Discount Airlines Tap Stock Market as Investors Bet on Travel Recovery
Frontier Airlines, Sun Country raise hundreds of millions in IPOs a year after the Covid-19 pandemic crushed air travel
As air travel shows more signs of rebounding from its pandemic lows, airlines that focus on offering cheap fares to leisure travelers are cashing in on the stock market.
Frontier Group Holdings Inc.’s initial public offering raised $570 million after shares of the Denver-based budget carrier were priced at $19 each. Sun Country Airlines Holdings Inc., which largely flies Midwesterners to sunny vacation locales, raised more than $250 million in its initial public offering in March.
U.S. airlines lost some $35 billion last year, and most are still losing money. But the stock-market offerings are a sign that investors are betting that some of the industries hit hardest by the pandemic are poised to bounce back.
Airports are busier than they have been anytime in the past year amid bustling spring break traffic, and airlines say summer bookings have picked up.
In the latest sign of an expected recovery in travel, United Airlines Holdings Inc. is planning to restart the pilot-hiring process it halted last year, the company told pilots in a memo.
United plans to begin with 300 pilots who had conditional job offers last year or whose new-hire training was canceled during the pandemic. The hiring was first reported by CNBC.
Some other airlines have also said they are planning to hire this year.
Frontier and Sun Country each say they stand to benefit as vaccinations accelerate and spark renewed appetite for travel.
“The vaccine is unlocking the demand that we’re seeing in the country,” Frontier Chief Executive Barry Biffle said in an interview.
Still, another wave of infections, rising fuel prices and stiff competition for the same pool of travelers all present challenges. Frontier shares slid in their market debut Thursday, dropping 15 cents to $18.85. The stock trades on Nasdaq under the ticker symbol ULCC, an industry acronym for ultra low cost carrier.
Airlines have had little trouble raising money during the pandemic, despite the industry’s troubles. With U.S. government grants and loans shoring up investors’ confidence that carriers could make it through the lean months, airlines were able to sell shares and mortgage everything from planes to frequent-flier programs to bring in billions of dollars of cash.
Now Frontier and Sun Country are hoping to get back on the rapid growth trajectory they had been before the pandemic hit.
“We’re spring-loaded to add capacity into a recovery,” Sun Country Chief Executive Jude Bricker said in an interview.
“That money is for growth and buying planes and hiring people,” he said of the cash raised in the public offering.
Neither airline escaped the pandemic unscathed. Frontier lost $225 million in 2020 after posting a $251 million profit in 2019.
Sun Country lost $3.9 million in 2020, just a year after a financial turnaround propelled the small airline to a $46 million profit in 2019.
Things are turning around. Frontier said its operation generated cash in March. Sun Country said it repaid a government loan it took in October.
In times of economic stress, lean low-fare airlines are often in a position to seize opportunities while legacy carriers with complicated international networks, costly hubs and hefty overhead costs must retrench.
So far, this travel recovery is playing to discounters’ strengths. Travelers flying to see family and friends within the U.S. or to nearby vacation spots like the Caribbean have been much quicker to return than the business and international travelers who are traditionally mainstays for big, global airlines.
Many of those major airlines also borrowed heavily to survive the pandemic. They will likely have to charge higher fares to cover the additional interest payments, Cowen & Co. analyst Helane Becker said. That could be an advantage to more nimble discount airlines that didn’t go as deeply into debt last year.
Still, competition is likely to be fierce. Rival discounters like Spirit Airlines Inc. and Allegiant Travel Co. are starting to add more routes. Spirit on Wednesday announced service to Puerto Vallarta, Mexico — the ninth new destination the airline has added to its network since the start of the pandemic.
Bigger airlines are also turning their focus to the increasingly crowded domestic market.
United last week announced plans to fly more than two dozen new domestic routes. Many of those routes fit the profile for the type of flights that ultra-low-cost carriers typically dominate, including from Midwestern cities that bypass big hubs and go straight to vacation destinations.
United Chief Executive Scott Kirby said this week that the airline’s domestic leisure business is nearly back to normal. American Airlines Group Inc. said this week that its domestic flights are 80% full and bookings over the previous week were almost back to pre-pandemic levels. It plans to put nearly all its jets back to work this summer.
Meantime, Delta Air Lines Inc. said Wednesday that it will start filling middle seats in May after blocking them off for more than a year for social distancing, a move that will immediately boost Delta’s seating capacity.
Mr. Biffle, Frontier’s CEO, said he believes there is more than enough demand to go around. “Everybody has been cooped up for a year now,” he said.
Indigo Partners LLC, a private-equity firm led by longtime airline investor William Franke, purchased Frontier in 2013 after Mr. Franke failed to persuade Spirit Airlines, where he had been chairman, to buy it.
Mr. Franke and Mr. Biffle, a former Spirit executive, cut costs and rebuilt Frontier on a model of charging extremely low fares but reaping fees for add-ons like carry-on luggage and advance seat assignment. The airline has expanded rapidly. It flies to 110 airports, up from 61 in 2017. Frontier made plans for an IPO that year, but it didn’t pull the trigger, and eventually shaved the offering last summer amid the air travel rout.
Sun Country was also in the midst of a turnaround before the pandemic, after being acquired by the private-equity firm Apollo Global Management Inc. in 2018. The airline has a unique business model. In addition to its scheduled passenger flights that ferry customers from its base in Minneapolis and other Midwestern cities to sunny, warm-weather destinations, it operates cargo service under a contract with Amazon.com Inc. and charters flights for customers like the NCAA, Major League Soccer and the U.S. Defense Department.
Mr. Bricker said Sun Country began planning its market debut following the positive vaccine news and seeing other airline stocks starting to pick up. The airline’s shares have fallen since they began trading, but at $33.50 they remain above the IPO price of $24.