Liquidity problem stalls Frontier Airlines

DENVER -- On Monday, Frontier Airlines was looking at plans to boost revenue and promote a new turboprop service. By Friday, the carrier was restructuring under the shield of bankruptcy court.

The Denver-based carrier, which will continue to operate as it reorganizes, blamed not high fuel costs or competition but credit card processor First Data Corp.'s decision to hold back up to 100 percent of proceeds from ticket sales until the passenger's flights are completed.

"This change in established practices would have represented a material change to our cash forecasts and business plan," Chief Executive Officer Sean Menke said in a statement. "Unchecked, it would have put severe restraints on Frontier's liquidity and would have made it impossible for us to continue normal operations."

The filing will prevent First Data from implementing the change until Frontier emerges from bankruptcy or the judge makes an independent decision.

First Data spokeswoman Elizabeth Grice in a statement said: "The terms of our agreement with Frontier Airlines are not unique; they are considered standard industry practice and terms originally agreed upon by Frontier."

Analysts had mixed views about whether Frontier will emerge successfully given the flagging U.S. economy and high fuel costs. ATA Airlines, Skybus and Aloha Airgroup also filed for bankruptcy in the past three weeks.

"It's obviously a business in which every carrier is under stress and will have to rely on some of its cash to carry it through," industry analyst Robert Mann said.

From its hub at Denver, Frontier battles Southwest and United Airlines in an atmosphere that has kept ticket prices low.

Last week, Calyon Securities analyst Ray Neidl voiced concerns about some budget airlines and said Frontier's cash holdings were likely to fall below 10 percent of expected revenue by the end of the year. Two days ago, First Data notified Frontier it wanted to step up the holdback from the current 45 percent up to 100 percent by May 1, airline spokesman Joe Hodas said.

In a research note Friday, Neidl said the bankruptcy "happened more quickly than we expected" and that he does not see a future for Frontier.

Industry analyst Mike Boyd said it appeared the bankruptcy was triggered by Wall Street speculation about Frontier, which likely raised concern at First Data.

It's not the first time credit card companies have imposed cash withholding requirements on airlines. Many did so in the months after the Sept. 11 terrorist attacks. Strict cash withholding requirements were a factor in Delta Air Lines Inc.'s 2005 bankruptcy.

Now analysts believe most larger airlines have sufficient cash to weather the economic downturn and spike in fuel prices. It's the smaller companies with less cash at more risk.