People Express Agrees to Sell Frontier Airlines to UAL
After deliberating the discount airline’s future for a week, directors of ailing People Express on Thursday agreed to sell its Frontier Airlines subsidiary to the parent of United Airlines for $146 million.
Sale of Frontier should give People Express a badly needed cash infusion, thus ensuring its survival at least temporarily. It will also significantly reduce competition at Denver, one of the busiest and most competitive airline “hubs” in the nation.
The sale is subject to approval by the board of UAL Inc., which meets today, and by the Department of Transportation.
Directors decided to sell Frontier after rejecting an offer from Texas Air to buy all of People Express’ stock for $9 per share, or $235.8 million.
The Newark, N.J.-based discount airline has suffered recently because of rapid expansion, management problems and increased competition. Eight months ago, it paid $300 million for Frontier--for a net cost of $100 million after taking into account the $200 million in Frontier’s cash it received in the deal. While operating Frontier as a separate airline, People Express hoped to join its own Newark hub with Frontier’s hub in Denver, linking them with Boeing 747 service between the two cities.
People Express had recently said that its financial health had deteriorated so much that it had to sell all or part of its assets. The 5-year-old carrier was launched as a no-frills, low-fare airline with service between Newark and Buffalo, N.Y.; Columbus, Ohio, and Norfolk, Va. Today it serves 49 airports, including some in Europe, and has a fleet of 79 planes.
But the airline’s loss of $27.5 million in 1985 grew to $58 million in the first quarter of this year as a result of losses by Frontier.
“I don’t think there was any alternative (but to sell Frontier),” said Scott Drysdale, airline analyst in the Seattle office of Birr, Wilson & Co., a brokerage house. “It could not have made it without People Express. . . . It needed a lot of work, and People did not have the capital resources or the cash flow needed to make the changes that have to be made. United has much deeper pockets, much greater management resources to make Frontier viable.”
Denver is the nation’s only hub--a location where airlines link arriving and departing flights--with three major competitors. United, the biggest, has 37.5% of the traffic through the city’s Stapleton International Airport. Continental Airlines has 26.3% and Frontier has 19.6%. Observers believe that United won’t continue operating Frontier as a separate airline. They predict that it will absorb Frontier’s flights into its own while possibly continuing to operate under the Frontier name on about a dozen routes out of Denver.
United officials declined to comment Thursday on their plans for Frontier.
People Express must now improve earnings quickly or again face the threat of takeover, observers said. “This deal buys People Express six months,” said airline analyst Louis Marckesano of Janney Montgomery Scott in Philadelphia. “It does not ensure that they will survive as an airline, but it gives them time to restructure and sell off other assets and, hopefully, to make money again.”
Neither Frontier nor People Express owns much of its equipment. What United is buying are gates, landing and takeoff slots, and maintenance and hangar facilities. Eight of Frontier’s 42 planes are leased, and the remainder are heavily encumbered.
In its announcement, People Express said Chicago-based UAL Inc. would begin next week to advance People Express at least $50 million of the purchase price. It also said United and Frontier will institute a joint marketing plan and will conduct joint advertising and promotional activities.
James J. Hartigan, president and chief executive of United, said the agreement “will support our aggressive strategic plans and enable us to continue the company’s strong growth.” In the past year, UAL has purchased the Pacific division of Pan American World Airways and Hertz Corp. from RCA.
In its announcement, People said it had “considered at length various alternatives for the company before determining that the United Airlines proposal was the best available course of action and in the best interests of the People Express shareholders.”
The statement said directors had rejected as “inadequate from a financial point of view” an offer from another party, which it did not identify. However, earlier Thursday, Houston-based Texas Air, parent of Continental Airlines, said its offer of $9 a share for People Express had been rejected.
People Express shares did not trade Thursday in the over-the-counter market. UAL shares rose $2.25 to close at $51.75 on the New York Stock Exchange. Texas Air closed up 25 cents at $32.25 on the American Stock Exchange.
