11 April 2008

Frontier's Collapse

Frontier Airlines has Denver International Airport as its biggest hub. We learned today that it filed for bankruptcy under Chapter 11 and that the immediate cause was that credit card processor First Data (also based in Colorado) had decided to give it less of the float from credit card payments to actual flights.

But it turns out that trouble has been brewing for some time at Frontier in the eyes of those paying attention. Its shares had lost about 75% of their value between the end of 2007 and the month before the bankruptcy filing (i.e. early March). Frontier has had net losses and cash flow problems ever since 9-11, five and a half years ago. Those problems have mounted rather than declining. Rising fuel prices are probably part of the problem, although probably not the only problem.

This makes what looks at face value like a mere "liquidity bankruptcy" considerably more troubling. In the absence of the First Data action Frontier probably could have held on for a number of months longer, but the First Data action appears to be a symptom of a larger problem, if applied rather crudely and precipitously, rather than the real underlying cause of Frontier's financial troubles.


Michael Malak said...

FirstData, based here in Denver, was recently bought out by KKR, the same people that orchestrated the leveraged buy-out of RJR Nabisco in 1988, the only beneficiaries of which being KKR and their friends.

I question whether if FirstData were still truly a Denver company that it would pull such a vicious move on another Denver company. I question, given KKR's track record, whether there are ulterior motives.

Another possible explanation is the mere shortage of cash in the banks. When FirstData wrote "due to economic conditions", they may have been in part referring to themselves and partner financial institutions. Frontier may just be the latest victim of the subprime crisis. And this may be what a 21st century bank run looks like: not long lines of men trying to withdraw cash from their banks, but rather companies trying to get their credit card payments.

Anonymous said...

"Collapse"? Isn't that melodramatic overstatement?