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By Chibuike Oguh and Tim Hepher
Feb 8 (Reuters) - Veteran budget airline investor Bill
Franke has pledged to avoid what he once called the "path to
hell" after masterminding a $2.9 billion merger of discount
airlines - letting dealmaking get the better of tight cost
controls that support low fares.
The 84-year-old entrepreneur has turned his private equity
firm's initial $36 million in Frontier Group Holdings
into a stake worth $2.4 billion in the agreed merger with Spirit
Airlines Inc - a rare feat in high-risk airline deals.
On Monday, Frontier and Spirit unveiled their plans to
create the fifth-largest U.S. airline, valuing Florida-based
Spirit at about $2.9 billion excluding debt.
After spearheading the low-cost strategy at both airlines -
having previously served as a chairman and key shareholder of
Spirit and now Frontier - Franke is no mood to relax the simple
formula that underpins his investments on three continents.
"The trick is being disciplined about cost structure,"
Franke told Reuters in an interview.
Franke has long been a pioneer of ultra-low cost airlines
like Frontier and Spirit, which occupy a tier of the market
below long-established budget rivals like Southwest.
Such airlines rely on offering a fare stripped back to its
lowest possible level, topped up by charges for extras like
booking through a call center, a strategy known as unbundling.
The business also keeps a laser focus on serving tourism or
visits to relatives, without chasing after business travelers.
Such carriers were among the first to recover from the
pandemic.
"There's been a rebound in booking in the U.S. though most
of them is the class we call visiting family and friends rather
than business travel," Franke said.
"We're optimistic because there is pent-up demand. Consumers
still like to pay low prices."
BUSINESS MODEL
The pledge to maintain low costs and fares appears directed
in part at U.S. regulators who will closely review the merger
deal, amid increased scepticism about takeovers under the Biden
administration, according to lawyers.
But it also reflects Franke's reluctance to make compromises
on the business model purely for the sake of expansion - a
message unlikely to be lost on other airlines in which his
investment firm owns shares, like Europe's Wizz Air.
While Frontier, Spirit and Wizz all have similar business
strategies, Wizz Air triggered concerns among some analysts
about its ability to expand without losing control of costs when
it made an approach to Britain's easyJet last year.
EasyJet rejected the approach and Wizz Air, which never
confirmed the move, subsequently said it preferred organic
growth without being "blind" to other opportunities.
Franke began his airline career at then-bankrupt America
West Airlines, which later acquired U.S. Airways and was then
bought out by American Airlines.
His airline-focused buyout firm, Indigo Partners, owns
stakes in Wizz Air, JetSMART of Chile and Mexico's Volaris, as
well as 83% of Colorado-based Frontier, valued at $2.7 billion.
It is expected to own about 43% in the combined entity
following the merger of Frontier and Spirit.
Indigo, which Franke founded in 2002, paid $36 million to
acquire ownership and assume the debt of Frontier from Republic
Airways Holdings Inc in 2013 after selling shares in Spirit.
Franke rebranded Frontier as a low-cost, no-frills carrier,
flying its jets for longer hours and eliminating some
destinations served by major U.S. airlines.
Indigo took Frontier public in April 2021 after the airline
grew to become a U.S. regional player and following the COVID-19
pandemic, which had upended air travel worldwide.
Frontier was valued at $4.5 billion in that offering, which
raised $300 million for the airline and another $300 million for
Indigo. It closed on Monday at $12.82 per share, for a market
value of $2.8 billion - still a 66-fold gain on Franke's gamble.
(Reporting by Chibuike Oguh in New York, Tim Hepher in Paris,
Additional reporting by Rajesh Kumar Singh in Chicago; Editing
by Catherine Evans)
