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Southwest Plays its Trump Card
Republic Gets a Lesson in Auction Bidding by Aaron Harber
August 10, 2009 - Print Article

In a move which can only be described as beyond preemptive (given that it is feeding on animals, some would describe it as “predatory”), Southwest Airlines, the nation’s top low-fare carrier, bid $170 million for Frontier Airlines. 

The only other bid was made by Republic Airways for what now looks like a paltry $104 million.  Republic was the first to recognize Frontier’s value and appeared to be the only bidder. 

Southwest adroitly waited until the last minute to announce its bid - as sophisticated auction bidders do.  After all, why start the bidding if all it is going to do is increase the price of what you are buying?  Novice bidders enter the bidding process too early and often get shunted aside as the price rises past their limit. 

This is exactly what Republic is experiencing.  With less than $100 million of cash on hand, Republic cannot compete with Southwest’s $2½ billion cash stash.  Had Republic waited until the last minute, it might have won the auction by default if no one else submitted a bid.  Without the ability to go much higher, however, Republic erred in its strategy. 

Republic’s best bet was to wait until the submission deadline and announce its bid at that time.  Had Southwest thought no one else was bidding, it may not have placed a bid and, instead, assumed Frontier would die with its assets being sold piecemeal. 

Some Frontier employees preferred Republic because the holding company would have allowed Frontier to continue to operate as a standalone enterprise.  Southwest made it known it would merge Frontier into Southwest, with all of the former’s animals becoming extinct. 

Acquiring Frontier makes sense for Southwest because Frontier has more value to Southwest than any other airline.  With the acquisition, Southwest eliminates a key competitor in the Denver market, increases its market share overnight, allows it to go head-to-head with United Airlines, and gives it a number of new routes and destinations.  The cost of doing all of this separately likely would exceed $500 million so getting Frontier for $170 million is a huge bargain. 

Southwest knows, in the Denver market still dominated by United, which is not a discount airline, Southwest can quickly recoup its investment with just slightly higher fares which still will be competitive.  

The bankruptcy court might have looked favorably on Republic’s bid even if it were 20% below Southwest’s but the fact Southwest’s bid was almost 70% higher makes it almost impossible for the court to not accept it.  The judge would have to make a cogent argument for awarding Republic the animal airline by arguing keeping Frontier whole had great value.  And although that argument can be made in myriad ways, Southwest’s strategic decision to almost double Republic’s bid likely eliminates the court’s ability select Republic - especially as Frontier’s creditors drool over the extra $70 million Southwest offered.  So, “Goodbye Larry, Foxy, Grizwald, Jack. Flip,” and the other 51 animals comprising Denver’s most unique fleet. 

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