Frontier JetExpress RFP

[cq43vt17t]

so can all of our best friends at g jets get the flying?

 

[FlyingDawg]

If RAH decides to bid on this flying, it would be done by Republic Airlines division.

 

[paid4training]

That may be, but there is no fuzzy math out there that can fit 70 seats into a 145. New type = higher costs.

Didn't your girlfriend tell you size does not matter....


:beer:

 

[ReverseSensing]

Souix 115 and low&slow have got it exactly right. When the news first came out, we all gasped a little, but after a couple of days, you realize that except for a handful of pilots who relocated to DEN, this isn't terribly bad news. (Only 200 total QX employees in DEN, out of 3500)

Management has been trying to insulate the F9 operation anyway, making it very cozy for the pilots in DEN. Now, perhaps, we will bring those pilots back into the fold, making the pilot group stronger going forward in negotiations.


Frankly, if QX and AAG management decided to walk away from F9, a lot of us would be relieved. In fact, turning our back on lowest-bidder contract flying and re-focusing on growing our native and AS harmonization flying, I think would even demonstrate that maybe, just maybe, management is looking out for the long-term health of the airline.

See next post for what management is saying about it:

 

[ReverseSensing]

Here's what management is saying about it:

Horizon considers its role, if any, in Frontier Airlines' ambitious, expansive plan
Sept. 7, 2006
To help you sort through the implications to Horizon Air of Frontier Airlines’ recent announcement, here are answers to questions posed to Jeff Pinneo, president and CEO; Rudi Schmidt, vice president, Finance; and Pat Zachwieja, vice president, Marketing and Planning.

This announcement by Frontier is pretty dramatic. What are they hoping to accomplish through these initiatives?

Pinneo: It’s no secret that Frontier has been under increasing pressure on a number of fronts. Its livelihood revolves around Denver, which has become one of the most competitive markets in the country with the emergence of United Airlines from bankruptcy and the entry of Southwest Airlines. Add to that the high airport operating costs in Denver and you have a very challenging situation.

Along the way, Frontier has responded in traditional fashion by working to reduce costs, improve unit revenues and building customer loyalty through service, mileage programs, etc. These measures have helped, but the pressure remains as Southwest continues to build its presence in Denver.

With the initiatives announced this week, Frontier has indicated that it’s looking to field a much larger Denver presence with new services that tie in the smaller “backyard” markets to the network with low-cost service and aircraft appropriate to the markets.

It’s a bold step that’s not without considerable risk, but doing nothing is also risky in light of the circumstances.

Regarding Frontier’s order for 10 Q400s and 10 options, why didn’t we bid on that flying?

Pinneo: In our ongoing talks with Frontier, we learned that they were interested in the idea of acquiring Q400s to add flying into their Denver hub. We told them we would be very interested in operating and maintaining the aircraft on their behalf.

After considering alternative approaches, Frontier chose not to put the flying out to a formal bid, but instead decided to form a subsidiary airline to operate the Q400s under a separate operating certificate. This decision was made after much consultation with us and a thorough review of our capabilities and cost forecasts.

Ultimately, their view was that it would be cheaper for them to own and operate the aircraft rather than pay a profit margin to somebody else to do it for them. As a startup airline with a new certificate, they expect this new operation to have very low operating costs.

How is going from nine to as many as 20 JetExpress aircraft going to help Frontier?

Zachwieja: Compensation in these types of agreements is usually cost plus a profit margin, so bringing the base cost down is important. This should allow them to reduce their CASM, or cost per available seat mile, which is a standard industry yardstick for measuring airline costs. Frontier believes that more JetExpress aircraft should help them spread overhead costs over more flying.

How does that work exactly?

Schmidt: For each additional JetExpress aircraft it will not be necessary to ratchet up staffing levels in incremental chunks for everything on the ground – like maintenance, customer service and support functions.

The one spare aircraft we have backing up the eight others to maintain reliability is disproportionately high compared to normal sparing levels and also adds to Frontier’s CASM. Increasing the fleet size allows Frontier to normalize the sparing level and thus reduce costs and make the fleet more efficient.

When the Frontier deal was announced and we began flying Jan. 1, 2004, we said it was a 12-year deal. How can they put our jet flying out to bid with an RFP?

Schmidt: When the Frontier contract was drawn up, neither party had any way of knowing for sure how the business would evolve, but we knew change was inevitable.
So, we wrote in a provision allowing either party, after three years, to initiate a review of the terms for changes to be agreed to. Citing that provision, they’ve given us notice of their intent to restructure the program.

From everything we’ve heard and seen, Frontier and its customers are still very happy with our service, aren’t they?

Pinneo: Our Frontier JetExpress operational performance has been nothing short of magnificent, as evidenced in our stats and the rave reviews we receive from Frontier’s management and its passengers.

By getting the operation up and running in 100 days and consistently meeting and exceeding our performance targets, we have demonstrated beyond a shadow of a doubt that we are fully capable of providing this kind of contract flying.

Frontier’s decision to operate the Q400s itself has everything to do with its need to be as cost efficient as possible and nothing to do with our operational performance or the service Frontier and its customers have received from our team.

Continued...

 

[ReverseSensing]

Part 3...

Couldn’t we pitch in and reduce our costs to hold on to the contract?

Schmidt: We looked hard at this in concert with our ongoing efforts to reduce costs across our operation. As it is, there is little more that Horizon can do that we haven’t already done to reduce the cost to operate JetExpress and still make an acceptable return on our capital investment.

Our lease rates for the jets are fixed by contract, as are our labor rates. As a mature company with mature costs, it’s very difficult for us to be cost competitive with a startup operation like the one Frontier has announced. This illustrates the importance of costs in being competitive for growth opportunities.

Do we intend to bid on the CRJ flying once the RFP is issued, and if so, what will be the primary factors that will influence our ability to successfully bid on the expanded flying?

Schmidt: Since the RFP has not yet been issued, we don’t know its exact terms, so it’s too early to say whether it will be in our best interest to submit a bid or not.
Of course, we will evaluate the RFP carefully and pursue the opportunity – if we think it will generate a sufficient return to justify the capital investment and not impair Horizon’s or AAG’s ability to pursue other strategically important opportunities.

Among the issues we’ll have to weigh are the capital and aircraft requirements of the program and related returns as they compare to alternative uses for the same. We’re obligated to channel our resources toward those opportunities that we believe will yield the highest returns at the lowest risk.

The 20 CRJs that Frontier is looking for represent about a half billion dollars in investment – that’s a big chunk of change for anyone to swallow.

If the RFP requires the operator to provide the jets – versus operating and maintaining equipment that is financed or provided by somebody else – that could be very challenging for us to justify. That’s particularly true given the long-term lease obligations we’d have to take on and the “cost” associated with not pursuing other strategic opportunities, like those on our native network.

How is the current situation different from three years ago?

Pinneo: When we pursued the JetExpress business in the first place, it was 2003, and we were dealing with a post-9/11, post-dot-com-bust environment. Many of the economic assumptions about where we could profitably operate the 20 CRJs we had committed to earlier weren’t holding up in the new world order.

The JetExpress opportunity offered several benefits: First, it provided a modestly profitable refuge for about half of our jet fleet when – at the time – there weren’t other profitable uses for the aircraft. It was like putting our money into a CD – we knew we weren’t going to get a high return, but at least we were getting a guaranteed return, which is more than we could say for riskier investments.

Second, at a time when traffic wasn’t as robust as it has been lately, it allowed us to diversify our lines of flying so that less of it was tied up in the “at risk” kind of flying we do in most of our native network.

Third, it gave us a chance to test our ability to successfully execute on the contract flying model – which is the primary line of business among other regional airlines and something we are still interested in pursuing now that we have shown we can do it so well.

Zachwieja: The current demand in our existing markets has left us short of aircraft to adequately meet the needs of our customers in several strategically important markets. New market opportunities have emerged that are both attractive and aligned with Horizon and AAG network growth strategies.

Harmonization flying with Alaska has proven very successful at putting the right Air Group aircraft on the right route at the right time, and we believe there are more opportunities on that front.

On our network, markets like Los Angeles to Redmond/Bend and to Eureka and Redding are all working well, and we believe there are several other, similar opportunities out there.

On top of that, we’ve agreed to sublease 16 Q200s to Commutair over the next year and a half – lines of flying that have not as yet been fully backfilled by the Q400 orders we have in place.

The point is that we have many current needs for aircraft and strategic opportunities within our network that weren’t present just a few years ago.

Why don’t we just maintain the status quo with our nine jets in Denver?

Pinneo: Frontier has determined that maintaining the program as it’s currently structured is not an option.

“Cost effectiveness” was cited by Frontier as a key driver in its decision to change and expand the program. Does that mean we’re not cost effective, and how does that affect our ability to pursue contract-flying opportunities in general?

Pinneo: It’s true that our operating costs are always going to be a factor in these situations, and they are the main reason why our bids for other contract flying have not been successful.

Oftentimes, operating cost is foremost in an airline’s choice of a contract partner, and the fact is we’re not the lowest-cost provider of this service.

Our unit costs are higher than most other regional airlines for several reasons. One is our chosen business model, which, unlike our competitors’, includes all the costs of running an independent airline, like reservations, marketing, etc. Then there’s the size of our operation. And then there are some of our labor rates.

Frontier had its eyes open to all this going in, but it was coming off an unsatisfactory previous experience and wanted to choose an airline that was known to provide superior service, and so it was willing to pay a bit more. Now, Frontier is facing a different, very challenging landscape that requires lower costs from its JetExpress provider and a potentially larger capital investment to boot.

While contract flying is not the core of our business, we’ve learned that we can do it well and, when it’s properly structured, that it contributes to our profitability. There are currently other contract flying opportunities in the RFP phase, each with its own mix of requirements, and we’re engaged in pursuing those that meet our strategic criteria.
We’ve proven that we’re very good at operating this line of business. Increasingly, it’s a matter of cost competitiveness – of determining how we bring our costs down to be in the running for these opportunities and be able to make money at prevailing market rates.

How is this likely to affect our Denver-based employees?

Pinneo: At this point, given that we haven’t seen the RFP, there are still more questions than answers, but two things are eminently clear.

One, any direction we take is likely to take over a year to unfold, given the practical realities involved and the terms of the contract.

Two, whatever the outcome, everyone of our 200-plus Denver-based employees is a highly valued, much needed part of the team.

The nine aircraft we have assigned to Frontier JetExpress will remain continuously active in Horizon’s system – if on top of that we decide to pursue the RJ opportunity, our requirement for Denver support could actually increase.

At this point, we simply don’t know – but however this turns, we will have jobs for all involved in the JetExpress program.

As we go forward, our focus will be on responding to Frontier’s decision in a way that ensures the best outcome for Horizon over the long run and that is supportive of our Denver team, whose contributions through the JetExpress program these past three years have been a real point of pride.

The leaders of our operating divisions – Andy Schneider, Gene Hahn and Celia Sherbeck – will be working with Marne McCluskey in Employee Resources and Dan Russo in Communications to ensure that everyone involved is receiving clear, timely updates and responses to workgroup-specific questions. They plan to be in Denver quite a bit over the next few weeks as well to connect with and support the team as the story unfolds.

Any parting thoughts?

Pinneo: We’re living through what has become an inevitable part of the business landscape – change in response to changing circumstances. Successful companies are, among other things, resilient in their ability to respond to the unanticipated, and that’s a function of their planning and their people.

We’re fortunate in both camps – we have always kept the possibility of change to this program on the radar, and have developed contingency plans and kept them at the ready. We’re confident that we have good opportunities available to us irrespective of what emerges in the Frontier RFP.

And in the people camp, we remain blessed with a talented and committed team that’s focused on “doing the right thing” for our business and the people involved.

For you naysayers, Pinneo's not really making a big deal out of our pay rates being the "reason" we don't get lowest-bidder contract flying. Refreshing.

 

[ratherbeflyen]

What is F9's financial situation? Are they doing this as a last ditch effort to compete or are they trying to grow?

Best of luck to all those involved, I hope Frontier makes it.

 

[turbinesurgeon]

Souix 115 and low&slow have got it exactly right. When the news first came out, we all gasped a little, but after a couple of days, you realize that except for a handful of pilots who relocated to DEN, this isn't terribly bad news. (Only 200 total QX employees in DEN, out of 3500)

Management has been trying to insulate the F9 operation anyway, making it very cozy for the pilots in DEN. Now, perhaps, we will bring those pilots back into the fold, making the pilot group stronger going forward in negotiations.


Frankly, if QX and AAG management decided to walk away from F9, a lot of us would be relieved. In fact, turning our back on lowest-bidder contract flying and re-focusing on growing our native and AS harmonization flying, I think would even demonstrate that maybe, just maybe, management is looking out for the long-term health of the airline.

See next post for what management is saying about it:

Do you think this would cause some of us to get furloughed as the DEN fleet gets absorbed into mainline QX?

I hope this doesn't screw up our negotiations, I have heard it before "take paycuts so we can put in more attractive bids, blah blah blah"

 

[PumpkinPony]

Do you think this would cause some of us to get furloughed as the DEN fleet gets absorbed into mainline QX?

I hope this doesn't screw up our negotiations, I have heard it before "take paycuts so we can put in more attractive bids, blah blah blah"

Nah... didn't you see this part??

At this point, we simply don’t know – but however this turns, we will have jobs for all involved in the JetExpress program.

 

[Master Shake]

Hey Express Jet people, how are you going to get a contract when no one cares about the 50 seat market anymore, especially F9

Well the F9 RFP simply stated RJ. No real specifics were mentioned. Our XRs can actually be filled with 50 people, bags and enough gas for a 1200 mile flight with reserves. Don't BS me and say there's not a market for that airplane.