Southwest’s bid for Frontier raises questions in Las Vegas

By Richard N. Velotta

Friday, Aug. 7, 2009 | 3 a.m.

Southwest Airlines' surprising announcement last week that it wants to acquire Frontier Airlines is a great business strategy for McCarran International Airport’s busiest carrier, but in the long run could be a detriment to Las Vegans who fly to Denver and Colorado tourists who come here.

Southwest plans a $113.6 million nonbinding offer for the Denver-based carrier through the U.S. Bankruptcy Court for the Southern District of New York. The nonbinding offer enables Southwest to conduct due diligence with Frontier in preparation for a binding offer due Aug. 10.

If more than one qualified bidder emerges, an auction would be conducted the next day. As of this writing, the court has received one other offer, a $108.8 million proposal from Republic Airways Holdings Inc.

Once the announcement was made, Southwest’s “Nuts About Southwest” blog lit up with dozens of posts, pro and con, responding to a Q&A about the proposal with Ron Ricks, Southwest’s executive vice president of corporate services.

Comments were mixed, but some pinpointed what should be a chief concern to Las Vegans: What will happen to airfares between Las Vegas and Denver if Southwest swallows up Frontier?

Frontier offers six nonstop round trips a day between Las Vegas and Denver, while Southwest averages just more than nine a day. The only other airline that flies the route, United, averages just under nine round trips a day.

Southwest said that if it successfully acquired Frontier it would operate it as a separate subsidiary and gradually integrate it into Southwest’s system.

Since both carriers fly the Las Vegas-Denver route, it would only be a matter of time before Southwest scales back the number of flights. But more important, one less competitor means it’s likely fares would rise.

Frontier, which operated as a low-cost carrier, and Southwest have kept each other honest on fares on the routes they share. Go to their Web sites on any given day and you’ll find that at times Frontier offers the better fare some days and Southwest on others.

Airline watchers have applauded Frontier for having a superior product — it has assigned seating and those seats are plopped in front of screens with 24 channels of DirecTV. Southwest, meanwhile, was ranked best in the most recent U.S. Transportation Department monthly consumer complaint statistics.

Southwest has shared a few other details about what it has planned if it is the successful bidder, but there are quite a few other unanswered questions:

• What would happen to Frontier’s fleet? Over the years Southwest has said that much of its success is, in part, because it has one aircraft type — the Boeing 737. Frontier flies Airbus Industries’ counterpart to the 737, the A319 and A320. Southwest would likely sell the 15 Airbus jets Frontier owns and return the 36 it leases to leaseholders.

• Would Southwest expand to some cities Frontier flies? There’s been a lot of speculation, and Southwest says it’s too early to say what will happen. Some plum destinations Frontier has that Southwest doesn’t are San Jose, Costa Rica; the Mexican destinations of Cabo San Lucas, Mazatlan, Puerto Vallarta, Cozumel and Cancun; Anchorage, Alaska; and the nation’s busiest airport, Atlanta. Frontier also has a coveted perimeter exemption allowing it to fly nonstop between Denver and Washington’s Reagan National Airport.

• If Southwest takes over Frontier’s Mexico routes, what would happen to its planned code-share agreement with Volaris Airlines? The airline has said it prefers to partner on international flying, planning a deal to Canada with WestJet. But Frontier already has its infrastructure in place so Southwest could take that over and fly there without being involved in a partnership.

• What would become of Lynx Aviation, a Frontier subsidiary that flies short hops between Denver and 12 destinations, primarily in the West? Lynx flies 11 Bombardier Q400 twin-engine turboprop planes to places such as Aspen, Colo., and Jackson Hole, Wyo. Southwest is mum on what would happen to Lynx, but it’s possible it could sell it to another operator.

Predictably, the mood in Denver generally is anti-Southwest since Frontier has been an institution in the city for years. Frontier has thousands of Denver-based employees and a popular TV advertising campaign in which wild animals depicted on Airbus plane tails come alive and talk with each other.

Aviation consultant Mike Boyd of Boyd International is right in the middle of the fray, based in Evergreen, Colo., a short drive west of Denver.

On his Web site Boyd characterized Frontier’s demise as an unfortunate turn of events spurred by misinformation on Wall Street reported by media that didn’t understand the industry, leading to Frontier’s credit card processor changing its cash holdback policy. Frontier, which is a profitable operation, had no choice but to file for bankruptcy.

Boyd said Southwest, which has been getting beaten by Frontier for market share on head-to-head competition, now has an ethical obligation to stakeholders to bid for the airline.

“Southwest has no ethical choice but to bid, and bid vigorously, for Frontier,” Boyd wrote. “The reality is that Frontier is for sale, via the Bankruptcy Court. The reality is that Frontier is a major competitor and the purchase would be in the best interests of Southwest, its shareholders and its employees. True, it would take out what is arguably one of the most innovative and operationally successful airlines in America. True, it would eliminate what is arguably Denver’s favorite airline. And true, at the end of the day, there would be less airline employment in Denver.

“But this is business, and Southwest has no choice. It’s got to bid strong to get control of Frontier. They’re not the bad guys in this.

“Assuming Southwest is successful, anybody who has a problem with the loss of Frontier as an independent carrier shouldn’t call Southwest.

“Give a call to the folks on Wall Street whose levels of airline analysis extend no further than what ‘everybody knows.’ ”

Nightclub nightmare

The Nevada Gaming Commission has approved a settlement, including a $500,000 fine, on a complaint against Planet Hollywood for its lax oversight of illegal activities at Prive nightclub.

The order for the fine, one of the largest imposed by the commission in recent years, includes a clause that orders Planet Hollywood to pay an additional $250,000 fine if the state Gaming Control Board files any similar complaints against the property through next July 31.

The complaint comes as gaming regulators are cracking down on a variety of questionable activities at nightclubs and other corners of the casino.

Gaming Control Board member Randall Sayre sent a letter July 21 inviting licensees to participate in informational seminars to head off problems at nightclubs, tournaments and charitable events and race and sports books. Sayre also wanted to address issues involving promotions, intellectual property theft and questionable or misleading advertising.

“The board recognizes these are hard economic times and licensees are facing increased competitive pressures,” Sayre wrote. “This does not mean, however, the board can allow a reduction in the regulatory standards governing licensees’ operations.”

Sayre said several industry leaders have expressed interest in the informational sessions and he’s awaiting comments on whether to conduct an ongoing series of seminars or a single event to help head off problems. He said with the number of issues, it appears a series will occur.

But they’ll come too late to help Planet Hollywood in its recent case.

The Control Board filed a nine-count complaint outlining several “incidences of excessive inebriation, drug distribution and abuse, violence, the involvement of minors and the handling of those individuals who became incapacitated while at the (Prive) club.”

Prive is operated by the Opium Group under a lease with Planet Hollywood.

The complaint said the Control Board sent a letter to all licensees about operating nightclubs in casinos and the Enforcement Division conducted classes on operations.

But the complaint said Planet Hollywood failed to act in several incidents that agents think would reflect poorly on or discredit the gaming industry.

The complaint said some people had to be hospitalized for overconsumption of alcohol, that some patrons were under the influence of controlled substances, that some were physically or sexually assaulted and that the Clark County Business Licensing Department issued Prive citations for topless and lewd activity.

The complaint also noted Metro officers reported more calls to the property and increased incidences of prostitution.

Prive’s problems were magnified a day after the commission took action when the Business Licensing Department denied a liquor license for Prive. County officials ordered the nightclub to remain closed until an appeal was heard by the Clark County Commission.

Gaming commissioners were universal in their support of nightclubs as a valuable attraction for casino properties. But Commissioner Tony Alamo said things “went sideways when the health and safety of patrons were being affected” by the activities in the clubs.

Frank Schreck, a lawyer representing Planet Hollywood, said he thinks the gaming industry received the commission’s stern message that licensees must have better oversight of the nightclubs they house as a result of the Planet Hollywood case. One of the concerns was that casino security officials weren’t given immediate access to the nightclub by Prive officials when complaints were made. That practice, Schreck said, has stopped.

Commissioners also mulled a higher fine in the case as Chairman Peter Bernhard said he didn’t want the fine to be considered “just a cost of doing business.”

In a related matter, Harrah’s Entertainment last week voluntarily shut down its topless Sapphire Pool at the Rio after 11 people were charged with solicitation of prostitution and suspected drug use.

Plainclothes officers made a routine enforcement operation at the pool, operated as a partnership between Harrah’s and the Sapphire Gentlemen’s Club, which dispatched topless dancers from its club to the pool during the day.

So what happens next?

It’s doubtful that casino nightclubs or topless pools, which have become a cash-cow staples, are going away. The fine imposed on Planet Hollywood isn’t that big considering the revenue clubs generate. But regulators are hoping the fine and the negative publicity will send a message to club operators.

We should learn more when Sayre’s seminars are conducted and we get a look at how many club and casino representatives attend and what types of questions are asked.

Richard N. Velotta covers tourism, technology and small business for In Business Las Vegas and its sister publication, the Las Vegas Sun. He can be reached at 259-4061 or at [email protected].