Frontier CEO Gives Employees an Economics 101 on Getting Screwed

Frontier Airlines reached an agreement with the Teamsters Union on Tuesday for a wage and benefit cut that will last through the summer. Meanwhile, many of the employees who are seeing as much as a 10 percent slash in hourly pay are wondering if the DIA-based carrier will be around that long.

Frontier got hit with the double whammy of being forced into bankruptcy by its credit card processor, First Data, and record-busting oil prices that hit a high of $135 per barrel last week but settled slightly as of this morning at $128. Along with a pay cut for executives, Frontier has been hunting for any and all means to increase cash flow, such as a policy to charge customers $25 for a second checked bag that will go into effect June 10.

All this has the rank and file at Frontier wondering why the company can’t simply raise ticket prices a little bit to reflect the new cost of doing business. Late last week, Frontier CEO Sean Menke attempted to answer their questions, and then some, in a nearly 900-word missive on “DIP financing” and “capacity pull down” that he sent to employees via an e-mail shown after the jump. Before his upbeat conclusion that Frontier is in the midst of "disruption and chaos," Menke says that he has "provided financial projections to many interested parties" and that he plans fly to New York to "meet with potential investors" -- language that could be read as a stand-in for "merge this puppy with another airline as quickly as possible." Or not. Feel free to offer your own economic analysis in the comments section. – Jared Jacang Maher

Dear Team Members,

I know this has been a difficult week for all of you, dealing with the repercussions from the Company’s announcement last week about wage and benefit concessions. Understandably, some of you are angry, and some of you have a lot of questions. The question I hear most is: “Can’t we just raise ticket prices instead of doing all of these other things?” I want to address that question in this letter.

As you all know, the world of airline ticket pricing is very complex. Consider we fly 70 aircraft (including our Q400s) into more than 60 different cities (not to mention all of the connecting options from each city) with 10 to 40 fares in each origin and destination we sell. Our revenue management team monitors our prices in all of those markets as well as those of our competitors almost around the clock. It is an extremely competitive business where adding a few dollars to a ticket price can benefit or cost an airline thousands of dollars.

At a basic level, ticket pricing is relatively simple. The most obvious pricing factor is competition. As you know, our pricing power in Denver (and other cities) is often based on how we and our competitors price our product. Accordingly, it is very difficult to sustain a price increase without suffering a decline in the bookings if all carriers don’t move to match such increases. By way of example, since December 2007 fare increase and fuel surcharge attempts were only successful about 10 percent of the time. Even so, we implemented a four dollar one-way fuel surcharge in early March and kept it in place for more than a month. During this period we were able to see that in some markets, even though priced higher, our unit revenue improvements continued. On the other hand we witnessed in other markets an impact on booking, thus revenue production, and reverted back to the competitive pricing levels. As has become the normal course we will continue to test the higher levels and monitor the response through booking and revenue production by market.

Based on industry announcements and actions over the past two weeks the industry is trying to correct the balance between capacity and demand to improve upon average fares paid. I am sure you are aware by this point that United reduced their capacity throughout North America by approximately five percent this coming fall. Just yesterday, American Airlines announced that they were going to reduce capacity in the same timeframe by approximately 11-12 percent. This level of capacity pull down equates to grounding approximately 90 regional and mainline aircraft. To be honest with you, with fuel now hovering over $130/barrel, I believe we will continue to see more capacity pulled.

Here is the point, the actions above by other airlines as well as the decision we made earlier this year to sell four aircraft and reduce our own capacity will help, over time, provide more pricing power to increase fares to offset the extreme price of fuel. I hope you understand that a simple response of “just raise ticket prices” is not really so simple and ignores the realities of the market. I also hope this re-emphasizes how vital all of our cost-controlling measures have been. There are no simple fixes to the situation we are in. We have to make tough decisions very quickly in order to emerge from this process as an airline that is viable for the long-term.

Before I conclude, I want to give you an update on the bankruptcy process and the current phase of DIP financing. As I write this I am on my way to New York again, my new home, to meet with potential investors. We have provided financial projections to many interested parties. We continue to share with potential investors the step we have already taken and those that we believe going forward will help us save dollars as well as drive additional revenues. As I have stated in the past this is a process that will take a little time, but as I have alluded to in the past I am very proud of this organization and what we have accomplished. With that said I haven’t had a problem sitting in front of any investor, members of the creditors committee or advisors and speak truthfully about what this company has accomplished and can accomplish going forward.

Finally, I thought you would like to know that several industry experts have shared with me how impressed they are with how well our airline operates on a daily basis. That is a tribute to the hard work you all do on a daily basis. There are still more challenges in front of us, therefore I need you all to stay focused on your jobs and taking care of our customers. I say that again because it is that vital to our long-term success. Please do your part, and our management team will take care of extending the runway and keeping us in the game. Thank you again for your hard work and patience during this extraordinary challenge. Your actions and kind words keep me focused and motivated to see us through the current disruption and chaos we find ourselves in.

All the best, Sean