Originally Posted by
ColdWhiskey
I agree with most everything you said and it represents the traditional business model and investor that we are used to.
But private equity firms and their methods are a whole different ball game. I did some internet research on some of the new big PE players and their methods. Their goal is often huge short term profits while turning around a failing business, and not necessarily the long term health of the business.
They excel in stripping much of the business's value (and pocketing it themselves) while maintaining or increasing the value of the business for a future IPO or sale.
Growth is a long term investment in a company. It requires that money made today be reinvested in the company to increase its future value. Any money invested in future growth is money the PE firm can not put in its pocket now.
Indigo's motive is to put as much money in it's pockets as it can while maintaining or increasing Frontier's value for a future IPO or sale. Their goal or concern is not necessarily the long term health of Frontier or your future at an airline they won't be part of 5 years from now.
I hope that I am wrong and you are correct!
PE is a very generic term. There was little of value to be stripped for cash at the purchase from Republic. Rather, I believe they are recognizing the potential of putting to market the value of the ULCC model. Legacy (not to be confused with legacy carriers) costs are very low with F9 and the replacement of smaller frames with larger frames and more efficient frames (read: A320NEO) means much greater efficiency. Load factors are enormous. They are embracing the ULCC model in what seems to be a transparent fashion with the market - meaning they are not saying "you only paid $29 for your seat sucker... take it or leave it" no, they are marketing an opportunity to fly cheap if you forego certain expectations and it works. Also, they offer these expectations if you are willing to pay. I believe this is the distinction between Frontier and Spirit.
I am certainly not suggesting that they are indeed a benevolent organization but neither are most [I]for profit[I] organizations. They are likely quickly reinvesting profits to grow as quickly as possible. As another poster mentioned, growth - and more importantly revenue, are most certainly the greatest concern for Indigo. I will suggest that they are not remotely concerned about pocketing the net profits they are making today. Here is why: They paid $150,000,000 or so for Frontier out of bankruptcy. They know and believe in the ULCC model. If they simply pocketed the $120,000,000 in profit for the next three years they would stand to make $360,000,000 less the original $150,000,000 or $210,000,000. Nothing to sneeze at but the real money comes from creating a much larger and semi profitable airline. For example, in the IPO world of airlines, revenue (not profit) is the name of game. Grow, grow, grow. Valuations are regularly 2x to 3x revenue. So...if they can grow revenue to say $2 billion they stand to generate $4 to $6 billion for their investment of $150,000,000.
So long as they can, I submit that they will grow as fast as possible. Not a guarantee even with all the moons in alignment but where my money is.