” Harteveldt said. “Where Frontier has not yet succeeded is in becoming a ‘travel company,’ like Allegiant, or creating a unique route network, like Spirit.”

Frontier Airlines, Harteveldt added, is fighting a three-way battle in Denver against United Airlines and Southwest Airlines. And even though the carrier has begun adding flights from underserved airports like Trenton, N.J., and Wilmington, Del., both are relatively small.

While there is definitely a lot of work ahead for whatever organization is successful in acquiring a stake in Frontier, the company could have plenty to gain, according to Harteveldt. “It is precisely this challenge that makes the airline so appealing,” he said. “This is a turnaround situation, and the opportunity exists in the upside.”