Southwest CEO Gary Kelly on the bid for Frontier

Categories: Business

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Gary Kelly.
With yesterday's promise of a $170 million bid for Frontier Airlines, Southwest Airlines made it clear it really, really wants the Denver-based carrier. After all, the total was nearly $60 million more than its previously announced offer of $113 million, which was already higher than the $108 million total pledged by Southwest's primary rival in the Frontier sweepstakes, Republic Airways Holdings.

Gary Kelly, Southwest's CEO and president, stressed this interest in a memo sent to all of his airline's employees. The note also attempts to undercut theories that Southwest is ponying up because Frontier is kicking its ass in the Denver market. He writes:

I have seen and read speculation and reports as to why Southwest would be interested in acquiring Frontier. Simply enough, Frontier is for sale, and purchasing them would allow us to increase our Customer base in a city where we want to grow. Frontier also is a stellar airline with a great reputation known for quality Customer Service, passionate Employees, and low fares. Sound familiar? Those are the three main ingredients that Southwest Airlines was founded on more than 38 years ago, and those three values remain at the core of our DNA today. While there are obviously some differences in our companies, we also see a lot of similarities.

Read Kelly's entire statement, plus Southwest's official press release about the bid, by clicking "Continue."

Southwest Airlines CEO Gary Kelly on Bid for Frontier

Mon, 08/10/2009

A press release was issued today announcing that Southwest Airlines has submitted a proposal to acquire Frontier Airlines, which will be sold at auction in bankruptcy court this month. The following memo was sent to all Southwest Airlines Employees from our CEO, Gary Kelly.

This morning Southwest Airlines submitted a bid of more than $170 million to acquire Frontier Airlines, which has been in bankruptcy since April 2008. We understand an auction will commence later this week in New York. Once the auction is concluded, the bankruptcy court must approve the selection of the winning bidder. So really, we just don't know when it will be that we'll hear about these results, but I commit that we'll keep you informed as we go.

We believe Southwest's bid represents the best possible longterm scenario for Frontier, its Employees, and the Denver traveling public. Southwest brings to the table the most consistently profitable airline in commercial aviation history, the best Customer Service record in the industry (as repeatedly determined by the Department of Transportation), an Employee-centric Culture, and low fares. If we are successful in our bid, Southwest will offer a financially stable, Customer friendly, low fare alternative to the dominant carrier in Denver into the future.

I have seen and read speculation and reports as to why Southwest would be interested in acquiring Frontier. Simply enough, Frontier is for sale, and purchasing them would allow us to increase our Customer base in a city where we want to grow. Frontier also is a stellar airline with a great reputation known for quality Customer Service, passionate Employees, and low fares. Sound familiar? Those are the three main ingredients that Southwest Airlines was founded on more than 38 years ago, and those three values remain at the core of our DNA today. While there are obviously some differences in our companies, we also see a lot of similarities.

I have also seen some speculation as to why this move makes sense for Southwest Airlines. Southwest is a growth company. Who would have ever thought 38 years ago that we would grow from offering service between three Texas cities to carrying more passengers than any other carrier in the United States? Pretty remarkable, and even more remarkable is the fact that we have grown while being profitable for 36 consecutive years -- a feat unmatched and unheard of the airline industry!

We began serving Denver in January 2006 with just 40 Employees and 13 daily nonstop flights. Today, we have nearly 400 Denver Employees and operate 113 daily nonstop flights to 34 destinations from the Mile High city, making Denver the fastest growing city in our history, and already among our top 10 airports (out of 66 and growing) that we serve in terms of daily departures. It's clear Colorado Customers appreciate our low fares, great service, and convenient schedule to places they want to go.

If our bid is successful, we will return to growth mode in the midst of a deep recession, expand our network in Denver to include many attractive destinations that we don't currently serve today, and offer Denver travelers a stable, low fare airline with legendary Customer Service to compete against the dominant carrier at DIA.

Through this acquisition, Southwest will continue to provide Denver a financially stable source of its historically low fares well into the future. There should be no doubt; the bankruptcy process will require some change to Frontier in any scenario. Given Southwest's history and track record of running a successful airline, we believe that our bid is the best option on the table for Frontier, Southwest, and the traveling public. A successful acquisition of Frontier Airlines by Southwest will expand our network of legendary low fares to additional cities, add jobs into Southwest through growth, and strengthen low-fare competitive pressure in Denver and other cities.

Press release:

SOUTHWEST AIRLINES SUBMITS BID TO ACQUIRE FRONTIER AIRLINES

Mon, 08/10/2009

Low-Fare Carrier Submits Bid of More Than $170 million

DALLAS, TX -- Aug. 10, 2009 -- Southwest Airlines (NYSE: LUV) confirmed today that the carrier submitted its binding cash offer of more than $170 million to acquire Frontier Airlines, which will be sold at auction as part of Frontier's bankruptcy case. The bid was submitted to Frontier in accordance with the procedures established in the U.S. Bankruptcy Court for the Southern District of New York.

Over the next week, Southwest will discuss its offer with the various interested parties. The auction is expected to commence on Thursday, Aug. 13. Once the auction is concluded, the bankruptcy court must still approve the selection of the winning bidder. From there, the bid will undergo review by the United States Department of Justice, which is normal and customary when one airline is purchasing another.

At this point, it is premature for Southwest to release complete details of its offer, which may change during the auction process before a winning bid is approved by the bankruptcy court. The offer contemplates that Southwest acquire approximately 80 percent of Frontier's existing Airbus fleet, which translates into about 40 aircraft, plus all of Lynx. Initially, Frontier would operate its Airbus aircraft as it does today, with a planned retirement of the Airbus fleet and transition to Southwest's Boeing 737s over a period of approximately 24 months. Despite the initial reduction in the fleet, Southwest intends to maintain all existing markets, as well as add new nonstop routes from Denver that are not served by either Southwest or Frontier today.

"We believe our bid ultimately should be seen as the strongest offer by all interested parties, including Frontier, its creditors, Employees, and Customers," said Gary Kelly, Southwest's Chairman of the Board, President, and CEO. "Southwest is a financially stable Company, and through this acquisition, will continue to provide Denver its historically low fares into the future. Frontier is up for sale. The bankruptcy process will lead to change at Frontier in any scenario. Given Southwest's history and track record of running a successful airline, we believe that our bid is the best option on the table for Frontier, Southwest, and the traveling public. A successful acquisition of Frontier Airlines by Southwest will expand a network of legendary low fares to additional cities, add jobs into Southwest through growth, and strengthen low-fare competitive pressure in Denver and other cities."

Frontier filed for bankruptcy court protection in April 2008. Southwest submitted its initial indication of interest to acquire Frontier Airlines on July 30, 2009, which gave the carrier an opportunity to engage with Frontier in the due diligence required to determine the scope of a binding proposal.

After 38 years of service, Southwest Airlines offers a reliable product with exemplary Customer Service. Southwest Airlines is the most productive airline in the sky and offers Customers a comfortable traveling experience with all premium leather seats and plenty of legroom. Southwest recently updated its gate areas and improved its boarding procedure to make flying Southwest Airlines even more convenient and simple. Southwest Airlines currently serves 66 cities in 33 states, and announced service to Boston Logan, which begins Aug. 16, 2009, and to Milwaukee, which begins Nov. 1, 2009. Southwest currently operates more than 3,300 flights a day and has more than 35,000 Employees systemwide.

This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Specific forward-looking statements relate to the Company's interest in acquiring Frontier Airlines and the Company's operating plans and expectations related to the acquisition. These forward-looking statements are based on the Company's current information, intent, expectations, and projections and are not guarantees of future actions or performance. These statements involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by them. Factors include, among others, (i) the Company's ability to receive all necessary approvals, including any necessary governmental or regulatory approvals and the approval of the Company's Board of Directors; (ii) results of the Company's due diligence; (iii) changes to the Company's business plan and strategies; (iv) the Company's being named the winning bidder in the auction process in Frontier's bankruptcy proceeding and the Company's ability to obtain all necessary approvals for the acquisition in Frontier's bankruptcy proceeding, including approval by Frontier's creditors and the bankruptcy court of Frontier's plan of reorganization, (v) the Company's ability to timely and effectively prioritize its revenue and cost reduction initiatives; and (vi) other factors, as described in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Therefore, the Company can give no assurance that any bid it submits to acquire Frontier will be successful or that any subsequent acquisition will be completed.

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